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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended September 30, 2008



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

For the transition period from  to

Commission File Number 0-30831





CAPITAL GROWTH SYSTEMS, INC.

(Exact name of small business issuer as
specified in its charter)







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

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

(Address of principal executive offices)

(312) 673-2400

(Issuers telephone number)





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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of November 3, 2008, the issuer had outstanding 149,980,018 shares of its $0.0001 par value common stock.

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



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









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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES



|                              |  |                                                                                                                                     |  |         
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                     |  | Page No.
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                    
|                              |  |                                                                                                                                    
|Item 1.                       |  | Financial Statements                                                                                                                |  | 3       
|                              |  |                                                                                                                                    
|                              |  | Interim Consolidated Condensed Balance Sheets as of September 30, 2008 [Unaudited] and December 31, 2007 [Audited and As
 Restated] |  | 4       
|                              |  |                                                                                                                                    
|                              |  | Consolidated Condensed Statements of Operations for the three-month periods ended September 30, 2008 and 2007 [Unaudited]           |  | 5       
|                              |  |                                                                                                                                    
|                              |  | Consolidated Condensed Statements of Shareholders Equity (Deficit) from January 1 to September 30, 2008 and 2007 [Unaudited]       |  | 6       
|                              |  |                                                                                                                                    
|                              |  | Consolidated Condensed Statements of Cash Flows for the three-month periods ended September 30, 2008 and 2007 [Unaudited]           |  | 8       
|                              |  |                                                                                                                                    
|                              |  | Notes to Interim Consolidated Condensed Financial Statements                                                                        |  | 9       
|                              |  |                                                                                                                                    
|Item 2.                       |  | Managements Discussion and Analysis                                                                                                |  | 27      
|                              |  |                                                                                                                                    
|Item 3                        |  | Not Applicable                                                                                                                      |  |         
|                              |  |                                                                                                                                    
|Item 4(T).                    |  | Controls and Procedures                                                                                                             |  | 33      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                    
|                              |  |                                                                                                                                    
|Item 1.                       |  | Legal Proceedings                                                                                                                   |  | 35      
|                              |  |                                                                                                                                    
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                         |  | 35      
|                              |  |                                                                                                                                    
|Item 3.                       |  | Defaults upon Senior Securities                                                                                                     |  | 35      
|                              |  |                                                                                                                                    
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                 |  | 35      
|                              |  |                                                                                                                                    
|Item 5.                       |  | Other Information                                                                                                                   |  | 35      
|                              |  |                                                                                                                                    
|Item 6.                       |  | Exhibits                                                                                                                            |  | 35      
|                              | 
|SIGNATURES AND CERTIFICATIONS |  | 36                                                                                                                                 



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PART IFINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

NOTE REGARDING
FORWARD-LOOKING STATEMENTS

Except with respect to historical financial information, the discussion contained in this report contains
forward-looking statements that involve risk and uncertainties. These statements may be identified by use of forward-looking terminology such as believes, expects, may, should, or
anticipates, or similar expressions, or by discussions of strategy. The cautionary statements made in this report should be read as being applicable to all related forward-looking statements wherever they appear in this report. Our
actual results could differ materially from those discussed in this report. Factors that could cause our results to differ from those discussed in this report include, but are not limited to, those discussed under the heading Factors Affecting
Future Performance in our report on Form 10-KSB/A for the period ended December 31, 2007.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share
amounts)



|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------------- | - | -------- | -
|                                                                                                                                                                     |  | September 30,2008 |          |   | December 31,2007        |  
|                                                                                                                                                                     |  | (Unaudited)       |          |   | (Audited) (As Restated) |  
|ASSETS                                                                                                                                                               |  |                   |          |   |                         |   |          |  
|CURRENT ASSETS                                                                                                                                                       |  |                   |          |   |                         |   |          |  
|Cash and cash equivalents                                                                                                                                            |  | $                 | 2,365    |   |                         | $ | 859      |  
|Accounts receivable, net of allowances of $251 and $99                                                                                                               |  |                   | 8,379    |   |                         |   | 1,782    |  
|Prepaid expenses and other current assets                                                                                                                            |  |                   | 745      |   |                         |   | 1,646    |  
|Current assets of discontinued operations                                                                                                                            |  |                   |         |   |                         |   | 2,387    |  
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|Total Current Assets                                                                                                                                                 |  |                   | 11,489   |   |                         |   | 6,674    |  
|Property and equipment, net                                                                                                                                          |  |                   | 962      |   |                         |   | 1,418    |  
|Intangible assets, net                                                                                                                                               |  |                   | 7,411    |   |                         |   | 8,308    |  
|Goodwill                                                                                                                                                             |  |                   | 12,513   |   |                         |   | 12,513   |  
|Other assets                                                                                                                                                         |  |                   | 2,445    |   |                         |   | 478      |  
|Non-current assets of discontinued operations                                                                                                                        |  |                   |         |   |                         |   | 1,031    |  
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|TOTAL ASSETS                                                                                                                                                         |  | $                 | 34,820   |   |                         | $ | 30,422   |  
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|                                                                                                                                                                     |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                       |  |                   |          |   |                         |   |          |  
|CURRENT LIABILITIES                                                                                                                                                  |  |                   |          |   |                         |   |          |  
|Current maturities of long-term debt                                                                                                                                 |  | $                 | 524      |   |                         | $ | 5,084    |  
|Accounts payable                                                                                                                                                     |  |                   | 4,069    |   |                         |   | 2,750    |  
|Accrued expenses                                                                                                                                                     |  |                   | 6,248    |   |                         |   | 3,231    |  
|Deferred revenue, current portion                                                                                                                                    |  |                   | 375      |   |                         |   | 537      |  
|Current liabilities of discontinued operations                                                                                                                       |  |                   |         |   |                         |   | 2,827    |  
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|Total Current Liabilities                                                                                                                                            |  |                   | 11,216   |   |                         |   | 14,429   |  
|Liabilities for warrants to purchase common stock                                                                                                                    |  |                   | 29,092   |   |                         |   | 35,883   |  
|Embedded derivatives of convertible debt instruments                                                                                                                 |  |                   | 17,906   |   |                         |   | 9,198    |  
|Long-term portion of debt                                                                                                                                            |  |                   | 2,148    |   |                         |   | 3,490    |  
|Deferred revenue, net of current portion                                                                                                                             |  |                   | 49       |   |                         |   | 76       |  
|Non-current liabilities of discontinued operations                                                                                                                   |  |                   |         |   |                         |   | 728      |  
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|Total Liabilities                                                                                                                                                    |  |                   | 60,411   |   |                         |   | 63,804   |  
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|                                                                                                                                                                     |  |                  
|SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                                       |  |                   |          |   |                         |   |          |  
|Preferred stock, $.0001 par value; 5,000,000 authorized, none issued or outstanding at September 30, 2008 and at December 31, 2007,
respectively                     |  |                   |         |   |                         |   |         |  
|Common stock, $.0001 par value; 350,000,000 authorized, 149,230,018 and 123,752,039 issued and outstanding at September 30, 2008 and
December 31, 2007, respectively |  |                   | 15       |   |                         |   | 12       |  
|Additional paid-in capital                                                                                                                                           |  |                   | 95,780   |   |                         |   | 77,462   |  
|Foreign currency translation adjustment                                                                                                                              |  |                   | (70      | ) |                         |   | (89      | )
|Accumulated deficit                                                                                                                                                  |  |                   | (121,316 | ) |                         |   | (110,767 | )
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|Total Shareholders Equity (Deficit)                                                                                                                                 |  |                   | (25,591  | ) |                         |   | (33,382  | )
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                 |  | $                 | 34,820   |   |                         | $ | 30,422   |  
|                                                                                                                                                                     |  |                   |          |   |                         |   |          |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except
share amounts)

(Unaudited)



|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|------------------------------------------------------ |  | -------------------------------- | ----------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------------- | - |  | - | ---------- | -
|                                                       |  | Three Months Ended September 30, |             |   | Nine Months Ended September 30, |  
|                                                       |  | 2008                             |             |   | 2007(As Restated)               |   |            | 2008 |  |   | 2007 (AsRestated) |  
|Revenue                                                |  | $                                | 5,789       |   |                                 | $ | 4,369      |      |  | $ | 23,963            |   |  | $ | 12,596     |  
|Cost of sales                                          |  |                                  | 3,976       |   |                                 |   | 3,176      |      |  |   | 12,623            |   |  |   | 8,754      |  
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Gross margin                                           |  |                                  | 1,813       |   |                                 |   | 1,193      |      |  |   | 11,340            |   |  |   | 3,842      |  
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Operating expenses                                     |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Compensation                                           |  |                                  | 3,319       |   |                                 |   | 3,499      |      |  |   | 12,410            |   |  |   | 11,537     |  
|Depreciation and amortization                          |  |                                  | 446         |   |                                 |   | 879        |      |  |   | 1,411             |   |  |   | 2,594      |  
|Other operating expenses                               |  |                                  | 3,161       |   |                                 |   | 1,464      |      |  |   | 8,542             |   |  |   | 4,202      |  
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Total operating expenses                               |  |                                  | 6,926       |   |                                 |   | 5,842      |      |  |   | 22,363            |   |  |   | 18,333     |  
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Operating loss                                         |  |                                  | (5,113      | ) |                                 |   | (4,649     | )    |  |   | (11,023           | ) |  |   | (14,491    | )
|Interest expense                                       |  |                                  | 1,941       |   |                                 |   | 3,409      |      |  |   | 14,986            |   |  |   | 35,773     |  
|Registration rights penalty                            |  |                                  | 1,140       |   |                                 |   |           |      |  |   | 2,280             |   |  |   |           |  
|(Gain) or loss on warrants and derivatives             |  |                                  | (1,719      | ) |                                 |   | (15,263    | )    |  |   | (17,189           | ) |  |   | (44,727    | )
|(Gain) or loss on extinguishment of debt               |  |                                  |            |   |                                 |   |           |      |  |   |                  |   |  |   | (1,645     | )
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Income (loss) from continuing operations               |  |                                  | (6,475      | ) |                                 |   | 7,205      |      |  |   | (11,100           | ) |  |   | (3,892     | )
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Discontinued operations                                |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Income (loss) from discontinued operations, net of tax |  |                                  | (18         | ) |                                 |   | (4,649     | )    |  |   | (104              | ) |  |   | (5,483     | )
|Gain on sale of discontinued operations, net of tax    |  |                                  | 257         |   |                                 |   |           |      |  |   | 655               |   |  |   |           |  
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Income (loss) from discontinued operations, net of tax |  |                                  | 239         |   |                                 |   | (4,649     | )    |  |   | 551               |   |  |   | (5,483     | )
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Net income (loss)                                      |  | $                                | (6,236      | ) |                                 | $ | 2,556      |      |  | $ | (10,549           | ) |  | $ | (9,375     | )
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Basic earnings (loss) per share of common stock        |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Income (loss) from continuing operations               |  | $                                | (0.04       | ) |                                 | $ | 0.10       |      |  | $ | (0.08             | ) |  | $ | (0.10      | )
|Income (loss) from discontinued operations             |  |                                  |            |   |                                 |   | (0.06      | )    |  |   |                  |   |  |   | (0.14      | )
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Net income (loss) applicable to common shareholders    |  | $                                | (0.04       | ) |                                 | $ | 0.04       |      |  | $ | (0.08             | ) |  | $ | (0.24      | )
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Weighted average shares outstanding                    |  |                                  | 148,507,511 |   |                                 |   | 71,829,042 |      |  |   | 143,748,976       |   |  |   | 39,462,198 |  
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Diluted earnings (loss) per share of common stock      |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Income (loss) from continuing operations               |  | $                                | (0.04       | ) |                                 | $ | 0.08       |      |  | $ | (0.08             | ) |  | $ | (0.10      | )
|Income (loss) from discontinued operations             |  |                                  |            |   |                                 |   | (0.05      | )    |  |   |                  |   |  |   | (0.14      | )
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Net income (loss) applicable to common shareholders    |  | $                                | (0.04       | ) |                                 | $ | 0.03       |      |  | $ | (0.08             | ) |  | $ | (0.24      | )
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  
|Weighted average shares outstanding                    |  |                                  | 148,507,511 |   |                                 |   | 97,688,710 |      |  |   | 143,748,976       |   |  |   | 39,462,198 |  
|                                                       |  |                                  |             |   |                                 |   |            |      |  |   |                   |   |  |   |            |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

(in thousands, except share amounts)

(Unaudited and As Restated)



|                                                                  |  |              |  |                          |   |  |                         |   |  |             |   |                |   |                          |  |   |                    |   |  |                                      |         |   |             |   |     |                   |  |   |         |   |  |   |        |  
|----------------------------------------------------------------- |  | ------------ |  | ------------------------ | - |  | ----------------------- | - |  | ----------- | - | -------------- | - | ------------------------ |  | - | ------------------ | - |  | ------------------------------------ | ------- | - | ----------- | - | --- | ----------------- |  | - | ------- | - |  | - | ------ | -
|                                                                  |  | CommonShares |  | Series AAPreferredShares |   |  | Series BPreferredShares |   |  | CommonStock |   | PreferredStock |   | AdditionalPaid-inCapital |  |   | AccumulatedDeficit |   |  | ForeignCurrencyTranslationAdjustment |         |   | TotalEquity |   |     | ComprehensiveLoss | 
|Balance, January 1, 2007 (As Restated)                            |  | 21,015,069   |  |                         |   |  | 2,516                   |   |  | $           | 2 |                | $ |                         |  | $ | 19,297             |   |  | $                                    | (49,378 | ) |             | $ | (49 | )                 |  | $ | (30,128 | ) |  |   |        |  
|Issuance of Series AA preferred stock                             |  |             |  | 20,635                   |   |  |                        |   |  |             |  |                |   |                         |  |   |                   |   |  |                                      |        |   |             |   |    |                   |  |   |        |   |  |   |        |  
|Stock-based compensation expense                                  |  |             |  |                         |   |  |                        |   |  |             |  |                |   |                         |  |   | 5,081              |   |  |                                      |        |   |             |   |    |                   |  |   | 5,081   |   |  |   |        |  
|Issuance of common stock                                          |  | 695,811      |  |                         |   |  |                        |   |  |             |  |                |   |                         |  |   | 326                |   |  |                                      |        |   |             |   |    |                   |  |   | 326     |   |  |   |        |  
|Stock issued as penalty for failure to register                   |  | 1,029,773    |  |                         |   |  |                        |   |  |             |  |                |   |                         |  |   | 631                |   |  |                                      |        |   |             |   |    |                   |  |   | 631     |   |  |   |        |  
|Foreign currency translation adjustment                           |  |             |  |                         |   |  |                        |   |  |             |  |                |   |                         |  |   |                   |   |  |                                      |        |   |             |   | (22 | )                 |  |   | (22     | ) |  | $ | (22    | )
|Conversion of Series AA preferred stock liability to common stock |  | 45,854,513   |  | (20,635                  | ) |  |                        |   |  |             | 5 |                |   |                         |  |   | 25,220             |   |  |                                      |        |   |             |   |    |                   |  |   | 25,225  |   |  |   |        |  
|Conversion of Series B preferred stock liability to common stock  |  | 3,698,201    |  |                         |   |  | (2,516                  | ) |  |             |  |                |   |                         |  |   | (486               | ) |  |                                      |        |   |             |   |    |                   |  |   | (486    | ) |  |   |        |  
|Net loss for the nine months ended September 30, 2007             |  |             |  |                         |   |  |                        |   |  |             |  |                |   |                         |  |   |                   |   |  |                                      | (9,375  | ) |             |   |    |                   |  |   | (9,375  | ) |  |   | (9,375 | )
|                                                                  |  |              |  |                          |   |  |                         |   |  |             |   |                |   |                          |  |   |                    |   |  |                                      |         |   |             |   |     |                   |  |   |         |   |  |   |        |  
|Balance, September 30, 2007 (As Restated)                         |  | 72,293,367   |  |                         |   |  |                        |   |  | $           | 7 |                | $ |                         |  | $ | 50,069             |   |  | $                                    | (58,753 | ) |             | $ | (71 | )                 |  | $ | (8,748  | ) |  | $ | (9,397 | )
|                                                                  |  |              |  |                          |   |  |                         |   |  |             |   |                |   |                          |  |   |                    |   |  |                                      |         |   |             |   |     |                   |  |   |         |   |  |   |        |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

(in thousands, except share amounts)

(Unaudited)



|                                                      |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |             |     |   |                   |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------------------ |  | - | ------------------------------------ | - |  | ----------- | --- | - | ----------------- | - | ------- | - |  | - | ------- | -
|                                                      |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | TotalEquity |     |   | ComprehensiveLoss |  
|Balance, January 1, 2008 (As Restated)                |  | 123,752,039  |  | $           | 12 |                          | $ | 77,462             |  | $ | (110,767                             | ) |  | $           | (89 | ) |                   | $ | (33,382 | ) |  |   |         |  
|Cashless warrant conversion                           |  | 3,767,612    |  |             | 1  |                          |   | 3,659              |  |   |                                     |   |  |             |    |   |                   |   | 3,660   |   |  |   |         |  
|Cashless exercise of stock options                    |  | 804,626      |  |             |   |                          |   |                   |  |   |                                     |   |  |             |    |   |                   |   |        |   |  |   |         |  
|Registration rights penalty                           |  | 477,185      |  |             |   |                          |   | 241                |  |   |                                     |   |  |             |    |   |                   |   | 241     |   |  |   |         |  
|Debt to equity conversion                             |  | 20,261,890   |  |             | 2  |                          |   | 8,741              |  |   |                                     |   |  |             |    |   |                   |   | 8,743   |   |  |   |         |  
|Stock-based compensation expense                      |  |             |  |             |   |                          |   | 5,643              |  |   |                                     |   |  |             |    |   |                   |   | 5,643   |   |  |   |         |  
|Foreign currency translation adjustment               |  |             |  |             |   |                          |   |                   |  |   |                                     |   |  |             | 19  |   |                   |   | 19      |   |  | $ | 19      |  
|Issuance of common stock                              |  | 166,666      |  |             |   |                          |   | 34                 |  |   |                                     |   |  |             |    |   |                   |   | 34      |   |  |   |         |  
|Net loss for the nine months ended September 30, 2008 |  |             |  |             |   |                          |   |                   |  |   | (10,549                              | ) |  |             |    |   |                   |   | (10,549 | ) |  |   | (10,549 | )
|                                                      |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |             |     |   |                   |   |         |   |  |   |         |  
|Balance, September 30, 2008                           |  | 149,230,018  |  | $           | 15 |                          | $ | 95,780             |  | $ | (121,316                             | ) |  | $           | (70 | ) |                   | $ | (25,591 | ) |  | $ | (10,530 | )
|                                                      |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |             |     |   |                   |   |         |   |  |   |         |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, except
share amounts)

(Unaudited)



|                                                                       |  |                                 |        |   |                   |   |        |  
|---------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ----------------- | - | ------ | -
|                                                                       |  | Nine Months Ended September 30, |       
|                                                                       |  | 2008                            |        |   | 2007(As Restated) |  
|Net cash used in operating activities from continuing operations       |  | $                               | (9,525 | ) |                   | $ | (7,173 | )
|Net cash used in operating activities from discontinued operations     |  |                                 | (431   | ) |                   |   | 845    |  
|                                                                       |  |                                 |        |   |                   |   |        |  
|Net cash used in operating activities                                  |  |                                 | (9,956 | ) |                   |   | (6,328 | )
|                                                                       |  |                                 |        |   |                   |   |        |  
|Net cash used in investing activities from continuing operations       |  |                                 | (57    | ) |                   |   | (454   | )
|Net cash provided by investing activities from discontinued operations |  |                                 | 846    |   |                   |   |       |  
|                                                                       |  |                                 |        |   |                   |   |        |  
|Net cash provided by investing activities                              |  |                                 | 789    |   |                   |   | (454   | )
|                                                                       |  |                                 |        |   |                   |   |        |  
|Net cash provided by financing activities from continuing operations   |  |                                 | 10,654 |   |                   |   | 8,821  |  
|Net cash used in financing activities from discontinued operations     |  |                                 |       |   |                   |   | (2,478 | )
|                                                                       |  |                                 |        |   |                   |   |        |  
|Net cash provided by financing activities                              |  |                                 | 10,654 |   |                   |   | 6,343  |  
|                                                                       |  |                                 |        |   |                   |   |        |  
|Effect of exchange rate on cash and equivalents                        |  |                                 | 19     |   |                   |   | (22    | )
|                                                                       |  |                                 |        |   |                   |   |        |  
|Increase (decrease) in cash and cash equivalents                       |  |                                 | 1,506  |   |                   |   | (461   | )
|Cash and cash equivalents  beginning of period                        |  |                                 | 859    |   |                   |   | 1,204  |  
|                                                                       |  |                                 |        |   |                   |   |        |  
|Cash and cash equivalents  end of period                              |  | $                               | 2,365  |   |                   | $ | 743    |  
|                                                                       |  |                                 |        |   |                   |   |        |  
|                                                                       |  |                                
|SUPPLEMENTAL CASH FLOW INFORMATION                                     |  |                                 |        |   |                   |   |        |  
|Cash paid for interest for continuing operations                       |  | $                               | 756    |   |                   | $ | 1,372  |  
|Cash paid for interest for discontinued operations                     |  |                                 |       |   |                   |   | 52     |  
|                                                                       |  |                                
|NON-CASH INVESTING AND FINANCING ACTIVITIES                            |  |                                 |        |   |                   |   |        |  
|Debt to equity conversion                                              |  | $                               | 8,743  |   |                   | $ |       |  
|Conversion of short-term bridge notes to Junior Secured Facility       |  |                                 |       |   |                   |   | 5,388  |  
|Issuance of common stock for cashless conversion of warrants           |  |                                 | 3,660  |   |                   |   |       |  
|Registration rights penalty                                            |  |                                 | 241    |   |                   |   |       |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Condensed Financial Statements

September 30, 2008 (Unaudited)

NOTE 1. Organization and Basis of Presentation.

The accompanying consolidated financial statements include the accounts of Capital Growth Systems, Inc. (CGSI) and its wholly-owned
subsidiaries, 20/20 Technologies, Inc. (20/20), Magenta netLogic Ltd. (Magenta), CentrePath, Inc. (CentrePath), and Global Capacity Group, Inc. (GCG). Except where necessary to distinguish the
entities, together they are referred to as the Company. All intercompany accounts have been eliminated in consolidation.

During the first quarter of 2007, the Company determined both Nexvu Technologies, LLC (Nexvu), and Frontrunner Network Systems (Frontrunner) were not core to its telecom logistics model and met the definition of
discontinued operations as prescribed in Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144) the financial results of these two entities are
presented as discontinued operations. See the Discontinued Operations note for further discussion.

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 that, in the opinion of management, are necessary in order to make the financial statements not misleading. The results for the interim periods
presented are not necessarily indicative of results to be expected for any future period.

These financial statements should be read in
conjunction with the audited financial statements and the notes thereto of all the entities included in the Companys 2007 Annual Report on Form 10-KSB/A filed with the Securities Exchange Commission.

NOTE 2. Summary of Significant Accounting Policies.

Except to the extent updated or described below, a detailed description of the Companys significant accounting policies can be found in its 2007 Annual Report on Form 10-KSB/A filed with the Securities Exchange Commission.

Amounts included in these footnotes to the financial statements are displayed in thousands of dollars, exclusive of share amounts.

Cash and Cash Equivalents

The Company considers
short-term, highly-liquid investments with original maturities of three months or less as cash and cash equivalents. The Company had $0.2 million of cash restricted for outstanding letters of credit as of September 30, 2008 and
December 31, 2007.

Intangible Assets and Goodwill

Intangible assets are assets acquired from an independent party. The assets have no significant residual values. There are no intangible assets that are not subject to amortization. The acquired intangible assets are
tested for impairment whenever events or circumstances indicate that a carrying amount of an asset or asset group may not be recoverable. The Company has determined that no impairments existed as of September 30, 2008. An impairment loss is
recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss to be recorded represents the excess of the assets carrying value
over its fair value. Fair value is generally determined using a discounted cash flow analysis.



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Gross carrying amounts, accumulated amortization, and estimated amortization period for each major
intangible asset class are as follows:



|                     |  |                             |  |                          |       |                         |   |        |     |  |   |      
|-------------------- |  | --------------------------- |  | ------------------------ | ----- | ----------------------- | - | ------ | --- |  | - | -----
|                     |  |                             |  | as of September 30, 2008
|                     |  | AmortizationPeriod in Years |  | GrossCarryingAmount      |       | AccumulatedAmortization |   |        | Net
|                     |  |                             |  | (in thousands)          
|Developed technology |  | 5 to 11                     |  | $                        | 5,805 |                         | $ | (1,307 | )   |  | $ | 4,498
|Trade names          |  | 3                           |  |                          | 350   |                         |   | (217   | )   |  |   | 133  
|Customer base        |  | 6 to 10                     |  |                          | 3,560 |                         |   | (780   | )   |  |   | 2,780
|                     |  |                             |  |                          |       |                         |   |        |     |  |   |      
|Total                |  | 9.29 weighted-average years |  | $                        | 9,715 |                         | $ | (2,304 | )   |  | $ | 7,411
|                     |  |                             |  |                          |       |                         |   |        |     |  |   |      
|                     |  |                            
|                     |  |                             |  | as of December 31, 2007 
|                     |  |                             |  | GrossCarryingAmount      |       | AccumulatedAmortization |   |        | Net
|                     |  |                             |  | (in thousands)          
|Developed technology |  |                             |  | $                        | 5,805 |                         | $ | (809   | )   |  | $ | 4,996
|Trade names          |  |                             |  |                          | 350   |                         |   | (129   | )   |  |   | 221  
|Customer base        |  |                             |  |                          | 3,560 |                         |   | (469   | )   |  |   | 3,091
|                     |  |                             |  |                          |       |                         |   |        |     |  |   |      
|Total                |  |                             |  | $                        | 9,715 |                         | $ | (1,407 | )   |  | $ | 8,308
|                     |  |                             |  |                          |       |                         |   |        |     |  |   |      

Amortization expense for the nine month periods ended September 30, 2008 and 2007 related to
the intangible assets was $0.9 million and $0.9 million, respectively. Estimated amortization expense for the intangible assets is as follows for the years or other defined periods ending December 31:



|                               |  |                |      
|------------------------------ |  | -------------- | -----
|                               |  | (in thousands)
|Remaining three months of 2008 |  | $              | 300  
|2009                           |  |                | 1,185
|2010                           |  |                | 1,081
|2011                           |  |                | 1,060
|2012                           |  |                | 857  
|Thereafter                     |  |                | 2,928
|                               |  |                |      
|                               |  | $              | 7,411
|                               |  |                |      

Goodwill is the excess of cost of an acquired entity over the amounts assigned to assets acquired
and liabilities assumed in a business combination. Goodwill is tested for impairment annually and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired.
There have been no current events or circumstances that would indicate an impairment of goodwill exists. There were no changes in the acquired amount of goodwill as of September 30, 2008 and December 31, 2007 in the continuing operations.

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



|                          |  |                   |        |                  |   |       
|------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                          |  | September 30,2008 |        | December 31,2007
|                          |  | (in thousands)   
|Acquisition of 20/20      |  | $                 | 8,810  |                  | $ | 8,810 
|Acquisition of CentrePath |  |                   | 1,754  |                  |   | 1,754 
|Acquisition of GCG        |  |                   | 1,949  |                  |   | 1,949 
|                          |  |                   |        |                  |   |       
|End of the period         |  | $                 | 12,513 |                  | $ | 12,513
|                          |  |                   |        |                  |   |       

Accounting for Convertible Debentures, Warrants, and Derivative Instruments

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



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The Company accounts for its embedded conversion features and freestanding warrants pursuant to SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Companys Own Stock (EITF 00-19) which
requires freestanding contracts that are settled in a companys own stock to be designated as an equity instrument, asset, or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at
fair value on a companys balance sheet, with any changes in fair value recorded in results of operations.

In accordance with EITF
00-19, certain warrants to purchase common stock and embedded conversion options are accounted for as liabilities at fair value and the unrealized changes in the values of these derivatives are recorded in the statement of operations as gain
or loss on warrants and derivatives. Contingent conversion features that reduce the conversion price of warrants or other conversion features are included in the valuation of the warrants and the conversion features. The recognition of the
fair value of derivative liabilities (i.e., warrants and embedded conversion options) at the date of issuance is applied first to the proceeds. The excess fair value, if any, over the proceeds from units-type offerings (i.e., preferred stock with
freestanding warrants) or from a debt instrument, is recognized immediately in the statement of operations as gain or loss on warrants and derivatives or interest expense, respectively. The value of warrants or derivatives
associated with a debt instrument is recognized at inception as a discount to the debt instrument. This discount is amortized over the life of the debt instrument using the effective interest method. The value of the warrants and derivatives
associated with the units-type offerings is credited to additional paid-in-capital upon conversion to common stock.

A determination is
made upon settlement, exchange, or modification of the debt instruments to determine if a gain or loss on the extinguishment has been incurred based on the terms of the settlement, exchange, or modification and on the value allocated to the debt
instrument at such date.

The Company uses the Black-Scholes pricing model to determine fair values of its derivatives. Valuations derived
from this model are subject to ongoing internal verification and review. The model uses market-sourced inputs such as interest rates, exchange rates, and option volatilities. Selection of these inputs involves managements judgment and may
impact net income. The fair value of the derivative liabilities are subject to the changes in the trading value of the Companys common stock. As a result, the Companys financial statements may fluctuate from quarter-to-quarter based on
factors, such as the price of the Companys stock at the balance sheet date, the amount of shares converted by note holders and/or exercised by warrant holders, and changes in the determination of market-sourced inputs. Consequently, the
Companys financial position and results of operations may vary materially from quarter-to-quarter based on conditions other than its operating revenues and expenses.

Accounting for Debt Issued with Stock Purchase Warrants

The Company accounts for debt issued with
stock purchase warrants in accordance with Accounting Principles Board (APB) Opinion No. 14, Accounting for Convertible Debts and Debts issued with Stock Purchase Warrants(APB 14), if such warrants merit equity classification. The
proceeds of the debt are allocated between the debt and the detachable warrants based on the relative fair values of the debt security without the warrants and the warrant themselves, if the warrants are equity instruments. The Company does not
currently have any warrants that merit equity classification.

Revenue Recognition

The Company generates revenue from two business units: Optimization Solutions and Connectivity Solutions. The revenue products of the Optimization
Business include Optimization Consulting, Automated Pricing Software, Remote Management Services, and Professional Services, while products of the Connectivity Business include delivering turn-key global networks and system management services.

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104) which
incorporates Emerging Issues Task Force Issues No. 00-21, Multiple-Deliverable Revenue Arrangements (EITF 00-21) and in accordance with AICPA Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended by AICPA
Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions (SOP 98-9). In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an
arrangement exists, the service is performed, and collectibility of the resulting receivable is reasonably assured.



While customers may purchase services separately, sales can include multiple products that cross business units. At the inception of such arrangements,
the deliverables are evaluated to determine whether they represent separate units of accounting under EITF 00-21. The Companys policy regarding this determination of separate units is based on all of the following criteria being met: the
delivered item has value to the customer on a standalone basis; there is objective and reliable evidence of the fair value of the items(s); and delivery or performance of the item(s) is considered probable and substantially in the Companys
control. Revenue is allocated to each unit of accounting in a transaction based on its fair value as determined by vendor objective evidence. Vendor objective evidence of fair value for all elements of an arrangement is based upon the normal pricing
and discounting practices when sold to other customers. If vendor objective evidence of fair value has not been established for all items under the arrangement, no allocation can be made, and revenue is recognized on all items over the term of the
arrangement.



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

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

Automated Pricing Software. The Company allocates revenue to software license and to the related maintenance based
on the residual method of accounting as prescribed in SOP 97-2 whereby the software revenue is recognized upon product acceptance by the customer and the maintenance allocation is recognized over the annual life of the license. The Company has
established Vendor Specific Objective Evidence (VSOE) for the value of its post-contract maintenance support agreement at 20% of the license amount, which is based on the amount charged to its customers in the renewal year. The Company allocates a
portion of the revenue of the arrangement to maintenance and the remaining amount to the software license.

Remote Management
Services. The Company recognizes revenue from the installation and servicing of these arrangements ratably over the term of the contract with no allocation to either installation or monthly monitoring since, as prescribed in EITF 00-21, as
the installation has no value to the customer on a standalone basis.

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

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

Cost of Sales

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

Cost
of sales for Connectivity Solutions products includes the cost of accessing circuits and bandwidth needed for communication networks and fees paid to third-party sales agents.

Comprehensive income (loss)

SFAS No. 130,Reporting Comprehensive Income (SFAS 130),
establishes standards for reporting and displaying of comprehensive income or loss, its components, and accumulated balances. Comprehensive income or loss is defined to include all changes in equity except those resulting from investments by, and
distributions to, shareholders. The following is the Companys comprehensive loss for the three and nine-month periods ended September 30, 2008 and 2007:



|                                        |  |                                  |        |   |                                 |   |       |      |  |   |                   |   |  |   |        |  
|--------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ----- | ---- |  | - | ----------------- | - |  | - | ------ | -
|                                        |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                        |  | 2008                             |        |   | 2007(As Restated)               |   |       | 2008 |  |   | 2007(As Restated) |  
|                                        |  | (in thousands)                   |        |   | (in thousands)                  |  
|Net income (loss), as reported          |  | $                                | (6,236 | ) |                                 | $ | 2,556 |      |  | $ | (10,549           | ) |  | $ | (9,375 | )
|Foreign currency translation adjustment |  |                                  | 34     |   |                                 |   | (11   | )    |  |   | 19                |   |  |   | (22    | )
|                                        |  |                                  |        |   |                                 |   |       |      |  |   |                   |   |  |   |        |  
|Comprehensive income (loss)             |  | $                                | (6,202 | ) |                                 | $ | 2,545 |      |  | $ | (10,530           | ) |  | $ | (9,397 | )
|                                        |  |                                  |        |   |                                 |   |       |      |  |   |                   |   |  |   |        |  



Earnings (loss) per Share

Basic and diluted net loss per share information is presented under the requirements of SFAS No. 128,Earnings per Share
(SFAS 128). Basic net loss per share is computed by dividing the net loss applicable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects potential dilution
of securities by adding other potential common shares, including stock options and warrants, to the weighted-average number of common shares outstanding for a period, if dilutive. All potentially dilutive securities, including stock options and
warrants, have been excluded from this computation, as their effect is anti-dilutive.

As of September 30, 2007, there were
19.0 million stock options and 82.2 million stock warrants outstanding that potentially could have been converted into common shares.



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On June 25, 2007, the Companys shareholders approved an increase in the number of authorized
common shares from 25 million to 350 million, resulting in the conversion of all series of preferred stock into common stock. At that date, the Company had a total of 2,516.10 and 20,634.53 shares of Series B and Series AA Convertible
preferred stock that converted into 3,698,147 and 45,854,567 shares of common stock, respectively. Also outstanding were warrants to purchase 2,020.756 shares of Series A preferred stock, which were convertible into 2,245,262 shares of common stock
upon exercise.

As of September 30, 2008, there were 73.9 million stock options and 80.5 million stock warrants outstanding
that potentially could be converted into common shares.

Recent Accounting Pronouncements

On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), Business Combinations (SFAS
141R). SFAS 141R replaces SFAS No. 141, Business Combinations and applies to all transactions or other events in which an entity obtains control of one or more businesses. SFAS 141R requires the acquiring entity in a business combination
to recognize the acquisition-date fair value of all assets acquired and liabilities assumed including contingent consideration and those relating to minority interests. SFAS 141R also requires acquisition-related transaction expenses and
restructuring costs to be expensed as incurred, rather than capitalized as a component of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and may not be applied before that date. The
provisions of SFAS 141R will impact the Company if it is party to a business combination after the pronouncement has been adopted.

On
December 4, 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements(SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements(ARB 51)
to establish accounting and reporting standards for the non-controlling interest (previously referred to as minority interests) in a subsidiary and for the deconsolidation of a subsidiary by requiring all non-controlling interests in subsidiaries be
reported in the same way (i.e., as equity in the consolidated financial statements) and eliminates the diversity in accounting for transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. SFAS
160 is effective for fiscal years beginning after December 15, 2008 and may not be applied before that date. The Company does not currently expect the adoption of SFAS 160 to have a material effect on its consolidated results of operations and
financial condition.

In February 2008, the FASB issued FASB Staff Positions (FSP) No. 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13(FSP 157-1) and No. 157-2, Effective
Date of FASB Statement No. 157(FSP 157-2). FSP 157-1 removes certain leasing transactions from the scope of SFAS 157. FSP 157-2 partially defers the effective date of SFAS 157 for one year for certain non-financial assets and non-financial
liabilities that are recognized at fair value on a non-recurring basis (at least annually). The Company does not currently expect the adoption of the recently issued FASB Staff Positions to have a material effect on its results of operations and
financial condition.

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.

Restatement

As of September 8, 2006, the shares of common stock required to settle the convertible bridge loan issued in connection with the Companys
acquisition of 20/20, the convertible preferred stock outstanding, the stock options outstanding, and the warrants outstanding were in excess of the Companys authorized but unissued shares of common stock. This condition, which continues
through the current balance sheet date, required evaluation in accordance with SFAS 133 and EITF 00-19; however, such evaluation was not considered during the preparation of the September 30, 2006 Form 10-QSB.

Pursuant to SFAS 133 and EITF 00-19, the conversion features of the bridge loans and the preferred stock are considered embedded derivatives requiring
bifurcation from the debt host and recording as a liability at fair value on the balance sheet. In accordance with the same guidance, the Companys outstanding warrants also meet the definition of a liability to be recorded at fair value on the
balance sheet. These liabilities are revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as a gain or loss on warrants and derivatives in the statements of operations.



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The Company has applied the aforementioned guidance and restated prior amounts, as necessary, for
September 2006 through March 2008. This restatement, reported in our Form 10-KSB/A filed on August 15, 2008, includes, among other things, balance sheet reclassification of warrants and preferred stock from the statement of shareholders equity
to a liability account. In addition, it requires a non-cash charge to mark the related liabilities to fair value at each balance sheet date. Balances effected by the restatement may also bear the notation As Restated.

NOTE 3. Discontinued Operations.

During the first
quarter of 2007, the Company determined the operations of Frontrunner and Nexvu were not core to the Companys overall telecom logistics integrator strategy and therefore made the decision to dispose of these two entities. Since early 2007, the
Company actively marketed the two companies. Development activity at Nexvu was ended effective September 30, 2007 and shut-down costs of $160,000 were accrued at that date to cover any residual costs, including severance and liquidation of
fixed assets.

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

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

In accordance with SFAS 144, the Company has
classified both of these entities as discontinued operations for the financial statements presented herein. Revenues for the nine-month periods ended September 30, 2008 and 2007 were $1.0 million and $7.3 million, respectively. Losses from
discontinued operations for the nine-month periods ended September 30, 2008 and 2007 were $0.1 million and $5.5 million, respectively. The operating results related to Frontrunner and Nexvu are included in discontinued operations of the Company
through the sale date. Gain on sale of discontinued operations for the nine-month period ended September 30, 2008 was $0.7 million.



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##### Table of Contents

The discontinued operations assets and liabilities are as follows:



|                                                     |  |                   |   |                  |   |      
|---------------------------------------------------- |  | ----------------- | - | ---------------- | - | -----
|                                                     |  | September 30,2008 |   | December 31,2007
|                                                     |  | (Unaudited)       |   | (Audited)       
|                                                     |  | (in thousands)   
|Current assets of discontinued operations            |  |                   |   |                  |   |      
|Accounts receivable, net                             |  | $                 |  |                  | $ | 1,298
|Inventory                                            |  |                   |  |                  |   | 864  
|Prepaid expenses and other current assets            |  |                   |  |                  |   | 58   
|Other current assets                                 |  |                   |  |                  |   | 167  
|                                                     |  |                   |   |                  |   |      
|Total current assets of discontinued operations      |  |                   |  |                  |   | 2,387
|                                                     |  |                   |   |                  |   |      
|Non-current assets of discontinued operations        |  |                   |   |                  |   |      
|Property and equipment, net                          |  |                   |  |                  |   | 505  
|Intangible assets, net                               |  |                   |  |                  |   | 526  
|Other assets                                         |  |                   |  |                  |   |     
|                                                     |  |                   |   |                  |   |      
|Non-current assets of discontinued operations        |  |                   |  |                  |   | 1,031
|                                                     |  |                   |   |                  |   |      
|Total assets from discontinued operations            |  | $                 |  |                  | $ | 3,418
|                                                     |  |                   |   |                  |   |      
|Current liabilities of discontinued operations       |  |                   |   |                  |   |      
|Accounts payable                                     |  | $                 |  |                  | $ | 326  
|Accrued expenses                                     |  |                   |  |                  |   | 644  
|Advanced billing                                     |  |                   |  |                  |   | 390  
|Warranty reserve                                     |  |                   |  |                  |   | 99   
|Deferred revenue, current portion                    |  |                   |  |                  |   | 1,368
|                                                     |  |                   |   |                  |   |      
|Total current liabilities of discontinued operations |  |                   |  |                  |   | 2,827
|                                                     |  |                   |   |                  |   |      
|Non-current liabilities of discontinued operations   |  |                   |   |                  |   |      
|Long-term portion of notes                           |  |                   |  |                  |   | 728  
|                                                     |  |                   |   |                  |   |      
|Non-current liabilities of discontinued operations   |  |                   |  |                  |   | 728  
|                                                     |  |                   |   |                  |   |      
|Total liabilities of discontinued operations         |  | $                 |  |                  | $ | 3,555
|                                                     |  |                   |   |                  |   |      



15



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##### Table of Contents

NOTE 4. Debt.

Debt as of September 30, 2008 and December 31, 2007 consists of the following:



|                                                                                                                                                                                                                                                                                                                                                                                |  |                   |       |                               |   |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----- | ----------------------------- | - | -----
|                                                                                                                                                                                                                                                                                                                                                                                |  | September 30,2008 |       | December 31,2007(As Restated)
|                                                                                                                                                                                                                                                                                                                                                                                |  | (in thousands)   
|Secured convertible debentures, with an outstanding balance of $18.7 million, bearing a 5% coupon for the first two years and a 10% coupon for
the last three years, secured, due March 2013. Debt discount at issuance of $21.7 million. As of September 30, 2008, the balance was reported net of $16.6 million, which represents the unamortized value of the debt discount. |  | $                 | 2,075 |                               |   |     
|Senior secured line of credit, with an outstanding balance of $5.5 million, bearing interest at 15%, due July 2008. Debt discount at issuance
of $2.4 million. As of December 31, 2007, the balance of the debt was reported net of $1.1 million, which represents the unamortized value of the debt discount.                                                                  |  |                   |      |                               | $ | 4,377
|Junior secured facility, with a face amount of $9.3 million, bearing simple interest at 12%, due January 2009. Debt discount at issuance of
$18.3 million. As of December 31, 2007, the balance of the debt was reported net of $5.9 million, which represents the unamortized value of the debt discount.                                                                      |  |                   |      |                               |   | 3,374
|Short-term bridge facility, with an outstanding balance of $0.2 million, bearing interest at 12%, due September 30, 2007, which was
subsequently extended. Debt discount at issuance of $0.2 million. As of December 31, 2007, the balance of the debt was reported net of $0.2 million, which represents the unamortized value of the debt discount.                           |  |                   |      |                               |   | 48   
|Unsecured notes payable to creditor with an interest rate of 5%, subject to certain conditions will convert into a new secured subordinated
debenture substantially in the form of the March 2008 Debentures                                                                                                                                                                    |  |                   | 500   |                               |   |     
|Unsecured notes payable to creditors with an interest rate of 8%, principal payments commencing in January 2007, maturing December
2008                                                                                                                                                                                                                                         |  |                   |      |                               |   | 601  
|Unsecured loans from certain employees of Magenta, bearing interest at 8.43%, due upon demand.                                                                                                                                                                                                                                                                                  |  |                   | 87    |                               |   | 138  
|Capital lease obligations.                                                                                                                                                                                                                                                                                                                                                      |  |                   | 10    |                               |   | 36   
|                                                                                                                                                                                                                                                                                                                                                                                |  |                   |       |                               |   |      
|Total                                                                                                                                                                                                                                                                                                                                                                           |  |                   | 2,672 |                               |   | 8,574
|Less: current maturities                                                                                                                                                                                                                                                                                                                                                        |  |                   | 524   |                               |   | 5,084
|                                                                                                                                                                                                                                                                                                                                                                                |  |                   |       |                               |   |      
|Long-term portion                                                                                                                                                                                                                                                                                                                                                               |  | $                 | 2,148 |                               | $ | 3,490
|                                                                                                                                                                                                                                                                                                                                                                                |  |                   |       |                               |   |      

Debentures. On March 11, 2008, the Company completed a private placement of
$19.0 million of securities (Purchase Agreement) with a number of investors (Purchasers). The securities comprise (i) variable rate senior secured convertible debentures (Debentures) in an aggregate principal
amount of $19.0 million, convertible into common stock of the Company at $0.50 per share (the Conversion Price); representing 38 million shares of common stock on an as-converted basis; and (ii) one warrant per Debenture,
providing a right to purchase 50% of the number of shares of common stock purchasable with the original principal amount of the Debentures, at a price of $0.73 per share and having a term ending five years from the closing date. The Conversion price
on all Debentures still outstanding 210 days after the closing shall be reset to 90% of the volume weighted average price for the five trading days immediately prior to such date  if such amount is lower than $0.50 per share. The contemplated
210-day period ended on October 7, 2008 and the new conversion price was determined to be $0.24 per share. See the Subsequent Events note for further discussion. The Conversion price can also be reset for (i) forward and
reverse splits and other extraordinary transactions and (ii) a full ratchet clause that effectively lowers the purchase price to the lowest price at which there is any subsequent placement of the Companys common stock (or common stock
equivalents), subject to certain exempt issuances not triggering such lowering of price.

Proceeds pursuant to the Purchase Agreement, net
of $1.7 million of advisory fees paid to Capstone Investments and Aequitas Capital Management, were used to extinguish the senior secured debt as well as all remaining subordinated debt that had not been converted to equity prior to the execution of
the Purchase Agreement. These outstanding balances were $6.6 million and $2.0 million, respectively, at the closing date. The remaining proceeds were retained for working capital purposes and the unamortized deferred financing costs related to the
extinguished debt were recognized. In addition to the cash paid fees, the Company issued to Capstone a warrant to purchase 2,660,000 shares of common stock. Such Warrant contains substantially similar terms and conditions (including exercise price
and expiration date) to the Warrants issued to the Purchasers and described below, but does not carry registration rights.



The Debentures mature five years from the closing date. Each Debenture contains a 5% coupon for the first two years and a 10% coupon for the last three
years. The coupon shall be paid quarterly in arrears and may, at the Companys option, be paid in cash or in shares of common stock pursuant to certain prescribed calculations to determine value. A late fee of 16% per annum is payable with
respect to any late payments.



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##### Table of Contents

During the first year, the Company will have the right to call up to 25% of the Debentures outstanding at
105% of their stated value (plus all interest that would have accrued on the prepaid amount were the Debentures held to maturity). In the second year, the Company may call up to 100% of the Debentures upon tender of the full amount owing with
respect to the Debentures (plus all interest that would have accrued on the prepaid amount were the Debentures held to maturity), provided the Company is in compliance with all of its obligations under the Debentures. The Debentures are subject to a
number of other restrictions, conditions, sanctions, and negative covenants. The Debentures are convertible from time to time at the option of their holders at the Conversion Price of $0.50 per share, subject to certain adjustments, which conversion
price has been reset to $0.24 per share, subject to full ratchet anti-dilution adjustment.

The Purchase Agreement calls for the issuance
of Warrants comprising the right to purchase up to 50% of the shares issuable per the Debentures (19 million shares of common stock in the aggregate for all of the Warrants) at an exercise price of $0.73 per share (subject to adjustment as discussed
below). The Warrants expire five years from the closing date and may be exercised for cash or on a cashless basis and are subject to certain other conditions. The Warrants also contain a full ratchet anti-dilution clause which effectively provides
that if there is a subsequent issuance of common stock at a price per share below $0.73, the exercise price of the Warrants ratchets to the lower price and the number of shares purchasable under the Warrants ratchet up so that the aggregate purchase
price to be paid based on the lower exercise price is the same aggregate purchase price that was payable based on the original exercise price.

Using the Black-Scholes pricing model, the Company allocated the debt proceeds to the Warrants and the embedded derivatives as follows:



|                     |  |                    |     
|-------------------- |  | ------------------ | ----
|                     |  | Initial Fair Value
|                     |  | (in millions)     
|Warrants             |  | $                  | 10.6
|Embedded derivatives |  |                    | 11.1
|                     |  |                    |     
|Total debt discount  |  | $                  | 21.7
|                     |  |                    |     

The initial fair value of the Warrants and embedded derivatives exceeded the proceeds of the
Debentures by $2.7 million, which was recognized immediately as interest expense.

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

The Company filed the registration statement discussed above on April 29, 2008 and the SEC elected to undertake a full review. Due to the complexity of the issues raised in that review and the
difficulty of the aforementioned restatement activity, the Company anticipates that it will not have the underlying common stock registered before the maximum penalty is incurred and has therefore accrued the full six months of the related
liquidated damages penalty.

The Company and all of its subsidiaries entered into a Security Agreement pursuant to which it granted to the
Purchasers a security interest in all of its assets, including a pledge by the Company of all of the capital stock of each of its subsidiaries. Upon an Event of Default, the Purchasers may take possession of the collateral and operate the business.



Senior Secured Facility. In January 2007, the
Company closed the initial funding of $7.0 million of borrowings on an eighteen-month, $12 million Senior Secured Facility issued to the Company by a Senior Lender. This Senior Secured Facility was retired on March 11, 2008. The Credit
Agreement for the facility named the Company and its subsidiaries as co-borrowers and provided for a term loan of $6.5 million plus up to $5.5 million of borrowing availability based upon an advance rate of 85% against eligible accounts receivable.
It required the payment of interest on a monthly basis at the greater of 15% per annum or prime plus 7% and had a $250,000 prepayment penalty until the last thirty days of the facility. There was a $3,000 per month collateral management fee, a
0.5% per month unused line fee, and an obligation to reimburse the lender for costs incurred by it in connection with the original issuance and ongoing administration of the facility. Further, the Company agreed to pay the Senior Lender a fee
of 5% of the maximum amount of the facility, with one half funded on the closing date and the second half due six months following the closing. The Company also paid a fee of $250,000 to a placement agent in connection with the facility. As of
December 31, 2007, the Companys borrowing capacity was $0.5 million.



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##### Table of Contents

The Senior Secured Facility was secured by a blanket lien on all of the Companys assets and all of
the assets of the Companys subsidiaries. Additionally, the Company pledged all of the capital stock or limited liability company interests of each of the Companys subsidiaries as additional collateral. The Credit Agreement prohibited
junior encumbrances on the Companys assets with the exception of the Junior Secured Facility (discussed herein) and certain permitted purchase money security interests. The Credit Agreement contained numerous affirmative and negative covenants
customary for facilities of this nature. The Company had agreed to EBITDA covenants (i.e., earnings before interest taxes, depreciation, and amortization and before non-cash stock compensation and warrant expense) as follows (at least 75% of the
amount to be achieved on a cumulative basis: Q1 2007 ($2.4) million; Q2 2007 ($2.6) million; Q3 2007 ($600,000); and Q4 2007 $3.1 million. The Company also agreed to a covenant capping capital expenditures at $0.5 million for 2007. The Senior lender
agreed to waive the Companys non-compliance related to the EBITDA covenant during 2007.

In connection with the Senior Secured
Facility, on January 19, 2007, the Company issued to the Senior Lender two warrants to purchase an aggregate of 1,125.0 shares of Series AA preferred stock (2.5 million shares of common stock, on an as-converted basis). Warrants with respect to
one half of the shares were exercisable on or before December 31, 2008 at an exercise price equal to $0.45 per share of common stock, on an as-converted basis, and warrants with respect to the one half of the shares were exercisable on or
before December 31, 2009 at an exercise price equal to $0.65 per share of common stock on an as-converted basis. In connection with the October 31, 2007 Waiver and Amendment to the Agreement, a new five-year warrant to purchase up to
3,500,000 shares of common stock at $0.15 was issued and the previously issued warrants were cancelled. The new warrant provided for, among other things, cashless exercise, anti-dilution, and registration rights. The Senior Lender subsequently
agreed to waive the requirements that the shares underlying its warrant be registered.

Using the Black-Scholes pricing model, the Company
allocated the debt proceeds to the warrants as follows:



|                                                                        |  |                    |    
|----------------------------------------------------------------------- |  | ------------------ | ---
|                                                                        |  | Initial Fair Value
|                                                                        |  | (in millions)     
|Warrants issued on January 19, 2007                                     |  | $                  | 1.9
|Fair value increase for replacement warrants issued on October 31, 2007 |  |                    | 0.5
|                                                                        |  |                    |    
|Total debt discount                                                     |  | $                  | 2.4
|                                                                        |  |                    |    

Junior Secured Facility. On January 19, 2007, the Company entered into an
agreement with a number of individuals and entities for the establishment of a Junior Secured Facility that permitted the funding of up to $10 million of original principal amount of advances. At the closing, an initial $6.3 million of funds was
provided pursuant to the facility. During the year, another $3.4 million was funded, bringing the aggregate principal amount of the facility to $9.3 million. The facility had a two-year term accruing simple interest at 12% per annum, with all
principal and interest due on maturity. The Junior Secured Facility included a junior lien on the Companys assets and the assets of its subsidiaries, which was expressly contractually subordinated to the Senior Secured Facility and any
refinancing of that facility.

The original principal amount of each note issued pursuant to the Junior Secured Facility was convertible at
the holders option into Series AA preferred stock (or following its conversion to common stock, then the conversion feature relates to common stock) at a price per share equal to a 20% discount to the trailing ten-day average for the
Companys common stock as of the day immediately preceding the date of conversion (subject to adjustment to account for stock splits and certain other extraordinary corporate circumstances). In connection with the funding of the Junior Secured
Facility, each lender under that facility was issued a warrant to purchase up to 67.5 shares of Series AA preferred stock for each $100,000 advanced, which represents 150,000 shares of common stock, on an as-converted basis, exercisable at $0.45 per
share and expiring December 31, 2009. The loan agreement establishing the facility was amended effective June 15, 2007 to: (i) eliminate the ceiling (originally applicable to the facility based on a floor of $0.65 and a ceiling of
$1.25 per share) and floor for the conversion of loan amounts to equity in the Company; (ii) permit the cashless exercise of warrants under the facility in lieu of an obligation to register the shares of capital stock underlying the warrants;
and (iii) provide that with respect to advances under the facility after June 15, 2007, the warrant coverage was increased to 90.0009 shares of Series AA preferred stock (200,000 shares of common stock, on an as-converted basis, at an
effective price of $0.45 per share) for each $100,000 of principal amount advanced; those lenders funding the facility on or before January 22, 2007 received a warrant to purchase up to 67.500675 shares of Series AA preferred stock for each
$100,000 of monies advanced (150,000 shares of common stock, on an as-converted basis, at an effective price of $0.45 per share) for each $100,000 of principal amount advanced. In connection with the June 15, 2007 amendment, additional funding
of $3.0 million was received and the Company issued 5,850,000 warrants. The Company had issued warrants to purchase an aggregate of 15,432,658 shares of its common stock under the Junior Secured Facility. All of the warrants under the facility would
have expired on December 31, 2009.



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Using the Black-Scholes pricing model, the Company allocated the debt proceeds to the warrants and the
embedded derivatives as follows:



|                                             |  |                    |     
|-------------------------------------------- |  | ------------------ | ----
|                                             |  | Initial Fair Value
|                                             |  | (in millions)     
|Warrants issued on January 19, 2007          |  | $                  | 7.6 
|Warrants issued with June 15, 2007 amendment |  |                    | 3.3 
|Embedded derivatives                         |  |                    | 7.4 
|                                             |  |                    |     
|Total debt discount                          |  | $                  | 18.3
|                                             |  |                    |     

The initial fair value of the warrants and embedded derivatives exceeded the proceeds of the
Debentures by $9.0 million, which was recognized immediately as interest expense.

In August 2007, the Company established a short-term
bridge facility authorizing the issuance of up to $1 million of Units comprised of short-term promissory notes bearing interest at 12% per annum and maturing September 30, 2007, coupled with a warrant to purchase up to 125,000 shares of
common stock for each $100,000 of notes funded. Each warrant is exercisable at $0.55 per share and expires December 31, 2010. At that time, two of the Companys Directors purchased Units for a total of $150,000. In addition, two officers
of the Company each purchased $50,000 of the Units and two investors purchased a total of $100,000 of Units. Collectively, the purchases of these Units resulted in the issuance of short-term notes in the principal amount of $350,000, plus warrants
to purchase an aggregate of up to 437,500 shares of common stock. The purchasers of these Units agreed to extend the maturity date until completion of the contemplated financing. The short-term bridge facility is unsecured.

Using the Black-Scholes pricing model, the Company allocated the debt proceeds to the warrants as follows:



|                    |  |                    |    
|------------------- |  | ------------------ | ---
|                    |  | Initial Fair Value
|                    |  | (in millions)     
|Warrants            |  | $                  | 0.2
|                    |  |                    |    
|Total debt discount |  | $                  | 0.2
|                    |  |                    |    

During 2008 and 2007, the Company failed to meet certain covenants required under various
borrowing agreements. The Company sought and obtained waivers from its lenders, as necessary. No acceleration of the indebtedness evidenced by these notes had been declared by any of its creditors.

The weighted-average interest rate on the debt listed above excluding the effect of the amortization of the fair value of the related warrants is 8.0%
and 12.8% as of September 30, 2008 and December 31, 2007, respectively.

The aggregate scheduled principal re-payments of
long-term debt for the next five years are as follows:



|                               |  |                |       
|------------------------------ |  | -------------- | ------
|                               |  | (in thousands)
|Remaining three months of 2008 |  | $              | 510   
|2009                           |  |                | 19    
|2010                           |  |                | 15    
|2011                           |  |                | 16    
|2012                           |  |                | 18    
|Thereafter                     |  |                | 18,684
|                               |  |                |       
|Total                          |  | $              | 19,262
|                               |  |                |       

NOTE 5. Stock Warrants.

At September 30, 2008 and 2007, respectively, the Company had 80.5 million and 82.1 million warrants outstanding to purchase its common stock. Certain warrants were originally issued as Series B
preferred stock warrants and Series AA preferred stock warrants. Under the terms of the warrant agreements, these preferred warrants automatically converted to warrants to purchase common stock of the Company effective as of June 25, 2007 upon
the approval of an amendment to the Companys articles of incorporation authorizing 350 million shares of common stock. These warrants were granted in connection with debt and equity offerings and in lieu of cash payments for services
provided and became exercisable when issued. The warrants expire two to five years from date of issuance.



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##### Table of Contents

The table below summarizes the warrant expiration dates as of September 30, 2008:



|                           |  |                                 |  |                          |            |                                |   |      
|-------------------------- |  | ------------------------------- |  | ------------------------ | ---------- | ------------------------------ | - | -----
|Expiration Date            |  | Numberof Warrants(in thousands) |  | Range of Exercise Prices |            | Weighted AverageExercise Price
|2009                       |  | 37,296                          |  | $                        | 0.30-$0.65 |                                | $ | 0.332
|2010                       |  | 675                             |  | $                        | 0.35-$0.36 |                                | $ | 0.356
|2011                       |  | 7,846                           |  | $                        | 0.45-$0.70 |                                | $ | 0.576
|2012                       |  | 13,000                          |  | $                        | 0.15-$0.50 |                                | $ | 0.263
|2013                       |  | 21,660                          |  | $                        | 0.73       |                                | $ | 0.730
|                           |  |                                 |  |                          |            |                                |   |      
|Total warrants outstanding |  | 80,477                          |  |                          |            |                                | $ | 0.452
|                           |  |                                 |  |                          |            |                                |   |      

All outstanding warrants expire no later than March 2013.

Warrant activity from December 31, 2007 through September 30, 2008 is as follows:



|                                                  |  |                                 |   |  |                                |       |                                                  |     |                                |   |    
|------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | ----- | ------------------------------------------------ | --- | ------------------------------ | - | ---
|                                                  |  | Numberof Warrants(in thousands) |   |  | Weighted AverageExercise Price |       | Weighted AverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue ($000)
|Outstanding at December 31, 2007                  |  | 67,107                          |   |  | $                              | 0.347 |                                                  | 2.6 |                                |   |    
|Warrants issued in connection with debt financing |  | 19,000                          |   |  |                                | 0.730 |                                                  |     |                                |   |    
|Warrants issued for services received             |  | 2,660                           |   |  |                                | 0.730 |                                                  |     |                                |   |    
|Exercised                                         |  | (8,290                          | ) |  |                                | 0.326 |                                                  |     |                                |   |    
|Forfeited/canceled                                |  |                                |   |  |                                |      |                                                  |     |                                |   |    
|                                                  |  |                                 |   |  |                                |       |                                                  |     |                                |   |    
|Outstanding at September 30, 2008                 |  | 80,477                          |   |  | $                              | 0.452 |                                                  | 2.6 |                                | $ | 975
|                                                  |  |                                 |   |  |                                |       |                                                  |     |                                |   |    

During the three and nine-month periods ended September 30, 2008, respectively,
1.1 million and 8.3 million warrants were exercised. All were completed in a cashless method except for 55,555 that were exercised for cash during the three-month period ended September 2008. As a result, the Company issued
0.3 million and 3.8 million shares for the same respective periods, net of shares used to complete the cashless exercise. The intrinsic value of warrants exercised in 2008 was $0.2 million and $2.2 million for the three and nine-month
periods ended September 30, 2008, respectively. There were no warrants exercised in the three and nine-month periods ended September 30, 2007. For the nine-month period ended September 30, 2007, 500,000 warrants with a weighted
average exercise price of $1.35 expired. No tax benefit has been recorded in connection with the above warrant-related expenses due to the net loss carryforward position of the Company.

On October 7, 2008, the conversion price for the convertible debentures and related warrants issued on March 11, 2008 was re-set, pursuant to
the terms of the respective agreements, from $0.50 to $0.24. The original exercise price of the warrants was $0.73. At the same time, the amount of related warrants was increased by 38.8 million (in addition to the 19.0 million issued at
March 11, 2008). The effect of this re-set has been recorded as of September 30, 2008. See the Subsequent Events note for further discussion.

The weighted average fair value of warrants issued is as follows:



|                                                          |  |                   |       |                  |   |      
|--------------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                                          |  | September 30,2008 |       | December 31,2007
|Warrants granted in connection with debt financing        |  | $                 | 0.555 |                  | $ | 0.606
|Warrants granted in connection with equity financing      |  |                   |      |                  |   | 0.675
|Warrants granted for services received                    |  |                   | 0.555 |                  |   | 0.502
|Weighted average fair value all grants issued in the year |  |                   | 0.555 |                  |   | 0.641

The total fair value of warrants issued and immediately exercisable during the nine-month periods
ended September 30, 2008 and 2007, respectively, was $12.0 million and $46.0 million. There were no warrants issued during the third quarter of 2008.



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The fair value of warrants issued is calculated using the Black-Scholes pricing model using the
Companys stock price on the date of the warrant grant as the warrant exercise price, the Companys expected volatility, and the risk free interest rate matched to the warrants expected life. The Company does not anticipate paying
dividends during the term of the warrants. The Company uses historical data to estimate volatility assumptions used in the valuation model. The expected term of warrants granted is derived from an analysis that represents the period of time that
warrants granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions underlying the calculations are as
follows:



|                                         |  |                   |       |   |                  |   |       |  
|---------------------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                                         |  | September 30,2008 |       |   | December 31,2007 |  
|Weighted-average exercise price          |  | $                 | 0.730 |   |                  | $ | 0.530 |  
|Weighted-average volatility              |  |                   | 160.6 | % |                  |   | 100.0 | %
|Expected dividends                       |  |                   | 0.0   | % |                  |   | 0.0   | %
|Expected term (in years)                 |  |                   | 5.0   |   |                  |   | 2.5   |  
|Weighted-average risk-free interest rate |  |                   | 2.46  | % |                  |   | 4.56  | %

NOTE 6. Liability for Warrants and Embedded Derivatives.

The Company has entered into certain financial arrangements that require evaluation for classification as derivatives in accordance with SFAS 133 and EITF
00-19:



| |  |  | As of September 8, 2006, the shares of common stock required to settle the convertible bridge loan issued in connection with the Companys acquisition of
20/20, the convertible preferred stock, the stock options, and the warrants outstanding were in excess of the Companys authorized but unissued shares of common stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On June 15, 2007, the Company amended the terms of the Junior Secured Facility to eliminate the floor for the conversion of loan amounts to equity in the
Company. Because of this provision, the potential existed that the Company would not have sufficient shares of common stock outstanding to settle the outstanding debt, if converted, and the outstanding warrants and options.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On June 25, 2007, the common shareholders approved increasing the number of authorized shares of common stock from 25 million to 350 million. However, due
to the amendment to the Junior Secured Facility, the potential still existed that the Company would not have sufficient shares of common stock outstanding to settle the outstanding debt, if converted, and the outstanding warrants and options.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On March 11, 2008, the Company entered into the Purchase Agreement discussed above. The conversion features of the related Debentures include a reset provision
by which the exercise price will be reset to 90% of the ten-day volume weighted average pricing 210 days after issuance. Because of this provision, there is the potential that the Company will not have sufficient shares of common stock outstanding
to settle the outstanding debt, if converted, and the outstanding warrants and options. On October 7, 2008, the conversion price for the convertible debentures and related warrants issued on March 11, 2008 was re-set, pursuant to the terms
of the respective agreements, from $0.50 to $0.24. See the Subsequent Events note for further discussion.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to SFAS 133 and EITF 00-19, the conversion features of the debt and the preferred stock are considered embedded derivatives requiring bifurcation from the debt host and they are included on the balance sheet as a liability (see
embedded derivates of convertible debt and preferred stock) at fair value. The embedded derivative is revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on
warrants and derivatives in the statements of operations.

The Companys outstanding warrants also meet the definition of a
liability based on the assessment above. The warrants are classified as a liability in the balance sheet (see liabilities for warrants to purchase common stock) at fair value. The warrant liability is revalued at each balance sheet date
and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statements of operations.

The embedded derivatives and the warrants are initially measured at fair value generally using the Black-Scholes option valuation technique. In selecting the appropriate fair value technique, the Company considers the
nature of the instrument, the market risks that it embodies, and the expected means of settlement.

The embedded derivative liability is
re-valued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statement of operations. As of September 30, 2008 and December 31,
2007, the fair value of the derivatives embedded in preferred stock and convertible debt was $17.9 million and $9.2 million, respectively.



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The warrant liability is revalued at each balance sheet date and marked to fair value with the
corresponding adjustment recognized as gain or loss on warrants and derivatives in the statement of operations. As of September 30, 2008 and December 31, 2007, the fair value of the warrants was $29.1 million and $35.9 million,
respectively.

Fair Value Measurements.On January 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurement (SFAS 157). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. The Statement clarifies that the exchange price is the price in an orderly
transaction between market participants to sell an asset or transfer a liability at the measurement date and emphasizes that fair value is a market-based measurement and not an entity-specific measurement.

SFAS 157 establishes the following hierarchy used in fair value measurements and expands the required disclosures of assets and liabilities measured at
fair value:



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



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



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

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

Liabilities measured at fair value on a recurring basis at
September 30, 2008 are as follows:



|                                 |  |                                                                  |  |                                           |      |                                        |  |                             |   |     
|-------------------------------- |  | ---------------------------------------------------------------- |  | ----------------------------------------- | ---- | -------------------------------------- |  | --------------------------- | - | ----
|(in millions)                    |  | Quoted Prices inActive Markets forIdentical Liabilities(Level 1) |  | SignificantOtherObservableInputs(Level 2) |      | SignificantUnobservableInputs(Level 3) |  | Balance atSeptember 30,2008
|Derivative financial instruments |  |                                                                  |  | $                                         | 17.9 |                                        |  |                             | $ | 17.9
|Warrant liability                |  |                                                                  |  | $                                         | 29.1 |                                        |  |                             | $ | 29.1

The effect of the October 7, 2008 re-set of the conversion price for the convertible
debentures has been recorded as of September 30, 2008 and, as a result, liability for warrants to purchase common stock and embedded derivatives of convertible debt instruments were increased by $11.4 million and $6.5 million, respectively. See
the Subsequent Events note for further discussion.

NOTE 7. Share-Based Compensation.

The Company accounts for stock-based compensation in accordance with SFAS No. 123R, Share-Based Payments (SFAS 123R), which requires the
measurement and recognition of compensation costs at fair value for all share-based payments, including stock options and non-vested stock.

The following table summarizes the activity under the stock option plan and other stock grants for the nine-month period ended September 30, 2008:



|                                  |  |             |   |  |                              |       |                                                 |     |                               |   |      
|--------------------------------- |  | ----------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------------- | - | -----
|                                  |  | Shares(000) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue($000)
|Outstanding at December 31, 2007  |  | 60,708      |   |  | $                            | 0.383 |                                                 |     |                               |   |      
|Granted                           |  | 14,850      |   |  |                              | 0.556 |                                                 |     |                               |   |      
|Exercised                         |  | (1,150      | ) |  |                              | 0.185 |                                                 |     |                               |   |      
|Forfeited/canceled                |  | (547        | ) |  |                              | 1.022 |                                                 |     |                               |   |      
|                                  |  |             |   |  |                              |       |                                                 |     |                               |   |      
|Outstanding at September 30, 2008 |  | 73,861      |   |  | $                            | 0.416 |                                                 | 9.0 |                               | $ | 4,806
|                                  |  |             |   |  |                              |       |                                                 |     |                               |   |      
|Exercisable at September 30, 2008 |  | 33,039      |   |  | $                            | 0.409 |                                                 | 8.9 |                               | $ | 2,276
|                                  |  |             |   |  |                              |       |                                                 |     |                               |   |      



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The weighted average grant-date fair value of options granted during the nine-month periods ended
September 30, 2008 and 2007 was $0.554 and $0.730, respectively. The Company estimates the fair value of stock option grants using the Black-Scholes pricing model. The Company used the following factors to calculate the fair value of stock
option grants issued:



|                                     |  |                   |  |                 
|------------------------------------ |  | ----------------- |  | ----------------
|                                     |  | September 30,2008 |  | December 31,2007
|Expected volatility                  |  | 130.8 -167.2%     |  | 100.0%          
|Expected life (in years)             |  | 5.0               |  | 5.0             
|Risk free interest rate              |  | 2.13% -2.51%      |  | 3.85%           
|No dividend payments are anticipated |  |                   |  |                 

The intrinsic value of options exercised during the nine-month period ended September 30,
2008 was $0.5 million. All exercises were made using a cashless method and 345,373 share options were surrendered as payment of the exercise price. There were no exercises during the three-month period ended September 30, 2008 or during the
three and nine-month periods ended September 30, 2007.

For the three-month periods ended September 30, 2008 and 2007, the
Company recognized compensation expense for stock option awards totaling $1.3 million and $1.0 million, respectively. For the nine-month periods ended September 30, 2008 and 2007, compensation expense associated with stock option awards was
$5.6 million and $5.1 million. No tax benefit has been recorded related to stock-based compensation expense. At September 30, 2008, unrecognized compensation expense related to stock options totaled $20.2 million with a remaining weighted
average amortization period of 2.1 years.

NOTE 8. Shareholders Equity (Deficit).

Preferred stock.The Company has 5.0 million preferred shares authorized of which 100,000 shares are reserved for issuance as Series A;
100,000 shares are reserved for issuance as Series B; and 120,000 shares are reserved for issuance as Series AA; all of which have a par value of $0.0001 per share. There were no preferred shares outstanding at September 30, 2008 or
December 31, 2007. The preferred stock previously issued was automatically converted to Company common stock upon ratification of an amendment to the Companys Articles of Incorporation on June 25, 2007, which increased the authorized
common shares to 350.0 million shares. The Series A and Series B shares enjoyed liquidation preferences of $1.00 per share until converted to common stock and do not have dividend privileges. The Series AA shares enjoyed liquidation preferences
of $1,000 per share and a 10% dividend until converted to common stock. Series A, B, and AA shares have voting rights on an as-converted basis.

2007 Activity.On January 19, 2007, the Company closed on an equity funding of $15.9 million toward the issuance of Units comprised of 15,590.1 shares of Series AA preferred stock (convertible into common stock at $0.45
per Share) and warrants to purchase an additional 15,869.4 shares of Series AA preferred stock. Each Unit was priced at $1,000 comprised of: (i) one share of Series AA preferred stock; (ii) one warrant to purchase one half share of Series
AA preferred stock at $1,000 per share expiring December 31, 2008 (Two-Year Warrant); and (ii) one warrant to purchase one half share of Series AA preferred stock at $1,444.43 per share, expiring December 31, 2009 (Three-Year
Warrant). Between January 20, 2007 and April 9, 2007, the Company closed on equity funding of an additional $5.0 million, representing an additional 5,044.4 shares of Series AA preferred stock (constituting 11,209,626 shares of common
stock, on an as-converted basis) and warrants to purchase an additional like amount of Series AA preferred stock, with one-half or 2,522.2 Series AA preferred shares (5,604,827 shares of common stock, as converted) exercisable at $1,000 per share on
or before December 31, 2008 ($0.45 per share, on an as-converted to common stock basis); and the other one-half or 2,522.2 Series AA preferred shares (5,604,799 shares of common stock, as converted) exercisable at $1,000 per share (or $0.65 per
share, on an as-converted to common stock basis). This financing brought aggregate issued Series AA preferred stock to 20,634.5 shares representing 45,854,513 shares of common stock, on an as-converted basis, which conversion was effective in June
2007 upon the filing of articles of amendment to the Companys Articles of Incorporation.

On an as-converted basis, the Two-Year
Warrants issued as part of the Units are exercisable to purchase an aggregate of 22,927,268 shares of common stock at $0.45 per share and the Three-Year Warrants are exercisable to purchase an aggregate of 22,927,245 shares of common stock at $0.65
per share.

The placement agent and designees in connection with the Units financing received warrants, with a fair value of $2.9 million,
to purchase 1,995.4 shares of Series AA preferred stock (4,434,186 shares of common stock, on an as-converted basis), with one half of the warrants expiring December 31, 2008 and exercisable at $0.45 per share (on an as-converted to common
stock basis) and one half expiring December 31, 2009 and exercisable at $0.65 per share (on an as-converted to common stock basis) in connection with the initial equity closing on January 19, 2007.



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The Company also entered into a Registration Rights Agreement with the Units purchasers which obligates
the Company to file a registration statement to register the shares of common stock underlying the Units within 90 days following the termination of the Units offering and to cause the registration statement to be declared effective no later than
180 days following the date of termination of the offering. There is a penalty of 1% of the purchase price of the Units per month for each month that the Company is late in the initial filing or the declaration of effectiveness of the registration
statement, subject to a cap of 12% in the aggregate of the original Units purchase price, and with the penalty to be payable in common stock issuable based upon the ten-days average trading value of the Companys shares of common
stock for the applicable period. The Two-Year Warrants and Three-Year Warrants are exercisable only by payment of cash; however, in the event of delays in the registration of the shares of common stock underlying the Warrants, the Warrants require
the Company to modify the terms of the warrants to either: (i) extend the outside date for the warrants to a year following the date of declaration of effectiveness of a registration statement with respect to the shares underlying the warrants
or (ii) modify the exercise rights under the warrants to be cashless, with an extension on the outside date for exercise of the warrants to be the later of their original term or one year following the modification to make them cashless. As of
September 30, 2008 and December 31, 2007, the Company had not filed a registration statement and therefore was obligated to issue 477,185 and 4,784,623 shares of common stock, respectively representing a non-cash registration rights
penalty of $0.2 million and $2.5 million, respectively. Holders of the affected shares include certain members of the Companys Board of Directors. During the first quarter, the Company advised these holders that their warrants were made
cashless and the outside date for exercise of the warrants expiring December 31, 2008 was February 4, 2009.

In connection with
the Senior Secured Facility, on January 19, 2007, the Company issued to its Senior Lender warrants, with a fair value of $1.8 million to purchase an aggregate of 1,125.0 shares of Series AA preferred stock (2.5 million shares of common stock,
on an as-converted basis). Warrants with respect to one half of the shares were exercisable on or before December 31, 2008 at an exercise price equal to $0.45 per share of common stock, on an as-converted basis, and warrants with respect to the
one half of the shares were exercisable on or before December 31, 2009 at an exercise price equal to $0.65 per share of common stock on an as-converted basis. In connection with the October 31, 2007 Waiver and Amendment to the Agreement, a
new five-year warrant to purchase up to 3.5 million shares of common stock at $0.15 was issued and the previously issued warrants above were cancelled. The new warrant provides for, among other things, cashless exercise, anti-dilution, and
piggyback registration rights. Using the Black-Scholes pricing model, this modification resulted in a $0.5 million increase in the fair value of the warrants.

The original principal amount of each note issued pursuant to the Junior Secured Facility is convertible at the holders option into common stock at a price per share equal to a 20% discount to the average
ten-day trailing average for the Companys common stock as of the day immediately preceding the date of conversion (subject to adjustment to account for stock splits and certain other extraordinary corporate circumstances). The loan agreement
establishing the facility was amended effective June 15, 2007 to: (i) eliminate the ceiling and floor for the conversion of loan amount (which had originally been at $0.65 per share floor and $1.25 per share ceiling) to equity in the
Company; (ii) permit the cashless exercise of warrants under the facility in lieu of an obligation to register the shares of capital stock underlying the warrants; and (iii) provide that with respect to advances under the facility after
June 15, 2007, the warrant coverage was increased to 200,000 shares of common stock at an effective price of $0.45 per share for each $100,000 of principal amount advanced; those lenders funding the facility on or before January 22, 2007
received a warrant to purchase up to 67.500675 shares of Series AA preferred stock for each $100,000 of monies advanced (150,000 shares of common stock, on an as-converted basis, at an effective price of $0.45 per share) for each $100,000 of
principal amount advanced. All of the warrants under the facility expire December 31, 2009. As of December 31, 2007, the Company had issued an aggregate of 15.4 million shares of common stock warrants in connection with the Junior
Secured Facility. Shares of common stock are issuable in connection with the warrants so issued. The warrants issued as part of the Junior Secured Facility are subject to similar extension and registration rights as those granted to the purchasers
in the Units offering described above.

Pursuant to SFAS 133 and EITF 00-19, the Series AA preferred stock, the embedded conversion
features related to the Series AA preferred stock and the junior secured facility, and the freestanding warrants to purchase common stock are accounted for as liabilities at fair value. The Company allocated the proceeds from the Series AA financing
between the Series AA preferred stock, the embedded conversion feature, and the warrants based upon their estimated fair values as of the closing date using a Black-Scholes pricing model.

2008 Activity.On March 11, 2008, the Company completed a private placement of $19.0 million of securities with a number of
Purchasers. The securities comprise (i) variable rate senior secured convertible debentures (Debentures) in an aggregate principal amount of $19.0 million, convertible into common stock of the Company at $0.50 per share, subject to
adjustment (the Conversion Price); representing 38 million shares of common stock on an as-converted basis; and (ii) one warrant per Debenture, providing a right to purchase 50% of the number of shares of common stock
purchasable with the original principal amount of the Debentures, at a price of $0.73 per share having a term ending five years from the closing date, subject to adjustment. The Warrants may be exercised for cash or on a cashless basis and are
subject to certain other conditions.



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During the first quarter of 2008, the Company issued 19,591,890 shares of common stock upon the
conversion of the principal and accrued interest with respect to the Junior Secured Facility. The conversion was based upon a 20% discount to the ten-day average closing price of the Companys common stock for the last ten trading days ended as
of the conversion date (ten-day trailing average), which resulted in effective conversion prices between $0.418 and $0.504. Principal and accrued interest were reduced by $8.4 million. The remaining amounts owed under the Senior and
Junior Secured Facilities of $6.3 million and $1.8 million, respectively, were paid in full with the proceeds from the Purchase Agreement.

During the first quarter of 2008, the Company issued 804,626 of common shares pursuant to the cashless conversion of options with an exercise price of $0.195 and a ten-day trailing average market price of $0.616. The Company also issued
2.4 million of common shares related to the cashless conversion of warrants with an exercise price between $0.30 and $0.45 and a ten-day trailing average market price between $0.565 and $0.630.

During the second quarter of 2008, the Company issued 1,066,487 of common shares related to the cashless conversion of warrants with exercise prices
ranging from $0.30 and $0.39.

During the third quarter of 2008, the Company issued 342,619 of common shares related to the cashless
conversion of warrants with exercise prices ranging from $0.30 and $0.39 and 55,555 of common shares in connection with a warrant exercise. In addition, 670,000 common shares were issued in connection with conversions of $335,000 of the secured
debentures issued in March 2008.

NOTE 9. Transactions with Related Parties.

On May 1, 2008, the Company granted an option to purchase 625,000 shares of its common stock at an exercise price of $0.59 per share to each of its
three resigning Directors. The Company recognized compensation expense of $1.2 million in the second quarter of 2008 in connection with these options, which vested upon grant.

On May 2, 2008, the Company granted an option to purchase 400,000 shares of its common stock at an exercise price of $0.60 per share to each of its
six new Directors. The Company recognized $0.4 million of expense in the second quarter of 2008 in connection with the grants, based upon 25% vesting at grant date.

The weighted average grant-date fair value of the options above was $0.630 and $0.629, respectively.

NOTE 10. Segment
Reporting and Geographic Area Information.

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 deciding how to allocate resources and assess performance. During the first quarter of 2007, the Company completed the process of identifying which
of the entities operations were core to its overall Telecom Logistics Integrator business model. The Company determined that all operations were core to this business model, with the exception of Nexvu and Frontrunner and therefore made a
decision to divest from these business activities. See the Discontinued Operations note for further discussion. The Companys management team views the remaining combined operations of 20/20, Magenta, CentrePath, GCG, and CGSI as
one operating segment, for which it prepares discrete financial statement information and is the basis for making decisions on how to allocate resources and assess performance.

Within the Companys one operating segment, revenues generated from Optimization Solutions totaled $2.2 million and $13.7 million for the three and
nine-month periods ended September 30, 2008, respectively, which represents professional services, remote network management services, and the use of automated pricing software. For the same periods in 2007, revenues from Optimization Solutions
totaled $1.9 million and $5.7 million, respectively. Revenues generated from Connectivity Solutions totaled $3.6 million and $10.3 million for the three and nine-month periods ended September 30, 2008, respectively, from the design, delivery,
and management of networks. For the same periods in 2007, revenues from Connectivity Solutions totaled $ 2.5 million and $6.9 million, respectively. A major Optimization Solutions customer ($6.7 million) represented 28% of total 2008 revenues
year-to-date and 68% of total accounts receivable at September 30, 2008. A major Connectivity Solutions customer ($3.4 million) represented 14% of total 2008 revenues-to-date and 12% of total accounts receivable at September 30, 2008

Revenues generated outside the United States during the three and nine-month periods ended September 30, 2008 and 2007, respectively,
totaled $0.2 million and $1.3 million; and $0.2 million and $0.7 million, respectively. All of the Companys international revenue was generated in the European Union.

As of September 30, 2008 and December 31, 2007, the Companys identifiable assets outside the United States totaled $0.1 million and
$40,000, respectively. All of the Companys identifiable international assets were located in the United Kingdom.



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NOTE 11. Going Concern.

Cash on hand at September 30, 2008 was $2.4 million (including $0.2 million restricted for outstanding letters of credit). The Company has incurred operating losses of $11.0 million and $14.5 million for the
nine-month periods ended September 30, 2008 and 2007, respectively. Results for the nine-month periods ended September 30, 2008 and 2007 include $6.8 million and $5.1 million, respectively, of non-cash expenses relating to the accounting
treatment for stock-based compensation as well as professional services purchased with warrants. Additionally, cash used in operating activities from continuing operations was $9.5 million and $7.2 million for the nine-month periods ended
September 30, 2008 and 2007, respectively. The Companys recurring losses and negative cash flows from operations raise some doubt about its ability to continue as a going concern. However, the successful delivery on major contracts signed
within the last year is anticipated to move the Company into profitability. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

The Company continues to find support amongst its shareholders and other investors, as evidenced by the $19.0 million financing completed in the
first quarter of 2008. This capital was used to pay off essentially all of the Companys outstanding debt. The balance of the funds are being used for operations and to support the Companys successful new business development efforts.

NOTE 12. Subsequent Events.

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

Interest and Loan Purchase Agreement. On November 14, 2008, the Company entered into an Interest and Loan Purchase Agreement (the ILPA) with Vanco plc, a U.K. corporation in administration (Seller) to
purchase all of the outstanding membership interests (the Interests) of Vanco Direct USA, LLC (Vanco Direct). The Company and Seller are submitting a joint application to the Federal Communications Commission for the granting
of a special temporary authority (STA) to operate the assets of Vanco Direct under a management services agreement pending the formal approval of the change in beneficial ownership. The ILPA contemplates that the purchase price for the
Interests of $15.2 million will be funded shortly following the granting of the STA. At closing, the financing underlying the transaction will include a senior secured loan, original issue discount junior secured convertible debentures, a
subordinated unsecured convertible debenture, and certain intercreditor agreements among the parties.



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|Item 2. | Managements Discussion and Analysis.
|------- | -------------------------------------

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

Overview

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

The Company is (and has been since its 2006 reorganization) investing its time, team
resources and capital in the scaling of its systems and personnel in order to meet the demand among its clients for its novel products. The successful delivery on major contracts signed in the last year is anticipated to put the Company into a
sustained period of growth of profitability. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

Cash on hand at September 30, 2008 was $2.4 million (including $0.2 million restricted for outstanding letters of credit). The Company has incurred net losses from continuing operations of $11.1 million and $3.9
million for the nine-month periods ended September 30, 2008 and 2007, respectively. Results for 2008 to date include $6.8 million in non-cash expenses relating to the accounting treatment for stock-based compensation as well as professional
services purchased with warrants. Cash used in operating activities from continuing operations was $9.5 million and $7.2 million for the nine-month periods ended September 30, 2008 and 2007, respectively. The Companys recurring losses and
negative cash flows from operations raise substantial doubt about its ability to continue as a going concern.



Notwithstanding the above, the Company continues to find support amongst its shareholders and other investors, as evidenced by the $19.0 million
financing completed in the first quarter of 2008. This capital was used to pay off essentially all of the Companys outstanding debt. The balance of the funds is being used for operations and to support the Companys successful new
business development efforts.



28



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During the first quarter of 2007, the Company determined the operations of Frontrunner and Nexvu were not
core to the Companys overall telecom logistics integrator strategy and therefore made the decision to dispose of these two entities. Since early 2007, the Company actively marketed the two companies. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived Assets(SFAS 144), the financial results of these two entities are presented as discontinued operations. See accompanying notes to the
consolidated financial statements incorporated by reference herein for further discussion.

Results for the three-month period ended September 30,
2008 compared to 2007

Continuing Operations

Total revenues for the three-month period ended September 30, 2008 were $5.8 million compared to $4.4 million for the same period in 2007, representing a 32% increase. This increase is primarily due to a
significant new contract in our Connectivity Solutions line of business.

Revenues generated from Optimization Solutions totaled $2.2
million for the three-month period ended September 30, 2008 compared to $1.9 million for the same period in 2007, which represents optimization consulting, automated pricing software, remote management services, and professional services. The
Connectivity Solutions business recorded $3.6 million for the three-month period ended September 30, 2008 compared to $2.5 million for the same period in 2007, which is from the delivery of turn-key global networks and system management
services. The increase was driven by a large novation customer that was initiated in the fourth quarter of 2007.

The consolidated gross
margin rate was 31% for the three-month period ended September 30, 2008 compared to 27% for the same period in 2007. This increase was driven primarily by the delivery of higher margin connectivity consulting services to the new customer
mentioned above. Optimization Solutions gross margin totaled $1.0 million or 45% for the three-month period ended September 30, 2008 as compared to $0.8 million or 43% for the same period in 2007. Connectivity Solutions margin
totaled $0.8 million or 23% compared to $0.4 million or 16% for the same period in 2007.

Operating expenses for the third quarters of 2008
and 2007 consists of the following:



|                              |  |                                 |       |                   |   |      
|----------------------------- |  | ------------------------------- | ----- | ----------------- | - | -----
|                              |  | Three Months EndedSeptember 30,
|                              |  | 2008                            |       | 2007(As Restated)
|                              |  | (in thousands)                 
|Compensation                  |  | $                               | 3,319 |                   | $ | 3,499
|Professional services         |  |                                 | 2,218 |                   |   | 468  
|Depreciation and amortization |  |                                 | 446   |                   |   | 879  
|All other operating expenses  |  |                                 | 943   |                   |   | 996  
|                              |  |                                 |       |                   |   |      
|Total operating expenses      |  | $                               | 6,926 |                   | $ | 5,842
|                              |  |                                 |       |                   |   |      

Compensation expense was down slightly at $3.3 million for the three-month period ended
September 30, 2008 as compared to 2007. Included in compensation expense for 2008 are non-cash charges of $1.3 million related to the accounting treatment (pursuant to SFAS 123R) of certain stock option grants as compared to $1.0 million for
the same period in 2007. Other compensation expense is lower in 2008 by $0.5 million due in part to lower operations staffing levels in several locations.

Professional services increased $1.7 million for the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, due in part to additional advisory expenses
and utilization of outside contractors in lieu of full-time staff for certain projects.

Depreciation and amortization expense relates
primarily to the Network Operating Center in the suburbs of Boston and the fair value assigned to the Companys intellectual property. Depreciation and amortization decreased by $0.4 million for the three-month period ended September 30,
2008 as compared to the three-month period ended September 30, 2007. This decrease was due primarily to lower depreciation resulting from the sale of certain fixed assets during 2007 and certain assets becoming fully depreciated during the same
time frame.

Other operating expenses were down slightly for the three-month period ended September 30, 2008 as compared to the same
period for 2007. Any significant increase in future operating costs is expected to be a direct result of a corresponding increase in revenues, excluding any additional stock-based compensation expense. Any significant increase in revenues is
anticipated to outpace the increase in related operating costs.



29



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##### Table of Contents

Results for the three-month period ended September 30, 2008 reflect interest of $1.9 million, a
decrease of $1.5 million from the three-month period ended September 30, 2007. Interest expense for the three-month periods ended September 30, 2008 and 2007 includes $1.4 million and $1.3 million, respectively, related to the amortization
of the fair value assigned to the warrants and embedded derivatives issued with debt. The weighted average interest rate was 8.0% and 12.5% for the three-month periods ended September 30, 2008 and 2007, respectively.

Results for the three-month period ended September 30, 2008 reflect a gain on warrants and derivatives of $1.7 million compared to a gain of $15.3
million for the comparable period in 2007. The current and prior years gain was driven mainly by the decrease in the Companys stock price while 2008 included the effects of a modest amount of cashless exercises. In accordance with SFAS
133 AND EITF 00-19, the warrant and embedded derivatives liabilities are revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statement of
operations.

Discontinued Operations

Total revenues for the three-month period ended September 30, 2008 were $8,000 compared to $2.4 million for the same period in 2007. The loss from discontinued operations for the three-month period ended September 30, 2008 was
$18,000 compared to a $4.7 million loss for the same period in 2007. The decreases in revenue and loss from discontinued operations were due to the sale of Frontrunner and Nexvu.

Results for the nine-month period ended September 30, 2008 compared to 2007

Continuing Operations

Total revenues for the nine-month period ended September 30, 2008 were $24.0 million compared to $12.6 million for the same
period in 2007, representing a 90% increase. This increase is primarily due to the recognition of revenue in 2008 in connection with significant new contracts in both the Optimization Solutions and Connectivity Solutions lines of business.

Revenues generated from Optimization Solutions totaled $13.7 million for the nine-month period ended September 30, 2008 compared to
$5.7 million for the same period in 2007, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $10.3 million for the nine-month
period ended September 30, 2008 compared to $6.9 million for the same period in 2007, which is from the delivery of turn-key global networks and system management services. The increase was driven by a large novation customer that was initiated
in the fourth quarter of 2007.

The consolidated gross margin rate was 47% for the nine-month period ended September 30, 2008 compared
to 31% for the same period in 2007. This increase was driven primarily by the delivery of higher margin optimization services to the new customer mentioned above. Optimization Solutions gross margin totaled 10.0 million or 74% for the
nine-month period ended September 30, 2008 as compared to $2.6 million or 46% for the same period in 2007. Connectivity Solutions margin totaled $1.3 million or 12%  which is net of the upfront cost of a novation for a large
customer  compared to $1.3 million or 18% for the same period in 2007.

Operating expenses for the nine-month periods ended
September 30, 2008 and 2007 consists of the following:



|                              |  |                                |        |                   |   |       
|----------------------------- |  | ------------------------------ | ------ | ----------------- | - | ------
|                              |  | Nine Months EndedSeptember 30,
|                              |  | 2008                           |        | 2007(As Restated)
|                              |  | (in thousands)                
|Compensation                  |  | $                              | 12,410 |                   | $ | 11,536
|Professional services         |  |                                | 5,765  |                   |   | 1,595 
|Depreciation and amortization |  |                                | 1,411  |                   |   | 2,594 
|All other operating expenses  |  |                                | 2,777  |                   |   | 2,608 
|                              |  |                                |        |                   |   |       
|Total operating expenses      |  | $                              | 22,363 |                   | $ | 18,333
|                              |  |                                |        |                   |   |       

Included in compensation expense for 2008 are non-cash charges of $5.6 million related to the
accounting treatment (pursuant to SFAS 123R) of certain stock option grants as compared to $5.1 million for the same period in 2007. Other compensation expense increased $0.4 million for the nine-month period ended September 30, 2008 as
compared to the nine-month period ended September 30, 2007, due in part to higher commission expense, which is consistent with the increase in revenue.

Professional services expense increased $4.2 million for the nine-month period ended September 30, 2008 as compared to the nine-month period ended September 30, 2007, due mainly to additional advisory
services needed to support financing activities. Non-cash charges from the amortization of warrants issued to service providers included in the above totaled $1.2 million. In addition, we utilized outside contractors in lieu of full-time staff for
certain projects.



30



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##### Table of Contents

Depreciation and amortization expense relates primarily to the Network Operating Center in the suburbs of
Boston and the fair value assigned to the Companys intellectual property. Depreciation and amortization decreased by $1.2 million for the nine-month period ended September 30, 2008 as compared to the nine-month period ended
September 30, 2007. This decrease was due primarily to lower depreciation resulting from the sale of certain fixed assets during 2007 and certain assets becoming fully depreciated during the same period.

Other operating expenses increased $0.2 million for the nine-month period ended September 30, 2008 as compared to the same period for 2007.
Increased travel related to new European Union-based customers drove this change.

Any significant increase in future operating costs is
expected to be a direct result of a corresponding increase in revenues, excluding any additional stock-based compensation expense. Any significant increase in revenues is anticipated to outpace the increase in related operating costs.

Results for the nine-month period ended September 30, 2008 reflect interest of $15.0 million, a decrease of $20.8 million from the nine-month period
ended September 30, 2007. Interest expense for the nine-month periods ended September 30, 2008 and 2007 includes $ 12.2 million and $27.8 million, respectively, related to the amortization of the fair value assigned to the warrants
and embedded derivatives issued with debt. The weighted average interest rate was 9.4% and 12.5% for the nine-month periods ended September 30, 2008 and 2007, respectively.

Results for the nine-month period ended September 30, 2008 reflect a gain on warrants and derivatives of $17.1 million compared to a gain of $44.8
million for the comparable period in 2007. The prior year gain was driven mainly by the decrease in the Companys stock price while 2008 to date benefitted from the payoff of the Senior and Junior Secured Facilities in the first quarter. In
accordance with SFAS 133 AND EITF 00-19, the warrant and embedded derivatives liabilities are revalued at each balance sheet date and marked-to-fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in
the statement of operations.

Discontinued Operations

Total revenues for the nine-month period ended September 30, 2008 were $1.0 million compared to $7.3 million for the same period in 2007. The loss from discontinued operations for the nine-month period ended
September 30, 2008 was $0.1 million compared to $5.5 million for the same period in 2007. The decreases in revenue and loss from discontinued operations were due to the sale of Frontrunner and Nexvu.

In February 2008, we entered into an Asset Purchase Agreement with an unaffiliated party (Buyer) pursuant to which Frontrunner sold
substantially all of its assets to the Buyer. The purchase price for the assets was $0.9 million and the Buyer assumed Frontrunners indebtedness to a material supplier that had a remaining principal amount of $0.6 million. Approximately $0.1
million of the cash purchase price was placed in escrow to be disbursed based on the collections of certain accounts receivable of Frontrunner that were purchased by the Buyer. In August 2008, we entered into an Asset Purchase Agreement with an
unaffiliated party pursuant to which Nexvu sold substantially all of its assets. The purchase price was $0.25 million. Half was paid at closing and the balance, represented by a promissory note, is due in early 2009. The gain on sale of discontinued
operations for the nine-month period ended September 30, 2008 was $0.7 million.

Liquidity and Capital Resources

Cash used in operating activities from continuing operations for the nine-month period ended September 30, 2008 was principally due to the net loss
from continuing operations of $11.1 million. The primary variance between operating loss and net cash used in operating activities from continuing operations for the nine-month period ended September 30, 2008 was due to non-cash charges of
$12.2 million for the amortization of debt discount, $5.6 million for stock-based compensation expense, $1.4 million of depreciation and amortization, and the $2.5 million of accrued registration rights penalty. This was offset by the $17.5 million
increase in the fair value of the embedded derivates and warrants, and an increase in accounts receivable of $6.6 million primarily related to a significant new contract in our Optimization Solutions line of business. The variance between the
operating loss and net cash used in operating activities from continuing operations during the nine-month period ended September 30, 2007 was primarily due to the non-cash charges of $27.8 million for stock warrant expense related to debt
financing and a non-cash credit of $44.7 million on the increase in the fair value of embedded derivates and warrants.

The cash used in
investing activities from continuing operations during the nine-month periods ended September 30, 2008 and 2007 was $57,000 and $0.5 million, respectively. Our capital expenditures in both 2008 and 2007 consisted primarily of computer-related
equipment. Although we currently do not anticipate any significant capital expenditures in the near future, we may have a need to make similar additional capital expenditures related to the integration of our operations.



31



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Net cash provided by financing activities from continuing operations during the nine-month period ended
September 30, 2008 and 2007 was $10.6 million and $8.8 million, respectively. The cash provided from financing activities during the nine-month period ended September 30, 2008 resulted from the sale of the secured convertible debentures of
$19.0 million completed on March 11, 2008. These proceeds were partially offset by the repayment of the Senior Secured and Junior Secured facilities and financing payments on the secured convertible debentures. The remaining proceeds were
retained for working capital purposes. The cash provided from financing activities during the nine-month period ended September 30, 2007 was the result of the debt and equity offerings funded primarily during the three-month period ended
June 30, 2007. We also generated cash from the issuance of the Senior Secured and Junior Secured credit facilities. These amounts were partially offset by the repayment of debt during the nine-month period ended September 30, 2007.

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

Future
contractual obligations as of September 30, 2008 are as follows:



|                               |  |                 |       |                 |   |       
|------------------------------ |  | --------------- | ----- | --------------- | - | ------
|                               |  | OperatingLeases |       | DebtObligations
|                               |  | (in thousands) 
|Remaining three months of 2008 |  | $               | 110   |                 | $ | 510   
|2009                           |  |                 | 434   |                 |   | 19    
|2010                           |  |                 | 442   |                 |   | 15    
|2011                           |  |                 | 371   |                 |   | 16    
|2012                           |  |                 | 272   |                 |   | 18    
|Thereafter                     |  |                 |      |                 |   | 18,684
|                               |  |                 |       |                 |   |       
|Total contractual obligations  |  | $               | 1,629 |                 | $ | 19,262
|                               |  |                 |       |                 |   |       

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

Recent Accounting Pronouncements

On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), Business Combinations (SFAS
141R). SFAS 141R replaces SFAS 141, Business Combinations, and applies to all transactions or other events in which an entity obtains control of one or more businesses. SFAS 141R requires the acquiring entity in a business combination to
recognize the acquisition-date fair value of all assets acquired and liabilities assumed including contingent consideration and those relating to minority interests. SFAS 141R also requires acquisition-related transaction expenses and restructuring
costs to be expensed as incurred, rather than capitalized as a component of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and may not be applied before that date. The provisions of SFAS 141R
will impact the Company if it is party to a business combination after the pronouncement has been adopted.

On December 4, 2007, the
FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements(SFAS 160). SFAS 160 amends Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements(ARB 51) to establish
accounting and reporting standards for the non-controlling interest (previously referred to as minority interests) in a subsidiary and for the deconsolidation of a subsidiary by requiring all non-controlling interests in subsidiaries be reported in
the same way (i.e., as equity in the consolidated financial statements) and eliminates the diversity in accounting for transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. SFAS 160 is
effective for fiscal years beginning after December 15, 2008 and may not be applied before that date. The Company does not currently expect the adoption of SFAS 160 to have a material effect on its consolidated results of operations and
financial condition.

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurement(SFAS 157). This
statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. SFAS 157 applies to other pronouncements that require or permit fair value measurements; but it does not
require any new fair value measurements. The adoption of this statement did not have a material effect on the Companys financial position, results of operations, or cash flows.



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In February 2008, the FASB issued FASB Staff Positions (FSP) No. 157-1, Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13(FSP 157-1) and No. 157-2,
Effective Date of FASB Statement No. 157(FSP 157-2). FSP 157-1 removes certain leasing transactions from the scope of SFAS 157. FSP 157-2 partially defers the effective date of SFAS 157 for one year for certain non-financial assets and
non-financial liabilities that are recognized at fair value on a non-recurring basis (at least annually). The Company does not currently expect the adoption of the recently issued FASB Staff Positions to have a material effect on its results of
operations and financial condition.



|Item 4(T). | Controls and Procedures.
|---------- | ------------------------

Managements Report on Internal
Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and affected by
our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of the circumvention or
overriding of controls. Therefore, even a system determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, internal control
effectiveness may vary over time.

Management has conducted an assessment of our internal control over financial reporting as of
September 30, 2008. Such assessment is required under Section 404 of the Sarbanes-Oxley Act of 2002 and was conducted using the criteria in Internal Control over Financial Reporting  Guidance for Smaller Public Companiesissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

As a result of that assessment, we
identified two material weaknesses with respect to our internal control over financial reporting:



| |  |  | we did not adequately analyze the contingent terms of previous financing transactions in light of the volume of increasingly complex accounting and reporting
standards issued by various promulgating bodies; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

A material weakness is a
deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Corporations annual or interim financial statements will not be prevented
or detected on a timely basis.

In order to determine whether a control deficiency, or combination of control deficiencies, is a material
weakness, management considers all relevant information and evaluates the severity of each control deficiency that comes to its attention. Management also evaluates the effect of its compensating controls, which serve to accomplish the objective of
another control that did not function properly, helping to reduce risk to an acceptable level. To have a mitigating effect, the compensating control should operate at a level of precision that would prevent or detect a misstatement that could be
material.

Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures are not effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities
and Exchange Commissions rules and includes controls and procedures designed to ensure that information required to be disclosed in these reports is accumulated and communicated to our management, as appropriate to allow timely decisions
regarding the required disclosure.

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



| |  |  | utilization of external consultants to assist in the planning for, and in advance of the execution of, the accounting treatment of complex transactions and
financings given the unforeseen effects driven by complex accounting standards; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33



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##### Table of Contents

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

During the second quarter of 2008, a previous weakness was addressed by increasing the number of members of our Board of directors to nine and completing
our search for independent directors to in order to have a majority of our Board of Directors become independent. Amongst the incoming directors, two were determined to be financial experts and have accepted assignments on the Boards Audit
Committee. In addition, we have begun to adopt audit committee best practices as recommended by the Treadway Commission and the major stock exchanges.

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

The certifications of our Chief Executive
Officer and Chief Financial Officer attached as Exhibits 31.1 and 31.2 to this quarterly report on Form 10-Q include, in paragraph 4 of each certification, information concerning our disclosure controls and procedures and internal control over
financial reporting. These certifications should be read in conjunction with the information contained in this Item 4(T) for a more complete understanding of the matters covered by the certifications.



34



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##### Table of Contents

PART IIOTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

None.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

During the quarter ended September 30, 2008, the Company issued 1.1 million shares of common stock as a result of the cashless exercise of 2.1 million outstanding warrants, the conversion of $0.3
million of debentures, and other exercises of outstanding warrants. The Company relied upon exemptions contained in Section 4(2) and/or in Regulation D promulgated under the Securities Act of 1933, as amended, to make such issuances.



|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-Q are listed in the Index to Exhibits located on page 37 of this Report.



35



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##### Table of Contents

SIGNATURES

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



CAPITAL GROWTH SYSTEMS, INC.By:

/s/ Patrick C. ShuttPatrick C. Shutt, Chief Executive Officer/s/ Jim McDevittJim McDevitt, Chief Financial and Accounting Officer


Dated: November 14, 2008



36



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##### Table of Contents

EXHIBIT INDEX



|                |  |                                                                                                                                                          
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber   |  | Description of Document                                                                                                                                  
|3.1.            |  | Articles of Incorporation of Capital Growth Systems, Inc.(1)                                                                                             
|                | 
|3.2.            |  | Amendment to Articles of Incorporation of Capital Growth Systems, Inc.(2)                                                                                
|                | 
|3.3.            |  | Articles of Amendment to Articles of Incorporation of Capital Growth Systems, Inc.(3)                                                                    
|                | 
|3.4.            |  | By-laws of Capital Growth Systems, Inc.(1)                                                                                                               
|                | 
|3.5.            |  | Amendment to By-laws of Capital Growth Systems, Inc.(3)                                                                                                  
|                | 
|3.6.            |  | Amended and Restated By-laws of Capital Growth Systems, Inc.(4)                                                                                          
|                | 
|4.1.            |  | 2008 Long Term Incentive Plan.(4)                                                                                                                        
|                | 
|10.1.           |  | CGSI Aequitas Unsecured Bridge Note Purchase Agreement, by and between the Company and Aequitas Catalyst Fund, LLC - Series B.(5)                        
|                | 
|31.1.           |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                        
|                | 
|31.2.           |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                                                        
|                | 
|32.             |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                                
|                | 
|ReferenceNumber |  | Description of Reference                                                                                                                                 
|*               |  | Filed herewith.                                                                                                                                          
|                | 
|(1)             |  | Incorporated herein by reference to the Form 10-KSB for fiscal year ended December 31, 2003, filed with the Commission on May 6, 2004 (File No. 0-30831).
|                | 
|(2)             |  | Incorporated by reference to Form 8-K filed with the Commission on September 14, 2006 (SEC File No. 0-30831).                                            
|                | 
|(3)             |  | Incorporated by reference to Form 8-K filed with the Commission on June 25, 2007 (SEC File No. 0-30831).                                                 
|                | 
|(4)             |  | Incorporated by reference to Form 8-K filed with the Commission on May 5, 2008 (SEC File No. 0-30831).                                                   
|                | 
|(5)             |  | Incorporated by reference to Form 8-K filed with the Commission on October 1, 2008 (SEC File No. 0-30831).                                               



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