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, 2007





**OR**





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


For
      the
      transition period from __________ to
      __________





Commission
      file number: **000-51426**






**FORTRESS
      INTERNATIONAL GROUP, INC.**


*(Exact
      name of registrant as specified in its charter)*




**Delaware**
              *(State
                or other jurisdiction*
              *of
                incorporation or organization)*
              
              **9841
                Broken Land Parkway**
              **Columbia,
                Maryland**
              *(Address
                of principal executive offices)*
            **20-2027651****
              *(I.R.S.
                Employer Identification No.)*
              
              
              **21046**
              *(Zip
                Code)*Registrant’s
                telephone number, including area code
              **(410)
                312-9988**





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
oNo
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
oNo
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 xNo 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 oNo
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) computed by reference to the price at which
        the common stock was last sold, or the average bid and asked price of the
        common
        stock, as of the last business day of the registrant’s most recently
        completed second fiscal quarter end was
        $19,578,343.




As
      of
      February 29, 2008, 12,089,221 shares of the registrant’s common stock, $0.0001
      par value, were outstanding




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
        2008 Annual Meeting of Stockholders to be filed within 120 days of the end
        of the fiscal year ended December 31, 2007 .




3




**TABLE
      OF CONTENTS**




**Page******
            ****
            
            ****
            ****PART
                IItem
                1.
            
            Business
            
            7Item
                1A.
            
            Risk
                Factors
            
            17Item
                1B.
            
            Unresolved
                Staff Comments
            
            27Item
                2.
            
            Properties
            
            27Item
                3.
            
            Legal
                Proceedings
            
            27Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            27PART
                IIItem
                5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            28Item
                6.
            
            Selected
                Financial Data
            
            29Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation
            
            31Item
                7A.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            42Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            43Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            44Item
                9A(T).
            
            Controls
                and Procedures
            
            44Item
                9B.
            
            Other
                Information
            
            45PART
                IIIItem
                10.
            
            Directors,
                Executive Officers and Corporate Governance
            
            45Item
                11.
            
            Executive
                Compensation
            
            45Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            45Item
                13.
            
            Certain
                Relationships and Related Transactions and Director
                Independence
            
            45Item
                14.
            
            Principal
                Accounting Fees and Services
            
            45PART
                IVItem
                15.
            
            Exhibits,
                Financial Statement Schedules
            
            46Signatures
            
            50




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.*




5




**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. Such statements include,
      but are not limited to, any statements relating to our ability to consummate
      any
      acquisition or other business combination and any other statements that are
      not
      historical facts. 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;


·
                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.


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;




·
            attract
                and retain qualified management and other personnel;and




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





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 SEC or 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**





**Background
      of Fortress International Group, Inc.**





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. 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 (“available funds”) were
      made available to be used to provide 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, L.L.C. and Vortech, L.L.C. (“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”). The closing consideration consisted of
        (i) $11,000,000 in cash, (ii) the assumption of $154,599 of debt of
        TSS/Vortech, (iii) 3,176,813 shares of our stock, of which 2,534,988 shares
        were issued to the selling members, 67,825 shares were issued to Evergreen
        Capital L.L.C. 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, interest-bearing promissory notes of $5,000,000
        each.




All
      of
      the shares of our common stock issued to the selling
      members, Messrs. Thomas P. Rosato and Gerard J. Gallagher, are subject
      to a lock-up agreement restricting the sale or transfer of those shares through
      July 13, 2008 and are 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). The shares of our 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.




Each
      convertible promissory note bears interest at 6% per year and has 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 of the note and
      continuing throughout the balance of the term of the note in equal quarterly
      installments of $416,667. At any time after the sixth month following the
      closing of the acquisition, the notes are convertible by Messrs. Rosato and
      Gallagher into shares of our common stock at a conversion price of $7.50 per
      share. At any time after the sixth month following the closing of the
      acquisition, the notes are automatically convertible if the average closing
      price of our common stock for 20 consecutive trading days equals or exceeds
      $7.50 per share.




On
      August
      29, 2007, we entered into an agreement with our Chief Executive Officer,
      Mr. Rosato, to retire $2,500,000 of the convertible promissory note due to
      him
      by paying $2,000,000 and Mr. Rosato agreed to use the proceeds to purchase
      the
      Company’s common stock and warrants pursuant to a 10b5-1 plan with a designated
      broker. The prepayment discount realized of $500,000 was recorded to additional
      paid-in capital. The transaction was completed on September 28,
      2007.




The
      cash
      portion of the payments made in the TSS/Vortech acquisition was financed
      entirely through the use of cash raised in our initial public offering and
      held
      in a trust fund prior to the closing of the 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 the converting stockholders. These conversions were also funded with
      the
      proceeds of our initial public offering.




Following
      the completion of the acquisition, we announced and implemented a common stock
      repurchase program. As a result of that program, through December 31, 2007,
      we
      had utilized $2,036,015 of cash to repurchase 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.




Upon
      the
      closing of the acquisition, we entered into employment agreements with each
      of
      the selling members, Messrs. Rosato and Gallagher, under which each is
      entitled to an initial annual base compensation of $425,000, an annual bonus
      of
      up to 50% of his base compensation, and if during the period from the closing
      of
      the acquisition through July 13, 2008 the market price of our common stock
      reaches certain thresholds, up to $5.0 million in shares of our common
      stock. Mr. Rosato’s employment agreement contemplates that
      he
      will serve as our chief executive officer for a period of three years, and
      Mr. Gallagher’s employment agreement contemplates that he will serve as our
      president and chief operating officer for a period of three years.




7




Upon
        the
        closing of the acquisition, we also entered into an employment agreement
        with
        Harvey L. Weiss under which Mr. Weiss agreed to serve as our chairman for a
        period of three years at an initial annual base compensation of $200,000
        and an
        annual bonus of up to 50% of his base compensation. Mr. Weiss is entitled
        to certain other benefits under the terms of his employment agreement. At
        the
        same time, we entered into a three-year consulting agreement with Washington
        Capital Advisors, L.L.C., whose principal equity owner and officer is C.
        Thomas
        McMillen, our director. Under the terms of the consulting agreement,
        Washington Capital Advisors has agreed to provide advisory services relating
        to
        strategic, financial, marketing and business development matters, as well
        as
        mergers and acquisitions for an initial annual base compensation of $200,000
        and
        an annual bonus of up to 50% of base compensation, as well as certain other
        benefits.




In
      connection with the acquisition, our stockholders adopted an amendment and
      restatement of our amended and restated certificate of incorporation to
      (i) change our name from “Fortress America Acquisition Corporation” to
“Fortress International Group, Inc.” and (ii) remove certain provisions
      applicable only prior to our completion of the acquisition. Stockholders also
      approved our 2006 Omnibus Incentive Plan and elected David J. Mitchell to our
      Board of Directors for a term expiring in 2009.




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 Solutions, Inc. and Quality Power
      Solutions, Inc. (“Innovative”) on September 24, 2007, and 100% of the membership
      interests of Rubicon Integration, L.L.C. (“Rubicon”) on November 30, 2007.
      Subsequent to year end, on January 2, 2008, we purchased 100% of the
      outstanding and issued capital stock of SMLB, Ltd.




Our
      principal executive offices are located at 9841 Broken Land Parkway,
      Columbia, Maryland 21046 and our telephone number is (410) 312-9988. Our
      annual reports on Form 10-K, quarterly reports on Form 10-Q, current
      reports on Form 8-K ,
      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://thefigi.com*  as
      soon
      as reasonably practicable after such materials have been electronically filed
      with, or furnished to, the SEC .




**Business**


We
        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 technology consulting, engineering and design
      management, construction management, system installations, operations
      management, and facilities management and maintenance.




During
      the past three years, our revenue growth has been driven primarily by government
      spending on homeland security initiatives spurred by the events
      of September 11, 2001. These events have also affected businesses,
      which are increasing spending on data security and privacy. These homeland
      security initiatives include projects that require the hardening, relocation,
      renovation and upgrade of mission-critical facilities to protect critical
      government information networks and data processing centers against attacks.
      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 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.




8




Growth
      Through
      Acquisitions




Beginning
      in 2006 and continuing into 2007, 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 four businesses during the fiscal year 2007 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). 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, L.L.C., doing business as Total Site Solutions, and Vortech,
        L.L.C., 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 $1,322,317 of acquired cash.
 (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 L.L.C. 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. (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 DC metropolitan area. P ursuant
      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 cost of $112,420, net of cash acquired
      of $244,968 cash subject to certain adjustment as provided in the
      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 stock purchase
      agreement.




On
      November 30, 2007, we entered into a membership interest purchase agreement
      with
      Rubicon Integration, L.L.C., or Rubicon, a Delaware limited liability company
      based in McLean, 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 $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.




During
      the fourth quarter of 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, a working capital adjustment was
      computed resulting in an additional amount of $90,141 due to the sellers
      on January 31, 2008.




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 in the purchase agreement, (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 is
      payable in three years, based on a five-year amortization schedule, with
      $100,000 plus accrued interest payable on each of January 2, 2009 and January
      2,
      2010 and the balance of $300,000 plus accrued interest payable on January 2,
      2011.





9




**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.




Market
      research indicates growth in overall IT spending and in the mission-critical
      business arena in particular. According to a 2006 report by the InterUnity
      Group, an industry market research firm based in Concord, Massachusetts, total
      information technology spending by the United States Government and the private
      sector is expected to grow from $1.02 trillion in 2007 to $1.24 trillion in
      2011. The mission-critical IT market in particular is growing rapidly.
      InterUnity Group estimates that total mission-critical IT spending by the United
      States Government and the private sector will grow from $51.5 billion in
      2007 to $91.1 billion in 2011, for an annual compound growth rate of 15.3%.
      InterUnity Group also estimates that mission-critical IT spending will grow
      from
      5.0% of total IT spending in 2007 to 7.4% in 2011.




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 LEEDS Certification and
      its
      design requirements and their contribution to the environment and potential
      profitability enhancements.




**Service
      Offerings**




We are
      focused on becoming involved in facilities integration projects that are in
      their planning stages. When involved in the initial planning stages of a
      facilities integration project, we develop a comprehensive project Solutions
      Path that meets rigorous design and scheduling requirements for the timely
      delivery of high technology facilities that are critical to the customer’s
      continuous operations. When involved in later project stages, services are
      provided on an integrated or individual basis.




**Project
      Solutions Path**




We
      have
      developed a five-step project named “Solutions Path” for mission-critical
      environments. The integrated Solutions Path provides a simple, yet
      comprehensive, process for program roll-out, and also serves to align project
      requirements with our capabilities. This Solutions Path incorporates each major
      phase of a design and construction project, from initial planning and
      programming, through maintenance and service of equipment. Descriptions of
      the
      five phases of the Solutions Path are provided below.




10









**Technology
      Consulting**




***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.




Various
      services are performed during the planning and programming phase, with selection
      depending upon project mission and scope. Typical planning and programming
      services include requirements analyses, site selections and comparisons,
      facility and system reliability assessments and audits, energy efficiency
      studies space planning, computer hardware planning and configurations, security
      risk assessment, disaster avoidance and recovery planning, and project budgeting
      and scheduling.




***Design
      and Engineering.*** During
      the second phase of the Solutions Path, design and engineering experts on our
      team apply vital, real-life experience in the engineering of critical
      environmental, power, communications and security systems. This expertise is
      the
      source of precise engineering solutions that directly impacts the unique
      function, reliability, energy usage and overall cost of the customer’s
      specialized facility.




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.*** 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.




***Installation
      Management.*** The
      fourth phase of the Solutions Path model involves the on-site construction
      work.
      During this phase, 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.




11




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 the Solutions Path.*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 continue to pursue account executives and additional sales
                staff and developed an educational program 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 provide 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.




12




·
            *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 subsequent to year end, 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. Our NOC was completed and began
                its
                operation during 2007.




·
            *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 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
      a
      time-and-material 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, 2007 and December 31, 2006, revenues from
      guaranteed maximum price contracts represented approximately 19.5% and 65.6%
      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.




13






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.




Our
        total
        backlog was approximately $172.9 million as of December 31, 2007.
At
        December 31, 2007, we have authorizations to proceed with work for approximately
        $32.4 million or 19% of our total backlog of $172.9 million. Additionally,
        approximately $118 million or 68% of our backlog relates to a single customer
        at
        December 31, 2007.




We
      estimate that approximately 50% of our backlog will be recognized
      during 2008 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. Our total backlog
      as of December 31, 2006 and December 31, 2005 was $20.6 million and
      $39.7 million, respectively.




We
      adjust
      backlog to reflect project cancellations, deferrals and revisions in scope
      and
      cost (both upward and downward) known at the reporting date; however, 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.




**Sales
      and Marketing**




The
      marketing approach employed by us emphasizes expertise in IT hardware
      systems 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 utilizes the Solutions Path and 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 hire
        and
        train sales professionals responsible for defined geographic regions in the
        United States. We have developed an educational program for account executives
        and other sales staff built around our project execution model. 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 provide 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, Whiting Turner and
        Clark
        Construction. Although these large construction and engineering companies
        have
        greater financial and other resources, we do not believe they offer as complete
        of a line of mission-critical IT services as us. We expect competition in
        the
        mission-critical IT technology services sector to increase in the
        future.
 14


**Executive
      Officers**




Set
      forth below is information as of March 28, 2008, about our executive officers,
      as determined in accordance with the rules of the SEC.




**Name**
                
                **Age**
                
                **Position
                    with the Company**Harvey
                    L. Weiss
                
                65
                
                Chairman
                    of the BoardThomas
                    P. Rosato
                
                56
                
                Chief
                    Executive Officer and DirectorGerard
                    J. Gallagher
                
                51
                
                President,
                    Chief Operating Officer and DirectorTimothy
                    C. Dec
                
                49
                
                Chief
                    Financial Officer
  ***Harvey
        L. Weiss*** ,
        age 65,
        became our Chairman of the Board upon the closing of our acquisition of
        TSS/Vortech on January 19, 2007. From our inception through the closing of
        the
        acquisition, 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.




15




***Thomas
      P. Rosato*** ,
      age 56,
      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 51,
      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 49,
      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.




Our
      officers employment are subject to the terms and conditions in their respective
      employment agreements.




**Employees**




At
      December 31, 2007, we had approximately 179 full-time and 5 part-time
      employees. We have obtained facility clearance from the United States Department
      of Defense. In addition to the facility clearance, we have successfully cleared
      approximately one third of our employees, allowing them individual access to
      restricted projects and facilities. Our future success will depend significantly
      on our ability to attract, retain and motivate qualified personnel. We are
      not a
      party to any collective bargaining agreement and we have not experienced
      any strikes or work stoppages. We consider our relationship with our
      employees to be satisfactory.




16






**Item
      1A.**  **RISK
      FACTORS**




**RISKS
      RELATED TO OUR RECENT ACQUISITIONS**




***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, L.L.C. and Vortech
        L.L.C., 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 theincrease 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 peform 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.




***Certain
      of our key personnel who joined us as a result of the acquisition of TSS/Vortech
      are unfamiliar with the requirements of operating a public company, which may
      adversely affect our operations, including reducing our revenues and net income,
      if any.***




Upon
      the
      completion of the acquisition TSS/Vortech, our former Chairman of the Board,
      C.
      Thomas McMillen, resigned and became our Vice Chairman, and our former Chief
      Executive Officer, President and Secretary, Harvey L. Weiss, resigned from
      those
      positions and became our Chairman of the Board. Thomas P. Rosato became our
      Chief Executive Officer, and Gerard J. Gallagher became our President and Chief
      Operating Officer. Neither Mr. Rosato nor Mr. Gallagher has
      significant public company experience, and both are unfamiliar with the unique
      requirements of operating a public company under United States securities laws.
      Our Chief Financial Officer, Timothy C. Dec, joined us in August 2007.
      Accordingly, we could be required to expend significant resources to assist
      our
      management team with regulatory and stockholder relations issues, which could
      be
      expensive and time-consuming and could lead to various regulatory issues that
      may adversely affect our operations, including reducing our revenues and net
      income, if any.




17




***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
      Chairman, Vice Chairman 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 Chairman of the Board, Mr.Weiss, Vice Chairman of the Board, Mr. McMillen,
        and 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.




***Voting
      control by our executive officers, directors and other affiliates may limit
      your
      ability to influence the outcome of director elections and other matters
      requiring stockholder approval.***




Persons
        who are parties to a voting agreement (Messrs. McMillen, Weiss, Gallagher
        and Rosato) own approximately 41% of our
        issued voting stock at December 31, 2007. Moreover, this concentration will
        increase if additional shares are issued under the employment agreements
        entered
        into with Messrs. Rosato and Gallagher or upon conversion of the
        convertible promissory notes delivered to Messrs. Rosato and Gallagher in
        connection with TSS/Vortech aquisition. These persons have made certain agreements to vote for each other’s designees to our Board of Directors through
        the 2008 director elections. Accordingly, they are able to significantly
        influence the election of directors and, therefore, our policies and direction
        during the term of the voting agreement. This concentration of ownership
        and the
        voting agreement could have the effect of delaying or preventing a change
        in our
        control or discouraging a potential acquirer from attempting to obtain control
        of us, which in turn could have a material adverse effect on the market price
        of
        our common stock or prevent our stockholders from realizing a premium over
        the
        market price for their shares of common stock.




***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 an 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.




18




***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.




***If
      third parties bring claims against us or if acquired companies breached any
      of
      its representations, warranties or covenants set forth in the purchase
      agreement, 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. For
      the
      Rubicon, Innovative, and subsequent to year end, SMLB, Ltd 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 there
      from.




19




***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 subsequent to year end, 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.




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.




**RISKS
      RELATED TO OUR BUSINESS AND 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. For
      the
      years ended December 31, 2007, 2006 and 2005, we had one large project
      with our major real estate investment trust (REIT) customer, Corporate
      Office Properties Trust ,
      which
      is providing mission-critical space to a government end user and which comprised
      approximately 12.0%, 63.0%, and 78.0%, respectively, of our revenues. Our 10
      largest customers accounted for approximately 58.5% and 80.4% of our total
      revenues for the years ended December 31, 2007 and 2006,
      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.




20




***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 indefinite delivery/indefinite quantity
      (“ID/IQ”) or similar 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 in
      scope and amount from the backlog amounts. Accordingly, we can not 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, 2007 was
      approximately $172.9 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 its 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 or errors
      or
      failure to meet customers’ expectations could result in claims for substantial
      damages against us. We currently maintain comprehensive general liability,
      umbrella, 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.




21




***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.




22




***An
      economic downturn or reduced homeland security related capital expenditures
      could result in a decrease in demand for our
      services.***




If
      federal, state or local government or private enterprise spending on homeland
      security 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 surety 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 Chairman, Mr. McMillen, 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.




23




***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;




·
            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.




24




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.




**RISKS
      RELATED TO OUR CAPITAL STRUCTURE**


**AND
      OUR EXPERIENCE AS A PUBLIC COMPANY**




***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 1.65 years and only 12,089,221 outstanding
        shares of common stock as of February 29, 2008. 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.




***If
      our initial stockholders and Messrs. Rosato and Gallagher exercise their
      registration rights, 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. If our initial stockholders exercise
      their registration rights with respect to all of their shares of common stock,
      then there will be an additional 1,750,000 shares of common stock eligible
      for
      trading in the public market. We have also granted registration rights to the
      selling members of TSS/Vortech, who received 2,534,988 shares of our common
      stock upon closing of the acquisition and who may receive, in the aggregate,
      up
      to $10,000,000 in additional shares of our common stock under the terms of
      their
      employment agreements. The contingently issuable shares expire on July 13,
      2008.
      The presence of this additional number of shares of common stock eligible for
      trading in the public market may have an adverse effect on the market price
      of
      our common stock.




***If
      we are unable to maintain a current prospectus relating to the common stock
      underlying our warrants, our warrants may be
      worthless.***




Our
      warrants will be exercisable and we will not be obligated to issue shares of
      common stock unless, at the time a holder seeks to exercise such warrant, a
      prospectus relating to the common stock issuable upon exercise of the warrant
      is
      current and the common stock has been registered or qualified or deemed to
      be
      exempt under the securities laws of the state of residence of the holder of
      the
      warrants. Under the terms of the warrant agreement between Continental Stock
      Transfer & Trust Company, as warrant agent, and us, we have agreed to use
      our reasonable best efforts to maintain a current prospectus relating to the
      common stock issuable upon exercise of our warrants until the expiration of
      our
      warrants. However, we cannot assure warrant holders that we will be able to
      do
      so. The warrant agreement does not provide that we are required to net-cash
      settle the warrants if we are unable to maintain a current prospectus. If the
      prospectus relating to the common stock issuable upon exercise of the warrants
      is not current, or if the common stock is not qualified or exempt from
      qualification in the jurisdictions in which the holders of the warrants reside,
      our warrants may not be exercisable before they expire. Thus, our warrants
      may
      be deprived of any value, the market for our warrants may be limited or
      non-existent and the warrants may expire worthless.




25




***The
      warrant agreement governing our warrants permits us to redeem the warrants
      after
      they become exercisable, and it is possible that we could redeem the warrants
      at
      a time when a prospectus is not current, resulting in the warrant holder
      receiving less than fair value of the warrant or the underlying common
      stock.***




Under the
      warrant agreement governing our outstanding warrants, we have the right to
      redeem outstanding warrants, at any time after they become exercisable and
      prior
      to their expiration, at the price of $0.01 per warrant, provided that the last
      sales price of our common stock is at least $8.50 per share on each of 20
      trading days within any 30 trading day period ending on the third business
      day
      prior to the date on which notice of redemption is given. The warrant agreement
      does not require, as a condition to giving notice of redemption, that we have
      in
      effect a current prospectus relating to the common stock issuable upon exercise
      of our warrants. Thus, it is possible that we could issue a notice of redemption
      of the warrants at a time when holders of our warrants are unable to exercise
      their warrants and thereafter immediately resell the underlying common stock
      under a current prospectus. Under such circumstances, rather than face
      redemption at a nominal price per warrant, warrant holders could be forced
      to
      sell the warrants or the underlying common stock for less than fair
      value.




***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, or the SEC, 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 will be 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
      must implement 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 will require
      significant management time, place significant additional demands on our finance
      and accounting staff and on our financial, accounting and information systems,
      and increase our insurance, legal and financial compliance costs.




***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 2008 and beyond.
      Any delays or difficulty in satisfying these requirements could adversely affect
      our future results of operations and our stock price.***




26




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, 2007 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, 2008 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. As of December 31, 2007, we carried out an evaluation, under the
        supervision and with the participation of our management, including our Chief
        Executive Officer, of the effectiveness of the design and operation of our
        “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
        promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
        Act”). Based upon that evaluation, our Chief Executive Officer and Chief
        Financial Officer have concluded that our disclosure controls and procedures
        were ineffective at that time for the purpose of ensuring that the information
        required to be disclosed in our 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 our management, including the Chief Executive Officer, as appropriate
        to
        allow timely decisions regarding required disclosure.




In
        January 2007, we acquired TSS/Vortech and re-evaluated our internal control
        process during 2007 based on the framework in "Internal Control-Interpreted
        Framework" issued by Committee of Sponsoring Organizations of the Treadway
        Commission (COSO). As a result of this re-evaluation, we have determined
        that
        our internal control over financial reporting is ineffective as of December
        31,
        2007. We had neither the resources, nor the personnel, to provide for an
        adequate internal control environment. The following material weaknesses
        in our
        internal control over financial reporting were noted at December 31, 2007:
        (i)
        we did not have the ability to segregate duties; (ii) we lacked the formal
        documentation of policies and procedures that were in place; (iii) we lacked
        adequate financial personnel; (iv) we lacked general computer controls and
        adequate procedures involving change management, and; (v) controls are
        inadequate to reasonably assume compliance with generally accepted accounting
        principles related to revenue.


We
        have
        begun to address the internal control weaknesses summarized above beginning
        in
        the first quarter of 2008, with the goal of eliminating such deficiencies
        by the
        end of 2008. We are working with a certified public accounting firm to serve
        as
        our internal auditors to further enhance our internal control environment
        and a
        Chief Financial Officer has been with the Company since August 20, 2007.
        The
        acquisitions of TSS/Vortech will require the development of more robust
        disclosure controls and procedures, which we are currently developing.
        Management will continue to monitor, evaluate and test the operating
        effectiveness of these controls during 2008.
  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.


**Item
              1B.**
            **UNRESOLVED
                STAFF COMMENTS**





None.





**Item
              2.**
            **PROPERTIES**





Our
      principal executive offices are located at 9841 Broken Land Parkway, 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**





No
      matters were submitted to a vote of security holders through the solicitation
      of
      proxies or otherwise during the fourth quarter of the year ended December 31,
      2007.




27




**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 25, 2008 was $4.37,
      $0.43
      and $5.30, 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
              
              UnitsYear
                  ended December 31, 2007
              
              High
              
              Low
              
              High
              
              Low
              
              High
              
              LowFirst
                  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
              
              $
              6.00Year
                  ended December 31, 2006First
                  Quarter
              
              $
              5.60
              
              $
              5.22
              
              $
              0.78
              
              $
              0.36
              
              $
              7.15
              
              $
              5.95Second
                  Quarter
              
              $
              5.54
              
              $
              5.35
              
              $
              0.83
              
              $
              0.49
              
              $
              7.20
              
              $
              6.23Third
                  Quarter
              
              $
              5.50
              
              $
              5.35
              
              $
              0.55
              
              $
              0.41
              
              $
              6.65
              
              $
              6.12Fourth
                  Quarter
              
              $
              5.62
              
              $
              5.40
              
              $
              0.51
              
              $
              0.40
              
              $
              6.55
              
              $
              6.25




**Stockholders**





As
        of
        February 29, 2008, there were 24 stockholders
        of record of our 12,089,221 outstanding shares of common stock (does not reflect persons or entities
thathold
        theirshares
        of
        commonstock
        in
        nominee or“street”name
        through various brokerage firms), 1 holders of record of our units
        and 1 holders 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.




28




**Item
              6.**
            **SELECTED
                FINANCIAL DATA**




The
      following table was derived from the audited consolidated financial statements
      of Fortress International Group, Inc. and its subsidiaries for each of the
      three
      years ended December 31, 2005, 2006 and 2007 and for the period from December
      20, 2004 (inception) through December 31, 2004. The selected financial data
      for
      each of the periods ended December 31, 2006 have been derived from our
      consolidated financial statement, which financial statements have been audited
      by Goldstein Golub Kessler LLP, an independent registered public accounting
      firm
      and the selected financial data for the period from January 1, 2007 through
      January 19, 2007 and from January 20, 2007 through December 31, 2007 have been
      audited by Grant Thornton LLP, an independent registered public accounting
      firm.
      The information for the period ended December 31, 2007 includes operations
      of
      TSS/Vortech from January 20, 2007 through December 31, 2007. The foregoing
      consolidated financial statements and the report thereon are included elsewhere
      in this Annual Report on Form 10-K. The information below should be read in
      conjunction with the consolidated financial statements (and notes thereon)
      and
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations,” included in Item 7.




29






**Fortress
                  International Group, Inc.****For
                  the period****December
                  20, 2004****(Successor)**
              
              
              
              
              
              **(inception)
                  to****2007**
              
              **2006**
              
              **2005**
              
              **Decmeber
                  31, 2004**Results
                  of Operations:Revenue
              
              $
              50,455,823
              
              $
              -
              
              $
              
              
              $
              -Cost
                  of revenue
              
              
              42,071,361
              
              
              -
              
              
              -
              
              
              -Gross
                  profit
              
              
              8,384,462
              
              
              -
              
              
              -
              
              
              -Operating
                  expenses:Selling,
                  general and administrative
              
              
              14,563,111
              
              
              689,120
              
              
              319,694
              
              
              -Depreciation
                  and amortization
              
              
              394,913
              
              
              -
              
              
              -
              
              
              -Amortization
                  of intangibles
              
              
              2,109,222
              
              
              -
              
              
              -
              
              
              -Total
                  operating costs
              
              
              17,067,246
              
              
              689,120
              
              
              319,694
              
              
              -Operating
                  income (loss)
              
              
              (8,682,784
              )
              
              (689,120
              )
              
              (319,694
              )
              
              **-**Interest income
                  (expense), net
              
              
              806,518
              
              
              1,666,806
              
              
              525,430
              
              
              (1,056
              )Income
                  (loss) before income taxes
              
              
              (7,876,266
              )
              
              977,686
              
              
              205,736
              
              
              (1,056
              )Income
                  tax expense (benefit)
              
              
              (499,155
              )
              
              332,414
              
              
              74,194
              
              
              -Net
                  Income (loss) from continuing operations(1)
              
              $
              (7,377,111
              )
              $
              645,272
              
              $
              131,542
              
              $
              (1,056
              )Per
                  Common Share:Basic
                  and diluted net income (loss) from continuing
                  operations(1)
              
              $
              (0.63
              )
              $
              0.07
              
              $
              0.03
              
              $
              0.11Dividends(2)
              
              
              -
              
              
              -
              
              
              -
              
              
              -Financial
                  Position:Total
                  assets
              
              $
              77,399,061
              
              $
              46,045,619
              
              $
              43,778,513
              
              $
              25,000Current
                  portion of long-term debt(3)
              
              
              1,650,306
              
              
              -
              
              
              -
              
              
              -Long-term
                  debt, less current portion(3)
              
              
              7,848,661
              
              
              -
              
              
              -
              
              
              -Common
                  stock, subject to possible conversion,1,559,220
                  at conversion value (4)
              
              
              -
              
              
              8,388,604
              
              
              8,388,604
              
              
              -Stockholders’
                  and members’ equity (5)
              
              
              47,853,675
              
              
              35,595,775
              
              
              34,950,503
              
              
              23,944




(1)
            During
                2007 we completed a series of acquisitions as
                follows:




A.
            On January 19, 2007, we purchased TSS/Vortech.


B.
            On
                May 7, 2007, we purchased substantially all of the assets of Comm
                Site of South Florida, Inc.


C.
            On
                September 24, 2007, we purchased 100% of outstanding stock
                of Innovative.


D.
            On
                November 30, 2007, we purchased all of the membership interests of
                Rubicon.





The
      TSS/Vortech, Comm Site, Innovative and Rubicon results of operations and
      financial position are included in our consolidated financial statements
      from the respective dates of their acquisition. During 2007, we recorded revenue
      attributable to TSS/Vortech of 48,595,473, Comm Site of
      $250,000, Innovative of $1,182,808, and Rubicon of $427,542.





(2)
            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.


(3)
            In
                conjunction with acquisition of TSS/Vortech, Innovative, and
                Rubicon we, in a non-cash exchange, issued notes payable, bearing
                interest at 6%, to the respective sellers. During the third quarter
                2007, we paid $2.0 million of cash to retire $2.5 million of notes
                payable issued to Mr. Rosato in conjunction with the sale of TSS/Vortech.
                The net $0.5 million difference was recorded as an addition to additional
                paid-in capital. (4)
            We had
                initially anticipated that 1,559,220 shares of our common stock would
                be
                subject to conversion; however, only 756,100 shares were
                converted.


(5)
              We used
                  approximately $2,036,015 of our 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.


30




The
      following table was derived from the audited consolidated financial statements
      of TSS/Vortech and its subsidiaries for the period from January 1, 2007 through
      January 19, 2007 (acquisition date) and for each of the four years ended
      December 31, 2006, 2005, 2004 and 2003. The foregoing consolidated financial
      statements and the report thereon are included elsewhere in this Annual Report
      on Form 10-K. The information below should be read in conjunction with the
      consolidated financial statements (and notes thereon) and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations,”
included in Item 7.




**Predecessor
                    (TSS/Vortech)****Period
                    from****Janaury
                    1, 2007****ending****January
                    19, 2007**
                
                **2006**
                
                **2005**
                
                **2004**
                
                **2003**Results
                    of Operations:Revenue
                
                $
                1,412,137
                
                $
                60,154,971
                
                $
                58,632,293
                
                $
                21,302,997
                
                $
                12,330,785Cost
                    of revenue
                
                
                1,108,276
                
                
                48,172,911
                
                
                50,056,924
                
                
                15,769,341
                
                $
                8,392,786Gross
                    profit
                
                
                303,861
                
                
                11,982,060
                
                
                8,575,369
                
                
                5,533,656
                
                
                3,937,999Operating
                    expenses:Selling,
                    general and administrative
                
                
                555,103
                
                
                8,165,386
                
                
                5,419,618
                
                
                4,363,144
                
                
                2,083,889Depreciation
                    and amortization
                
                
                33,660
                
                
                277,664
                
                
                228,279
                
                
                151,331
                
                
                48,019Amortization
                    of intangibles
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Total
                    operating costs
                
                
                588,763
                
                
                8,443,050
                
                
                5,647,897
                
                
                4,514,475
                
                
                2,131,908Operating
                    income (loss)
                
                
                (284,902
                )
                
                3,539,010
                
                
                2,927,472
                
                
                1,019,181
                
                
                1,806,091Other
                    income (expense), net
                
                
                3,749
                
                
                (24,084
                )
                
                (35,184
                )
                
                (29,139
                )
                
                (3,957
                )Income
                    from continuing operations
                
                
                (281,153
                )
                
                3,514,926
                
                
                2,892,288
                
                
                990,042
                
                
                1,802,134Loss
                    (gain) from discontinued operations
                
                
                -
                
                
                -
                
                
                (252,845
                )
                
                252,845
                
                
                -Income
                    (loss) from continuing operations
                
                $
                (281,153
                )
                $
                3,514,926
                
                $
                3,145,133
                
                $
                737,197
                
                $
                1,802,134Per
                    Common Share: (1)Basic
                    and diluted income (loss) from continuing operations
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Dividends
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Financial
                    Position:Total
                    assets
                
                $
                10,346,091
                
                $
                13,962,112
                
                $
                14,099,310
                
                $
                6,001,953
                
                $
                5,448,474Current
                    portion of long-term debt
                
                
                72,808
                
                
                76,934
                
                
                72,808
                
                
                116,654
                
                
                48,726Long-term
                    debt, less current portion
                
                
                79,524
                
                
                81,679
                
                
                160,652
                
                
                369,579
                
                
                167,015Stockholders’
                    and members’ equity
                
                
                1,889,323
                
                
                3,413,862
                
                
                2,591,634
                
                
                356,117
                
                
                1,276,437




(1)  The
        Predecessor was a Limited Liability Company accordingly no earnings per share
        data is computed.




**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
      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.* ****




31




**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, L.L.C., doing business as “Total Site Solutions” (“TSS”), and
      Vortech, L.L.C. (“Vortech” and, together with TSS, “TSS/Vortech”) and
      simultaneously changed our name to “Fortress International Group, Inc.”
 TSS/Vortech provides comprehensive services for the planning, design, and
      development of mission critical facilities and information infrastructure.
      The
      details of the TSS/Vortech acquisition are provided in Item 1, Part I,
 “Business-Background of Fortress International Group, Inc” in this Annual
      Report on Form 10-K.




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 Solutions, Inc. and Quality Power Solutions, Inc. on
      September 24, 2007, and 100% of the membership interests of Rubicon Integration,
      L.L.C. on November 30, 2007. Subsequent to year end 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,
        engineering and design management, construction management, system
        installations, operations management, and facilities management and
        maintenance.
 
 During
        the past three years, our revenue growth has been driven mainly by government
        spending on homeland security initiatives spurred by the events of
        September 11, 2001. These events have also affected businesses, which are
        increasing spending on data security and privacy. These homeland security
        initiatives include projects that require the relocation, renovation and
        upgrade
        of mission-critical facilities to protect critical government information
        networks and data processing centers against attacks. In addition to these
        factors there are other drivers that cause our market to remain robust.
        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.
  32
 
 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 year 2007, 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.
  We
        believe there are high barriers to entry in our sector for new competitors
        due
        to our specialized technology service offerings we deliver for 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.




**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.




33




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 a strong indicator of our future performance is our backlog of
        uncompleted projects in process or recently awarded. Our backlog represents
        our
        estimate of anticipated revenue from executed and awarded contracts that
        have
        not been completed and that we expect will be recognized as revenues over
        the
        life of the contracts. We have broken our backlog into the following three
        categories: (i) technology consulting consisting of services related to
        consulting and/or engineering design contracts; (ii) construction management
        and
        (iii) facility management.
 
 Backlog
          is not a measure defined in generally accepted accounting principles, and
          our
          methodology for determining backlog may not be comparable to the methodology
          of
          other companies in determining their backlog. Our backlog is generally
          recognized under two categories: (1) contracts for which work authorizations
          have been or are expected to be received on a fixed-price basis, guaranteed
          maximum price basis and time and materials basis and (2) contracts awarded
          to us
          where some, but not all, of the work have not yet been authorized. At December
          31, 2007, we have authorizations to proceed with work for approximately
          $32.4
          million or 19% of our total backlog of $172.9 million. Additionally,
          approximately $118 million or 68% of our backlog relates to a single customer
          at
          December 31, 2007.
 
 As
        of
        December 31, 2007, our backlog was approximately $172.2 million, compared
        to
        approximately $20.6 million at December 31, 2006. We believe that approximately
        50% of the backlog at December 31, 2007 will be recognized during over the
        next
        twelve months. The following table reflects the value of our backlog in the
        above three categories as of December 31, 2007 and December 31, 2006,
        respectively.
  (Successor)
                  December
                    31,
                  2007
                
                (Predecessor)December
                    31,
                  2006Technology
                    consulting
                
                $
                3.9
                
                $
                1.3Construction
                    management
                
                
                154.1
                
                
                11.8Facilities
                    management
                
                
                14.9
                
                
                7.5Total
                    Backlog
                
                $
                172.9
                
                $
                20.6
  *Related
          Party
          Transactions*
  We have in
          the past, and continue to have, transactions with related parties and
          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 reflected at arm’s length terms.  For a discussion of certain
          relationships andrelatedpartytransactions,
          see Note 14 — Related Party Transactions
          of the Notes to Consolidated Financial Statements. The table below summarizes
          our related party transactions:
 (Successor)
                  
                  (Predecessor)For
                      the Year
                  
                  For
                      the YearEnded
                  
                  EndedDecember
                      31,
                  
                  December
                      31,2007
                  
                  2006Revenue
                  
                  $
                  0.4
                  
                  $
                  2.4Cost
                      of revenue
                  
                  
                  4.3
                  
                  
                  7.5Selling,
                      general and administrative
                  
                  
                  0.6
                  
                  
                  1.3







**Overview
      of 2006**




We
      neither engaged in any operations, generated any revenues nor incurred any
      debt
      or expenses during the period ended December 31, 2006, other than for rent
      and administrative support, taxes, accounting and legal fees associated with
      our
      public reporting obligations, and expenses related to pursuing acquisitions
      of
      target businesses. Our activity from inception until January 19, 2007 was
      focused on preparing for and consummating our initial public offering and then
      identifying and investigating target businesses for a business
      combination.




34




**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. The preparation of these
      financial statements requires that management make estimates and assumptions
      that affect the amounts reported in the financial statements and the
      accompanying notes. Actual results could differ significantly from those
      estimates.




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




*Revenue
      Recognition*


The
          Company recognizes revenue when pervasive evidence of an arrangement exists,
          the
          contract price is fixed or determinable, services have been rendered or
          goods
          delivered, and 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
          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 i ncurred,
          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.


35





*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
        writeoffs and an aging of the accounts receivable balance. Account balances
        are
        charged off against the allowance after all means of collection have been
        exhausted and the potential for recovery is considered remote.
  *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
        an our financial statements. The expense differs from other compensation
        and
        professional expenses in that these charges, though generally permitted to
        be
        settled in cash, are typically settled through the issuance of common stock,
        which would have a dilutive effect upon earnings per share, if and when such
        warrants are exercised or restricted stock vests. The determination of the
        estimated fair value used to record the compensation or professional expenses
        associated with the equity or liability instruments issued requires management
        to make a number of assumptions and estimates that can change or fluctuate
        over
        time.




*Goodwill
      and Other Purchased Intangible Assets*




Goodwill
      represents the excess of costs over fair value of net assets of businesses
      acquired. Other purchased intangible assets include the fair value of items
      such
      as customer contracts, backlog and customer relationships. SFAS No. 142, *Goodwill
      and Other Intangible Assets* (SFAS
      No. 142), establishes financial accounting and reporting for acquired
      goodwill and other intangible assets. Goodwill and intangible assets acquired
      in
      a purchase business combination and determined to have an indefinite useful
      life
      are not amortized, but rather tested for impairment on an annual basis or
      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. None of these events have occurred for the periods presented. We
      determine impairment by comparing the net book value of the asset to its future
      undiscounted net cash flows. If an impairment occurs, we will record an
      impairment expense equal to the difference between the net book value of the
      asset and its estimated discounted cash flows using a discount rate based on
      our
      cost of capital and the related risks of recoverability.




*Long-Lived
      Assets (Excluding Goodwill)*




In
      accordance with the provisions of 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, 2007 are fully
      realizable.




36




*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, 2007, we do not have
        any material gross unrecognized tax benefit liabilities. However, management
        is
        still in the process of evaluating the various tax positions associated with
        the
        acquisition of Innovative and is of the opinion that any deferred tax
        liabilities that would ultimately result from uncertain tax positions related
        to
        these entities may be covered by indemnification provisions provided in the
        acquisition agreements or may result in an adjustment to
        goodwill.


*Use
        of Estimates*
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenue and expenses during the reporting period.
        The
        most critical estimates and assumptions are made in determining the allowance
        for doubtful accounts, revenue recognition, recovery of long-lived assets,
        useful lives of long-lived assets, accruals for estimated tax and stock
        compensation expense. Actual results could differ from those estimates and
        assumptions.
  *Recently
        Issued Accounting Pronouncements*
  In
        September 2006, the FASB issued Statements of Financial Accounting Standards
        (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles, and expands disclosures about fair
        value measurements. SFAS No. 157 does not require any new fair value
        measurements, but provides guidance on how to measure fair value by providing
        a
        fair value hierarchy used to classify the source of the information. This
        statement is effective for fiscal years beginning after November 15, 2007
        and interim periods within that fiscal year. The adoption of SFAS No. 157
        is not expected to have a material effect on our consolidated results of
        operations or financial condition upon adoption on January 1, 2008.
  In
        December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
        Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141,
“Business Combinations.” SFAS No.141R retains the underlying concepts of SFAS
        No. 141 in that all business combinations are still required to be
        accounted for at fair value under the acquisition method of accounting, but
        SFAS
        No. 141R will significantly change the accounting for business
        combinations. Under SFAS 141R, an acquiring entity will be required to
        recognize all the assets acquired and liabilities assumed in a transaction
        at
        the acquisition-date fair value with limited exceptions. SFAS No. 141R will
        change the accounting treatment for certain specific acquisition related
        items
        including: (1) expensing acquisition related costs as incurred;
        (2) expensing changes in deferred tax asset valuation allowances and income
        tax uncertainties after the acquisition date; (3) valuing noncontrolling
        interests at fair value at the acquisition date; and (4) expensing
        restructuring costs associated with an acquired business. SFAS No. 141R
        also includes a substantial number of new disclosure requirements. SFAS
        No. 141R is to be applied prospectively to business combinations for which
        the acquisition date is on or after January 1, 2009.
  In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements” (“SFAS No. 160”). SFAS No.160 requires
        noncontrolling interests, previously referred to as minority interests, to
        be
        treated as a separate component of equity, not as a liability or other item
        outside of permanent equity and applies to the accounting for noncontrolling
        interests and transactions with noncontrolling interest holders in consolidated
        financial statements. SFAS No. 160 will be applied prospectively to all
        noncontrolling interests, including any that arose before the effective date
        except that comparative period information must be restated to classify
        noncontrolling interests in equity, attributed net income and other
        comprehensive income to noncontrolling interests, and provide other disclosures
        required by SFAS No. 160. This statement is effective for the Company
        beginning January 1, 2009. We currently do not expect the adoption of SFAS
        No. 160 to have a material effect on our consolidated results of operations
        or financial condition.


**Results
      of Operations**





***Year
      ended December 31, 2007 (Successor) compared to the year ended December 31,
      2006
      (Successor)***




*Revenue
      and operating costs and expenses.* The
      Company had no operating revenues or cost of revenues in the year ended
      December 31, 2006, compared to $50.5 million of revenues and
      $42.1 million in cost of revenues in the year ended December 31, 2007.




**  *Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses of $0.7 million for the year ended
      December 31, 2006 were related to the pursuit of potential acquisition
      candidates. For the year ended December 31, 2007, the $14.6 million of
      selling, general and administrative expenses were related to our operations
      of
      the acquired companies.


37


**  *Depreciation.* There
      was
      no depreciation expense in the year ended December 31, 2006. For the year
      ended December 31, 2007, the $0.4 million of depreciation expense was
      related to our operations of the acquired companies. **




*Amortization
      of intangible assets.* There
      was
      no amortization of intangible assets in the year ended December 31, 2006.
      For the year ended December 31, 2007, the $2.1 million of amortization
      expense reflects the amortization of intangible assets resulting from the
      acquisitions of TSS/Vortech, Innovative and Rubicon.




**  *Interest
      income (expense), net* Interest
      income, net was $0.8 million in the year ended December 31, 2007, and
      interest income was $1.7 million for the year ended December 31, 2006.
      The interest income for the period ended December 31, 2006 was primarily
      related to earnings on funds that were held in trust until we consummated
      the acquisition of TSS/Vortech, which occurred on January 19, 2007. The
      interest income for the period ended December 31, 2007 was primarily
      lower due to lower average invested balances and higher expense associated
      with
      promissory notes issued in conjunction with our acquistions.




**  *Provision
      for income taxes.* The
      income tax benefit was $0.5 million for the year ended December 31,
      2007 from an income tax expense of $0.3 million for the year ended
      December 31, 2006.




***Year
      ended December 31, 2007 (Successor) compared to year ended December 31, 2006
      (Predecessor)***




*Revenue.* Revenue
      decreased $9.7 million to $50.5 million for the year ended December 31, 2007
      from $60.2 million for the year ended December 31, 2006. The decrease in revenue
      is primarily attributable to our transition from dependence on a single
      customer, whose contracts were substantially completed in 2007, to a more
      diversified customer base.




*Cost
      of Revenue.* Cost
      of
      revenue decreased $6.1 million to $42.1 million for the year ended December
      31,
      2007 from $48.2 million for the year ended December 31, 2006. The decrease
      in
      cost of revenue is primarily attributable to decline in contract volume and
      the
      transition in contracted revenue largely from a single customer to a more
      diversified customer base.




*Gross
      Margin Percentage.* Gross
      margin percentage decreased approximately 300 basis points to 17% for the year
      ended December 31, 2007 from 20% for the year ended December 31, 2006. The
      decline in gross profit is primarily attributable to the contract mix of work
      being performed.




**  *Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses increased $6.4 million to $14.6 million
      for the year ended December 31, 2007 from $8.2 million for the year ended
      December 31, 2006. The increase in expense is associated primarily with
      additional costs of being a public company and increased headcount in the
      proposal, sales and marketing departments, as we sought to simultaneously
      grow and diversify our customer base in 2007.




**  *Depreciation.* Depreciation
      expenses increased $0.1 million to $0.4 million for the year ended
      December 31, 2007 from $0.3 million for the year ended December 31, 2006.
      The increase was driven by a higher average depreciable base.




**  *Amortization
      of intangible assets.* Amortization
      expense increased to $2.1 million for the year ended December 31, 2007 from
      $0 for the year ended December 31, 2006. For the year ended December 31,
      2007, the $2.1 million of amortization expense reflects the amortization of
      intangible assets resulting from the acquisitions of TSS/Vortech, Innovative
      and
      Rubicon. The predecessor had no amortizable intangibles in 2006.




**  *Interest
      income (expense), net.* Interest
      income, net was $0.8 million in the year ended December 31, 2007 as
      compared to $0 for the year ended December 31, 2006. The interest
      income for the period ended December 31, 2007 was primarily attributable to
      interest of $1.3 million on invested cash balances, offset in part by interest
      expense of $0.5 million associated with promissory notes issued in acquisitions.




**  *Provision
      for income taxes.* The
      income tax benefit was $0.5 million for the year ended December 31,
      2007 as compared to $0.0 million for the year ended December 31, 2006. The
      predecessor company was a limited liability company, and therefore the entity
      was not taxed rather its members were responsible for any tax obligation.




38





***Year
      ended December 31, 2006 (Successor) compared to the year ended December 31,
      2005
      (Successor)***




*Selling,
      general and administrative expenses.* Selling,
      general and administrative expenses increased $0.4 million to $0.7 million
      for the year ended December 31, 2006 from $0.3 million for the year ended
      December 31, 2005. The costs are associated were related to the pursuit of
      acquisition candidate and increased due primarily to a partial year of
      operations from July 25, 2005 (IPO) through December 31, 2005.




*Interest
      income, (expense), net* .
      For the
      year ended December 31, 2006, we had total income of $1.7 million,
      consisting of net interest income on investments held in trust and on cash
      balances maintained. This represented an increase of $1.2 million, or 217%,
      from the year ended December 31, 2005 due to the completion of our initial
      public offering on July 20, 2005.




*Provision
      for income taxes* .
      The
      provision for income taxes increased $0.2 million to $0.3 million for the year
      ended December 31, 2006 from $0.1 million for the year ended December 31, 2005.
      The increase in the provision is associated with the $0.5 million increase
      in income from operations due to higher net interest income on investments
      held
      in trust




**Liquidity
      and Capital Resources**





**Overview**




Successor
                  (Fortress International Group, Inc.)2007
              
              2006
              
              2005Cash used
                  in operations
              
              $
              (4,554,793
              )
              $
              (780,496
              )
              $
              (252,074
              )Cash
                  provided by (used in) investing
              
              
              26,286,893
              
              
              (224,704
              )
              
              (41,964,000
              )Cash
                  provided by (used in) financing
              
              
              (8,567,237
              )
              
              20,000
              
              
              43,183,621Net
                  increase (decrease) in cash
              
              $
              13,164,863
              
              $
              (985,200
              )
              $
              967,547





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 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 to an operating
      company.




Successor
              
              PredecessorDecember
                  31,
              
              December
                  31,2007
              
              2006
              
              ChangeCash
                  provided by (used in) operations
              
              $
              (4,554,793
              )
              $
              3,912,514
              
              $
              (8,467,307
              )Cash
                  provided by (used in) investing
              
              
              26,286,893
              
              
              (488,459
              )
              
              26,775,352Cash
                  used in financing
              
              
              (8,567,237
              )
              
              (2,799,292
              )
              
              (5,767,945
              )Net
                  increase (decrease) in cash
              
              $
              13,164,863
              
              $
              624,763
              
              $
              12,540,100


For
        the
        year ended December 31, 2007, we had cash and cash equivalents of $13,172,210.
        For the year ended December 31, 2006 we had cash and cash equivalent of $7,437
        and cash held in trust of $44,673,994. As of January 19, 2007 and December
        31,
        2006, the predecessor had cash and cash equivalent of $1,322,317 and $2,361,838,
        respectively.




*Operating
      Activity*





Net
      cash
      provided by operations decreased $8.5 million to $ 4.6 million used by
      operations for this successor
      year ended December 31, 2007 from $ 3.9 million provided by operations for
      the
predecessor
      for the year ended December 31, 2006. The decline in operating cash flow
      is primarily attributable to the following:





·
            *Increase
                in net loss.*We had a$7.5
                million increase in our net loss excluding non-cash items such as
                provisions for bad debt, depreciation, amortization, equity-based
                expense,
                provision for income taxes and other non-cash charges. As discussed
                above
                during 2007 fiscal year, we incurred increased costs associated with
                being
                a public company and sought to align our headcount consistent with
                our
                objective of diversifying our customer concentration and growing
                revenue
                over the long-term. Our current backlog growth is indicative of this
                strategic effort and we expect that such backlog will turn into
                operating cash flows in the future.




39




·
            *Increase
                in working capital.*Net
                changes in operating assets and liabilities increased approximately
                $0.9
                milllion accounting for the remaining decline in operating cash flows.
                The
                decrease is attributable primarily to timing on contracts, as management
                seeks to balance customer and vendor cash flows via contractual terms
                standard to our industry.





*Investing
      Activity*





Net
      cash
      provided by investing was attributable to our transition to an operating Company
      and the release of investments held in trust for general operating purposes.
      Net
      cash used in 2006 reflects only purchase of property plant and equipment at
      levels generally consistent with 2007, and accordingly the increase is primarily
      attributable to the following:





·
            *Sale
                of investments held in Trust*.
                Upon the approval of the TSS/Vortech acquisition, we sold
                approximately $44.7 million in trust investments to fund the cash
                portion
                the acquisition and related operations, and repay dissenting shareholders
                electing to receive their IPO proceeds back.





·
            *Acquisitions.*We
                purchased four companies during the year resulting in a net cash
                investment of approximately $18.0 million. We initially invested
                approximately $11.5 million, net of acquisition costs and acquired
                cash,
                toward the purchase of TSS/Vortech, and subsequently invested $6.5
                million, net of acquisition costs and acquired cash, toward the purchase
                of Comm Site, Innovative and
                Rubicon.





*Financing
      Activity*





Net
      cash
      used in financing increased approximately $5.7 million. Predecessor financing
      activities were comprised of members’ distributions. Successor cash used in
      financing activities consisted primarily of the following:





·
            *Repurchase.*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 share buy back
                program through the first half of the year.




·
                *Non-Cash
                    Debt Issuance.*In connection
                    with our purchase of TSS/Vortech, we issued to selling members
                    Mr. Rosato
                    and Mr. Gallagher a total of $10.0 million in convertible, unsecured
                    promissory notes, bearing interest at 6% per annum and repayable
                    over a
                    five-year term.
                  
                  In
                      connection with our purchase of Innovative, we issued to selling
                      members
                      $0.3 million unsecured promissory notes, bearing interest at
                      6% per annum
                      and repayable over a three-year term. Additionally, the sellers
                      were
                      entitled to a contingently issuable note in the event Innovative
                      achieves
                      certain earnings targets.
                    
                    During
                      the fourth quarter Innovative achieved 2007 financial targets
                      for 2007
                      established in the purchase agreement, resulting in an additional
                      note of $0.1 million.
                    
                    In
                      connection with our purchase of Rubicon, we issued contingent
                      consideration in the form of two unsecured promissory notes
                      issuable up to
                      a maximum of $1.5 million and $2.0 million contingently issuable.
                      The
                      notes are issuable in the event of achievement of certain operational
                      and
                      financial targets for December 2007 and calendar year 2008.
                      The notes bear
                      interest at 6% from the purchase date and are payable upon
                      achievement of
                      the targets.
                    
                    During
                      the fourth quarter, Rubicon achieved certain 2007 earnings
                      targets
                      established in the purchase agreement, resulting in an unsecured
                      promissory note of $1.5 million due on January 31, 2008.
                    
                    For
                      a discussion of our acquisitions, see Note 2 —Acquisitions of the
                      Notes to Consolidated Financial
                      Statements.


·
            *Debt
                Repayments.*We
                paid $2.2 million in repayment of debt, consisting primarily of the
                $2.0
                million to retire the promissory note due to our Chief Executive
                Officer. Our Chief Executive Officer, Thomas
                P. Rosato,used the proceeds to purchase our common stock and
                warrants in the open market pursuant to a 10b5-1
                Plan.




The
      share
      repurchase program was suspended in the third quarter 2007. We expect to retain
      future earnings, if any, for use in possible expansion of our business and
      do
      not anticipate paying any cash dividends in the foreseeable future.





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
      shareholders. If we raise additional funds through the issuance of debt
      securities, the terms of such debt could impose additional restrictions on
      our
      operations. Additional capital, if required, may not be available on acceptable
      terms, if at all. If we are unable to obtain additional financing, we may be
      required to reduce the scope of acquisition plan, which could impact our
      business, financial condition and earnings.




**Off-Balance
      Sheet
      Arrangements**




At
      December 31, 2007, we had no off-balance sheet
      arrangements.





40





**Contractual
      Obligations and Commercial Commitments**





The
      following table summarizes our future contractual obligations and commercial
      commitments of the Company at December 31, 2007, as further described in
      the notes to our consolidated financial statements:




Less
                  thanTotal
              
              1
                  Year
              
              1-3
                  Years
              
              3-5
                  YearsLong-term
                  debt
              
              $
              9,498,967
              
              $
              1,650,306
              
              $
              7,223,664
              
              $
              624,997Operating
                  leases
              
              
              2,851,585
              
              
              870,035
              
              
              1,925,410
              
              
              56,140Contractual
                  purchase commitments
              
              
              14,897,631Total
              
              $
              27,248,183
              
              $
              2,520,341
              
              $
              9,149,074
              
              $
              681,137




Contractual
      purchase commitments represent outstanding purchase orders at December 31,
      2007.




41




**Item
              7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**





The
      following discussion about our market risk disclosures involves forward-looking
      statements. Actual results could differ materially from those projected in
      forward-looking statements.




Our
      exposure to market risk for changes in interest rates relates to our cash
      equivalents. Our cash and cash equivalents are highly liquid and consist of
      maturies less than 90 days. Our cash and investments policy emphasizes liquidity
      and preservation of principal over other portfolio considerations. If market
      interest rates were to increase by one percent from December 31, 2007, the
      fair value of our portfolio would decline less than approximately $0.1 million.




42




**Item
                8.**
              **FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY
                  DATA**


**Fortress
        International Group, Inc.**




Index
                to Financial Statements and Financial Statement
                Schedule
            
            
            NumberFinancial
                Statements:Report
                of Independent Registered Public
                Accounting Firm
            
            
            F-2Consolidated
                Balance Sheets as ofDecember
                31,2007
                (Successor), December 31, 2006(Successor),
                January 19, 2007 (Predecessor) and December 31, 2006
                (Predecessor)
            
            
            F-6Consolidated
                Statements of Operations for the three years ended December 31, 2007
                (Successor), December 31, 2006 (Successor) and December 31, 2005
                (Successor), and for the period from January 1, 2007 through January
                19,
                2007 (Predecessor) and for the years ended December 31, 2006 (Predecessor)
                and December 31, 2005 (Predecessor)
            
            
            F-7Consolidated
                  Statements of Stockholders’ Equity for the three years ended December 31,
                  2007 (Successor), 2006 (Successor) and 2005 (Successor) and
                  Consolidated Statements of Members’ Equity for the period from January 1,
                  2007 through January 19, 2007 (Predecessor), and for the years ended
                  December 31, 2007 (Predecessor) and 2006 (
                  Predecessor).
            
            
            F-8Consolidated
                  Statements of Cash Flows for the three years ended December 31,
                  2007
                  (Successor),December
                  31, 2006 (Successor) and December 31, 2005 (Successor), and for
                  the period
                  from January 1, 2007 through January 19, 2007 (Predecessor) and for
                  the years ended December 31, 2006 (Predecessor) and December 31,
                  2005
                  (Predecessor)
            
            
            F-9Notes
                to Consolidated Financial Statements
            
            
            F-10Financial
                Statement Schedules:Schedule
                - II Valuation Accounts




43




**Report
      of Independent Registered Public Accounting Firm**






Board
      of
      Directors and Shareholders


Fortress
      International Group, Inc.






We
        have
        audited the accompanying consolidated balance sheet of Fortress International
        Group, Inc. and Subsidiaries (the “Company”) (a Delaware corporation) as of
        December 31, 2007, and the related consolidated statements of operations,
        stockholders’ equity, and cash flows for the year ended December 31, 2007. Our
        audit of the basic financial statements included the financial statement
        schedule for the year ended December 31, 2007 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 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 consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Fortress International
      Group, Inc. and Subsidiaries as of December 31, 2007, and the consolidated
      results of their operations and their cash flows for the year ended December
      31,
      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 for the year ended December 31, 2007.




/s/
        GRANT THORNTON LLP


Baltimore,
      Maryland


March
        28,
        2008




F-2




**Report
      of Independent Certified Public Accountants**







Board
      of
      Directors and Shareholders


Fortress
      International Group, Inc.







We
      have
      audited the accompanying combined balance sheet of Vortech, L.L.C. and VTC,
      L.L.C. (the “Company”) (a Delaware corporation) as of January 19, 2007, and the
      related statements of operations, stockholders’ equity, and cash flows for the
      period from January 1, 2007 through January 19, 2007. These financial statements
      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 auditing standards generally accepted
      in
      the United States of America as established by the American Institute of
      Certified Public Accountants. Those standards require that we plan and perform
      the audit to obtain reasonable assurance about whether the financial statements
      are free of material misstatement. An audit includes 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 provide a reasonable
      basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the combined financial position of Vortech, L.L.C. and VTC,
      L.L.C. as of January 19, 2007, and the combined results of their operations
      and
      their cash flows for the period from January 1, 2007 through January 19, 2007
      in
      conformity with accounting principles generally accepted in the United States
      of
      America.




/s/
          GRANT THORNTON LLP


Baltimore,
      Maryland


March
        28,
        2008


F-3
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 To
          the
          Board of Directors and Shareholders
 Fortress
          International Group, Inc.
 
  We
          have
          audited the accompanying balance sheet of Fortress International Group,
          Inc.
          (formerly Fortress America Acquisition Corporation) (a corporation in the
          development stage) as of December 31, 2006, and the related statements
          of
          operations, stockholders’ equity and cash flows for the years ended December 31,
          2006 and 2005. These financial statements are the responsibility of the
          Company’s management. Our responsibility is to express an opinion on these
          financial statements 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. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes 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 financial statements referred to above present fairly, in
          all
          material respects, the financial position of Fortress International Group,
          Inc.
          as of December 31, 2006, and the results of its operations and its cash
          flows
          for the years ended December 31, 2006 and 2005 in conformity with United
          States
          generally accepted accounting principles.
 
 
  **GOLDSTEIN
          GOLUB KESSLER LLP**
 New
          York,
          New York
 
 February
          27, 2007
  F-4


**Report
            Of Independent Registered Public Accounting Firm**
 
 
 To
            the
            Members
 Vortech,
            LLC and VTC, LLC
 Beltsville,
            Maryland
 
 We
            have
            audited the accompanying combined balance sheet of Vortech, LLC and VTC,
            LLC
            (the Company) as described in Note 1 to the financial statements, as
            of
            December 31, 2006 and the related combined statements of operations,
            changes in members’ equity and cash flows for the years ended December 31, 2006
            and 2005. These financial statements are the responsibility of the Company
            management. Our responsibility is to express an opinion on these financial
            statements based on our audits.
 
 We
            conducted our audits in accordance with 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. An audit includes examining,
            on a
            test basis, evidence supporting the amounts and disclosures in the financial
            statements. An audit also includes 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 combined financial statements referred to above present
            fairly, in
            all material respects, the financial position of the Vortech,
            LLC and VTC, LLC as of
            December 31, 2006 and the results of their operations and their cash
            flows for
            the years ended December 31, 2006 and 2005 in conformity with U.S., generally
            accepted accounting principles.
 
 Baltimore,
            Maryland
 March
            27,
            2007


F-5


**PART
      I - FINANCIAL INFORMATION**





FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      BALANCE SHEETS




**Successor****(Fortress**
                  **International
                    Group, Inc.)**
                
                **Predecessor
                    (TSS/Vortech)****December
                    31,**
                
                **December
                    31,**
                
                **January
                    19,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006***Current
                    Assets*Cash
                    and cash equivalents
                
                $
                13,172,210
                
                $
                7,347
                
                $
                1,322,317
                
                $
                2,361,838Investments
                    held in trust
                
                
                -
                
                
                44,673,994
                
                
                -
                
                
                -Contract
                    and other receivables, net
                
                
                18,349,140
                
                
                -
                
                
                6,261,988
                
                
                9,960,851Costs
                        and estimated earnings in excess of billings on uncompleted
                        contracts
                
                
                1,322,254
                
                
                -
                
                
                1,559,045
                
                
                480,540Prepaid
                    expenses and other current assets
                
                
                301,487
                
                
                3,750
                
                
                233,894
                
                
                125,276Income
                    taxes receivable
                
                
                893,322
                
                
                -
                
                
                -
                
                
                -Due
                    from affiliated entities
                
                
                -
                
                
                -
                
                
                -
                
                
                201,670Total
                    Current Assets
                
                
                34,038,413
                
                
                44,685,091
                
                
                9,377,244
                
                
                13,130,175Property
                    and equipment, net
                
                
                1,044,545
                
                
                -
                
                
                904,689
                
                
                810,747Goodwill
                
                
                20,714,967
                
                
                -
                
                
                -
                
                
                -Intangible
                    assets, net
                
                
                21,089,136
                
                
                -
                
                
                -
                
                
                -Other
                    assets
                
                
                512,000
                
                
                1,360,528
                
                
                64,158
                
                
                21,190Total
                    Assets
                
                $
                77,399,061
                
                $
                46,045,619
                
                $
                10,346,091
                
                $
                13,962,112*Liabilities,
                    Stockholders’ and Members’ Equity*Current
                    LiabilitiesNotes
                    payable, current portion
                
                $
                1,650,306
                
                $
                -
                
                $
                72,808
                
                $
                76,934Accounts
                    payable and accrued expenses
                
                
                16,121,492
                
                
                913,222
                
                
                6,641,718
                
                
                8,503,024Billings
                      in excess of costs and estitmated earnings on uncompleted
                      contracts
                
                
                3,880,279
                
                
                -
                
                
                1,662,718
                
                
                1,243,042Advances
                    from stockholder
                
                
                -
                
                
                20,000
                
                
                -
                
                
                -Income
                    taxes payable
                
                
                -
                
                
                586,283
                
                
                -
                
                
                -Interest
                    income on common stock subject to possible
                    redemption
                
                
                -
                
                
                541,735
                
                
                -
                
                
                -Deferred
                    compensation payable
                
                
                -
                
                
                -
                
                
                -
                
                
                643,571Total
                    Current Liabilities
                
                
                21,652,077
                
                
                2,061,240
                
                
                8,377,244
                
                
                10,466,571Convertible
                  notes
                  payable, less current portion
                
                
                7,500,000
                
                
                -
                
                
                -
                
                
                -Notes
                    payable, less current portion
                
                
                348,611
                
                
                -
                
                
                79,524
                
                
                81,679Other
                    liabilities
                
                
                44,648
                
                
                -
                
                
                -
                
                
                -Total
                    Liabilities
                
                
                29,545,386
                
                
                2,061,240
                
                
                8,456,768
                
                
                10,548,250Common
                    stock, subject to possible redemption 1,559,220 shares
                
                
                -
                
                
                8,388,604
                
                
                -
                
                
                -Commitments
                    and Contingencies
                
                
                -
                
                
                -
                
                
                -
                
                
                -Stockholders’
                    and Members’ 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;
                        12,150,400 and
                        9,550,000 issued; 11,992,325 and 9,550,000 outstanding, at
                        December 31,
                        2007 and 2006 respectively (which includes 0 and 1,559,220
                        shares subject
                        to possible redemption, respectively)
                
                
                1,214
                
                
                955
                
                
                -
                
                
                -Additional
                    paid-in capital
                
                
                55,268,012
                
                
                34,819,062
                
                
                -
                
                
                -Treasury
                    stock, 158,075 and 0 shares at December 31, 2007 and December
                    31, 2006,
                    respectively, at cost
                
                
                (814,198
                )
                
                -
                
                
                -
                
                
                -Retained
                    earnings (accumulated deficit)
                
                
                (6,601,353
                )
                
                775,758
                
                
                -
                
                
                -Members’
                    equity
                
                
                -
                
                
                -
                
                
                1,889,323
                
                
                3,732,115Note
                    receivable from affiliate
                
                
                -
                
                
                -
                
                
                -
                
                
                (318,253
                )Total
                    stockholders’ and members’ equity
                
                
                47,853,675
                
                
                35,595,775
                
                
                1,889,323
                
                
                3,413,862Total
                        liabilities, common stock subject to redemption, and stockholders’ and
                        members’ equity
                
                $
                77,399,061
                
                $
                46,045,619
                
                $
                10,346,091
                
                $
                13,962,112




See
      accompanying notes to consolidated financial statements.





F-6




FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      STATEMENTS OF OPERATIONS




**Predecessor****Sucessor
                  for the Year
                  Ended**
              
              **For
                  the period January 1,**
              
              **For
                  the Year Ended****December
                  31,**
              
              **(inception)
                  to**
              
              **December
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2005**
              
              **Janaury
                  19, 2007**
              
              **2006**
              
              **2005**Results
                  of Operations:Revenue
              
              $
              50,455,823
              
              $
              -
              
              $
              -
              
              $
              1,412,137
              
              $
              60,154,971
              
              $
              58,632,293Cost
                  of revenue
              
              
              42,071,361
              
              
              -
              
              
              -
              
              
              1,108,276
              
              
              48,172,911
              
              
              50,056,924Gross
                  profit
              
              
              8,384,462
              
              
              -
              
              
              -
              
              
              303,861
              
              
              11,982,060
              
              
              8,575,369Operating
                  expenses:Selling,
                  general and administrative
              
              
              14,563,111
              
              
              689,120
              
              
              319,694
              
              
              555,103
              
              
              8,165,386
              
              
              5,419,618Depreciation
                  and amortization
              
              
              394,913
              
              
              -
              
              
              -
              
              
              33,660
              
              
              277,664
              
              
              228,279Amortization
                  of intangibles
              
              
              2,109,222
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  operating costs
              
              
              17,067,246
              
              
              689,120
              
              
              319,694
              
              
              588,763
              
              
              8,443,050
              
              
              5,647,897Operating
                  income (loss)
              
              
              (8,682,784
              )
              
              (689,120
              )
              
              (319,694
              )
              
              (284,902
              )
              
              3,539,010
              
              
              2,927,472Interest
                  income (expense), net
              
              
              806,518
              
              
              1,666,806
              
              
              525,430
              
              
              3,749
              
              
              (24,084
              )
              
              (35,184
              )Income
                  (loss) from continuing operations beforeincome
                  taxes
              
              
              (7,876,266
              )
              
              977,686
              
              
              205,736
              
              
              (281,153
              )
              
              3,514,926
              
              
              2,892,288Income
                  tax expense (benefit)
              
              
              (499,155
              )
              
              332,414
              
              
              74,194
              
              
              -
              
              
              -
              
              
              -Income
                  (loss) from continuing operations
              
              
              (7,377,111
              )
              
              645,272
              
              
              131,542
              
              
              (281,153
              )
              
              3,514,926
              
              
              2,892,288Gain
                  on discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              252,845Net
                  income (loss)
              
              $
              (7,377,111
              )
              $
              645,272
              
              $
              131,542
              
              $
              (281,153
              )
              $
              3,514,926
              
              $
              3,145,133Per
                  Common Share (Basic and Diluted): (1)Basic
                  and diluted net income (loss) per share
              
              $
              (0.63
              )
              $
              0.07
              
              $
              0.03
              
              
              -
              
              
              -
              
              
              -Weighted
                  average common shares outstanding-basic and diluted
              
              
              11,698,895
              
              
              9,550,000
              
              
              5,107,534
              
              
              -
              
              
              -
              
              
              -




(1)
      Basic
      and diluted earnings per share are the same, as the inclusion of dilutive
      securities would have an anti-dilutive impact due to reported net losses. The
      Predecessor was a limited liability Company accordingly no earnings per share
      data is computed.




See
      accompanying notes to consolidated financial statements.





F-7




FORTRESS
            INTERNATIONAL GROUP, INC.
 CONSOLIDATED
            STATEMENTS OF STOCKHOLDERS’
            AND MEMBERS’
            EQUITY
 Successor
                      (Fortress International Group, Inc.)Common
                      Stock
                  
                  
                  
                  
                  
                  Treasury
                      StockShares
                  
                  
                  Amount
                  
                  
                  Additional
                      Paid-in Capital
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  (Accumulated
                      Deficit) Retained Earnings
                  
                  
                  Total
                      Stockholders’ EquityBalance
                      at January 1, 2005
                  
                  
                  1,250,000
                  
                  $
                  125
                  
                  $
                  24,875
                  
                  
                  -
                  
                  $
                  -
                  
                  $
                  (1,056
                  )
                  $
                  23,944Redemption
                      of common stock
                  
                  
                  (1,250,000
                  )
                  
                  (125
                  )
                  
                  (24,875
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (25,000
                  )Common
                          shares issued March 9, 2005 at $0.01429 per
                          share
                  
                  
                  1,750,000
                  
                  
                  175
                  
                  
                  24,825
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,000Common
                      shares issued July 20, 2005, net of underwriters’ discount and offering
                      expenses (includes 1,399,300 shares subject to possible
                      conversion)
                  
                  
                  7,000,000
                  
                  
                  700
                  
                  
                  38,687,329
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  38,688,029Common
                          shares issued August 24, 2005, net of underwriters’ discount and offering
                          expenses (includes159,920 shares subject to possible
                          conversion)
                  
                  
                  800,000
                  
                  
                  80
                  
                  
                  4,495,412
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,495,492Proceeds
                          subject to possible conversion of 1,559,220
                          shares
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (8,388,604
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (8,388,604
                  )Proceeeds
                      from issuance of option
                  
                  
                  -
                  
                  
                  -
                  
                  
                  100
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  100Net
                      income for the period
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  131,542
                  
                  
                  131,542Balance
                      at December 31, 2005
                  
                  
                  9,550,000
                  
                  
                  955
                  
                  
                  34,819,062
                  
                  
                  -
                  
                  
                  -
                  
                  
                  130,486
                  
                  
                  34,950,503Net
                      income for the period
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  645,272
                  
                  
                  645,272Balance
                      at December 31, 2006
                  
                  
                  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
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  73,500Non-cash
                      compensation
                  
                  
                  730,832
                  
                  
                  73
                  
                  
                  1,405,655
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,405,728Net
                      loss for the period
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (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
                  )
                  $
                  47,853,675




PredecessorMembers’EquityBeginning
                      balance January 1, 2005
                  
                  $
                  356,117Distributions
                  
                  
                  (559,616
                  )Net
                      income
                  
                  
                  3,145,133Balance
                      December 31, 2005
                  
                  
                  2,941,634Distributions
                  
                  
                  (2,724,445
                  )Net
                      income
                  
                  
                  3,514,926Balance
                      December 31, 2006
                  
                  
                  3,732,115Distributions
                  
                  
                  (1,561,639
                  )Net
                      loss
                  
                  
                  (281,153
                  )Balance
                      January 19, 2007
                  
                  $
                  1,889,323
  See
        accompanying notes to consolidated financial statements.




F-8




FORTRESS
      INTERNATIONAL GROUP, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS




**Successor
                    (Fortress International**
                  **Group,
                    Inc.)**
                
                **Predecessor
                    (TSS/Vortech)****For
                    the Year Ended**
                
                
                
                **For
                    the Year Ended****2007**
                
                **2006**
                
                **2005**
                
                **For
                    the period January 1, to Janaury 19, 2007**
                
                **December
                    31, 2006**
                
                **December
                    31, 2005**Cash
                    Flows from Operating Activities:Net
                    (loss) income
                
                $
                (7,377,111
                )
                $
                645,272
                
                $
                131,542
                
                $
                (281,153
                )
                $
                3,514,926
                
                $
                3,145,133Adjustments
                    to reconcile net income (loss) to net cash provided by (used
                    in) operating
                    activities:Depreciation
                    and amortization
                
                
                394,913
                
                
                -
                
                
                -
                
                
                33,660
                
                
                277,664
                
                
                228,279Amortization
                    of intangibles
                
                
                2,562,741
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Allowance
                    for doubtful accounts
                
                
                79,611
                
                
                -
                
                
                -
                
                
                -
                
                
                50,000
                
                
                (26,876
                )Stock
                    and warrant-based compensation
                
                
                1,405,728
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Benefit
                    from income taxes
                
                
                (499,155
                )
                
                
                
                
                
                
                
                -
                
                
                -
                
                
                -Other
                    non cash income, net
                
                
                (222,597
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Gain
                    from discontinued operations
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (252,845
                )Changes
                    in operating assets and liabilities, net of effects of
                    acquisitions:Contracts
                    and other receivables
                
                
                (11,057,579
                )
                
                -
                
                
                -
                
                
                3,698,863
                
                
                1,125,982
                
                
                (8,440,587
                )Costs
                      and estimated earnings in excess of billings on uncompleted
                      contracts
                
                
                652,937
                
                
                -
                
                
                -
                
                
                (1,078,505
                )
                
                47,954
                
                
                434,595Prepaid
                    expenses
                
                
                (50,988
                )
                
                46,415
                
                
                (50,165
                )
                
                (108,618
                )
                
                (119,079
                )
                
                (2,236
                )Due
                    from affiliates
                
                
                -
                
                
                -
                
                
                -
                
                
                519,923
                
                
                (118,150
                )
                
                (285,303
                )Other
                    assets
                
                
                425,972
                
                
                (358,675
                )
                
                (132,000
                )
                
                (42,968
                )
                
                17,796
                
                
                (146,809
                )Accounts
                    payable and accrued expenses
                
                
                7,689,253
                
                
                162,765
                
                
                104,252
                
                
                (1,861,306
                )
                
                256,574
                
                
                5,066,299Billings
                      in excess of costs and estitmated earnings on uncompleted
                      contracts
                
                
                2,149,719
                
                
                -
                
                
                -
                
                
                419,676
                
                
                (1,656,686
                )
                
                1,361,266Interest
                      income attributable to common stock subject to possible
                      redemption
                
                
                -
                
                
                (2,070,193
                )
                
                (639,801
                )
                
                -
                
                
                -
                
                
                -Other
                    liabilities
                
                
                (708,236
                )
                
                793,920
                
                
                334,098
                
                
                (643,571
                )
                
                515,533
                
                
                103,472Net
                    cash provided by (used in) operating activities
                
                
                (4,554,792
                )
                
                (780,496
                )
                
                (252,074
                )
                
                656,001
                
                
                3,912,514
                
                
                1,184,388Cash
                    Flows from Investing Activities:Purchase
                    of property and equipment
                
                
                (357,974
                )
                
                -
                
                
                -
                
                
                (127,602
                )
                
                (488,459
                )
                
                (59,521
                )Purchase
                    of investments held in trust
                
                
                -
                
                
                -
                
                
                (41,964,000
                )
                
                -
                
                
                -
                
                
                -Sale
                    of investments held in trust
                
                
                44,673,994
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Payments
                    of deferred acquistion costs
                
                
                -
                
                
                (224,704
                )
                
                -
                
                
                -
                
                
                -
                
                
                -Purchase
                    of TSS/Vortech, net of cash received
                
                
                (11,519,151
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Purchase
                    of Comm Site of South Florida, Inc. net of cash received
                
                
                (150,000
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Purchase
                    of Innovative, net of cash received
                
                
                (1,614,452
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Purchase
                    of Rubicon Integration, L.L.C., net of cash received
                
                
                (4,745,524
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Net
                    cash provided by (used in) investing activities
                
                
                26,286,893
                
                
                (224,704
                )
                
                (41,964,000
                )
                
                (127,602
                )
                
                (488,459
                )
                
                (59,521
                )Cash
                    Flows from Financing Activities:Proceeds
                    of public offering, including over-allotment option exercise,
                    and net of
                    issuance costs
                
                
                -
                
                
                -
                
                
                43,196,121
                
                
                -Payments
                    on notes payable
                
                
                (242,413
                )
                
                -
                
                
                -
                
                
                (6,281
                )
                
                (74,847
                )
                
                (331,514
                )Proceeds
                    from issuance of notes payable, stockholders
                
                
                -
                
                
                20,000
                
                
                57,500
                
                
                -
                
                
                -
                
                
                -Payment
                    of notes payable, stockholders
                
                
                (20,000
                )
                
                -
                
                
                (70,000
                )
                
                -
                
                
                -
                
                
                -Payment
                    on promissory note payable to officer
                
                
                (2,000,000
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Warrant
                    exercise
                
                
                73,500
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Payment
                    to shareholders electing to redeem their shares in connection
                    with the
                    TSS/Vortech acquisition
                
                
                (4,342,310
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Proceeds
                    from sale of shares of common stock
                
                
                -
                
                
                -
                
                
                25,000
                
                
                -
                
                
                -
                
                
                -Redemption
                    of common stock
                
                
                -
                
                
                -
                
                
                (25,000
                )
                
                -
                
                
                -
                
                
                -Repurchase
                    of treasury stock
                
                
                (2,036,015
                )
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Members’
                    distributions
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,561,639
                )
                
                (2,724,445
                )
                
                (559,616
                )Net
                    cash provided by (used in) financing activities
                
                
                (8,567,238
                )
                
                20,000
                
                
                43,183,621
                
                
                (1,567,920
                )
                
                (2,799,292
                )
                
                (891,130
                )Net
                    Increase (Decrease) in Cash
                
                
                13,164,863
                
                
                (985,200
                )
                
                967,547
                
                
                (1,039,521
                )
                
                624,763
                
                
                233,737Cash,
                    beginning of period
                
                
                7,347
                
                
                992,547
                
                
                25,000
                
                
                2,361,838
                
                
                1,737,075
                
                
                1,503,338Cash,
                    end of period
                
                $
                13,172,210
                
                $
                7,347
                
                $
                992,547
                
                $
                1,322,317
                
                $
                2,361,838
                
                $
                1,737,075Supplemental
                    disclosure of cash flow information:Cash
                    paid for interest
                
                $
                523,268
                
                $
                -
                
                $
                -
                
                $
                368
                
                $
                24,084
                
                $
                35,184Cash
                    paid for taxes
                
                
                593,196
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Supplemental
                    disclosure of non cash Investing Activities:Issuance
                    of common stock in connection with the acquisition of
                    TSS/Vortech
                
                
                14,211,359
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Accrual
                    of acquisitions
                
                
                -
                
                
                645,149
                
                
                -
                
                
                -
                
                
                -
                
                
                -Promissory
                    notes payable issued in connection with the acquisition of
                    TSS/Vortech
                
                
                10,000,000
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issuance
                    of common stock in connection with the acquisition of
                    Innovative
                
                
                150,075
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Promissory
                    notes issued in connection with the acquisition of
                    Innovative
                
                
                564,611
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Promissory
                    notes isssued in connection with the acquisition of
                    Rubicon
                
                
                1,517,753
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Supplemental
                    disclosure of non cash Financing Activities:Discount
                    received on repayment of promissory note to officer
                
                
                500,000
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -


See
        accompanying notes to consolidated financial statements.


F-9




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,
      2007, 2006, and 2005 for Fortress International Group, Inc. (the
“Successor Company”, “Fortress” or the “Company”) and are for the period January
      1, 2007 to January 19, 2007 (the acquisition date) and the years ended December
      31, 2006 and December 31, 2005 for VTC, L.L.C. t/a Total Site Solutions and
      Vortech, L.L.C. ( collectively the “Predecessor Company” or
“TSS/Vortech”).




The
      Company was formed 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 (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 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 2). The acquisition transformed
        the Company from a firm investing capital 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, facilities management.
  After
        acquiring TSS/Vortech, the Company continued its expansion through the
        acquisition ofComm Site of South Florida, Inc. (“Comm Site”) on
        May 7, 2007, Innovative Power Solutions, Inc. and Quality Power Solutions,
        Inc.
        (“Innovative”) on September 24, 2007, and Rubicon Integration, L.L.C.
        (“Rubicon”) on November 30, 2007. 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 2). All
        intercompany 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 i ncurred,
        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 included as
      direct costs.




F-10




FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS


***Stock-Based
      Compensation***




Effective
      January 1, 2006, we adopted Statement of Financial Accounting Standards (SPAS)
      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 stock option as determined by an option pricing model, the
      Black-Scholes valuation model. 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 common 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 $1.2 million, $0 and $0 for the years ended
      December 31, 2007, December 31, 2006 and December 31, 2005, respectively. For
      the period January 1, 2007 through January 19, 2007 and for the years ended
      December 31, 2006 and December 31, 2005, the predecessor
      incurred advertising expense of $0.1 million, $1.0 million, and $0.4
      million, respectively.




***Depreciation
      and Amortization***




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




DepreciableLivesVehicles
              
              
              5Trade
                  equipment
              
              
              5Furniture
                  and fixtures
              
              
              7Office
                  equipment
              
              
              3-7




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 have 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, options to purchase units, warrants to purchase common
        shares
        and notes convertible totaling 19,764,466 common shares were excludedin
        the computation of diluted loss per share in 2007 because the Company incurred
        a
        net loss and the effect of inclusion would have been anti-dilutive. Options
        to
        purchase units and warrants to purchase common shares totaling 17,700,000
        were
        excluded in the computation of diluted loss per share in 2007 because the
        Company incurred a net loss and the effect of inclusion would have been
        anti-dilutive.




F-11




FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS


***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. 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
      writeoffs 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
          successor company had recorded accounts receivable allowances of $65,000
          and $0
          at December 31, 2007 and December 31, 2006, respectively.  The
          predecessor had recorded accounts receivable allowances of $75,000 and
          $75,000
          at January 19, 2007 and December 31, 2006,
          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, 2007 bonds
      secured by customer accounts receivable totaled $0.6 million. The predecessor
      had similar such bonds at January 19, 2007 and December 31, 2006 of $0.4
      million an $0.9 million, respectively.




***Cash
      and cash equivalents***




The
      Company considers all highly liquid investments with original maturities of
      three months or less to be cash equivalents.




***Long-Lived
      Assets***




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 is evaluated for impairment
      at least annually.




Other
      intangible assets primarily include customer contracts, customer relationships,
      and trademarks acquired in business combinations. The intangible assets
      with estimated useful lives are amortized on a straight-line basis over the
      expected period of benefit, which ranges from 1 to 8 years. Certain
      intangibles acquired in business combinations have an indefinite life.
      In accordance with SFAS No. 142, the Company evaluates its indefinite lived
      intangible assets for impairment annually or as circumstances change that could
      affect the recoverability of the carrying amount of the assets.




The
      Company at least annually, or as events or circumstances change that could
      affect the recoverability of the carrying value of its long-lived assets,
      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.”
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.




F-12




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 be 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.




***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 estimatable, and the fair value
      of stock and option grants. Actual results could differ from those estimates
      and
      assumptions.




***Recently
      Issued Accounting Pronouncements***


In
        September 2006, the FASB issued Statements of Financial Accounting Standards
        (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles, and expands disclosures about fair
        value measurements. SFAS No. 157 does not require any new fair value
        measurements, but provides guidance on how to measure fair value by providing
        a
        fair value hierarchy used to classify the source of the information. This
        statement is effective for fiscal years beginning after November 15, 2007
        and interim periods within that fiscal year. The adoption of SFAS No. 157
        is not expected to have a material effect on the Company’s consolidated results
        of operations or financial condition upon adoption on January 1, 2008.
  In
        February 2007, the FASB issued SFAS No. 159, *The
        Fair Value Option for Financial Assets and Financial Liabilities–Including
        an
        amendment of FASB Statement No. 115.*SFAS No. 159 permits entities to
        choose to measure many financial instruments and certain other items at fair
        value. Unrealized gains and losses on items for which the fair value option
        has been elected will be recognized in earnings at each subsequent reporting
        date. We do not believe the adoption of SFAS No. 159 will have a
        material impact on our finanical statements.
  In
        December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
        Combinations” (“SFAS No. 141R”), which replaces SFAS No. 141,
“Business Combinations.” SFAS No.141R retains the underlying concepts of SFAS
        No. 141 in that all business combinations are still required to be
        accounted for at fair value under the acquisition method of accounting, but
        SFAS
        No. 141R will significantly change the accounting for business
        combinations. Under SFAS 141R, an acquiring entity will be required to
        recognize all the assets acquired and liabilities assumed in a transaction
        at
        the acquisition-date fair value with limited exceptions. SFAS No. 141R will
        change the accounting treatment for certain specific acquisition related
        items
        including: (1) expensing acquisition related costs as incurred;
        (2) expensing changes in deferred tax asset valuation allowances and income
        tax uncertainties after the acquisition date; (3) valuing noncontrolling
        interests at fair value at the acquisition date; and (4) expensing
        restructuring costs associated with an acquired business. SFAS No. 141R
        also includes a substantial number of new disclosure requirements. SFAS
        No. 141R is to be applied prospectively to business combinations for which
        the acquisition date is on or after January 1, 2009.
  In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements” (“SFAS No. 160”). SFAS No.160 requires
        noncontrolling interests, previously referred to as minority interests, to
        be
        treated as a separate component of equity, not as a liability or other item
        outside of permanent equity and applies to the accounting for noncontrolling
        interests and transactions with noncontrolling interest holders in consolidated
        financial statements. SFAS No. 160 will be applied prospectively to all
        noncontrolling interests, including any that arose before the effective date
        except that comparative period information must be restated to classify
        noncontrolling interests in equity, attributed net income and other
        comprehensive income to noncontrolling interests, and provide other disclosures
        required by SFAS No. 160. This statement is effective for the Company
        beginning January 1, 2009. The Company does not expect the adoption of SFAS
        No. 160 to have a material effect on its consolidated results of operations
        or financial condition.




**(2)****Acquisitions**




In
      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.




**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 7).  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 will be released subject to certain conditions under
      the
      respective agreements. Based on a determination of net working capital at the
      acquisition date, the Company has recorded a payable for approximately $200,000,
      included in accounts payable and accrued expenses in the December 31, 2007
      consolidated balance sheet, expected to be paid to the sellers as a purchase
      price adjustment.




Shareholders
      owning 756,100 shares of Fortress common stock voted against the acquisition
      and
      requested to receive the pro rata share of cash in the Trust Fund. The
      Company paid approximately $4,342,000 in exchange for these shares.


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 are 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). 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 preliminarily 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.
 
 ·
              TSS/Vortech’s
                  business model and potential for growth, increasing demand in its
                  industry
                  and its complete service offering when compared to other similar
                  companies. In addition TSS/Vortech may provide the platform to
                  assist us
                  in managing acquisitions in the future.
  ·
              TSS/Vortech
                  has been building a national business development organization
                  to expand
                  beyond its current regional
                  presence.





**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.




**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 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 agreement.





During
        the fourth quarter, Innovative achieved 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 preliminarily 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.




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





On
      November 30, 2007, Fortress acquired 100% of the membership interests of Rubicon
      Integration L.L.C. (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.





During
        the fourth quarter, 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 due to the seller on January 31, 2008.




The
      Company paid a premium (i.e., goodwill) over the fair value of the net tangible
      and preliminarily identified intangible assets acquired for a number of reasons,
      including Rubicon’s complementary experience, key customer relationships, and
      service offerings in the mission-critical facility industry.






F-14




FORTRESS
        INTERNATIONAL GROUP, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
  *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 have been
            finalized. We expect to have Rubicon complete in the first quarter of
            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. These
          estimates are subject to change upon the finalization of the valuation
          of
          certain assets and liabilities and may be adjusted in accordance with the
          provisions of SFAS No. 141, *Business
          Combinations* . 
          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
      preliminary estimated value and the range of amortizable lives of each of the
      components of intangible assets as of December 31, 2007 are as
      follows:




AmortizableTSS/Vortech
                
                Innovative
                
                Rubicon
                
                Total
                
                Lives
                    in YearsIntangible
                    asset:Trade
                    name
                
                $
                4,930,000
                
                $
                60,000
                
                $
                460,000
                
                $
                5,450,000
                
                
                IndefiniteIn-place
                    contracts
                
                
                406,277
                
                
                350,000
                
                
                50,000
                
                
                806,277
                
                
                1-1.25Customer
                    relationships
                
                
                14,100,000
                
                
                560,000
                
                
                2,000,000
                
                
                16,660,000
                
                
                5-8Non
                    competition agreement
                
                
                -
                
                
                50,600
                
                
                685,000
                
                
                735,600
                
                
                2Total
                    Intangible
                
                
                19,436,277
                
                
                1,020,600
                
                
                3,195,000
                
                
                23,651,877Accumulated
                    amortization
                
                
                (2,397,231
                )
                
                (85,968
                )
                
                (79,542
                )
                
                (2,562,741
                )Net
                    intangible assets
                
                $
                17,039,046
                
                $
                934,632
                
                $
                3,115,458
                
                $
                21,089,136




Unaudited  pro
      forma
      results of operations are as follows. The amounts are shown as if the TSS,
      Inovative and Rubicon acquisitions had occurred on January 1, 2006:




**2007**
              
              **2006**Proforma
                  revenue
              
              $
              50,455,823
              
              $
              60,154,971Proforma
                  operating (loss) income
              
              
              (9,466,620
              )
              
              (496,610
              )Proforma
                  pretax (loss) income
              
              
              (8,660,102
              )
              
              1,146,412Proforma
                  net (loss) income
              
              
              (8,160,947
              )
              
              813,698Pro
                  forma basic and diluted net (loss) per share
              
              $
              (0.68
              )
              $
              0.07Weighted
                  average common shares
              
              
              12,003,664
              
              
              12,381,968
  This information is not necessarily indicative of the
          operational results that would have occurred if the acquisition had been
          consummated on the dates indicated nor is it necessarily indicative of
          future
          operating results of the combined enterprise.




F-15




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 are as
        follows:


**TSS/Vortech**
                
                **Comm
                    site**
                
                **Innovative**
                
                **Rubicon**
                
                **Total**Cash
                
                $
                11,000,000
                
                $
                150,000
                
                $
                1,747,000
                
                $
                4,590,141
                
                $
                17,487,141Common
                    stock
                
                
                14,211,359
                
                
                -
                
                
                150,075
                
                
                1,080,800
                
                
                15,442,234Promissory
                    notes to sellers
                
                
                10,000,000
                
                
                -
                
                
                564,611
                
                
                1,517,753
                
                
                12,082,364Acquistion
                    costs
                
                
                1,841,468
                
                
                -
                
                
                112,420
                
                
                198,043
                
                
                2,151,931Total
                    purchase price
                
                
                37,052,827
                
                
                150,000
                
                
                2,574,106
                
                
                7,386,737
                
                
                47,163,670AssetsCash
                    and equivalents
                
                
                1,322,317
                
                
                -
                
                
                244,968
                
                
                42,660
                
                
                1,609,945Contracts
                    and other receivables
                
                
                6,261,988
                
                
                5,200
                
                
                466,852
                
                
                637,132
                
                
                7,371,172Costs
                    and estimated earnings
                
                
                1,559,045
                
                
                -
                
                
                317,868
                
                
                98,278
                
                
                1,975,191Prepaid
                    expenses
                
                
                233,894
                
                
                -
                
                
                12,855
                
                
                -
                
                
                246,749Total
                    current assets
                
                
                9,377,244
                
                
                5,200
                
                
                1,042,543
                
                
                778,070
                
                
                11,203,057Property
                    and equipment
                
                
                904,689
                
                
                10,177
                
                
                163,947
                
                
                3,048
                
                
                1,081,861Goodwill-Investment
                    in Subsidiary
                
                
                15,739,472
                
                
                134,623
                
                
                942,323
                
                
                3,898,549
                
                
                20,714,967Identifiable
                    intangibles, net
                
                
                19,436,200
                
                
                -
                
                
                1,020,600
                
                
                3,195,000
                
                
                23,651,800Other
                    Assets
                
                
                64,158
                
                
                -
                
                
                -
                
                
                -
                
                
                64,158Total
                    assets
                
                
                45,521,763
                
                
                150,000
                
                
                3,169,413
                
                
                7,874,667
                
                
                56,715,843LiabilitiesNotes
                    payable, current
                
                
                72,808
                
                
                -
                
                
                6,684
                
                
                -
                
                
                79,492Accounts
                    payable and accrued expenses
                
                
                6,653,886
                
                
                -
                
                
                398,903
                
                
                487,930
                
                
                7,540,719Income
                    taxes payable
                
                
                -
                
                
                -
                
                
                114,075
                
                
                -
                
                
                114,075Billings
                    in excess of costs
                
                
                1,662,718
                
                
                -
                
                
                67,842
                
                
                -
                
                
                1,730,560Total
                    current liabilities
                
                
                8,389,412
                
                
                -
                
                
                587,504
                
                
                487,930
                
                
                9,464,846Long-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
                
                
                9,552,173Allocated
                    purchase price
                
                $
                37,052,827
                
                $
                150,000
                
                $
                2,574,106
                
                $
                7,386,737
                
                $
                47,163,670




**(3)
      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.




**(4)
      Property and Equipment**




Property
      and equipment consisted of the following:




F-16




FORTRESS
        INTERNATIONAL GROUP, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
  Successor
                
                
                PredecessorDecember
                    31,
                
                
                Decmber
                    31,
                
                
                January
                    19,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Vehicles
                
                $
                164,576
                
                $
                -
                
                $
                393,185
                
                $
                393,185Trade
                    equipment
                
                
                135,482
                
                
                
                
                
                67,829Leasehold
                    improvements
                
                
                500,040
                
                
                -
                
                
                584,544
                
                
                584,544Furniture
                    and fixtures
                
                
                32,753
                
                
                -
                
                
                14,732
                
                
                14,732Office
                    equipment
                
                
                606,607
                
                
                -
                
                
                416,087
                
                
                373,4501,439,458
                
                
                -
                
                
                1,476,377
                
                
                1,365,911Less
                    accumulated
                    depreciation
                
                
                (394,913
                )
                
                
                
                
                (571,688
                )
                
                (555,164
                )$
                1,044,545
                
                $
                -
                
                $
                904,689
                
                $
                810,747


Depreciation
      of fixed assets was $0.4 million for the year ended December 31, 2007 for the
      successor. For the predecessor for the period January 1, 2007 through January
      19, 2007 and for the years ended December 31, 2006 and December 31, 2005,
      depreciation expense totaled $0.0, $0.3 million, and $0.2 million,
      respectively.




**(5)
      Goodwill and Other Intangibles**




The
      Company recognized goodwill associated with its four acquisitions during 2007.
      As of December 31, 2007, goodwill totaled $20.7 million of which approximately
      $19.8 million is deductible for income tax purposes. The predecessor had no
      goodwill.




Other
      intangibles at December 31, 2007 were related to the following
      acquisitions:




AmortizableTSS/Vortech
                
                Innovative
                
                Rubicon
                
                Total
                
                Lives
                    in YearsIntangible
                    asset:Trade
                    name
                
                $
                4,930,000
                
                $
                60,000
                
                $
                460,000
                
                $
                5,450,000
                
                
                IndefiniteIn-place
                    contracts
                
                
                406,277
                
                
                350,000
                
                
                50,000
                
                
                806,277
                
                
                1-1.25Customer
                    relationships
                
                
                14,100,000
                
                
                560,000
                
                
                2,000,000
                
                
                16,660,000
                
                
                5-8Non
                    competition agreement
                
                
                -
                
                
                50,600
                
                
                685,000
                
                
                735,600
                
                
                2Total
                    Intangible
                
                
                19,436,277
                
                
                1,020,600
                
                
                3,195,000
                
                
                23,651,877Accumulated
                    amortization
                
                
                (2,397,231
                )
                
                (85,968
                )
                
                (79,542
                )
                
                (2,562,741
                )Net
                    intangible assets
                
                $
                17,039,046
                
                $
                934,632
                
                $
                3,115,458
                
                $
                21,089,136




Intangible
        asset amortization expense totaling $2,562,741 has been included in the
        accompanying consolidated statement of operations related to the above
        intangibles, of which $453,442 is included in cost of revenue for the year
        ended
        December 31, 2007. The Company estimates amortization expense will be $2.9
        million in 2008, $2.5 million in 2009, $2.2 million in 2010, $2.2 million
        in
        2011 and $2.1 million in 2012 and $3.8 million thereafter.




During
      the fourth quarter of 2007, the Company performed an impairment analysis of
      the
      intangible assets acquired pursuant to SFAS 142 and SFAS 144. The Company did
      not recognize an impairment loss, as the carrying amount of infinite-lived
      intangible assets was determined to be recoverable.




F-17




FORTRESS
        INTERNATIONAL GROUP, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**(6)
      Basic and Diluted Net Loss Per Common Share**




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




SuccessorYear
                  EndedDecember
                  31,
              
              December
                  31,
              
              December
                  31,2007
              
              2006
              
              2005Net
                  income (loss)
              
              $
              (7,377,111
              )
              $
              645,272
              
              $
              131,542Basic
                  and diluted weighted average common shares
              
              
              11,698,895
              
              
              9,550,000
              
              
              5,107,534Earnings
                  per share
              
              $
              (0.63
              )
              $
              0.07
              
              $
              0.03




Unvested
        restricted stock, options to purchase units, convertible unsecured promissory
        notes, and warrants outstanding as of December 31, 2007 to purchase
        954,166, 2,100,000, 1,000,000, and 15,710,300 shares of common stock,
        respectively, options 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.
 
 Options
          to purchase units and warrants outstanding as of December 31, 2006 to
          purchase 2,100,000 and 15,600,000 shares of common stock, respectively,
          options
          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.




**(7)
      Notes Payable**




Long-term
      debt was as follows:




Successor
                
                PredecessorDecember
                    31,
                
                December
                    31,
                
                January
                    19,
                
                December
                    31,2007
                
                2006
                
                2007
                
                2006Convertible
                    Unsecured promissory notes, due 2012 (6.0%)
                
                $
                7,500,000
                
                $
                -
                
                $
                -
                
                $
                -Unsecured
                    promissory note, due 2011 (6.0%)
                
                
                394,611
                
                
                -
                
                
                -
                
                
                -Unsecured
                    promissory note, due 2008 (6.0%)
                
                
                1,517,753
                
                
                -
                
                
                -
                
                
                -Vehicle
                    notes
                
                
                86,603
                
                
                -
                
                
                152,332
                
                
                158,613Total
                    debt
                
                
                9,498,967
                
                
                -
                
                
                152,332
                
                
                158,613Less
                    current portion
                
                
                1,650,306
                
                
                -
                
                
                72,808
                
                
                76,934$
                7,848,661
                
                $
                -
                
                $
                79,524
                
                $
                81,679




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
      Chief Executive Officer and President ) 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 month 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 month 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 Chief Executive Officer
      ( 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 discount realized of $500,000 has been recorded
      as
      additional paid-in capital. This transaction was completed on September 28,
      2007.




In
      connection with the Innovative acquisition, the Company entered into an
      unsecured promissory note with the sellers in the amount of $300,000. The
      note bears interest at six percent per year and has a three year tem. Quarterly,
      interest is payable and quarterly principal installments of $15,000 commence
      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, Innovative
      sellers received an additional promissory note of approximately $65,000 at
      December 31, 2007. see Note 2. The additional unsecured promissory note is
      in similar form to the unsecured promissory note issued at closing, bearing
      interest at six percent per year and has a three year term. Quarterly interest
      is payable and quarterly principal installments of $8,200 commence March 31,
      2008 with a final balloon payment of $65,600 due on March 31, 2011.




F-18




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 ended December 31,
      2007
      and certain revenue bookings targets for 2008, respectively. As described in
      footnote 2 above, Rubicon exceeded earnings targets for the month ended
      December, 31 2007, resulting in the issuance of a promissory note totaling
      $1.5
      million due January 31, 2008 per the terms of the purchase agreement. 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
      at
      December 31, 2007.




The
      Company is obligated under multiple notes payable arrangements through October
      2010 totaling $106,885 that bear interest at rates up to six percent, and are
      secured by vehicles.




Scheduled
      principal repayments at December 31, 2007 are as follows:




2008
              
              $
              1,650,3062009
              
              
              1,970,9122010
              
              
              2,672,7502011
              
              
              2,580,0022012
              
              
              624,997Total
              
              $
              9,498,967




**(8)**  **Advance
      from Stockholder**





In
        December 2006, an Initial Stockholder, officer and director made payments
        totaling $20,000 on behalf of the Company. These payments are non interest
        bearing and due on demand. Such amounts have been included in Advances from
        Stockholders in the December 31, 2006 balance sheet. These advances were
        repaid by the Company in January 2007.




**(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. To date grants
        under
        the plan have been limited 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.




The
        fair
        value of restricted stock awarded for the years ended December 31, 2007
        totaled $5.3 million and was calculated using the value of Fortress’ common
        stock on the grant date and is being amortized over the restriction lapse
        periods of the awards taking into account the effect of an estimated forfeiture
        rate of 12% associated with termination behavior. The Company recognized
        non-cash compensation associated with restricted stock of $1.2 million for
        the
        year ended December 31, 2007.  As of December 31, 2007, the total
        compensation cost related to unvested restricted stock or restricted stock
        not
        yet recognized was $3.4 million with a weighted average remaining vest life
        of
        2.3 years.




F-19




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
                
                
                (16,667
                )
                
                5.43Unvested
                    December 31, 2007
                
                
                954,166
                
                $
                5.47




The
      Company did not grant any stock-based awards to employees prior to fiscal year
      2007.




***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 2007. The Company matches
      50%
      of employee contributions up to 6% of eligible earnings or applicable regulatory
      limits. The Company made 401(k) Plan matching contributions in cash of
      approximately $222,000 for the year ended December 31, 2007. The predecessor
      contributed approximately $15,000, $163,000 and $71,000 for the period from
      January 1, 2007 through January 19, 2007, for the year ended December 31, 2006
      and December 31, 2005, respectively. The Company’s matching contributions were
      recorded in selling, general and administrative expenses.




**(10)****Common
      Stock Repurchases**




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).




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 from these
      redemptions and currently has 158,075 shares of Treasury Stock.




**(11)
      Options to Purchase Units and** **Warrants**




Total
      warrants outstanding at December 31, 2007 and
      2006 were 17,810,300 and 17,700,000, respectively.




In
      conjunction with initial public offerings, the Company issued 15,600,000
      warrants 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 has been 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-20




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 Period**
                      **Ended December 31,****2007**
                    
                    **2006**Current:Federal
                    
                    $
                    (897,283
                    )
                    $
                    691,089State
                    
                    
                    —
                    
                    
                    —Deferred:Federal
                    
                    
                    (1,730,703
                    )
                    
                    (358,675
                    )State
                    
                    
                    (347,573
                    )Total
                        provision (benefit) for income taxes before valuation
                        allowance
                    
                    $
                    (2,975,559
                    )
                    $
                    332,414Change
                        in valuation allowance
                    
                    
                    2,476,404
                    
                    
                    —Total
                        provision (benefit) for income taxes
                    
                    $
                    (499,155
                    )
                    $
                    332,414
 
 F-21
  FORTRESS
            INTERNATIONAL GROUP, INC.
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
  The
              significant components of the Company’s deferred tax assets and liabilities are
              as follows:
 **December 31,**
                        **2007**
                      
                      **December 31,**
                        **2006**Gross
                          current deferred taxes:Deferred
                          tax assets:Bad
                          debts
                      
                      $
                      22,123
                      
                      $
                      —Accrued
                          expenses
                      
                      
                      17,719
                      
                      
                      —Net
                          operating loss carryover
                      
                      
                      412,632
                      
                      
                      —Deferred
                          compensation
                      
                      
                      142,191
                      
                      
                      —Gross
                          current deferred tax assets before valuation allowance
                      
                      
                      594,665
                      
                      
                      —Valuation
                          allowance
                      
                      
                      (445,180
                      )
                      
                      —Gross
                          current deferred tax assets
                      
                      $
                      149,485
                      
                      $
                      —Deferred
                          tax liabilities:Tax
                          accounting differences for long-term contracts
                      
                      
                      (75,899
                      )
                      
                      —Prepaid
                          expenses
                      
                      
                      (59,535
                      )
                      
                      —Deferred
                          current tax liabilities
                      
                      $
                      (135,434
                      )
                      $Net
                          current deferred taxes
                      
                      $
                      14,051
                      
                      $
                      —Non-current
                          deferred taxes:Deferred
                          tax assets:Interest
                          income deferred for financial reportingpurposes
                      
                      $
                      —
                      
                      $
                      183,702Net
                          operating loss carryover
                      
                      
                      1,219,628
                      
                      
                      —Expenses
                          deferred for income tax purposes
                      
                      
                      325,521
                      
                      
                      306,973Deferred
                          compensation
                      
                      
                      521,945
                      
                      
                      —Depreciation
                      
                      
                      63,453
                      
                      
                      —Gross
                          non-current deferred tax assets before valuation allowance
                      
                      
                      2,130,547
                      
                      
                      490,675Valuation
                          allowance
                      
                      
                      (1,595,059
                      )
                      
                      —Gross
                          non-current deferred tax assets
                      
                      $
                      535,488
                      
                      $
                      490,675Deferred
                          tax liabilities:Amortization
                          of goodwill and other
                      
                      
                      (549,539
                      )
                      
                      —Deferred
                          non-current tax liabilities
                      
                      
                      (549,539
                      )
                      
                      —Net
                          non-current deferred taxes
                      
                      $
                      (14,051
                      )
                      $
                      490,675
  In
            2007,
            the company has reported a net operating loss and expects, $2,627,418
            of this
            loss will be carried back to prior years resulting in a refund of federal
            income
            taxes of $893,322. The remainder, or $4,113,066, will be carried forward
            to
            future years, and will expire in 2028. The Company has recorded a deferred
            tax
            asset of $1,632,260 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 Section 382 and believes it will also be available for state
            income
            tax purposes subject to state carryforward limitations.
  The
            Company has established a partial 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.
  F-22
 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.
  The
            Company’s provision for income taxes for the year ended December 31, 2006
            consists primarily of federal income taxes on interest income.
  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 acquired all issued and outstanding stock of Innovative Power Systems,
            Inc. and Quality Power Systems, Inc. effective September 24, 2007. 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 since inception remain open
            under
            statutes of limitation.  Innovative Power System Inc.’s statutes of
            limitation are open from the 2002 tax year forward for both federal
            and Virginia purposes.  Quality Power Systems
            Inc.’s statutes of limitation are open from the 2003 tax year forward for
            both federal and Virginia purposes.
  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 Period**
                    **Ended December 31,****2007**
                  
                  **2006******
                  
                  ****Federal
                      statutory rate
                  
                  
                  34.0
                  %
                  
                  34.0
                  %State
                      tax, net of income tax benefit
                  
                  
                  -
                  
                  
                  -Effect
                      of permanent differences
                  
                  
                  (0.3
                  )Effect
                      of valuation allowance
                  
                  
                  (27.4
                  )Total
                  
                  
                  6.3
                  %
                  
                  34.0
                  %




F-23




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 of
      the Company’s board of directors reviews and approves these transactions
      with each of these affiliated entities.





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





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





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





**Chesapeake
      Tower Systems, Inc** .
      Chesapeake Tower Systems, Inc. (Chesapeake) is 100% owned by the Company’s Chief
      Executive Officer. On February 28, 2007 Chesapeake sold substantially all of
      its
      assets to Chesapeake Systems and Chesapeake MC 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.




F-24




FORTRESS
        INTERNATIONAL GROUP, INC.
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**CTS
      Services, L.L.C.** (CTS) is
      55% owned by the Company’s Chief Executive Officer and 5% owned by the Company’s
      Treasurer. 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.





**Telco
      P&C, L.L.C.** Telco
      P&C, L.L.C. 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, L.L.C.** TPR
      Group, L.L.C. 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, L.L.C.** As of
        November 1, 2006, TPR Group Re Three, L.L.C. (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, 2007 and 2006 (Successor),
      and Predecessor transactions for the period January 1, 2007 through January
      19,
      2007 and for the years ended December 31, 2006 and 2005. 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-25




FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS


**(Succesor)**
              
              
              
              **(Predecessor)****Year
                  Ended**
              
              **Year
                  Ended**
              
              
              
              **Year
                  Ended**
              
              **Year
                  Ended****December
                  31,**
              
              **December
                  31,**
              
              **January
                  19,**
              
              **December
                  31,**
              
              **December
                  31,****2007**
              
              **2006**
              
              **2007**
              
              **2006**
              
              **2005****Revenue**CTS
                  Services, L.L.C.
              
              $
              183,532
              
              $
              -
              
              
              1,800
              
              $
              88,017
              
              
              189,743CSI
                  Engineering, Inc.
              
              
              -
              
              
              -
              
              
              -
              
              
              2,289,102
              
              
              3,627,743Chesapeake
                  Systems, L.L.C.
              
              
              105,965
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chesapeake
                  Mission Critical, L.L.C.
              
              
              106,627
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chesapeake
                  Tower Systems, Inc.
              
              
              -
              
              
              -
              
              
              -
              
              
              16,183
              
              
              7,729S3
                  Integration, L.L.C.
              
              
              -
              
              
              -
              
              
              -
              
              
              1,668
              
              
              18,204TPR
                  Group, L.L.C.
              
              
              -
              
              
              -
              
              
              -
              
              
              1,772
              
              
              8,808**Total**
              
              $
              396,124
              
              $
              -
              
              
              1,800
              
              $
              2,396,742
              
              
              3,852,227**Cost
                  of Revenue**CTS
                  Services, L.L.C.
              
              $
              3,439,631
              
              $
              -
              
              
              82,032
              
              $
              4,473,118
              
              
              3,425,784CSI
                  Engineering, Inc.
              
              
              -
              
              
              -
              
              
              -
              
              
              501,974
              
              
              380,586Chesapeake
                  Systems, L.L.C.
              
              
              161,178
              
              
              -
              
              
              -
              
              
              -
              
              
              -Chesapeake
                  Mission Critical, L.L.C.
              
              
              144,924
              
              
              
              
              
              -
              
              
              -
              
              
              -Chesapeake
                  Tower Systems, Inc.
              
              
              1,052
              
              
              -
              
              
              8,225
              
              
              925,833
              
              
              7,387,225GR
                  Parnters
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              508,234S3
                  Integration, L.L.C.
              
              
              267,848
              
              
              -
              
              
              -
              
              
              848,160
              
              
              6,628LH
                  Cranston & Sons, Inc.
              
              
              234,252
              
              
              -
              
              
              -
              
              
              769,672
              
              
              2,001,354Telco
                  P&C, L.L.C.
              
              
              29,174
              
              
              -
              
              
              -
              
              
              17,268
              
              
              17,268**Total**
              
              $
              4,278,059
              
              $
              -
              
              
              90,257
              
              $
              7,536,025
              
              
              13,727,079**Selling,
                  general and administrative**Management
                  fees paid to TPR Group, L.L.C.
              
              $
              -
              
              $
              -
              
              
              -
              
              $
              836,400
              
              
              -Management
                  fees paid to GR Partners
              
              
              -
              
              
              -
              
              
              -
              
              
              50,935
              
              
              275,000Office
                  rent paid on Chesapeake sublease agmt
              
              
              207,671
              
              
              -
              
              
              16,016
              
              
              256,465
              
              
              190,727Office
                  rent paid to TPR Group Re Three, L.L.C.
              
              
              384,271
              
              
              -
              
              
              26,472
              
              
              65,392
              
              
              -Equipment
                  rent paid to GR Partners
              
              
              -
              
              
              -
              
              
              -
              
              
              66,987
              
              
              33,066Vehicle
                  repairs to Automotive Technologies, Inc.
              
              
              4,442
              
              
              -
              
              
              656
              
              
              25,148
              
              
              26,165Management
                  fees to CTS Services
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              534,700**Total**
              
              $
              596,384
              
              $
              -
              
              
              43,144
              
              
              1,301,327
              
              
              524,958
  **Successor**
                
                **(Predecessor)****December
                    31,**
                
                **December
                    31,**
                
                **January
                    19,**
                
                **December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**
                
                **2005****Accounts
                    receivable/(payable):**CTS
                    Services, L.L.C.
                
                $
                44,821
                
                
                
                
                
                231,135
                
                $
                229,335
                
                
                4,669CTS
                    Services, L.L.C.
                
                
                (2,969,671
                )
                
                
                
                
                (207,195
                )
                
                (405,091
                )
                
                (275,553
                )CSI
                    Engineering, Inc.
                
                
                -
                
                
                
                
                
                -
                
                
                199,317
                
                
                854,455CSI
                    Engineering, Inc.
                
                
                -
                
                
                
                
                
                -
                
                
                (78,351
                )
                
                (8,795
                )Chesapeake
                    Systems, L.L.C.
                
                
                611
                
                
                
                
                
                -
                
                
                -
                
                
                -Chesapeake
                    Systems, L.L.C.
                
                
                (873
                )
                
                
                
                
                -
                
                
                -
                
                
                -Chesapeake
                    Mission Critical, L.L.C.
                
                
                104,397
                
                
                
                
                
                -
                
                
                -
                
                
                -Chesapeake
                    Mission Critical, L.L.C.
                
                
                (18,950
                )
                
                
                
                
                -
                
                
                -
                
                
                -Chesapeake
                    Tower Systems, Inc.
                
                
                -
                
                
                
                
                
                2,336
                
                
                2,802
                
                
                94Chesapeake
                    Tower Systems, Inc.
                
                
                -
                
                
                
                
                
                (8,225
                )
                
                
                
                
                (469,418
                )Telco
                    P&C, L.L.C.
                
                
                (8,000
                )
                
                
                
                
                
                
                
                -
                
                
                (4,174
                )GR
                    Partners
                
                
                -
                
                
                
                
                
                
                
                
                (2,801
                )
                
                (14,785
                )LH
                    Cranston & Sons, Inc.
                
                
                (11,575
                )
                
                
                
                
                
                
                
                -
                
                
                (615,622
                )S3
                    Integration, L.L.C.
                
                
                -
                
                
                
                
                
                150
                
                
                150
                
                
                9,381S3
                    Integration, L.L.C.
                
                
                (60,556
                )
                
                
                
                
                (42,918
                )
                
                -
                
                
                -**Total
                    Accounts receivable**
                
                $
                149,829
                
                $
                -
                
                $
                233,621
                
                $
                431,604
                
                
                868,599**Total
                    Accounts (payable)**
                
                $
                (3,069,625
                )
                $
                -
                
                $
                (258,338
                )
                $
                (486,243
                )
                
                (1,388,347
                )




F-26


FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS


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.




**(15)**  **Commitments,
      Contingencies and Other**




Leases




Under
      operating leases, the Company leases certain facilities, equipment and vehicles
      for use in its operations. Total rent expense for the successor was $1.0 million
      and $0.1 million for the year ended December 31, 2007 and December 31, 2006,
      respectively. For the period January 1, 2007 through January 19, 2007 and for
      the years ended December 31, 2006 and December 31, 2005, the predecessor
      incurred rent expense of $0.0 million, $0.4 million, and $0.2 million,
      respectively.





The
      aggregate minimum rental commitments under non-cancelable leases for the periods
      shown at December 31, 2007, are as follows:




Year2008
              
              $
              870,0352009
              
              
              719,7472010
              
              
              641,2962011
              
              
              564,3672012
              
              
              56,140Total
              
              $
              2,851,585


The
      Company occupied office space provided by an affiliate of an Initial
      Stockholder. Such affiliate agreed that, until the acquisition or a target
      business by the Company, it will make such office space, as well as certain
      office and secretarial services, available to the Company, as may be required
      by
      the Company from time to time. The Company paid such affiliate $7,500 per month
      for such services. Rent expense under this agreement amounted to $90,000 and
      $37,500 for the twelve month periods ended December 31, 2006 and
      December 31, 2005, respectively.




*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.




***Employment
      Agreements***





On
      January 19, 2007, the Company entered into employment agreements with its
      Chairman, Chief Executive Officer and President and a consulting agreement
      (the
      agreements) with an entity controlled by the Vice-Chairman, 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.




The
      agreements with the Chief Executive Officer and President also provide a share
      performance bonus, as described below:




Up
      to
      $5.0 million in additional shares of common stock will be issuable if during
      the
      period from the closing of the acquisition through July 13, 2008, certain
      share performance thresholds (alternative and not cumulative) set forth below
      are satisfied:




·
            if
                the highest average share price of the Company’s common stock during any
                60 consecutive trading day period between the closing of the acquisition
                and July 13, 2008 exceeds $9.00 per share but is no more than $10.00
                per share, each of the Chief Executive Officer and President will
                be
                entitled to $0.5 million worth of additional shares;
                or




·
            if
                the highest average share price of Company’s common stock during any 60
                consecutive trading day period between the closing of the acquisition
                and
                July 13, 2008 exceeds $10.00 per share but is no more than $12.00 per
                share, each of the Chief Executive Officer and President will be
                entitled
                to $1.5 million worth of additional shares;
                or




·
            if
                the highest average share price of Company’s common stock during any 60
                consecutive trading day period between the closing of the acquisition
                and
                July 13, 2008 exceeds $12.00 per share but is no more than $14.00 per
                share, each of the Chief Executive Officer and President will be
                entitled
                to $3.0 million worth of additional shares;
                or




F-27




FORTRESS
          INTERNATIONAL GROUP, INC.
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS


·
            if
                the highest average share price of Company’s common stock during any 60
                consecutive trading day period between the closing of the acquisition
                and
                July 13, 2008 exceeds $14.00 per share, each of the Chief Executive
                Officer and President will be entitled to $5.0 million worth of additional
                shares.




*Customer
      Concentration*




The
          Company earned approximately 36% of its revenue from three customers for
          the
          year ended December 31, 2007. Accounts receivable from these customers
          at
          December 31, 2007 was $7.7 million. For the predecessor years ended December
          31,
          2006 and December 31, 2005, the Company earned approximately 63% and 78%,
          respectively, of it’s revenue from one customer. Accounts receivable from this
          customer were $4.8 million and $7.8 million at December 31, 2006 and 2005,
          respectively.




**(16)**  **Unaudited
      Quarterly Financial Data**


Successor2007
                  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
                  income
              
              
              
              
              
              (1,165,087
              )
              
              (2,621,052
              )
              
              (2,558,964
              )
              
              (1,032,008
              )Net
                  income per share – basic and diluted
              
              
              
              
              $
              (0.10
              )
              $
              (0.22
              )
              $
              (0.21
              )
              $
              (0.09
              )2006
                  Quarter Ended
              
              
              
              
              December
                  31,
              
              September
                  30,
              
              June
                  30,
              
              March
                  31,Total
                  interest income
              
              
              
              
              $
              449,400
              
              $
              444,941
              
              $
              410,904
              
              $
              361,561Net
                  income
              
              
              
              
              
              124,118
              
              
              207,978
              
              
              190,839
              
              
              122,337Net
                  income per share – basic and diluted
              
              
              
              
              $
              0.02
              
              $
              0.02
              
              $
              0.02
              
              $
              0.01
  Predecessor*2006
                    Quarter EndedJanuary
                    1, 2007 through
                  January
                    17, 2007
                
                December
                    31,
                
                September
                    30,
                
                June
                    30,
                
                March
                    31,Revenue
                
                $
                1,412,137
                
                $
                12,854,954
                
                $
                12,573,856
                
                $
                18,445,839
                
                $
                16,280,322Operating
                    income (loss)
                
                
                (284,902
                )
                
                324,820
                
                
                541,237
                
                
                1,257,233
                
                
                1,415,720Net
                    income
                
                $
                (281,153
                )
                $
                314,858
                
                $
                536,813
                
                $
                1,252,500
                
                $
                1,410,7552005
                    Quarter Ended
                
                
                
                
                December
                    31,
                
                September
                    30,
                
                June
                    30,
                
                March
                    31,Revenue
                
                
                
                
                $
                15,204,834
                
                $
                15,733,713
                
                $
                18,038,896
                
                $
                9,654,850Operating
                    income (loss)
                
                
                
                
                
                30,645
                
                
                1,047,658
                
                
                1,768,948
                
                
                80,221Net
                    income
                
                
                
                
                $
                21,579
                
                $
                1,707,244
                
                $
                1,345,263
                
                $
                71,047


* 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
      January 2, 2008, the Company acquired all of the outstanding stock of
      SMLB, Ltd, which provides consulting, facility management and equipment
      integrations services for the mission-critical facilities in the Chicago area.
      The closing consideration consisted of (i) $2.0 million in cash,
      (ii) the issuance of 96,896 commons shares valued at approximately
      $500,000, (iii) promissory note of $500,000 bearing interest at 6% over a five
      year term, (iv) additional
      earn-out amounts contingent upon the achievement of certain earnings targets
      by
      SMLB for each of the calendar years 2008-2009.




F-28





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





None.





**Item
              9A(T).**
            **CONTROLS
                AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**




Our
        management is responsible for establishing and maintaining adequate internal
        control over financial reporting and performed an evaluation under the
        supervision and with the participation of our Chief Executive Officer (Principal
        Executive Officer) and Chief Financial Officer (Principal Financial Officer)
        of
        the effectiveness of our disclosure controls and procedures (as defined in
        Rule
        13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended)
        as of
        December 31, 2007. Based upon that evaluation, our Chief Executive Officer
        and
        Chief Financial Officer have concluded that as of December 31, 2007, our
        disclosure controls and procedures were ineffective.





**Changes
      in Internal Control Over Financial Reporting**




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. As of December 31, 2007, we carried out an evaluation, under the
        supervision and with the participation of our management, including our Chief
        Executive Officer of the effectiveness of the design and operation of our
        “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
        promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
        Act”). Based upon that evaluation, our Chief Executive Officer and Chief
        Financial Officer have concluded that our disclosure controls and procedures
        were ineffective at that time for the purpose of ensuring that the information
        required to be disclosed in our 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 our management, including the Chief Executive Officer, as appropriate
        to
        allow timely decisions regarding required disclosure.




In
        January 2007 we acquired TSS/Vortech and re-evaluated our internal control
        process during 2007 based on the framework in "Internal Control-Interpreted
        Framework" issued by Committee of Sponsoring Organizations of the Treadway
        Commission (COSO). As a result of this re-evaluation, we have determined
        that
        our internal control over financial reporting is ineffective as of December
        31,
        2007. We had neither the resources, nor the personnel, to provide for an
        adequate internal control environment. The following material weaknesses
        in our
        internal control over financial reporting were noted at December 31, 2007:
        (i)
        we did not have the ability to segregate duties; (ii) we lacked the formal
        documentation of policies and procedures that were in place; (iii) we lacked
        adequate financial personnel; (iv) we lacked general computer controls and
        adequate procedures involving change management, and; (v) controls are
        inadequate to reasonably assume compliance with generally accepted accounting
        principles related to revenue.




44





We
      have
      begun to address the internal control weaknesses summarized above beginning
      in
      the first quarter of 2008, with the goal of eliminating such deficiencies by
      the
      end of 2008. We are working with a certified public accounting firm to serve
      as
      our internal auditors to further enhance our internal control environment and
      a
      Chief Financial Officer has been with the Company since August 20, 2007. The
      acquisitions of TSS/Vortech will require the development of more robust
      disclosure controls and procedures, which we are currently developing.
      Management will continue to monitor, evaluate and test the operating
      effectiveness of these controls during 2008.




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.




**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 2008 Annual Meeting of Stockholders (the
        “2008 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
        2008 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 Compensation” and “Compensation Committee
        Report” in the 2008 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 2008 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 2008
        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 2008 Proxy Statement and is incorporated herein by
        reference.
   45
 
 **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:
 **Page****Consolidated
                        Financial Statements:**Report
                      of Independent Registered Public
                      Accounting Firm
                  
                  
                  F-2Consolidated
                      Balance Sheets as ofDecember
                      31,2007
                      (Successor), December 31, 2006(Successor),
                      January 19, 2007 (Predecessor) and December 31, 2006
                      (Predecessor)
                  
                  
                  F-6Consolidated
                      Statements of Operations for the three years ended December
                      31, 2007
                      (Successor), December 31, 2006 (Successor) and December 31,
                      2005
                      (Successor), and for the period from January 1, 2007 through
                      January 19,
                      2007 (Predecessor) and for the years ended December 31, 2006
                      (Predecessor)
                      and December 31, 2005 (Predecessor)
                  
                  
                  F-7Consolidated
                        Statements of Stockholders’ Equity for the three years ended December 31,
                        2007 (Successor), 2006 (Successor) and 2005 (Successor) and
                        Consolidated Statements of Members’ Equity for the period from January 1,
                        2007 through January 19, 2007 (Predecessor), and for the years
                        ended
                        December 31, 2007 (Predecessor) and 2006 (
                        Predecessor).
                  
                  
                  F-8Consolidated
                        Statements of Cash Flows for the three years ended December
                        31, 2007
                        (Successor),December
                        31, 2006 (Successor) and December 31, 2005 (Successor), and
                        for the period
                        from January 1, 2007 through January 19, 2007 (Predecessor)
                        and for
                        the years ended December 31, 2006 (Predecessor) and December
                        31, 2005
                        (Predecessor)
                  
                  
                  F-9Notes
                      to Consolidated Financial Statements
                  
                  
                  F-10
 15(a)
            (2). Summplementary Financial Data:
  Schedule II—Valuation
            and Qualifying Accounts for fiscal year ended December 31, 2007, and the
            period from January 1, 2007 through January 19, 2007 and years ended
            2006 and 2007.
  Balance
                      at
                  
                  
                  
                  
                  
                  Balance
                      atBeginning
                  
                  
                  
                  
                  
                  End
                      ofSuccessor
                  
                  of
                      Period
                  
                  Additions
                  
                  Deductions
                  
                  Period2007Allowance
                      for doubtful accounts
                  
                  
                  -
                  
                  
                  (79,611
                  )
                  
                  14,611
                  
                  
                  (65,000
                  )Allowance
                      for unrealizable deferred tax assets
                  
                  
                  -
                  
                  
                  (2,476,404
                  )
                  
                  436,165
                  
                  
                  (2,040,239
                  )2006Allowance
                      for unrealizable deferred tax assetsBalance
                      at
                  
                  
                  
                  
                  
                  
                  
                  
                  Balance
                      atBeginning
                  
                  
                  Additions
                  
                  
                  
                  
                  
                  End
                      ofPredecessor
                  
                  
                  of
                      Period
                  
                  
                  at
                      Cost
                  
                  
                  Deductions
                  
                  
                  PeriodJanuary
                      1, 2007-January 19, 2007Allowance
                      for doubtful accounts
                  
                  
                  (75,000
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (75,000
                  )2006Allowance
                      for doubtful accounts
                  
                  
                  (25,000
                  )
                  
                  35,112
                  
                  
                  (85,112
                  )
                  
                  (75,000
                  )
  46
  (2)  **Financial
        Statements Schedules:**
  (3)  **Index
        to Exhibits:**
  **Exhibit**
                  **Number**
                
                **Description**
 3.1
                
                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)
  47
 **Exhibit**
                      **Number**
                    
                    **Description**
 10.7
                  
                  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)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)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)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)10.11
                  
                  Voting
                      Agreement dated January 19, 2007 by Fortress America Acquisition
                      Corporation, Thomas P. Rosato, Gerard J. Gallagher, C. Thomas
                      McMillen and
                      Harvey L. Weiss (previously filed with the Commission as Exhibit
                      10.11 to
                      the Company’s Current Report on Form 8-K filed on January 25, 2007
                      and incorporated herein by reference)10.12
                  
                  Letter
                      Agreement among the Company, Sunrise Securities Corp. and C.
                      Thomas
                      McMillen (previously filed with the Commission as Exhibit 10.1
                      to the
                      Company’s Annual Report on Form 10-KSB for the year ended
                      December 31, 2005 and incorporated herein by
                      reference)10.13
                  
                  Letter
                      Agreement among the Company, Sunrise Securities Corp. and Harvey
                      L. Weiss
                      (previously filed with the Commission as Exhibit 10.2 to the
                      Company’s
                      Annual Report on Form 10-KSB for the year ended December 31, 2005 and
                      incorporated herein by reference)10.14
                  
                  Letter
                      Agreement among the Company, Sunrise Securities Corp. and David
                      J.
                      Mitchell (previously filed with the Commission as Exhibit 10.3
                      to the
                      Company’s Annual Report on Form 10-KSB for the year ended
                      December 31, 2005 and incorporated herein by
                      reference)10.15
                  
                  Letter
                      Agreement among the Company, Sunrise Securities Corp. and Donald
                      L.
                      Nickles (previously filed with the Commission as Exhibit 10.4
                      to the
                      Company’s Annual Report on Form 10-KSB for the year ended
                      December 31, 2005 and incorporated herein by
                      reference)10.16
                  
                  Agreement
                      among the Company, Sunrise Securities Corp. and Paladin Homeland
                      Security
                      Fund, L.P., Paladin Homeland Security Fund (NY City), L.P.,
                      Paladin
                      Homeland Security Fund (CA), L.P. and Paladin Homeland Security
                      Fund
                      (Cayman Islands), L.P. (previously filed with the Commission
                      as Exhibit
                      10.5 to the Company’s Annual Report on Form 10-KSB for the year ended
                      December 31, 2005 and incorporated herein by
                      reference)10.17
                  
                  Letter
                      Agreement among the Company, Sunrise Securities Corp. and Asa
                      Hutchinson
                      (previously filed with the Commission as Exhibit 10.6 to the
                      Company’s
                      Annual Report on Form 10-KSB for the year ended December 31, 2005 and
                      incorporated herein by reference)10.18
                  
                  Investment
                      Management Trust Agreement between Continental Stock Transfer
& Trust
                      Company and the Company (previously filed with the Commission
                      as Exhibit
                      10.7 to the Company’s Annual Report on Form 10-KSB for the year ended
                      December 31, 2005 and incorporated herein by
                      reference)10.19
                  
                  Stock
                      Escrow Agreement between the Company, Continental Stock Transfer
&
                      Trust Company and the Initial Stockholders (previously filed
                      with the
                      Commission as Exhibit 10.8 to the Company’s Annual Report on Form 10-KSB
                      for the year ended December 31, 2005 and incorporated herein by
                      reference)10.20
                  
                  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)10.21
                  
                  Warrant
                      Purchase Agreement between C. Thomas McMillen, Harvey L. Weiss
                      and Sunrise
                      Securities Corp. (previously filed with the Commission as Exhibit
                      10.10 to
                      the Company’s Annual Report on Form 10-KSB for the year ended
                      December 31, 2005 and incorporated herein by
                      reference)
  48
 **Exhibit**
                    **Number**
                  
                  **Description**
 10.22
                    
                    Letter
                        Agreement between the Company and Global Defense Corp. (previously
                        filed
                        with the Commission as Exhibit 10.11 to the Company’s Annual Report on
                        Form 10-KSB for the year ended December 31, 2005 and incorporated
                        herein by reference)10.23
                    
                    Agreement
                        and Plan of Merger among Fortress America Acquisition Corporation
                        and FAAC
                        Merger Corporation dated June 29, 2005 (previously filed with the
                        Commission as Exhibit 10.15 to the Company’s Registration Statement on
                        Form S-1 No. 333-123504, effective July 13, 2005 and incorporated
                        herein by reference)10.24
                    
                    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)10.25
                    
                    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)10.26
                    
                    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)*10.27
                    
                    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)*10.28
                    
                    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)10.29†
                    
                    Membership
                        Interest Purchase Agreement dated November 30, 2007 between
                        Rubicon
                        Integration, L.L.C., each of the members of Rubicon and the
                        Company10.30
                    
                    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,
                        2007.23.2
                    
                    Consent
                        of Grant Thornton LLP regarding Vortech L.L.C. and VTC L.L.C.
                        financial
                        statements for the period ending January 1, 2007 through
                        January 19,
                        2007.23.3
                    
                    Consent
                        of Goldstein Golub Kessler LLP23.4
                    
                    Consent
                        of McGladrey & Pullen, LLP31.1
                    
                    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.


49




**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, 2008
            
            By:
            /s/
                Thomas P. RosatoThomas
                P. RosatoChief
                Executive Officer*(Authorized
                Officer and Principal Executive Officer)*Date:
            March
                31, 2008
            
            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
              
              Date**Name**
              
              **Position**
              
              **Date**Chief
                  Executive Officer and Director/s/
                Thomas P. Rosato
              
              (Principal
                  Executive Officer)
              
              March
                    31, 2008Thomas
                  P. Rosato/s/
                  Gerard J. Gallagher
              
              President
                  and Director
              
              March
                    31, 2008Gerard
                  J. Gallagher/s/
                  Timothy C. Dec
              
              Chief
                Financial Officer
              
              March
                  31, 2008Timothy
                  C. Dec
              
              (Principal
                Financial Officer)/s/
                  Asa Hutchinson
              
              Director
              
              March
                    31, 2008Asa
                  Hutchinson/s/
                  C. Thomas McMillen
              
              Director
              
              March
                    31, 2008C.
                  Thomas McMillen/s/
                  David J. Mitchell
              
              Director
              
              March
                    31, 2008David
                  J. Mitchell/s/
                  John Morton, III
              
              Director
              
              March
                    31, 2008John
                  Morton, III/s/
                  Donald L. Nickles
              
              Director
              
              March
                    31, 2008Donald
                  L. Nickles/s/
                  Harvey L. Weiss
              
              Director
              
              March
                    31, 2008Harvey
                  L. Weiss




50