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 September 30, 2005
 
 o  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
                  or other jurisdiction of
              (I.R.S.
                  Employer Identification No.)incorporation
                  or organization)
 
 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 £
 
 The
        total
        number of shares outstanding of the issuer’s common stock, par value $.0001, as
        of November 11, 2005 is 17,015,754.
 
 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 ofSeptember
                    30, 2005 (Unaudited) and December 31, 2004
                
                4Consolidated
                    Condensed Statements of Operations, For the three and ninemonth
                    periods ended September 30, 2005 and 2004 (Unaudited)
                
                5Consolidated
                    Condensed Statement of Shareholders' Equity fromJanuary
                    1, 2005 to September 30, 2005 (Unaudited)
                
                6Consolidated
                    Condensed Statements of Cash Flows, For the nine monthperiods
                    ended September 30, 2005 and 2004 (Unaudited)
                
                7Notes
                    to Interim Consolidated Condensed Financial Statements
                
                8Item
                    2. Management's Discussion and Analysis
                
                19Item
                    3. Controls and Procedures
                
                28PART
                    II. OTHER INFORMATION
                
                29Item
                    1. Legal Proceedings
                
                29Item
                    2. Changes in Securities and Small Business Issuer Purchases
                    of
                    EquitySecurities
                
                29Item
                    3. Defaults Upon Senior Securities
                
                29Item
                    4. Submission of Matters to a Vote of Security Holders
                
                29Item
                    5. Other Information
                
                29Item
                    6. Exhibits
                
                29Signatures
                    and Certifications
                
                30
 2
  **PART
        I - FINANCIAL INFORMATION**
  **Item
        1. Financial Statements**
 
 
 
 CAPITAL
        GROWTH SYSTEMS, INC.
  Interim
        Consolidated Condensed Financial Statements
  (Unaudited)
  September
        30, 2005
     3
  **CAPITAL
                  GROWTH SYSTEMS, INC.****CONSOLIDATED
                  CONDENSED BALANCE SHEETS****(Unaudited)****September
                  30,**
                **2005**
              
              **December
                  31,**
                **2004****ASSETS:**Current
                  Assets:Cash
              
              $
              957,125
              
              $
              3,660,894Accounts
                  receivable, net
              
              
              2,052,904
              
              
              1,454,579Inventories,
                  net
              
              
              1,860,278
              
              
              1,982,102Prepaid
                  expenses
              
              
              115,573
              
              
              90,303Other
                  current assets
              
              
              85,742
              
              
              119,352Total
                  current assets
              
              
              5,071,622
              
              
              7,307,230Fixed
                  assets, net of accumulated depreciation
              
              
              983,358
              
              
              1,099,805Software
                  license fees
              
              
              30,910
              
              
              43,311Customer
                  list acquired, net
              
              
              2,953,946
              
              
              3,410,622Goodwill
              
              
              3,553,619
              
              
              3,452,369Other
                  assets
              
              
              16,355
              
              
              44,652Total
                  Assets
              
              $
              12,609,810
              
              $
              15,357,989**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  Liabilities:Current
                  maturities of debt
              
              $
              4,145,935
              
              $
              4,795,994Accounts
                  payable
              
              
              1,311,475
              
              
              1,407,499Accrued
                  expenses
              
              
              1,001,355
              
              
              1,081,199Deferred
                  revenues
              
              
              1,653,136
              
              
              1,472,083Advance
                  billings
              
              
              656,945
              
              
              1,214,030Other
                  current liabilities
              
              
              200,066
              
              
              115,030Total
                  current liabilities
              
              
              8,968,912
              
              
              10,085,835Long-term
                  liabilitiesDebt
              
              
              919,125
              
              
              1,231,716Total
                  Liabilities
              
              
              9,888,037
              
              
              11,317,551Stockholders’
                  EquityCommon
                  Stock, $.0001 par value, 25,000,000 authorized, 17,015,754 and
                  16,940,754
                  issued and outstanding as of September 30, 2005 and December 31,
                  2004,
                  respectively
              
              
              1,701
              
              
              1,694Additional
                  paid-in capital
              
              
              12,831,414
              
              
              12,730,171Accumulated
                  deficit
              
              
              (10,111,342
              )
              
              (8,691,427
              )Total
                  Stockholders’ Equity
              
              
              2,721,773
              
              
              4,040,438Total
                  Liabilities and Stockholders’ Equity
              
              $
              12,609,810
              
              $
              15,357,989
  **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**
                **Sept.
                  30,**
              
              **Nine
                  Months Ended**
                **Sept.
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****Revenue**
              
              $
              4,547,244
              
              $
              593,114
              
              $
              12,080,090
              
              $
              896,587**Cost
                  of Goods Sold**
              
              
              2,631,914
              
              
              273,379
              
              
              6,451,411
              
              
              366,744**Gross
                  Margin**
              
              
              1,915,330
              
              
              319,735
              
              
              5,628,679
              
              
              529,843**Operating
                  Expenses:**Compensation
              
              
              1,262,544
              
              
              788,864
              
              
              3,875,402
              
              
              2,381,112Other
                  operating expenses
              
              
              942,996
              
              
              758,802
              
              
              2,873,258
              
              
              1,534,476**Total
                  Operating Expenses**
              
              
              2,205,540
              
              
              1,547,666
              
              
              6,748,660
              
              
              3,915,588**Operating
                  Loss**
              
              
              (290,210
              )
              
              (1,227,931
              )
              
              (1,119,981
              )
              
              (3,385,745
              )**Interest
                  expense (income)**
              
              
              85,686
              
              
              (9,729
              )
              
              261,718
              
              
              (26,838
              )**Net
                  Loss before Income Taxes**
              
              
              (375,896
              )
              
              (1,218,202
              )
              
              (1,381,699
              )
              
              (3,358,907
              )**Income
                  taxes**
              
              
              15,000
              
              
              -
              
              
              38,216
              
              
              -**Net
                  Loss**
              
              $
              (390,896
              )
              $
              (1,218,202
              )
              $
              (1,419,915
              )
              $
              (3,358,907
              )**Loss
                  per Share**
              
              $
              (0.02
              )
              $
              (0.08
              )
              $
              (0.08
              )
              $
              (0.23
              )**Average
                  Shares Outstanding**
              
              
              17,015,754
              
              
              16,132,778
              
              
              16,974,148
              
              
              14,553,990
 
 **The
        accompanying notes are an integral part of these unaudited consolidated
        condensed financial statements.**
  5
  **CAPITAL
                  GROWTH SYSTEMS, INC.****CONSOLIDATED
                  CONDENSED STATEMENT OF SHARHOLDERS’ EQUITY**(Unaudited)**Common**
                **Shares
                  Outstanding**
              
              **Accumulated
                  Deficit**
              
              **Common**
                **Stock**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Total**
                **Equity**Balance,
                  January 1, 2005
              
              
              16,940,754
              
              $
              (8,691,427
              )
              $
              1,694
              
              $
              12,730,171
              
              $
              4,040,438Net
                  loss
              
              
              -
              
              
              (1,419,915
              )
              
              -
              
              
              -
              
              
              (1,419,915
              )Issuance
                  of Common Stock for Acquisition
              
              
              75,000
              
              
              -
              
              
              7
              
              
              101,243
              
              
              101,250Balance,
                  September 30, 2005
              
              
              17,015,754
              
              $
              (10,111,342
              )
              $
              1,701
              
              $
              12,831,414
              
              $
              2,721,773
 
 **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)Nine
                  Months Ended
                September
                  30,2005
              
              2004Net
                  Cash Used in Operating Activities
              
              $
              (1,706,838
              )
              $
              (3,352,307
              )Net
                  Cash Used In Investing Activities
              
              
              (34,281
              )
              
              (1,416,577
              )Net
                  Cash Provided By (Used in) Financing Activities
              
              
              (962,650
              )
              
              7,915,558Increase
                  (Decrease) in Cash and Cash Equivalents
              
              
              (2,703,769
              )
              
              3,146,674Cash
                  and Cash Equivalents - Beginning of Period
              
              
              3,660,894
              
              
              616,880Cash
                  and Cash Equivalents - End of period
              
              $
              957,125
              
              $
              3,763,554SUPPLEMENTAL
                  CASH FLOW INFORMATION:Cash
                  paid for interest
              
              $
              304,240
              
              $
              11,611Cash
                  paid for income taxes
              
              $
              8,216
              
              $
              -NONCASH
                  INVESTING AND FINANCING ACTIVITIES:Contributions
                  by members through conversions of loans
              
              $
              -
              
              $
              550,000Issuance
                  of Stock for Frontrunner Acquisition
              
              $
              101,250
              
              $
              1,248,750
 
 **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**
 **September
        30, 2005 (Unaudited)**
  **NOTE
        1 - Organization and Basis of Presentation**
  The
        accompanying unaudited consolidated condensed financial statements include
        the
        accounts of Capital Growth Systems, Inc. (“CGSI”) 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.” 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 CGSI’s 2004 Annual Report on Form
        10-KSB filed with the Securities Exchange Commission for the year ended December
        31, 2004.
  **Corporate
        Restructure**
  On
        January 28, 2004, CGSI completed a merger under which it acquired 100% of
        the
        ownership of Nexvu, a Delaware limited liability company. From its inception
        up
        to the time of the merger, CGSI was an inactive publicly registered shell
        corporation with no significant assets or operations. Simultaneously with
        the
        closing of the merger, a closing was held under a private offering of CGSI’s
        common stock in which approximately 3.9 million shares of common stock were
        issued for approximately $5.3 million of total gross consideration. The private
        offering was completed in April 2004 and, including the approximately 3.9
        million shares of common stock issued simultaneously with the closing of
        the
        merger, resulted in a total of 5,633,504 shares being issued for total gross
        consideration of $7,605,230. Additionally, simultaneously with the merger,
        $550,000 of bridge loans of Nexvu were converted to 577,500 shares of CGSI
        common stock as part of a loan conversion agreement. As a result of this
        merger,
        the financial statements of Nexvu became the financial statements of the
        surviving entity for accounting purposes. CGSI’s assets were recorded at fair
        value, with the net assets of Nexvu reflected at historical costs. In addition,
        as CGSI was a public shell company acquiring a privately-held company, no
        goodwill was reported. The accumulated deficit of Nexvu survived the merger
        with
        the accumulated deficit of CGSI eliminated.
  **Acquisition
        of Frontrunner**
  On
        September 14, 2004, CGSI acquired 100% of the outstanding common stock of
        Frontrunner. The results of Frontrunner’s operations have been included in the
        consolidated financial statements since the acquisition date. 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. This
        acquisition enables CGSI’s existing subsidiary, Nexvu, to better leverage its
        application performance monitoring product into the market as well as provide
        leverage for Frontrunner to further expand its existing infrastructure. We
        also
        expect to reduce costs through economies of scale from the
        combination.
  8
 In
        consideration for the Frontrunner shares, we paid $222.18 in the aggregate
        in
        exchange for all of the Senior Preferred Stock, upon the surrender thereof.
        All
        of the shares of Junior Preferred Stock, Convertible Preferred Stock and
        Frontrunner common stock, and all outstanding unexpired and unexercised options
        and warrants to acquire Frontrunner common stock were cancelled without receipt
        of consideration. As additional consideration, 1 million shares of CGSI’s common
        stock, with an estimated fair market value of $1.35 per share, was issued
        to
        certain creditors in exchange for the cancellation of indebtedness by those
        creditors in the approximate amount of $2.3 million. This $1.35 value was
        determined by utilizing the last purchase price of shares of our common stock
        in
        the private offering completed in April 2004. During 2004, all but 75,000
        shares
        of stock had been issued pursuant to this transaction. During the quarter
        ending
        June 30, 2005, the last credit waiver was received and the remaining 75,000
        shares of common stock were issued.
  **NOTE
        2 - Summary of Significant Accounting Policies**
  **Cash
        and Cash Equivalents**
 The
        Company considers those short-term, highly liquid investments with original
        maturities of three months or less as cash and cash equivalents. During the
        second quarter of 2005, the Company entered into a Commercial Surety and
        General
        Indemnity Agreement with RLI Surety. Pursuant to the Agreement, the Company,
        and
        its two subsidiaries, Frontrunner and Nexvu agreed to indemnify RLI Insurance
        Company from all losses and costs of any kind that RLI Insurance Company,
        as
        surety, may incur in connection with any contractual obligation undertaken
        for
        Frontrunner. The Company issued a letter of credit to support this obligation
        in
        the amount of $510,000 through its operating bank. To give effect to this
        letter
        of credit, the Company agreed to restrict $510,000 of its operating cash.
        Subsequent to September 30, 2005, Frontrunner completed their obligations
        under
        this contract. The Letter of Credit was released and the cash is no longer
        restricted.
  **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”).
  9
 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 products has not bee 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.
  **Allowance
        for Doubtful 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 $187,179
        and
        $132,127 as of September 30, 2005 and December 31, 2004,
        respectively.
  **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 nine months ended September 30, 2005
        and
        2004 were $957,503 and $1,474,271, respectively.
  10
 **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 2004. The company has no reason to believe that goodwill impairment
        has occurred in 2005. There can be no assurance that future goodwill impairment
        tests will not result in a charge to earnings.
  **Stock-Based
        Compensation**
  In
        December 2002, the FASB issued SFAS No. 148, “Accounting for
        Stock-Based-Compensation Transition and Disclosure-an Amendment of SFAS 123.”
        This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,”
        to provide alternative methods of transition for a voluntary change to the
        fair
        value based method of accounting, for stock-based employee compensation.
        In
        addition, this statement amends the disclosure requirements of SFAS No. 123
        to
        require prominent disclosures in both annual and interim financial statements
        about the method of accounting for stock-based employee compensation and
        the
        effect of the method used on reported results. The Company has chosen to
        continue to account for stock-based compensation using the intrinsic value
        method prescribed in APB Opinion No. 25 and related interpretations.
        Accordingly, compensation expense for stock options is measured as the excess,
        if any, of the fair market value of the Company's stock at the date of the
        grant
        over the exercise price of the related option. To date the company has not
        issued any stock options where the exercise price of the option is different
        than the fair market value of the Company’s stock at grant date. The Company has
        adopted the annual disclosure provisions of SFAS No. 148 in its financial
        reports for the nine month period ended September 30, 2005, and
        2004.
  **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.
  11
 **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.
  **Reclassifications**
  Certain
        amounts previously reported have been reclassified to conform to the current
        period presentation.
  **NOTE
        3 - Inventories**
  Inventories
        as of September 30, 2005 and December 31, 2004 consist of the
        following:
  Sept
                  30, 2005
              
              Dec
                  31, 2004Equipment
              
              $
              2,035,868
              
              $
              1,978,273Work
                  in process
              
              
              989,729
              
              
              1,080,332Less:
                  Inventory reserve
              
              
              (1,165,319
              )
              
              (1,076,503
              )Net
                  inventory
              
              $
              1,860,278
              
              $
              1,982,102
 
 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 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
        September 30, 2005, we have issued and outstanding 1,524,557 stock options
        under
        the plan, net of forfeitures.
  12
  The
        following table summarizes the activity under the stock option plan from
        inception to September 30, 2005:
  Number
                  of
                Shares
              
              Price
                  Per
                Share
              
              Weighted
                Average
                Price
                  per ShareOptions
                  Outstanding:December
                  31, 2003
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              1,769,907
              
              $
              0.95
                  - 1.35
              
              $
              1.35Terminated
              
              
              630,000
              
              
              1.35
              
              
              1.35December
                  31, 2004
              
              
              1,139,907
              
              
              0.95
                  - 1.35
              
              
              1.34Granted
              
              
              400,000
              
              
              1.35
              
              
              1.35Terminated
              
              
              15,350
              
              
              1.35
              
              
              1.35September
                  30, 2005
              
              
              1,524,557
              
              
              0.95
                  - 1.35
              
              $
              1.35Vested
                  Shares:Vested
                  at $1.35
              
              
              615,701
              
              
              1.35
              
              
              1.35Vested
                  at $0.95
              
              
              10,657
              
              
              0.95
              
              
              0.95Vested,
                  September 30, 2005
              
              
              626,358
              
              $
              0.95
                  - 1.35
              
              $
              1.35
 
 We
        account for stock-based compensation for our employee stock plans using the
        intrinsic value method as prescribed by Accounting Principles Board (APB)
        Opinion No. 25, Accounting for Stock Issued to Employees. Statement of Financial
        Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
        as
        amended by SFAS No. 148, Accounting for Stock-Based Compensation, requires
        disclosure of pro forma earnings as if we had adopted the SFAS No. 123 fair
        value method since our inception. The fair value of stock-based awards to
        employees is calculated utilizing the minimum value model, as our shares
        are not
        publicly traded.
  The
        weighted-average fair value of stock-based compensation to our employees
        is
        based on the single option value approach. Forfeitures are recognized as
        they
        occur, and it is assumed that no dividends will be declared. The
        weighted-average fair-value calculations are based on the following
        assumptions
 Nine
                    Months Ended
                    Sept. 30,2005
                
                
                2004Estimated
                    life (in years)
                
                
                5.0
                
                
                5.0Risk-free
                    interest rate
                
                
                3.85
                %
                
                3.5
                %
  13
 For
        pro-forma purposes, the estimated fair value of stock-based compensation
        awards
        to employees are amortized using the straight-line method over the vesting
        period of the options.
  Nine
                  months ended September 30,2005
              
              2004Reported
                  net loss
              
              $
              (1,419,915
              )
              $
              (3,358,907
              )Employee
                  stock-based compensation under the intrinsic value method (APB
                  No.
                  25)
              
              
              -
              
              
              -Employee
                  stock-based compensation as calculated under the fair value method
                  (SFAS
                  No. 123)
              
              
              46,178
              
              
              53,393Pro
                  forma net loss
              
              $
              (1,466,093
              )
              $
              (3,412,300
              )Loss
                  Per Share:As
                  reported
              
              $
              (0.08
              )
              $
              (0.23
              )Pro
                  forma
              
              $
              (0.09
              )
              $
              (0.23
              )
 
 **NOTE
        5 - Property and Equipment**
  Property
        and equipment at September 30, 2005 and December 31, 2004 consists of the
        following:
 
 Sept.
                  30, 2005
              
              Dec.
                  31, 2004Furniture
                  & fixtures
              
              $
              169,193
              
              $
              169,193Computer
                  equipment
              
              
              914,436
              
              
              882,923Leasehold
                  improvements
              
              
              88,154
              
              
              88,154Machinery
                  & equipment
              
              
              271,521
              
              
              240,4561,443,304
              
              
              1,380,726Accumulated
                  depreciation
              
              
              (459,946
              )
              
              (280,921
              )Net
                  property and equipment
              
              $
              983,358
              
              $
              1,099,805
 
 14
 **NOTE
        6 - Debt**
  Debt
        as
        of September 30, 2005 and December 31, 2004 consist of the
        following:
  September
                  30, 2005
              
              December
                  31, 2004Demand
                  note payable to Harris Bank, plus interest at 1.50% above prime
                  rate;
                  6.75% at September 30, 2005, until the loan is paid in full or
                  demand is
                  made by the bank. Secured by substantially all of the assets of
                  Frontrunner and personal guarantee by a separate entity and three
                  individuals. (To date, the bank has not called the note. The
                  Company
                  is in the process of negotiating an extension to this
                  note.)
              
              $
              3,305,000
              
              $
              3,690,000Promissory
                  note payable to Nortel Networks, payable in monthly payments of
                  $27,776
                  through October 2009. Interest on the note is fixed at
                  7.25%.
              
              
              1,174,997
              
              
              1,355,588Unsecured
                  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 September 30,
                  2005,
                  Frontrunner was in default under the terms of the
                  agreement.
              
              
              286,431
              
              
              390,720Unsecured
                  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%
              
              
              115,965
              
              
              272,212Unsecured
                  note payable to creditor, payable in monthly installments of $12,500,
                  including interest at 8.25%, through December 2005. As of September
                  30,
                  2005, Frontrunner was in default under the terms of the
                  agreement.
              
              
              131,993
              
              
              232,829Installment
                  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%.
              
              
              50,674
              
              
              86,361Total
                  debt
              
              
              5,065,060
              
              
              6,027,710Less:
                  Current maturities
              
              
              4,145,935
              
              
              4,795,994Long
                  term portion
              
              $
              919,125
              
              $
              1,231,716
 
 The
        weighted-average interest rate on the debt listed above is 7.1% for
        2005.
  15
  The
        aggregate principal re-payments of long term debt for the twelve months ended
        September 30, are as follows:
  2006
              
              $
              4,145,9352007
              
              
              276,4262008
              
              
              296,4352009
              
              
              318,6552010
              
              
              27,609
 
 **NOTE
        7 - Transactions with Related Parties**
  Included
        in accounts payable at September 30, 2005 and December 31, 2004 is $58,800
        due
        to an entity owned by the former president of Frontrunner for software support.
        Purchases of services to this entity were $101,600 for the nine month period
        ended September 30, 2005.
  **NOTE
        8 - 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. During
        the
        third quarter of 2004, the Company also started splitting out its corporate
        costs from the Nexvu financial statements. Accordingly, the segment results
        reflect this change in 2005.
  16
  **Results
        of Operation:**
  Three
        months ended September 30, 2005.
  Frontrunner
              
              Nexvu
              
              Corp/elim
              
              TotalRevenues
              
              $
              4,141,208
              
              $
              406,036
              
              $
              -
              
              $
              4,547,244Gross
                  margin
              
              
              1,718,541
              
              
              196,789
              
              
              -
              
              
              1,915,330Expenses
              
              
              1,505,194
              
              
              489,747
              
              
              210,599
              
              
              2,205,540Operating
                  income (loss)
              
              
              213,347
              
              
              (292,958
              )
              
              (210,599
              )
              
              (290,210
              )Depreciation
                  / amortization
              
              
              193,142
              
              
              20,422
              
              
              -
              
              
              213,564
 
 Three
        months ended September 30, 2004.
  Frontrunner
              
              Nexvu
              
              Corp/elim
              
              TotalRevenues
              
              $
              531,594
              
              $
              61,520
              
              $
              -
              
              $
              593,114Gross
                  margin
              
              
              277,810
              
              
              41,925
              
              
              -
              
              
              319,735Expenses
              
              
              231,063
              
              
              1,081,761
              
              
              234,842
              
              
              1,547,666Operating
                  loss
              
              
              46,747
              
              
              (1,039,836
              )
              
              (234,842
              )
              
              (1,227,931
              )Depreciation
                  / amortization
              
              
              9,625
              
              
              85,542
              
              
              -
              
              
              95,167
 
  Nine
        months ended September 30, 2005.
  Frontrunner
              
              Nexvu
              
              Corp/elim
              
              TotalRevenues
              
              $
              11,089,986
              
              $
              990,104
              
              $
              -
              
              $
              12,080,090Gross
                  margin
              
              
              5,155,411
              
              
              473,268
              
              
              -
              
              
              5,628,679Expenses
              
              
              4,704,515
              
              
              1,365,360
              
              
              678,785
              
              
              6,748,660Operating
                  income (loss)
              
              
              450,896
              
              
              (892,092
              )
              
              (678,785
              )
              
              (1,119,981
              )Depreciation
                  / amortization
              
              
              586,528
              
              
              61,574
              
              
              -
              
              
              648,102Capital
                  expenditures
              
              
              31,065
              
              
              31,513
              
              
              -
              
              
              62,578
 
 17
 Nine
        months ended September 30, 2004.
  Frontrunner
              
              Nexvu
              
              Corp/elim
              
              TotalRevenues
              
              $
              531,594
              
              $
              364,993
              
              $
              -
              
              $
              896,587Gross
                  margin
              
              
              277,810
              
              
              252,033
              
              
              -
              
              
              529,843Expenses
              
              
              231,063
              
              
              3,449,683
              
              
              234,842
              
              
              3,915,588Operating
                  loss
              
              
              46,747
              
              
              (3,197,650
              )
              
              (234,842
              )
              
              (3,385,745
              )Depreciation
                  / amortization
              
              
              9,625
              
              
              137,917
              
              
              -
              
              
              147,542Capital
                  expenditures
              
              
              -
              
              
              171,460
              
              
              -
              
              
              171,460
 
 **Segment
        assets as of September 30, 2005.**
  Frontrunner
              
              Nexvu
              
              Corp/elim
              
              TotalTangible
                  assets
              
              $
              4,149,357
              
              $
              3,053,935
              
              $
              (1,101,047
              )
              $
              6,102,245Intangibles
                  & goodwill
              
              
              6,507,565
              
              
              -
              
              
              -
              
              
              6,507,565Total
                  assets
              
              $
              10,656,922
              
              $
              3,053,935
              
              $
              (1,101,047
              )
              $
              12,609,810
 
 **Segment
        assets as of December 31, 2004.**
  Frontrunner
              
              Nexvu
              
              Corp/elim
              
              TotalTangible
                  assets
              
              $
              5,130,973
              
              $
              4,064,204
              
              $
              (700,179
              )
              $
              8,494,998Intangibles
                  & goodwill
              
              
              6,862,991
              
              
              -
              
              
              -
              
              
              6,862,991Total
                  assets
              
              $
              11,993,964
              
              $
              4,064,204
              
              $
              (700,179
              )
              $
              15,357,989
  18
  **Item
        2. Management’s Discussion and Analysis**
  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, 2004.
 
 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
        December 31, 2003, we were a development-stage company that had conducted
        virtually no business operations, other than efforts to effect a business
        combination. On January 28, 2004, we completed a merger through which Nexvu
        became a subsidiary of ours. As a result of the merger, the owners of Nexvu
        became the majority owners of our company, which resulted in the transaction
        being deemed a reverse acquisition for accounting purposes. Under this
        treatment, Nexvu became the surviving company for financial statement purposes.
        Our net assets were recorded at fair value, with the net assets of Nexvu
        reflected at historical costs. In addition, as we were a public shell company
        acquiring a privately-held company, no goodwill was reported. Our financial
        statements after the merger reflect the historical financial statements of
        Nexvu, the operating company. Our accumulated deficit prior to the merger
        was
        eliminated as of the merger and only the accumulated deficit of Nexvu is
        reflected in our consolidated balance sheet.
  On
        September 14, 2004, we completed a merger under which we acquired 100% of
        the
        stock of Frontrunner. This transaction was a stock-based transaction whereby
        we
        issued 925,000 shares of our common stock on the date of merger in exchange
        for
        cancellation of indebtedness from certain creditors in the approximate amount
        of
        $2.3 million dollars. There also was a nominal payment of $222.18 in exchange
        for all of the Senior Preferred Stock of Frontrunner. An additional 75,000
        shares of common stock were issued with respect to this transaction that
        was
        subject to one creditor waiver being signed. This waiver was signed during
        the
        second quarter of 2005 and such shares were issued.  The issuance
        of the
        shares resulted in an increase in the goodwill of $101,250 at the current
        estimated market price of our stock of $1.35 per share. Frontrunner generated
        approximately $12 million of revenues during 2004 and has approximately 1,000
        customers.
  19
 We
        presently have approximately 105 full time employees between Nexvu and
        Frontrunner. We do not anticipate that this number will increase significantly
        in the near future. In addition, there are no current plans to significantly
        increase our capital spending on software or equipment.
  **Results
        of Operations**
  **Three
        months ended September 30, 2005 compared to 2004**
  Revenues
        for the three month period ended September 30, 2005 were heavily influenced
        by
        the acquisition of Frontrunner. Frontrunner generated 91% of the consolidated
        revenue of the Company. Total revenues from Frontrunner were $4.1 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 49% increase to the comparative prior year level. Installation
        revenues represented approximately 50% of total Frontrunner revenues with
        managed services and maintenance revenues representing the other 50% of the
        revenues.
  The
        Nexvu
        revenues for the three month period ended September 30, 2005 were approximately
        $406 thousand and are comprised primarily of consulting fees, as well as
        sales
        of our product and maintenance. The percentage of total revenue for Nexvu
        was
        79% for consulting services and 17% for product sales. Maintenance revenues
        comprised the remaining 4% of revenues.
  Gross
        margins for Frontrunner for the three month period ended September 30, 2005
        were
        41.5% with the managed services and maintenance revenues having a 46% gross
        margin and installation revenues having a 25% gross margin. All revenue streams
        for Frontrunner experienced significant margin erosion compared to the prior
        year. The Nexvu gross margin rate was 48.5% for the three month period ended
        September 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.
   20
  Total
        operating expenses were as follows:
  Three
                  months ended,Sept.
                  30, 2005
              
              Sept.
                  30, 2004Compensation
              
              $
              1,262,544
              
              $
              788,864Travel
                  and entertainment
              
              
              69,802
              
              
              70,932Occupancy
              
              
              122,735
              
              
              145,828Professional
                  services
              
              
              197,671
              
              
              267,567Insurance
              
              
              75,515
              
              
              35,615Depreciation
                  and amortization
              
              
              213,564
              
              
              95,167Other
                  operating expenses
              
              
              263,709
              
              
              143,693Total
                  operating expenses
              
              $
              2,205,540
              
              $
              1,547,666
 
 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 expenses for Nexvu for the three month period ended September 30, 2005
        were $490 thousand compared to $1.1 million for the comparable period last
        year.
        Total compensation expense for Nexvu was approximately $321 thousand, down
        from
        the $620 thousand during the same period last year. Frontrunner compensation
        was
        approximately $849 thousand with Corporate salaries of approximately $93
        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 and the National Association of Securities Dealers
        Inc., 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 $149.6 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 $5.1 million of debt.
        The
        debt has a weighted average interest rate of 7.1%. 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.
  21
 **Nine
        months ended September 30, 2005 compared to 2004**
  Revenues
        for the nine month period ended September 30, 2005 were heavily influenced
        by
        the acquisition of Frontrunner. Frontrunner generated 92% of the consolidated
        revenue. Total revenues from Frontrunner were $11.1 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 35% increase to the comparative prior year level. Installation revenues
        represented approximately 46% of total Frontrunner revenues with managed
        services and maintenance revenues representing approximately 54% of the total
        revenues.
  The
        Nexvu
        revenues for the nine month period ended September 30, 2005 were $990.1
        thousand, which represents a 171% increase over the same period last year.
        The
        Nexvu revenues are comprised primarily of consulting fees, as well as, sales
        of
        our product and maintenance. The percentage of total revenue for Nexvu was
        77%
        for consulting services and 19% for product sales. Maintenance revenues
        comprised the remaining 4% of revenues.
  Gross
        margins for Frontrunner for the nine month period ended September 30, 2005
        were
        46.5% 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 47.8% for the nine month period ended September 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:
  Nine
                  months ended,Sept.
                  30, 2005
              
              Sept.
                  30, 2004Compensation
              
              $
              3,875,402
              
              $
              2,381,112Travel
                  and entertainment
              
              
              187,225
              
              
              210,990Occupancy
              
              
              375,579
              
              
              204,645Professional
                  services
              
              
              551,366
              
              
              593,036Insurance
              
              
              234,193
              
              
              62,195Depreciation
                  and amortization
              
              
              648,102
              
              
              147,542Other
                  operating expenses
              
              
              876,793
              
              
              316,068Total
                  operating expenses
              
              $
              6,748,660
              
              $
              3,915,588
 
 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. Total expenses
        for
        Nexvu for the nine month period ended September 30, 2005 were $1.4 million
        compared to $3.5 million for the comparable period last year. Nexvu currently
        has 12 full time employees, down from a level during early 2004 that reached
        30.
        Total compensation expense for Nexvu was approximately $983 thousand, down
        from
        the $2.2 million during the same period last year. Frontrunner compensation
        was
        approximately $2.6 million with Corporate salaries of approximately $277
        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 and the National Association of Securities Dealers Inc.,
        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 $457 thousand of expense recorded
        during the nine month period ended September 30, 2005. Other expenses are
        principally comprised of operations and marketing expenses at
        Frontrunner.
  22
 The
        current period results reflect interest expense on the $5.1 million of debt
        from
        the Frontrunner acquisition. The debt has a weighted average interest rate
        of
        7.1%. 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**
  We
        have
        historically met our liquidity needs through loans from individuals and through
        equity contributions. As of September 30, 2005, we had $248.7 thousand of
        working capital excluding current debt maturities of debt and $957.1 thousand
        in
        cash and cash equivalents. The cash was generated from the private placement
        of
        our common stock primarily during the first quarter of 2004. Total gross
        proceeds from this offering were approximately $7.6 million with net proceeds
        after advisory, legal and accounting fees bringing the net total to
        approximately $6.6 million. Of the cash balance at September 30, 2005, $510
        thousand was restricted cash and was being utilized as cash
        collateral
        for a surety bond issued for a Frontrunner equipment installation. This
        restricted cash was released subsequent to September 30, 2005 and is now
        available for working capital needs. During the nine months ended September
        30,
        2005, we utilized approximately $1.7 million of cash in operations. We continue
        to utilize cash, primarily to fund the losses being experienced at Nexvu,
        funding working capital requirements and paying down existing levels of
        debt.
  As
        part
        of the acquisition of Frontrunner, we assumed approximately $4.7 million
        in debt
        and subsequently converted $1.6 million of old accounts payable from two
        vendors
        into interest bearing promissory notes. The majority of debt is a callable
        demand loan and is currently classified in current liabilities. We have received
        notification from the lender of this loan that they plan on calling this
        note by
        December 31, 2005. We are currently negotiating with the bank to extend this
        facility or will seek alternative financing. Additionally, we are in the
        planning process to raise additional capital which may include the issuance
        of
        additional common stock. We are also forecasting that the existing levels
        of
        cash will not be sufficient to fund operations through the end of the year.
        We
        are currently negotiating a bridge loan that would be sufficient to cover
        working capital needs until the additional capital is raised. If we are not
        successful in generating sufficient liquidity from operations or in raising
        sufficient capital resources, on terms acceptable to us, this could have
        a
        material adverse effect on our business, results of operations, liquidity
        and
        financial condition.
  During
        the nine months ended September 30, 2005 we spent $34 thousand on investing
        activities, primarily computer equipment and other equipment. We do not expect
        to require significant capital expenditures in the near future.
  23
 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
        September 30, 2005:
  Twelve
                  months ended Sept. 30,
              
              Operating
                Leases
              
              Debt
                Obligations
              
              Minimum
                Royalty
                Payments2006
              
              $
              334,387
              
              $
              4,145,935
              
              $
              93,7502007
              
              
              146,227
              
              
              276,426
              
              
              118,7502008
              
              
              38,649
              
              
              296,435
              
              
              143,7502009
              
              
              25,008
              
              
              318,655
              
              
              37,5002010
              
              
              -
              
              
              27,609
              
              
              -Total
                  contractual obligations
              
              $
              544,271
              
              $
              5,065,060
              
              $
              393,750
 
 All
        debt
        that is callable or not in compliance is reflected in the 2005 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.
  **Trends,
          Risks and Uncertainties**
  We
        have
        incurred losses since our inception, and cannot be assured that we will achieve
        profitability. We have incurred an accumulated net loss from operations of
        $10,111,342 through September 30, 2005, including a $1,419,915 loss for the
        nine
        months ended September 30, 2005.  To succeed, we must develop new
        client
        and customer relationships and substantially increase our revenues from sales
        of
        products and services. We intend to continue to expend substantial
        resources to develop and improve our products and to market our products
        and
        services.  These development and marketing expenses often must be
        incurred
        well in advance of the recognition of revenue.  There is no certainty
        that
        these expenditures will result in increased revenues.
  **Off-Balance
        Sheet Arrangements**
 
 We
        do not
        have any off-balance sheet arrangements.
 
 **Inflation**
 
 In
        the
        opinion of management, inflation has not had a material effect on the operations
        of the Company.
 
 24
  **Recent
        Accounting Pronouncements**
  On
        December 16, 2004, FASB published SFAS No. 123 (Revised 2004), “Share-Based
        Payment.” SFAS 123R requires that compensation costs related to share-based
        payment transactions be recognized in the financial statements. Share-based
        payment transactions within the scope of SFAS 123R include stock options,
        restricted stock plans, performance-based awards, stock appreciation rights,
        and
        employee share purchase plans. The provisions of SFAS 123R are effective
        as of
        the first fiscal year that begins after June 15, 2005. Accordingly, we will
        implement the revised standard in fiscal year 2006. Currently, we account
        for
        our share-based payment transactions under the provisions of APB 25, which
        does
        not necessarily require the recognition of compensation costs in the financial
        statements. Management is assessing the implications of this revised standard,
        which may materially impact our results of operations in 2006 and
        thereafter.
  On
        December 16, 2004, FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.”
        an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.
        This statement amends APB Opinion 29 to eliminate the exception for nonmonetary
        exchanges of similar productive assets and replaces it with a general exception
        for exchanges of nonmonetary assets that do not have commercial substance.
        Under
        SFAS 153, if a nonmonetary exchange of similar productive assets meets a
        commercial-substance criterion and fair value is determinable, the transaction
        must be accounted for at fair value resulting in recognition of any gain
        or
        loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods
        that
        begin after June 15, 2005. We do not anticipate that the implementation of
        this
        standard will have a material impact on our financial position, results of
        operations or cash flows.
  **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” (“SAB
        104”), which superseded Staff Accounting Bulletin No. 101, “Revenue
        Recognition in Financial Statements” (“SAB 101”).
  25
 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.
  **Stock-Based
        Compensation**
  In
        December 2002, the FASB issued SFAS No. 148 - “Accounting for Stock-Based
        Compensation - Transition and Disclosure.” This statement amends SFAS No. 123 -
“Accounting for Stock-Based Compensation,” providing alternative methods of
        voluntarily transitioning to the fair-market value-based method of accounting
        for stock-based employee compensation. SFAS 148 also requires disclosure
        of the
        method used to account for stock-based employee compensation and the effect
        of
        the method in both the annual and interim financial statements. The provisions
        of this statement related to transition methods are effective for fiscal
        years
        ending after December 15, 2002, while provisions related to disclosure
        requirements are effective in financial reports for interim periods beginning
        after December 31, 2003.
  We
        elected to continue to account for stock-based compensation plans using the
        intrinsic value-based method of accounting prescribed by APB No. 25, “Accounting
        for Stock Issued to Employees,” and related interpretations. Under the
        provisions of APB No. 25, compensation expense is measured at the grant date
        for
        the difference between the fair value of the stock and the exercise
        price.
  26
 From
        our
        inception, we have incurred significant costs in connection with the issuance
        of
        equity-based compensation, which is comprised primarily of our common stock
        and
        warrants to acquire our common stock, to non-employees. We anticipate continuing
        to incur such costs in order to conserve our limited financial resources.
        The determination of the volatility, expected term and other assumptions
        used to
        determine the fair value of equity-based compensation issued to non-employees
        under SFAS 123 involves subjective judgment and the consideration of a variety
        of factors, including our historical stock price, option exercise activity
        to
        date and the review of assumptions used by comparable enterprises.
  We
        account for equity-based compensation, issued to non-employees in exchange
        for
        goods or services, in accordance with the provisions of SFAS No. 123 and
        EITF
        No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than
        Employees for Acquiring, or in Conjunction with Selling, Goods or
        Services.”
  **Merger
        with Frontrunner**
  On
        September 14, 2004, we completed a merger under which we acquired 100% of
        the
        stock of Frontrunner. The form of the business combination with Frontrunner
        was
        a reverse triangular merger in which we issued 925,000 shares of our common
        stock and paid $222.18 in exchange for 100% of the ownership of Frontrunner
        and
        the cancellation of indebtedness of Frontrunner in the amount of $2,252,423
        (excluding accrued unpaid interest and other claims). The merger was approved
        by
        our board of directors and the boards of directors of Frontrunner and our
        subsidiary. The merger was also approved by a majority of the shareholders
        of
        Frontrunner. At the time of the merger, Frontrunner had assets principally
        in
        the form of inventory, fixed assets and receivables in the amount of
        approximately $3,800,000.
  The
        merger agreement contained certain conditions precedent including: (i) requiring
        certain creditors of Frontrunner to execute creditor waiver agreements; (ii)
        James Cuppini entering into an employment agreement with Frontrunner, (iii)
        entry by Frontrunner into certain payment agreements calling for amortization
        of
        outstanding past due obligations of Frontrunner plus a market rate of interest
        with certain other of its creditors, and (iv) Frontrunner obtaining from
        Harris
        Trust and Savings Bank a consent to the merger and a commitment that it would
        extend and maintain a loan to Frontrunner with a principal amount of not
        less
        than the principal balance outstanding as of the date of the merger
        (approximately $3,920,000). We waived all of the conditions precedent except
        the
        entry into certain creditor waiver agreements and our issuance of common
        stock
        to those creditors.
  Frontrunner
        entered into creditor waiver agreements with several of its identified
        creditors. All but one of these identified creditors (John Jellinek) executed
        the creditor waiver agreements at the time of the merger where we in turn
        issued
        925,000 shares of our common stock. The remaining 75,000 shares were
        subsequently issued to the last identified creditor, John Jellinek during
        the
        second quarter of 2005. The shares of common stock distributed among the
        creditors was determined pursuant to negotiations between the creditors and
        Frontrunner, rather than allocated pursuant to a formula. The most recent
        private placement of our common stock was made at $1.35 per share, which
        was
        assumed to constitute its fair market value.
  27
 Fifteen
        percent (15%) of the 1,000,000 shares issued to the participating creditors
        (approximately 150,000 shares) was deposited in escrow to be held for a year
        for
        the purpose of settling or litigating claims. Each of the creditors agreed
        to
        indemnify and hold us harmless against the creditor’s pro rata portion of any
        merger agreement losses incurred by us. Merger agreement losses are those
        losses
        or liabilities that we incur as a result of a breach or an inaccuracy of
        any of
        the representations or warranties made by Frontrunner to us pursuant to the
        merger agreement. This indemnity obligation is limited to and satisfied solely
        from the creditor shares held in escrow. No merger agreement loss claims
        have
        been filed with us, nor do we have any knowledge of any pending merger agreement
        loss claims. Mr. Kenny is the owner of the escrow agent for this
        account.
  **Item
        3. Controls and Procedures**
  **Evaluation
        of Disclosure Controls and Procedure**
  Our
        co-chief executive officers and chief financial officer have evaluated our
        disclosure controls and procedures as of September 30, 2005, and have concluded
        that, as of September 30, 2005, 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.
  28
 **PART
        II - OTHER INFORMATION**
  **Item
        1. Legal Proceedings**
  None.
  **Item
        2. Changes in Securities and Small Business Issuer Purchases of Equity
        Securities**
  None.
  **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 31 of this Report.
  29
  **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/ Lee
                WiskowskiLee
                Wiskowski, Co-Chief Executive OfficerBy:
              /s/
                  Douglas Stukel
                Douglas
                  Stukel, Co-Chief Executive OfficerBy:
              /s/
                Derry L. Behm
                Derry
                L. Behm, Chief Financial and Accounting
                Officer
  Dated:
        November 14, 2005
  30
   **EXHIBIT
        INDEX**
  Exhibit
                Number
              Description
                  of Document3.i
              Articles
                of Incorporation of Capital Growth Systems,
                Inc.(1)3.ii
              By-laws
                of Capital Growth Systems, Inc.(1)4.1
              Registration
                Rights Agreement by and among Capital Growth Systems, Inc. and certain
                shareholders of the company dated as of December 16, 2003.(2)4.2
              Form
                of Warrant to Purchase common stock of Capital Growth Systems, Inc.
                for
                bridge lenders. (3)4.3
              Form
                of Warrant to Purchase common stock of Capital Growth Systems, Inc.
                for
                Advisory Service Agreements.(3)4.4
              Form
                of Warrant to Purchase common stock of Capital Growth Systems, Inc.
                for
                selling shareholder.(3)4.5
              2003
                Long-Term Incentive Plan.(3)4.6
              2005
                Long-Term Incentive Plan.(4)4.7
              Separation/Severance
                Agreement Between Frontrunner Network Systems, Inc., Capital Growth
                Systems, Inc. and James Cuppini, dated April 14,
                2005.(4)31.1
              Certification
                of co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
              Certification
                of co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.3
              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 (File No. 0-30831)
 
 (2)
              Incorporated
                  herein by reference to the Form 8-K filed with the Commission on
                  February
                  11, 2004 (File No. 0-30831).
 
 (3)
              Incorporated
                  herein by reference to the Form 10-KSB for fiscal year ended December
                  31,
                  2003, filed with the Commission on May 6, 2004 (File No.
                  0-30831).
 
 (4)
              Incorporated
                  herein by reference to the Form 10-KSB for fiscal year ended December
                  31,
                  2004, filed with the Commission on May 4, 2005 (File No.
                  0-30831)
   31