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 1934





For
      the
      quarterly period ended June 30, 2006





[   ]  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
                ofincorporation or organization)
            
            (I.R.S.
                Employer Identification
                No.)




50
                East Commerce Drive, Schaumburg,
                Illinois 60173(Address
                of principal executive
                offices)630-872-5800(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 S No £





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





The
      total
      number of shares outstanding of the issuer’s common stock, par value $.0001, as
      of August 14, 2006 is 17,115,754.





Transitional
      Small Business Disclosure Format: Yes £ No S








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




Page
                  No.PART
                  I
              FINANCIAL
                  INFORMATION
              3Item
                  1.
              Financial
                  Statements
              3Interim
                    Consolidated Condensed Balance Sheets as ofJune
                  30, 2006 [Unaudited] and December 31, 2005 [Audited]
              4Consolidated
                    Condensed Statements of OperationsFor
                  the three and six month periods ended June 30, 2006 and 2005
                  [Unaudited]
              5Consolidated
                  Condensed Statement of Shareholders' Equity from January 1, 2006
                  to June
                  30, 2006 [Unaudited]
              6Consolidated
                    Condensed Statements of Cash FlowsFor
                  the six month periods ended June 30, 2006 and 2005
                  [Unaudited]
              7Notes
                  to Interim Consolidated Condensed Financial Statements.
              8Item
                  2.
              Management’s
                  Discussion and Analysis.
              21Item
                  3.
              Controls
                  and Procedures.
              32PART
                  II.
              OTHER
                  INFORMATION
              32Item
                  1.
              Legal
                  Proceedings.
              32Item
                  2.
              Changes
                  in Securities and Small Business Issuer Purchases of Equity Securities.
              32Item
                  3.
              Defaults
                  Upon Senior Securities.
              33Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              33Item
                  5.
              Other
                  Information.
              33Item
                  6.
              Exhibits.
              33Signatures
                and Certifications.
              34




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 “Factors
      Affecting Future Performance” in our report on Form 10-KSB for the period ending
      December 31, 2005.










CAPITAL
      GROWTH SYSTEMS, INC.




Interim
      Consolidated Condensed Financial Statements


(Unaudited)




June
      30,
      2006




3


**CAPITAL
        GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      CONDENSED BALANCE SHEETS**


**(Unaudited)**
              
              **(Audited)****June
                  30, 2006**
              
              **December
                  31, 2005****ASSETS:**Current
                  Assets:Cash
              
              $
              5,221
              
              $
              436,842Accounts
                  receivable, net
              
              
              1,757,809
              
              
              1,232,606Inventories,
                  net
              
              
              1,481,639
              
              
              1,537,908Prepaid
                  expenses
              
              
              138,780
              
              
              121,466Other
                  current assets
              
              
              14,583
              
              
              34,987Total
                  current assets
              
              
              3,398,032
              
              
              3,363,809Fixed
                  assets, net of accumulated depreciation
              
              
              906,028
              
              
              947,203Software
                  license fees
              
              
              18,911
              
              
              26,778Customer
                  list acquired, net
              
              
              2,529,111
              
              
              2,812,334Goodwill
              
              
              3,965,543
              
              
              3,965,543Other
                  assets
              
              
              37,188
              
              
              18,543Total
                  Assets
              
              $
              10,854,813
              
              $
              11,134,210**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  Liabilities:Current
                  maturities of debt
              
              $
              3,674,690
              
              $
              3,815,337Accounts
                  payable
              
              
              1,693,920
              
              
              536,453Accrued
                  expenses
              
              
              1,498,931
              
              
              1,389,514Deferred
                  revenues
              
              
              1,683,843
              
              
              1,536,369Advance
                  billings
              
              
              810,510
              
              
              964,734Other
                  current liabilities
              
              
              165,612
              
              
              191,624Total
                  current liabilities
              
              
              9,527,506
              
              
              8,434,031Long-term
                  liabilitiesDebt
              
              
              713,519
              
              
              851,379Total
                  Liabilities
              
              
              10,241,025
              
              
              9,285,410Stockholders’
                  EquityCommon
                  Stock, $.0001 par value, 25,000,000 authorized; 17,115,754 outstanding
                  as
                  of June 30, 2006 and 17,015,754 issued and outstanding as of December
                  31,
                  2005, respectively
              
              
              1,711
              
              
              1,701Additional
                  paid-in capital
              
              
              13,009,362
              
              
              12,831,414Retained
                  earnings, (deficit)
              
              
              (12,397,285
              )
              
              (10,984,315
              )Total
                  Stockholders’ Equity
              
              
              613,788
              
              
              1,848,800Total
                  Liabilities and Stockholders’ Equity
              
              $
              10,854,813
              
              $
              11,134,210




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




4




**CAPITAL
                GROWTH SYSTEMS, INC.****CONSOLIDATED
                CONDENSED STATEMENTS OF OPERATIONS**(Unaudited)**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Revenue**
            
            $
            3,653,565
            
            $
            3,478,100
            
            $
            7,516,461
            
            $
            7,532,846**Cost
                of Goods Sold**
            
            
            1,815,874
            
            
            1,677,843
            
            
            3,838,590
            
            
            3,819,497**Gross
                Margin**
            
            
            1,837,691
            
            
            1,800,257
            
            
            3,677,871
            
            
            3,713,349**Operating
                Expenses:**Compensation
            
            
            1,410,509
            
            
            1,316,015
            
            
            2,902,805
            
            
            2,612,858Other
                operating expenses
            
            
            932,128
            
            
            1,002,008
            
            
            1,948,374
            
            
            1,930,262**Total
                Operating Expenses**
            
            
            2,342,637
            
            
            2,318,023
            
            
            4,851,179
            
            
            4,543,120**Operating
                Loss**
            
            
            (504,946
            )
            
            (517,766
            )
            
            (1,173,308
            )
            
            (829,771
            )**Interest
                expense (income)**
            
            
            107,404
            
            
            92,036
            
            
            209,511
            
            
            176,032**Net
                Loss Before Income Taxes**
            
            
            (612,350
            )
            
            (609,802
            )
            
            (1,382,819
            )
            
            (1,005,803
            )**Income
                taxes**
            
            
            15,000
            
            
            15,000
            
            
            30,151
            
            
            23,216**Net
                Loss**
            
            $
            (627,350
            )
            $
            (624,802
            )
            $
            (1,412,970
            )
            $
            (1,029,019
            )**Loss
                per Share**
            
            $
            (0.04
            )
            $
            (0.04
            )
            $
            (0.08
            )
            $
            (0.06
            )**Average
                Shares Outstanding**
            
            
            17,115,754
            
            
            16,965,479
            
            
            17,066,303
            
            
            16,953,117





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




5




**CAPITAL
                GROWTH SYSTEMS, INC.****CONSOLIDATED
                CONDENSED STATEMENT OF SHAREHOLDERS'
                EQUITY**


(Unaudited)**Common
                Shares Outstanding**
            
            **Retained
                Deficit**
            
            **Common
                Stock**
            
            **Additional
                Paid-in Capital**
            
            **Total
                Equity**Balance,
                January 1, 2006
            
            
            17,015,754
            
            $
            (10,984,315
            )
            $
            1,701
            
            $
            12,831,414
            
            $
            1,848,800Net
                loss
            
            
            -
            
            
            (1,412,970
            )
            
            -
            
            
            -
            
            
            (1,412,970
            )Stock
                issued for consulting services
            
            
            100,000
            
            
            -
            
            
            10
            
            
            134,990
            
            
            135,000Stock-based
                compensation expense
            
            
            
            
            
            
            
            
            
            
            
            42,958
            
            
            42,958Balance,
                June 30, 2006
            
            
            17,115,754
            
            $
            (12,397,285
            )
            $
            1,711
            
            $
            13,009,362
            
            $
            613,788





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




6




**CAPITAL
                  GROWTH SYSTEMS, INC.****CONSOLIDATED
                  CONDENSED STATEMENTS OF CASH FLOWS**(Unaudited)**Six
                  Months Ended June 30,**
              ********
              **2006**
              ****
              **2005**Net
                  Cash Used in Operating Activities
              
              $
              (58,570
              )
              $
              (1,443,717
              )Net
                  Cash Used In Investing Activities
              
              
              (94,544
              )
              
              (111,719
              )Net
                  Cash Provided By (Used in) Financing Activities
              
              
              (278,507
              )
              
              (616,907
              )Increase
                  (Decrease) in Cash and Cash Equivalents
              
              
              (431,621
              )
              
              (2,172,343
              )Cash
                  and Cash Equivalents - Beginning of Period
              
              
              436,842
              
              
              3,660,894Cash
                  and Cash Equivalents - End of period
              
              $
              5,221
              
              $
              1,488,551SUPPLEMENTAL
                  CASH FLOW INFORMATION:Cash
                  paid for interest
              
              $
              153,559
              
              $
              211,391Cash
                  paid for income taxes
              
              $
              2,446
              
              $
              8,216NONCASH
                  INVESTING AND FINANCING ACTIVITIES:Issuance
                  of Stock for Frontrunner Acquisition
              
              $
              -
              
              $
              101,250Stock
                issued for consulting services
              
              $
              135,000
              
              $
              -Stock-based
                  compensation expense
              
              $
              42,958
              
              $
              -




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




7


**CAPITAL
      GROWTH SYSTEMS, INC.**


**Notes
      To Interim Consolidated Condensed Financial Statements**


**June
      30, 2006 (Unaudited)**




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




The
      accompanying unaudited consolidated condensed financial statements include
      the
      accounts of Capital Growth Systems, Inc. (“Company”) and its wholly-owned
      subsidiaries, Nexvu Technologies, LLC (“Nexvu”) and Frontrunner Network Systems
      Corp. (“Frontrunner”). Except where necessary to distinguish the three entities,
      we will refer to all three as the “Company.” All significant intercompany
      transactions and balances 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 included in the Company’s 2005 Annual Report on
      Form 10-KSB filed with the Securities Exchange Commission for the year ended
      December 31, 2005.




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




**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 $79,894 and
      $83,148 as of June 30, 2006 and December 31, 2005, respectively.




**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”
(“SAB104”), which superseded Staff Accounting Bulletin No. 101, “Revenue
      Recognition in Financial Statements” (“SAB101”).




SAB101
      requires 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.




8


SAB
      104
      incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”),
“Multiple-Deliverable Revenue Arrangements.” EITF 00-21 addresses accounting for
      arrangements that may involve the delivery or performance of multiple products,
      services and/or rights to use assets. The effect of implementing EITF 00-21
      on
      the Company’s consolidated financial position and results of operations was not
      significant.




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.




**Product
      Warranties**




The
      Company’s subsidiary, Frontrunner, sells certain of its products to customers
      with a product warranty that provides repairs at no cost to the customer or
      issuance of credit to the customer for a one year period. The Company accrues
      its estimated exposure to warranty claims based upon estimates of future costs
      associated with fulfilling the warranty obligations. Management reviews these
      obligations on a regular basis and adjusts the warranty provisions as actual
      experience differs from historical estimates or other information becomes
      available.




**Research
      and Development**




The
      Company accounts for research and development costs in accordance with
      the SFAS No. 2 “Accounting for Research and Development Costs.” Under SFAS
      No. 2, all research and development costs must be charged to expense as
      incurred. Accordingly, internal research and development costs are expensed
      as
      incurred. Third-party research and developments costs are expensed when the
      contracted work has been performed or as milestones are achieved.
      Company-sponsored research and development costs related to both present and
      future products are expensed in the period incurred. Total research and
      development costs incurred during the three months ended June 30, 2006 and
      2005
      were $707,978 and $643,008, respectively.




9


**Goodwill
      and Purchased Intangible Assets**




In
      July
      2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”
Effective for fiscal years beginning after December 15, 2001, SFAS No. 142
      requires goodwill to be tested for impairment on an annual basis and between
      annual tests in certain circumstances, and written down when impaired, rather
      than being amortized as previous accounting standards required. Furthermore,
      SFAS No. 142 requires purchased intangible assets other than goodwill to be
      amortized over their useful lives unless these lives are determined to be
      indefinite. Intangible assets, consisting of software licenses and customer
      lists, are amortized on a straight-line basis over periods ranging 3 to 7 years,
      representing the remaining life of the assets.




Based
      on
      the impairment tests performed by management, there was no impairment of
      goodwill in 2005. The Company has no reason to believe that goodwill impairment
      has occurred in 2006. There can be no assurance that future goodwill impairment
      tests will not result in a charge to earnings.




**Stock-Based
      Compensation**




At
      June
      30, 2006, the Company has a stock option plan and two separate employee related
      stock option agreements, which are described more fully in Note 4. Prior to
      January 1, 2006, the Company accounted for those plans under the recognition
      and
      measurement provisions of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for* *Stock-Based
      Compensation*.
      No
      stock-based employee compensation cost was recognized in the Statement of
      Operations for the six month period ended June 30, 2005, as all outstanding
      unvested options granted under those plans at that time had an exercise price
      equal to the market value of the underlying common stock on the date of grant
      and no restricted stock grants were outstanding during that period. Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      FASB Statement No. 123(R),*Share-Based
      Payment*,
      using
      the modified-prospective-transition method. Under this transition method,
      compensation cost recognized in fiscal 2006 includes: (a) compensation cost
      for
      all share-based payments granted prior to, but not yet vested as of January
      1,
      2006, based on the grant date fair value estimated in accordance with the
      original provisions of Statement 123, and (b) compensation cost for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of Statement
      123(R). Results for prior periods have not been restated.





**Segment
      Information**




SFAS No.
      131, “Disclosures about Segments of an Enterprise and Related Information”
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 No.
      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.




10


**Intangible
      assets**




Intangible
      assets represent purchased customer lists with respect to our acquisition of
      Frontrunner. The intangible assets are carried at cost less accumulated
      amortization. We amortize intangible assets over the expected benefits of the
      list over the estimated useful life. The estimated useful life on this
      identifiable intangible asset is 7 years. The Company monitors the balance
      and
      related accumulated amortization of the intangible assets quarterly in regards
      to impairment. Based on our analysis, no provision for impairment was made
      as of
      June 30, 2006. Total amortization of the customer lists was $283,223 and
      $307,104 for the six months ending June 30, 2006 and 2005 respectively.
      Remaining amortization of the customer list for the year ended December 31,
      2006
      and amortization for future years is expected to be as follows:




2006
            
            $
            273,7852007
            
            
            529,1602008
            
            
            502,7042009
            
            
            477,5682010
            
            
            453,6882011
            
            
            292,206




Total
      cost and accumulated amortization for the customer list is as
      follows:




**June
                30,2006**
            ****
            **December
                31, 2005**Customer
                list costs
            
            $
            3,615,358
            
            $
            3,615,358Accumulated
                amortization
            
            
            (1,086,247
            )
            
            (803,024
            )Customer
                list, net
            
            $
            2,529,111
            
            $
            2,812,334




**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.




11


**Going
      Concern**




As
      of
      June 30, 2006, the Company’s current liabilities exceeded its current assets by
      $6.1 million. Included in the current liabilities is $3.7 million of current
      maturities of long-term debt, including a $2.8 million demand note payable
      to
      Harris Bank. Frontrunner and Harris have been in negotiations to extend the
      due
      date of this demand note. On June 13, 2006, Frontrunner received notice that
      Harris Bank issued to Frontrunner a demand for payment of the Demand Note no
      later than July 12, 2006.  We
      have
      been in discussions with the Harris Bank to extend the payment date of such
      demand note until August 31, 2006. However, no final agreement to extension
      has
      been reached. This debt reflects pre-existing balances from the acquisition
      of
      Frontrunner during 2004. There was essentially no cash on hand at June 30,
      2006.
      The Company has incurred operating losses of $2.3 million and $4.9 million
      for
      the two years ended December 31, 2005 and 2004 respectively and $1.4 million
      for
      the six months ended June 30, 2006. Cash utilized in operating activities were
      $1.8 million and $3.3 million for the two years ended December 31, 2005 and
      2004
      respectively. Only $59 thousand of cash was utilized for operating activities
      during the six months ended June 30, 2006. However, net losses were funded
      by
      delaying payments to some vendors, increasing accounts payable by $1.2 million
      since December 31, 2005.




The
      Company’s net working capital deficiency, recurring losses and negative cash
      flows from operations raise substantial doubt about the Company’s ability to
      continue as a going concern. During the six months ended June 30, 2006, the
      Company’s revenues were relatively flat but the loss increased from $1.0 million
      to $1.4 million for the six month period ended June 30, 2006. Nexvu is
      continuing to strive to increase sales of its software products and professional
      services in order decrease the operating losses experienced previously.
      Frontrunner sales have decreased for the six months ended June 30, 2006 and
      have
      had several headcount reductions during the year. Both companies continue to
      be
      vigilant on operating expenses.




The
      Company is in the process of raising additional funds through bridge financing
      and new equity capital. These funds would be utilized in part to fund recently
      announced intentions to acquire Global Capacity Group, LLC, 20-20 Technologies,
      Inc. (and its affiliates) and Cirond, Inc. Additionally, the capital raised
      would fund working capital needs, reduce debt, specifically, the Harris note
      payable, and provide additional funding for additional acquisitions. Through
      August 14, 2006, the Company has raised $916 thousand in bridge loans of which
      $461 is convertible into stock of the Company. However, no assurance can be
      made
      that the additional bridge loans and an adequate capital raise can be
      completed.




**Reclassifications**




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




12


**NOTE
      3 - Inventories**




Inventories
      as of June 30, 2006 and December 31, 2005 consist of the following:




**June
                30, 2006**
            
            **Dec
                31,2005**Equipment
            
            $
            1,396,266
            
            $
            1,459,357Work
                in process
            
            
            768,436
            
            
            718,512Gross
                Inventory
            
            
            2,164,702
            
            
            2,177,869Less:
                Inventory reserve
            
            
            (683,063
            )
            
            (639,961
            )Net
                inventory
            
            $
            1,481,639
            
            $
            1,537,908





Inventories
      are stated at lower of cost or market as determined by the First-in, First-out
      (FIFO) method. The reserve balance is estimated by management based on previous
      experience and considers the on-hand inventory needs based on the networks
      under
      maintenance service agreements.




**NOTE
      4 - Employee Benefit Plans**




**2003
      Stock Option Plan**




In
      December 2003, we adopted the 2003 Long-Term Incentive Plan for key employees
      and other persons providing assets or services to us. The 2003 Plan provides
      for
      the issuance of stock-based awards to key employees as part of their overall
      compensation. We consider our option program a core component of our operating
      productivity. A total of 2,285,000 restricted shares of common stock, stock
      options or other equity-based compensation can be issued under the plan. As
      of
      June 30, 2006, we have issued and outstanding 1,524,557 restricted shares under
      the plan, net of forfeitures.




The
      following table summarizes the activity under the stock option plan from
      inception to June 30, 2006:




**Number
                of Shares**
            ****
            **Price
                Per Share**
            ****
            **Weighted
                Average Price per Share**Options
                Outstanding:January
                1, 2006
            
            
            1,524,557
            
            
            0.95
                - 1.35
            
            $
            1.34Granted
            
            
            -
            
            
            -
            
            
            -Terminated
            
            
            -
            
            
            -
            
            
            -June
                30, 2006
            
            
            1,524,557
            
            
            0.95
                - 1.35
            
            $
            1.34Vested
                Shares:Vested,
                June 30, 2006
            
            
            1,009,317
            
            $
            0.95
                - 1.35
            
            $
            1.34





**Tom
      Hudson Option Agreement**




On
      June
      29, 2006, pursuant to the terms of an Employee Option Agreement, the Corporation
      granted its new CEO, Mr.Thomas G. Hudson, the option to acquire shares of common
      stock of the Company equal to 1,496,993 at a strike price equal to the closing
      price of the Company’s common stock as of that date ($.70 per share). In
      accordance with the terms of this option agreement (i) 25% of the Employee
      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.
      Accordingly, 374,248 of stock options were vested under this plan.




13


**Performance
      Option Agreement**




Mr.
      Hudson’s employment agreement provided for a Performance Option Agreement, which
      provides for a grant of an option to acquire 2,993,985 shares of the Company’s
      common stock for a strike price equal to per share common stock price of the
      next equity financing which is expected to be completed during 2006. The
      Performance Option Plan is designed to deliver and attain certain revenue
      objectives. Portions of the performance options shall vest on the following
      basis:  upon each realization by the Company of an incremental $2.0 million
      of third party service and/or maintenance revenue from new customers, with
      gross
      margins in excess of 35%, pursuant to an agreement of one year or more, Mr.
      Hudson shall vest, incrementally, in 199,599 option shares of the total number
      of Performance Options, up to a total of such available Performance
      Options.  Notwithstanding, Mr. Hudson shall have authority, subject to the
      Board approval, to direct the allocation of such performance options to other
      Company executives. As of June 30, 2006, no options have vested.





During
      2006 we implemented SFAS No.123R, which requires the Company to account for
      the
      value of our stock based compensation as an expense. The Company is utilizing
      the modified prospective application transition method in implementing this
      standard. Under the modified prospective application, SFAS No 123R applies
      to
      new awards and to awards modified, repurchased, or cancelled after the effective
      date, which is January 1, 2006. Additionally, compensation cost for the stock
      options issued prior to January 1, 2006 is recognized as the requisite service
      is rendered for these awards. The value of all options granted prior to January
      1, 2006 was calculated utilizing the minimum value model, as our shares have
      historically not been publicly traded.




The
      weighted-average fair value of stock-based compensation to our employees is
      based on the single option value approach. We have estimated that no forfeitures
      of stock will take place, and it is assumed that no dividends will be declared.
      The weighted-average fair-value calculations are based on the following
      assumptions:




******Six
                  months Ended
                  June 30,**
              ********
              ****
              **2006**
              ****
              **2005**Dividend
                  yield
              
              
              0
              %
              
              0
              %Estimated
                  life (in years)
              
              
              5.0
              
              
              5.0Expected
                  volatility
              
              
              100
              %
              
              N/ARisk-free
                  interest rate
              
              
              5.17
              %
              
              3.85
              %




14


For
      pro-forma purposes, the estimated fair value of stock-based compensation awards
      to employees is amortized using the straight-line method over the vesting period
      of the options.




**Six
                months ended June 30,**
            ********
            ****
            **2006**
            ****
            **2005**Reported
                net loss
            
            $
            (1,412,970
            )
            $
            (1,029,019
            )Employee
                stock-based compensation included in reported net loss
            
            
            42,948Employee
                stock-based compensation as calculated under the fair value method
                (SFAS
                No. 123)
            
            
            (42,958
            )
            
            (29,309
            )Pro
                forma net loss
            
            $
            (1,412,970
            )
            $
            (1,058,328
            )Loss
                Per Share:As
                reported
            
            $
            (0.08
            )
            $
            (0.06
            )Pro
                forma
            
            $
            (0.08
            )
            $
            (0.06
            )





**NOTE
      5 - Property and Equipment**




Property
      and equipment at June 30, 2006 and December 31, 2005 consists of the
      following:




**June
                30, 2006**
            ****
            **Dec.
                31, 2005**Furniture
                & fixtures
            
            $
            166,952
            
            $
            165,702Computer
                equipment
            
            
            948,210
            
            
            921,611Leasehold
                improvements
            
            
            130,493
            
            
            88,154Machinery
                & equipment
            
            
            288,324
            
            
            285,9461,533,979
            
            
            1,461,413Accumulated
                depreciation
            
            
            (627,951
            )
            
            (514,210
            )Net
                property and equipment
            
            $
            906,028
            
            $
            947,203




Depreciation
      and amortization of property and equipment were $117,072 and $119,136 for the
      six months ended June 30, 2006 and 2005 respectively.




15


**NOTE
      6 - Debt**




Debt
      as
      of June 30, 2006 and December 31, 2005 consist of the following:




**June
                30, 2006**
            ****
            **December
                31,****2005**Demand
                note payable to Harris Bank, plus interest at 1.50% above prime rate;
                8.25% at June 30, 2006, until the loan is paid in full. Secured by
                substantially all of the assets of Frontrunner and personal guarantee
                by a
                separate related party entity and three individuals (one of which
                is a
                related party).
            
            $
            2,830,000
            
            $
            3,155,000Promissory
                note payable to Nortel Networks, payable in monthly payments of $27,776
                through October 2009. Secured by certain assets of Frontrunner. Interest
                on the note is fixed at 7.25%.
            
            
            1,006,042
            
            
            1,112,591Unsecured
                note payable to Global Crossing North America, due in monthly installments
                of $16,667 through May 2006. The note bears interest (imputed at
                8%) and
                is subordinated to the outstanding bank debt. As of March 31, 2006,
                Frontrunner was in default under the terms of the
                agreement.
            
            
            132,017
            
            
            178,070Unsecured
                promissory note payable to Review Video, payable in monthly payments
                of
                $10,000 through September 2006. Interest on the note is fixed at
                7.25%
            
            
            40,007
            
            
            87,926Unsecured
                note payable to related party creditor, unsecured, payable in monthly
                installments of $12,500, including interest at 8.25%, through December
                2005. The Company is in default under the terms of this
                note.
            
            
            85,143
            
            
            96,976Unsecured
                installment payment agreement to New York State Department of Taxation
                and
                Finance, payable in monthly payments of $5,455 through June 2006.
                Includes
                principle and imputed interest and penalties at 16.67%.
            
            
            -
            
            
            36,153Unsecured
                term note to individual creditor, payable June 30, 2006, including
                all
                accrued interest at 14%. The Company is in default under the terms
                of this
                note.
            
            
            100,000
            
            
            -Unsecured
                term note, payable to Momentum Capital, a related party, due June
                30,
                2006, including all accrued interest at 7.5%. The Company is in default
                under the terms of this note.
            
            
            100,000
            
            
            -Various
                unsecured bridge advances, payable upon demand, including all accrued
                interest at 7.5% - 14.0%.
            
            
            95,000
            
            
            -Total
                debt
            
            
            4,388,209
            
            
            4,666,716Less:
                current maturities
            
            
            3,674,690
            
            
            3,815,337Long
                term portion
            
            $
            713,519
            
            $
            851,379





16


As
      of
      June 30, 2006, the Company is in default on two of the loan agreements. The
      Company is in arrears on the total Global Crossing note and the unsecured note
      payable to a related party creditor. There have been no adverse actions from
      these creditors concerning the arrearage amount.




The
      weighted-average interest rate on the debt listed above is 8.9% as of June
      30,
      2006.




The
      aggregate principal re-payments of long term debt as of June 30, 2006 are as
      follows:




2006
            
            $
            3,674,6902007
            
            
            291,1262008
            
            
            312,9482009
            
            
            109,445




**NOTE
      7 - Transactions with Related Parties**




On
      March
      31, 2004, the Company issued warrants to purchase 250,000 shares of common
      stock
      to two Board members in connection with advisory service agreements with each
      of
      these individuals. These two board members are now operating in the capacity
      of
      interim CEO’s of the Company. All warrants have an exercise price of $1.35 per
      share and are exercisable on or before March 31, 2007.




The
      Company currently has a $85,143 unsecured note payable to an entity that
      includes one of our board members. Although the Company is in default under
      this
      agreement, no demands have been made by this creditor to pay the loan.
      Additionally, the company has a $100,000 unsecured note payable to Momentum
      Capital, LLC, whose principals are comprised of our prior co-CEO’s, each of
      which are still senior executives of the Company. One of these senior executives
      provided an additionally $30,000 demand note to the Company on June 14, 2006.




**NOTE
      8 - Product Warranties**




The
      change in the aggregate product warranty liability which relates to Frontrunner
      for the year ended December 31, 2005 is as follows:




**June
                30, 2006**
            ****
            **June
                30, 2005**Beginning
                balance
            
            $
            191,624
            
            $
            115,030Additional
                warranties issued
            
            
            157,261
            
            
            164,302Claims
                paid
            
            
            (129,593
            )
            
            (98,448
            )Revisions
                in estimates
            
            
            (53,680
            )
            
            (2,966
            )Balance,
                end of period
            
            $
            165,612
            
            $
            177,918




17


**NOTE
      9 - Commitments and Contingencies**




As
      permitted under Florida law, the Company has agreements indemnifying its
      executive officers and directors for certain events and occurrences while the
      officer or director is, or was, serving at the Company’s request in such
      capacity. The maximum potential amount of future payments the Company could
      be
      required to make under these indemnification agreements is not estimable. The
      Company has secured an insurance policy, which will enable the Company to
      recover a portion of any future amounts that may be paid. No liabilities have
      been recorded for these indemnification agreements as of June 30, 2006 or
      December 31, 2005.




During
      2005 the Company became aware of additional contingent liabilities for
      Frontrunner that related to periods prior to the acquisition date of
      Frontrunner. The majority of these contingent liabilities were associated with
      potential prevailing wage laws for state work in the state of New York. The
      total amount of this potential liability is approximately $405 thousand of
      which
      approximately $317 thousand related to periods prior to the acquisition of
      Frontrunner. The amount of the liability related to pre acquisition periods
      was
      recorded as an adjustment to goodwill with the difference recorded in earnings
      prospectively. An additional $95 thousand of contingent liabilities were
      identified that related to prior periods. The majority of these liabilities
      related to costs to remove fiber optic cable from rented utility poles in New
      York. These liabilities also related to periods prior to the acquisition date
      of
      Frontrunner and were recorded as an adjustment to goodwill.




**NOTE
      10 - Segment Reporting**




The
      Company follows the provisions of SFAS No. 131, “Disclosures about Segments of
      an Enterprise and Related Information.” 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. Frontrunner is a single-source provider of business communications
      equipment and multimedia integration services for data, voice, video, and
      advanced applications. Most of Frontrunner’s customers are located in the
      northeast United States. Nexvu licenses its proprietary application performance
      monitoring software along with related hardware. It also provides consulting
      services to its customers. For purposes of segment reporting, the Company
      considers Nexvu and Frontrunner as two separate identifiable businesses. These
      two segments have separate management teams and financial statements.




18


**Results
      of Operation:**




**Three
      months ended June 30, 2006.**




**Frontrunner**
            ****
            **Nexvu**
            ****
            **Corp/elim**
            ****
            **Total**Revenues
            
            $
            3,253,935
            
            $
            399,630
            
            $
            -
            
            $
            3,653,565Gross
                margin
            
            
            1,639,253
            
            
            198,438
            
            
            -
            
            
            1,837,691Expenses
            
            
            1,605,220
            
            
            458,074
            
            
            279,343
            
            
            2,342,637Operating
                income (loss)
            
            
            34,033
            
            
            (259,636
            )
            
            (279,343
            )
            
            (504,946
            )Interest
                expense (income)
            
            
            99,464
            
            
            -
            
            
            7,940
            
            
            107,404Loss
                before taxes
            
            
            (65,431
            )
            
            (259,636
            )
            
            (287,283
            )
            
            (612,350
            )Depreciation
                / amortization
            
            
            179,998
            
            
            24,878
            
            
            -
            
            
            204,876





**Three
      months ended June 30, 2005.**




**Frontrunner**
            ****
            **Nexvu**
            ****
            **Corp/elim**
            ****
            **Total**Revenues
            
            $
            3,221,216
            
            $
            256,884
            
            $
            -
            
            $
            3,478,100Gross
                margin
            
            
            1,679,838
            
            
            120,419
            
            
            -
            
            
            1,800,257Expenses
            
            
            1,609,061
            
            
            450,009
            
            
            258,953
            
            
            2,318,023Operating
                income (loss)
            
            
            70,777
            
            
            (329,590
            )
            
            (258,953
            )
            
            (517,766
            )Interest
                expense (income)
            
            
            101,933
            
            
            (9,897
            )
            
            -
            
            
            92,036Loss
                before taxes
            
            
            (31,156
            )
            
            (319,693
            )
            
            (258,953
            )
            
            (609,802
            )Depreciation
                / amortization
            
            
            196,271
            
            
            21,345
            
            
            -
            
            
            217,616





**Six
      months ended June 30, 2006.**




**Frontrunner**
            
            **Nexvu**
            
            **Corp/elim**
            
            **Total**Revenues
            
            $
            6,730,069
            
            $
            786,392
            
            $
            -
            
            $
            7,516,461Gross
                margin
            
            
            3,264,986
            
            
            412,885
            
            
            -
            
            
            3,677,871Expenses
            
            
            3,250,588
            
            
            939,567
            
            
            661,024
            
            
            4,851,179Operating
                income (loss)
            
            
            14,398
            
            
            (526,682
            )
            
            (661,024
            )
            
            (1,173,308
            )Interest
                expense (income)
            
            
            199,973
            
            
            (44
            )
            
            9,582
            
            
            209,511Loss
                before taxes
            
            
            (185,575
            )
            
            (526,638
            )
            
            (670,606
            )
            
            (1,382,819
            )Depreciation
                / amortization
            
            
            361,125
            
            
            47,039
            
            
            -
            
            
            408,164Capital
                expenditures
            
            
            22,850
            
            
            53,049
            
            
            -
            
            
            75,899





19


**Six
      months ended June 30, 2005.**




**Frontrunner**
            ****
            **Nexvu**
            ****
            **Corp/elim**
            ****
            **Total**Revenues
            
            $
            6,948,778
            
            $
            584,068
            
            $
            -
            
            $
            7,532,846Gross
                margin
            
            
            3,436,870
            
            
            276,479
            
            
            -
            
            
            3,713,349Expenses
            
            
            3,199,321
            
            
            875,613
            
            
            468,186
            
            
            4,543,120Operating
                income (loss)
            
            
            237,549
            
            
            (599,134
            )
            
            (468,186
            )
            
            (829,771
            )Interest
                expense (income)
            
            
            202,555
            
            
            (26,523
            )
            
            -
            
            
            176,032Loss
                before taxes
            
            
            34,994
            
            
            (572,611
            )
            
            (468,186
            )
            
            1,005,803
            )Depreciation
                / amortization
            
            
            393,386
            
            
            41,152
            
            
            -
            
            
            434,538Capital
                expenditures
            
            
            98,944
            
            
            41,042
            
            
            -
            
            
            139,986




**Segment
      assets as of June 30, 2006.**




**Frontrunner**
            ****
            **Nexvu**
            ****
            **Corp/elim**
            ****
            **Total**Tangible
                assets
            
            $
            3,073,720
            
            $
            2,718,920
            
            $
            (1,432,481
            )
            $
            4,360,159Intangibles
                & goodwill
            
            
            6,494,654
            
            
            -
            
            
            -
            
            
            6,494,654Total
                assets
            
            $
            9,568,374
            
            $
            2,718,920
            
            $
            (1,432,981
            )
            $
            10,854,813





**Segment
      assets as of December 31, 2005**




**Frontrunner**
            ****
            **Nexvu**
            ****
            **Corp/elim**
            ****
            **Total**Tangible
                assets
            
            $
            2,926,847
            
            $
            2,693,263
            
            $
            (1,263,777
            )
            $
            4,356,333Intangibles
                & Goodwill
            
            
            6,777,877
            
            
            -
            
            
            -
            
            
            6,777,877Total
                assets
            
            $
            9,704,724
            
            $
            2,693,263
            
            $
            (1,263,777
            )
            $
            11,134,210




**NOTE
      11 - Subsequent Event**




Subsequent
      to June 30, 2006, the Company announced letters of intent to acquire three
      additional companies. One of these targets has $3.1 million of secured notes
      which are collateralized by all of the assets of such company. The most
      significant asset of this company that we intend on acquiring is a supply chain
      pricing software and database software system. Although the Company has signed
      a
      business development and licensing agreement with this company, we believe
      that
      this software may be paramount to our acquisition strategy and the Company
      believes that it is crucial to protect the availability of this software.
      Accordingly, the Company has obligated itself to purchase $1.6 million of this
      secured debt and expects to obligate itself to purchase the remaining balance
      of
      this secured debt prior to the acquisition. However, there can be no assurance
      that the acquisition will be completed.




20


**Item
      2. Management’s Discussion and Analysis**




THE
      FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION SHOULD
      BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
      THERETO INCLUDED ELSEWHERE IN THIS REPORT.




**Overview**




As
      of
      June 30, 2006, the Company’s current liabilities exceeded its current assets by
      $6.1 million. Included in the current liabilities is $3.7 million of current
      maturities of long-term debt, including a $2.8 million demand note payable
      to
      Harris Bank. Frontrunner and Harris have been in negotiations to extend the
      due
      date of this demand note. On June 13, 2006, Frontrunner received notice that
      Harris Bank issued to Frontrunner a demand for payment of the Demand Note no
      later than July 12, 2006.  We
      have
      been in discussions with the Harris Bank to extend the payment date of such
      demand note until August 31, 2006. However, no final agreement to extension
      has
      been reached. The majority of this debt reflects pre-existing balances from
      the
      acquisition of Frontrunner during 2004. There was essentially no cash on hand
      at
      June 30, 2006. The Company has incurred operating losses of $2.3 million and
      $4.9 million for the two years ended December 31, 2005 and 2004 respectively
      and
      $1.4 million for the six months ended June 30, 2006. Cash utilized in operating
      activities were $1.8 million and $3.3 million for the two years ended December
      31, 2005 and 2004 respectively. Only $59 thousand of cash was utilized for
      operating activities during the six months ended June 30, 2006. However, net
      losses were funded by delaying payments to some vendors, increasing accounts
      payable by $1.2 million since December 31, 2005.




The
      Company’s net working capital deficiency, status of the demand note, recurring
      losses and negative cash flows from operations raise substantial doubt about
      the
      Company’s ability to continue as a going concern. During the six months ended
      June 30, 2006, the Company’s revenues were relatively flat but the loss
      increased from $1.0 million to $1.4 million. Included in the current year loss
      is $43 thousand of stock based compensation, compared to none during 2005.
      Nexvu
      is continuing to strive to increase sales of its software products and
      professional services in order decrease the operating losses experienced
      previously. Frontrunner sales have decreased during the since months ended
      June
      30, 2006 and have had several headcount reductions during the year. Both
      companies continue to be vigilant on operating expenses.




The
      Company is in the process of raising additional funds through bridge financing
      and new equity capital. These funds would be utilized to fund recently
      announced intentions to acquire Global Capacity Group, LLC, 20-20 Technologies,
      Inc. and Cirond, Inc. Additionally, the capital raised will fund working capital
      needs, reduce debt, specifically, the Harris notes payable, and provide
      additional funding for additional acquisitions. Through August 14, 2006, the
      Company has raised $916 thousand in bridge loans of which $461 is convertible
      into stock of the Company. However, no assurance can be made that the additional
      bridge loans and an adequate capital raise can be completed.




21


We
      presently have approximately 90 full time employees between Nexvu and
      Frontrunner. We do not anticipate that this number will increase significantly
      in the near future, except for through acquisitions. In addition, there are
      no
      current plans to significantly increase our capital spending on software or
      equipment.




**Results
      of Operations**




**Three
      months ended June 30, 2006 compared to 2005**




Revenues
      for the three month period ended June 30, 2006 were heavily influenced by
      Frontrunner. Frontrunner is nearly 90% of the consolidated revenue. Total
      revenues from Frontrunner were $3.3 million, representing a 1% increase to
      the
      prior year comparable period. Revenues for Frontrunner are generated from
      installation of voice and data systems, as well as, through managed services
      and
      maintenance contracts on installed systems. Installation revenues represented
      approximately 43% of total Frontrunner revenues with managed services and
      maintenance revenues representing approximately 57% of the total Frontrunner
      revenues. Installation revenues increased 12% to the prior year with managed
      services and maintenance revenues declining 6%. This decrease reflects the
      decline in the base of customers with maintenance contracts that occurred during
      2005. The Nexvu revenues for the three month period ended June 30, 2006 were
      approximately $400 thousand representing a 56% increase compared to the prior
      year. The Nexvu sales are comprised primarily of consulting services and sales
      of our software product. Consulting services experienced a 99% increase in
      revenues and resulted in the majority of the increase in the Nexvu revenues,
      with sales of Nexvu’s software product and related maintenance actually
      decreasing 52%. The percentage of total revenue for Nexvu was 91% for consulting
      services and 9% for product sales and related maintenance.




Our
      consolidated gross margin rate was 49.7% compared to 51.8% last year. Gross
      margins for Frontrunner were 50% compared to 52% for the prior year. The managed
      services and maintenance revenues had a 50% gross margin rate, an increase
      of 5%
      from last year of 45%. Gross margin on installation revenues were 24% comparing
      unfavorably to the 38% achieved last year. There is significant competition
      in
      this market and margin rates will continue to be pressured. The Nexvu gross
      margin rates were 50% for the three month period ended June 30, 2006, increasing
      from the 47% attained last year. Gross margin includes outside labor on
      consulting arrangements, amortization of software licensing fees related to
      the
      development of our product, sales commissions and incidental expenses billable
      to customers.




22


Total
      operating expenses were as follows:




**Three
                months ended,**
            ********
            ****
            **June
                30, 2006**
            ****
            **June
                30, 2005**Compensation
            
            $
            1,410,509
            
            $
            1,316,015Travel
                and entertainment
            
            
            60,415
            
            
            71,130Occupancy
            
            
            147,914
            
            
            124,123Professional
                services
            
            
            203,999
            
            
            235,359Insurance
            
            
            78,482
            
            
            78,382Depreciation
                and amortization
            
            
            204,876
            
            
            217,616Other
                operating expenses
            
            
            236,442
            
            
            275,398Total
                operating expenses
            
            $
            2,342,637
            
            $
            2,318,023





The
      majority of our operating expenses consist of compensation expenses,
      professional fees and depreciation and amortization expenses. The increase
      in
      the compensation expense is primarily the result of $30 thousand of stock
      compensation incurred during the 2 nd quarter
      of 2006. This expense is primarily the result of stock options issued to the
      new
      CEO of the Company. The professional fees 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.
      Our travel and entertainment expenses relate primarily to costs associated
      with
      our sales force. Our occupancy expense represents the costs of our corporate
      offices in Schaumburg, IL, our Frontrunner office in Rochester, NY, as well
      as
      11 other sales offices. The majority of the depreciation is comprised of the
      amortization of the acquired customer list of Frontrunner, with $141.6 thousand
      of expense recorded during the quarter. Other expenses are principally comprised
      of operations and marketing expenses at Frontrunner.




The
      current period results reflect interest expense on the $4.4 million of debt.
      The
      debt has a weighted average interest rate of 8.9% compared to 6.2% during the
      same quarter last year. This increase in the average interest rate is primarily
      the result of higher prime interest rates, which correlate to the interest
      costs
      of Frontrunner’s largest lender, Harris Bank. However debt levels have fallen
      from $5.4 million at June 30, 2005 to the current level of $4.4 million,
      resulting in an overall decrease in interest expense.




**Three
      months ended June 30, 2005 compared to 2004**




Revenues
      for the three month period ended June 30, 2005 were heavily influenced by the
      acquisition of Frontrunner. Frontrunner is generating over 90% of the
      consolidated revenue of the Company. Total revenues from Frontrunner were $3.2
      million with revenues generated from installation of voice and data systems,
      as
      well as through managed services and maintenance contracts on installed systems.
      This represents a 12.6% increase to the prior year level. Installation revenues
      represented approximately 39% of total Frontrunner revenues with managed
      services and maintenance revenues representing approximately 61% of the total
      revenues.




The
      Nexvu
      revenues for the three month period ended June 30, 2005 were approximately
      $257
      thousand and are comprised primarily of sales of our product, as well as
      consulting fees and maintenance. The percentage of total revenue for Nexvu
      was
      71% for consulting services and 24% for product sales. Maintenance revenues
      comprised the remaining 5% of revenues.




23


Gross
      margins for Frontrunner for the three month period ended June 30, 2005 were
      52%
      with the managed services and maintenance revenues having a 45% gross margin
      and
      installation revenues having a 38% gross margin. The Nexvu gross margin rate
      was
      47% for the three month period ended June 30, 2005. Gross margin includes the
      costs of the appliances included in the product sales, outside labor on
      consulting arrangements, amortization of software licensing fees related to
      the
      development of our product, sales commissions and incidental expenses billable
      to customers.




Total
      operating expenses were as follows:




**Three
                months ended,**
            ********
            ****
            **June
                30, 2005**
            ****
            **June
                30, 2004**Compensation
            
            $
            1,316,015
            
            $
            917,667Travel
                and entertainment
            
            
            71,130
            
            
            91,424Occupancy
            
            
            124,123
            
            
            29,189Professional
                services
            
            
            235,359
            
            
            168,176Insurance
            
            
            78,382
            
            
            20,482Depreciation
                and amortization
            
            
            217,616
            
            
            34,621Other
                operating expenses
            
            
            275,398
            
            
            74,989Total
                operating expenses
            
            $
            2,318,023
            
            $
            1,336,548





The
      majority of our operating expenses consist of compensation expenses,
      professional fees and depreciation and amortization expenses. During 2004,
      we
      took steps to reduce the overall number of Nexvu employees by over 50%. This
      was
      accomplished by a partial reduction in July and another reduction in August.
      Annual savings from this reduction are estimated to be over $1.5 million due
      to
      decreased compensation, travel and other incidental expenses. Nexvu currently
      has 12 full time employees, down from a level during early 2004 that reached
      30.
      Total compensation expense for Nexvu was approximately $312 thousand, down
      from
      the $918 thousand during the same period last year. Frontrunner compensation
      was
      approximately $912 thousand with corporate salaries of approximately $92
      thousand. The professional fees are primarily related to legal fees related
      to
      acquisitions and securities work related to filings with the Securities and
      Exchange Commission, as well as, accounting fees. Our travel and entertainment
      expenses relate primarily to costs associated with our sales force. Our
      occupancy expense represents the costs of leasing our corporate offices in
      Schaumburg, IL, our Frontrunner office in Rochester, NY, as well as 11 other
      sales offices. During September 2004, we made the decision to move our corporate
      offices to another location in Schaumburg, IL, sharing space with the
      Frontrunner division. We subleased the vacated offices through the remaining
      term (December 2005) and recorded a charge of $78 thousand for the remaining
      lease payments, net of future sublease income. The majority of the depreciation
      is comprised of the amortization of the acquired customer list of Frontrunner,
      with $153.6 thousand of expense recorded during the quarter. Other expenses
      are
      principally comprised of operations and marketing expenses at
      Frontrunner.




24


The
      current period results reflect interest expense on the $5.4 million of debt.
      The
      debt has a weighted average interest rate of 6.2%. Partially offsetting the
      debt
      is interest income on the invested cash balances. The 2004 results reflect
      interest income on invested capital from the private equity raise that occurred
      in early 2004.




**Six
      months ended June 30, 2006 compared to 2005**




Revenues
      for the six month period ended June 30, 2006 were heavily influenced by
      Frontrunner. Frontrunner is generating 90% of the Company’s consolidated
      revenue. Total revenues from Frontrunner were $6.7 million, representing a
      3%
      decrease to the prior year comparable period. Revenues for Frontrunner are
      generated from installation of voice and data systems, as well as, through
      managed services and maintenance contracts on installed systems. Installation
      revenues represented approximately 46% of total Frontrunner revenues with
      managed services and maintenance revenues representing approximately 54% of
      the
      total Frontrunner revenues. Installation revenues increased 2% to the prior
      year
      with managed services and maintenance revenues declining 8%. This decrease
      reflects the decline in the base of customers with maintenance contracts that
      occurred during 2005. The Nexvu revenues for the six month period ended June
      30,
      2006 were approximately $786 thousand representing an 35% increase compared
      to
      the prior year. The Nexvu sales are comprised primarily of consulting services
      and sales of our software product. Consulting services experienced a 55%
      increase in revenues and resulted in the majority of the increase in the Nexvu
      revenues, with sales of Nexvu’s software product and related maintenance
      decreasing 25%. The consulting revenues are primarily derived from one customer.
      The percentage of total revenue for Nexvu was 86% for consulting services and
      14% for product sales and related maintenance.




Our
      consolidated gross margin rate was 48.9% compared to 49.3% last year. Gross
      margins for Frontrunner were 48.5% compared to 49.5% last year. The managed
      services and maintenance revenues had a 48% gross margin rate an increase from
      the 46% attained last year. Gross margin on installation revenues were 28%
      comparing unfavorably to the 31% achieved last year. There is significant
      competition in this market and margin rates will continue to be pressured.
      The
      Nexvu gross margin rates were 52.5% for the six month period ended June 30,
      2006, increasing from the 47.3% attained last year. Gross margin includes
      outside labor on consulting arrangements, amortization of software licensing
      fees related to the development of our product, sales commissions and incidental
      expenses billable to customers.




25


Total
      operating expenses were as follows:




**Six
                months ended,**
            ********
            ****
            **June
                30, 2006**
            ****
            **June
                30, 2005**Compensation
            
            $
            2,902,805
            
            $
            2,612,858Travel
                and entertainment
            
            
            112,277
            
            
            117,423Occupancy
            
            
            272,259
            
            
            252,844Professional
                services
            
            
            542,305
            
            
            353,695Insurance
            
            
            159,853
            
            
            158,678Depreciation
                and amortization
            
            
            408,164
            
            
            434,538Other
                operating expenses
            
            
            453,516
            
            
            613,084Total
                operating expenses
            
            $
            4,851,179
            
            $
            4,543,120





The
      majority of our operating expenses consist of compensation expenses,
      professional fees and depreciation and amortization expenses. The increase
      in
      the compensation expense is primarily the result of $43 thousand of stock
      compensation incurred for the six months ended June 30, 2006 .
      This
      expense is primarily the result of stock options issued to the new CEO of the
      Company. Additionally, Frontrunner had a higher level of compensation expense
      in
      2006 compared to 2005; however, they have taken steps to reduce this expense
      during the 2 nd quarter.
      The professional fees 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 demands loan in connection with the continuance of
      such
      guarantees. The Company recorded $135 thousand of expense during the six months
      ended June 30, 2006, with respect to such issuance of shares. Our travel and
      entertainment expenses relate primarily to costs associated with our sales
      force. Our occupancy expense represents the costs of our corporate offices
      in
      Schaumburg, IL, our Frontrunner office in Rochester, NY, as well as 11 other
      sales offices. The majority of the depreciation is comprised of the amortization
      of the acquired customer list of Frontrunner, with $307.1 thousand of expense
      recorded during the quarter. Other expenses are principally comprised of
      operations and marketing expenses at Frontrunner.




The
      current period results reflect interest expense on the $4.6 million of debt.
      The
      debt has a weighted average interest rate of 8.9% compared to 6.2% during the
      same period last year. This increase in the average interest rate is primarily
      the result of higher prime interest rates, which correlate to the interest
      costs
      of Frontrunner’s largest lender, Harris Bank. However debt levels have fallen
      from $5.4 million at June 30, 2005 to the current level of $4.4 million,
      resulting in an overall decrease in interest expense.




**Six
      months ended June 30, 2005 compared to 2004**




Revenues
      for the six month period ended June 30, 2005 were heavily influenced by the
      acquisition of Frontrunner. Frontrunner generated over 90% of the consolidated
      revenue. Total revenues from Frontrunner were $6.9 million with revenues
      generated from installation of voice and data systems, as well as through
      managed services and maintenance contracts on installed systems. This represents
      a 26% increase to the prior year level. Installation revenues represented
      approximately 43% of total Frontrunner revenues with managed services and
      maintenance revenues representing approximately 57% of the total revenues.




26


The
      Nexvu
      revenues for the six month period ended June 30, 2005 were approximately $584
      thousand, which represents a 92% increase over the same period last year. The
      Nexvu revenues are comprised primarily of sales of our product, as well as,
      consulting fees and maintenance. The percentage of total revenue for Nexvu
      was
      75% for consulting services and 20% for product sales. Maintenance revenues
      comprised the remaining 5% of revenues.




Gross
      margins for Frontrunner for the six month period ended June 30, 2005 were 50%
      with the managed services and maintenance revenues having a 46% gross margin
      and
      installation revenues having a 31% gross margin. The Nexvu gross margin rates
      were 47% for the six month period ended June 30, 2005. Gross margin includes
      the
      costs of the appliances included in the product sales, outside labor on
      consulting arrangements, amortization of software licensing fees related to
      the
      development of our product, sales commissions and incidental expenses billable
      to customers.




Total
      operating expenses were as follows:




**Six
                months ended,**
            ********
            ****
            **June
                30, 2005**
            ****
            **June
                30, 2004**Compensation
            
            $
            2,612,858
            
            $
            1,592,249Travel
                and entertainment
            
            
            117,423
            
            
            140,058Occupancy
            
            
            252,844
            
            
            58,817Professional
                services
            
            
            353,695
            
            
            325,469Insurance
            
            
            158,678
            
            
            26,580Depreciation
                and amortization
            
            
            434,538
            
            
            52,375Other
                operating expenses
            
            
            613,084
            
            
            172,374Total
                operating expenses
            
            $
            4,543,120
            
            $
            2,367,922





The
      majority of our operating expenses consist of compensation expenses,
      professional fees and depreciation and amortization expenses. During 2004,
      we
      took steps to reduce the overall number of Nexvu employees by over 50%. This
      was
      accomplished by a partial reduction in July and another reduction in August.
      Annual savings from this reduction are estimated to be over $1.5 million due
      to
      decreased compensation, travel and other incidental expenses. Nexvu currently
      has 12 full time employees, down from a level during early 2004 that reached
      30.
      Total compensation expense for Nexvu was approximately $662 thousand, down
      from
      the $1.6 million during the same period last year. Frontrunner compensation
      was
      approximately $1.8 million with corporate salaries of approximately $184
      thousand. The professional fees are primarily related to legal fees related
      to
      acquisitions and securities work related to filings with the Securities and
      Exchange Commission, as well as accounting fees. Our travel and entertainment
      expenses relate primarily to costs associated with our sales force. Our
      occupancy expense represents the costs of leasing our corporate offices in
      Schaumburg, IL, our Frontrunner office in Rochester, NY, as well as 11 other
      sales offices. During September 2004, we made the decision to move our corporate
      offices to another location in Schaumburg, IL, sharing space with the
      Frontrunner division. We subleased the vacated offices through the remaining
      term (December 2005) and recorded a charge of $78 thousand for the remaining
      lease payments, net of future sublease income. The majority of the depreciation
      is comprised of the amortization of the acquired customer list of Frontrunner,
      with $307 thousand of expense recorded during the six month period ended June
      30, 2005. Other expenses are principally comprised of operations and marketing
      expenses at Frontrunner.




27


The
      current period results reflect interest expense on the $5.4 million of debt.
      The
      debt has a weighted average interest rate of 6.2%. Partially offsetting the
      debt
      is interest income on the invested cash balances. The 2004 results reflect
      interest income on invested capital from the private equity raise that occurred
      in early 2004.




**Liquidity
      and Capital Resources**




Cash
      utilized in operating activities was only $59 thousand during the six month
      period ending June 30, 2006 compared to $1.4 million the previous comparable
      period. Although the cash utilization is favorable, it was attained by delaying
      payments to vendors, with accounts payable growing during the first six months
      of the year by $1.2 million. Accounts receivable increased since December 31,
      2005 by $525 thousand primarily due to timing of receipts of existing
      receivables by customers.




The
      Company did not utilize significant cash for investing activities as $95
      thousand was used during the six months ended June 30, 2006. These expenditures
      were primarily the result of moving our offices for our Nexvu engineering staff
      to new facilities during the first quarter. This was required as our old lease
      expired and was not renewed by the landlord. We do not expect to require
      significant expenditures in the future.




Total
      cash utilized in financing activities was $279 thousand and represents a $574
      reduction in Frontrunner debt during the six month period ended June 30, 2006
      partially offset by an additional $295 thousand of debt taken by the Company.
      Included in the current liabilities is $3.7 million of current maturities of
      long-term debt, including a $2.8 million demand note payable to Harris Bank.
      Frontrunner and Harris have been in negotiations to extend the due date of
      this
      demand note. On June 13, 2006, Frontrunner received notice that Harris Bank
      issued to FNS a demand for payment of the Demand Note no later than July 12,
      2006.  We
      have
      been in discussions with the Harris Bank to extend the payment date of such
      demand note until August 31, 2006. However, no final agreement to extension
      has
      been reached.




Through
      August 14, 2006, the Company has raised $916 thousand in bridge loans. The
      Company is in the process of raising additional funds through bridge financing
      and new equity capital. These funds would be utilized to fund recently announced
      intentions to acquire Global Capacity Group, LLC, 20-20 Technologies, Inc.
      and
      Cirond, Inc. Additionally, the capital raised will fund working capital needs,
      reduce debt, specifically, the Harris notes payable, and provide additional
      funding for additional acquisitions. However, no assurance can be made that
      the
      additional bridge loans and an adequate capital raise can be
      completed.




28


We
      have
      future contractual obligations for leases of our offices and for minimum future
      royalty payments related to a software licensing agreement with a third party.
      This software is being utilized as a component of our own proprietary software.
      The following table summarizes our future contractual obligations as of June
      30,
      2006:




**Operating**
              **Leases**
            ****
            **Debt
                Obligations**
            ****
            **Minimum
                Royalty Payments**2006
            
            $
            310,676
            
            $
            3,674,690
            
            $
            100,0002007
            
            
            187,406
            
            
            291,126
            
            
            125,0002008
            
            
            190,475
            
            
            312,948
            
            
            150,0002009
            
            
            137,416
            
            
            109,445
            
            
            -2010
                and beyond
            
            
            149,444
            
            
            -
            
            
            -Total
                contractual obligations
            
            $
            975,417
            
            $
            4,388,209
            
            $
            375,000





All
      debt
      that is callable or not in compliance is reflected in the 2006 obligations.




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




**Critical
      Accounting Policies**




The
      preparation of our consolidated financial statements in conformity with
      accounting principles generally accepted in the United States requires us to
      make estimates and judgments that affect our reported assets, liabilities,
      revenues, and expenses, and the disclosure of contingent assets and liabilities.
      We base our estimates and judgments on historical experience and on various
      other assumptions we believe to be reasonable under the circumstances. Future
      events, however, may differ markedly from our current expectations and
      assumptions. While there are a number of significant accounting policies
      affecting our consolidated financial statements; we believe the following
      critical accounting policies involve the most complex, difficult and subjective
      estimates and judgments.




**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”
(“SAB104”), which superceded Staff Accounting Bulletin No. 101, “Revenue
      Recognition in Financial Statements” (“SAB 101”).




29


SAB
      101
      requires that four basic criteria must be met before revenue can be recognized:
      (1) persuasive evidence that 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.




SAB
      104
      incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”),
“Multiple-Deliverable Revenue Arrangements.” EITF 00-21 addresses accounting for
      arrangements that may involve the delivery or performance of multiple products,
      services and/or rights to use assets. The effect of implementing EITF 00-21
      on
      the Company's consolidated financial position and results of operations was
      not
      significant.




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 defers maintenance revenue and recognizes it ratably over the
      maintenance term. The Company defers consulting and training billings and
      recognizes them as those services are performed.




**Goodwill
      and Purchased Intangible Assets**




In
      July
      2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”
Effective for fiscal years beginning after December 15, 2001, SFAS No. 142
      requires goodwill to be tested for impairment on an annual basis and between
      annual tests in certain circumstances, and written down when impaired, rather
      than being amortized as previous accounting standards required. Furthermore,
      SFAS No. 142 requires purchased intangible assets other than goodwill to be
      amortized over their useful lives unless these lives are determined to be
      indefinite. Intangible assets, consisting of software licenses and customer
      lists, are amortized on a straight-line basis over periods ranging from 3 to
      7
      years, representing the remaining life of the assets.




30


Based
      on
      the impairment tests performed by management, there was no impairment of
      goodwill in 2005 or 2004 nor does management believe that any impairment has
      occurred during 2006. There can be no assurance that future goodwill impairment
      tests will not result in a charge to earnings.




**Stock-Based
      Compensation**




At
      June
      30, 2006, the Company had a stock option plan and two separate employee
      related stock option agreements, which are described more fully in Note 4.
      Prior
      to January 1, 2006, the Company accounted for those plans under the recognition
      and measurement provisions of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* .
      No
      stock-based employee compensation cost was recognized in the Statement of
      Operations for the six month period ended June 30, 2005, as all outstanding
      unvested options granted under those plans at that time had an exercise price
      equal to the market value of the underlying common stock on the date of grant
      and no restricted stock grants were outstanding during that period. Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      FASB Statement No. 123(R), *Share-Based
      Payment* ,
      using
      the modified-prospective-transition method. Under this transition method,
      compensation cost recognized in fiscal 2006 includes: (a) compensation cost
      for
      all share-based payments granted prior to, but not yet vested as of January
      1,
      2006, based on the grant date fair value estimated in accordance with the
      original provisions of Statement 123, and (b) compensation cost for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of Statement
      123(R). Results for prior periods have not been restated.




**Inventory**




Inventories
      are stated at lower of cost or market as determined by the first in, first
      out
      (FIFO) method. The entire inventory represents balances from Frontrunner as
      Nexvu has no inventory. The reserve balance is estimated by management based
      on
      previous experience and considers the on-hand inventory needs based on the
      networks under maintenance service agreements.





**Off
      -Balance Sheet Obligations**




The
      Company has no off-balance sheet obligations at June 30, 2006.





**Subsequent
      Events**





Subsequent
      to June 30, 2006, the Company announced letters of intent to acquire three
      additional companies. One of these targets has $3.1 million of secured notes
      which are collateralized by all of the assets of such company. The most
      significant asset of this company that we intend on acquiring is a supply chain
      pricing software and database software system. Although the Company has signed
      a
      business development and licensing agreement with this company, we believe
      that
      this software may be paramount to our acquisition strategy and the Company
      believes that it is crucial to protect the availability of this software.
      Accordingly, the Company has obligated itself to purchase $1.6 million of this
      secured debt and expects to obligate itself to purchase the remaining balance
      of
      this secured debt prior to the acquisition. However, there can be no assurance
      that the acquisition will be completed.




31


**Item
      3. Controls and Procedures**




**Evaluation
      of Disclosure Controls and Procedure**




Our
      chief
      executive officer and chief financial officer have evaluated our disclosure
      controls and procedures as of June 30, 2006, and have concluded that, as of
      June
      30, 2006, these controls and procedures have been effectively designed to ensure
      that information required to be disclosed in reports that we file with or submit
      to the United States Securities and Exchange Commission is recorded, processed,
      summarized and reported within the time periods specified in the Commission’s
      rules and forms and is accumulated and communicated to management as appropriate
      to allow timely decisions regarding this disclosure.




**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. 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. Changes in Securities and Small Business Issuer Purchases of Equity
      Securities**




The
      following sets forth securities sold by us in the quarterly period ended June
      30, 2006 without registration under the Securities Act.  Unless otherwise
      noted, in each case we sold shares of our common stock or warrants to acquire
      common stock in private transactions to persons we believed were “accredited
      investors” and/or “sophisticated investors” not affiliated with us unless
      otherwise noted, and purchasing the shares with an investment intent.  Each
      of the transactions involved the offering of such securities to a substantially
      limited number of persons.  Each person took the securities as an
      investment for his/her/its own account, and not with a view to distribution.
      We
      relied upon exemptions contained in Section 4(2) of the Securities Act or
      Regulation D promulgated thereunder in each of these instances.  In each
      case we did not engage in general solicitation and advertising and the shares
      were purchased by investors with whom we, through our officers and directors,
      had preexisting relationships.  Each person had access to information
      equivalent to that which would be included on a registration statement on the
      applicable form under the Securities Act.  We did not use underwriters for
      any of the transactions described below; therefore, these transactions did
      not
      involve underwriter discounts or commissions.




32


On
      April
      1, 2006 we issued a total of 50,000 shares of common stock to John Jellinek
      in
      connection with Mr. Jellinek’s delivery of an extension of guaranty with respect
      to the Harris Bank demand note to our subsidiary, Frontrunner.




On
      April
      1, 2006 we issued a total of 50,000 shares of common stock to Phil Kenney in
      connection with Mr. Kenney’s delivery of an extension of guaranty with respect
      to the Harris Bank demand note to our subsidiary, Frontrunner. Mr. Kenney is
      a
      member of our board of directors.




On
      June
      28, 2006, pursuant to the terms of an Employee Option Agreement, we issued
      an
      option to acquire 1,496,993 of the common stock to Thomas G. Hudson. The options
      have a strike price equal to $.70. In accordance with the terms of this Employee
      Option Agreement (i) 25% of the Employee 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. Mr. Hudson is the Chief Executive
      Officer of the Company.




On
      June
      28, 2006, pursuant to the terms of a Performance Option Agreement, we issued
      an
      option to acquire 2,993,985 of common stock to Thomas G. Hudson. The options
      have a strike price equal to per share common stock price of the next equity
      financing of the Company which is expected to be completed during 2006. In
      accordance with the terms of this Performance Option Agreement, portions of
      the
      performance options shall vest on the following basis:  upon each
      realization by the Company of an incremental $2.0 million of third party service
      and/or maintenance revenue from new customers, with gross margins in excess
      of
      35%, pursuant to an agreement of one year or more, Mr. Hudson shall vest,
      incrementally, in 199,599 option shares of the total number of Performance
      Options, up to a total of such available Performance Options. Mr. Hudson is
      the
      Chief Executive Officer of the Company.




**Item
      3. Defaults Upon Senior Securities**




None.




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




None.




**Item
      5. Other Information**




None.




**Item
      6. Exhibits**




Exhibits
      filed as a part of this quarterly report on Form 10-QSB are listed in the Index
      to Exhibits located on page 34 of this Report.




33


**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant has duly
      caused this report to be signed by the undersigned, thereunto duly
      authorized.




**CAPITAL
              GROWTH SYSTEMS, INC.**By:
            /s/ Thomas
              G.
              HudsonThomas
              G. Hudson, Chief Executive
              Officer


By:
            /s/ Derry
              L.
              BehmDerry
              L. Behm, Chief Financial and Accounting
              Officer




Dated:
      August 21, 2006




34


**EXHIBIT
      INDEX**


**Exhibit
                    Number**
                
                **Description
                    of Document**3.i
                
                Articles
                    of Incorporation of Capital Growth Systems, Inc.(1)3.ii
                
                By-laws
                    of Capital Growth Systems, Inc.(1)10.1
                
                Employment
                    Agreement by and between Thomas G. Hudson and the company, dated
                    June 28,
                    2006.(2)10.2
                
                Stock
                    Option Agreement by and between Thomas G. Hudson and the Company,
                    dated
                    June 28, 2006.(2)10.3
                
                Performance
                    Option Agreement by and between Thomas G. Hudson and the Company,
                    dated
                    June 28, 2006.(2)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 10-SB filed with the Commission on
                June
                20, 2000 (SEC File No. 0-30831).





(2)
            Incorporated
                herein by reference to the Form 8-K previously filed with the Commission
                on July 5, 2006 (SEC File No. 0-30831).





(*)
            Filed
                herewith.