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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended September 30, 2009



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
|- | ---------------------------------------------------------------------

For the transition period from  to

Commission File Number 0-30831





CAPITAL GROWTH SYSTEMS, INC.

(Exact name of
registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 65-0953505                          
|(State of other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

500 W. Madison Street, Suite 2060, Chicago, IL 60661

(Address of principal executive offices)

(312) 673-2400

(Registrants telephone number including area code)





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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of
September 30, 2009, the issuer had outstanding 168,233,180 shares of its $0.0001 par value common stock.

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



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x









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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES



|                              |  |                                                                                                                                    |  |         
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                    |  | Page No.
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                                                   
|Item 1.                       |  | Financial Statements                                                                                                               |  | 1       
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2009 [Unaudited] and December 31, 2008                                   |  | 2       
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2009
and 2008 [Unaudited] |  | 3       
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Statements of Shareholders Equity (Deficit) from January 1 to September 30, 2009
and 2008 [Unaudited]      |  | 4       
|                              |  |                                                                                                                                   
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2009 and 2008
 [Unaudited]          |  | 5       
|                              |  |                                                                                                                                   
|                              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                   |  | 6       
|                              |  |                                                                                                                                   
|Item 2.                       |  | Managements Discussion and Analysis                                                                                               |  | 33      
|                              |  |                                                                                                                                   
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk (Not Applicable)                                                        |  | 41      
|                              |  |                                                                                                                                   
|Item 4.                       |  | Controls and Procedures                                                                                                            |  | 41      
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                                                                   
|Item 1.                       |  | Legal Proceedings                                                                                                                  |  | 43      
|                              |  |                                                                                                                                   
|Item 1A.                      |  | Risk Factors                                                                                                                       |  | 43      
|                              |  |                                                                                                                                   
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                        |  | 43      
|                              |  |                                                                                                                                   
|Item 3.                       |  | Defaults upon Senior Securities                                                                                                    |  | 43      
|                              |  |                                                                                                                                   
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                |  | 43      
|                              |  |                                                                                                                                   
|Item 5.                       |  | Other Information                                                                                                                  |  | 43      
|                              |  |                                                                                                                                   
|Item 6.                       |  | Exhibits                                                                                                                           |  | 43      
|                              | 
|SIGNATURES AND CERTIFICATIONS |  |                                                                                                                                   



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PART I  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are contained principally in the sections entitled Business and Managements Discussion and Analysis and
Plan of Operation. These statements involve known and unknown risks, uncertainties, and other factors, which may cause our actual results, performance, or achievements to be materially different from any future results, performances, or
achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking
statements by terms such as may, should, could, would, expects, plans, anticipates, believes, estimates, projects,
predicts, potential, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in this report in greater detail under the heading Factors Affecting Future Performance.
These forward-looking statements represent our estimates and assumptions only as of the date of this report and we do not assume any obligation to update any of these statements.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in
thousands, except par value and share data)



|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                     |  | September 30,2009 |          |   | December 31,2008 |  
|                                                                                                                                                                     |  | (Unaudited)       |          |   |                  |  
|ASSETS                                                                                                                                                               |  |                   |          |   |                  |   |          |  
|CURRENT ASSETS                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                            |  | $                 | 2,234    |   |                  | $ | 4,598    |  
|Accounts receivable, net                                                                                                                                             |  |                   | 6,746    |   |                  |   | 6,277    |  
|Prepaid expenses and other current assets                                                                                                                            |  |                   | 941      |   |                  |   | 844      |  
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                     |  |                  
|Total Current Assets                                                                                                                                                 |  |                   | 9,921    |   |                  |   | 11,719   |  
|Property and equipment, net                                                                                                                                          |  |                   | 1,156    |   |                  |   | 1,548    |  
|Intangible assets, net                                                                                                                                               |  |                   | 23,329   |   |                  |   | 26,182   |  
|Goodwill                                                                                                                                                             |  |                   | 13,993   |   |                  |   | 13,993   |  
|Other assets                                                                                                                                                         |  |                   | 1,609    |   |                  |   | 3,875    |  
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                                                                         |  | $                 | 50,008   |   |                  | $ | 57,317   |  
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                     |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                       |  |                   |          |   |                  |   |          |  
|CURRENT LIABILITIES                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Current maturities of long-term debt                                                                                                                                 |  | $                 | 11,962   |   |                  | $ | 8,106    |  
|Accounts payable                                                                                                                                                     |  |                   | 12,385   |   |                  |   | 12,636   |  
|Accrued expenses                                                                                                                                                     |  |                   | 4,153    |   |                  |   | 4,971    |  
|Deferred revenue                                                                                                                                                     |  |                   | 4,060    |   |                  |   | 4,349    |  
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                     |  |                  
|Total Current Liabilities                                                                                                                                            |  |                   | 32,560   |   |                  |   | 30,062   |  
|Liabilities for warrants to purchase common stock                                                                                                                    |  |                   | 18,740   |   |                  |   | 12,153   |  
|Embedded derivatives of convertible debt instruments                                                                                                                 |  |                   | 30,199   |   |                  |   | 16,854   |  
|Deferred revenue                                                                                                                                                     |  |                   | 14       |   |                  |   | 45       |  
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total Liabilities                                                                                                                                                    |  |                   | 81,513   |   |                  |   | 59,114   |  
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                        |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                     |  |                  
|SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Common stock, $.0001 par value; 350,000,000 authorized, 168,233,180 and 154,281,018 issued and outstanding at September 30,
2009 and December 31, 2008, respectively |  |                   | 17       |   |                  |   | 16       |  
|Additional paid-in capital                                                                                                                                           |  |                   | 105,137  |   |                  |   | 101,606  |  
|Accumulated other comprehensive income (loss)                                                                                                                        |  |                   | (41      | ) |                  |   | 7        |  
|Accumulated deficit                                                                                                                                                  |  |                   | (136,618 | ) |                  |   | (103,426 | )
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total Shareholders Equity (Deficit)                                                                                                                                 |  |                   | (31,505  | ) |                  |   | (1,797   | )
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                 |  | $                 | 50,008   |   |                  | $ | 57,317   |  
|                                                                                                                                                                     |  |                   |          |   |                  |   |          |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share data)

(Unaudited)





|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|--------------------------------------------------------------------- |  | -------------------------------------- | ------ | - | ------------------------------------- | - | ------ | ---- |  | - | --------------- | - |  | - | ------- | -
|                                                                      |  | Three-month periods endedSeptember 30, |        |   | Nine-month periods endedSeptember 30, |  
|                                                                      |  | 2009                                   |        |   | 2008As Restated                       |   |        | 2009 |  |   | 2008As Restated |  
|REVENUES                                                              |  | $                                      | 16,457 |   |                                       | $ | 5,789  |      |  | $ | 48,578          |   |  | $ | 23,963  |  
|COST OF REVENUES                                                      |  |                                        | 12,524 |   |                                       |   | 3,976  |      |  |   | 37,411          |   |  |   | 12,623  |  
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|GROSS MARGIN                                                          |  |                                        | 3,933  |   |                                       |   | 1,813  |      |  |   | 11,167          |   |  |   | 11,340  |  
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|OPERATING EXPENSES                                                    |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|Compensation                                                          |  |                                        | 2,747  |   |                                       |   | 3,319  |      |  |   | 9,459           |   |  |   | 12,410  |  
|Travel and entertainment                                              |  |                                        | 260    |   |                                       |   | 300    |      |  |   | 935             |   |  |   | 1,098   |  
|Occupancy                                                             |  |                                        | 413    |   |                                       |   | 423    |      |  |   | 1,230           |   |  |   | 1,069   |  
|Professional services                                                 |  |                                        | 1,658  |   |                                       |   | 2,218  |      |  |   | 5,001           |   |  |   | 5,765   |  
|Insurance                                                             |  |                                        | 79     |   |                                       |   | 125    |      |  |   | 240             |   |  |   | 314     |  
|Depreciation and amortization                                         |  |                                        | 1,139  |   |                                       |   | 446    |      |  |   | 3,415           |   |  |   | 1,411   |  
|Other operating expenses                                              |  |                                        | 416    |   |                                       |   | 95     |      |  |   | 1,138           |   |  |   | 295     |  
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|TOTAL OPERATING EXPENSES                                              |  |                                        | 6,712  |   |                                       |   | 6,926  |      |  |   | 21,418          |   |  |   | 22,362  |  
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|OPERATING LOSS                                                        |  |                                        | (2,779 | ) |                                       |   | (5,113 | )    |  |   | (10,251         | ) |  |   | (11,022 | )
|Interest expense                                                      |  |                                        | (4,322 | ) |                                       |   | (1,941 | )    |  |   | (10,511         | ) |  |   | (7,092  | )
|Registration rights and failure to file (penalties) recoveries        |  |                                        | 1,395  |   |                                       |   | (1,140 | )    |  |   |                |   |  |   | (2,280  | )
|Gain (loss) on warrants and derivatives                               |  |                                        | 7,565  |   |                                       |   | (807   | )    |  |   | (12,262         | ) |  |   | 10,186  |  
|Gain (loss) on extinguishment of debt and conversion of debt to stock |  |                                        | 294    |   |                                       |   |       |      |  |   | (68             | ) |  |   | (5,217  | )
|Income tax expense                                                    |  |                                        | (100   | ) |                                       |   |       |      |  |   | (100            | ) |  |   |        |  
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|Income (loss) from continuing operations                              |  |                                        | 2,053  |   |                                       |   | (9,001 | )    |  |   | (33,192         | ) |  |   | (15,425 | )
|Income (loss) from discontinued operations, net of tax                |  |                                        |       |   |                                       |   | 239    |      |  |   |                |   |  |   | 551     |  
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|NET INCOME (LOSS)                                                     |  | $                                      | 2,053  |   |                                       | $ | (8,762 | )    |  | $ | (33,192         | ) |  | $ | (14,874 | )
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|                                                                      |  |                                        |        |  
|INCOME (LOSS) PER SHARE OF COMMON STOCK  BASIC                       |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|Loss from continuing operations                                       |  | $                                      | 0.01   |   |                                       | $ | (0.06  | )    |  | $ | (0.20           | ) |  | $ | (0.10   | )
|Income (loss) from discontinued operations                            |  |                                        |       |   |                                       |   |       |      |  |   |                |   |  |   |        |  
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|Net income (loss) per share of common stock  basic                   |  | $                                      | 0.01   |   |                                       | $ | (0.06  | )    |  | $ | (0.20           | ) |  | $ | (0.10   | )
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|                                                                      |  |                                        |        |  
|INCOME (LOSS) PER SHARE OF COMMON STOCK  DILUTED                     |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|Loss from continuing operations                                       |  | $                                      |       |   |                                       | $ | (0.10  | )    |  | $ | (0.20           | ) |  | $ | (0.13   | )
|Income (loss) from discontinued operations                            |  |                                        |       |   |                                       |   |       |      |  |   |                |   |  |   |        |  
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  
|Net loss per share of common stock  diluted                          |  | $                                      |       |   |                                       | $ | (0.10  | )    |  | $ | (0.20           | ) |  | $ | (0.13   | )
|                                                                      |  |                                        |        |   |                                       |   |        |      |  |   |                 |   |  |   |         |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

(in thousands, except share data)

(Unaudited)



|                                                            |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|----------------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------------------ |  | - | ------------------------------------------ | - |  | ---------------------------------- | --- | - |  | - | ------- | -
|                                                            |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity (Deficit) |    
|Balance, January 1, 2008 (As Restated)                      |  | 123,752,039  |  | $           | 12 |                          | $ | 77,462             |  | $ | (110,767                                   | ) |  | $                                  | (89 | ) |  | $ | (33,382 | )
|Cashless exercise of stock options                          |  | 804,626      |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    |    |   |  |   |        |  
|Conversion of debt to common stock                          |  | 20,261,890   |  |             | 2  |                          |   | 12,703             |  |   |                                           |   |  |                                    |    |   |  |   | 12,705  |  
|Exercise of warrants                                        |  | 3,767,612    |  |             | 1  |                          |   | 3,659              |  |   |                                           |   |  |                                    |    |   |  |   | 3,660   |  
|Registration rights penalty                                 |  | 477,185      |  |             |   |                          |   | 241                |  |   |                                           |   |  |                                    |    |   |  |   | 241     |  
|Stock-based compensation expense                            |  |             |  |             |   |                          |   | 5,643              |  |   |                                           |   |  |                                    |    |   |  |   | 5,643   |  
|Foreign currency translation adjustment                     |  |             |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    | 19  |   |  |   | 19      |  
|Issuance of common stock                                    |  | 166,666      |  |             |   |                          |   | 34                 |  |   |                                           |   |  |                                    |    |   |  |   | 34      |  
|Net loss for the nine-month period ended September 30, 2008 |  |             |  |             |   |                          |   |                   |  |   | (14,874                                    | ) |  |                                    |    |   |  |   | (14,874 | )
|                                                            |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|Balance, September 30, 2008                                 |  | 149,230,018  |  | $           | 15 |                          | $ | 99,742             |  | $ | (125,641                                   | ) |  | $                                  | (70 | ) |  | $ | (25,954 | )
|                                                            |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|                                                            |  |              |  |             |    |                         
|Balance, January 1, 2009                                    |  | 154,281,018  |  | $           | 16 |                          | $ | 101,606            |  | $ | (103,426                                   | ) |  | $                                  | 7   |   |  | $ | (1,797  | )
|Conversion of debt to common stock                          |  | 13,952,162   |  |             | 1  |                          |   | 1,976              |  |   |                                           |   |  |                                    |    |   |  |   | 1,977   |  
|Expired warrants                                            |  |             |  |             |   |                          |   | 6                  |  |   |                                           |   |  |                                    |    |   |  |   | 6       |  
|Stock-based compensation expense                            |  |             |  |             |   |                          |   | 1,549              |  |   |                                           |   |  |                                    |    |   |  |   | 1,549   |  
|Foreign currency translation adjustment                     |  |             |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    | (48 | ) |  |   | (48     | )
|Net loss for the nine-month period ended September 30, 2009 |  |             |  |             |   |                          |   |                   |  |   | (33,192                                    | ) |  |                                    |    |   |  |   | (33,192 | )
|                                                            |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|Balance, September 30, 2009                                 |  | 168,233,180  |  | $           | 17 |                          | $ | 105,137            |  | $ | (136,618                                   | ) |  | $                                  | (41 | ) |  | $ | (31,505 | )
|                                                            |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share data)

(Unaudited)



|                                                                       |  |                                       |        |   |      |   |        |  
|---------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                       |  | Nine-month periods endedSeptember 30, |       
|                                                                       |  | 2009                                  |        |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                   |  |                                       |        |   |      |   |        |  
|Net cash used in operating activities from continuing operations       |  | $                                     | (7,721 | ) |      | $ | (9,525 | )
|Net cash used in operating activities from discontinued operations     |  |                                       |       |   |      |   | (431   | )
|                                                                       |  |                                       |        |   |      |   |        |  
|NET CASH USED IN OPERATING ACTIVITIES                                  |  |                                       | (7,721 | ) |      |   | (9,956 | )
|                                                                       |  |                                       |        |   |      |   |        |  
|                                                                       |  |                                      
|CASH FLOWS FROM INVESTING ACTIVITIES                                   |  |                                       |        |   |      |   |        |  
|Purchase of property and equipment                                     |  |                                       | (170   | ) |      |   | (57    | )
|Proceeds from sale of Nexvu                                            |  |                                       |       |   |      |   | 846    |  
|                                                                       |  |                                       |        |   |      |   |        |  
|Net cash used in investing activities from continuing operations       |  |                                       | (170   | ) |      |   | (57    | )
|Net cash provided by investing activities from discontinued operations |  |                                       |       |   |      |   | 846    |  
|                                                                       |  |                                       |        |   |      |   |        |  
|NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                    |  |                                       | (170   | ) |      |   | 789    |  
|                                                                       |  |                                       |        |   |      |   |        |  
|                                                                       |  |                                      
|CASH FLOWS FROM FINANCING ACTIVITIES                                   |  |                                       |        |   |      |   |        |  
|Proceeds from the issuance of debt                                     |  |                                       | 5,600  |   |      |   | 11,201 |  
|Repayment of long-term debt                                            |  |                                       | (25    | ) |      |   |       |  
|Payment of financing costs                                             |  |                                       |       |   |      |   | (1,595 | )
|Issuance of common stock                                               |  |                                       |       |   |      |   | 1,048  |  
|                                                                       |  |                                       |        |   |      |   |        |  
|Net cash provided by financing activities from continuing operations   |  |                                       | 5,575  |   |      |   | 10,654 |  
|Net cash provided by financing activities from discontinued operations |  |                                       |       |   |      |   |       |  
|                                                                       |  |                                       |        |   |      |   |        |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                              |  |                                       | 5,575  |   |      |   | 10,654 |  
|                                                                       |  |                                       |        |   |      |   |        |  
|Effect of exchange rate on cash and equivalents                        |  |                                       | (48    | ) |      |   | 19     |  
|                                                                       |  |                                       |        |   |      |   |        |  
|Increase (decrease) in cash and cash equivalents                       |  |                                       | (2,364 | ) |      |   | 1,506  |  
|Cash and cash equivalents  beginning of period                        |  |                                       | 4,598  |   |      |   | 859    |  
|                                                                       |  |                                       |        |   |      |   |        |  
|Cash and cash equivalents  end of period                              |  | $                                     | 2,234  |   |      | $ | 2,365  |  
|                                                                       |  |                                       |        |   |      |   |        |  
|                                                                       |  |                                      
|SUPPLEMENTAL CASH FLOW INFORMATION                                     |  |                                       |        |   |      |   |        |  
|Cash paid for interest for continuing operations                       |  | $                                     | 1,053  |   |      | $ | 756    |  
|                                                                       |  |                                      
|NON-CASH INVESTING AND FINANCING ACTIVITIES                            |  |                                       |        |   |      |   |        |  
|Conversion of debt to common stock                                     |  |                                       | 2,931  |   |      |   | 8,743  |  
|Registration rights and failure to file penalties                      |  |                                       |       |   |      |   | 241    |  
|Conversion of accounts payable to VPP debentures                       |  |                                       | 1,207  |   |      |   |       |  
|July debentures issued under intercreditor agreement                   |  |                                       | 400    |   |      |   |       |  
|Issuance of common stock for cashless conversion of warrants           |  |                                       |       |   |      |   | 3,660  |  

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



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

September 30, 2009 (Unaudited)

NOTE 1. Organization and
Basis of Presentation.

Description of Business

Capital Growth Systems, Inc. (CGSI) and its subsidiaries (the Company) operate in one reportable segment as a single source telecom logistics provider in North America and the European Union. The Company
helps customers improve efficiency, reduce cost, and simplify operations of their complex global networks  with a particular focus on access networks.

Basis of Presentation

The Companys unaudited consolidated financial
statements as of and for the three and nine-months ended September 30, 2009 and 2008, have been prepared in accordance with generally accepted accounting principles for interim information and the rules and regulations of the Securities and
Exchange Commission for interim financial information. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of the
Companys management, all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair statement have been included. The results for the three and nine-months ended September 30, 2009 are not necessarily
indicative of the results to be expected for the year ending December 31, 2009. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for the most recent disclosure of the Companys accounting policies.

The Company consolidates its wholly-owned operating subsidiaries. The continuing operations presented in the accompanying
consolidated financial statements include the accounts of Capital Growth Systems, Inc. (CGSI) and its wholly-owned operating subsidiaries: 20/20 Technologies, Inc. (20/20), Magenta netLogic Ltd. (Magenta) which operates in the United Kingdom,
CentrePath, Inc. (CentrePath), and Global Capacity Group, Inc. (GCG). Also consolidated, effective November 20, 2008, is VDUL, now known as Global Capacity Direct, LLC. The Company also consolidated two other businesses, Nexvu Technologies, LLC
(Nexvu) and Frontrunner Network Systems (Frontrunner) until their respective closure or sale and the Company reports their results as discontinued operations. See the Discontinued Operations note for additional information. Except where necessary to
distinguish the entities, together they are referred to as the Company.

All material intercompany transactions
and balances have been eliminated in consolidation.

The foreign currency translation adjustments resulting from the
consolidation of Magenta, the Companys United Kingdom subsidiary, have not been significant.

Amounts, exclusive of
shares and per share data, are shown in thousands of dollars unless otherwise noted.

Concentrations of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash
and cash equivalents. Cash and cash equivalents are maintained with reputable major financial institutions. Deposits with these banks exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits by $1.7 million and $4.1 million for the
nine-month period ended September 30, 2009 and the year ended December 31, 2008, respectively. Daily cash balances in the operating accounts are monitored and adjusted, as appropriate. These balances could be impacted if one or more of the
financial institutions with Company deposits fails or is subject to other adverse conditions in the financial or credit markets. To date, the Company has not experienced any loss or lack of access to its invested cash or cash equivalents; however,
there can be no assurance that access to invested balances will not be impacted by adverse conditions in the financial and credit markets.

Cash and Cash Equivalents

The Company considers those short-term, highly-liquid investments with original
maturities of three months or less as cash and cash equivalents.

Restricted Cash

At September 30, 2009 and December 31, 2008, the Company had $0.6 million and $0.5 million of restricted cash for outstanding
letters of credit, respectively. The letters of credit expire within one year of issuance; therefore, restricted cash is classified with other current assets.

Accounts Receivable

Accounts receivable represent amounts owed from
billings to customers and are recorded at gross amounts owed less an allowance for potentially uncollectible accounts. Such allowance for potentially uncollectible accounts receivable is based upon prior experience and managements assessment
of the collectability of existing accounts. The total allowance for uncollectible accounts was $6.7 million and $6.8 million as of September 30, 2009 and December 31, 2008, respectively. The September 30, 2009 allowance includes $5.7
million related to one major international customer, $0.3 million related to GCG, and $0.7 million related to the acquisition of VDULs customers. The Companys policy is to write-off accounts receivable balances once management has deemed
them to be uncollectible.



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##### Table of Contents

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Provision for depreciation is made generally at rates designed to allocate the cost of the property and equipment over the
estimated useful lives of three to fifteen years. Depreciation is calculated using the straight-line method. The cost of ordinary maintenance and repairs is charged to operations while renewals and replacements are capitalized.

Impairment of Long-lived Assets

The Company assesses the impairment of long-lived assets, which include property, equipment and amortizable intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the
Company considers important, which could trigger an impairment review, include the following:



| |  |  | a significant decrease in the market price of a long-lived asset or asset group;
| | - |  | --------------------------------------------------------------------------------



| |  |  | a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an
adverse action or assessment by a regulator;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset
group;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates
continuing losses associated with the use of a long-lived asset or asset group; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end
of its previously estimated useful life.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The impairment of long-lived assets held for sale is measured at
the lower of book value or estimated fair value less cost to sell. The recoverability of long-lived assets held and used is assessed based on a comparison of the carrying amount of the asset to the sum of the undiscounted cash flows expected to
result from the use and the eventual disposal of the asset. Should the carrying value be higher than the undiscounted cash flows, an impairment charge would be recorded to write the asset down to its estimated fair value. The Company determines
estimated fair value based on the estimated discounted cash flows, as well as specific independent appraisal in certain instances.

Although the Company has a recent history of operating losses, Management has determined that the long-lived assets are expected to provide adequate cash flows to demonstrate the recoverability of the long-lived assets reported
carrying value. As such, no impairment charges were recognized related to the long-lived assets of the continuing operations for the nine-month period ended September 30, 2009 and 2008.

Goodwill

Goodwill
represents the excess of the cost of acquired businesses over the fair market value of their net assets at the dates of acquisition. Goodwill, which is not subject to amortization, is tested for impairment annually as of December 31. The
Company tests goodwill and other intangible assets for impairment on an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value. Recoverability of goodwill is evaluated using a two-step process.
The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, then the second step of the process involves a comparison of the implied fair
value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The Company
re-evaluates its reporting units and the goodwill and intangible assets assigned to the reporting units annually, prior to the completion of the impairment testing. The fair value of the Companys reporting unit is determined based upon
Managements estimate of future discounted cash flows and other factors. Managements estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash
flows.

Other intangible assets consisting mainly of customer relationships, trade names, software licenses, databases, and
developed technology were all determined to have a definite life and are amortized over the shorter of the estimated useful life or contractual life of the these assets, which range from 3 to 15 years. Intangible assets with definite useful lives
are periodically reviewed to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the
recoverability of intangible assets is assessed by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any,
are based on the excess of the carrying amount over the fair value of those assets. Newly acquired VDULs intangible assets are classified into two categories, developed technology and customer relationships. These assets have a useful life
ranging from five to fifteen years and are amortized using an economic benefit method.



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Deferred Financing Costs

Deferred financings costs, included in other long-term assets in the consolidated balance sheets, were $1.5 million and $3.7 million as of
September 30, 2009 and December 31, 2008, respectively, both net of accumulated amortization of $0.8 million and $0.1 million, respectively. These costs represent fees incurred and paid in either cash or warrants to obtain debt financing
and are amortized over the life of the related debt using the effective interest rate method.

Accounting for Debt Issued with Stock
Purchase Warrants

Accounting for debt issued with detachable stock purchase warrants under the equity classification,
provides for the proceeds of the debt to be allocated between the debt and the detachable warrants based on the relative estimated fair values of the debt security without the warrants and the warrants themselves. The amount allocated to the
warrants would then be reflected as both an increase to additional paid-in capital and as a debt discount that would be amortized over the term of the debt. However, in certain circumstances the warrants must be accounted for as a liability, where
the full estimated fair value of the warrant is established as both a liability and as a debt discount. As of September 30, 2009 and December 31, 2008, the Company does not have any warrants that merit equity classification.

Accounting for Convertible Instruments and Related Securities

The Company does not enter into derivative contracts for purposes of risk management or speculation. However, from time to time, the Company enters into financing contracts that are not considered
derivative financial instruments in their entirety but that include embedded derivative features and may also include detachable warrants.

Upon issuance of convertible debt instruments, the Company first determines whether the instrument and any conversion features and warrants, should be accounted for as a liability. The Company then
considers whether the conversion option or other embedded features (such as puts and calls) require bifurcation from the debt or preferred stock. This consideration includes, among other things, an assessment of whether the embedded feature would
qualify as a derivative, whether such a derivative is indexed to the Companys common stock and whether the derivative would, if freestanding, be classified in shareholders equity (deficit). If it is determined that one or more embedded
features are required to be bifurcated, those bifurcated features are separated from the debt as a bundle and accounted for as a liability or asset of the Company. The debt itself would then be recorded with a discount (if the separated features
were a liability) or a premium (if the separated features were an asset) which would be amortized over the term of the debt. The Company has no such derivative assets, but it does have various derivative liabilities.

To the extent that the initial estimated fair value of the derivative liability, along with the initial estimated fair value of detachable
warrants also issued with the same convertible instrument, exceeds the proceeds received upon issuance of the security, the resulting debt discount is capped at the amount of those proceeds and the excess of the initial derivative and warrant
liability is charged to the statement of operations as interest expense.

The derivative and warrant liabilities are required
to be accounted for at estimated fair value. As such, at each balance sheet date, all such outstanding securities are reported at the period ends estimated fair value and changes in that estimate from the prior period end are reflected in
Gain (loss) on warrants and derivatives in the statements of operations. The estimated fair values include, as appropriate, any contingency provisions related to the respective securities. The Company uses the Black-Scholes pricing model
to determine fair values of its warrants and derivatives. Valuations derived from any model are subject to ongoing internal verification and review. The models use, among other things, market-sourced inputs such as common stock price, interest
rates, exchange rates, and common stock price volatility. Selection of these inputs involves Managements judgment and has a direct impact on net income. The fair value of the derivative liabilities and certain of the warrant liabilities are
subject to changes in the trading value of the Companys common stock. Accordingly, the Companys financial statements may fluctuate from quarter-to-quarter based on factors such as the price of the Companys stock at the balance
sheet date, the amount of shares converted by note holders and/or exercised by warrant holders, and changes in the determination of market-sourced inputs. Consequently, the Companys financial position and results of operations may vary
materially from quarter-to-quarter based on conditions other than its operating revenues and expenses.

These warrant and
derivative liabilities are also marked-to-market prior to any related conversions, exercises, modifications, or extinguishments with any necessary changes being reflected in Gain or loss related to warrants and derivatives. Upon such
events, the carrying cost of the liability is eliminated (upon a conversion, exercise, or extinguishment) or adjusted as may be necessary in a modification and such eliminations and adjustments are included in the overall accounting for the related
event.



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##### Table of Contents

The Company follows extinguishment accounting for conversions of convertible debt in
instances where the conversion features have been bifurcated from the convertible debt host contract and accounted for as liabilities since there is no equity conversion feature remaining in the debt instrument for accounting purposes. Therefore,
while there may be a legal conversion of the debt, for accounting purposes both liabilities (i.e., the debt host contract and the bifurcated derivative liability) are subject to extinguishment accounting because such liabilities are being
surrendered in exchange for common shares. As such, a gain or loss upon extinguishment of the two liabilities equal to the difference between the recorded value of the liabilities and the fair value of the common stock issued to extinguish them
should be recorded.

Upon a conversion of a portion of debt associated with separated derivatives into common shares, the
Company records a credit to capital equal to that dates fair value of the shares issued upon conversion. Concurrently, the Company eliminates the carrying value of the debt, including its pro rata portion of deferred financing costs, debt
discounts, and derivative liability, thereby resulting in a gain or loss on extinguishment upon the conversion.

In certain
circumstances, the terms of the convertible securities and warrants require the Company to (i) file and keep effective a registration statement in regards to the common shares to be delivered upon conversion or exercise or (ii) convene a
shareholders meeting for the purpose of authorizing for issuance additional shares of common stock in an amount sufficient to ensure that all shares of common stock underlying convertible debt and underlying warrants held by the holders of
such convertible debt will be available for issuance in the event of conversion of such debt and/or exercise of such warrants. In certain of those cases, the Company may incur penalties for not meeting those requirements on a timely basis. The
Company records any related penalties upon its assessment that such penalties will become due and payable to the holders. If such determination is made upon issuance or modification of the convertible securities or warrants, the related penalties
are considered in the overall accounting for the issuance of those securities. If such determination is made subsequent to the issuance or modification, which is almost always the case, the related penalties are charged to expense.

Fair Value Measurements

The Company defines fair value as the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date and emphasizes that fair value is a market-based measurement and not an
entity-specific measurement and uses the following hierarchy in fair value measurements and expands the required disclosures of assets and liabilities measured at fair value:



| |  |  | Level 1  Inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Inputs use other inputs that are observable, either directly or indirectly. These inputs include quoted prices for similar assets and
liabilities in active markets as well as other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the
related asset or liability.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In instances where inputs used to measure fair value fall into different levels
in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Companys assessment of the significance of particular inputs to these fair
measurements requires judgment and considers factors specific to each asset or liability.

The Company has embedded
derivatives associated with its convertible debt instruments and warrants classified as liabilities which are measured at fair value on a recurring basis. The embedded derivatives and the warrants are measured at fair value using the Black-Scholes
valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. In selecting the appropriate fair value technique the Company considers the nature of the
instrument, the market risks that it embodies, and the expected means of settlement.



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##### Table of Contents

Recurring Fair Value Measurements: Liabilities measured at fair value on a recurring basis at
September 30, 2009 are as follows, in millions:



|                                 |  |                                                                  |  |                                           |      |                                        |   |                            |   |     
|-------------------------------- |  | ---------------------------------------------------------------- |  | ----------------------------------------- | ---- | -------------------------------------- | - | -------------------------- | - | ----
|                                 |  | Quoted Prices inActive Markets
forIdentical Liabilities(Level 1) |  | SignificantOtherObservableInputs(Level 2) |      | SignificantUnobservableInputs(Level 3) |   | BalanceatSeptember 30,2009
|Derivative financial instruments |  |                                                                 |  | $                                         | 30.2 |                                        |  |                            | $ | 30.2
|Warrant liability                |  |                                                                 |  | $                                         | 18.7 |                                        |  |                            | $ | 18.7

Fair Value of Financial Instruments not measured at fair value on a recurring
basis: The carrying amount of cash, accounts receivable, debt, and accounts payable are considered representative of their respective fair values because of the short-term nature of these financial instruments. Long-term debt approximates fair
value due to the interest rates on the promissory notes approximating current market rates.

Revenue Recognition

The Company generates revenue from two business units: Optimization Solutions and Connectivity Solutions. The revenue offerings of
Optimization Solutions include Optimization Consulting, Automated Pricing Software, Remote Management Services, and Professional Services. Revenue offerings of Connectivity Solutions include delivering turnkey global networks and system management
services.

The Company recognizes revenue only when the price is fixed or determinable, persuasive evidence of an arrangement
exists, the service is performed and collectability of the resulting receivable is reasonably assured.

While customers may
purchase services separately, sales often include multiple offerings that cross business units. At the inception of such arrangements, the deliverables are evaluated to determine whether they represent separate units of accounting. The
Companys policy regarding this determination of separate units is based on all of the following criteria being met: the delivered item has value to the customer on a standalone basis, there is objective and reliable evidence of the fair value
of the items(s), and delivery or performance of the item(s) is considered probable and substantially in the Companys control. Revenue is allocated to each unit of accounting in a transaction-based on its fair value as determined by vendor
objective evidence. Vendor objective evidence of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices when sold to other customers. If vendor objective evidence of fair value has not been
established for all items under the arrangement, no allocation can be made, and revenue is recognized on all items over the term of the arrangement.

As part of the revenue recognition process, the Company records provisions for estimated offering returns and allowances as determined by historical sales returns, reviewing economic trends, and changes
to customers demands. Cancellation charges that are included in Company contracts are recorded upon managements determination that the customer has violated the terms of the contract.

Optimization Consulting:The Company contracts these services on a contingent basis, where the Company is paid a non-recurring
fee-based on a percentage of the savings achieved from the engagement. Savings in off-net access can be identified through the novation of existing circuits, least-cost carrier upgrades, point-of-presence re-homing, and aggregation of circuits into
higher bandwidth facilities. Revenues related to optimization recommendations that require additional action before acceptance or implementation are deferred until such contingency is resolved.

Automated Pricing Software: The Company allocates revenue to software licenses and to the related maintenance based on the residual
method of accounting, whereby the software revenue is recognized upon offering acceptance by the customer and the maintenance allocation is recognized over the annual life of the license. The Company has established Vendor Specific Objective
Evidence (VSOE) for the value of its post-contract maintenance support agreement at 20% of the license amount, which is based on the amount charged to its customers in the renewal year. Therefore, the Company allocates 20% of the revenue of the
arrangement to maintenance and the remaining amount to the software license.

Remote Management Services: The Company
recognizes revenue from the installation and servicing of the arrangement ratably over the term of the contract with no allocation to either installation or monthly monitoring since the installation has no value to the customer on a standalone
basis.

Professional Services: The Company recognizes revenue over the duration of the contract on a percentage of
completion method from the go-live date through the contract life.



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##### Table of Contents

Global Networks and System Management Services: The Company generally bills its
customers for ongoing services on a monthly basis. Invoices include charges for the current months connectivity access and for the prior months excess usage-based revenue. Revenue is recognized in the month earned. Installation charges
are recognized upon acceptance by the customer.

Cost of Revenues

The cost of revenues for the Optimization solutions offerings include the cost of accessing circuits and fiber networks, the direct costs for
labor, travel and materials to install and maintain customer sites, along with the occupancy and labor costs of operating a network operations center.

Cost of revenues for the connectivity solutions offerings includes the cost of accessing circuits and bandwidth needed for communication networks and fees paid to third-party sales agents.

Accounting for Stock-Based Compensation

The Company measures and recognizes the cost of share-based awards granted to employees and directors based on the grant-date fair value of the award and recognizes expense over the vesting period. The
Company estimates the grant date fair value of each award using a Black-Scholes option-pricing model.

From time to time, in
lieu of, or in addition to cash, the Company issues equity instruments as a contract incentive or as payment for non-employee services. Such payments may include the issuance of stock, stock purchase warrants, or both. The amount recorded for shares
issued is based on the closing price of the Companys common stock on the effective date of the stock issuance or the agreement. The grant date fair value of warrants awarded is estimated using the Black-Scholes option-pricing model. The fair
value of the awards is charged to expense as they are earned. The Company has not classified outstanding stock options as liabilities because the underlying shares are not classified as liabilities and the Company is not required to settle the
options by transferring cash or other assets.

Income Taxes

Income tax provisions are recorded for taxes currently payable or refundable and for deferred income taxes arising from the future tax
consequences of events that were recognized in the Companys financial statements or tax returns. The effects of income taxes are measured based on enacted tax laws and rates applicable to periods in which the differences are expected to
reverse. As necessary, a valuation allowance is established to reduce deferred income tax assets to an amount that will more likely than not be realized.

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, and various state, local, and foreign jurisdictions. Based on its evaluation, the Company has concluded that it
has no significant unrecognized tax benefits. Generally, tax years ended December 31, 2005 and forward remain subject to examination by major tax jurisdictions as of September 30, 2009. The Company does not believe there will be any
material changes in its unrecognized tax positions over the next twelve months.

The Company may from time to time be assessed
interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to its financial results. The Company classifies interest and penalties as a component of income tax expense.

Comprehensive Income (Loss)

Comprehensive income (loss) is as follows:



|                                        |  |                                        |       |                 |                                       |        |      |  |   |                 |   |  |   |         |  
|--------------------------------------- |  | -------------------------------------- | ----- | --------------- | ------------------------------------- | ------ | ---- |  | - | --------------- | - |  | - | ------- | -
|                                        |  | Three-month periods endedSeptember 30, |       |                 | Nine-month periods endedSeptember 30, |       
|                                        |  | 2009                                   |       | 2008As Restated |                                       |        | 2009 |  |   | 2008As Restated |  
|Net income (loss), as reported          |  | $                                      | 2,053 |                 | $                                     | (8,762 | )    |  | $ | (33,192         | ) |  | $ | (14,874 | )
|Foreign currency translation adjustment |  |                                        | 2     |                 |                                       | 34     |      |  |   | (48             | ) |  |   | 19      |  
|                                        |  |                                        |       |                 |                                       |        |      |  |   |                 |   |  |   |         |  
|Comprehensive income (loss)             |  | $                                      | 2,055 |                 | $                                     | (8,728 | )    |  | $ | (33,240         | ) |  | $ | (14,855 | )
|                                        |  |                                        |       |                 |                                       |        |      |  |   |                 |   |  |   |         |  

Use of Estimates

The preparation of financial statements with accounting principles, generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these
estimates.



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##### Table of Contents

NOTE 2. Recent Accounting Pronouncements.

In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification Subtopic (ASC) 105-10-05 which
established The FASB Accounting Standards Codification and the Hierarchy of GAAP (Codification) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. SEC rules and interpretive
releases are also sources of authoritative GAAP for SEC registrants. ASC 105-10-05 modifies the GAAP hierarchy to include only two levels of GAAP: authoritative and non-authoritative. The Codification is effective for interim and annual periods
ending after September 15, 2009. As the Codification is not intended to change or alter existing GAAP, it has not impacted the Companys condensed consolidated financial statements. The Company has adjusted all historical GAAP references
in this Form 10-Q for the third quarter of 2009 to reflect accounting guidance references included in the Codification.

In
June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets  an amendment of FASB Statement No. 140 (SFAS 166), which has yet to be codified in the ASC.
Once codified, the standard would amend ASC 860, Transfers and Servicing. SFAS 166 amends the existing guidance on transfers of financial assets. The amendments include: (1) eliminating the qualifying special-purpose entity concept,
(2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the de-recognition criteria for a transfer to be accounted for as a
sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. SFAS 166 is effective for
new transfers of financial assets occurring on or after January 1, 2010. The adoption of this standard is not expected to have a material impact on the Companys consolidated financial statements; however, it could impact future
transactions entered into by the Company.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB
Interpretation No. 46(R) (SFAS 167), which has yet to be codified in the ASC. Once codified, the standard would amend ASC 810, Consolidation. The amendments include: (1) the elimination of the exemption for qualifying special
purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 is effective
January 1, 2010. The Company presently does not have variable interest entities; therefore, there will not be an impact on the consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update 2009-05, Fair Value Measurements and Disclosures (Topic 820)  Measuring Liabilities at Fair Value (ASU 2009-05). ASU 2009-05
provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques
prescribed by the update. ASU 2009-05 is effective for reporting periods (including interim periods) beginning after August 26, 2009, which would be the fourth quarter of 2009 for the Company. The Company is currently evaluating the impact of
the pending adoption this ASU on its consolidated financial statements.

In October 2009, the FASB issued ASU 2009-13,
Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition) (ASU 2009-13) and ASU 2009-14, Certain Arrangements That Include Software Elements, (amendments to ASC Topic 985, Software) (ASU
2009-14). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently evaluating the impact of the adoption of these ASUs on its consolidated financial statements.

NOTE 3. Going Concern.

As
of September 30, 2009, the Companys current liabilities exceeded its current assets by $22.6 million. Included in the current liabilities is $12.0 million of current maturities of long-term debt, net of $32.1 million of debt discount
associated with the initial fair value of related warrants and embedded derivatives and $23.1 million associated with original issue discount and imputed interest. Cash on hand at September 30, 2009 was $2.2 million (not including $0.6 million
restricted for outstanding letters of credit). The Company reported a net loss from continuing operations of $33.2 million and $15.4 million for the nine-month periods ended September 30, 2009 and 2008, respectively. The results for 2009
include non-cash expenses of $1.5 million relating to the accounting treatment for stock and options. The current nine-month period includes non-cash loss of $12.3 million from the change in fair value of embedded derivatives and warrants, and $8.9
million of amortization of debt discounts, interest paid-in-kind and Original Issue Discount (OID). The results for 2008 include $5.6 million in non-cash expenses relating to the accounting treatment for stock and options, $2.0 million related to
the amortization of debt discount, a $5.2 million loss on debt extinguishments, and a non-cash gain on warrants and derivatives of $10.2 million. Cash used in operating activities from continuing operations was $7.7 million and $9.5 million for the
nine-month periods ended September 30, 2009 and 2008, respectively. The Companys net working capital deficiency, recurring operating losses, and negative cash flows from operations raise substantial doubt about its ability to continue as
a going concern. However, the successful delivery on major customer contracts



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entered into since mid-2008 and continued success in closing these types of contracts are expected to move the Company into profitability. In addition to those new contracts, Management believes
that the inclusion of VDULs business and cash flows will have a positive impact on future results. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

Notwithstanding the above, the Company continues to find support among its shareholders and other investors, as evidenced by the $5.6
million and $35.8 million financing completed in 2009 and 2008, respectively. This capital was used to fund the VDUL acquisition, to strengthen its core logistics business model, and to support existing operations.

NOTE 4. Acquisition.

On
November 14, 2008, CGSI, through its wholly-owned subsidiary Capital Growth Acquisition, Inc. (CGAI), entered into an Interest and Loan Purchase Agreement (the ILPA) with an administrator for the estate of Vanco, plc, the corporate parent of
VDUL (Seller) for the purchase of all of the outstanding membership interests (the Interests) of VDUL. For full details of the transaction, see the Companys Form 10-K for the year ended December 31, 2008.

The acquisition of Interests was accounted for using the purchase method. Accordingly, the net assets were recorded at their estimated fair
values and operating results were included in the Companys consolidated financial statements from November 20, 2008, the date of acquisition. The purchase price, as adjusted, was allocated as of the Financial Closing and resulted in
goodwill of approximately $1.5 million.

The purchase price allocation as of November 20, 2008 was as follows:



|                                                       |  |   |         |  
|------------------------------------------------------ |  | - | ------- | -
|Cash purchase price                                    |  | $ | 12,233  |  
|Seller debenture, as adjusted                          |  |   | 4,000   |  
|Less imputed interest at 19.0%                         |  |   | (1,503  | )
|Transaction Costs                                      |  |   | 250     |  
|Fair value of stock options transferred to Seller      |  |   | 290     |  
|                                                       |  |   |         |  
|Total purchase price                                   |  |   | 15,270  |  
|                                                       |  |   |         |  
|Assets acquired and liabilities assumed at fair value: |  |   |         |  
|Cash                                                   |  |   | 2,009   |  
|Accounts receivable, net                               |  |   | 5,709   |  
|Other current assets                                   |  |   | 224     |  
|Identifiable intangible assets                         |  |   | 19,360  |  
|Other assets                                           |  |   | 1,216   |  
|Accounts payable and accrued expenses                  |  |   | (10,456 | )
|Deferred revenue                                       |  |   | (4,272  | )
|                                                       |  |   |         |  
|Fair value of net assets acquired                      |  |   | 13,790  |  
|                                                       |  |   |         |  
|Goodwill                                               |  | $ | 1,480   |  
|                                                       |  |   |         |  

The following unaudited pro forma consolidated condensed results of continuing
operations are presented as though VDUL had been acquired as of January 1, 2008:



|                                                                     |  |                                       |         |   |      |   |         |  
|-------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                     |  | Nine-month periods endedSeptember 30, |        
|                                                                     |  | 2009                                  |         |   | 2008 |  
|Revenues                                                             |  | $                                     | 48,578  |   |      | $ | 58,299  |  
|Loss from continuing operations                                      |  |                                       | (33,192 | ) |      |   | (11,117 | )
|Basic and diluted income (loss) per share from continuing operations |  |                                       | (0.20   | ) |      |   | (0.08   | )

The pro forma results of operations are not necessarily indicative of what actually
would have occurred had the VDUL acquisition occurred at an earlier date, nor are they necessarily indicative of future consolidated results. The Seller continued to support the operations of VDUL while marketing VDUL for sale. The historical
results of operations of VDUL in 2008 were impacted by Vanco plcs bankruptcy and the Sellers marketing of VDUL for sale.



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NOTE 5. Discontinued Operations.

During the first quarter of 2007, the Company determined the operations of Frontrunner and Nexvu were not core to the Companys overall
telecom logistics integrator strategy and therefore made the decision to dispose of these two entities. Since early 2007, the Company actively marketed the two companies. Development activity at Nexvu was ended effective September 30, 2007 and
shutdown costs of $0.2 million were accrued at that date to cover any residual costs, including severance and liquidation of fixed assets.

On February 19, 2008, the Company entered into an Asset Purchase Agreement with an unaffiliated party (Buyer) pursuant to which Frontrunner sold substantially all of its assets to the
Buyer. The purchase price for the assets was $0.9 million and the Buyer assumed Frontrunners indebtedness to a material supplier that had a remaining principal amount of $0.6 million. Approximately $0.1 million of the cash purchase price was
placed in escrow to be disbursed based on the collections of certain accounts receivable of Frontrunner that were purchased by the Buyer. In connection with the sale of assets, the Company agreed to not compete with the Buyer for a period of five
years.

On August 26, 2008, the Company entered into an Asset Purchase Agreement with an unaffiliated party
(Purchaser) pursuant to which Nexvu sold its assets to the Purchaser. The purchase price for the assets was $0.25 million, of which $0.125 million was paid at closing with the balance due in 2009. The Purchaser signed a promissory note
for $0.125 million. The note was paid in full, including interest, in November 2009.

The Company has classified both of these
entities as discontinued operations. Revenues for the nine-month period ended September 30, 2008 were $1.0 million. Losses from discontinued operations for the nine-month period ended September 30, 2008 were $0.1 million. The operating
results related to Frontrunner and Nexvu are included in discontinued operations of the Company through the sale date. Gain on sale of discontinued operations for the nine-month period ended September 30, 2008 was $0.7 million.

NOTE 6. Property and Equipment.

Property and equipment consists of the following:



|                           |  |                   |        |   |                  |   |        |  
|-------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                           |  | September 30,2009 |        |   | December 31,2008 |  
|Furniture and fixtures     |  | $                 | 343    |   |                  | $ | 343    |  
|Computer equipment         |  |                   | 992    |   |                  |   | 963    |  
|Leasehold improvements     |  |                   | 813    |   |                  |   | 782    |  
|Machinery and equipment    |  |                   | 1,589  |   |                  |   | 1,478  |  
|                           |  |                   |        |   |                  |   |        |  
|                           |  |                   | 3,737  |   |                  |   | 3,566  |  
|Accumulated depreciation   |  |                   | (2,581 | ) |                  |   | (2,018 | )
|                           |  |                   |        |   |                  |   |        |  
|Net property and equipment |  | $                 | 1,156  |   |                  | $ | 1,548  |  
|                           |  |                   |        |   |                  |   |        |  

Depreciation of property and equipment was $0.6 million and $0.5 million for the
nine-month periods ended September 30, 2009 and September 30, 2008, respectively. Depreciation expense of $0.2 million was recorded for both of the three-month periods ended September 30, 2009 and 2008.

NOTE 7. Intangible Assets and Goodwill.

Intangible assets were acquired in business combinations. The assets have no significant residual values. All intangible assets are subject to amortization. Gross carrying amounts, accumulated
amortization, and amortization for the periods ended September 30, 2009 and December 31, 2008 for each major intangible asset class are as follows:



|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|-------------------- |  | ---------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | --- |  | - | ------
|                     |  |                              |  | September 30, 2009 
|                     |  | AmortizationPeriod in Years  |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | Net
|Developed technology |  | 5 to 15                      |  | $                   | 12,215 |                         | $ | (3,092 | )   |  | $ | 9,123 
|Trade names          |  | 3                            |  |                     | 350    |                         |   | (333   | )   |  |   | 17    
|Customer base        |  | 6 to 15                      |  |                     | 16,510 |                         |   | (2,321 | )   |  |   | 14,189
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|Total                |  | 13.02 weighted average years |  | $                   | 29,075 |                         | $ | (5,746 | )   |  | $ | 23,329
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       



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|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|-------------------- |  | ---------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | --- |  | - | ------
|                     |  |                              |  | December 31, 2008  
|                     |  | AmortizationPeriod in Years  |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | Net
|Developed technology |  | 5 to 15                      |  | $                   | 12,215 |                         | $ | (1,625 | )   |  | $ | 10,590
|Trade names          |  | 3                            |  |                     | 350    |                         |   | (246   | )   |  |   | 104   
|Customer base        |  | 6 to 15                      |  |                     | 16,510 |                         |   | (1,022 | )   |  |   | 15,488
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|Total                |  | 13.02 weighted average years |  | $                   | 29,075 |                         | $ | (2,893 | )   |  | $ | 26,182
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       

Amortization expense year to date for the nine-month periods ended September 30,
2009 and 2008 related to the intangible assets was $2.8 million and $0.9 million, respectively. Amortization expense of $0.9 million and $0.3 million was recorded for the three-month periods ended September 30, 2009 and 2008, respectively.

Estimated amortization expense for intangible assets is as follows for the years ending December 31:



|                           |  |   |       
|-------------------------- |  | - | ------
|Remaining 3 months of 2009 |  | $ | 939   
|2010                       |  |   | 3,434 
|2011                       |  |   | 3,206 
|2012                       |  |   | 2,810 
|2013                       |  |   | 2,527 
|Thereafter                 |  |   | 10,413
|                           |  |   |       
|Total                      |  | $ | 23,329
|                           |  |   |       

The Company did not recognize any impairment charges related to the long-lived assets
of continuing operations for the nine-month period ended September 30, 2009 and the year ended December 31, 2008.

Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment annually and will be tested for impairment between annual
tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. There have not been any current events or circumstances that would indicate an impairment of goodwill exists nor any changes in the carrying
amount of goodwill for the nine-month period ended September 30, 2009 in the continuing operations.

The value at
acquisition and current carrying cost for each acquired company are as follows:



|                          |  |                    |        |                   |   |                    |  |               |        |  |   |       
|------------------------- |  | ------------------ | ------ | ----------------- | - | ------------------ |  | ------------- | ------ |  | - | ------
|                          |  | September 30, 2009 |        | December 31, 2008
|                          |  | GrossCarrying Cost |        | AcquiredValue     |   | GrossCarrying Cost |  | AcquiredValue
|Acquisition of 20/20      |  | $                  | 8,810  |                   | $ | 8,810              |  | $             | 8,810  |  | $ | 8,810 
|Acquisition of CentrePath |  |                    | 1,754  |                   |   | 1,754              |  |               | 1,754  |  |   | 1,754 
|Acquisition of GCG        |  |                    | 1,949  |                   |   | 1,949              |  |               | 1,949  |  |   | 1,949 
|Acquisition of VDUL       |  |                    | 1,480  |                   |   | 1,480              |  |               | 1,480  |  |   | 1,480 
|                          |  |                    |        |                   |   |                    |  |               |        |  |   |       
|Total                     |  | $                  | 13,993 |                   | $ | 13,993             |  | $             | 13,993 |  | $ | 13,993
|                          |  |                    |        |                   |   |                    |  |               |        |  |   |       

NOTE 8. Accrued Expenses.

Accrued expenses consist of the following:



|                               |  |                   |       |                  |   |      
|------------------------------ |  | ----------------- | ----- | ---------------- | - | -----
|                               |  | September 30,2009 |       | December 31,2008
|Disputed claims with carriers  |  | $                 | 1,094 |                  | $ | 606  
|Compensation and payroll taxes |  |                   | 225   |                  |   | 539  
|Professional services          |  |                   | 498   |                  |   | 1,418
|Interest expense               |  |                   | 225   |                  |   | 103  
|Excise taxes                   |  |                   | 460   |                  |   | 909  
|Other                          |  |                   | 1,651 |                  |   | 1,396
|                               |  |                   |       |                  |   |      
|Total accrued expenses         |  | $                 | 4,153 |                  | $ | 4,971
|                               |  |                   |       |                  |   |      



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NOTE 9. Debt.

Debt consists of the following:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                   |        |                  |   |      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | -----
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | September 30,2009 |        | December 31,2008
|Term loan, interest at the higher of prime or 5%, plus a margin of 14% (5% paid-in-kind), due November 2009, extends to November
2010 effective with the Final Closing, debt discount at issuance of $2.2 million, outstanding principal balance of $8.5 million, plus paid-in-kind interest of $0.4 million, net of unamortized debt discount of $1.3 million. At December 31, 2008,
the outstanding principal balance was $8.5 million, plus paid-in-kind interest of $0.1 million, net of unamortized debt discount of $2.0 million.                               |  | $                 | 7,612  |                  | $ | 6,489
|Amended March Debentures, original issue discount and debt discount at issuance of $12.4 million and $18.4 million, respectively,
due November 2009, extends to March 2015 effective with the Final Closing, outstanding principal balance of $26.9 million, net of unamortized original issue discount and debt discount of $11.4 million and $14.7 million, respectively. At
December 31, 2008, the outstanding principal balance was $29.9 million, net of unamortized original issue discount and debt discount of $12.1 million and $17.1 million, respectively. |  |                   | 758    |                  |   | 695  
|November Debentures, original issue discount and debt discount at issuance of $5.9 million and $9.0 million, respectively, due
November 2009, extends to November 2015 effective with the Final Closing, outstanding principal balance of $14.9 million, net of unamortized original issue discount and debt discount of $5.7 million and $8.8 million, respectively. At
December 31, 2008, the outstanding principal balance was $14.9 million, net of unamortized original issue discount and debt discount of $5.8 million and $8.9 million, respectively.         |  |                   | 339    |                  |   | 245  
|July Debentures, issued in July 2009 and August 2009, original issue discount and debt discount at issuance of $4.5 million and
$5.2 million, respectively, interest at the higher of prime or 5%, plus a margin of 14% (5% paid-in-kind), and due May 2011, outstanding principal balance of $10.5 million including $0.03 million payment-in-kind interest, net of unamortized original
issue discount and debt discount of $4.2 million and $4.8 million, respectively.                                                                                            |  |                   | 1,524  |                  |   |     
|VPP Debentures, issued in July 2009, original issue discount and debt discount at issuance of $0.8 million and $1.2 million,
respectively, and due November 2011, outstanding principal balance of $2.0 million, net of unamortized original issue discount and debt discount of $0.7 million and $1.1 million, respectively.                                                                                                                                                                                                                                         |  |                   | 173    |                  |   |     
|Seller Debenture, non-interest bearing, debt discount for imputed interest and conversion feature at issuance of $1.5 million and
$2.0 million, respectively, due November 2009, extends to May 2011 effective with the Final closing and renewable monthly thereafter, outstanding principal balance of $4.0 million, net of unamortized debt discount of $2.5 million. At
December 31, 2008, the outstanding principal balance was $4.0 million, net of unamortized debt discount of $3.4 million.                                                                  |  |                   | 1,520  |                  |   | 617  
|Unsecured loans from certain employees of Magenta, interest at 8.43%, due upon demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |                   | 36     |                  |   | 60   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                   |        |                  |   |      
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                   | 11,962 |                  |   | 8,106
|Less: current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                   | 11,962 |                  |   | 8,106
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                   |        |                  |   |      
|Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | $                 |       |                  | $ |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                   |        |                  |   |      

All long-term debt is presented as a current obligation as a result of the
Companys anticipation of continued events of default on certain reporting and administrative covenants and its inability to predict the continued issuance of waivers by its lenders. The long-term debt commitments including the maturity value
of original issue discount securities are $67.2 million as of September 30, 2009. This amount does not include minimum interest due on the term note per the default clause of the agreement.

In July 2009, the Company entered into the following agreements: (i) a Second Amendment, and Waiver Agreement (the Second Amendment)
with ACF CGS, L.L.C., which amends certain conditions contained in the Term Loan and governs the priorities and payments in favor of the Senior Lender, (ii) a July Debt Subordination and Intercreditor Agreement (the July Debentures) with the
holders of its junior secured convertible debentures issued on November 30, 2008 (November Debentures) and (Amended March Debentures), pursuant to which the holders waived and amended certain conditions contained in the November and Amended
March Debentures and the corresponding securities purchase agreement which enabled the Company to enter into the Second Amendment and Waiver Agreement, and agree to subordinate the debt to the Senior Lender, (iii) a Vendor Payment Plan Debt
Subordination and Intercreditor Agreement (the VPP Debenture) with the holders of its junior secured convertible debentures issued on November 30, 2008 (November Debentures) and (Amended March Debentures), pursuant to which the VPP holders
agreed to subordinate the debt to all debt outstanding as of July 31, 2009, (iv) a Securities Purchase Agreement (the July SPA) with the holders of its junior secured convertible debentures, pursuant to which the Company issued the July
Debentures and VPP Debenture.



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In April 2009, the Company entered into a First Amendment, Waiver, Extension and Consent
Agreement (the First Amendment) with ACF CGS, L.L.C., pursuant to which the holders waived and amended certain conditions contained in the Term Loan and governs the priorities and payments in favor of the Senior Lender.

In November 2008, the Company entered into the following agreements: (i) a Term Loan and Security Agreement (Term Loan Agreement) with
ACF CGS, L.L.C (Agent or Senior Lender); (ii) a Consent, Waiver, Amendment, and Exchange Agreement (the Waiver Agreement) with the holders of its senior secured convertible debentures issued on March 11, 2008 (March Debentures), pursuant
to which the holders waived and amended certain conditions contained in the March Debentures and the corresponding securities purchase agreement, and which enabled the Company to enter into the Term Loan Agreement, to amend and restate the March
Debentures (Amended March Debentures) and to issue Junior Secured Convertible Debentures (November Debentures); (iii) a new Securities Purchase Agreement (November SPA), pursuant to which the Company issued the November Debentures; (iv) a
$3 million unsecured subordinated convertible debenture issued to the Seller of Vanco Direct (Seller Debenture), which, by its terms, subsequently increased by $1 million to $4 million; (v) an intercreditor agreement which governs the
priorities and payments in favor of the Senior Lender (Senior Lender Intercreditor Agreement) relative to the holders of the Amended March Debentures and the November Debentures (collectively, the Debentures or Junior Secured Creditors); and
(vi) an intercreditor agreement which governs the priorities and payments in favor of the Junior Secured Creditors (the Junior Lender Intercreditor Agreement) relative to the holder of the Seller Debenture.

Term Loan: The Term Loan Agreement provided for a senior secured term loan (Term Loan) of $8.5 million effective November 19,
2008. The Company, each of its subsidiaries and VDUL (Borrowers) granted to the Agent a security interest in substantially all of its assets and a collateral pledge of all of the common stock or limited liability company interests of its
wholly-owned subsidiaries. Interest on the Term Loan is payable monthly at the higher of prime or 5% plus a margin of 14%, with 5% of that rate paid-in-kind. Paid-in-kind interest compounds monthly and is added to the outstanding principal balance
of the Term Loan. The Company incurred debt issuance costs of $1.8 million in connection with the Term Loan Agreement, which included a Term Loan origination fee of 2.5%, financial advisory services, legal fees and other costs.

The Term Loan matures November 2010. The Company may voluntarily prepay the Term Loan upon at least 30 days prior written notice to the
Borrowers. If the Term Loan is prepaid at any time within the first 12 months of the Term Loan, the Company is required to pay as an exit fee any shortfall to 12 months of interest, calculated by applying the then applicable interest rate for the
balance of the twelve-month period. The prepayment premium is 2% of the outstanding balance paid, or 1% of the $8.5 million original principal amount if the Company repays the Term Loan during months 12-18 or 19-24 from the origination date,
respectively. The Term Loan Agreement contains certain mandatory prepayments which, when made, do not trigger any of the prepayment premiums. If the Company sells assets outside of the ordinary course of business or incurs additional indebtedness
after the Financial Closing, the Company must use the net proceeds to pay down the Term Loan. Similarly, the Company has agreed that two-thirds of any collections it receives on its existing accounts receivable with its largest customer as of
September 30, 2008 will be used to pay down the Term Loan. The Term Loan Agent waived the right to apply the proceeds of the July Debentures and the VPP Debentures to pay down the Term Loan in the Intercreditor Agreement.

The Term Loan Agreement contains financial covenants that require the Company to maintain a minimum cash balance and to achieve a minimum
monthly recurring circuit revenue and margin. The Company was in compliance with these minimum requirements at December 31, 2008. Beginning with the first quarter of 2009, the Company is subject to additional financial covenants related to a
minimum ratio of EBITDA (defined as earnings before interest, taxes, depreciation, amortization, non-cash stock compensation and warrant expense and other items related to the acquisition of VDUL) to fixed charges, as defined, and a maximum ratio of
debt to EBITDA. As of September 30, 2009 the Company was in compliance with the EBITDA covenant. The Term Loan Agreement also contains restrictive covenants that limit additional indebtedness, liens, guarantees, acquisitions or other
investments, the sale or disposal of assets outside the ordinary course of business, payments on other indebtedness, dividends or other capital distributions, stock repurchases, capital expenditures or new capital leases and compensation increases
to certain members of the Companys management. The Company has various reporting requirements under the Term Loan Agreement. The Term Loan Agreement contains an affirmative covenant requiring the Company to increase its authorized common
shares by 12 million within 175 days from the Financial Closing date of July 31, 2009.

In connection with entering
into the Term Loan Agreement, effective as of the Financial Closing, the Company issued to the Agent a warrant (Agent Warrant) to purchase up to 12 million shares of its Common Stock with a term of five years and an exercise price of $0.24 per
share. The Agent Warrant is exercisable upon an increase in the Companys authorized shares of common stock (Authorized Share Increase) and expires in November 2013. The Agent Warrant had a grant date fair value of $2.2 million determined using
the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.27 per share, expected volatility of 141.2%, risk-free interest rate of 2.1%, expected term of 5.0 years and no dividends. The fair value of the warrants,
adjusted for the uncertainty related to the Authorized Share Increase, was recorded as a decrease to the carrying value of the Term Loan, or debt discount, and an increase to liabilities for warrants to purchase common stock.



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The Borrowers had entered into a Forbearance Agreement on July 9, 2009 (effective as of
July 7, 2009), which constituted an additional Loan Document under the Loan Agreement, and which was subsequently superseded by Second Amendment and Waiver Agreement which amended the Term Loan Agreement effective as of
July 31, 2009 and introduced certain additional financial and reporting covenants. The Forbearance Agreement provided that, as of the Effective Date (as defined therein), if certain specified conditions were met that the percentage of the
collection that the Borrowers received (if any) with respect to the accounts receivable subject to the lawsuit referenced above, were to be applied toward the pay down of obligations of the Borrowers under the Loan Agreement, was to be increased to
75%. The agreement also contained an acknowledgement that the $42,500 amendment fee paid by the Borrowers previously should be in consideration for the forbearance of the enumerated defaults through the Effective Date, and that the Borrowers
remained obligated with respect to all reasonable fees and disbursements of Agents counsel in connection with the Forbearance Agreement or other related matters.

Amended March Debentures: Pursuant to the November 20, 2008 Waiver Agreement, the holders of $16 million of original principal amount of March Debentures exchanged their March Debentures due
March, 2013 for $28.0 million of Amended March Debentures, convertible into common stock at $0.24 per share (the Tranche 1 Amended March Debentures). The principal amount of the Tranche 1 Amended March Debentures is comprised of the $16 million
original principal amount of the March Debentures plus the sum of the following: (i) the remainder of the interest that would have accrued under the March Debentures, $6.0 million; (ii) 25% of the original principal amount of the March
Debentures, $4.0 million; (iii) liquidated damages related to the Companys failure to timely complete the registration of its common stock, as discussed below, equal to 12% of the original principal amount, $1.9 million; and
(iv) interest on the liquidated damages at 16% per annum, $0.1 million (collectively, the Tranche 1 Add-on Amount).

The remaining March Debentures were held by two affiliated holders, who held a total of $3.0 million of original principal amount. The two affiliated holders subsequently reduced their original principal amount to an aggregate outstanding
balance of $2.5 million through conversions of their principal to common stock. Pursuant to the November 20, 2008 Waiver Agreement, the Company exchanged their March Debentures for $2.9 million of Amended March Debentures (the Tranche 2 Amended
March Debentures), which mirror the terms of the Tranche 1 Amended March Debentures. The principal amount of the Tranche 2 Amended March Debentures is comprised of the $2.5 million outstanding balance of the March Debentures plus the sum of the
following: (i) liquidated damages related to the Companys failure to timely complete the registration of its common stock, as discussed below, equal to 12% of the original principal amount, $0.4 million and (ii) legal fees incurred
by the two affiliated holders in negotiation and documentation of the revised transactions (collectively, the Tranche 2 Add-on Amount). In addition, at the Financial Closing, the Company made a one-time payment to the two affiliated holders in the
aggregate of $0.9 million, which was the sum of the interest accrued on the March Debentures up to the amendment date and the remainder of the interest that would have accrued under their March Debentures.

The Amended March Debentures are due March 2015. The warrants originally issued with the March Debentures, discussed below, remain
outstanding and the March 2013 expiration date of the warrants was unchanged. The Amended March Debentures are original issue discount securities and do not call for the payment of interest over their term. The Company is required to make quarterly
redemption payments of the Add-on Amounts beginning July 1, 2009 through the maturity date, at which time the remaining principal balance will also be due. The November 20, 2008 Senior Lender Intercreditor Agreement contains certain
conditions to the cash payment of the quarterly redemption amounts. To the extent the Company fails to satisfy those conditions, the Amended March Debenture holders, at their election, can accept either payment of such amount with shares of common
stock, provided the Company has completed the Authorized Share Increase and met certain other conditions as defined by the March Amended Debentures, or, alternatively, accrue the unpaid portion with interest until maturity.

In July 2009, in conjunction with the issuance of the July Debentures, Amended March Debenture holders were allowed the right to exercise up
to the lesser of their Amended March Debenture balance or five times the subscription price of the July Debentures at $0.15 per share and the quarterly redemption payments due July 1, 2009 through April, 2012 were deferred until the Maturity
date, March 11, 2015.

The holders of the Amended March Debentures retain the right at any time to convert up to an
aggregate of $14.4 million of the face amount into common stock of the Company at $0.24 per share or up to 60.0 million shares on an as converted basis and convert up to an aggregate of $3.2 million of the face amount into common stock of the
Company at $0.15 per share or up to 21.0 million shares on an as converted basis. During the quarter ended September 30, 2009, holders converted $0.7 million of the Amended March Debentures into 4.6 million shares of common stock.
During the nine months ended September 30, 2009, holders converted $2.9 million of the Amended March Debentures into 13.9 million shares of common stock. During 2008, holders converted $1.0 million of the Amended March Debentures into
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The November 20, 2008, amendment and restatement of the March Debentures was deemed a
debt extinguishment and the Company recorded a loss on extinguishment of the March Debentures of $4.8 million. The write-off includes unamortized debt discount and deferred financing costs related to the March Debentures of $16.0 million and $1.1
million, respectively, the one-time payment to the holders of the Tranche 2 Amended March Debentures of $0.9 million, offset by the write-off the fair value of the embedded derivative liability related to the March Debentures of $10.8 million and
the restructuring of the accrued registration rights penalties related to the March Debentures of $2.3 million. Upon issuance of the Amended March Debentures, the Company recorded original issue discount of $12.4 million based upon the difference
between the aggregate $30.9 million face amount of the Amended March Debentures and the original principal amount of the March Debentures at the amendment date of $18.5 million. The Company determined that the conversion feature of the Amended March
Debentures was an embedded derivative. Accordingly, the estimated fair value at the amendment date, adjusted for the probability of the Authorized Share Increase, was recorded as additional debt discount and an increase to embedded derivative
liability. The initial fair value of the embedded derivative of $24.2 million exceeded the $18.5 million original principal amount of the Amended March Debentures by $5.7 million, which was recognized immediately as interest expense. The Company
determined the fair value of the embedded derivative using the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.22 per share, expected volatility of 141.8%, risk-free interest rate of 1.0%, expected term of
6.3 years and no dividends.

The July 31, 2009 modification to the Amended March Debentures was also deemed a debt
extinguishment and the Company recorded a gain on extinguishment of the Amended March Debentures of $2.2 million. The extinguishment includes the write-off of unamortized debt discount and unamortized original issuance discount related to the
Amended March Debentures of $13.2 million and $10.6 million, respectively, offset by the write-off the fair value of the embedded derivative liability related to the Amended March Debentures of $16.4 million. In connection with the modification of
the Amended March Debentures, the Company recorded original issue discount of $12.0 million based upon the difference between the aggregate $27.6 million face amount of the modified Amended March Debentures and the principal amount of the Amended
March Debentures at the amendment date of $15.6 million. The Company determined that the conversion feature of the modified Amended March Debentures was an embedded derivative. Accordingly, the estimated fair value at the amendment date, adjusted
for the probability of the Authorized Share Increase (i.e., the obligation of the Company to subsequently amend its Articles of Incorporation to authorize the issuance of additional shares of common stock sufficient to enable the holders of the
Amended March Debentures, November Debentures, and July Debentures to convert all of such indebtedness to common stock, as well as to exercise all warrants issued to them in connection with the funding of such debt), was recorded as additional debt
discount and an increase to embedded derivative liability. The initial fair value of the embedded derivative of $18.0 million exceeded the $15.6 million principal amount of the modified Amended March Debentures by $2.4 million, which was recognized
with the gain on extinguishment. The Company determined the fair value of the embedded derivative using the Black-Scholes pricing model with the following assumptions: weighted average exercise price of $0.22 per share, expected volatility of
152.1%, risk-free interest rate of 2.71%, expected term of 5.6 years and no dividends. The warrants issued with the March Debentures were not changed by the July 31, 2009 modifications.

The Company issued the March Debentures on March 11, 2008 through a private placement. The March Debentures were senior secured
convertible debentures with an aggregate principal amount of $19.0 million and had an interest rate of 5% in the first and second years and 10% in the next three years. Interest was payable quarterly in arrears and, at the Companys option,
could be paid in cash or in shares of common stock pursuant to certain prescribed calculations to determine value. A late fee of 16% per annum was payable with respect to any late payments. In connection with the issuance of the March
Debentures, the Company incurred debt issuance costs of $2.4 million. The remaining unamortized debt issuance costs as of the date of extinguishment of the March Debentures of $1.1 million were written-off to loss on extinguishment of debt in 2008.

The March Debentures were convertible into common stock initially at $0.50 per share, or 38 million shares. In addition,
the Company issued to the purchasers of the March Debentures warrants to purchase an aggregate of 19 million shares of its common stock at an exercise price of $0.73 per share. The warrants were immediately exercisable and expire in March 2013.
The Company determined that the conversion feature and certain other provisions of the March Debentures were embedded derivatives. The estimated fair value of the warrants and embedded derivatives as of the issuance date of the March Debentures was
$10.2 million and $10.5 million, respectively, and was recorded as additional debt discount and an increase to liabilities for warrants to purchase common stock and embedded derivative liability, respectively. The aggregate initial fair value of the
warrants and embedded derivatives of $20.7 million exceeded the $19 million original principal amount of the March Debentures by $1.7 million, which was recognized immediately as interest expense. On October 7, 2008, in accordance with the
reset provision of the March Debentures, the conversion price of the debentures outstanding and the exercise price of the warrants outstanding was reduced to $0.24 per share. Effective with the reduction in exercise price of the warrants, the total
number of warrants for common stock under the March Debentures increased from 19.0 million shares to 57.8 million shares.



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Prior to the amendment and restatement of the March Debentures, $0.6 million of original
principal amount of March Debentures were converted into 1,420,000 shares of common stock. Pursuant to the terms of the March Debentures, the Company made additional interest payments on the converted debt of $0.2 million. The write-off of
unamortized debt discount and deferred debt costs at the time of debt conversion of $0.5 million and $0.1 million, respectively, and the additional payments are included in interest expense. The write-off of the fair value of the embedded derivative
liability at the time of conversion of $0.2 million was included in net (gains) losses on extinguishment in 2008.

Pursuant to
Registration Rights Agreement, on April 29, 2008, the Company filed a registration statement with the Securities Exchange Commission (SEC) to register all or the maximum amount permitted by the SEC of the common stock underlying the March
Debentures and warrants (subject to the obligation to file one or more subsequent registration statements as necessary to register the remaining unregistered shares until all of the underlying securities are eligible for resale under Rule 144
without volume limitation), which provided their holders the rights to certain liquidated damages if not timely filed. The registration statement was to be filed on the earlier of the fifteenth calendar day following the date it files its annual
report on Form 10-KSB or May 1, 2008 and was to be declared effective no later than sixty days following the filing date (or ninety days following the filing date if the registration statement undergoes a full review by the SEC).
Failure to meet any of these obligations would subject the Company to liquidated damages equal to 2% of the original principal amount of the March Debentures for each month in which it occurs and on each monthly anniversary thereof, subject to an
aggregate cap of 12% of the original principal amount of the March Debentures, payable in cash unless otherwise agreeable to the Company and the March Debenture holder (and interest accrues on unpaid liquidated damages at 16% per annum).

The SEC elected to undertake a full review of the Companys registration statement. Due to the complexity of the issues
raised in that review and a resulting restatement of the Companys consolidated financial statements for the year ended December 31, 2006, the Companys registration statement was not declared effective within the deadline.
Accordingly, the Company accrued the maximum amount, $2.3 million, of the related liquidated damages.

November
Debentures: On November 20, 2008, pursuant to the November securities purchase agreement (SPA), the Company completed the private placement of $9.0 million of November Debentures with a maturity value of $14.9 million. The Company incurred
$2.0 million of debt issuance costs in connection with the SPA. The November Debentures are due November 2015. The November Debentures are original issue discount securities and do not call for the payment of interest over their term. In connection
with the issuance of the November Debentures, the Company recorded original issue discount of $5.9 million based upon the difference between the principal amount due at maturity of $14.9 million and the subscription amount of $9.0 million. The
Company is required to make quarterly redemption payments beginning July 1, 2009 through the maturity date, at which time the remaining principal balance will also be due. The Senior Lender Intercreditor Agreement contains certain conditions to
the cash payment of the quarterly redemption amounts. To the extent the Company fails to satisfy those conditions, the November Debenture holders, at their election, can accept either payment of such amount with shares of common stock, provided the
Company has completed the Authorized Share Increase and met certain other conditions as defined by the November Debentures, or, alternatively, accrue the unpaid portion until maturity.

The November Debentures are convertible into common stock at $0.24 per share, or 62.0 million shares based on the aggregate maturity
value, at any time at the option of the holders, but not before the Companys Authorized Share Increase. In addition, the Company issued to the purchasers of the November Debentures warrants to purchase an aggregate of 28.2 million shares
of its common stock at an exercise price of $0.24 per share. The warrants are exercisable at any time prior to their expiration date, but not before the Authorized Share Increase and expire five years after the date of Authorized Share Increase. The
Company determined that the conversion feature of the November Debentures was an embedded derivative. The estimated fair value of the warrants and embedded derivative as of the issuance date of the November Debentures, adjusted for the probability
of the timing of the Authorized Share Increase, was $4.2 million and $9.6 million, respectively, and was recorded as additional debt discount and an increase to liabilities for warrants to purchase common stock and embedded derivative liability,
respectively. The aggregate initial fair value of the warrants and embedded derivative of $13.8 million exceeded the $9.0 million original principal amount of the November Debentures by $4.8 million, which was recognized immediately as interest
expense. The Company determined the fair value of the warrants and embedded derivative using the Black-Scholes pricing model with the following average assumptions: common stock fair value of $0.22 per share, expected volatility of 141.6%, risk-free
interest rate of 1.0%, expected term of 7.0 years for the derivative liability, 5.3 years for warrants, and no dividends.

In
July 2009, in conjunction with the issuance of the July Debentures, November Debenture holders were allowed the right, upon an increase in Authorized Shares, to exercise up to the lesser of their November Debenture balance or five times the
subscription price of the July Debentures purchased by them, at $0.15 per share and the quarterly redemption payments due July 1, 2009 through April 1, 2012 were deferred until the Maturity date, November 20, 2015. The modification to
the November Debentures was deemed a debt extinguishment and the Company recorded a loss on extinguishment of the November Debentures of $1.7 million. The extinguishment includes the write-off of unamortized debt discount and unamortized original
issuance discount related to the November Debentures of $8.1 million and $5.3 million, respectively, offset by the write-off the fair value of the embedded derivative



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liability related to the November Debentures of $7.4 million. In connection with the modification of the November Debentures, the Company recorded original issue discount of $5.9 million based
upon the difference between the aggregate $14.9 million face amount of the modified November Debentures and the principal amount of the November Debentures at the amendment date of $9.0 million. The Company determined that the conversion feature of
the modified November Debentures was an embedded derivative. Accordingly, the estimated fair value at the amendment date, adjusted for the probability of the Authorized Share Increase, was recorded as additional debt discount of $9.0 million and an
increase to embedded derivative liability. The Company determined the fair value of the embedded derivative using the Black-Scholes pricing model with the following assumptions: weighted average exercise price of $0.20 per share, expected volatility
of 152.5%, risk-free interest rate of 2.93%, expected term of 6.3 years and no dividends. The warrants issued with the November Debentures were not changed by the July 31, 2009 modifications.

Pursuant to the Senior Lender Intercreditor Agreement, the Amended March Debentures and the November Debentures are subordinate to the Term
Loan. Under the security agreements for the Debentures, the Company granted to the Debenture holders a security interest in all of the assets of the Company. In addition, under the security agreement for the Amended March Debentures, the Company
pledged the capital stock of each of its subsidiaries, subordinate to the collateral pledge of such securities to the Senior Lender.

The Amended March Debentures and the November Debentures contain negative covenants, which can be waived by the holders of at least 67% of each of the outstanding Amended March Debentures and November Debentures. The negative covenants,
among other things, limit additional indebtedness, liens, guarantees, payments on indebtedness (other than as required by the Term Loan Agreement, scheduled payments under the Amended March Debentures and the November Debentures or pro rata
nonscheduled repayments of the Amended March Debentures and the November Debentures), stock repurchases and dividends or other capital distributions. Upon an event of default and subject to the subordination provisions of the Senior Lender
Intercreditor Agreement, the Debenture holders may take possession of the collateral and operate the business.

Under the
November SPA, except for certain exempt issuances including the conversion of the Amended March Debentures, the Company is prohibited from issuing any common stock or securities convertible or exercisable into shares of common stock until the
Companys shareholders approve the Authorized Share Increase. In addition, the November SPA contained an affirmative covenant requiring the Company to complete the Authorized Share Increase within 75 days from the Financial Closing. In February
2009, the Company obtained an amendment to the November SPA that extended the time for completion of the Authorized Share Increase to within 175 days from the Financial Closing (and which was further modified as provided in the July Debentures
discussion below).

July Debentures: Effective July 31, 2009 and August 24, 2009, the Company issued two
tranches that totaled $10.5 million of principal amount of original issue discount convertible senior secured debentures (July Debentures), representing the funding of $6.0 million of subscription amount (inclusive of $0.4 million of subscriptions
credited to the holders of the March and November debentures for entering into a waiver and amendment agreement which, among other things, consented to the issuance of the July Debentures, and inclusive of $0.1 million against liabilities of the
Company to Aequitas Capital Management, Inc.) and $4.5 million of original issue discount added to principal, coupled with warrants to purchase up to 18.7 million shares of common stock, all exercisable or convertible at $0.24 per share (the
July Warrants and coupled with the July Debentures, the Units). The transaction resulted in proceeds to the Company of $5.6 million, before $0.2 million of financing fees. The July Debentures are secured by a security interest in the assets of the
Company and its subsidiaries, and Aequitas Capital Management, Inc. has been appointed as collateral agent for the July Debenture holders.

At issuance, the July Debentures are convertible into common stock at $0.24 per share, or 43.8 million shares based on the aggregate maturity value, at any time at the option of the holders, but not
before the Companys Authorized Share Increase. In addition, the Company issued to the purchasers of the July Debentures warrants to purchase an aggregate of 18.7 million shares of its common stock at an exercise price of $0.24 per share.
The warrants are exercisable at any time prior to their expiration date, but not before the Authorized Share Increase and expire five years after the date of Authorized Share Increase. The Company determined that the conversion feature of the July
Debentures was an embedded derivative. The estimated fair value of the warrants and embedded derivative as of the issuance date of the July Debentures, adjusted for the probability of the timing of the Authorized Share Increase, was $2.0 million and
$3.2 million, respectively, and was recorded as debt discount and an increase to liabilities for warrants to purchase common stock and embedded derivative liability, respectively. The Company determined the fair value of the warrants and embedded
derivative using the Black-Scholes pricing model with the following average assumptions: common stock fair value of $0.16 per share, expected volatility of 152.4% for warrants and 154.5% for embedded derivatives, risk-free interest rate of 2.6% for
warrants and 1.0% for embedded derivatives, expected term of 5.3 years for warrants and 1.8 years for embedded derivatives and no dividends.

The Company realized a shortfall in collection of certain designated receivables or contract amounts by August 31, 2009. As a result, the July Units purchase agreement required a reduction in the
conversion price of the July debentures and the exercise price of the associated warrants from $0.24 per share to $0.15 per share.



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At the same time, the Company entered into a Second Amendment and Waiver Agreement (Second
Amendment) with its Senior Lender, ACF CGS, L.L.C., as Agent for itself and other lenders with respect to $8.5 million of senior secured financing, restoring the loan to good standing and setting adjusted covenants and other terms and conditions.

In addition to the Original Issue Discount amount, the Cash Subscription Amount of the July Debentures bears interest in an
amount equal to the Cash Subscription Amount Interest, comprised of the sum of: (i) the prime rate of interest as announced in the Wall Street Journal (subject to a floor of 5%); plus (ii) 14% per annum (the Applicable
Margin). Basic Interest (comprised of the prime rate component plus 9% of the total 14% of the Applicable Margin) is payable monthly in arrears (twenty days following the end of each month), with the remaining 5% to be paid at the option of the
Company in either cash or as PIK Interest, whereby such amount can be accrued and added to principal (in which event an additional OID factor of 75% of such amount is also added to principal of the July Debenture). The Senior Lender July Purchaser
Intercreditor Agreement permits the payment in cash of the Cash Subscription Amount Interest for so long as the Senior Loan is not in default and a blockage on payment of interest on the July Debentures is not in effect. In the event that payment of
the Cash Subscription Amount Interest is prohibited by such intercreditor agreement, then it is to be accrued and added to the principal amount of the July Debentures in the same manner as the addition of the PIK Interest to the July Debentures (and
failure to pay such interest shall in such instance not be an Event of Default under the July Debenture).

The July Debentures
also require that the Company redeem 1/7 of the original OID Amount of the July Debentures forty five days following the end of each calendar quarter, commencing with the quarter ended December 31, 2009. Cash payments of the redemption amount
will only be permitted under the Senior Loan Agreement to the extent of funds available from 25% of Excess Cash Flow, and provided that the Company is not otherwise in default under the Senior Loan Agreement or subject to a blockage period under the
applicable intercreditor agreement. Provided that certain equity conditions of the Company have been met, the Company at its option may elect to pay the Quarterly Redemption Amount (discussed below) either in cash or with Common Stock of the Company
whereby the Common Stock would be credited with a value equal to the lesser of (i) the then existing conversion price; or (ii) 90% of the volume weighted average price (VWAP) for the ten consecutive trading days of the Common
Stock ended on the trading day that is immediately prior to the applicable Quarterly Redemption Date.

Vendor Payment Plan
(VPP):The Company has established a vendor payment plan designed to reduce past due obligations to certain of its vendors over time. In conjunction with the Second Amendment to the Loan Agreement, the Company issued $1.2 million
subscription value, equal to the amount of vendor obligations, with a 65% original issue discount (OID) factor as Vendor Payment Plan Debentures, due November 2011, convertible at $0.24 per share into 8.3 million shares of common stock, along
with 3.8 million detachable warrants expiring five years from the date of the authorized share increase. The VPP Security Agreement is substantially a similar form of security agreement (the VPP Security Agreement) as applicable to
the July Security Agreement, with Aequitas Capital Management, Inc. to serve as the Collateral Agent.

At issuance, the VPP
Debentures are convertible into common stock at $0.24 per share, or 8.3 million shares based on the aggregate maturity value, at any time at the option of the holders, but not before the Companys Authorized Share Increase. In addition,
the Company issued to the VPP Debenture holders warrants to purchase an aggregate of 3.8 million shares of its common stock at an exercise price of $0.24 per share. The warrants are exercisable at any time prior to their expiration date, but
not before the Authorized Share Increase and expire five years after the date of authorized share increase. The Company determined that the conversion feature of the VPP Debentures was an embedded derivative. The estimated fair value of the warrants
and embedded derivative as of the issuance date of the VPP Debentures, adjusted for the probability of the timing of the Authorized Share Increase, was $0.4 million and $0.7 million, respectively, and was recorded as debt discount and an increase to
liabilities for warrants to purchase common stock and embedded derivative liability, respectively. The Company determined the fair value of the warrants and embedded derivative using the Black-Scholes pricing model with the following average
assumptions: common stock fair value of $0.17 per share, expected volatility of 152.5% for warrants and 145.8% for embedded derivatives, risk-free interest rate of 2.6% for warrants and 1.3% for embedded derivatives, expected term of 5.3 years for
warrants and 2.3 years for embedded derivatives and no dividends.

The Company utilized the services of both Aequitas and
Capstone Investments in accomplishing the aforementioned transactions. The substantial majority of the investors in the July debentures are from the same pool of investors that participated in the 2008 financings.

In addition to the items disclosed above, during negotiation of the July 31, 2009 debt instruments, the holders of the November
Debentures and Amended March Debentures waived their rights to $1.4 million in registration rights penalties. The waiver of the registration rights penalties was accounted for as a recovery of registration rights penalties.

Seller Debenture: The Seller Debenture was issued as partial consideration in the November 2008 VDUL acquisition. The Debenture is
non-interest bearing so the Company discounted the note at a 19% imputed interest rate resulting in an initial carrying value of $2.5 million. Management determined the 19% rate was applicable based on the interest rate at which the Company obtained
other financing at the date of Closing. The Seller Debenture is subject to the terms of the Senior Lender Intercreditor Agreement and the Junior Lender Intercreditor Agreement.



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The Seller Debenture is convertible into shares of the Companys common stock at a
conversion rate of $0.24 per share, or 12.5 million shares. The Seller Debenture is convertible at any time at the option of the Seller, but not before the Companys Authorized Share Increase. The Company determined that the conversion
feature of the Seller Debenture was an embedded derivative. The estimated fair value of the embedded derivative as of the issuance date of the Seller Debenture, adjusted for the probability of the timing of the Authorized Share Increase, of $2.0
million was recorded as debt discount and an increase to embedded derivative liability. The Company determined the fair value of the embedded derivative using the Black-Scholes pricing model with the following assumptions: common stock fair value of
$0.22 per share, expected volatility of 141.6%, risk-free interest rate of 1.0%, expected term of 2.5 years and no dividends.

Junior Secured Facility: On January 19, 2007, the Company entered into an agreement with a group of lenders that provided a $10.0 million junior secured facility. At closing, the Company was initially advanced $6.4 million under
the facility and subsequently borrowed an additional $2.9 million during 2007, bringing the aggregate outstanding borrowing under the facility to $9.3 million. An additional $0.4 million was borrowed under a short-term bridge facility as described
below. In connection with certain borrowings under the junior secured facility, the Company incurred debt issuance costs and fees of $0.3 million. The facility had a two-year term with simple interest at 12% per annum and all principal and
interest due at maturity. The junior secured facility included a junior lien on the Companys assets and the assets of its subsidiaries, which was subordinated to the senior secured line of credit facility and any refinancing of that facility.

The original principal amount issued pursuant to the junior secured facility was convertible at the holders option into
Series AA preferred stock (or following its conversion to common stock, then the conversion feature relates to common stock) at a price per share equal to a 20% discount to the trailing ten-day average for the Companys common stock as of the
day immediately preceding the date of conversion. The agreement for the junior secured facility was amended effective June 15, 2007 to: (i) eliminate the originally applicable floor of $0.65 and a ceiling of $1.25 per share for the
conversion of loan amounts to equity; (ii) permit the cashless exercise of warrants under the facility in lieu of an obligation to register the shares of capital stock underlying the warrants; and (iii) provide that with respect to
advances under the facility after June 15, 2007, the warrant coverage was increased to 90.0 shares of Series AA preferred stock, or 200,000 shares of common stock, on an as converted basis, at an effective price of $0.45 per share for each
$100,000 of principal amount advanced. Those lenders funding the facility on or before January 22, 2007 received a warrant to purchase up to 67.5 shares of Series AA preferred stock for each $100,000 of monies advanced, or 150,000 shares of
common stock on an as converted basis, at an effective price of $0.45 per share for each $100,000 of principal amount advanced. In connection with the June 15, 2007 amendment, the Company obtained additional funding of $3.0 million and issued
warrants for the purchase of 5,850,000 shares of common stock. After the amendment and on an as converted basis, the warrants issued under the junior secured facility were exercisable for a total of 15,432,658 shares of the Companys common
stock. The warrants under the junior secured facility expire in December 2009.

The fair value of the warrants issued to the
junior secured lenders as of January 2007, on an as converted basis, was $7.6 million, and the aggregate fair value of the additional warrants issued in connection with the June amendment was $3.3 million. The Company determined that the conversion
features were embedded derivatives. The total fair value of the warrants and related embedded derivatives as of the respective issuance dates was $10.9 million and $7.4 million, respectively, and was recorded as additional debt discount and an
increase to liabilities for warrants to purchase common stock and embedded derivative liability, respectively. The aggregate initial fair value of the warrants and embedded derivatives of $18.3 million exceeded the $9.3 million original principal
amount of the junior secured facility by $9.0 million, which was recognized immediately as interest expense. The fair values were determined using the Black-Scholes pricing model. The following assumptions were used to value the initial warrants, on
an as converted basis: common stock fair value of $1.02 per share, expected volatility of 100.0%, risk-free interest rate of 4.5%, expected term of 3.0 years and no dividends. The following average assumptions were used to value the additional
warrants, on an as converted basis: common stock fair value of $0.68 per share, expected volatility of 126.2%, risk-free interest rate of 3.9%, expected term of 4.2 years and no dividends. The following average assumptions were used to value the
embedded derivatives: common stock fair value of $0.88 per share, expected volatility of 116.2%, risk-free interest rate of 4.9%, expected term of 2.6 years and no dividends.

During the first quarter of 2008, $7.6 million of outstanding principal and $0.7 million of accrued interest under the junior secured
facility were converted into 19,486,324 shares of common stock. The remaining outstanding principal and accrued interest of $1.7 million and $0.1 million, respectively, were repaid with proceeds from the issuance of the March Debentures. The
write-off of the aggregate unamortized debt discount and deferred debt costs at the time of debt conversion and repayment of $5.2 million and $0.1 million, respectively, are included in loss on extinguishment of debt. The aggregate fair value of the
embedded derivative liability for the junior secured facility at the time of debt conversion and repayment of $8.3 million was also written-off to net (gain) loss on extinguishment of debt.



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Short-Term Bridge Facility: In August 2007, the Company issued $0.4 million of
unsecured, short-term promissory notes under a bridge facility authorizing the issuance of up to $1.0 million of units of short-term promissory notes coupled with a warrant to purchase up to 125,000 shares of common stock for each $0.1 million of
notes funded (Units). The promissory notes had an annual interest rate of 12% and an original maturity of September 2007, which was ultimately extended until the issuance of the March Debentures when the promissory notes were repaid. The Company
issued warrants to purchase an aggregate of 437,500 shares of common stock exercisable at $0.55 per share and expiring in December 2010. The warrants had a grant-date fair value of $0.2 million determined using the Black-Scholes pricing model
with the following assumptions: common stock fair value of $0.70 per share, expected volatility of 90.0%, risk-free interest rate of 4.9%, expected term of 3.4 years and no dividends. The fair value of the warrants was recorded as a decrease to the
carrying value of the Short-Term Bridge Facility, or debt discount, and an increase to liabilities for warrants to purchase common stock.

During the first quarter of 2008, $0.1 million of outstanding principal under the short-term bridge facility was converted into 105,566 shares of common stock. The remaining $0.1 million of outstanding
principal was repaid with proceeds from the issuance of the March Debentures. The write-off of the aggregate unamortized debt discount at the time of debt conversion and repayment of $0.1 million is included in loss on extinguishment of debt.

NOTE 10. Liability for Warrants and Embedded Derivatives.

Pursuant to ASC 815-10, the conversion features of debt are considered embedded derivatives requiring bifurcation from the debt host and are
included on the balance sheet as a liability (embedded derivatives of convertible debt) at fair value. The embedded derivative is revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain
or loss on warrants and derivatives in the statements of operations.

As of September 30, 2009 and
December 31, 2008, the fair value of the derivatives embedded in the convertible debt was $30.2 million and $18.8 million, respectively. The assumptions used to value the embedded derivative liability at September 30, 2009 were: exercise
price of $0.20, weighted average life of 4.4 years, volatility 153.6%, and risk free interest rate of 1.9%. At December 31, 2008, the assumptions used were: exercise price of $0.24, weighted average life of 6.1 years, volatility 145.3%, and
risk free interest rate of 1.0%.

The Companys outstanding warrants also meet the definition of a liability based on the
assessment above. The warrants are classified as a liability in the balance sheet (see liabilities for warrants to purchase common stock) at fair value. The warrant liability is revalued at each balance sheet date and marked to fair
value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statements of operations. As of September 30, 2009 and December 31, 2008, the fair value of the warrants was $18.7 million
and $12.2 million, respectively. The assumptions used to value the warrant liability at September 30, 2009 were: weighted average exercise price of $0.24, weighted average life of 3.5 years, weighted average volatility 155.8%, and weighted
average risk free interest rate of 1.6%. At December 31, 2008, the assumptions used were: exercise price of $0.26, weighted average life of 3.6 years, volatility 145.3%, and risk free interest rate of 0.8%.

The embedded derivatives and warrants associated with the Term Loan, the Amended March Debentures, the November Debentures, the Seller
Debenture, the July Debentures and the VPP Debentures were valued using a Black-Scholes Model. The right to convert a portion of the debt to common stock, which creates the embedded derivative liability and certain warrants can only be exercised
upon an increase in the Companys authorized shares. Based on a management survey of available studies relative to shareholder resolution approvals, these valuations have been reduced 25% as a result of the uncertainty related to the share
increase authorization.

NOTE 11. Warrants.

At September 30, 2009 and December 31, 2008, respectively, the Company had 190.3 million and 181.1 million warrants outstanding to purchase its common stock. These warrants were issued
in connection with debt and equity offerings and in lieu of cash payments for services provided and became exercisable when issued. The warrants expire two to five years from date of issuance. Warrants issued in connection with the November
Debentures, July Debentures and VPP Debentures expire five years from the date of the Authorized Share Increase.



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The table below summarizes the warrant expiration dates as of September 30, 2009:



|                           |  |                                 |  |                          |            |                                |   |      
|-------------------------- |  | ------------------------------- |  | ------------------------ | ---------- | ------------------------------ | - | -----
|Expiration Date            |  | Numberof Warrants(in thousands) |  | Range of Exercise Prices |            | Weighted AverageExercise Price
|2009                       |  | 23,977                          |  | $                        | 0.25-$0.31 |                                | $ | 0.268
|2010                       |  | 675                             |  | $                        | 0.27-$0.35 |                                |   | 0.306
|2011                       |  | 7,846                           |  | $                        | 0.45-$0.70 |                                |   | 0.576
|2012                       |  | 13,000                          |  | $                        | 0.15-$0.25 |                                |   | 0.198
|2013                       |  | 94,063                          |  | $                        | 0.24       |                                |   | 0.240
|2014                       |  | 50,724                          |  | $                        | 0.15-$0.24 |                                |   | 0.207
|                           |  |                                 |  |                          |            |                                |   |      
|Total warrants outstanding |  | 190,285                         |  |                          |            |                                | $ | 0.246
|                           |  |                                 |  |                          |            |                                |   |      

All outstanding warrants expire no later than December 31, 2014 with the
exception of the warrants issued in connection with the November Debentures, July Debentures and VPP Debentures, which expire 5 years from the Authorized Share Increase.

Warrant activity from December 31, 2008 through September 30, 2009 is as follows:



|                                  |  |                                 |   |  |                                |       |                                                   |     |                                |   |  
|--------------------------------- |  | ------------------------------- | - |  | ------------------------------ | ----- | ------------------------------------------------- | --- | ------------------------------ | - | -
|                                  |  | Numberof Warrants(in thousands) |   |  | Weighted AverageExercise Price |       | Weighted AverageRemaining ContractualLife (Years) |     | AggregateIntrinsicValue ($000)
|Outstanding at December 31, 2008  |  | 181,083                         |   |  | $                              | 0.261 |                                                   |     |                                |   |  
|Warrants issued                   |  | 22,521                          |   |  |                                | 0.240 |                                                   |     |                                |   |  
|Exercised                         |  |                                |   |  |                                |      |                                                   |     |                                |   |  
|Modified                          |  | (46,241                         | ) |  |                                | 0.270 |                                                   |     |                                |   |  
|Modified                          |  | 46,241                          |   |  |                                | 0.220 |                                                   |     |                                |   |  
|Forfeited/cancelled               |  | (13,319                         | ) |  |                                | 0.270 |                                                   |     |                                |   |  
|                                  |  |                                 |   |  |                                |       |                                                   |     |                                |   |  
|Outstanding at September 30, 2009 |  | 190,285                         |   |  | $                              | 0.246 |                                                   | 3.5 |                                | $ | 
|                                  |  |                                 |   |  |                                |       |                                                   |     |                                |   |  

There were 22.5 million warrants issued during the three and nine-month periods
ended September 30, 2009, with a weighted average fair value of $0.108. A total of 13.3 million warrants expired during the nine-month period ended September 30, 2009.

During the nine-month period ended September 30, 2008, 8.2 million warrants were exercised using the cashless method and
0.1 million warrants were issued for cash. Additionally, 21.7 million warrants were issued, and none were cancelled. The intrinsic value of warrants exercised in the nine-months ended September 30, 2008 was $1.0 million.

During the three-month period ended September 30, 2009, the exercise price of warrants changed pursuant to the July Debentures as
follows: 12.4 million warrants from $0.31 to $0.28, 0.4 million warrants from $0.29 to $0.27, 14.7 million warrants from $0.27 to $0.25, and 18.7 million warrants from $0.24 to $0.15. The fair value of this modification was $0.05
million and was charged to gain (loss) on warrants and derivatives.

NOTE 12. Share-Based Compensation.

Long-Term Incentive Plans

The Company has adopted various long-term incentive plans under which, at December 31, 2006, 7,505,000 shares of common stock and equivalents were authorized to be granted and an additional 56,330,000 common stock, stock options, or
other equity-based compensation units were authorized during 2007. During 2007, the Board of Directors authorized an additional 56,330,000 shares under the agreements. At December 31, 2007, these plans authorized a total of 70,335,000 shares of
common stock, stock options, or other equity-based compensation units for issuance.

On May 1, 2008, the Company adopted
a 2008 Long-Term Incentive Plan (Plan) for providing stock options and other equity-based compensation awards to its employees and other persons assisting the Company. Initially, up to 22,000,000 shares of common stock are issuable under
the Plan. The Plan also contains an evergreen provision such that each year the number of shares of common stock issuable under the Plan shall automatically increase, so that the amount of shares issuable under the Plan is equal to
fifteen percent (15%) of the total number of shares of common stock outstanding on the last trading day in December of the prior calendar year. In no event shall the number of shares of common stock issuable under the Plan exceed 30,000,000
shares. The Plan is to be administered by the Companys Compensation Committee or, in its absence, the Board of Directors. Awards under the Plan have a term of up to ten years from the date of grant.



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Shares under all plans generally vest 25% upon issuance and 25% on the grant anniversary
date until fully vested for service grants. Performance options granted under the plans vest as objectives outlined are achieved. Vesting requirements include new revenue goals, creating value within the organization, and/or achieving performance
targets. When performance objectives are not attained, that portion of the award is cancelled.

Executive Stock Option Agreements

From time to time, the Company provides for the issuance of share-based compensation in conjunction with employment
agreements or special arrangements with certain of its executives and directors. As of September 30, 2009, the Company has authorized up to 66,015,000 shares to be issued under these arrangements.

Under employment agreements with the four current officers and one former senior executive of the Company, there are 26,300,000 options
outstanding to acquire common stock of the Company at exercise prices ranging between $0.185 and $0.98. Approximately 3,000,000 options were issued during 2006 and 23,300,000 were issued during 2007, and zero in 2008 and 2009. All of these options
are subject to performance conditions. These performance option agreements are designed to incent the attainment of certain revenue objectives and 3,300,000 will vest on the following basis: (i) upon each realization by the Company of an
incremental $20 million of third-party service and/or maintenance revenue from new or existing customers, with gross margins in excess of 30%, pursuant to an agreement of one year or more, 50% of the options will vest; and (ii) the remaining
options vest upon realization by the Company of a second $20 million of third-party service and/or maintenance revenue from new or existing customers, with gross margins in excess of 30%. Approximately 1,000,000 performance options shall vest upon
the Company achieving the target goals. In accordance with the terms of the former Chief Executive Officers employment agreement, 1,000,000 shares immediately vested on his separation date of May 18, 2007. No other stock options have
vested under these agreements.

In February 2008, a prior executive converted options to acquire 1,000,000 shares at an
exercise price of $0.185 per share in a cashless exercise, resulting in the issuance of 699,675 shares of common stock. Separately, another option holder exercised 150,000 options on a cashless basis resulting in 104,951 shares being issued for an
aggregate of 804,626 shares issued upon cashless common stock option exercises during 2008.

Activity under the stock option
plans and Board-approved stock grants with time-based vesting for December 31, 2008 through September 30, 2009 is as follows:



|                                  |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|--------------------------------- |  | -------------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -
|                                  |  | Shares(in thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue
|Outstanding at December 31, 2008  |  | 32,573               |   |  | $                            | 0.502 |                                                 |     |                         |   |  
|Granted                           |  | 800                  |   |  |                              | 0.240 |                                                 |     |                         |   |  
|Exercised                         |  |                     |   |  |                              |      |                                                 |     |                         |   |  
|Forfeited/cancelled               |  | (916                 | ) |  |                              | 0.655 |                                                 |     |                         |   |  
|                                  |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|                                  |  |                      |   | 
|Outstanding at September 30, 2009 |  | 32,457               |   |  | $                            | 0.490 |                                                 | 6.9 |                         | $ | 
|                                  |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|                                  |  |                      |   | 
|Exercisable at September 30, 2009 |  | 25,754               |   |  | $                            | 0.465 |                                                 | 7.1 |                         | $ | 
|                                  |  |                      |   |  |                              |       |                                                 |     |                         |   |  

Time-based awards generally vest 25% upon issuance and 25% on the successive three
anniversary dates of the award. The Company estimates the fair value of stock option grants using the Black-Scholes pricing model with the assumptions detailed below. The weighted average grant-date fair value of options with time-based vesting
granted during the nine-month periods ended September 30, 2009 and 2008 was $0.124 and $0.554, respectively. For the nine-month periods ended September 30, 2009 and 2008, respectively, the Company recognized compensation expense for stock
option awards totaling $1.5 million and $4.5 million, respectively. In the three-month period ended September 30, 2009 and 2008, compensation expense was $0.6 million and $0.9 million, respectively. At September 30, 2009, unamortized
compensation associated with time-based options totaled $3.4 million with a remaining weighted average amortization period of 1.2 years.



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Activity under the stock option plans and Board-approved stock grants with performance-based
vesting for December 31, 2008 through September 30, 2009 is as follows:



|                                  |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|--------------------------------- |  | -------------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -
|                                  |  | Shares(in thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue
|Outstanding at December 31, 2008  |  | 31,050               |   |  | $                            | 0.355 |                                                 |     |                         |   |  
|Granted                           |  |                     |   |  |                              |      |                                                 |     |                         |   |  
|Exercised                         |  |                     |   |  |                              |      |                                                 |     |                         |   |  
|Forfeited/cancelled               |  | (883                 | ) |  |                              | 0.590 |                                                 |     |                         |   |  
|                                  |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|                                  |  |                      |   | 
|Outstanding at September 30, 2009 |  | 30,167               |   |  |                              | 0.348 |                                                 | 7.7 |                         | $ | 
|                                  |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|                                  |  |                      |   | 
|Exercisable at September 30, 2009 |  | 1,000                |   |  | $                            | 0.700 |                                                 | 6.9 |                         | $ | 
|                                  |  |                      |   |  |                              |       |                                                 |     |                         |   |  

Performance-based awards generally vest 33% to 50% upon attaining targeted revenue
growth, and gross profit margins, and continued employment with the Company. The Company estimates the fair value of stock option grants using the Black-Scholes pricing model. There were no performance options issued during the nine-month period
ended September 30, 2009. For the nine-month periods ended September 30, 2009 and 2008, respectively, the Company recognized compensation expense for performance-based stock option awards totaling $0.1 million and $1.1 million,
respectively. For the three-month period ended September 30, 2009, compensation expense was reduced by $0.1 million as performance criteria were deemed unlikely for certain options. During the three-months ended September 30, 2008,
compensation expense of $0.4 million was recognized. At September 30, 2009, unamortized compensation associated with performance-based options totaled $13.6 million with a remaining weighted average amortization period of 1.2 years.

The assumptions used to calculate the fair value of stock option grants issued are as follows:



|                                         |  |                                          |   |  |                             |  
|---------------------------------------- |  | ---------------------------------------- | - |  | --------------------------- | -
|                                         |  | Nine-monthperiod endedSeptember 30, 2009 |   |  | Year endedDecember 31, 2008 |  
|Expected volatility                      |  | 146.4%-149.1                             | % |  | 130.8%-149.8                | %
|Weighted-average expected volatility     |  | 147.8                                    | % |  | 140.1                       | %
|Expected term (in years)                 |  | 6.0                                      |   |  | 6.3                         |  
|Weighted-average risk-free interest rate |  | 2.53                                     | % |  | 2.57                        | %
|Expected dividends                       |  |                                         |   |  |                            |  

Expected volatility is based on the Companys trading history over a two-year
period. Weighted average volatility uses the volatility on the grant date and the number of options granted throughout the year. The expected term is the time Management estimates options will be outstanding. The weighted average risk free interest
rate is taken from the US Treasury rate of similar lived instruments on the date of the option grant. The Company does not anticipate issuing dividends for the foreseeable future. A forfeiture rate of 5.0% is currently being used.

No options were exercised during the nine-month period ended September 30, 2009. No tax benefit has been recorded related to
stock-based compensation expense.

NOTE 13. Shareholders Equity (Deficit).

The Companys authorized common stock entitles holders to one vote for each share held of record. Effective June 25, 2007, an
amendment to the Companys articles of incorporation increased the authorized shares of the Companys common stock, par value $.0001 par value per share, from 25.0 million shares to 350.0 million shares (the 2007 Authorized Share
Increase). In late 2009 or early 2010, the Company intends to obtain an additional amendment to its articles of incorporation to increase the authorized shares of common stock to not less than 990.0 million shares. During the three and
nine-month period ended September 30, 2009, the Company issued 4.6 million and 13.9 million shares of common stock in connection with the conversion of $0.7 million and $2.9 million of Amended March Debentures. The conversion prices
were $0.24 and $0.15.

During 2009, the Company issued 14.0 million shares of common stock upon the conversion of $2.9
million of outstanding principal under the amended and restated March Debentures.

During 2008, the Company issued
25.3 million shares of common stock in connection with the conversion of debt. During the first quarter of 2008, 19.6 million shares of common stock were issued upon the conversion of $7.6 million of outstanding principal and $0.7 million
of accrued interest under the junior secured facility and short-term bridge loan. The conversion was based upon a



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20% discount to the ten-day average closing price of the Companys common stock for the last ten trading days ended as of the conversion date (ten-day trailing average), which resulted in
conversion prices of between $0.418 and $0.504. The Company also issued 5,721,000 shares in connection with the conversion of $0.6 million original principal amount of March Debentures and $1.0 million of Amended March Debentures during 2008. The
shares issued were based on a conversion price of $0.50 per share on $0.4 million of the original principal amount and all remaining shares were based on a conversion price of $0.24 per share. See the Debt note for additional information about debt
issued with conversion features and warrants.

From time to time, in lieu of, or in addition to cash, the Company issues
shares of its common stock as a contract incentive or as payment for non-employee services. The amount recorded for such shares issued is based on the closing price of the Companys common stock on the effective date of the stock issuance or
the agreement and is included with professional services on the Companys consolidated statements of operations. During the year ended December 31, 2008, the Company entered into a non-employee service agreement and as a contract incentive
agreed to issue common stock of 2.0 million shares and a warrant to purchase up to 15.0 million shares of common stock, exercisable at 24 cents per share. The shares and warrant were earned as of the effective date of the agreements and,
except for a breach of contract, are non-forfeitable. Accordingly, the Company recorded expense in 2008 of $0.4 million based on the closing price per share on the effective date of the agreement of $0.22. The 2.0 million shares under the 2008
contract incentive and the 15.0 million share warrant, although earned, are not issuable until the Authorized Share Increase expected in 2009 and until approval of the holders of the outstanding debentures of the Company (which approval was
obtained in November, 2009).

NOTE 14. Income Taxes.

ASC Topic 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It
also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company had no uncertain tax positions as of September 30, 2009 and December 31, 2008.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as a component of income
tax expense. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. The Company recorded no interest and
penalties during the nine-month period ended September 30, 2009 and the year ended December 31, 2008 nor had any accrued interest or penalties as of these dates. The Company is no longer subject to U.S. Federal tax examinations by tax
authorities for tax years before 2006. The Company is open to state tax audits until the applicable statutes of limitations expire.

A provision for income taxes of $0.1 million has been recorded for the nine-month period ended September 30, 2009. The tax provision includes state income taxes but is primarily related to deferred tax expense arising from the book and
income tax basis difference in goodwill from the VDUL acquisition which occurred in November 2008.

Deferred tax assets and
liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has Federal net operating loss (NOL)
carry forwards of $55.7 million in the United States (U.S.) and foreign (U.K.) NOL carry forwards of $6.1 million at September 30, 2009 and December 31, 2008. The Federal NOL and credit carry forwards have been reduced to reflect
approximate annual limitations under Internal Revenue Code Sections 382 and 383 as a result of the various subsidiary stock acquisitions in prior years. It is likely subsequent equity changes have since occurred to further limit the utilization of
these NOLs and credit carry forwards. A formal analysis of Internal Revenue Code Section 382 impact on NOL utilization, as well as U.K. NOL utilization rules, will be required when the Company begins to utilize the NOLs. If not used, the
Federal NOLs begin to expire in 2011.

Realization of the NOL carry forwards, tax credits, and other deferred tax temporary
differences is contingent on future taxable earnings. The deferred tax asset was reviewed for expected utilization using a more likely than not approach by assessing the available positive and negative evidence surrounding its
recoverability.

The Company has recorded a full valuation allowance against the net deferred tax assets (whether acquired or
otherwise generated) due to the uncertainty of future taxable income, which is necessary to realize the benefits of the deferred tax assets.

The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portions thereof, to be utilized and will reduce the valuation allowance appropriately at such time
when it is determined that the more likely than not criteria is satisfied. Reversal of the valuation allowance for those acquired deferred tax assets will generally be recorded in earnings as a reduction to income tax expense.



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NOTE 15. Income (Loss) per Share.

Basic net income (loss) per share is computed by dividing the net income (loss) applicable to common stock holders by the weighted-average
number of shares of common stock outstanding for the period. Diluted net income (loss) per share reflects potential dilution of all applicable common stock equivalents. Such common stock equivalents would include shares issuable pursuant to common
stock options and warrants using the treasury stock method and shares issuable pursuant to convertible debt and preferred stock using the if-converted method to the extent such inclusion would be dilutive. Because the Companys warrants are
accounted for as liabilities, the treasury stock method is supplemented by adjusting net income (loss) applicable to common shareholders to an amount that excludes any gains or losses related to the warrants otherwise reflected in net income (loss).
Similarly, the if-converted method for convertible securities includes a similar adjustment to net income (loss) applicable to common stock holders. Because the Company has several potentially dilutive securities outstanding, its earning (loss) per
share computations include appropriate consideration of the sequencing of potentially dilutive assumptions.



|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|-------------------------------------------------------------------- |  | -------------------------------------- | ----------- | - | ------------------------------------- | - | ----------- | ---- |  | - | --------------- | - |  | - | ----------- | -
|                                                                     |  | Three-month periods endedSeptember 30, |             |   | Nine-month periods endedSeptember 30, |  
|                                                                     |  | 2009                                   |             |   | 2008As Restated                       |   |             | 2009 |  |   | 2008As Restated |  
|Diluted EPS Computation                                              |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|Loss from continuing operations                                      |  | $                                      | 2,053       |   |                                       | $ | (8,762      | )    |  | $ | (33,192         | ) |  | $ | (14,874     | )
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|                                                                     |  |                                        |             |  
|Add back:                                                            |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|Debenture interest expense                                           |  |                                        | 336         |   |                                       |   |            |      |  |   |                |   |  |   |            |  
|Debt discount and gain on derivatives and warrants                   |  |                                        | (2,133      | ) |                                       |   | (7,126      | )    |  |   |                |   |  |   | (7,126      | )
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|Total add-backs                                                      |  |                                        | (1,797      | ) |                                       |   | (7,126      | )    |  |   |                |   |  |   | (7,126      | )
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|                                                                     |  |                                        |             |  
|Income (loss) from continuing operations, adjusted                   |  |                                        | 256         |   |                                       |   | (15,888     | )    |  |   | (33,192         | ) |  |   | (22,000     | )
|Income (loss) from discontinued operations                           |  |                                        |            |   |                                       |   | 239         |      |  |   |                |   |  |   | 551         |  
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|Net income (loss) applicable to common shareholders  diluted        |  | $                                      | 256         |   |                                       | $ | (15,649     | )    |  | $ | (33,192         | ) |  | $ | (21,449     | )
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|                                                                     |  |                                        |             |  
|Weighted average common shares outstanding  basic                   |  |                                        | 165,492,875 |   |                                       |   | 148,507,511 |      |  |   | 162,807,688     |   |  |   | 148,507,511 |  
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|                                                                     |  |                                        |             |  
|Dilutive effect of common stock equivalents  options                |  |                                        |            |   |                                       |   |            |      |  |   |                |   |  |   |            |  
|Dilutive effect of common stock equivalents  warrants               |  |                                        |            |   |                                       |   | 14,887,450  |      |  |   |                |   |  |   | 14,887,450  |  
|Dilutive effect of common stock equivalents  convertible debentures |  |                                        | 26,346,054  |   |                                       |   |            |      |  |   |                |   |  |   |            |  
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|Total dilutive effect of common stock equivalents                    |  |                                        | 26,346,054  |   |                                       |   | 14,887,450  |      |  |   |                |   |  |   | 14,887,450  |  
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|                                                                     |  |                                        |             |  
|Weighted average common shares outstanding  diluted                 |  |                                        | 191,838,829 |   |                                       |   | 163,394,961 |      |  |   | 162,807,688     |   |  |   | 163,394,961 |  
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|                                                                     |  |                                        |             |  
|Loss from continuing operations                                      |  | $                                      |            |   |                                       | $ | (0.10       | )    |  | $ | (0.20           | ) |  | $ | (0.13       | )
|Loss from discontinued operations                                    |  |                                        |            |   |                                       |   |            |      |  |   |                |   |  |   |            |  
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  
|Net loss per share of common stock  diluted                         |  | $                                      |            |   |                                       | $ | (0.10       | )    |  | $ | (0.20           | ) |  | $ | (0.13       | )
|                                                                     |  |                                        |             |   |                                       |   |             |      |  |   |                 |   |  |   |             |  

The diluted earnings per share calculation includes the add-back of interest expense
debt discount, and derivative/warrant gain or (loss).

Potentially dilutive shares, which were excluded from the above
calculations in 2009 and 2008, as their inclusion would have had an anti-dilutive effect on the net income (loss) per share, are as follows:





|                                  |  |                                         |  |                                        |  |             |  |                
|--------------------------------- |  | --------------------------------------- |  | -------------------------------------- |  | ----------- |  | ---------------
|                                  |  | Three-month periods ended September 30, |  | Nine-month periods ended September 30,
|                                  |  | 2009                                    |  | 2008As Restated                        |  | 2009        |  | 2008As Restated
|Stock options                     |  | 62,623,702                              |  | 73,861,453                             |  | 62,623,702  |  | 73,861,453     
|Warrants                          |  | 190,285,389                             |  | 65,589,299                             |  | 190,285,389 |  | 65,589,299     
|Convertible debentures            |  | 189,603,585                             |  | 37,902,144                             |  | 242,103,585 |  | 37,902,144     
|                                  |  |                                         |  |                                        |  |             |  |                
|Total Potentially Dilutive Shares |  | 442,512,676                             |  | 177,352,896                            |  | 495,012,676 |  | 177,352,896    
|                                  |  |                                         |  |                                        |  |             |  |                



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NOTE 16. Commitments and Contingencies.

Operating and Capital Leases: The Company has entered into or assumed certain non-cancelable operating and capital lease agreements
related to office and warehouse space, equipment, and vehicles. Total rent expense under operating leases, net of sublease income, was $0.8 million and $0.9 million for the nine-month periods ended September 30, 2009 and 2008, respectively.

Future contractual obligations are as follows for the years ending December 31:



|                           |  |                 |      
|-------------------------- |  | --------------- | -----
|                           |  | OperatingLeases
|Remaining 3 months of 2009 |  | $               | 358  
|2010                       |  |                 | 1,190
|2011                       |  |                 | 1,038
|2012                       |  |                 | 512  
|2013                       |  |                 | 179  
|Thereafter                 |  |                 |     
|                           |  |                 |      
|Total                      |  | $               | 3,277
|                           |  |                 |      

Legal Pursuit of Accounts Receivables: In February 2009, after numerous
attempts to resolve material open accounts receivable ($10.2 million) with a major international customer, the Company filed a suit in a foreign court. The parties have agreed to a non-binding pre-trial mediation and look forward to a potential
resolution in the next few months. The Companys counsel has advised Management that a favorable outcome related to this lawsuit is probable, but that the amount to be recovered cannot be determined at this time. As a result, the Company has
established an allowance for the entire balance as of December 31, 2008 and will record any amounts recovered through future operating results.

Vendor Payment Plan: In July 2009, the Company established a vendor payment plan designed to reduce past due obligations to certain of its vendors over time. Under the plan, invoices outstanding
prior to May 31, 2009 would be repaid over the year following when the plan became effective, with a moratorium on payments during the first six months. All invoices for goods and services sold or provided to the Company between May 31,
2009 and the date of communication of the program to the vendors were to be paid within sixty days of the date upon which new financing was received by the Company. All creditors holding such claims were asked to act with forbearance pending
payment. Although a portion of the contemplated new working capital was received by the Company, all of the contemplated payments to the vendors have not yet been liquidated.

The Company is also involved in various legal actions arising in the ordinary course of business. In the opinion of Management, the ultimate
disposition of those matters will not have a material adverse effect on our consolidated financial position or the results of operations.

NOTE 17. Related Parties.

Certain of the Companys significant shareholders, directors and executive
officers perform financing and other services for the Company and have made loans to the Company or otherwise participated in financing transactions.

Aequitas Capital Management, Inc., together with its affiliates Aequitas Catalyst Fund, LLC, Aequitas Hybrid Fund, LLC and Aequitas Commercial Finance, LLC (collectively, Aequitas), owned approximately 8%
of the Companys outstanding common stock and held warrants to purchase 25.0 million shares of the Companys common stock as of September 30, 2009. During the nine-month period ended September 30, 2009, in connection with
advisory services provided, the Company paid Aequitas fees of $0.09 million. Recent transactions included in the totals above are discussed in detail below:

In 2009 the Company designated Aequitas as Collateral Agent to administer the July Securities Purchase Agreement. Aequitas is entitled to a Collateral Agent Fee of $0.3 million with $0.1 million paid at
July 31, 2009, $0.1 million payable on October 31, 2009, and $0.1 million payable on January 31, 2010. The Company also paid $0.05 million to Aequitas for expenses incurred in the July Securities Purchase Agreement.

During 2009, Aequitas purchased $5.2 million of the Companys July Debentures, convertible into 21.7 millions shares of common stock
and received warrants to purchase 9.3 million shares of the Companys common stock. In addition, during 2009 Aequitas received $0.05 million of July Debentures, convertible into 0.2 million shares of common stock and received warrants
to purchase 0.09 million shares of the Companys common stock as their proportionate shares of a debenture allocation to remedy prior covenant defaults in the November and March Debentures.



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Also during 2009, the Company issued a VPP Debenture to Aequitas, as part of the July
Securities Purchase Agreement, with a cash subscription amount of $0.2 million in exchange for an equal amount of trade accounts payable owed to Aequitas. The VPP Debenture includes an OID factor of .65 and is convertible 1.2 million shares of
common stock and Aequitas received warrants to purchase 0.5 million shares of the Companys common stock. The terms of the VVP Debenture include interest of 14% per annum payable monthly and PIK interest of 5% per annum which is
added to the subscription amount, along with 7 quarterly OID payments beginning on January 31, 2010, with the balance due May 31, 2011. The Company did not make the cash interest payment due August 20, 2009, as it was not permitted at
that time under the provisions of the Senior Lender intercreditor agreement.

Additionally, during 2009, Aequitas was issued
July Debentures with a cash subscription amount of $0.1 million in exchange for $0.1 million of trade accounts payable. The July Debenture includes an OID factor of 1.75, is convertible into 0.7 million shares of common stock and received
warrants to purchase 0.3 million shares of the Companys common stock.

During 2008, Aequitas purchased $2.0 million
of the Companys November Debentures, convertible into 8.3 million shares of common stock and received warrants to purchase 6.3 million shares of the Companys common stock. Aequitas applied to the purchase amount for the
November Debentures as a credit against the $0.5 million due under a bridge loan made to the Company in September 2008. In addition, in connection with other advisory services provided during 2008, the Company paid Aequitas advisory fees of $1.6
million and issued warrants to purchase 1.5 million shares of the Companys common stock at an exercise price of $0.24 per share. The warrants had a grant date fair value, adjusted for the probability of the timing of the Authorized Share
Increase, of $0.2 million. The Company determined the fair value of the warrants using the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.20 per share, expected volatility of 143.8%, risk-free interest rate
of 2.1%, expected term of 5.1 years, and no dividends.

Capstone Investments, Inc. (Capstone) owned less than 1% of the
Companys outstanding common stock and held warrants to purchase 12.5 million shares of the Companys common stock as of September 30, 2009. During 2009, Capstone provided financial advisory services to the Company in connection
with the July Securities Purchase Agreement. As consideration for those services, the Company paid Capstone fees and expenses of $0.2 million. Additionally, in June of 2009 the Company signed a one year consulting agreement with Capstone which
includes a monthly retainer of $0.01 million, on which $0.04 million had been paid during 2009.

Also during 2009, the Company
issued a VPP Debenture to Capstone, as part of the July Securities Purchase Agreement, with a cash subscription amount of $0.4 million in exchange for an equal amount of accounts payable owed to Capstone. The VPP Debenture includes an OID factor of
..65 and is convertible at $0.24 per share, and includes 75% warrant coverage. The terms of the VVP Debenture include interest of 14% per annum payable monthly and PIK interest of 5% per annum which is added to the subscription amount,
along with 7 quarterly OID payments beginning January 31, 2010, with the balance due May 31, 2011. The Company did not make the cash interest payment due August 20, 2009.

Capstone is currently occupying certain excess office space being leased by the Company. The related rent under this sublease will be offset
against the VPP debenture held by Capstone.

During 2008, Capstone provided financial advisory services to the Company in
connection with the November Debentures and Term Loan. As consideration for these services, the Company issued to Capstone warrants to purchase 5.1 million shares of common stock at an exercise price of $0.24 per share and paid Capstone $1.4
million in fees. The warrants had a grant date fair value, adjusted for to the probability of the timing of the Authorized Share Increase, of $0.8 million. The Company determined the fair value of the warrants using the Black-Scholes pricing model
with the following assumptions: common stock fair value of $0.22 per share, expected volatility of 141.8%, risk-free interest rate of 2.1%, expected term of 5.1 years, and no dividends The Company paid $0.7 million of the fees to Capstone in cash
and applied the remaining $0.7 million to Capstones purchase of $0.7 million of November Debentures. The November Debentures are convertible into 2.9 million shares of common stock and include warrants to purchase 2.2 million shares
of common stock.

In March 2008, in connection with the issuance of the March Debentures, the Company paid Capstone an
advisory fee of $1.3 million and issued to Capstone warrants to purchase 2.7 million shares of common stock at an exercise price of $0.24 per share. The warrants had a grant-date fair value of $1.5 million, determined using the Black-Scholes
pricing model with the following assumptions: common stock fair value of $0.60 per share, expected volatility of 147.2%, risk-free interest rate of 2.5%, expected term of 5 years and no dividends.

NOTE 18. Business Concentration.

During the nine-month period ended September 30, 2009, a major customer represented $7.0 million (14%) of total revenues, while the same major customer represented $2.6 million (16%) of total revenues for the three-month
period ended September 30, 2009. During the nine-month period ended September 30, 2008, two major customers represented $6.7 million (28%) and $3.4 million (14%) respectively, of total revenue. During the three-month period ended
September 30, 2008, one major customer represented $1.7 million (29%) of total revenues.



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At September 30, 2009, two major customers each represented $1.1 million (17%) of
accounts receivable. At December 31, 2008, a major customer represented $1.0 million (16%) of accounts receivable.

NOTE 19.
Geographic and Other Information.

Revenues generated outside the United States for the three and nine-month periods ended
September 30, 2009 and 2008, respectively, totaled $0.3 million and $0.2 million; and $0.8 million and $7.4 million, respectively. Substantially all of the Companys international revenue was generated in the European Union and Canada. As
of September 30, 2009 and December 31, 2008, the Companys international identifiable assets outside the United States totaled less than $0.3 million for both periods. All of the Companys international identifiable assets were
located in the United Kingdom.

The Companys management team views the operations of CGSI, 20/20, Magenta, CentrePath,
GCG, and VDUL as a single operating segment, for which it prepares discrete financial statement information and is the basis for making decisions on how to allocate resources and assess performance. All of the Companys products and services
are part of an integrated suite of offerings within telecom logistics solutions. Customer offerings are grouped into two categories: Optimization Solutions and Connectivity Solutions. Customers may buy one or both of these product offerings.

NOTE 20. Subsequent Events.

The Company has evaluated subsequent events through the issuance of these condensed consolidated financial statements on November 13, 2009.

In October 2009, the Company was in default with the Senior Lender as a result of failure to remit scheduled payments to vendors under the
VPP plan. The senior lender waived such event of default in exchange for a fee of 2% of the principal balance of the Senior Loan that is to be added to the principal balance of the Senior Loan. The Company may default on the same covenant in future
periods due to cash constraints.

On November 10, 2009, the Company signed a Consulting Agreement with Salzwedel
Financial Communications, Inc. (Salzwedel) effective as of November 1, 2009 pursuant to which Salzwedel will continue to provide investor relations consulting to the Company through October 31, 2010. In consideration for the consulting
services, the Company will pay Salzwedel $15,000 per month during the term of the agreement.

In addition, the Company agreed
to issue to Salzwedel a total of 2.3 million shares of its common stock and to issue it a warrant to purchase 15 million shares of its common stock at $0.15 per share in conjunction with the execution of the renewal, in addition to the
previously approved 2.0 million shares and 15 million share warrant with respect to the prior years renewal. By agreement of the holders of the March Debentures, July Debentures, November Debentures and the VPP Debentures, the
aforesaid (for the past year and the renewal for the year ending October 31, 2010) grants of stock and warrants to Salzwedel Financial Communications, Inc. were added as "Exempt Issuances" with respect to the purchase agreements and debenture
instruments evidencing their respective investments. These shares and warrants will not be issued until the Authorized Share Increase has been effected.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
accompanying consolidated financial statements and related notes thereto.

Overview

There are several economic or industry-wide factors relevant to Capital Growth Systems, Inc. (CGSI or Company). The global market for access
networks is measured at over $100 billion and the present state of the global capital markets underlines efforts to cut costs in SG&A  including networks. The market continues to grow, as technology advancements and dependency on
electronic mediums are increasing the need for faster, more efficient, and more cost effective access network solutions.

It
is generally understood that the access network market is complex and inefficient. There are over 900 primary suppliers offering services to clients around the world and no single provider has a ubiquitous network footprint. In the global
marketplace for our services, fragmentation of infrastructure and technology exists within and between geographies. In addition, pricing, tariffs, business rules, and methods of doing business vary widely by geography and the lack of accurate supply
and pricing data leads to inefficient procurement practices. Margin stacking thus becomes a normal condition.

This market
inefficiency creates opportunity and there is significant excess margin available in the system for those who can provide: price transparency, physical network transparency, and operational transparency.

To service its clients, CGSI has operating offices in several U.S. locations (Chicago, IL, Waltham, MA, New York, NY, and Houston, TX). It
also has a presence in the European Union (London, UK, Manchester, UK, and Lisbon, Portugal).

CGSI has created a
fully-integrated supply chain management system that streamlines and accelerates the process of designing, pricing, building, and managing customized communications networks. As such, we analyze complex networks and identify opportunities for
improvement by using highly-automated systems, processes, and industry expertise to design, price, and implement optimized network solutions. Then, we function as a single source of accountability for the entire network solution.

The Company generates revenue by providing a wide variety of custom combinations of the following services, mainly to global suppliers of
connectivity.

Optimization Solutions focus on identifying and implementing improved network efficiencies and reduced network
costs for complex customer networks globally. The primary offering of the business unit is a network optimization consulting practice that follows a very structured process of customer and market data collection, data cleansing, data implementation,
and data analysis by leveraging powerful tools and a proprietary pricing engine to yield a complete, automated network optimization analysis. Results provide both financial and physical network optimization recommendations. In order to help
customers implement the identified savings and efficiencies, the Optimization Solutions business offers a suite of professional services and remote network management services. The Optimization Solutions business also offers telecommunications and
systems integrator customers the ability to use automated pricing software to provide fast, accurate, automated price quotes for off-net access requirements globally.

Optimization Consulting uses a well-defined methodology to work with clients to collect, cleanse, implement, and analyze network data  including inventory, cost, and design data  in order to
produce a network optimization report that identifies opportunities to improve the efficiency and reduce the cost of complex global networks. Recommendations include: financial grooming, where costs are reduced through identification of overcharges;
contractual strategies, including moving services to new tariff structures and novating existing network contracts to more favorable vehicles; and physical grooming, where networks are moved to more favorable suppliers, re-homed to different points
of presence, or aggregated to achieve better cost points. The Company then employs its logistics capabilities to help customers implement and realize the identified savings. The optimization process typically identifies savings of 2-5% for financial
grooming and 15-40% for physical grooming. These savings can total many millions of dollars in large, complex network environments. The Company contracts for Optimization Consulting engagements on a contingent basis, where the Company is paid a
non-recurring fee-based upon a percentage of the savings achieved from the engagement.

Automated pricing software exploits
the Companys unique knowledgebase of telecom market pricing and supply data to provide telecommunications companies and systems integrators the ability to quickly and accurately obtain an automated price for access circuits globally. This
automated pricing process replaces the largely manual process most companies continue to rely on and dramatically reduces the amount of time it takes to generate an accurate quote, while increasing the accuracy of the quote. This results in a
competitive sales advantage for our customers, while also reducing their operating costs. Automated pricing software is sold as an annual software license.



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Remote Management Services employs the Companys highly-integrated Operations Support
Systems (OSS) and state of the art Network Operations Center (NOC) to deliver network monitoring and management of customer networks. This service can be delivered as a stand-alone service for networks not provided by us or it can be bundled as part
of a complete network solution delivered via the Connectivity Solutions business unit. Remote Management Services are proactive, including 7X24 monitoring and management services that leverage automated fault and performance management systems,
integrated trouble ticketing and reporting systems, and world-class network engineering and operations expertise to provide a premium level of service for a customers most critical networks. Remote Management Services are contracted on a
monthly recurring basis.

The Company also provides network design, engineering, implementation, and project management
services under the heading of Professional Services. These services leverage the well-developed processes, repeatable methodologies, and deep expertise of the Company to deliver targeted engagements that help customers design, engineer, build, test,
and turn-up complex networks. These engagements are delivered as non-recurring revenue on a statement of work (SOW) basis.

For customers seeking to simplify the sourcing and management of their complex networks, the Companys Connectivity Solutions business provides turn-key network solutions, from design and pricing through network provisioning, testing,
and on-going management. By leveraging unique market knowledge and powerful tools that automate the entire telecom supply chain, the Company designs and delivers network solutions that combine the best underlying network assets at the optimal market
price, overlaid with the Companys world-class customer service and network management. The result is a single point of accountability to design, price, deliver, and manage the best network at the lowest cost  resulting in improved
network efficiency and simplified operations.

For customers wishing to simplify their procurement process for complex global
networks, we will deploy our breadth of logistics expertise and solutions to deliver a turn-key network solution. Using the Companys pricing systems, we generate an automated, accurate price quote. We then manage that quote from initial
pricing through ordering, procurement, provisioning, test and turn up, and operations hand-off, utilizing the Companys proprietary Circuit Lifecycle Manager (CLM) system, which manages the entire circuit lifecycle. Networks are then monitored
and managed by our 7X24 Network Operations Center (NOC). By leveraging automated systems across the entire telecom supply chain, the Company is able to accelerate the delivery of an optimal network solution.

The Company operates as an asset light service provider, taking advantage of the underlying network assets of other suppliers,
while strategically deploying network infrastructure to insure maximum network efficiency and operational capability. This model enables the Company to avoid the requirement that many facilities-based providers have of pushing customers toward
solutions that maximize use of their own network, regardless of the fit to the customers requirements. We utilize our logistics systems and capabilities to identify the best network solution based on the customers requirements, and then
apply our model to deliver that network as a turn-key solution to the customer  regardless of who the underlying suppliers are. This model insures that the customer receives the best solution, in the shortest time, at the best price, while
insuring the Company maintains margin by maximizing the efficiency of our pricing and logistics systems.

Significant recent
progress in gaining customer acceptance of our offerings underlines Managements belief that our technology, systems, and logistics capabilities make the Companys business offerings more efficient, faster, and less expensive for systems
integrators, telecommunications companies, and enterprise customers to manage the telecom supply chain for their complex global networks. By purchasing our solutions to create market pricing transparency and improve the efficiency of the entire
telecom supply chain, our customers are able to improve the responsiveness of sales, reduce operating expense, improve margins, and deliver better service.

The Company is (and has been since its 2006 reorganization) investing its time, team resources and capital in the scaling of its systems and personnel in order to meet the demand among its clients for its
novel products. The successful delivery on major customer contracts entered into since mid-2008 and continued success in closing these types of contracts will move the Company into profitability. In addition to those new contracts, Management
believes that the inclusion of VDULs business and cash flows will have a positive impact on future results. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

As of September 30, 2009, the Companys current liabilities exceeded its current assets by $22.6 million. Included in the
current liabilities is $12.0 million of current maturities of long-term debt, net of $32.1 million of debt discount associated with the year-to-date fair value of related warrants and embedded derivatives and $23.1 million associated with original
issue discount and imputed interest. Cash on hand at September 30, 2009 was $2.2 million (not including $0.6 million restricted for outstanding letters of credit). The Company reported a net loss from continuing operations of $33.2 million and
$15.4 million for the nine-month periods ended September 30, 2009 and 2008, respectively. The results for 2009 include non-cash expenses of $1.5 million relating to the accounting treatment for stock and options. The current period includes
non-cash charges of $12.3 million from the change in fair value of embedded derivatives and warrants, and $8.9 million of non-cash charges from the change in debt discounts. The results for the nine-month period ended September 30, 2008 include
$5.6 million in non-cash expenses relating to the accounting treatment for stock and options, $11.9 million related to the amortization of debt discount, and non cash gain on warrants and derivatives of $10.2 million.



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Cash used in operating activities from continuing operations was $7.7 million and $9.5
million for the nine-month period ended September 30, 2009 and 2008, respectively. The Companys net working capital deficiency, recurring operating losses, and negative cash flows from operations raise substantial doubt about its ability
to continue as a going concern. However, the successful delivery on major customer contracts entered into since mid-2008 and continued success in closing these types of contracts are expected to move the Company into profitability. In addition to
those new contracts, Management believes that the inclusion of VDULs business and cash flows will have a positive impact on future results. At the same time, expenses are managed closely and lower-cost outsource opportunities are given
case-by-case consideration.

The Companys net working capital deficiency, recurring losses, and negative cash flows from
operations raise doubt about its ability to continue as a going concern. Notwithstanding the above, the Company continues to find support amongst its shareholders and other investors.

There was significant capital activity during 2008 and 2009. The major components are summarized below:



| |  |  | On March 11, 2008, the Company closed on $19.0 million of Senior Secured Convertible debentures. Approximately $8.8 million of the proceeds from
the sale of the debentures was used to pay off almost all previously outstanding indebtedness and $1.7 million was used to pay advisory fees. The remaining proceeds were used for working capital purposes and to support the Companys successful
new business development efforts.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Variable Rate Senior Secured Convertible Debentures issued on March 11, 2008 included a provision that, on the 210th calendar day after
issuance, the conversion price for the debentures would be reduced to 90% of the volume weighted average price for the five trading days immediately prior to that date. The contemplated 210-day period ended on October 7, 2008 and the new
conversion price was determined to be $0.24 per share. This value was used in determining the liability for warrants to purchase common stock and the embedded derivatives of convertible debt instruments.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On November 20, 2008, the Company entered into an Interest and Loan Purchase Agreement (the ILPA) with Vanco plc, a U.K. corporation
in administration (Seller) to purchase all of the outstanding membership interests (the Interests) of Vanco Direct USA, LLC (VDUL). In order to finance the purchase of the Interests, the Company entered into the
following additional agreements, inter alia, to be effective as of the funding of the transaction: (i) a Term Loan and Security Agreement (Term Loan) pursuant to which the Company agreed to borrow $8.5 million from the senior
lender(s); (ii) a Consent, Waiver, Amendment, and Exchange Agreement with holders of its outstanding Senior Secured Convertible Debentures issued on March 11, 2008, pursuant to which the holders waived and amended certain conditions and
enabled the Company to enter into the Term Loan Agreement and issue the November Debentures (defined below) and the other transactions referenced below; (iii) a new Securities Purchase Agreement (the November SPA) pursuant to which
the Company agreed to issue to certain holders of the March Debentures and to certain additional designated purchasers (including Aequitas Catalyst Fund, LLC, which agreed to convert its September 30, 2008, $500,000 loan to the Company into a
November Debenture) an additional $9.0 million of purchase price amount of junior original issue discount secured convertible debentures (the November Debentures), convertible at $0.24 per share, subject to anti-dilution adjustment
coupled with warrants exercisable at $0.24 per share, subject to anti-dilution adjustment; and (iv) an unsecured $3.0 million convertible debenture to be issued to the Seller; and (v) certain intercreditor agreements among the parties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Effective July 31, 2009 and August 24, 2009, the Company issued two tranches that totaled $10.5 million of principal amount of original issue
discount convertible senior secured debentures (July Debentures), representing the funding of $6.0 million of subscription amount (inclusive of $0.4 million of subscriptions credited against liabilities of the Company to the respective holders) and
$4.5 million of original issue discount added to principal, coupled with warrants to purchase up to 18.7 million shares of Common Stock, all exercisable or convertible at $0.24 per share (the July Warrants and coupled with the July Debentures,
the Units). The transaction resulted in proceeds to the Company of $5.6 million, before $0.2 million of financing fees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has established a vendor payment plan designed to reduce past due obligations to certain of its vendors over time. In conjunction with
the Second Amendment to the Loan Agreement, the Company issued $1.2 million subscription value, equal to the amount of vendor obligations, with a 65% original issue discount (OID) factor as Vendor Payment Plan Debentures, due November 2011,
convertible at $0.24 per share into 8.3 million shares of common stock, along with 3.4 million detachable warrants expiring five years from the date of the authorized share increase. The VPP Security Agreement is substantially a similar
form of security agreement (the VPP Security Agreement) as applicable to the July Security Agreement, with Aequitas to serve as the Collateral Agent.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Results for the three-month period ended September 30, 2009 compared to 2008

Continuing Operations

Total revenues for the three-month period ended September 30, 2009 were $16.5 million compared to $5.8 million for the same period in 2008, representing a 184% increase. This increase is primarily due to the acquisition of VDUL.

Revenues generated from Optimization Solutions totaled $2.5 million for the three-month period ended September 30, 2009
compared to $2.2 million for the same period in 2008, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $14.0 million for the
three-month period ended September 30, 2009 compared to $3.6 million for the same period in 2008, which is from the delivery of turn-key global networks and system management services.

The consolidated gross margin rate was 24% for the three-month period ended September 30, 2009 compared to 31% for the same period in
2008. This decrease was driven primarily by the decrease in margins associated with Connectivity revenues. Optimization Solutions gross margin totaled $1.4 million or 57% for the three-month period ended September 30, 2009 as
compared to $1.0 million or 45% for the same period in 2008. Connectivity Solutions margin totaled $2.5 million or 18% compared to $0.8 million or 23% for the same period in 2008.

Operating expenses for the three-month periods ended September 30, 2009 and 2008 consist of the following:



|                              |  |                                        |       |      |   |      
|----------------------------- |  | -------------------------------------- | ----- | ---- | - | -----
|                              |  | Three-month periods endedSeptember 30,
|                              |  | 2009                                   |       | 2008
|Compensation                  |  | $                                      | 2,747 |      | $ | 3,319
|Professional services         |  |                                        | 1,658 |      |   | 2,218
|Depreciation and amortization |  |                                        | 1,139 |      |   | 446  
|Other operating expenses      |  |                                        | 1,168 |      |   | 943  
|                              |  |                                        |       |      |   |      
|Total operating expenses      |  | $                                      | 6,712 |      | $ | 6,926
|                              |  |                                        |       |      |   |      

Compensation expense decreased $0.6 million for the three-month period ended
September 30, 2009 as compared to 2008. Included in compensation expense for 2009 are non-cash charges of $0.5 million related to the accounting treatment of certain stock option grants as compared to $1.3 million for the same period in 2008.

Professional services decreased $0.6 million for the three-month period ended September 30, 2009 as compared to the
three-month period ended September 30, 2008, due to the decrease in advisory fees.

Depreciation and amortization expense
relates primarily to the Network Operating Center in the suburbs of Boston and the fair value assigned to the Companys intellectual property. Depreciation and amortization increased by $0.7 million for the three-month period ended
September 30, 2009 as compared to September 30, 2008. This increase was due primarily to the acquisition of $19.4 million of intangible assets in November 2008 with the acquisition of VDUL.

Other operating expenses increased $0.2 million for the three-month period ended September 30, 2009 as compared to the same period for
2008. Any significant increase in future operating costs is expected to be a direct result of a corresponding increase in revenues, excluding any additional stock-based compensation expense. Any significant increase in revenues is anticipated to
outpace the increase in related operating costs.

Results for the three-month period ended September 30, 2009 reflect
interest of $4.3 million, an increase of $2.4 million from the three-month period ended September 30, 2008. Interest expense for the three-month periods ended September 30, 2009 and 2008 includes $3.9 million and $0.9 million,
respectively, related to the amortization of the fair value assigned to the warrants and embedded derivatives issued with debt.

Results for the three-month period ended September 30, 2009 reflect a gain on warrants and derivatives of $7.6 million compared to a loss of $0.8 million for the comparable period in 2008. The current quarters gain was driven
mainly by the $0.03 decrease of the September 30, 2009 closing price of $0.15 versus the June 30, 2009 closing price of $.18, issuance of an additional 22.5 million warrants, and embedded derivatives with debentures convertible into
52.0 million shares of common stock in connection with the July Debentures and the VPP Debentures, while 2008 included the effects of a modest amount of cashless exercises. The Company has revalued the warrant and embedded derivative
liabilities at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statement of operations.



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Discontinued Operations

The gain from discontinued operations for the three-month periods ended September 30, 2009 and September 30, 2008 was de
minimis. The decreases in revenue and loss from discontinued operations were due to the sale of Frontrunner and Nexvu.

Results for the
nine-month period ended September 30, 2009 compared to 2008

Continuing Operations

Total revenues for the nine-month period ended September 30, 2009 were $48.6 million compared to $24.0 million for the same period in
2008, representing a 103% increase. This increase is primarily due to the acquisition of VDUL.

Revenues generated from
Optimization Solutions totaled $7.1 million for the nine-month period ended September 30, 2009 compared to $13.7 million for the same period in 2008, which represents optimization consulting, automated pricing software, remote management
services, and professional services. The Connectivity Solutions business recorded $41.5 million for the nine-month period ended September 30, 2009 compared to $10.3 million for the same period in 2008, which is from the delivery of turn-key
global networks and system management services.

The consolidated gross margin rate was 23% for the nine-month period ended
September 30, 2009 compared to 47% for the same period in 2008. This decrease was driven primarily by the decrease in higher margin revenue from Optimization Solutions. Optimization Solutions gross margin totaled $3.5 million or 49% for
the nine-month period ended September 30, 2009 as compared to $10.0 million or 74% for the same period in 2008. Connectivity Solutions margin totaled $7.7 million or 18% compared to $1.3 million or 12% for the same period in 2008.

Operating expenses for the first nine-months of 2009 and 2008 consist of the following:



|                              |  |                                       |        |      |   |       
|----------------------------- |  | ------------------------------------- | ------ | ---- | - | ------
|                              |  | Nine-month periods endedSeptember 30,
|                              |  | 2009                                  |        | 2008
|Compensation                  |  | $                                     | 9,459  |      | $ | 12,410
|Professional services         |  |                                       | 5,001  |      |   | 5,765 
|Depreciation and amortization |  |                                       | 3,415  |      |   | 1,411 
|Other operating expenses      |  |                                       | 3,543  |      |   | 2,776 
|                              |  |                                       |        |      |   |       
|Total operating expenses      |  | $                                     | 21,418 |      | $ | 22,362
|                              |  |                                       |        |      |   |       

Compensation expense decreased $3.0 million for the nine-month period ended
September 30, 2009 as compared to 2008. Included in compensation expense for 2009 are non-cash charges of $1.5 million related to the accounting treatment of certain stock option grants as compared to $5.6 million for the same period in 2008.

Professional services decreased $0.8 million for the nine-month period ended September 30, 2009 as compared to the
nine-month period ended September 30, 2008, due to fewer advisory fees incurred.

Depreciation and amortization expense
relates primarily to the Network Operating Center in the suburbs of Boston and the fair value assigned to the Companys intellectual property. Depreciation and amortization increased by $2.0 million for the nine-month period ended
September 30, 2009 as compared to September 30, 2008. This increase was due primarily to the acquisition of $19.4 million of intangible assets in November 2008 with the acquisition of VDUL.

Other operating expenses increased $0.8 million for the nine-month period ended September 30, 2009 as compared to the same period for
2008. Any significant increase in future operating costs is expected to be a direct result of a corresponding increase in revenues, excluding any additional stock-based compensation expense. Any significant increase in revenues is anticipated to
outpace the increase in related operating costs.

Results for the nine-month period ended September 30, 2009 reflect
interest of $10.5 million, an increase of $3.4 million from the nine-month period ended September 30, 2008. Interest expense for the nine-month periods ended September 30, 2009 and 2008 includes $8.9 million and $12.2 million,
respectively, related to the amortization of the fair value assigned to the warrants and embedded derivatives issued with debt.

Results for the nine-month period ended September 30, 2009 reflect a loss on warrants and derivatives of $12.3 million compared to a gain of $10.2 million for the comparable period in 2008. The current years loss was driven
mainly by the $0.04 increase of the $0.11 closing share price of December 31, 2008 versus the September 30, 2009 closing price of $0.15, issuance of an additional 22.5 million warrants, and embedded derivatives with debentures
convertible into 52.0 million shares of common stock in connection with the July Debentures and the VPP Debentures, while 2008 included the effects of a modest amount of cashless exercises. In accordance with ASC 815-10, the warrant and
embedded derivatives liabilities are revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statement of operations.



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Discontinued Operations

The gain from discontinued operations for the nine-month periods ended September 30, 2009 and September 30, 2008 was de
minimis. The decreases in revenue and gain from discontinued operations were due to the sale of Frontrunner and Nexvu.

Liquidity and
Capital Resources

Cash used in operating activities from continuing operations for the nine-month period ended
September 30, 2009 and 2008 was principally due to the operating losses of $10.3 and $11.0 million, respectively. The primary variance between operating loss and net cash used in operating activities from continuing operations for the
nine-month period ended September 30, 2009 was due to non-cash charges of $4.9 million, $1.5 million for stock-based compensation expense, and $3.4 million of depreciation and amortization. The variance between the operating loss and net cash
used in operating activities from continuing operations during the nine-month period ended September 30, 2008 was primarily due to the non-cash charges of $5.6 million for stock-based compensation expense, $1.4 million of depreciation and
amortization, and non cash gain on warrants and derivatives of $10.2 million.

The cash used in investing activities from
continuing operations during the nine-month periods ended September 30, 2009 and 2008 was $0.2 million and $0.1 million, respectively. Our capital expenditures in both 2009 and 2008 consisted primarily of computer-related equipment. Although we
currently do not anticipate any significant capital expenditures in the near future, we may have a need to make similar additional capital expenditures related to the integration of our operations.

Net cash provided by financing activities from continuing operations during the nine-month periods ended September 30, 2009 was $5.6
million. Net cash provided by financing activities were $10.7 million for the nine-month periods ended September 30, 2008.

There are various financial and non-financial covenants that the Company must comply with in connection with the Term Loan and Debentures. The financial covenants require a minimum cash balance and to achieve minimum monthly recurring
circuit revenue and margin. Beginning in the first nine-month period of 2009, the Company was subject to covenants related to EBITDA. Among other things, the non-financial covenants include restrictions on additional indebtedness, acquisitions, and
capital expenditures except as permitted under the agreements. See Notes to Consolidated Financial Statements. A failure to comply with one or more of the covenants could impact the Companys operating flexibility, impair strategic undertakings
and accelerate the repayment of debt.

Historically, our working capital requirements have been met through proceeds of
private equity offerings and debt issuances. We currently believe our working capital will be sufficient to fund the business until we start generating positive cash flow from operations, which we expect will occur in 2010. However, if our revenues
do not materialize as anticipated, we may be forced to raise additional capital through issuance of new equity or increasing our debt load, or a combination of both as we did in 2008 and 2009.

All long-term debt is presented as a current obligation as a result of the Companys anticipation of continued events of default on
certain reporting and administrative covenants and its inability to predict the continued issuance of waivers by its lenders. Long-term debt commitments include the maturity value of original issue discount securities and the minimum interest due on
the Term Note consistent with the default clause of the agreement.

From time to time, we may evaluate potential acquisitions
of businesses, products, or technologies. A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use third-party technologies. In addition, in making such acquisitions or investments,
we may assume obligations or liabilities that may require us to make payments or otherwise use additional cash in the future.

Recent
Accounting Pronouncements

For information regarding recent accounting pronouncements and their expected impact on our
future consolidated results of operations or financial condition, see the Notes to Consolidated Financial Statements.

Off-Balance Sheet
Arrangements

The Company has no off-balance sheet arrangements in place as of September 30, 2009 or December 31,
2008.



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Factors Affecting Future Performance

In evaluating our business, and us you should carefully consider the following risks. These risk factors contain, in addition to historical
information, forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. The order in which the following risks are presented is not
intended to represent the magnitude of the risks described. Many of the risks set forth below are written as they apply to our business as presently constituted, but have similar if not identical application to the businesses of any companies us may
acquire in the future.

We have historically lost money and losses may continue.We have incurred operating losses
since our inception and cannot assure you that we will achieve profitability. Through September 30, 2009, we have incurred cumulative losses of $136.6 million compared to a cumulative loss of $103.4 million through December 31, 2008. To
succeed, we must continue to develop new client and customer relationships and substantially increase our revenues from sales of offerings and services. We intend to continue to expend substantial resources to develop and improve our offerings and
to market our offerings and services. These development and marketing expenses often must be incurred well in advance of the recognition of revenue. There is no certainty that these expenditures will result in increased revenues. Incurring
additional expenses while failing to increase revenues could have a material adverse effect on our financial condition.

Going concern.Our net working capital deficiency, recurring operating losses, negative cash flows from operations, shareholders deficit and the related debt covenant violations and penalties related to such covenant violations,
raise substantial doubt about our ability to continue as a going concern.

We may need additional capital and may incur
defaults with respect to existing indebtedness.We may need to obtain additional financing over time to fund operations and/or to strengthen our balance sheet to attract customers and to ensure credit from suppliers, the amount and timing of
which will depend on a number of factors including the pace of expansion of our markets and customer relationships, development efforts and the cash flow generated by our operations. We cannot predict the extent to which we will require additional
financing, and cannot assure you that additional financing will be available on favorable terms or at all times. The rights of the holders of any debt or equity we may issue in the future could be senior to the rights of shareholders, and any future
issuance of equity could result in the dilution of our shareholders proportionate equity interests in us (including due to the full ratchet anti-dilution rights in favor of the holders of our secured debt and financing on unattractive terms).
Failure to obtain financing or obtaining of financing on unattractive terms could have a material adverse effect on our business.

Due to the extensive financial and reporting covenants that we have with respect to our Senior Loan, as well as the obligation to make substantial principal reductions with respect to our July Debentures, there is a substantial risk that we
will not be able to meet future loan covenants, which could be a triggering event of default. Although we have been successful in the past in obtaining waivers of default or amendments to our loan documents to address defaults and avoid acceleration
of indebtedness, there can be no assurances that we will be able to do so in the future. Our secured indebtedness contains cross default provisions, so that in the event of a declaration of an event of default, this might trigger the acceleration of
indebtedness with respect to our Senior Loan and our Debentures.

We have incurred substantial debt in developing the
business and in acquiring our subsidiaries.There can be no assurances that the Company will be able to refinance or extend any existing debt. At December 31, 2007, we had incurred substantial debt with our primary secured lender and with
the providers of subordinated secured debt and short-term bridge debt. All of such debt was refinanced in March 2008 with a portion of the proceeds of $19 million of five-year senior secured convertible notes (the Convertible Notes). In November
2008, as part of the financing for the VDUL acquisition, the Company entered into agreements that modified the Convertible Notes and created an additional $16.8 million of debt. In July 2009, the Company issued $10.5 million face value July
debentures and $2.0 million face value VPP Debentures. (See the Notes to Consolidated Financial Statements.) There is a risk that the Company will be unable to meet all of the covenants contained in the loan documents, including the meeting of
EBITDA covenants on the term loan, repayment and interest obligations and the obligation to timely increase the Companys authorized common stock and to file its required Exchange Act filings on a current, ongoing basis. There is also a risk
that on maturity we will lack the funds to repay the obligations. Conversely, the debentures are convertible into common stock at $0.15 to $0.24 per share, with full ratchet anti-dilution protection. Conversion of the debentures and exercise of the
warrants could be substantially dilutive to existing shareholders.

We may choose to effect additional acquisitions.
Should we choose to effect additional acquisitions, any such future acquisition should be subject to all of the risks inherent in purchasing a new business. Shareholders must rely upon Managements estimates as to fair market value and future
opportunities with respect to acquisitions of such companies. In addition, in order to attract and retain key personnel with respect to any acquisitions (including 20/20, Magenta, CentrePath, GCG, and VDUL), we may be obligated to increase
substantially the benefits with respect to employment agreements and equity participation rights (through the issuance of stock, warrants, options, phantom stock rights, or other assets with equity participation features) which could be
substantially dilutive of existing shareholders.



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We face operational challenges and have a history of losses. We have lost money over
our operating history and there can be no assurances that either our historical business or our business as centered on our new Telecom Logistics Integrator strategy will prove profitable. This risk is further heightened by the fact that the
integration of an acquired business often results in the incurring of substantial costs and possible disruption of the business once acquired due to differences in the culture between the entities and the possibility that key employees may either
elect not to continue with the integrated entity or work under a different motivation than prior to the acquisition. In addition, customers and suppliers may modify the way they do business due to their perception of the Company post-acquisition
and/or due to certain preconceived issues that they may have with the acquiring company.

Barriers to entry.In the
high technology business, one of the largest barriers to entry for small and start-up companies is the concern by enterprise customers and suppliers as to the viability of the Company. Even if we are profitable, we may experience significant
resistance from prospective customers due to our relatively small size. This could be exacerbated as we have not attained operational profitability since our inception and we continue to maintain significant debt on our balance sheet. This
resistance could have a material adverse effect on our results of operations and financial condition.

Competition.Competition in our current and anticipated future markets is very intense, and it is expected that existing and new competitors will seek to replicate much of the functionality of our offerings and services. Additionally, there can be no
assurances that we will be able to successfully develop the next generation of offerings and services necessary to establish a lead on the market or that if we are able to do so, that customer acceptance for these offerings could continue.
Replication by competitors of our existing offerings, failure to develop new offerings, or failure to achieve acceptance of offerings could have a material adverse effect on our business and financial condition.

Given the software-intense nature of our business, once an offering or service is developed, competition has the ability to lower its
pricing significantly to gain market share, due to the minimal incremental cost to production. Additionally, certain aspects of the market may be lost to the extent that free software is developed to address this functionality. These
factors could have a material adverse effect on our business and financial condition.

We face the risk of service
obsolescence if we fail to develop new offerings.We expect that the market for our offerings and services will be characterized by rapidly changing technology and introduction of new offerings. Our success will depend, in part, upon our
continued ability to provide offerings with the advanced technological qualities desired by our customers, to enhance and expand our existing offerings and to develop in a timely manner new offerings that achieve market acceptance. Failure to
enhance and expand existing offerings or failure to develop new offerings could have a material adverse effect on our business, results of operations and financial condition.

We face various Software, and Software License Issues. Defects in our software could reduce demand for our offerings and expose us to
costly liability that would adversely affect our operating results. Our technology solutions are internally complex. Complex software may contain errors or defects, particularly when first introduced or when new versions or enhancements are
released. Although we conduct extensive testing, we may not discover software defects that affect our current or new offerings or enhancements until after they are sold.

Service liability claims.Our license and service agreements with our customers typically contain provisions designed to limit our exposure to potential offering liability claims. It is possible,
however, that the limitation of liability provisions contained in our license and service agreements may not be effective as a result of existing or future federal, state, or local laws, ordinances, or judicial decisions. Although we have not
experienced any offering liability claims to date, sale and support of our offerings entails the risk of such claims, which could be substantial in light of our customers use of many of our offerings in mission-critical applications. We do not
maintain offering liability insurance. If a claimant brings a product liability claim against us, it could have a material adverse effect on our results of operations and financial condition.

We face uncertainties regarding protection of our proprietary technology.We may lack the resources to enforce any patents or other
intellectual property rights we may have or a court may subsequently determine that the scope of our intellectual property protection is not as broad as presently envisioned. In any event, proprietary rights litigation can be extremely protracted
and expensive and we may lack the resources to enforce our intellectual property rights. There is not patent protection for those technologies that are the subject of trade secrets, and our ability to protect such competitive advantages will be a
function of many factors that are not fully within our control, including maintenance of confidentiality agreements and general efforts to keep trade secret information from coming into the public domain. Failure to protect our patents and our
confidential information (as well as associated business techniques) could have a material adverse impact upon the way in which we do business.

Our success is highly dependent on us taking principal positions in telecommunication circuit contracts, especially with novations.The significant revenue growth in our business plan
is predicated on our ability to successfully take principal positions in large telecommunication circuit contracts. A novation is the assumption of existing circuits from a client and managing this position over time to an improved cost basis with
the same or better quality of services. Since these contracts tend to have a high dollar value, any delay in securing them or in improving the cost structure post-closing will have a significant impact on our current years revenue and cash
from operations. Customers and suppliers alike will demand credit worthiness as well. We have many such



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opportunities in our sales pipeline and the market appears ready to accept our innovative approach to outsourcing of these functions. In the event we do experience a delay or are ultimately
unsuccessful in closing these orders, we may be forced to raise additional capital through issuance of new equity or increased debt load, or a combination of both to fund our current operations. However, there can be no assurance we will be able to
raise additional capital or issue additional indebtedness, or if we do so that it will not be dilutive of existing investors. There is a risk that prospective customers may delay or not issue orders until our balance sheet is stronger and that
potential suppliers of bandwidth may cut back supply of bandwidth absent cash or cash collateral.

If we fail to meet all
applicable continued listing requirements of the Over the Counter Bulletin Board Market (OTCBB), we may be de-listed.According to the OTCBB rules relating to the timely filing of periodic reports with the SEC, any OTCBB issuer who fails to file
a periodic report (Quarterly Report on Form 10-Q or Annual Report on Form 10-K) by the due date of such report three times during any 24-month period may be delisted from the OTCBB. Such removed issuer would not be eligible to be listed on the OTCBB
for a period of one year, during which time any subsequent late filing would reset the one-year period of delisting. As we were late in filing our Annual Report on Form 10-K for the year ended December 31, 2008 our common stock was delisted
from trading on the OTCBB. We were also late in filing our Form 10-Q for the period ended March 31, 2009. We were delisted from trading on the OTCBB and were able to reinstate the trading of our common stock on the OTCBB following our bringing
current our filings for such periods. However, if we are late in filing a periodic report one time in any subsequent one-year period from the bringing current of our filings, or three times in any subsequent two-year period, we will not be permitted
to re-list our stock for trading for a period of one year from when such reports are brought forward. In the event our common stock is traded on the Pink Sheets, the market for our common stock will be adversely affected and our liquidity and
business operations may be adversely impacted.

Registration rights and failure to file penalties.The Company failed
to file on a timely basis a registration statement for common stock underlying a Units offering. There was a penalty of 1% of the purchase price of the Units per month for each month that the we are late in the initial filing or the declaration of
effectiveness of the registration statement, subject to a cap of 12% in the aggregate of the original Units purchase price, and with the penalty to be payable in common stock issuable based upon the ten-days average trailing value of our
shares of common stock for the applicable period. As of December 31, 2007, we had not filed a registration statement and therefore were obligated to issue 4,784,623 shares of common stock representing a non-cash registration rights penalty of
$2.5 million. In addition, a late penalty was assessed against us by the holders of the March Debentures for our failure to obtain declaration of effectiveness of the registration statement we subsequently filed to register the shares underlying the
March Debentures and corresponding warrants. Holders of the affected shares include certain members of our Board of Directors. Similarly, there is an obligation with respect to our Debentures issued in 2008 and 2009 to remain current in our required
SEC filings, which obligations were breached due to the delays in filing, inter alia, our Form 10-K for the year ended December 31, 2008 and our Form 10-Q for the period ended March 31, 2009. Penalties may also accrue should we be unable
to effect the Authorized Share Increase as required with respect to the Debentures and the Senior Loan.

We are dependent
upon key members of Management.Our success depends to a significant degree upon the continuing contributions of our key Management. These individuals have the most familiarity with our offerings and services and the markets in which we present
them. The loss of any of these individuals could have a material adverse effect on our business, and we do not currently maintain key man insurance on any of these individuals.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (NOT APPLICABLE)
|------- | ---------------------------------------------------------------------------



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

Disclosure controls and procedures are the controls and other procedures designed to
ensure information required to be disclosed in the reports the Company files under the Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and to
ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely
decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of the
Companys management, including the Chief Executive Officer and the Chief Financial Officer, on the design and effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, or the Exchange Act) as of December 31, 2008. Based on that evaluation and the material weaknesses described below under Managements Report on Internal Control over Financial
Reporting, Management, including the Chief Executive Officer and Chief Financial Officer, have concluded the Companys disclosure controls and procedures were not effective as of September 30, 2009.



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Managements Report on Internal Control Over Financial Reporting

Our Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our Management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting on the framework in Internal Control over Financial Reporting  Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control over Financial Reporting  Guidance for Smaller Public Companies,Management concluded our internal control over financial reporting was not effective as of
September 30, 2009.

A material weakness in internal control over financial reporting is a control deficiency, or
combination of deficiencies, in internal control over financial reporting (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5), such that there is a reasonable possibility that a
material misstatement of the Companys annual or interim financial statements will not be prevented or detected on a timely basis.

As a result of the evaluation, Management identified two material weaknesses with respect to internal controls over financial reporting:



| |  |  | The Company did not maintain sufficient levels of qualified personnel in our financial reporting processes. As a result, our internal controls over
financial reporting did not include an effective control to ensure appropriate review and analysis of contingent terms in previous financing transactions, resulting in a restatement of the consolidated financial statements for the fiscal year ended
December 31, 2007 in fiscal year 2008. The restatement required a balance sheet reclassification of warrants and preferred stock from the consolidated statement of shareholders equity to a liability account. See Notes to the Consolidated
Financial Statements included in Item 8, herein. The Companys 10-KSB for fiscal year ended December 31, 2007 and 10-QSB (beginning balances) for the interim period ended September 30, 2008 were subsequently amended as a result
of the restatement, and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has not yet deployed our staff and systems in a manner that allows for the desired level of segregation of duties to operate and be
documented in a manner sufficient to meet Sarbanes-Oxley standards that will need to be evidenced in the future.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In order to determine whether a control deficiency, or combination of control deficiencies is a material weakness, Management considers all relevant information and evaluates the severity of each control deficiency that comes to its
attention. Management also evaluates the effect of its compensating controls, which serve to accomplish the objective of another control that did not function properly, helping to reduce risk to an acceptable level. To have a mitigating effect, the
compensating control should operate at a level of precision that would prevent or detect a misstatement that could be material. Based on our evaluation under the framework set forth in Internal Control over Financial Reporting  Guidance for
Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission, management, including the Chief Executive Officer and Chief Financial Officer, have concluded the Companys internal controls over
financial reporting were not effective as of September 30, 2009 as a result of the aforementioned material weaknesses.

Managements Plan to Address Material Weaknesses

Management is committed to continuing efforts aimed at
improving the design adequacy and operational effectiveness of its system of internal control. During 2008, the Company began the implementation of the following remediation activities to improve the Companys internal control over financial
reporting and will continue to implement such activities until the deficiencies are remediated:



| |  |  | utilization of external consultants to assist in the planning for, and in advance of the execution of, the accounting treatment of complex transactions
and financings given the unforeseen effects driven by complex accounting standards. The utilization of external consultants has provided additional accounting resources and initiated steps toward creating a desired level of segregation of duties;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | utilization of external consultants to assist in the implementation and design of policies and procedures to meet the required documentation and
effectiveness requirements for internal control over financial reporting under the Sarbanes-Oxley Act and to address the segregation of duties within the financial reporting process.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the second three-month period of 2008, a previously disclosed material weakness was addressed by increasing the number of members of
our Board of Directors to nine and completing our search for independent directors in order to have a majority of our Board of Directors become independent, as defined in Item 407(a) of Regulation S-K. Among the incoming directors, two were
determined to be audit committee financial experts as defined in Item 407(d)(5) of Regulation S-K. Subsequent to year-end, a member of the Board resigned and an additional, independent director was appointed. This member was
determined to be an additional audit committee financial expert and assumed chairmanship of the audit committee. In addition, we have begun to adopt audit committee best practices as recommended by the Treadway Commission and the major
stock exchanges.



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Even with these changes, due to the increasing number and complexity of pronouncements,
emerging issues and releases, and reporting requirements and regulations, we expect there will continue to be some risk related to financial reporting controls. The process of identifying risk areas and implementing the many facets of internal
control over financial reporting as required under the Sarbanes-Oxley Act continues to be complex and subject to significant judgment and may result in the identification in the future of areas where we may need additional resources.

The Companys lack of resources resulted in the Company not establishing an adequate system for identifying, documenting and testing
its internal control system. The Companys process did not include a sustainable process for identifying and documenting systems and the related key controls at operating locations throughout the Company and periodically evaluating control
design and operating effectiveness across the Company on an ongoing basis.

There were no changes in the internal control over
financial reporting identified in managements evaluation during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

None.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

For
information about risk factors affecting future performance, see the Factors Affecting Future Performance in the Management Discussion and Analysis section of these financial statements.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

All long-term debt is presented as a current obligation as a result of the Companys anticipation of continued events of default on certain reporting and administrative covenants and its inability to predict the continued issuance of
waivers by its lenders.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

None.



|ITEM 6. | EXHIBITS.
|------- | ---------

Exhibits filed
as a part of this quarterly report on Form 10-Q are listed in the Index to Exhibits located on page 45 of this Report.



43



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##### Table of Contents

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



CAPITAL GROWTH SYSTEMS, INC.By:

/S/    PATRICK C.
SHUTTPatrick C. Shutt, Chief Executive Officer/S/    JIM
MCDEVITTJim McDevitt, Chief Financial and Accounting Officer


Dated: November 13, 2009



44



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##### Table of Contents

|                 |  |                                                                                                                                                          
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number   |  | Description of Document                                                                                                                                  
|3.1              |  | Articles of Incorporation of Capital Growth Systems, Inc.(1)                                                                                             
|                 | 
|3.2              |  | Amendment to Articles of Incorporation of Capital Growth Systems, Inc.(2)                                                                                
|                 | 
|3.3              |  | Articles of Amendment to Articles of Incorporation of Capital Growth Systems, Inc.(3)                                                                    
|                 | 
|3.4              |  | By-laws of Capital Growth Systems, Inc.(1)                                                                                                               
|                 | 
|3.5              |  | Amendment to By-laws of Capital Growth Systems, Inc.(3)                                                                                                  
|                 | 
|3.6              |  | Amended and Restated By-laws of Capital Growth Systems, Inc.(4)                                                                                          
|                 | 
|4                |  | 2008 Long Term Incentive Plan.(4)                                                                                                                        
|                 | 
|10.1             |  | Term Loan and Security Agreement.(5)                                                                                                                     
|                 | 
|10.2             |  | First Amendment, Waiver, Extension and Consent.(5)                                                                                                       
|                 | 
|10.3             |  | Second Amendment and Waiver.(5)                                                                                                                          
|                 | 
|10.4             |  | July Debt Subordination and Intercreditor Agreement.(5)                                                                                                  
|                 | 
|10.5             |  | VPP Debt Subordination and Intercreditor Agreement.(5)                                                                                                   
|                 | 
|10.6             |  | Securities Purchase Agreement.(5)                                                                                                                        
|                 | 
|10.7             |  | Original Issue Discount Secured Convertible Debenture.(5)                                                                                                
|                 | 
|10.8             |  | Common Stock Purchase Warrant.(5)                                                                                                                        
|                 | 
|10.9             |  | Security Agreement.(5)                                                                                                                                   
|                 | 
|10.11            |  | Subsidiary Guarantee.(5)                                                                                                                                 
|                 | 
|10.12            |  | 2009 Sub Debt Consent, Waiver, and Amendment Agreement.(5)                                                                                               
|                 | 
|10.13            |  | 2009 Intercreditor Agreement.(5)                                                                                                                         
|                 | 
|10.14            |  | VPP Securities Purchase Agreement.(5)                                                                                                                    
|                 | 
|10.15            |  | VPP Original Issue Discount Secured Convertible Debenture.(5)                                                                                            
|                 | 
|10.16            |  | VPP Common Stock Purchase Warrant.(5)                                                                                                                    
|                 | 
|10.17            |  | VPP Security Agreement.(5)                                                                                                                               
|                 | 
|10.18            |  | VPP Subsidiary Guarantee.(5)                                                                                                                             
|                 | 
|10.19            |  | Escrow Agreement.(5)                                                                                                                                     
|                 | 
|31.1             |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                        
|                 | 
|31.2             |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                        
|                 | 
|32               |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                                
|                 | 
|Reference Number |  | Description of Reference                                                                                                                                 
|*                |  | Filed herewith.                                                                                                                                          
|                 | 
|(1)              |  | Incorporated herein by reference to the Form 10-KSB for fiscal year ended December 31, 2003, filed with the Commission on May 6, 2004 (File No. 0-30831).
|                 | 
|(2)              |  | Incorporated by reference to Form 8-K filed with the Commission on September 14, 2006 (SEC File No. 0-30831).                                            
|                 | 
|(3)              |  | Incorporated by reference to Form 8-K filed with the Commission on June 25, 2007 (SEC File No. 0-30831).                                                 
|                 | 
|(4)              |  | Incorporated by reference to Form 8-K filed with the Commission on May 5, 2008 (SEC File No. 0-30831).                                                   
|                 | 
|(5)              |  | Incorporated by reference to Form 8-K filed with the Commission on August 4, 2009 (SEC File No. 0-30831).                                                



45