covlogoForm
                10QSB
              
              CAPITAL
                GROWTH SYSTEMS INC /FL/ - CGSY
              
              Filed:
                November 19, 2007 (period: September 30, 2007)
              
              Quarterly
                report filed by small
                businesses








covlogo1Form
                10QSB
              
              CAPITAL
                GROWTH SYSTEMS INC /FL/ - CGSY
              
              Filed:
                November 19, 2007 (period: September 30, 2007)
              
              Quarterly
                report filed by small businesses










Table
                of Contents





PART
                IFINANCIAL
                INFORMATIONItem
                1.
            
            Financial
                Statements
            
            3PART
                I-
                FINANCIAL INFORMATIONItem
                1.
            
            Financial
                Statements
            
            3Item
                2.
            
            Management’s
                Discussion and Analysis or Plan of Operation
            
            30Item
                3.
            
            Controls
                and Procedures
            
            35PART
                II-
                OTHER INFORMATIONItem
                1.
            
            Legal
                Proceedings
            
            35Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds.
            
            35Item
                3.
            
            Defaults
                Upon Senior Securities
            
            35Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            35Item
                5.
            
            Other
                Information
            
            36Item
                6.
            
            Exhibits
            
            36SIGNATURES
            
            37EXHIBIT
                INDEXEX-31.1
                (Certifications required under Section 302 of the Sarbanes-Oxley
                Act of
                2002)EX-31.2
                (Certifications required under Section 302 of the Sarbanes-Oxley
                Act of
                2002)EX-32
                (Certifications required under Section 906 of the Sarbanes-Oxley
                Act of
                2002)









UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB





x
            
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the quarterly period ended September 30, 2007o
            
            TRANSITION
                REPORT UNDER 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 small business issuer as specified in its
                charter)




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





125
                South Wacker Drive, Suite 300  Chicago, Illinois
                60606(Address
                of principal executive offices)





(312)
                673-2400(Issuer's
                telephone number)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports) and (2) has been subject
      to such filing requirements for the past 90 days.





Yes x No o





As
      of
      November 9, 2007, the issuer had outstanding 72,293,367 shares of its $0.0001
      par value common stock and had 18,068,707 shares issuable.





DOCUMENTS
      INCORPORATED BY REFERENCE




None




Transitional
      Small Business Disclosure Format: Yes o No x







**CAPITAL
      GROWTH SYSTEMS, INC. AND SUBSIDIARIES**





Page
                No.PART
                I
            
            FINANCIAL
                INFORMATION
            
            3Item
                1.
            
            Financial
                Statements
            
            3Interim
                Consolidated Condensed Balance Sheets as of September 30, 2007 [Unaudited]
                and December 31, 2006 [Audited]
            
            5Consolidated
                Condensed Statements of Operations for the three and nine month periods
                ended September 30, 2007 and 2006 [Unaudited]
            
            6Consolidated
                Condensed Statement of Shareholders' Equity from January 1, 2007
                to
                September 30, 2007 [Unaudited]
            
            7Consolidated
                Condensed Statements of Cash Flows for the nine month periods ended
                September 30, 2007 and 2006 [Unaudited]
            
            8Notes
                to Interim Consolidated Condensed Financial Statements.
            
            9Item
                2.
            
            Management's
                Discussion and Analysis.
            
            30Item
                3.
            
            Controls
                and Procedures.
            
            35PART
                II.
            
            OTHER
                INFORMATION
            
            35Item
                1.
            
            Legal
                Proceedings.
            
            35Item
                2.
            
            Changes
                in Securities and Small Business Issuer Purchases of Equity
                Securities.
            
            35Item
                3.
            
            Defaults
                upon Senior Securities.
            
            35Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders.
            
            35Item
                5.
            
            Other
                Information.
            
            36Item
                6.
            
            Exhibits.
            
            36Signatures
                and Certifications
            
            37




2




**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





NOTE
      REGARDING FORWARD-LOOKING STATEMENTS





Except
      with respect to historical financial information, the discussion contained
      in
      this report contains forward-looking statements that involve risk and
      uncertainties. These statements may be identified by use of forward-looking
      terminology such as “believes,” “expects,” “may,” “should,” or “anticipates,” or
      similar expressions, or by discussions of strategy. The cautionary statements
      made in this report should be read as being applicable to all related
      forward-looking statements wherever they appear in this report. Our actual
      results could differ materially from those discussed in this report. Factors
      that could cause our results to differ from those discussed in this report,
      include, but are not limited to, those discussed under the heading “Risk
      Factors” in our report on Form 10-KSB for the period ending December 31,
      2006.





On
      June
      25, 2007, the Company’s Common and all Series of Preferred Stockholders voted in
      favor to increase the number of authorized Common shares from 25,000,000 to
      350,000,000. This resulted in the automatic conversion of all outstanding Series
      of Preferred Stock into shares of the Company’s Common. Therefore, any reference
      contained herein to any outstanding shares of any Series of Preferred Stock
      is
      now Common Stock. Shares of Common Stock outstanding prior to this conversion
      totaled 21,710,880. After the conversions, the total share count of Common
      Stock
      totaled 71,263,594. In addition, all outstanding warrants and stock options
      are
      now all issuable upon exercise into the Company’s Common Stock.




3




CAPITAL
      GROWTH SYSTEMS, INC.




Interim
      Consolidated Condensed Financial Statements


(Unaudited)




September
      30, 2007


4




**CAPITAL
      GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      CONDENSED BALANCE SHEETS**




**September
                30,**
            
            **December
                31,****2007**
            
            **2006****ASSETS**
            
            **(Unaudited)**
            
            **(Audited)****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            742,693
            
            $
            1,203,819Accounts
                receivable, net
            
            
            1,566,583
            
            
            1,592,110Prepaid
                expenses
            
            
            389,209
            
            
            474,781Other
                current assets
            
            
            16,834
            
            
            41,811Current
                assets of discontinued operations
            
            
            2,395,994
            
            
            2,429,677**Total
                Current Assets**
            
            
            5,111,313
            
            
            5,742,198Fixed
                assets, net
            
            
            2,613,570
            
            
            3,915,820Intangible
                assets, net
            
            
            8,613,833
            
            
            9,493,179Goodwill
            
            
            12,513,090
            
            
            12,513,090Other
                assets
            
            
            80,260
            
            
            38,508Long-term
                assets of discontinued operations
            
            
            1,215,577
            
            
            5,677,953**TOTAL
                ASSETS**
            
            $
            30,147,643
            
            $
            37,380,748**LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Current
                maturities of long-term debt
            
            $
            8,145,987
            
            $
            21,200,138Current
                maturities of obligations under capital leases
            
            
            38,162
            
            
            42,872Accounts
                payable
            
            
            3,686,557
            
            
            1,429,882Accrued
                expenses
            
            
            3,029,307
            
            
            3,352,806Deferred
                revenue, current portion
            
            
            615,029
            
            
            608,461Current
                liabilities of discontinued operations
            
            
            4,697,436
            
            
            7,378,404**Total
                Current Liabilities**
            
            
            20,212,478
            
            
            34,012,563Deferred
                revenue, net of current portion
            
            
            52,314
            
            
            112,222Long-term
                portion of debt
            
            
            2,862,845
            
            
            738,607Long-term
                portion of obligations under capital leases
            
            
            13,351
            
            
            38,653Long-term
                liabilities of discontinued operations
            
            
            369,871
            
            
            570,587Total
                Liabilities
            
            
            23,510,859
            
            
            35,472,632**SHAREHOLDERS'
                EQUITY**Common
                Stock, $.0001 par value, 350,000,000 authorized; 72,293,367 issued
                and
                outstanding Common Stock at September 30, 2007. 25,000,000 authorized;
                17,115,754 issued and outstanding at December 31, 2006. 0 and 3,899,315
                shares were issuable at September 30, 2007 and December 31, 2006,
                respectively.
            
            
            7,229
            
            
            2,101Additional
                paid-in capital
            
            
            57,512,143
            
            
            24,519,495Accumulated
                other comprehensive loss
            
            
            (71,361
            )
            
            (48,904
            )Accumulated
                deficit
            
            
            (50,811,227
            )
            
            (22,564,576
            )**SHAREHOLDERS'
                EQUITY**
            
            
            6,636,784
            
            
            1,908,116**TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            $
            30,147,643
            
            $
            37,380,748




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


5


**CAPITAL
      GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      CONDENSED STATEMENTS OF OPERATIONS**


(Unaudited)




**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****Revenues**Networks
                and circuits
            
            $
            2,482,075
            
            $
            89,260
            
            $
            7,155,049
            
            $
            89,260Services
            
            
            1,647,574
            
            
            —
            
            
            4,749,443
            
            
            —Software
            
            
            239,983
            
            
            —
            
            
            691,796
            
            
            —**Total
                revenues**
            
            
            4,369,632
            
            
            89,260
            
            
            12,596,288
            
            
            89,260**Cost
                of goods sold**Networks
                and circuits
            
            
            1,664,325
            
            
            —
            
            
            5,232,086
            
            
            —Services
            
            
            554,801
            
            
            —
            
            
            1,744,111
            
            
            —Software
            
            
            —
            
            
            —
            
            
            —
            
            
            —**Total
                cost of goods sold**
            
            
            2,219,126
            
            
            —
            
            
            6,976,197
            
            
            —**Gross
                margin**
            
            
            2,150,506
            
            
            89,260
            
            
            5,620,091
            
            
            89,260**Operating
                expenses**Compensation
            
            
            4,005,415
            
            
            104,716
            
            
            12,478,190
            
            
            104,716Depreciation
                and amortization
            
            
            879,379
            
            
            599
            
            
            2,594,132
            
            
            599Other
                operating expenses
            
            
            1,914,929
            
            
            33,227
            
            
            5,038,886
            
            
            33,227**Total
                operating expenses**
            
            
            6,799,723
            
            
            138,542
            
            
            20,111,208
            
            
            138,542**Operating
                loss from continuing operations**
            
            
            (4,649,217
            )
            
            (49,282
            )
            
            (14,491,117
            )
            
            (49,282
            )Interest
                expense
            
            
            3,118,704
            
            
            18,129
            
            
            8,271,941
            
            
            18,129**Loss
                from continuing operations**
            
            
            (7,767,921
            )
            
            (67,411
            )
            
            (22,763,058
            )
            
            (67,411
            )**Loss
                from discontinued operations, net of tax**
            
            
            (4,649,075
            )
            
            (3,299,070
            )
            
            (5,483,593
            )
            
            (4,712,040
            )**Net
                loss**
            
            
            (12,416,996
            )
            
            (3,366,481
            )
            
            (28,246,651
            )
            
            (4,779,451
            )**Deemed
                dividend warrants and beneficial conversion features issued to preferred
                shareholders**
            
            
            —
            
            
            —
            
            
            (20,424,432
            )
            
            —**Net
                loss applicable to Common shareholders**
            
            $
            (12,416,996
            )
            $
            (3,366,481
            )
            $
            (48,671,083
            )
            $
            (4,779,451
            )**Net
                loss per share applicable to Common shareholders:**Loss
                from continuing operations
            
            $
            (0.11
            )
            $
            —
            
            $
            (1.09
            )
            $
            —Loss
                from discontinued operations
            
            
            (0.06
            )
            
            (0.18
            )
            
            (0.14
            )
            
            (0.27
            )**Net
                loss applicable to Common shareholders**
            
            $
            (0.17
            )
            $
            (0.18
            )
            $
            (1.23
            )
            $
            (0.27
            )**Average
                shares outstanding**
            
            
            71,858,652
            
            
            19,065,412
            
            
            39,585,664
            
            
            17,737,537





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


6




**CAPITAL
      GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY**


(Unaudited)


**Common
                  Shares**
              
              **Series
                  AA Preferred Shares**
              
              **Series
                  B Preferred Shares**
              
              **Common
                  Stock**
              
              **Preferred
                  Stock**
              
              **Additional
                  Paid-in Capital**
              
              **Accumulated
                  Deficit**
              
              **Foreign
                  Translation Adjustment**
              
              **Total
                  Equity**
              
              **Comprehensive
                  loss**Balance,
                  January 1, 2007
              
              
              21,015,069
              
              
              —
              
              
              2,516
              
              $
              2,101
              
              $
              —
              
              $
              24,519,495
              
              $
              (22,564,576
              )
              $
              (48,904
              )
              $
              1,908,116Issuance
                  of Common Stock
              
              
              695,811
              
              
              
              
              
              
              
              
              70
              
              
              
              
              
              326,387
              
              
              
              
              
              
              
              
              326,457Issuance
                  of Series AA Preferred Stock
              
              
              
              
              
              20,635
              
              
              
              
              
              
              
              
              2
              
              
              17,930,608
              
              
              
              
              
              
              
              
              17,930,610Beneficial
                  conversion feature related to Junior Secured Subordinated
                  debt
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,010,451
              
              
              
              
              
              
              
              
              3,010,451Issuance
                  of Series AA Preferred Stock warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,182,990
              
              
              
              
              
              
              
              
              9,182,990Deemed
                  Dividend related to the issuance of convertible Series AA Preferred
                  Stock
                  warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (9,182,990
              )
              
              
              
              
              
              
              
              (9,182,990
              )Beneficial
                  conversion of Series AA Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,241,442
              
              
              
              
              
              
              
              
              11,241,442Deemed
                  Dividend related to the conversion of Series AA Preferred Stock
                  to Common
                  Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (11,241,442
              )
              
              
              
              
              
              
              
              (11,241,442
              )Conversion
                  of Preferred Stock to Common Stock
              
              
              49,552,714
              
              
              (20,635
              )
              
              (2,516
              )
              
              4,955
              
              
              (2
              )
              
              (4,953
              )
              
              
              
              
              
              
              
              —Stock
                  warrants issued for debt issuance
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,018,111
              
              
              
              
              
              
              
              
              6,018,111Stock
                  issued as penalty for failure to register
              
              
              1,029,773
              
              
              
              
              
              
              
              
              103
              
              
              
              
              
              631,053
              
              
              
              
              
              
              
              
              631,156Stock-based
                  compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,080,991
              
              
              
              
              
              
              
              
              5,080,991Foreign
                  translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (22,457
              )
              
              (22,457
              )
              $
              (22,457
              )Net
                  loss for the nine months ended September 30, 2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (28,246,651
              )
              
              
              
              
              (28,246,651
              )
              
              (28,246,651
              )Balance,
                  September 30, 2007
              
              
              72,293,367
              
              
              —
              
              
              —
              
              $
              7,229
              
              $
              —
              
              $
              57,512,143
              
              $
              (50,811,227
              )
              $
              (71,361
              )
              $
              6,636,784
              
              $
              (28,269,108
              )





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




7




**CAPITAL
      GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      CONDENSED STATEMENTS OF CASH FLOWS**


(Unaudited)





Nine
                Months Ended September 30,2007
            
            2006Net
                cash (used in) continuing operating activities
            
            $
            (7,173,562
            )
            $
            (67,411
            )Net
                cash (used in) discontinued operating activities
            
            
            (4,973,629
            )
            
            (1,166,582
            )Net
                cash (used in) operating activities
            
            
            (12,147,191
            )
            
            (1,233,993
            )Net
                investing cash flows (used in) continuing operations
            
            
            (454,287
            )
            
            —Net
                investing cash flows provided by discontinued operations
            
            
            3,844,560
            
            
            (260,361
            )Net
                cash provided by (used in) investing activities
            
            
            3,390,273
            
            
            (260,361
            )Net
                cash provided by financing activities from continuing
                operations
            
            
            8,821,535
            
            
            —Net
                cash provided by (used in) financing activities from discontinued
                operations
            
            
            (503,286
            )
            
            1,402,149Net
                cash provided by financing activities
            
            
            8,318,249
            
            
            1,402,149Effect
                of exchange rate changes on cash and equivalents
            
            
            (22,457
            )
            
            —(Decrease)
                in Cash and Cash Equivalents
            
            
            (461,126
            )
            
            (92,205
            )Cash
                and Cash Equivalents - Beginning of Period
            
            
            1,203,819
            
            
            436,842Cash
                and Cash Equivalents - End of period
            
            $
            742,693
            
            $
            344,637SUPPLEMENTAL
                CASH FLOW INFORMATION:Cash
                paid for interest for continuing operations
            
            $
            1,371,749
            
            
            —Cash
                paid for interest for discontinued operations
            
            $
            52,492
            
            $
            283,136Cash
                paid for income taxes for continuing operations
            
            $
            18,443
            
            
            —Cash
                paid for income taxes for discontinued operations
            
            $
            14,130
            
            $
            2,446NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Conversion
                of short-term bridge notes into preferred stock
            
            $
            3,190,831
            
            
            —Conversion
                of mandatory convertible notes into preferred stock
            
            $
            1,394,964
            
            
            —Conversion
                of short-term bridge notes to new junior secured notes
            
            $
            5,388,438
            
            
            —Issuance
                of stock for acquisitions
            
            
            —
            
            $
            5,303,068Issuance
                of stock for consulting services
            
            
            —
            
            $
            135,000Stock-based
                compensation expense
            
            
            —
            
            $
            1,395,080Issuance
                of warrants for consulting services
            
            
            —
            
            $
            45,691Conversion
                of short-term bridge notes to new junior secured notes
            
            
            —
            
            $
            1,887,976





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




8




**CAPITAL
      GROWTH SYSTEMS, INC.**


**Notes
      to Interim Consolidated Condensed Financial Statements**


**September
      30, 2007 (Unaudited)**





**NOTE
      1 - Organization and Basis of Presentation**





The
      accompanying consolidated financial statements include the accounts of Capital
      Growth Systems, Inc. (“CGSI”) and its wholly-owned subsidiaries, Nexvu
      Technologies, LLC (“Nexvu”), Frontrunner Network Systems Corp. (“Frontrunner”),
      CentrePath, Inc. (“CentrePath”), Global Capacity Group, Inc. (“GCG”), 20/20
      Technologies, Inc. (“20/20”) and its wholly-owned subsidiary, Magenta net Logic
      (“Magenta”). During the first quarter of 2007, the Company determined both
      Frontrunner and Nexvu met the definition of discontinued operations as
      prescribed in Statement of Financial Accounting Standards No. 144, *Accounting
      for Impairment or Disposal of Long-Lived Assets* (SFAS
      144) and the financial results of these two entities are presented as
      discontinued operations for the three and nine-month periods ended September
      30,
      2007 and 2006 (see Note 3 - Discontinued Operations, for further discussion).
      Except where necessary to distinguish the entities, CGSI, CentrePath, GCG,
      20/20
      and Magenta are referred to as the “Company.” All intercompany accounts have
      been eliminated in consolidation.





These
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America for interim financial
      information and the rules and regulations of the Securities and Exchange
      Commission for interim financial statements. These financial statements reflect
      all adjustments and accruals of a normal recurring nature, which, in the opinion
      of management are necessary in order to make the financial statements not
      misleading. The results for the interim periods presented are not necessarily
      indicative of results to be expected for any future period.





These
      financial statements should be read in conjunction with the audited financial
      statements and the notes thereto of all the companies included in CGSI's 2006
      Annual Report on Form 10-KSB filed with the Securities Exchange Commission
      for
      the year ended December 31, 2006.





**Acquisition
      of 20/20 Technologies**





On
      September 8, 2006, the Company entered into an Agreement and Plan of Merger
      (the
“20/20 Merger Agreement”) with 20/20 Technologies, Inc., a Delaware corporation
      (“20/20”). Pursuant to the terms of the 20/20 Merger Agreement, the Company
      agreed to acquire all of the capital stock of 20/20 in exchange for certain
      cash, stock consideration and the assumption of certain indebtedness. The
      Company and 20/20 effected the transaction through a reverse triangular merger,
      whereby a subsidiary established for the purpose of merger was merged with
      20/20
      and 20/20 was the surviving corporation (the “Merger”).





The
      aggregate consideration paid to 20/20 in connection with the Merger was $8.7
      million, comprised of debt refinanced in the amount of $3.5 million and stock
      valued at $5.2 million. The stock consideration consisted of 3,899,315 shares
      of
      the Company's common stock, par value of $0.0001 (“Common Stock”) and 2,516.10
      shares of the Company's Series B preferred stock, par value $.0001 (the “Series
      B Preferred Stock”, and collectively with the shares of Common Stock, the
“Transaction Shares”). The value of the Transaction Shares was based on the
      average closing price of the Company's Common Stock for the ten trading days
      immediately preceding the Closing Date and was equal to $0.68 per share. The
      Series B Preferred Stock, by its terms, converted into an additional 3,700,147
      shares of Common Stock on June 25, 2007, with the Common Shareholder approval
      of
      increasing the number of authorized shares of Common Stock from 25,000,000
      to
      350,000,000. All of the Transaction Shares have been released to the former
      shareholders of 20/20.





The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of 20/20. Under the purchase method of accounting, the total
      estimated consideration as shown in the table below is allocated to 20/20's
      tangible and intangible assets and liabilities based on their estimated fair
      values as of the Closing Date. The consideration is allocated as
      follows:





Debt
                refinanced
            
            
            
            
            $
            3,559,416Value
                of stock issued
            
            
            
            
            
            5,167,634Professional
                fees
            
            
            
            
            
            250,000Total
                purchase price
            
            
            
            
            $
            8,977,050Assets
                and liabilities acquired/assumedCash
            
            $
            49,856Accounts
                receivable
            
            
            66,115Other
                current assets
            
            
            14,140Property
                and equipment, net
            
            
            9,904Other
                assets
            
            
            4,675Accounts
                payable
            
            
            (639,589
            )Accrued
                expenses and other current liabilities
            
            
            (357,783
            )Deferred
                revenue
            
            
            (258,254
            )Notes
                payable
            
            
            (3,247,479
            )Net
                liabilities assumed
            
            
            
            
            
            (4,358,415
            )Identifiable
                intangible assets
            
            
            
            
            
            4,525,400Goodwill
            
            
            
            
            
            8,810,065Total
            
            
            
            
            $
            8,977,050




9




The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:





**Fair Value**
            
            **Useful Life**
            
            **Annual Amortization**Developed
                technology
            
            $
            3,755,400
            
            
            11
                years
            
            $
            341,400Trade
                name
            
            
            50,000
            
            
            3
                years
            
            
            16,667Customer
                base
            
            
            720,000
            
            
            8
                years
            
            
            90,000$
            4,525,400
            
            
            
            
            $
            448,067




The
      amount allocated to goodwill is not deductible for tax purposes.





**Acquisition
      of CentrePath**





On
      November 22, 2006, the Company entered into an Agreement and Plan of Merger
      (the
“Merger Agreement”) with CentrePath, Inc., a Delaware corporation (“CentrePath”)
      pursuant to which CentrePath merged with and into a subsidiary of the Company
      established for that purpose. The merger consideration to be paid to the
      CentrePath stockholders was a cash amount equal to $6.8 million, subject to
      a
      post-closing net working capital adjustment. On November 30, 2006, the Company
      consummated the acquisition of CentrePath. Pursuant to the Merger Agreement,
      an
      additional payment of $750,000 related to the post-closing net working capital
      adjustment was agreed to, bringing the total amount of the merger consideration
      to $7.5 million. The additional payment due was recorded in accrued expenses
      at
      December 31, 2006 and paid during the three months ended March 31,
      2007.





As
      part
      of this Merger, the Company borrowed the $7.9 million original principal amount
      in November 2006 with $6.8 million of the proceeds used toward the purchase
      of
      CentrePath and the balance of the proceeds used for working capital, which
      loans
      were secured by the stock and assets of CentrePath. The principal and accrued
      interest with respect to these loans was either paid off or rolled into the
      purchase of Units per the Units offering on January 19, 2007 (see Note 8 -
      Shareholders’ Equity). In connection with the funding of this loan, the Company
      issued warrants to purchase 2,261.27261 shares of Series AA Preferred Stock
      (representing 3,925,000 shares of Common Stock, on an as-converted basis),
      exercisable on or before December 31, 2009, at $1,000 per share ($0.45 per
      share, on an as-converted to Common Stock basis). Due to the June 2007 amendment
      to the Company’s Articles of Incorporation to increase its authorized Common
      Stock, the warrants issued in connection with the loans became exercisable
      to
      purchase Common Stock.





The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of CentrePath. Under the purchase method of accounting, the total
      consideration as shown in the table below was allocated to CentrePath's tangible
      and intangible assets and liabilities based on their fair values as of the
      date
      of completion of the CentrePath acquisition. The consideration is allocated
      as
      follows:





Cash
            
            
            
            
            $
            7,500,000Professional
                fees
            
            
            
            
            
            150,000Total
                consideration
            
            
            
            
            $
            7,650,000Assets
                and liabilities acquired/assumedCash
                and cash equivalents
            
            $
            2,488,328Accounts
                receivable
            
            
            889,608Prepaid
                expenses
            
            
            263,120Property
                and equipment, net
            
            
            3,910,000Accounts
                payable
            
            
            (282,012
            )Accrued
                expenses
            
            
            (2,438,583
            )Deferred
                revenue
            
            
            (415,009
            )Capital
                lease
            
            
            (59,272
            )Net
                assets acquired
            
            
            
            
            
            4,356,180Identifiable
                intangible assets
            
            
            
            
            
            1,540,000Goodwill
            
            
            
            
            
            1,753,820Total
            
            
            
            
            $
            7,650,000





The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:





**Fair Value**
            
            **Useful Life**
            
            **Annual Amortization**Developed
                technology
            
            $
            970,000
            
            
            9
                years
            
            $
            107,778Trade
                name
            
            
            90,000
            
            
            3
                years
            
            
            30,000Customer
                base
            
            
            480,000
            
            
            6
                years
            
            
            80,000$
            1,540,000
            
            
            
            
            $
            217,778





The
      amount allocated to goodwill is not deductible for tax purposes.




10




**Acquisition
      of Global Capacity**





Effective
      December 12, 2006, the Company consummated the acquisition of Global Capacity
      Group, Inc. (“GCG”) pursuant to which GCG became a wholly-owned subsidiary of
      the Company. The aggregate cash consideration paid at closing in connection
      with
      the merger was $5.3 million. The former Global Capacity Group, Inc. stockholders
      were entitled to additional contingent consideration after the second and third
      anniversary dates of the merger, if certain revenue and profitability thresholds
      were reached by GCG after the merger. The parties agreed to various revenue
      and
      gross margin combinations that could have resulted in additional consideration
      of an amount between $1.5 million and $3.0 million on each of the second and
      third anniversary dates. The Company required the Executives to be employed
      in
      order to receive any such additional consideration payments. Therefore, any
      additional payments or stock issued related to the contingent consideration
      was
      to be recorded as compensation in the Company's Statement of Operations in
      the
      period it was earned. The revenue thresholds ranged between $9 million and
      $13.4
      million and the gross profit thresholds range between 27.5% and 30% of revenue.
      Any additional consideration to be paid on the second anniversary date was
      to be
      paid in cash. Contingent consideration on the third anniversary date may have
      been paid in cash or CGSI Common Stock at the Company's discretion. Ultimately,
      on October 31, 2007, separation agreements were reached with the former owners
      and all claims to potential earn-out payments were released in exchange for
      a
      lump sum payment of $350,000. This amount, which has been paid, was accrued
      and
      is included as compensation in the period ended September 30, 2007.





The
      Company established a tranche of up to $5.5 million of 60-day bridge notes
      that
      it was issuing pursuant to a Global Bridge Note Purchase Agreement dated as
      of
      December 11, 2006, by and among the Company and various lenders party thereto,
      to provide the cash necessary to fund the purchase of Global Capacity Group,
      Inc. ($5.3 million) plus an additional amount of up to $200,000 for general
      working capital purposes. Each bridge note bore interest at 8% per annum and
      was
      secured by a collateral pledge of the stock of Global Capacity Group, Inc.
      as
      well as a junior security interest in the assets of the Company. In addition,
      for each $1.0 million of bridge notes funded the lenders received a detachable
      warrant to purchase up to 225.00225 shares of Series AA Convertible Preferred
      Stock of the Company, which by their terms were convertible into 500,000 shares
      of Common Stock upon the authorization of the underlying Common Stock and with
      the warrants exercisable on or before December 31, 2009 at an as-converted
      to
      Common Stock purchase price of $0.45 per share. The certificate of designations
      for the Series AA Convertible Preferred Stock provides that the Series AA
      Convertible Preferred Stock will automatically convert to Common Stock once
      the
      articles of incorporation for the Company are amended to authorize the issuance
      of not less than 200,000,000 shares of Common Stock. This amendment to the
      articles occurred in June 2007. On December 11, 2006, an aggregate of $4.7
      million of bridge notes were issued. The balance of the merger consideration
      was
      provided by available cash from the Company. During the three months ended
      March
      31, 2007, approximately $2.9 million of the principal and accrued interest
      related to the bridge notes was extended and became part of the Company's new
      junior secured facility (see Note 5 - Debt, for further discussion) and the
      remaining balance of $1.8 million was repaid. There was no further obligation
      related to the bridge notes outstanding as of September 30, 2007.





The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of Global Capacity Group, Inc. Under the purchase method of
      accounting, the total consideration as shown in the table below is allocated
      to
      Global Capacity, Inc's tangible and intangible assets and liabilities based
      on
      their fair values as of the date of completion of the Global Capacity Group,
      Inc. acquisition. The consideration is allocated as follows:





Cash
            
            
            
            
            $
            5,300,000Professional
                fees
            
            
            
            
            
            150,000Total
                consideration
            
            
            
            
            $
            5,450,000Assets
                and liabilities acquired/assumedAccounts
                receivable
            
            
            415,481Prepaid
                expenses and other assets
            
            
            52,451Property
                and equipment, net
            
            
            192,002Cash
                overdraft
            
            
            (26,879
            )Accounts
                payable
            
            
            (364,575
            )Accrued
                expenses
            
            
            (303,917
            )Notes
                payable
            
            
            (75,398
            )Capital
                lease
            
            
            (28,370
            )Net
                liabilities assumed
            
            
            
            
            
            (139,205
            )Identifiable
                intangible assets
            
            
            
            
            
            3,640,000Goodwill
            
            
            
            
            
            1,949,205Total
            
            
            
            
            $
            5,450,000




The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:





**Fair Value**
            
            **Useful Life**
            
            **Annual Amortization**Developed
                technology
            
            $
            1,070,000
            
            
            5
                years
            
            $
            214,000Trade
                name
            
            
            210,000
            
            
            3
                years
            
            
            70,000Retail
                customer base
            
            
            2,210,000
            
            
            10
                years
            
            
            221,000Wholesale
                customer base
            
            
            150,000
            
            
            6
                years
            
            
            25,000$
            3,640,000
            
            
            
            
            $
            530,000





The
      amount allocated to goodwill is not deductible for tax purposes.




11




**Unaudited
      Pro Forma Financial Information**





The
      following unaudited pro forma condensed consolidated results of operations
      have
      been prepared as if the acquisition of 20/20, CentrePath and Global Capacity
      had
      occurred as of January 1, 2006:





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                revenues
            
            $
            4,369,632
            
            $
            4,773,018
            
            $
            12,596,288
            
            $
            13,908,592Net
                loss applicable to Common Shareholders
            
            $
            (12,416,996
            )
            $
            (6,065,152
            )
            $
            (48,671,083
            )
            $
            (11,562,916
            )Net
                loss per share:Basic
                and diluted
            
            $
            (0.17
            )
            $
            (0.21
            )
            $
            (1.23
            )
            $
            (0.64
            )Weighted
                average shares outstanding:Basic
                and diluted
            
            
            71,858,652
            
            
            22,964,727
            
            
            39,585,664
            
            
            21,636,852





The
      unaudited pro forma condensed consolidated results of operations are not
      necessarily indicative of results that would have occurred had the acquisitions
      occurred as of January 1, 2006, nor are they necessarily indicative of the
      results that may occur in the future.





**NOTE
      2 - Summary of Significant Accounting Policies**





**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.





**Accounts
      Receivable**





Accounts
      receivable represent amounts owed from billings to customers and are recorded
      at
      gross amounts owed less an allowance for uncollectible accounts. The Company
      provides an allowance for uncollectible accounts receivable based upon prior
      experience and management's assessment of the collectibility of existing
      specific accounts. Total reserve for uncollectible accounts was $24,000 and
      $64,000 as of September 30, 2007 and December 31, 2006, respectively. The
      Company's policy is to write off accounts receivable balances once management
      has deemed them to be uncollectible.





**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 their estimated useful lives of 3 - 15 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.




12




**Revenue
      Recognition**





The
      Company generates revenue from selling and installing hardware, licensing its
      software and the provision of services.





For
      revenue from product sales and services, the Company recognizes revenue in
      accordance with Staff Accounting Bulletin No. 104, *Revenue
      Recognition* (SAB
      104), which incorporates Emerging Issues Task Force Issue No. 00-21, *Multiple-Deliverable
      Revenue Arrangements* (EITF
      00-21). EITF 00-21 addresses accounting for arrangements that may involve the
      delivery or performance of multiple products, services and/or rights to use
      assets. Revenue from the sale of software is recognized in accordance with
      AICPA
      Statement of Position 97-2, *Software Revenue Recognition* (SOP
      97-2), as amended by AICPA Statement of Position 98-9, *Modification
      of SOP 97-2, Software Revenue Recognition, with Respect to Certain
      Transactions* (SOP
      98-9).





Both
      SOP
      97-2 and SAB 104 require that four basic criteria must be met before revenue
      can
      be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery
      has occurred; (3) the selling price is fixed and determinable; and (4)
      collectibility is reasonably assured. Determination of criteria (3) and (4)
      are
      based on management's judgments regarding the fixed nature of the selling prices
      of the products delivered and the collectibility of those amounts. Provisions
      for discounts and rebates to customers, estimated returns and allowances, and
      other adjustments are provided for in the same period the related sales are
      recorded. The Company defers any revenue for which the product has not been
      delivered or is subject to refund until such time that the Company and the
      customer jointly determine that the product has been delivered or no refund
      will
      be required. The allocation of license and maintenance is based on the residual
      method of accounting as prescribed in SOP 97-2. Under this method, the Company
      has established Vendor Specific Objective Evidence (VSOE) for the value of
      its
      post-contract support agreements at 20% of the license amount, which is based
      on
      the amount charged to its customer in the renewal year. Therefore, of the total
      amount received under the arrangement, the Company allocates 20% to maintenance
      and the remaining amount to software license under the “residual method” of
      accounting as prescribed in SOP 97-2.





The
      Company recognizes revenues and all related costs on installation contracts
      with
      revenues of $100,000 or more using the percentage of completion method. Progress
      is measured by the percentage of actual labor incurred to date to management's
      estimate of total labor to be incurred on each contract. This method is used
      as
      management considers labor incurred to be the best available measure of progress
      on these contracts. Contract costs include all direct subcontractor labor and
      supervisory labor costs and those indirect costs related to contract performance
      such as indirect labor, supplies and other general expenses. Provisions for
      estimated losses on uncompleted contracts are made in the period in which such
      losses are determined. Changes in job performance, conditions and estimated
      profitability may result in revisions to costs and income and are recognized
      in
      the period in which revisions are determined. All installation contracts with
      revenues less than $100,000 are accounted for on the completed contract method.
      The Company recognizes revenue and all related costs on these contracts upon
      delivery and acceptance by the customer.





The
      Company also earns sales revenue from providing its customers ongoing access
      to
      broadband data services and from the installation of those services. Ongoing
      services are billed in advance and the installation of those services is billed
      in arrears. The Company recognizes sales revenue when persuasive evidence of
      an
      arrangement exists, delivery has occurred, the fee is fixed or determinable,
      and
      collectibility is probable. Advance billings are recorded as deferred revenue
      in
      the month prior to delivery.





The
      Company defers maintenance and services revenue related to providing network
      monitoring and the ongoing access to broadband. This revenue is recognized
      ratably over the term of such contracts. The Company defers recognition of
      revenue on consulting and training billings until the related services are
      performed.





**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.
      The Company places its cash and temporary cash investments with credit quality
      institutions. At times, such investments may be in excess of the FDIC insurance
      limit.




13




**Comprehensive
      Loss**





Statement
      of Financial Accounting Standards No. 130, *Reporting
      Comprehensive Income* (SFAS
      130), establishes standards for reporting and displaying of comprehensive
      income, its components and accumulated balances. Comprehensive income (loss)
      is
      defined to include all changes in equity except those resulting from investments
      by owners and distributions to owners. Among other disclosures, SFAS 130
      requires that all items that are required to be recognized under current
      accounting standards as components of comprehensive loss be reported in a
      financial statement that is displayed with the same prominence as other
      financial statements. The following is the Company's comprehensive loss for
      the
      three and nine-month periods ended September 30, 2007 and 2006:





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                loss
            
            $
            (12,416,996
            )
            $
            (3,366,481
            )
            $
            (28,246,651
            )
            $
            (4,779,451
            )Exchange
                translation loss
            
            
            (11,400
            )
            
            (2,503
            )
            
            (22,457
            )
            
            (2,503
            )Comprehensive
                loss
            
            $
            (12,428,396
            )
            $
            (3,368,984
            )
            $
            (28,269,108
            )
            $
            (4,781,954
            )Basic
                and diluted Comprehensive loss per share
            
            $
            (0.17
            )
            $
            (0.18
            )
            $
            (0.71
            )
            $
            (0.27
            )Weighted
                average shares outstanding:Basic
                and diluted
            
            
            71,858,652
            
            
            19,065,412
            
            
            39,585,664
            
            
            17,737,537





**Accounting
      for Stock-Based Compensation**





In
      the
      first quarter of 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123R, *Share-Based
      Payments* (SFAS
      123R), which revises SFAS No. 123, *Accounting
      for Stock-Based Compensation* (SFAS
      123) and supersedes Accounting Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (APB
      25). SFAS 123R requires that share-based payment transactions with employees
      be
      recognized in the financial statements based on their fair value and recognized
      as compensation expense over the vesting period. Prior to SFAS 123R, the Company
      disclosed the pro forma effects of SFAS 123 under the minimum value method.
      The
      Company adopted SFAS 123R effective January 1, 2006, prospectively for new
      equity awards issued subsequent to January 1, 2006. The adoption of SFAS 123R
      resulted in the recognition of stock-based compensation expense during the
      three
      and nine-month periods ended September 30, 2007 of $1.0 million and $5.1
      million, respectively, compared to $1.3 million and $1.4 million, respectively,
      for the same periods in the prior year. No tax benefit has been recorded due
      to
      the full valuation allowance on deferred tax assets that the Company has
      recorded.





The
      Company accounts for equity instruments issued for services and goods to
      non-employees under SFAS 123; Emerging Issues Task Force Issue No. 96-18, *Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* (EITF
      96-18); and Emerging Issues Task Force Issue No. 00-18, *Accounting
      Recognition for Certain Transactions Involving Equity Instruments Granted to
      Other Than Employees* (EITF
      00-18). Generally, the equity instruments issued for services and goods are
      for
      shares of the Company's Common Stock or warrants to purchase shares of the
      Company's Common Stock. These shares or warrants generally are fully vested,
      nonforfeitable and exercisable at the date of grant and require no future
      performance commitment by the recipient. The Company expenses the fair market
      value of these securities over the period in which the related services are
      received.




14




**Income
      Taxes**





The
      Company adopted the provisions of FASB Interpretation No 48, *Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement
      No. 109* (FIN
      48), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an enterprise's financial statements in accordance
      with Statement of Financial Accounting Standards No. 109, *Accounting for Income Taxes* (SFAS
      109), and prescribes a recognition threshold and measurement process for
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition.





The
      Company, including any of its subsidiaries, files income tax returns in the
      U.S.
      federal jurisdiction, and various state and foreign jurisdictions. Based on
      its
      evaluation, the Company has concluded that there are no significant unrecognized
      tax benefits. The Company's evaluation was performed for the tax years ended
      December 31, 2003, 2004, 2005 and 2006, the tax years that remain subject to
      examination by major tax jurisdictions as of September 30, 2007. The Company
      does not believe there will be any material changes in its unrecognized tax
      positions over the next 12 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. In accordance with FIN 48, paragraph 19,
      the Company has decided to classify interest and penalties as a component of
      income tax expense.





**Loss
      per Share**





Basic
      and
      diluted net loss per share information is presented under the requirements
      of
      Statement of Financial Accounting Standards No. 128, *Earnings
      per Share* (SFAS
      128). Basic net loss per share is computed by dividing the net loss by the
      weighted-average number of shares of common stock outstanding for the period,
      less shares subject to repurchase. Diluted net loss per share reflects potential
      dilution of securities by adding other potential common shares, including stock
      options and warrants in the weighted-average number of common shares outstanding
      for a period, if dilutive. All potentially dilutive securities, including stock
      options and warrants, have been excluded from this computation, as their effect
      is anti-dilutive. As of September 30, 2007, there were 18,974,557 (see Note
      4 -
      Stock-Based Compensation) stock options and 82,151,796 (see Note 6 - Stock
      Warrants) stock warrants outstanding that could be converted into potential
      common shares. The Company also has outstanding a Junior Secured Facility (see
      Note 5 - Debt) which contains a conversion feature into shares of Common Stock.
      Based on the Company's ten-day trailing closing market price, these notes had
      the potential to convert into 19,263,026 of additional common shares as of
      September 30, 2007. On June 25, 2007, the Company’s shareholders approved an
      increase in the number of authorized common shares from 25,000,000 to
      350,000,000, resulting in the conversion of all series of preferred stock into
      Common Stock. At that date, the Company had a total of 2,516.10 and 20,634.53
      shares of Series B and Series AA Convertible preferred stock that converted
      into
      3,700,147 and 45,852,567 shares of Common Stock, respectively. The Company
      also
      had outstanding warrants to purchase 2,020.756 Series A preferred stock, which
      was now convertible into 2,245,262 shares of Common Stock upon
      exercise.





**Goodwill
      and Intangible Assets**





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 not
      amortized. 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. Impairment testing for
      goodwill is done at a reporting unit level. Reporting units are one level below
      the business segment level, but can be combined when reporting units within
      the
      same segment have similar economic characteristics. The Company has determined
      that there are three reporting units, of which two are being reported as
      discontinued operations (see Note 3 - Discontinued Operations). There have
      been
      no current events or circumstances that would indicate an impairment of goodwill
      exists in the continuing units. In connection with tentative offers for
      Frontrunner, the Company reassessed the carrying amount of that unit’s goodwill
      and wrote-off the balance of $2.6 million as of September 30, 2007.
      Frontrunner's goodwill had previously been reclassified as part of reporting
      this entity as a discontinued operation. There were no other changes in the
      carrying amount of goodwill for the nine-month period ended September 30,
      2007.




15




Intangible
      assets are assets acquired from an independent party. The assets have no
      significant residual values. There are no intangible assets that are not subject
      to amortization. The acquired intangible assets are tested for impairment
      whenever events or circumstances indicate that a carrying amount of an asset
      (asset group) may not be recoverable. The Company has determined that no
      material impairments existed as of September 30, 2007 with respect to the
      continuing units. In connection with its ongoing assessment of the future
      prospects of Frontrunner, the Company reassessed the carrying amount of that
      unit’s intangible assets and wrote-down the balance of $1.8 million to $650,000
      as of September 30, 2007. An impairment loss is recognized when the carrying
      amount of an asset exceeds the estimated undiscounted cash flows used in
      determining the fair value of the asset. The amount of the impairment loss
      to be
      recorded is calculated by the excess of the asset's carrying value over its
      fair
      value. Fair value is generally determined using a discounted cash flow analysis.
      The acquired intangible assets by major intangible asset class as of September
      30, 2007 were as follows:





**Acquired**
              **Value**
            
            **Amortization**
              **Period
                in Years**Developed
                technology
            
            $
            5,795,400
            
            
            5
                to 11Trade
                names
            
            
            350,000
            
            
            3Customer
                base
            
            
            3,560,000
            
            
            6
                to 10$
            9,705,400
            
            
            9.08
                weighted average years





Gross
      carrying amounts and accumulated amortization of the acquired other intangibles
      were as follows for each major intangible asset class:





**As
                of September 30, 2007****Gross
                Carrying**
              **Amount**
            
            **Accumulated
                Amortization**
            
            **Net
                Balance**Developed
                technology
            
            $
            5,795,400
            
            $
            (632,094
            )
            $
            5,163,306Trade
                names
            
            
            350,000
            
            
            (99,089
            )
            
            250,911Customer
                base
            
            
            3,560,000
            
            
            (360,384
            )
            
            3,199,616$
            9,705,400
            
            $
            (1,091,567
            )
            $
            8,613,833





**As
                of December 31, 2006****Gross
                Carrying**
              **Amount**
            
            **Accumulated
                Amortization**
            
            **Net
                Balance**Developed
                technology
            
            $
            5,795,400
            
            $
            (141,221
            )
            $
            5,654,179Trade
                names
            
            
            350,000
            
            
            (13,889
            )
            
            336,111Customer
                base
            
            
            3,560,000
            
            
            (57,111
            )
            
            3,502,889$
            9,705,400
            
            $
            (212,221
            )
            $
            9,493,179





Amortization
      expense for the nine-month periods ended September 30, 2007 and 2006 related
      to
      the acquired intangible assets was $879,346 and $0, respectively.





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





Remaining
                3 months of 2007
            
            $
            291,7592008
            
            
            1,195,8442009
            
            
            1,184,2552010
            
            
            1,079,1782011
            
            
            1,067,452Thereafter
            
            
            3,795,345Total
            
            $
            8,613,833




16




**Segment
      Information**





Statement
      of Financial Accounting Standards No. 131, *Disclosures
      about Segments of an Enterprise and Related Information* (SFAS
      131) establishes standards for reporting information regarding operating
      segments in annual financial statements and requires selected information for
      those segments to be presented in interim financial reports issued to
      stockholders. SFAS 131 also establishes standards for related disclosures about
      products and services and geographic areas. Operating segments are identified
      as
      components of an enterprise about which separate discrete financial information
      is available for evaluation by the chief operating decision maker, or
      decision-making group, in making decisions how to allocate resources and assess
      performance. The information disclosed herein materially represents all of
      the
      financial information related to the Company's principal operating segments.
      During the first quarter of 2007, the Company completed the process of
      identifying which of the seven entities' operations were core to its overall
      Telecom Integrator business model. As a result, the Company determined that
      all
      operations were core to this business model, except Nexvu and Frontrunner and
      therefore made a decision to divest from these business activities (see Note
      3 -
      Discontinued Operations). The Company's management team views the remaining
      combined operations of 20/20 Technologies, CentrePath, Inc., Global Capacity
      and
      Capital Growth Systems, Inc. (the parent holding company) as one 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.





**Fair
      Value of Financial Instruments**





The
      carrying amount of cash, accounts receivable, prepaid expenses, current
      maturities of long-term 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 rate on the promissory note approximating current rates.





**Use
      of Estimates**





The
      preparation of financial statements in conformity 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.





**Going
      Concern**





As
      of
      September 30, 2007, the Company's current liabilities exceeded its current
      assets by $15.6 million. Included in the current liabilities is approximately
      $8.2 million of current maturities of long-term debt and capital leases payable,
      which is net of approximately $840,000 of unamortized discounts associated
      with
      the fair value assigned to the warrants issued with the senior secured facility.
      This debt reflects indebtedness to its senior debt holder, Hilco Financial,
      LLC,
      and pre-existing balances assumed from the acquisition of 20/20. Cash on hand
      at
      September 30, 2007 was $543,000 (not including $200,000 restricted for
      outstanding letters of credit) and the Company's borrowing capacity under the
      line of credit with Hilco totaled $1.3 million. The Company has incurred net
      losses from both continuing and discontinued operations of $28.2 million and
      $12.4 million for the nine-month periods ended September 30, 2007 and 2006,
      respectively. Additionally, cash used in operating activities was $11.6 million
      and $1.2 million during the nine-month periods ended September 30, 2007 and
      2006, respectively. The Company’s financial operating performance for the year
      to date was not in compliance with the financial covenants established with
      its
      senior debt holder. Hilco has provided the Company with a waiver related to
      this
      non-compliance (see Note 5 - Debt, for further discussion). However, if the
      Company is not able to improve its financial performance, there can be no
      assurance Hilco will provide additional waivers in the future for
      non-compliance.





The
      Company's net working capital deficiency, recurring losses and negative cash
      flows from operations raise substantial doubt about its ability to continue
      as a
      going concern. On January 19, 2007, the Company successfully completed the
      initial closing of new private offering of Units comprised of Series AA
      Preferred Convertible Stock with 100% warrant coverage and the Company concluded
      the offering on April 9, 2007, at which time an aggregate of approximately
      $22.4
      million of equity was raised (from a combination of new cash infusion and
      conversions of debt to equity). In addition, at or about the time of the initial
      equity closing, the Company raised approximately an additional $14.2 million
      of
      debt financing pursuant to a line of credit established with Hilco (initial
      draw
      of $7.0 million), a secured subordinated term loan from a small number of
      individuals and a short-term bridge financing, bringing aggregate debt and
      equity funding to approximately $37 million. This capital raise allowed the
      Company to reduce existing indebtedness and fund its current working capital
      needs. However, the Company continues to utilize cash to fund its current
      operations. The Company's cash balance as of November 9, 2007, combined with
      the
      ability to draw against a line of credit with Hilco totaled $1.3 million. The
      Company now believes this level of working capital will not be sufficient to
      fund its operations until it expects to start generating positive cash flow,
      as
      the timing of certain revenues did not materialize as anticipated. Therefore,
      the Company will be forced to raise additional capital through either the
      issuance of new equity or increase its debt load, or a combination of both
      (see
      Note 10 - Subsequent Events, for further discussion). Although the Company
      is
      currently in negotiations with several lending and financial institutions,
      there
      can be no assurance that it will be successful in raising additional capital
      or
      issuing additional indebtedness, or that any such raise may not be dilutive
      to
      existing shareholders.





**Reclassifications**





Certain
      amounts previously reported have been reclassified to conform to the current
      period presentation.




17




**Recent
      Accounting Pronouncements**





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, *Fair
      Value Measurements* (SFAS
      157), which defines fair value, establishes a framework for measuring fair
      value
      in generally accepted accounting principles (GAAP), and expands disclosures
      about fair value measurements. SFAS 157 will apply whenever another standard
      requires (or permits) assets or liabilities to be measured at fair value. The
      standard does not expand the use of fair value to any new circumstances, and
      is
      effective beginning after December 31, 2007. The Company is currently evaluating
      the impact of adopting SFAS 157 on its financial position and results of
      operations.





**Note
      3 - 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 Integrator strategy
      and
      therefore made the decision to dispose of these two entities. Since the
      beginning of the year, the Company has been actively marketing the two companies
      and is currently in final negotiations for the sale of both entities.
      Development activity at Nexvu was ended effective September 30, 2007 and shut
      down costs of $160,000 have been accrued at that date to cover any residual
      costs, including severance and liquidation of fixed assets. In accordance with
      Statement of Financial Accounting Standards No. 144, *Accounting
      for Impairment or Disposal of Long-Lived Assets* (SFAS
      144), the Company has classified both of these entities as discontinued
      operations for the financial statements presented herein. Revenues for the
      nine-month periods ended September 30, 2007 and 2006 were $7.3 million and
      $10.8
      million, respectively. The loss from discontinued operations for the nine-month
      periods ended September 30, 2007 and 2006 were $5.5 million and $4.7 million,
      respectively. The discontinued operations assets and liabilities were as
      follows:





**September
                30,**
            
            **December
                31,****2007**
            
            **2006****(Unaudited)**
            
            **(Audited)****Current
                assets of discontinued operations**Accounts
                receivable, net
            
            $
            1,420,456
            
            $
            1,194,639Inventory,
                net
            
            
            897,042
            
            
            1,115,753Prepaid
                expenses
            
            
            71,207
            
            
            74,934Other
                current assets
            
            
            7,289
            
            
            44,351Total
                current assets of discontinued operations
            
            
            2,395,994
            
            
            2,429,677**Long-term
                assets of discontinued operations**Fixed
                assets, net
            
            
            558,590
            
            
            834,651Software
                licensing fee, net
            
            
            —
            
            
            10,244Intangible
                assets, net
            
            
            653,973
            
            
            2,255,327Goodwill
            
            
            —
            
            
            2,565,543Other
                assets
            
            
            3,014
            
            
            12,188Total
                long-term assets of discontinued operations
            
            
            1,215,577
            
            
            5,677,953**Total
                assets from discontinued operations**
            
            $
            3,611,571
            
            $
            8,107,630**Current
                liabilities of discontinued operations**Current
                maturities of long-term debt
            
            $
            408,129
            
            $
            2,947,562Accounts
                payable
            
            
            1,010,799
            
            
            1,244,435Accrued
                expenses
            
            
            1,413,753
            
            
            1,318,939Deferred
                revenue, current portion
            
            
            1,410,469
            
            
            1,394,373Advance
                billings
            
            
            354,668
            
            
            321,045Warranty
                reserve
            
            
            99,618
            
            
            152,050Total
                current liabilities of discontinued operations
            
            
            4,697,436
            
            
            7,378,404**Long-term
                liabilities of discontinued operations**Long-term
                portion of debt
            
            
            369,871
            
            
            570,587**Total
                liabilities of discontinued operations**
            
            $
            5,067,307
            
            $
            7,948,991**Net
                assets of discontinued operations**
            
            $
            (1,455,736
            )
            $
            158,639




18




**Note
      4 - Stock-Based Compensation**





**2003
      Stock Option Plan**





In
      December 2003, the Company adopted the 2003 Long-Term Incentive Plan for key
      employees and other persons providing assets or services. The 2003 Plan provides
      for the issuance of stock-based awards to key employees as part of their overall
      compensation. The Company considers its option program a core component of
      its
      operating productivity. A total of 2,285,000 restricted shares of Common Stock,
      stock options or other equity-based compensation units can be issued under
      the
      plan. As of September 30, 2007, the Company has issued and outstanding 1,424,557
      stock options under the plan, net of forfeitures.





**Executive
      Stock Option Agreements**





On
      June
      29, 2006, pursuant to the terms of an Employee Option Agreement, as amended,
      the
      Company granted its former CEO an option to acquire 1,496,993 shares of Common
      Stock of the Company at a strike price equal to the closing price of the
      Company's Common Stock as of that date ($.70 per share). On September 8, 2006,
      the Company amended this option agreement and increased the grant by 303,007
      shares, also at an exercise price of $.70 per share. Additionally, in
      conjunction with the acquisition of 20/20, the Company's Chief Executive Officer
      and the Company's President were each granted options to acquire 1,500,000
      shares of Common Stock of the Company at $.70 per share. In the first quarter
      of
      2007, the Company granted options to acquire 500,000 and 300,000 shares of
      Common Stock to its Chief Operating Officer and its Chief Financial Officer
      at a
      price of $.98 and $.92, respectively. In accordance with the terms of each
      of
      these option agreements (i) 25% of such options vested upon execution of the
      Agreement and (ii) 25% shall thereafter vest on the yearly anniversary of the
      Agreement over the next three (3) years. In accordance with the terms of the
      former CEO’s employment agreement, approximately 1,350,000 shares immediately
      vested on his separation date of May 18, 2007. In total, 3,500,000 of stock
      options are vested under these agreements, as amended.





**Employee
      Stock Option Agreements**





On
      February 5, 2007, March 5, 2007 and May 2, 2007, pursuant to separate Board
      resolutions, the Company granted options to employees to acquire 400,000,
      1,950,000 and 2,870,000 shares of Common Stock of the Company at strike prices
      of $0.98, $0.92 and $0.85, respectively. Of the stock options granted on May
      2,
      2007, 750,000 provided for immediate vesting, while all the remaining grants
      had
      vesting terms contained within each stock option agreement of (i) 25% of such
      options vest upon execution of the Agreement and (ii) 25% shall thereafter
      vest
      on the yearly anniversary of the Agreement over the next three (3) years.
      Accordingly, 1,831,250 of stock options are vested under these three agreements
      as of September 30, 2007.




**Executive
      Performance Option Agreement**





Under
      employment agreements with the four current officers and one former senior
      executive of the Company, there are 4,300,000 options to acquire Common Stock
      of
      the Company at a price ranging between $.70 and $.98. Approximately 3,000,000
      options were issued during 2006 and 1,300,000 were issued during the first
      quarter of 2007. All options are subject to vesting restrictions. These
      performance option agreements are designed to deliver and attain certain revenue
      objectives and approximately 3,300,000 will vest on the following basis: 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; 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 realization
      by
      the Company of achieving a “Target MRR (monthly recurring revenue),” which means
      the sum of the Base Amount plus $3.5 million of monthly recurring revenue for
      a
      period of at least 90 days on or before April 1, 2009. For purposes of defining
      the Base Amount, this is equal to monthly recurring revenue with respect to
      the
      maintenance contracts and the installed circuits for Frontrunner Networks
      Systems Corporation and for Global Capacity Group, respectively. In accordance
      with the terms of the former CEO’s employment agreement, approximately 1,066,000
      shares immediately vested on his separation date of May 18, 2007. As of
      September 30, 2007, no other stock options have vested under these
      agreements.





**Employee
      Performance Option Agreements**





Under
      the
      terms of the stock option agreements approved by the Board on March 5, 2007,
      a
      total of 3,000,000 options were granted to certain employees to acquire Common
      Stock of the Company at a price of $0.92. All options are subject to vesting
      restrictions. The vesting requirements are conditional upon these employees
      achieving specific key objectives as outlined in their respective performance
      option agreements. The vesting requirements include delivering new revenue,
      creating value within their organization and/or achieving executive performance
      targets as outlined above. As of September 30, 2007, none of the options has
      vested under these agreements.




19




The
      following table summarizes the activity under the 2003 stock option plan and
      other stock grants for January 1, 2007 to September 30, 2007:





Options
                Outstanding:
            
            **Number
                of**
              **Shares**
            
            **Exercise**
              **Price
                per**
              **Share**
            
            **Weighted
                Average Exercise Price Per Share**January
                1, 2007
            
            
            9,324,557
            
            $
            0.70
                - 1.35
            
            $
            0.81Granted
            
            
            10,320,000
            
            
            0.85-0.98
            
            
            0.91Terminated
            
            
            (670,000
            )
            
            —
            
            
            (0.98
            )September
                30, 2007
            
            
            18,974,557
            
            
            0.70-1.35
            
            
            0.86Vested
                Shares:Vested,
                September 30, 2007
            
            
            7,790,216
            
            
            0.70-1.35
            
            
            0.87





The
      aggregate intrinsic value for options vested and outstanding as of September
      30,
      2007 totaled $0 and the weighted average remaining contractual life of those
      options was 8.66 years.





As
      of
      September 30, 2007, $5.0 million of compensation expense remained to be
      recognized on the stock options above, which include $2.9 million related to
      options under Performance Agreements. The expense will be recognized over 3
      years. The Company has not recognized any deferred income tax benefit related
      to
      stock-based compensation due to its deferred tax asset being fully
      reserved.





The
      weighted average fair value per stock option issued during the nine months
      ended
      September 30, 2007 was $0.73.





**Weighted-****Average****Options**
            
            **grant-date**Non-Vested
                Options
            
            **Outstanding**
            
            **fair
                value**Balance,
                January 1, 2007
            
            
            7,082,997
            
            $
            0.52Grants
            
            
            10,320,000
            
            
            0.73Vested
            
            
            (5,548,656
            )
            
            (0.58
            )Expirations
            
            
            (670,000
            )
            
            (0.98
            )Balance,
                September 30, 2007
            
            
            11,184,341
            
            
            0.66





A
      summary
      of compensation expense recognized for the issuance of stock options for the
      three and nine-month periods ended September 30, 2007 and 2006 are as
      follows:





**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Stock-based
                compensation costs included in:Compensation
            
            $
            1,007,160
            
            $
            1,352,132
            
            $
            5,080,991
            
            $
            1,395,080Total
                stock-based compensation costs
            
            $
            1,007,160
            
            $
            1,352,132
            
            $
            5,080,991
            
            $
            1,395,080




All
      stock
      awards granted by the Company have an exercise based on either the 10-day
      trailing average closing price or the closing market value on date of grant
      of
      the underlying Common Stock.





The
      fair
      value of each award is estimated on the date of the grant using the
      Black-Scholes option-pricing model, assuming no expected dividends and the
      following assumptions:





**2007
                Grants**
            
            **2006
                Grants**Expected
                volatility factors
            
            
            90%
                - 100
            %
            
            100
            %Approximate
                risk free interest rates
            
            
            4.54
            %
            
            3.85
            %Expected
                lives
            
            
            5
                Years
            
            
            5
                YearsForfeiture
                rate
            
            
            5
            %
            
            0
            %




The
      determination of the fair value of all awards is based on the above
      assumptions.




20




**NOTE
      5 - Debt**





*Senior
      Secured Facility* .
      On
      January 19, 2007, the Company closed the initial funding of $7.0 million of
      borrowings on an 18-month $12 million Senior Secured Facility issued to the
      Company by Hilco Financial, LLC. The Credit Agreement for the facility names
      the
      Company and its Magenta netLogic, Limited subsidiary as guarantors of the
      facility and the Company's remaining active subsidiaries (20/20 Technologies,
      Inc., 20/20 Technologies I, LLC, Nexvu Technologies, LLC, Frontrunner Network
      Systems Corporation, CentrePath, Inc. and Global Capacity Group, Inc.) as
      co-borrowers. The Credit Agreement provides for a term loan of $6.5 million
      plus
      up to $5.5 million of borrowing availability based upon an advance rate of
      85%
      against eligible accounts receivable. It requires the payment of interest on
      a
      monthly basis at the greater of 15% per annum or prime plus 7%, and has a
      $250,000 prepayment penalty until the last 30 days of the facility. There is
      a
      $3,000 per month collateral management fee, a 0.5% per month unused line fee
      and
      an obligation to reimburse the lender for costs incurred by it in connection
      with the original issuance and ongoing administration of the facility. Further,
      the Company agreed to pay Hilco a fee of 5% of the maximum amount of the
      facility, with one half funded on the closing date and the second half due
      six
      months following the closing. The Company also paid a fee of $250,000 to a
      placement agent in connection with the facility. As of September 30, 2007,
      the
      Company's borrowing capacity was $1.3 million. The Company accrued $300,000
      during the first quarter of 2007 related to the initial issuance costs payable
      to Hilco in July 2007. The Company received a waiver from Hilco allowing for
      a
      30-day grace period related to the payment of this fee, which was paid in the
      third quarter of 2007.





The
      Senior Secured Facility is secured by a blanket lien on all of the Company's
      assets and all of the assets of the Company's subsidiaries. Additionally, the
      Company pledged all of the capital stock or limited liability company interests
      of each of the Company's subsidiaries as additional collateral. The Credit
      Agreement prohibits junior encumbrances on the Company's assets with the
      exception of the Junior Secured Facility (discussed herein) and certain
      permitted purchase money security interests. The Credit Agreement includes
      a
      covenant limiting the Company's capital expenditures and the parties have agreed
      to establish additional loan covenants post closing. The Credit Agreement
      contains numerous affirmative and negative covenants customary for facilities
      of
      this nature, as well as certain post closing obligations. The Company had agreed
      to EBITDA covenants (earnings before interest taxes, depreciation and
      amortization and before non-cash stock compensation and warrant expense) with
      Hilco as follows (at least 75% of the amount must be achieved on a cumulative
      basis: Q1 2007 ($2.4) million; Q2 2007 ($2.6) million; Q3 2007 ($600,000);
      and
      Q4 2007 $3.1 million. Hilco and the Company also agreed to a covenant capping
      capital expenditures at $500,000 for 2007. Hilco agreed to waive the Company’s
      non-compliance related to the EBITDA covenant as of June 30 and September 30,
      2007. The Company was in compliance with all other covenants under this debt
      agreement as of those dates.





In
      connection with the Senior Secured Facility, on January 19, 2007, the Company
      issued to Hilco two warrants to purchase an aggregate of 1,125.0 shares of
      Series AA Preferred Stock (2,500,000 shares of Common Stock, on an as-converted
      basis). Warrants with respect to one half of the shares were exercisable on
      or
      before December 31, 2008 at an exercise price equal to $0.45 per share of Common
      Stock, on an as-converted basis, and warrants with respect to the one half
      of
      the shares were exercisable on or before December 31, 2009 at an exercise price
      equal to $0.65 per share of Common Stock on an as-converted basis. In connection
      with the October 31, 2007 Waiver and Amendment to the Hilco Agreement, a new
      five-year warrant to purchase up to 3.5 million shares of Common Stock at $0.15
      was issued and the previously issued warrants were cancelled. The new warrant
      provides for, among other things, cashless exercise, anti-dilution and
      registration rights.





*Junior
      Secured Facility* .
      On
      January 19, 2007, the Company entered into an agreement with a number of
      individuals and entities for the establishment of a Junior Secured Facility
      that
      permits the funding of up to $10.0 million of original principal amount of
      advances. At the closing, an initial $5.9 million of funds was provided pursuant
      to the facility. On both January 22, 2007 and June 15, 2007, the Company added
      $500,000 to the facility. In the third quarter of 2007, another $425,000 was
      funded, bringing the aggregate principal amount of the facility to $7.325
      million as of September 30, 2007. All but $1.425 million of the funding of
      the
      facility to date was provided by the exchange of existing bridge loans for
      the
      issuance of new notes with respect to the facility (valued dollar for dollar
      against outstanding principal plus accrued interest of the bridge loans;
      including a bridge loan of $500,000 plus accrued interest funded to the Company
      by its then chief executive officer). The facility has a two-year term accruing
      simple interest at 12% per annum, with all principal and interest due on
      maturity.





The
      original principal amount of each note issued pursuant to the Junior Secured
      Facility is 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
      average ten-day trading average for the Company's Common Stock as of the day
      immediately preceding the date of conversion, (subject to adjustment to account
      for stock splits and certain other extraordinary corporate circumstances).
      In
      connection with the funding of Junior Secured Facility, each lender under that
      facility was issued a warrant to purchase up to 67.5 shares of Series AA
      Preferred Stock for each $100,000 of monies advanced, which represents 150,000
      shares of Common Stock, on an as-converted basis, exercisable at $0.45 per
      share
      and expiring December 31, 2009. The loan agreement establishing the facility
      was
      amended effective June 15, 2007 to: (i) eliminate the ceiling (originally
      applicable to the facility based on a floor of $0.65 and ceiling of $1.25 per
      share) and floor for the conversion of loan amount to equity in the Company;
      (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 5,
      2007, the warrant coverage was increased to 90.0009 shares of Series AA
      Preferred Stock (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 67.500675 shares of Series AA Preferred
      Stock for each $100,000 of monies advanced (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. All of the warrants under the facility
      expire December 31, 2009. As of September 30, 2007, the Company has issued
      warrants to purchase an aggregate of 11,432,658 shares of Common Stock. Shares
      of Common Stock are issuable in connection with the warrants so issued. The
      warrants issued as part of the Junior Secured Facility are subject to similar
      extension and registration rights as those granted to the purchasers in the
      Units offering described in Note 8 - Shareholders’ Equity.




21




The
      Junior Secured Facility is secured by a junior lien on the Company's assets
      and
      the assets of its subsidiaries, which is expressly contractually subordinated
      to
      the Senior Secured Facility and any refinancing of that facility.





*Short-term
      Bridge Facility* .
      In
      August 2007, the Company established a short-term bridge facility authorizing
      the issuance of up to $1,000,000 of Units comprised of short-term promissory
      notes bearing interest at 12% per annum and maturing September 30, 2007, coupled
      with a warrant to purchase up to 125,000 shares of Common Stock for each
      $100,000 of notes funded; the warrant is exercisable at $0.55 per share and
      expires December 31, 2010. During the month, two of the Company’s directors
      purchased Units for a total of $150,000. In addition, two officers of the
      Company each purchased $50,000 of the Units and two investors purchased a total
      of $100,000 of Units. Collectively, the purchases of these Units resulted in
      the
      issuance of short-term notes in the principal amount of $350,000 in the
      aggregate, plus warrants to purchase an aggregate of up to 437,500 shares of
      Common Stock. The purchasers of these units agreed to extend the maturity date
      to November 30, 2007. The short-term bridge facility is unsecured.





The
      Company had previously entered into a series of bridge loans as summarized
      herein, all of which were either paid off, extended or converted under the
      terms
      of the Unit offering described in Note 8 - Shareholders’ Equity. These bridge
      loans included the following (all of the warrants issued in connection with
      these loans have registration rights comparable to those with respect to the
      Units offering):





*20/20
      Bridge Loan* .
      The
      Company had borrowed approximately $6.0 million in original principal amount
      of
      monies simultaneous with or shortly following its purchase of 20/20
      Technologies, Inc., which loans had been secured by a blanket lien on the assets
      of 20/20. The principal and accrued interest with respect to these loans was
      either paid off or rolled into the purchase of Units per the Units offering
      on
      January 19, 2007. The holders of these notes were issued warrants to purchase
      Series A Preferred Stock which are convertible into Common Stock at the rate
      of
      37,500 shares for each $100,000 of funds advanced (2,245,263 shares of Common
      Stock, on an as-converted basis), exercisable on or before December 31, 2011,
      at
      $1,000 per share ($0.45 per share, on an as-converted to Common Stock basis),
      subject to a call in favor of the Company in the event that the closing price
      of
      the Company's Stock exceeds $4.00 per share for 30 consecutive days following
      the effectiveness of a registration statement registering the Common Stock
      underlying the warrants.




*CentrePath
      Bridge Loan* .
      The
      Company had borrowed approximately $7.9 million in original principal amount
      in
      November 2006 with approximately $6.8 million of the proceeds used toward the
      purchase of CentrePath, and the balance of the proceeds used for working
      capital, which loans were secured by the stock and assets of CentrePath. The
      principal and accrued interest with respect to these loans was either paid
      off
      or rolled into the purchase of Units per the Units offering on January 19,
      2007.
      In connection with the funding of this loan the Company issued warrants to
      purchase 2,261.27 shares of Series AA Preferred Stock (representing 5,024,994
      shares of Common Stock, on an as-converted basis), exercisable on or before
      December 31, 2009, at $1,000 per share ($0.45 per share, on an as-converted
      to
      Common Stock basis).





*Global
      Bridge Loan* .
      The
      Company had borrowed approximately $4.7 million in original principal amount
      in
      December 2006, which proceeds were (together with an additional $500,000
      provided from working capital) used toward the purchase of Global Capacity.
      The
      principal and accrued interest with respect to these loans was secured by the
      stock of Global Capacity. The principal and accrued interest with respect to
      these loans was either paid off or rolled into the purchase of Units per the
      Units offering on January 19, 2007. In connection with the funding of this
      loan
      the Company issued warrants to purchase 1,057.5105 shares of Series AA Preferred
      Stock (representing 2,350,000 shares of Common Stock, on an as-converted basis),
      exercisable on or before December 31, 2009, at $1,000 per share ($0.45 per
      share, on an as-converted to Common Stock basis).





*Mandatory
      Notes* .
      The
      Company issued an aggregate of approximately $3.7 million of Mandatory Notes
      through January 19, 2007, which by their terms were automatically converted
      to
      Units on the initial closing of the Units offering. In addition, each Mandatory
      Note holder was issued a warrant that was exercisable for 331.60 (rounded)
      shares of Series AA Preferred Stock, representing 20,000 shares of Common Stock
      (on an as-converted basis) or 736,868 shares of Common Stock in the aggregate.
      The warrants associated with this issuance are exercisable at $0.45 per share,
      on an as-converted basis, expire on December 31, 2009 and are callable by the
      Company. From January 22, 2007 through March 25, 2007, an aggregate of
      approximately $4.3 million of additional Mandatory Notes were issued (increased
      by another $104,000 thereafter through April 9, 2007), which were converted
      into
      Units of Series AA Preferred Stock and Warrants on the terms as described in
      Section above. In consideration for the funding of the Mandatory Notes, in
      addition to the conversion of the Mandatory Notes into Units (comprising a
      portion of the Units discussed in “Units Offering” above), warrants to purchase
      an additional 327.15327 shares of Series AA Preferred Stock (convertible into
      727,000 shares of Common Stock) were issued to the Mandatory Note lenders for
      the funding through January 19, 2007, which was increased by the subsequent
      Mandatory Note issuances through March 25, 2007 to warrants for an additional
      386.17946 shares of Series AA Preferred Stock (convertible into 858,168 shares
      of Common Stock) and again increased by the subsequent Mandatory Note issuances
      through April 9, 2007 to warrants for an additional 9.31514 shares of Series
      AA
      Preferred Stock (convertible into 20,700 shares of Common Stock). The warrants
      associated with this issuance are exercisable at $0.45 per share, on an
      as-converted to Common Stock basis, expire on December 31, 2011 and are callable
      by the Company.




22




Debt,
      as
      of September 30, 2007 and December 31, 2006, consists of the
      following:





September
                30,
              2007
            
            December
                31,
              2006Senior
                secured line of credit, with an outstanding balance of $8,283,879
                at
                September 30, 2007, bearing interest at 15%, secured by all of the
                assets
                of Capital Growth Systems, Inc. and subsidiaries, due July 2008.
                The
                Company had $1.3 million additional borrowing capacity under this
                line-of-credit as of September 30, 2007. The debt instrument also
                provided
                for the issuance of stock warrants allowing the holder to purchase
                2,500,000 shares of Common Stock (or equivalent) of the Company at
                an
                exercise price between $.45 and $.65 per share. Using the Black-Scholes
                Model, the Company estimated the fair value of the warrants to be
                $1,586,124 and allocated that amount of the proceeds to the warrants
                resulting in a discount on the notes payable. As of September 30,
                2007,
                the balance of the debt due was reported net of an $840,438 discount.
                This
                facility was subject to waiver and amendment at October 31,
                2007.
            
            $
            7,443,441
            
            
            —Junior
                secured notes payable, with a face amount of $7,313,438, bearing
                simple
                interest at 12%, due January 2009. The debt instrument also provided
                for
                the issuance of stock warrants allowing the holder to purchase 11,402,657
                shares of Common Stock of the Company at an exercise price of $.45.
                The
                Company issued additional stock warrants as part of securing these
                notes,
                which allow the purchase of 267,788 shares of Common Stock of the
                Company
                at an exercise price between $.45 and $.65 per share. Using the
                Black-Scholes Model, the Company estimated the fair value of the
                warrants
                to be $4,288,520 and allocated that amount of the proceeds to the
                warrants
                resulting in a discount on the notes payable. In addition, the junior
                secured notes contained a conversion feature that was deemed beneficial
                to
                the holders, which resulted in an additional discount totaling $3,010,451.
                As of September 30, 2007, the balance of the debt due was reported
                net of
                a $4,961,087 discount.
            
            
            2,352,351
            
            
            —Short-term
                bridge facility, with an outstanding balance of $350,000, authorized
                for
                issuance of up to $1,000,000 of Units comprised of short-term promissory
                notes bearing interest at 12% per annum and maturing September 30,
                2007,
                coupled with a warrant to purchase up to 125,000 shares of Common
                Stock
                for each $100,000 of notes funded; the warrant is exercisable at
                $0.55 per
                share and expires December 31, 2010. Using the Black-Scholes model,
                the
                company estimated the fair value of the warrants to be $129,437 and
                expensed the amount to interest as the notes were initially due September
                30, 2007. The facility was funded in August 2007 and warrants to
                purchase
                an aggregate of up to 437,500 shares of Common Stock were issued.
                The
                purchasers of these units agreed to extend the maturity date to November
                30, 2007. The short-term bridge facility is unsecured.
            
            
            350,000
            
            
            —Secured
                short-term notes payable to various parties, with a face amount of
                $5,987,367 bearing interest at 18%, secured by all of the assets
                of 20/20
                and Nexvu, due January 2007. The debt instrument also provided for
                the
                issuance of stock warrants allowing the holders to purchase 4,787,137
                shares of Common Stock (or equivalent) of the Company at an exercise
                price
                between $.45 and $.70 per share. Using the Black-Scholes Model, the
                Company estimated the fair value of the warrants to be $1,554,219
                and
                allocated that amount of the proceeds to the warrants resulting in
                a
                discount on the notes payable. As of December 31, 2006, the balance
                of the
                debt due was reported net of a $64,758 discount. The remaining discount
                was recognized during the three months ended March 31, 2007, as the
                amount
                outstanding was either repaid, converted into the Junior secured
                note
                payable or converted into Series AA Preferred Stock (see Note 8
                -Shareholders’ Equity).
            
            
            —
            
            
            5,922,609Secured
                short-term notes payable to various parties, with a face amount of
                $7,950,000 bearing interest at 8%, secured by all of the assets of
                CentrePath, due January 2007. The debt instrument also provided for
                the
                issuance of stock warrants allowing the holder to purchase 4,925,000
                shares of Common Stock (or equivalent) of the Company at an exercise
                price
                of $.45 per share. Using the Black-Scholes Model, the Company estimated
                the fair value of the warrants to be $1,349,181 and allocated that
                amount
                of the proceeds to the warrants resulting in a discount on the notes
                payable. As of December 31, 2006, the balance of the debt due was
                reported
                net of a $652,104 discount. The remaining discount was recognized
                during
                the three months ended March 31, 2007, as the amount outstanding
                was
                either repaid, converted into the Junior secured note payable or
                converted
                into Series AA Preferred Stock (see Note 8 - Shareholders’
                Equity).
            
            
            —
            
            
            7,197,896Secured
                short-term notes payable to various parties, with a face amount of
                $4,700,000 bearing interest at 8%, secured by all of the assets of
                Global
                Capacity Group, due January 2007. The debt instrument also provided
                for
                the issuance of stock warrants allowing the holder to purchase 2,350,000
                shares of Common Stock (or equivalent) of the Company at an exercise
                price
                of $.45 per share. Using the Black-Scholes Model, the Company estimated
                the fair value of the warrants to be $810,077 and allocated that
                amount of
                the proceeds to the warrants resulting in a discount on the notes
                payable.
                As of December 31, 2006, the balance of the debt due was reported
                net of a
                $540,051 discount. The remaining discount was recognized during the
                three
                months ended March 31, 2007, as the amount outstanding was either
                repaid,
                converted into the Junior secured note payable or converted into
                Series AA
                Preferred Stock (see Note 8 - Shareholders’ Equity).
            
            
            —
            
            
            4,159,949




23




Mandatory
                  convertible promissory notes to various parties, with a face amount
                  of
                  $1,275,000 bearing interest at 8% per annum and mandatory convertible
                  into
                  the securities issued by the Company on the terms of the offering
                  completed on January 19, 2007. The debt instrument also provided
                  for the
                  issuance of stock warrants allowing the holder to purchase 255,000
                  shares
                  of Common Stock (or equivalent) of the Company at an exercise price
                  of
                  $.45 per share. Using the Black-Scholes Model, the Company estimated
                  the
                  fair value of the warrants to be $149,887 and allocated that amount
                  of the
                  proceeds to the warrants resulting in a discount on the notes payable.
                  As
                  of December 31, 2006, the balance of the debt due was reported
                  net of a
                  $131,151 discount. The remaining discount was recognized during
                  the three
                  months ended March 31, 2007, as the amount outstanding was converted
                  into
                  Series AA Preferred Stock (see Note 8 - Shareholders’
                  Equity).
              
              
              —
              
              
              1,143,849Promissory
                  notes to US Bank bearing interest at the rate of 6.75%, secured
                  by
                  vehicles of Global Capacity Group. One of the notes requires monthly
                  payments in the amount of $1,027 and expires in September 2010
                  and the
                  other note requires monthly payments in the amount of $873 and
                  expires in
                  October 2010. The obligation to make payments on these notes and
                  the
                  related vehicles were transferred to certain former employees effective
                  October 31, 2007.
              
              
              61,845
              
              
              75,398Promissory
                  note payable to DTD Investments, LLC, secured by the Company's
                  accounts
                  receivable from CNT Telecom Services, Inc., which has as its interest
                  rate
                  the right to participate in the proceeds the Company receives with
                  respect
                  to this contract (anticipated over the life of the contract to return
                  the original principal and pay “participation interest” equal to
                  approximately $470,000). The principal and interest owed were converted
                  into Series AA Preferred Stock during the three months ended March
                  31,
                  2007 (see Note 8 - Shareholders’ Equity).
              
              
              —
              
              
              406,187




Unsecured
                  note payable to various creditors of 20/20, past due, bearing interest
                  rates between 8% and 16%. All notes were either repaid or converted
                  into
                  Junior secured notes payable during the first quarter of
                  2007.
              
              
              —
              
              
              1,610,000Unsecured
                  notes payable to various creditors with interest rates at HSBC
                  plus 4%,
                  principal payments commencing in January 2007, maturing December
                  2008.
              
              
              646,537
              
              
              1,257,992
 Various
                  unsecured loans from employees of Magenta netLogic, bearing interest
                  at
                  8.43%, due upon demand.
              
              
              154,658
              
              
              164,865Total
                  debt
              
              
              11,008,832
              
              
              21,938,745Less:
                  current maturities
              
              
              8,145,987
              
              
              21,200,138Long-term
                  portion
              
              $
              2,862,845
              
              $
              738,607
 
 In
        anticipation of a default on the senior secured line related to meeting certain
        EBITDA covenants as of September 30, 2007, the Company sought and obtained
        a
        waiver from Hilco. In connection therewith, certain covenants were re-negotiated
        and a sub-limit in the agreement will be reduced effective December 31, 2007,
        which will result in a reduction in borrowing capacity of $2.5 million. As
        of
        September 30, 2007, the Company is in default on unsecured notes payable
        to two
        of the Company's law firms and on one note to an entity affiliated with one
        of
        the Company's Board members. No acceleration of the indebtedness evidenced
        by
        these notes has been declared as of this date by any of such
        creditors.




24





The
      weighted-average interest rate on the debt listed above is 13.7% as of September
      30, 2007.





The
      aggregate principal re-payments of long-term debt for the remaining three months
      of 2007 and annual thereafter are as follows (not including discount on notes
      payable):




Remaining
                  3 months of 2007
              
              $
              9,271,9242008
              
              
              560,5572009
              
              
              6,919,2022010
              
              
              40,6652011
              
              
              23,836Thereafter
              
              
              45,685Total
              
              $
              16,861,869





**NOTE
      6 - Stock Warrants**





The
      Company has issued stock warrants to various entities and individuals. The
      following table summarizes the stock warrants issued, share issue price, grant
      date and expiration date:




**Issue
                  Date**
              
              **Exp
                  Date**
              
              **#
                  of Warrants**
              
              **Exercise
                  Price**Preliminary
                  bridge notes
              
              
              9/8/2006
              
              
              12/31/2011
              
              
              678,766
              
              $
              .50
                  - .70Secured
                  bridge notes
              
              
              9/8/2006
              
              
              9/8/2011
              
              
              2,250,000
              
              
              .45Inducement
                  agreements
              
              
              9/8/2006
              
              
              12/31/2011
              
              
              2,061,875
              
              
              .45Board
                  and executive warrants
              
              
              9/14/2008
              
              
              9/14/2011
              
              
              2,330,000
              
              
              .70Consulting
                  Services
              
              
              9/14/2006
              
              
              9/14/2011
              
              
              100,000
              
              
              .70CentrePath
                  bridge notes
              
              
              11/30/2006
              
              
              12/31/2009
              
              
              4,925,000
              
              
              .45Advisory
                  services
              
              
              11/30/2006
              
              
              12/31/2009
              
              
              100,000
              
              
              .45Global
                  Capacity bridge notes
              
              
              12/11/2006
              
              
              12/31/2009
              
              
              2,350,000
              
              
              .45Advisory
                  services
              
              
              12/11/2006
              
              
              12/31/2009
              
              
              50,000
              
              
              .45National
                  Securities - equity issuance
              
              
              1/19/2007
              
              
              12/31/2008
              
              
              12,141,010
              
              
              .45National
                  Securities - equity issuance
              
              
              1/19/2007
              
              
              12/31/2009
              
              
              12,141,010
              
              
              .65Conversion
                  of bridge notes to equity
              
              
              1/19/2007
              
              
              12/31/2008
              
              
              3,001,661
              
              
              .45Conversion
                  of bridge notes to equity
              
              
              1/19/2007
              
              
              12/31/2009
              
              
              3,001,661
              
              
              .65Mandatory
                  convertible notes
              
              
              (1
              )
              
              (2
              )
              
              1,615,868
              
              
              .45Mandatory
                  convertible notes
              
              
              (1
              )
              
              (3
              )
              
              9,020,727
              
              
              .45Mandatory
                  convertible notes
              
              
              (1
              )
              
              (4
              )
              
              9,020,706
              
              
              .65Advisory
                  fees - mandatory convertible notes
              
              
              3/22/2007
              
              
              3/22/2008
              
              
              784,447
              
              
              .45Advisory
                  fees - mandatory convertible notes
              
              
              3/22/2007
              
              
              3/22/2009
              
              
              784,446
              
              
              .65Junior
                  secured facility
              
              
              1/19/2007
              
              
              12/31/2009
              
              
              10,582,658
              
              
              .45Advisory
                  fees - Junior secured facility
              
              
              3/22/2007
              
              
              3/22/2008
              
              
              133,894
              
              
              .45Advisory
                  fees - Junior secured facility
              
              
              3/22/2007
              
              
              3/22/2009
              
              
              133,894
              
              
              .65Conversion
                  of 20/20 unsecured convertible notes payable
              
              
              1/19/2007
              
              
              12/31/2008
              
              
              233,327
              
              
              .45Conversion
                  of 20/20 unsecured convertible notes payable
              
              
              1/19/2007
              
              
              12/31/2009
              
              
              233,327
              
              
              .65DTD
                  Investment loan
              
              
              1/19/2007
              
              
              12/31/2009
              
              
              300,000
              
              
              .45Senior
                  secured facility
              
              
              1/19/2007
              
              
              12/31/2008
              
              
              1,250,000
              
              
              .45Senior
                  secured facility
              
              
              1/19/2007
              
              
              12/31/2009
              
              
              1,250,000
              
              
              .65Advisory
                  fees - 20/20 Bridge
              
              
              3/22/2007
              
              
              3/22/2008
              
              
              195,010
              
              
              .45Advisory
                  fees - 20/20 Bridge
              
              
              3/22/2007
              
              
              3/22/2009
              
              
              195,009
              
              
              .65Junior
                  secured facility
              
              
              7/23/2007
              
              
              12/31/2009
              
              
              550,000
              
              
              .45Junior
                  secured facility
              
              
              8/22/2007
              
              
              12/31/2009
              
              
              300,000
              
              
              .45Short-term
                  bridge facility
              
              
              8/24/2007
              
              
              12/31/2010
              
              
              437,500
              
              
              .55Total
                  stock warrants outstanding
              
              
              
              
              
              
              
              
              82,151,796
              
              $
              .53




25




All
      of
      the stock warrants are exercisable and have a weighted average life of 2.9
      years. Certain of the stock warrants were issued as Series A Preferred Stock
      Warrants and Series AA Preferred Stock Warrants. These warrants have been
      converted to warrants to acquire Common Stock of the Company, effective as
      of
      June 2007 with the amendment to the Company's articles of incorporation to
      authorize 350,000,000 shares of Common Stock. Warrant expense recognized as
      interest expense during the three and nine-month periods ended September 30,
      2007, was $1.3 million and $714,048, respectively, compared to $0 for the same
      periods in the prior year.





(1)
            The
                warrants related to the mandatory convertible notes offering were
                issued
                between December 31, 2006 and April 9,
                2007.





(2)
            The
                expiration dates of the warrants issued with the mandatory convertible
                offering are between December 31, 2011 and March 31,
                2012.




(3)
            The
                expiration dates of the warrants issued with the mandatory convertible
                offering are between December 31, 2008 and March 31,
                2009.




(4)
            The
                expiration dates of the warrants issued with the mandatory convertible
                offering are between December 31, 2009 and March 31,
                2010.





**NOTE
      7 - Transactions with Related Parties**





The
      Company currently has an $85,000 unsecured note payable to an entity that
      includes one of its Board members. Although the Company is in default under
      this
      agreement, no demands have been made by this creditor to pay the loan as of
      September 30, 2007.





Two
      current and one former members of the Company's Board of Directors had lent
      a
      total of $418,000, plus accrued interest, to the Company as part of the
      short-term secured financing completed by the Company during 2006. These
      balances were transferred from secured debt of 20/20 at the time of acquisition
      to the secured short-term note payables of the Company. The loans bore interest
      at a rate of 18% and matured on January 6, 2007. Additionally, as part of the
      secured loan agreement, these individuals were issued stock warrants to
      ultimately purchase 156,611 shares of Common Stock at an exercise price of
      $0.50
      per share. These warrants expire on August 24, 2009. Additionally, the Company's
      former chairman of the Board of Directors had a total of $468,000 of principal
      secured debt with 20/20 prior to the acquisition. As part of the acquisition
      of
      20/20, a portion of this secured debt was paid to him totaling $231,000 of
      principal and $29,000 of accrued interest. On January 19, 2007, the two current
      and one former member of the Company's Board of Directors were all repaid the
      principal and interest amounts owed totaling $445,000.





In
      connection with the acquisition of CentrePath and Global Capacity, the Company
      issued two short-term bridge notes bearing interest at a rate of 8%. Of this
      amount, the Company's then Chief Executive Officer and its now former Chairman
      of the Board lent approximately $2.0 million each and in turn received stock
      warrants to purchase 1123.00112 Series AA Preferred shares (2,000,000 Common
      shares, on an as-converted basis) and 464.62965 Series AA Preferred Stock
      (1,032,500 Common shares, on an as-converted basis), respectively. The Company's
      then Chief Executive Officer received an additional warrant to purchase 450.0045
      AA Preferred shares (1,000,000 Common shares, on an as-converted basis) for
      putting $1.0 million at risk in connection with the completion of the
      acquisition of CentrePath at a time when the remaining financing for the
      acquisition of CentrePath had not been committed. The Company's then Chief
      Executive Officer was not paid any cash compensation related to his investment
      in the Company. The above-mentioned stock warrants have an exercise price of
      $1,000 per Series AA Preferred shares ($0.45 per share of Common Stock, on
      an
      as-converted basis) expiring on December 31, 2009. In addition, the former
      Chairman of the Board of Directors was also paid $280,000 for providing personal
      guarantees and pledging his own collateral to secure bridge loans in the amount
      of approximately $3.7 million. These loans were accomplished on very short
      notice and, without the former Chairman of the Board of Directors providing
      his
      personal guarantees and the pledge of his own assets, it is likely that both
      of
      the CentrePath and Global Capacity acquisitions would have been in
      jeopardy.





In
      connection with the financing services performed for the second quarter of
      2007,
      the Company has agreed to compensate two current Board members each a sum of
      $17,000 plus warrants to purchase 20,555 shares of Common Stock, with one half
      at an exercise price of $0.45 per share expiring on December 31, 2008 and the
      other half at an exercise price of $0.65 per share expiring on December 31,
      2009. In connection with financing services performed in the third quarter
      of
      2007, the Company has agreed to compensate the same directors $8,500 each.
      This
      is in addition to the compensation set forth in the Form 10-QSB for the period
      ended March 31, 2007.





In
      August
      2007, the Company established a short-term bridge facility authorizing the
      issuance of up to $1,000,000 of Units comprised of short-term promissory notes
      bearing interest at 12% per annum and maturing September 30, 2007, coupled
      with
      a warrant to purchase up to 125,000 shares of Common Stock for each $100,000
      of
      notes funded; the warrant is exercisable at $0.55 per share and expires December
      31, 2010. During the month, two of the Company’s directors purchased Units for a
      total of $150,000. In addition, two officers of the Company each purchased
      $50,000 of the Units and two investors purchased a total of $100,000 of Units.
      Collectively, the purchases of these Units resulted in the issuance of
      short-term notes in the principal amount of $350,000 in the aggregate, plus
      warrants to purchase an aggregate of up to 437,500 shares of Common Stock.
      The
      purchasers of these units agreed to extend the maturity date to November 30,
      2007. The short-term bridge facility is unsecured.




26




**NOTE
      8 - Shareholders’ Equity**





On
      January 19, 2007, the Company closed on an equity funding of approximately
      $15.9
      million toward the issuance of Units comprised of 15,869.4 (rounded) shares
      of
      Series AA Preferred Stock (convertible into Common Stock at $0.45 per Share)
      and
      warrants to purchase an additional 15,869.4 (rounded) shares of Series AA
      Preferred Stock. Each Unit was priced at $1,000 comprised of: (i) one share
      of
      Series AA Preferred Stock; (ii) one warrant to purchase one half share of Series
      AA Preferred Stock at $1,000 per share expiring December 31, 2008 (“Two-Year
      Warrant); and (ii) one warrant to purchase one half share of Series AA Preferred
      Stock at $1,444.43 per share, expiring December 31, 2009 (Three-Year Warrant).
      Between January 20, 2007 and April 9, 2007, the Company closed on equity funding
      of an additional approximately $5.0 million, representing an additional
      5,044.4(rounded) shares of Series AA Preferred Stock (constituting 11,209,626
      shares of Common Stock, on an as-converted basis) and warrants to purchase
      an
      additional like amount of Series AA Preferred Stock, with one-half or 2,522.2
      Series AA Preferred shares (5,604,827 shares of Common Stock, as converted)
      exercisable at $1,000 per share on or before December 31, 2008 ($0.45 per share,
      on an as-converted to Common Stock basis); and the other one-half or 2,522.2
      Series AA Preferred shares (5,604,799 shares of Common Stock, as converted)
      exercisable at approximately $1,000 per share (or $0.65 per share, on an
      as-converted to Common Stock basis). This financing brought aggregate issued
      Series AA Preferred Stock to 20,634.53 (rounded) shares representing 46,852,567
      shares of Common Stock, on an as-converted basis, which conversion was effective
      in June 2007 upon the filing of articles of amendment to the Company’s articles
      of incorporation.





On
      an
      as-converted basis, the Two-Year Warrants issued as part of the Units are
      exercisable to purchase an aggregate of 23,237,501 shares of Common Stock
      exercisable at $0.45 per share and the Three-Year Warrants are exercisable
      to
      purchase an aggregate of 23,237,344 shares of Common Stock exercisable at $0.65
      per share.





The
      placement agent and designees in connection with the Units financing received
      warrants to purchase 997.70 (rounded) shares of Series AA Preferred Stock
      (2,217,095 shares of Common Stock, on an as-converted basis), with one half
      of
      the warrants expiring December 31, 2008 and exercisable at $0.45 per share
      (on
      an as-converted to Common Stock basis) and one half expiring December 31, 2009
      and exercisable at $0.65 per share (on an as-converted to Common Stock basis)
      in
      connection with the initial equity closing on January 19, 2007. The placement
      agent and its designees were awarded from January 20, 2007 to April 9, 2007
      warrants to purchase an additional 65.000 (rounded) shares of Series AA
      Preferred Stock (144,443 shares of Common Stock on an as-converted basis),
      with
      one half of the warrants expiring December 31, 2008 and exercisable at $0.45
      per
      share (on an as-converted to Common Stock basis) and one half expiring December
      31, 2009 and exercisable at $0.65 per share (on an as-converted to Common Stock
      basis).





The
      Company also entered into a Registration Rights Agreement with the Units
      purchasers which obligates the Company to file a registration statement to
      register the shares of Common Stock underlying the Units within 90 days
      following the termination of the Units offering and to cause the registration
      statement to be declared effective no later than 180 days following the date
      of
      termination of the offering. There is a penalty of 1% of the purchase price
      of
      the Units per month for each month that the Company is 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
      10
      days' average trading value of the Company's shares of Common Stock for the
      applicable period. The Two-Year Warrants and Three-Year Warrants are exercisable
      only by payment of cash; however, in the event of delays in the registration
      of
      the shares of Common Stock underlying the Warrants, the Warrants require the
      Company to modify the terms of the warrants to either: (i) extend the outside
      date for the warrants to a year following the date of declaration of
      effectiveness of a registration statement with respect to the shares underlying
      the warrants or (ii) modify the exercise rights under the warrants to be
      cashless. As of September 30, 2007, the Company had not filed a registration
      statement and therefore was obligated to issue 1,029,773 shares of Common Stock
      for the first three months of delinquency. The Company intends to file a
      registration statement in combination with the completion of a subsequent equity
      raise, which may require similar registration rights.





In
      connection with the Senior Secured Facility, on January 19, 2007, the Company
      issued to Hilco two warrants to purchase an aggregate of 1,125.0 shares of
      Series AA Preferred Stock (2,500,000 shares of Common Stock, on an as-converted
      basis). Warrants with respect to one half of the shares were exercisable on
      or
      before December 31, 2008 at an exercise price equal to $0.45 per share of Common
      Stock, on an as-converted basis, and warrants with respect to the one half
      of
      the shares were exercisable on or before December 31, 2009 at an exercise price
      equal to $0.65 per share of Common Stock on an as-converted basis. In connection
      with the October 31, 2007 Waiver and Amendment to the Hilco Agreement, a new
      five-year warrant to purchase up to 3.5 million shares of Common Stock at $0.15
      was issued and the previously issued warrants above were cancelled. The new
      warrant provides for, among other things, cashless exercise, anti-dilution
      and
      registration rights.




27




The
      original principal amount of each note issued pursuant to the Junior Secured
      Facility is convertible at the holder's option into Common Stock at a price
      per
      share equal to a 20% discount to the average ten day trading average for the
      Company's Common Stock as of the day immediately preceding the date of
      conversion (subject to adjustment to account for stock splits and certain other
      extraordinary corporate circumstances). The loan agreement establishing the
      facility was amended effective June 15, 2007 to: (i) eliminate the ceiling
      and
      floor for the conversion of loan amount (which had originally been at $0.65
      per
      share floor and $1.25 per share ceiling) to equity in the Company; (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 5, 2007, the warrant
      coverage was increased to 200,000 shares of Common Stock 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 67.500675 shares of Series AA Preferred Stock for each $100,000
      of monies advanced (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. All of the warrants under the facility expire December 31, 2009.
      As of
      September 30, 2007, the Company has issued an aggregate of 11,432,658 shares
      of
      Common Stock warrants in connection with the junior secured facility. Shares
      of
      Common Stock are issuable in connection with the warrants so issued. The
      warrants issued as part of the Junior Secured Facility are subject to similar
      extension and registration rights as those granted to the purchasers in the
      Units offering described above.





The
      Company has engaged a number of consultants and has agreed to compensate them
      for financial consulting services with warrants issued as of the dates set
      forth
      below, in each instance with: (i) one half of the warrants set for the below
      exercisable at $1,000 per share of Series AA Preferred Stock (convertible into
      2222.2 shares of Common Stock at $0.45 per share) expiring December 31, 2007;
      and (ii) one half exercisable at approximately $1,000 per share of Series AA
      Preferred Stock (convertible into 2222.2 shares of Common Stock at $0.65 per
      share). The agreed upon issuances were as follows:


Date
              
              Number
                  of Series AA Preferred Shares Purchasable(1)1.
              
              March
                  22, 2007
              
              383.7
              
              (852,672
                  Common, as converted)2.
              
              March
                  22, 2007
              
              383.7
              
              (852,672
                  Common, as converted)3.
              
              March
                  22, 2007
              
              109.9
              
              (244,266
                  Common, as converted)4.
              
              March
                  22, 2007
              
              14.2
              
              (31,479
                  Common, as converted)5.
              
              March
                  22, 2007
              
              45.3
              
              (100,636
                  Common, as converted)6.
              
              March
                  22, 2007
              
              31.3
              
              (69,534
                  Common, as converted)7.
              
              March
                  22, 2007
              
              33.9
              
              (75,444
                  Common, as converted)





(1)
              Allocated
                  one half to $0.45 warrants and one half to $0.65 warrants as outlined
                  above.


In
      connection with financing services performed in the second quarter of 2007,
      the
      Company has agreed to compensate two current directors of the Company, each
      $17,000 plus warrants to purchase 20,555 shares of Common Stock, with one half
      at an exercise price of $0.45 per share expiring on December 31, 2008 and the
      other half at an exercise price of $0.65 per share expiring on December 31,
      2009. This is in addition to the compensation set forth in the Form 10-QSB
      for
      the period ended March 31, 2007.





Pursuant
      to the guidance in paragraph 5 of Emerging Issues Task Force Issue No. 00-27, *Application
      of Issue No. 98-5 to Certain Convertible Instruments* (EITF
      00-27), the Company allocated the proceeds from the Series AA financing between
      the Series AA Preferred Stock and the warrants based upon their estimated fair
      value as of the closing date. The Company calculated the intrinsic value of
      the
      beneficial conversion feature embedded in the Series AA Preferred Stock and
      warrants. As the amount of the beneficial conversion feature exceeded the value
      allocated to the Series AA Preferred Stock and warrants, the amount of the
      beneficial conversion feature to be recorded is limited to the proceeds
      allocated to the Series Preferred Stock and warrants. The beneficial conversion
      values related to the Series AA Preferred Shareholders and warrants of
      approximately $11.2 million and $9.1 million, respectively, were recognized
      as
      an additional discount on the Series AA Preferred Stock which amounts were
      accreted and treated as a deemed dividend to the holder of the Series AA
      Preferred Stock with the Common Shareholders successfully authorizing the
      increase of Common Stock from 25 million to 350 million on the Company's
      shareholder meeting held on June 25, 2007. In addition, the Company determined
      the junior secured facility contained a beneficial conversion feature related
      to
      the holders’ ability to purchase the Company’s Common Stock at a 20% discount
      based on a ten-day market closing price trading average. The intrinsic value
      of
      the conversion option exceeded the fair value of the proceeds allocated to
      the
      debt, thus limiting the beneficial conversion feature total to $3.0 million.
      This amount was recorded as a reduction to notes payable and an increase to
      additional paid-in capital. This amount will be accreted through interest
      expense on a straight-line basis through the redemption date, which is January
      2009. As of September 30, the unamortized balance associated with this
      beneficial conversion feature was $1.5 million.




28




**NOTE
      9 - Segment Reporting**





The
      Company follows the provisions of Statement of Financial Accounting Standards
      No. 131, *Disclosures
      about Segments of an Enterprise and Related Information* (SFAS
      131). This standard establishes standards for reporting information regarding
      operating segments in annual financial statements and requires selected
      information for those segments to be presented in interim financial reports
      issued to stockholders. Operating segments are identified as components of
      an
      enterprise about which separate, discrete financial information is available
      for
      evaluation by the chief operating decision makers in making decisions on how
      to
      allocate resources and assess performance. During the first quarter of 2007,
      the
      Company completed the process of identifying which of the seven entities'
      operations were core to its overall Telecom Integrator business model. The
      Company determined that all operations were core to this business model, with
      the exception of Nexvu and Frontrunner and therefore made a decision to divest
      from these business activities (see Note 3 - Discontinued Operations). The
      Company's management team views the remaining combined operations of 20/20
      Technologies, CentrePath, Inc., Global Capacity and Capital Growth Systems,
      Inc.
      (the parent holding company) as one 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.





The
      core
      Telecom Integrator operating segment has three primary lines of revenue. The
      first line of revenue is from network and circuits business, which is broken
      down between enterprise and wholesale circuits and strategic networks.
      Enterprise and wholesale circuits is the procurement of new telecommunication
      circuits for the Company's enterprise companies and for customers who are
      telecommunication providers. The strategic network sales are for contracts
      whereby the Company takes a principal position on existing circuits and will
      work with its suppliers to negotiate more favorable terms for those circuits
      that are out of contractual term. This revenue is being provided from the
      recently acquired operations of both Global Capacity Group and 20/20
      Technologies. The second line of revenue relates to the Company's services
      offerings, which includes both remote monitoring services and professional
      services. The remote monitoring services revenue includes 24x7x365 remote
      monitoring and management services for data replication networks encompassing
      the entire data path (i.e., storage area network switches, channel extension
      equipment and DWDM and SONET devices). This revenue is primarily generated
      from
      the Company's acquisition of CentrePath, Inc. In addition, the Company generates
      professional services revenue from the initial design and deployment of these
      networks. Also, the Company generates professional fees related to the
      implementation and customization of 20/20's pricing and quotation database
      system through its Magenta netLogic subsidiary (Magenta 20/20). The third line
      of revenue is sales generated from Magenta 20/20's global pricing and quotation
      software.





During
      the three and nine-month periods ended September 30, 2007, the Company generated
      $223,000 and $740,000 of revenue outside of the United States, compared to
      $0
      for both periods in the prior year.





**NOTE
      10 - Subsequent Events**





*Warrant
      Exercise Offer* .
      On
      October 2, 2007, the Company offered to amend all of its outstanding Warrant
      Agreements for a limited time, which was extended until November 15. The offer
      to amend allowed Warrant Agreement holders to exercise all or a portion of
      their
      warrants at $0.15 per share. Any warrants exercised on or before November 15,
      2007 will be amended in accordance with the Offer. If a Warrant Agreement holder
      exercises his, her or its warrants on or prior to November 15 for at least
      half
      of the shares underlying the Warrant Agreement, the holder will be provided
      cashless exercise rights (to the extent the original Warrant Agreement does
      not
      contain cashless exercise rights) for the remaining shares in the Warrant
      Agreement at the original exercise price. If the Warrant Agreement holder does
      not accept the offer by exercising all or a portion of his, her or its warrants
      on or before October 24, 2007 (or the additional outside date, if extended),
      then the Warrant Agreement of such holder will remain in place and not be
      amended. As of November 9, 2007, warrant exercises representing 13,068,707
      shares of Common Stock to be issued were effected under the Offer. The Company
      currently has outstanding Warrant Agreements with respect to warrants to
      purchase up to an aggregate of approximately 82 million shares of its Common
      Stock. The Company made the offer in order to generate additional funds to
      enable it to execute on its business plan and to simplify its capital structure,
      with an ultimate goal of achieving a national exchange listing. The Company
      believes that the market price of its capital stock reflects, in part, the
      overhang from the large number of outstanding warrants. Early exercise of the
      warrants would reduce the outstanding number of warrants and provide an
      efficient means for generating additional cash.





*Waiver
      and Amendment to Hilco Credit Agreement* .
      On
      October 31, 2007, the Company entered into a Waiver and Amendment No. 1 to
      Credit Agreement (“Amendment”) with its primary secured lender, Hilco Financial,
      LLC. The original credit agreement with Hilco established a borrowing base
      of:
      (i) $6,500,000 (the “Sublimit”); plus (ii) additional draws based upon 85% of
      eligible receivables and 50% of eligible inventory of the subsidiaries of the
      Company, subject to the overall cap of $12,000,000 of total borrowings. Under
      the Amendment, effective December 31, 2007, the Sublimit will be reduced to
      $4,000,000, effectively reducing borrowing availability by $2,500,000. In the
      Amendment, the parties acknowledge that the Company’s EBITDA for the quarter
      ended September 30, 2007 was less than the minimum EBITDA covenant required
      by
      Hilco, and Hilco agreed to waive the covenant default, subject to the
      establishment of new loan covenants based upon 80% of adjusted EBITDA amounts
      of
      the Company for the future. In addition, the warrant issued by the Company
      per
      the original Credit Agreement (to purchase up to 2,500,000 shares of Common
      Stock at $0.45 per share, subject to certain adjustments) was cancelled, in
      consideration for the issuance of a new 5-year warrant to purchase up to
      3,500,000 shares of Common Stock at $0.15 per Share, with cashless exercise
      rights. The Warrant also provides for full ratchet anti-dilution rights and
      a
“put” right in favor of the holder in the event of a default by the Company with
      respect to the Warrant or corresponding loan agreement. The Company also entered
      into a registration rights agreement obligating the Company to file a
      registration statement within 60 business days following the closing date,
      and
      to cause a declaration of its effectiveness within 120 days (150 days in the
      event of full SEC review) of the closing date. Penalties of 2% of the initial
      loan amount apply to each 30-day period for which the Company defaults on the
      registration obligations, until such time as shares underlying the Warrant
      are
      Rule 144(k) eligible.




*Separation
      Agreements* .
      On
      October 31, 2007, the Company entered into Separation Agreements with the two
      founders of Global Capacity. In December 2006, these individuals Global Capacity
      to the Company (by way of merger agreement) to the Company for $5,250,000 cash,
      plus a contingent earnout agreement whereby the Company agreed to pay up to
      $3,000,000 to them after two years and up to an additional $3,000,000 after
      three years upon achievement of certain milestones. In addition, the Company
      and
      Global Capacity entered into 3-year employment agreements with each of them.
      On
      August 10, 2007, the employment of the two founders was terminated. Under the
      terms of the Separation Agreements, each individual has been paid a lump sum
      of
      $175,000 and delivered title to the Global Capacity vehicles that they had
      been
      using (subject to existing financing), in return for: (i) a termination of
      their
      employment agreements (except as noted below) and any obligations for severance
      or other payments on the employment agreements, and (ii) a termination of the
      Company's obligation to pay any of the earnout consideration from the original
      merger agreement. The Separation Agreements provide that the confidentiality
      and
      one year non-solicitation obligations (from the date of termination of
      employment and limited to 21 of the largest customers of the Company) with
      respect to the employment agreements survive the termination of the employment
      agreements, but otherwise permit competition and solicitation of other customers
      and prospects. As part of the Separation Agreements, the parties further agreed
      to settle all outstanding matters and delivered mutual releases.





*Consulting
      Agreement with Salzwedel* .
      On
      November 6, 2007, the Company signed a Consulting Agreement with Salzwedel
      Financial Communications, Inc. pursuant to which Salzwedel will provide investor
      relations consulting to the Company for a one-year period. In consideration
      for
      the consulting services, the Company will pay Salzwedel $6,000 per month during
      the term of the Consulting Agreement. In addition, the Company agreed to issue
      to Salzwedel a total of five million shares of the Company’s Common Stock within
      thirty days of execution of the Consulting Agreement.




29




**Item
      2. Management's Discussion and Analysis or Plan of
      Operation**





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





**Overview**





Since
      the
      completion of the acquisitions in 2006, the three merged companies (20/20,
      Global Capacity and Centre Path) significantly increased the amount of debt
      and
      overall losses for the year. At the same time, the company has made significant
      progress in executing on its business model. In January 2007, the Company
      successfully completed the initial closing of a new private offering of Units
      comprised of Series AA Preferred Convertible Stock with 100% warrant coverage.
      The offering was concluded in April 2007, at which time an aggregate of
      approximately $22.4 million of equity was raised (from a combination of new
      cash
      infusion and conversions of debt to equity). In addition, at or about the time
      of the initial equity closing, the Company generated eligibility for up to
      approximately $13.4 million of debt financing pursuant to a line of credit
      established with Hilco Financial, LLC (initial draw of $7.0 million) and a
      secured subordinated term loan from a small number of individuals was funded
      ($6.4 million of proceeds), bringing aggregate debt and equity funding to
      approximately $36 million (inclusive of the unused portion of Hilco line).
      Through August 2007, the Company successfully secured $800,000 of additional
      funds under the secured subordinated term loan and an additional $350,000
      pursuant to a short-term bridge facility. This capital raise allowed for the
      reduction of existing indebtedness and to fund current working capital needs.
      Although the Company has made progress towards profitability and still projects
      to achieve break-even operations in the upcoming months, cash continues to
      be
      utilized to fund current operations. The Company’s cash balance as of November
      9, 2007, combined with the ability to draw against the line of credit with
      Hilco
      totaled $1.3 million. The Company believes this level of working capital will
      not be sufficient to fund the operations until it starts generating positive
      cash flow from operations. Therefore, the Company intends to raise additional
      capital through either the issuance of new equity or debt, or a combination
      of
      both. Although the Company is currently in advanced negotiations with several
      lending and financial institutions, there can be no assurance that the Company
      will be successful in raising additional capital or issuing additional
      indebtedness, or that any such raise may not be dilutive to existing
      shareholders, or that the Company will achieve profitability when
      projected.





In
      October 2007, the Company offered to lower the exercise price of its outstanding
      warrants to encourage the generation of cash to enable the Company to better
      meet its business plan. The Company has commenced the installation and turn-up
      of circuits at a number of its existing and new accounts, including the recently
      announced initial novation that it has contracted to put in place, which has
      resulted in growth of its core business. The Company also initiated an
      aggressive program toward the reduction of costs through a combination of the
      following: (i) reduction in head count in non-critical areas; (ii) outsourcing
      of certain telecom functions in a manner expected to lower cost without
      sacrificing customer service; (iii) reduction in space rental requirements,
      intended to effect cost savings at end of certain existing leases (and possibly
      beforehand); and (iv) reduction of personnel and certain operating activities
      at
      its discontinued operations, intended to reduce monthly cash
      requirements.





The
      Company is hopeful, but can provide no guarantees, that the above initiatives
      will move the Company toward profitability in the future. The Company is using
      the warrant exercise program (and is considering other capital initiatives)
      as a
      manner of seeking to improve its balance sheet, which it views as a critical
      step toward continued growth of its core connectivity business. The Company
      is
      also seeking additional independent candidates for its board of directors
      (including to fill the seat recently vacated by its former chairman), as it
      recognizes that it will need to have in place a majority of independent members
      of its board of directors in the future if it is to seek ultimate listing as
      an
      exchange traded stock.





The
      Company presently has approximately 120 full-time employees between all seven
      entities (the Company and all six operating subsidiaries as of November 9,
      2007). Of these employees, approximately 65 are engaged in core operations
      and
      the balance with the entities expected to be divested. This complement is
      approximately 20% less than levels reported in the previous quarter. This number
      is not anticipated to significantly increase in the near future until additional
      acquisitions occur and/or revenue significantly increases. The Company has
      negotiated and is negotiating a number of significant contracts. At the end
      of
      the second quarter of this year, the Company announced its first strategic
      network contract - with an initial contract value in excess of $6 million to
      be
      recognized over a 15-month period. Management believes that the fourth quarter
      will mark the start of recognition of the related revenue. Future investment
      in
      personnel and assets is expected to be governed to match revenue and maintaining
      this balance is a principal short-term operating challenge to
      management.




30




**Results
      of Operations**





**Three
      months ended September 30, 2007 compared to 2006**





Revenues
      for the three-month period ended September 30, 2007 generated from the circuits
      and networks business totaled $2.6 million, which represented circuit sales
      to
      enterprise and wholesale customers. No revenue was recognized during the third
      quarter of 2007 or 2006 from strategic networks, which is revenue generated
      by
      taking a principal position in existing circuits and, through a proprietary
      pricing and quotation system, negotiating more favorable pricing terms for
      the
      Company’s customers. In June 2007, the Company announced its first strategic
      network contract with an initial contract value in excess of $6 million. The
      related revenue will be recognized over a 15-month period starting in the fourth
      quarter. Revenue generated from strategic networks is expected to account for
      the majority of the Company’s revenue and growth, as these circuit contracts are
      often quite large and typically fixed for several years. Revenues generated
      from
      services, which includes remote monitoring services as well as network
      implementation services totaled $1.9 million for the three-month period ended
      September 30, 2007, compared to $0 for the same period in the prior
      year.





Consolidated
      gross margin was 49% compared to 48% last year. Gross profit generated by the
      circuits and networks business was 33%. Gross margins generated from services
      were 66% during the third quarter of 2007, compared to 0% for the same period
      in
      2006. Since revenue generated from the software license business is entirely
      proprietary, a 100% gross margin is achieved on those licenses. If, in the
      future, the Company elects to embed a third-party product into its technology,
      gross margins on software sales could decrease.




Total
      operating expenses were as follows:


**Three
                  months ended**
                **September
                  30,****2007**
              
              **2006**Compensation
              
              $
              4,005,415
              
              $
              2,583,050Travel
                  and entertainment
              
              
              348,716
              
              
              51,778Occupancy
              
              
              561,711
              
              
              138,085Professional
                  services
              
              
              629,904
              
              
              826,230Insurance
              
              
              166,025
              
              
              88,204Depreciation
                  and amortization
              
              
              879,379
              
              
              203,030Other
                  operating expenses
              
              
              208,570
              
              
              240,205Total
                  operating expenses
              
              $
              6,799,720
              
              $
              4,130,582





The
      majority of the operating expenses consist of compensation expenses,
      professional fees and depreciation and amortization expenses. The increase
      in
      all of operating expense is the result of the acquisition of 20/20 Technologies
      late in the third quarter of 2006, and CentrePath, Inc. and Global Capacity
      Group, which were subsequent to September 30, 2006. Of the $4.0 million of
      compensation expense, approximately $1.0 million related to non-cash stock-based
      compensation expense. The remaining compensation, professional fees and other
      operating costs relate to the continuing efforts in building and supporting
      current operations into a world-class telecommunications logistic provider.
      Any
      significant increase in operating costs will be a direct result of a
      corresponding increase in revenues, excluding any stock-based compensation
      expense. Any significant increase in revenues is expected to outpace the
      increase in operating costs. The depreciation and amortization expense relates
      primarily to the network operating center in Waltham, Massachusetts and the
      fair
      value assigned to the Company’s intellectual property. The costs in the prior
      year represent administrative costs associated with Capital Growth Systems,
      Inc., as the holding company for Nexvu and Frontrunner. The professional fees
      in
      2006 are primarily related to legal fees related to securities work related
      to
      filings with the Securities and Exchange Commission and NASD and other general
      legal work as well as accounting fees.





The
      current period results for the three months ended September 30, 2007 reflect
      interest related to the existing debt that totaled $1.8 million compared to
      $800,000 for the same period a year ago. The three-month period ended September
      30, 2007 also includes the amortization of the fair value assigned to the
      warrants issued with the debt, which totaled approximately $1.3 million compared
      to $0 for the same period a year ago. In addition, approximately $800,000
      related to a beneficial conversion feature associated with the issuance of
      the
      junior secured facility was recognized.




31




**Nine
      months ended September 30, 2007 compared to 2006**





Revenues
      generated from the circuits and networks business totaled $7.2 million, which
      represent circuit sales to enterprise and wholesale customers. No revenue was
      recognized during the first nine months of 2007 or 2006 from strategic networks,
      which is revenue generated by taking a principal position in existing circuits
      and, through the Company’s proprietary pricing and quotation system, negotiating
      more favorable pricing terms for customers. Revenue generated from strategic
      networks is expected to account for the majority of the Company’s revenue and
      growth, as these circuit contracts are often quite large and typically fixed
      for
      several years. During the first nine months of 2007, $5.4 million of services
      related to remote monitoring as well as network implementation services was
      recognized, compared to $0 in the same period for the prior year.





Consolidated
      gross margin for the first nine months of 2007 was 45% compared to 49% for
      the
      same period a year ago. Gross profit generated by the circuits and networks
      business for the first nine months of 2007 was 27%. The Company anticipates
      gross margins generated by the circuits and networks business will increase
      in
      the range of 25% and 30% as new circuits are sold and the pricing on existing
      circuits is renegotiated. Gross margins generated from services were 63% during
      the first nine months of 2007, compared to 0% for the same period in 2006.
      As
      the software license business is entirely proprietary, 100% gross margin are
      achieved on those licenses. If, in the future, the Company elects to embed
      a
      third-party product into its technology, gross margins on software sales could
      decrease.





Total
      operating expenses were as follows:


**Nine
                  months ended**
                **September
                  30,****2007**
              
              **2006**Compensation
              
              $
              12,478,190
              
              
              5,485,855Travel
                  and entertainment
              
              
              1,015,794
              
              
              164,055Occupancy
              
              
              1,576,556
              
              
              410,344Professional
                  services
              
              
              1,595,883
              
              
              1,368,535Insurance
              
              
              326,021
              
              
              248,057Depreciation
                  and amortization
              
              
              2,594,132
              
              
              611,194Other
                  operating expenses
              
              
              524,631
              
              
              693,721Total
                  operating expenses
              
              $
              20,111,207
              
              
              8,981,761





The
      majority of operating expenses consist of compensation expenses, professional
      fees and depreciation and amortization expenses. The increase in all operating
      expense is the result of the acquisition of 20/20 Technologies late in the
      third
      quarter of 2006 and the acquisitions of CentrePath, Inc. and Global Capacity
      Group, which were subsequent to September 30, 2006. Of the $12.5 million of
      compensation expense, approximately $5.1 million related to non-cash stock-based
      compensation expense. During the second quarter of 2007, the Company granted
      approximately 2.8 million of stock options to employees and accelerated the
      remaining stock options granted to the former CEO, which resulted in a
      significant increase in stock compensation expense during the nine month period
      ended September 30, 2007, when compared to the same period in 2006. In addition,
      approximately $235,000 of severance costs related to the departure of the former
      CEO was accrued in accordance with the terms of his employment agreement. The
      remaining compensation, professional fees and other operating costs relate
      to
      the continuing efforts in building and supporting current operations into a
      world-class telecommunications logistic provider. Any significant increase
      in
      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. Depreciation and amortization expense relates primarily
      to the network operating center in Waltham, Massachusetts and the fair value
      assigned to the Company’s intellectual property. The professional fees in 2006
      are primarily related to legal fees related to securities work related to
      filings with the Securities and Exchange Commission and NASD and other general
      legal work as well as accounting fees. In addition, the Company agreed to issue
      an additional 100,000 shares of its Common Stock to two of the guarantors on
      the
      Harris demand loan (repaid at the time of the initial Unit closing) in
      connection with the continuance of such guarantees. The Company expensed
      $135,000 during the first quarter of 2006 in connection with the issuance of
      these shares.





Results
      for the first nine months of 2007 reflect interest of $6.2 million related
      to
      the existing debt, compared to $1.1 million for the same period a year ago.
      The
      year to date 2007 results also includes the amortization of the fair value
      assigned to the warrants issued with the debt, which totaled approximately
      $3.6
      million, compared to $0 in the same period a year ago. In addition, the Company
      recognized approximately $1.5 million related to a beneficial conversion feature
      associated with the issuance of the junior secured facility. The debt had a
      weighted average interest rate of 13.7%.




32




**Liquidity
      and Capital Resources**





Cash
      used
      in operating activities during the nine months ended September 30, 2007 and
      2006
      was $12.1 million and $1.2 million, respectively. The cash used in operating
      activities was principally due to the net loss for the year and to fund certain
      previously accrued obligations. The primary variance between operating loss
      and
      net cash used in operating activities during the nine months ended September
      30,
      2007 was due to stock option expense of $5.1 million and warrant expense of
      $3.6
      million, along with depreciation and amortization totaling $2.6 million. These
      amounts were partially offset by a $2.3 million increase in accounts
      payable.





Investing
      activities provided $3.4 million and $260,000 for the nine months ended
      September 30, 2007 and 2006, respectively, when excluding the effect of
      writing-down $3.8 million of goodwill and intangible assets related to
      discontinued operations. Year to date capital expenditures for 2007 totaled
      approximately $420,000. Capital expenditures in both 2007 and 2006 consisted
      primarily of computer related equipment and vehicles for the Frontrunner
      business. In connection with supporting the new $6 million strategic novation
      contract announced in June 2007, approximately $300,000 of networking equipment
      was purchased in the third quarter. As strategic novation revenue continues
      to
      increase, similar capital expenditures may be required in the future. As part
      of
      the debt covenant with Hilco, capital expenditures are limited to $500,000
      per
      year.





Cash
      provided by financing activities during the nine months ended September 30,
      2007
      totaled approximately $8.3 million. This was the result of the equity offering
      funded primarily in the first half of the year, which totaled $18.4 million,
      net
      of issuance fees. Of this amount, approximately $4.6 million was the result
      of a
      non-cash conversion of existing debt into the equity offering (see Note 8 -
      Shareholders’ Equity). Cash was also generated from the issuance of a new senior
      secured line of credit with Hilco, a junior secured two year credit facility
      funded by a small number of lenders and a short-term bridge facility. The
      outstanding balance on the senior debt line of credit as of September 30, 2007
      was $8.3 million. The total amount issued with the junior secured notes payable
      was $7.8 million, of which $5.4 million was generated through the non-cash
      conversion of existing short-term borrowings. Borrowings under the short-term
      bridge facility totaled $350,000. These amounts were partially offset by the
      repayment of debt totaling approximately $15.2 million during the nine months
      ended September 30, 2007.





Historically,
      the Company’s working capital requirements have been met through proceeds of
      capital stock, private equity offerings and debt issuances. As of September
      30,
      2007, there was $1.8 million of cash, cash equivalents and borrowing capacity
      under the senior secured line of credit with Hilco Financial. This level of
      working capital will probably not be sufficient to fund operations until
      positive cash flow from operations can be generated. To date, revenues have
      not
      materialized on the timeline anticipated. Therefore, additional capital will
      need to be raised through issuance of new equity or increasing the debt load,
      or
      a combination of both. Although the Company is currently in negotiations with
      several lending and financial institutions, there can be no assurance it will
      be
      able to raise additional capital or issue additional indebtedness or, if it
      does, that it will not be dilutive of existing shareholders.





The
      Company has future contractual obligations for leases of offices and for minimum
      future royalty payments related to a software licensing agreement with a third
      party. The Company has also entered into several purchase commitments with
      various telecommunication companies for the provisioning of bandwidth, which
      is
      resold by Global Capacity. The following table summarizes future contractual
      obligations for both continuing and discontinued operations as of September
      30,
      2007:


For
                  the years ended December 31,
              
              Operating
                Leases
              
              Capital
                Leases
              
              Debt
                Obligations
              
              Minimum
                  Royalty PaymentsRemaining
                  three months of 2007
              
              $
              471,417
              
              $
              14,599
              
              $
              9,084,026
              
              $
              56,2502008
              
              
              851,037
              
              
              36,880
              
              
              973,105
              
              
              150,0002009
              
              
              312,476
              
              
              5,121
              
              
              3,649,789
              
              
              —2010
              
              
              254,570
              
              
              —
              
              
              41,809
              
              
              —2011
              
              
              121,651
              
              
              —
              
              
              23,836
              
              
              —Thereafter
              
              
              —
              
              
              —
              
              
              45,685
              
              
              —Total
                  contractual obligations
              
              $
              2,011,151
              
              $
              56,600
              
              $
              13,818,250
              
              $
              206,250





The
      above
      table does not include two $3.0 million dollar earn-out payments related to
      the
      acquisition of Global Capacity in December 2006. Both payments were based upon
      achieving certain revenue and gross margin targets over the next two years.
      If
      the targets were met, the first $3.0 million payment would have been due in
      cash
      and payable in October 2008 and the second $3.0 million payment would have
      been
      payable either through the issuance of Common Stock (based on the fair market
      value of the Company’s Common Stock as of the relevant pay out period) or in
      cash or a combination of the two, at the Company’s discretion, in October 2009.
      The Company would have recorded any such payments of additional consideration
      as
      compensation in the period the revenue objectives have been met; however, on
      October 31, 2007, separation agreements were reached with the former owners
      and
      all potential earn-out payments were released in exchange for a lump sum of
      $350,000. This amount has been paid and is included as compensation in the
      period ended September 30, 2007. Included in Debt Obligation for 2007 is $7.7
      million of principal and interest owed under the senior debt facility, which
      is
      due in full in July 2008.




33




From
      time
      to time, the Company may evaluate potential acquisitions of businesses, products
      or technologies. A portion of 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,
      obligations or liabilities that may require us to make payments or otherwise
      use
      additional cash in the future may be assumed.




34




**Item
      3. Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedure**





As
      required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
      under the supervision and with the participation of our management, including
      our chief executive officer and our chief financial officer, of the
      effectiveness and the design and operation of our disclosure controls and
      procedures as of September 30, 2007, the end of the period covered by this
      report. Based upon that evaluation, our chief executive officer and our chief
      financial officer concluded that our disclosure controls and procedures are
      effective to ensure that information required to be disclosed in the reports
      that we file or submit under the Exchange Act is recorded, processed, summarized
      and reported within the time periods specified in the Securities and Exchange
      Commission's rules and forms and includes controls and procedures designed
      to
      ensure that information required to be disclosed in these reports is accumulated
      and communicated to our management, including our chief executive officer and
      our chief financial officer, as appropriate to allow timely decisions regarding
      the required disclosure. As described below, there were changes in our internal
      control over financial reporting that occurred during the fiscal quarter ended
      December 31, 2006 that have materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.





During
      the third and fourth quarter of 2006, we completed our acquisitions of 20/20
      Technologies, CentrePath and Global Capacity Group. Since these entities had
      limited resources for processing accounting information and financial reporting,
      we concluded a material weakness existed related to proper segregation of duties
      and financial reporting at these locations. We are currently in the process
      of
      improving our internal controls in an effort to remediate these deficiencies.
      This process includes a thorough review of our internal control structure to
      ensure we have proper segregation of duties being performed by our accounting
      staff, consolidation of existing accounting systems and the implementation
      of
      defining our accounting policies and procedures. It also includes the process
      of
      implementing a financial reporting checklist related to our quarterly and annual
      reporting requirements with the SEC. Upon completion, we will be able to provide
      reasonable assurance that no acts of fraud are being committed, along with
      the
      completeness and accuracy of our financial reporting.





**Changes
      in Internal Control over Financial Reporting**





No
      changes in our internal control over financial reporting have come to
      management's attention during our last fiscal quarter that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting in addition to those described above. Review and
      evaluation of disclosure controls and procedures is an ongoing process that
      we
      will continue to refine as we perform quarterly evaluations.




**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





None.





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





All
      unregistered securities issued during the quarter ended September 30, 2007
      have
      been disclosed in our previous 8-K filings.





**Item
      3. Defaults upon Senior Securities**





None.





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





On
      June
      12, 2007, the Company held a special shareholders meeting to consider a vote
      upon the following proposals. However, the Company was unable to obtain a quorum
      and the meeting was reconvened on June 25, 2007. The tabulation of the votes,
      in
      favor, against, and abstaining with regard to the proposals is set forth below
      (with Common Stock and Preferred Stock voting on an as-converted to common
      stock
      basis and all voting as one class).





**AFFIRMATIVE**
            
            **NEGATIVE**
            
            **ABSTAIN****PROPOSAL**
            
            **VOTES**
            
            **VOTES**
            
            **VOTES**1.
            
            Amendment
                of Article of Incorporation to increase the maximum number of shares
                of
                our Common Stock authorized from 25 million to 350 million
            
            36,869,739
            
            267,322
            
            679,5832.
            
            Amendment
                of Corporate By-Laws to permit the amendment of By-Laws by the Board
                of
                Directors, without the need for stockholder approval
            
            34,757,832
            
            2,261,452
            
            797,360





35




**Item
      5. Other Information**




None.





**Item
      6. Exhibits**




Exhibits
      filed as a part of this quarterly report on Form 10-QSB are listed in the Index
      to Exhibits located on page 36 of this Report.




36





**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 Shutt
              Patrick
                C. Shutt, Chief Executive Officer





/s/
                Jim McDevitt
              Jim
                McDevitt, Chief Financial and Accounting
                Officer





**Dated:
      November 19, 2007**




37





**EXHIBIT
      INDEX**





Exhibit
                Number
            
            Description
                of Document3.1
            
            Articles
                of Amendment to articles of Incorporation of Capital Growth Systems,
                Inc.(1)3.2
            
            Amendment
                to By-laws of Capital Growth Systems, Inc.(1)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.







(1)
              Incorporated
                  herein by reference to the Form 8-K filed with the Commission on
                  June 25,
                  2007 (File No. 0-30831).





38