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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-QSB/A







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

For the quarterly period ended March 31, 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)





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

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

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

As of May 5, 2008, the issuer had outstanding 147,116,567 shares of its $0.0001 par value common stock.

Transitional Small Business
Disclosure Format:    Yes   ̈    No  x









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Explanatory Note:

This Amendment No. 1 (this Amendment) on Form 10-QSB/A to the Quarterly Report on Form 10-QSB for the period ended March 31, 2008 and filed with the Securities and Exchange Commission
on August 14, 2008 amends and restates the Companys consolidated condensed balance sheets, consolidated condensed statements of operations, consolidated condensed statements of shareholders equity, and the consolidated condensed
statements of cash flow. In addition, this Amendment amends and restates the following notes: Summary of Significant Accounting Policies; Debt; Warrants; Liability for Warrants and Embedded Derivatives; Shareholders Deficit; and Related
Parties to the Companys consolidated condensed financial statements and certain other disclosures in response to comments raised by the Securities and Exchange Commission. This Amendment has been made to reflect adjustments to the
Companys accounting for the embedded derivatives related to its various debt issuances and the Companys outstanding warrants.

The information contained in this Amendment, including the financial statements and notes thereto, amends or restates the following only:



| |  |  | Part I, Item 1. Financial Statements
| | - |  | ------------------------------------



| |  |  | Part I, Item 2. Managements Discussion and Analysis and Plan of Operation
| | - |  | --------------------------------------------------------------------------



| |  |  | Certifications from our Chief Executive Officer and Chief Financial Officer as required by Rules 13a-15(e) and 15d-15(e), included as exhibits
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Signatures.
| | - |  | -----------

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 Technologies, Inc., 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 Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and Emerging
Issues Task Force 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys own Stock (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 consolidated 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 consolidated 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 consolidated statements of operations. Note 13 to the Consolidated Condensed Financial Statements contained in this Amendment to our Quarterly Report on Form 10-QSB/A sets forth the effects of the
restatement to the Companys previously reported consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders equity, and the consolidated statements of cash flow.

This restatement requires a balance sheet reclassification of warrants and preferred stock from the consolidated statement of shareholders equity
to a liability account. In addition, it requires a non-cash charge to mark the liabilities to fair value at each balance sheet date. As a result, this restatement had no impact on the following financial statement items:



| |  | Operating income or loss
|- |  | ------------------------



| |  | Net cash used in operating activities
|- |  | -------------------------------------



| |  | Net cash used in investing activities
|- |  | -------------------------------------



| |  | Net cash used in financing activities.
|- |  | --------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES



|                              |  |                                                                                                                       |  |         
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                       |  | Page No.
|PART I.                       |  | FINANCIAL INFORMATION                                                                                                 |  | 4       
|                              |  |                                                                                                                      
|Item 1.                       |  | Financial Statements                                                                                                  |  | 4       
|                              |  |                                                                                                                      
|                              |  | Interim Consolidated Condensed Balance Sheets as of March 31, 2008 [Unaudited] and December 31, 2007 [Audited]        |  | 5       
|                              |  |                                                                                                                      
|                              |  | Consolidated Condensed Statements of Operations for the three-month periods ended March 31, 2008 and 2007 [Unaudited] |  | 6       
|                              |  |                                                                                                                      
|                              |  | Consolidated Condensed Statements of Shareholders Deficit from January 1 to March 31, 2008 and 2007 [Unaudited]      |  | 7       
|                              |  |                                                                                                                      
|                              |  | Consolidated Condensed Statements of Cash Flows for the three-month periods ended March 31, 2008 and 2007 [Unaudited] |  | 9       
|                              |  |                                                                                                                      
|                              |  | Notes to Interim Consolidated Condensed Financial Statements                                                          |  | 10      
|                              |  |                                                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis                                                                                  |  | 46      
|                              |  |                                                                                                                      
|Item 3.                       |  | Controls and Procedures                                                                                               |  | 51      
|                              |  |                                                                                                                      
|PART II.                      |  | OTHER INFORMATION                                                                                                     |  | 53      
|                              |  |                                                                                                                      
|Item 6.                       |  | Exhibits                                                                                                              |  | 53      
|                              | 
|SIGNATURES AND CERTIFICATIONS |  | 54                                                                                                                   



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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)



|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                    |  | As Restated   |         
|                                                                                                                                                                    |  | March 31,2008 |          |   | December 31,2007 |  
|                                                                                                                                                                    |  | (Unaudited)   |          |   | (Audited)        |  
|ASSETS                                                                                                                                                              |  |               |          |   |                  |   |          |  
|CURRENT ASSETS                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                           |  | $             | 6,930    |   |                  | $ | 859      |  
|Accounts receivable, net of allowances of $109 and $99                                                                                                              |  |               | 6,634    |   |                  |   | 1,782    |  
|Prepaid expenses and other current assets                                                                                                                           |  |               | 1,400    |   |                  |   | 1,646    |  
|Current assets of discontinued operations                                                                                                                           |  |               | 3        |   |                  |   | 2,387    |  
|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total Current Assets                                                                                                                                                |  |               | 14,967   |   |                  |   | 6,674    |  
|Property and equipment, net                                                                                                                                         |  |               | 1,193    |   |                  |   | 1,418    |  
|Intangible assets, net                                                                                                                                              |  |               | 8,008    |   |                  |   | 8,308    |  
|Goodwill                                                                                                                                                            |  |               | 12,513   |   |                  |   | 12,513   |  
|Other assets                                                                                                                                                        |  |               | 1,916    |   |                  |   | 478      |  
|Non-current assets of discontinued operations                                                                                                                       |  |               | 10       |   |                  |   | 1,031    |  
|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                                                                        |  | $             | 38,607   |   |                  | $ | 30,422   |  
|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                               |  |               |          |   |                  |   |          |  
|CURRENT LIABILITIES                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Current maturities of long-term debt                                                                                                                                |  | $             | 36       |   |                  | $ | 5,084    |  
|Accounts payable                                                                                                                                                    |  |               | 1,940    |   |                  |   | 2,750    |  
|Accrued expenses                                                                                                                                                    |  |               | 4,465    |   |                  |   | 3,231    |  
|Deferred revenue                                                                                                                                                    |  |               | 560      |   |                  |   | 537      |  
|Current liabilities of discontinued operations                                                                                                                      |  |               | 30       |   |                  |   | 2,827    |  
|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total Current Liabilities                                                                                                                                           |  |               | 7,031    |   |                  |   | 14,429   |  
|Liabilities for warrants to purchase common stock                                                                                                                   |  |               | 37,270   |   |                  |   | 35,883   |  
|Embedded derivatives of convertible debt instruments and preferred stock                                                                                            |  |               | 11,417   |   |                  |   | 9,199    |  
|Long-term portion of debt                                                                                                                                           |  |               | 314      |   |                  |   | 3,490    |  
|Deferred revenue                                                                                                                                                    |  |               | 63       |   |                  |   | 76       |  
|Non-current liabilities of discontinued operations                                                                                                                  |  |               |         |   |                  |   | 727      |  
|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total Liabilities                                                                                                                                                   |  |               | 56,095   |   |                  |   | 63,804   |  
|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Preferred stock, $.0001 par value; 5,000,000 authorized, none issued or outstanding at March 31, 2008 and at December 31, 2007,
respectively                        |  |               |         |   |                  |   |         |  
|Common stock, $.0001 par value; 350,000,000 authorized, 146,984,246 and 123,752,039 issued and outstanding at March 31, 2008 and at
December 31, 2007, respectively |  |               | 14       |   |                  |   | 12       |  
|Additional paid-in capital                                                                                                                                          |  |               | 90,472   |   |                  |   | 77,462   |  
|Foreign currency translation adjustment                                                                                                                             |  |               | (95      | ) |                  |   | (89      | )
|Accumulated deficit                                                                                                                                                 |  |               | (107,879 | ) |                  |   | (110,767 | )
|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total Shareholders Deficit                                                                                                                                         |  |               | (17,488  | ) |                  |   | (33,382  | )
|                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                         |  | $             | 38,607   |   |                  | $ | 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)



|                                                             |  |                                         |             |   |      |   |            |  
|------------------------------------------------------------ |  | --------------------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                             |  | As RestatedThree Months Ended March 31, |            
|                                                             |  | 2008                                    |             |   | 2007 |  
|Revenue                                                      |  | $                                       | 9,523       |   |      | $ | 4,000      |  
|Cost of Sales                                                |  |                                         | 4,418       |   |      |   | 2,735      |  
|                                                             |  |                                         |             |   |      |   |            |  
|Gross Margin                                                 |  |                                         | 5,105       |   |      |   | 1,265      |  
|                                                             |  |                                         |             |   |      |   |            |  
|Operating Expenses                                           |  |                                         |             |   |      |   |            |  
|Compensation                                                 |  |                                         | 4,289       |   |      |   | 3,250      |  
|Depreciation and amortization                                |  |                                         | 536         |   |      |   | 938        |  
|Other operating expenses                                     |  |                                         | 2,857       |   |      |   | 1,170      |  
|                                                             |  |                                         |             |   |      |   |            |  
|Total Operating Expenses                                     |  |                                         | 7,682       |   |      |   | 5,358      |  
|                                                             |  |                                         |             |   |      |   |            |  
|Operating Loss                                               |  |                                         | (2,577      | ) |      |   | (4,093     | )
|Interest Expense                                             |  |                                         | 11,606      |   |      |   | 29,568     |  
|(Gain) or loss on warrants and derivatives                   |  |                                         | (16,763     | ) |      |   | 9,199      |  
|(Gain) or loss on extinguishment of debt                     |  |                                         |            |   |      |   | (1,645     | )
|                                                             |  |                                         |             |   |      |   |            |  
|Income (loss) from continuing operations                     |  |                                         | 2,580       |   |      |   | (41,215    | )
|                                                             |  |                                         |             |   |      |   |            |  
|Discontinued operations                                      |  |                                         |             |   |      |   |            |  
|Loss from discontinued operations, net of tax                |  |                                         | (91         | ) |      |   | (492       | )
|Gain on sale of discontinued operations, net of tax          |  |                                         | 399         |   |      |   |           |  
|                                                             |  |                                         |             |   |      |   |            |  
|Total income (loss) from discontinued operations, net of tax |  |                                         | 308         |   |      |   | (492       | )
|                                                             |  |                                         |             |   |      |   |            |  
|Net income (loss)                                            |  | $                                       | 2,888       |   |      | $ | (41,707    | )
|                                                             |  |                                         |             |   |      |   |            |  
|BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK              |  |                                         |             |   |      |   |            |  
|Income (loss) from continuing operations                     |  | $                                       | 0.02        |   |      | $ | (1.92      | )
|Loss from discontinued operations                            |  |                                         |            |   |      |   | (0.02      | )
|                                                             |  |                                         |             |   |      |   |            |  
|Net income (loss) per share of common stock                  |  | $                                       | 0.02        |   |      | $ | (1.94      | )
|                                                             |  |                                         |             |   |      |   |            |  
|Weighted average shares outstanding                          |  |                                         | 135,303,454 |   |      |   | 21,491,069 |  
|                                                             |  |                                        
|DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK            |  |                                         |             |   |      |   |            |  
|Income (loss) from continuing operations                     |  | $                                       | 0.01        |   |      | $ | (1.92      | )
|Loss from discontinued operations                            |  |                                         |            |   |      |   | (0.02      | )
|                                                             |  |                                         |             |   |      |   |            |  
|Net income (loss) per share of common stock                  |  | $                                       | 0.01        |   |      | $ | (1.94      | )
|                                                             |  |                                         |             |   |      |   |            |  
|Weighted average common shares outstanding                   |  |                                         | 192,922,548 |   |      |   | 21,491,069 |  

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 DEFICIT

(in thousands, except share amounts)

(Unaudited)

(As Restated)



|                                        |  |              |  |                          |  |                         |  |             |   |                |   |                          |  |                    |        |  |                                      |         |   |                           |   |     |                   |  |   |         |   |  |   |         |  
|--------------------------------------- |  | ------------ |  | ------------------------ |  | ----------------------- |  | ----------- | - | -------------- | - | ------------------------ |  | ------------------ | ------ |  | ------------------------------------ | ------- | - | ------------------------- | - | --- | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                        |  | CommonShares |  | Series AAPreferredShares |  | Series BPreferredShares |  | CommonStock |   | PreferredStock |   | AdditionalPaid-inCapital |  | AccumulatedDeficit |        |  | ForeignCurrencyTranslationAdjustment |         |   | TotalShareholdersDeficit |   |     | ComprehensiveLoss | 
|Balance, January 1, 2007                |  | 21,015,069   |  |                         |  | 2,516                   |  | $           | 2 |                | $ |                         |  | $                  | 19,297 |  | $                                    | (49,378 | ) |                           | $ | (49 | )                 |  | $ | (30,128 | ) |  |   |        |  
|Issuance of Series AA preferred stock   |  |             |  | 19,984                   |  |                        |  |             |  |                |   |                         |  |                    |       |  |                                      |        |   |                           |   |    |                   |  |   |        |   |  |   |        |  
|Stock-based compensation expense        |  |             |  |                         |  |                        |  |             |  |                |   |                         |  |                    | 1,432  |  |                                      |        |   |                           |   |    |                   |  |   | 1,432   |   |  |   |        |  
|Issuance of common stock                |  | 695,811      |  |                         |  |                        |  |             |  |                |   |                         |  |                    | 327    |  |                                      |        |   |                           |   |    |                   |  |   | 327     |   |  |   |        |  
|Foreign currency translation adjustment |  |             |  |                         |  |                        |  |             |  |                |   |                         |  |                    |       |  |                                      |        |   |                           |   | (1  | )                 |  |   | (1      | ) |  |   | (1      | )
|Net loss                                |  |             |  |                         |  |                        |  |             |  |                |   |                         |  |                    |       |  |                                      | (41,707 | ) |                           |   |    |                   |  |   | (41,707 | ) |  |   | (41,707 | )
|                                        |  |              |  |                          |  |                         |  |             |   |                |   |                          |  |                    |        |  |                                      |         |   |                           |   |     |                   |  |   |         |   |  |   |         |  
|Balance, March 31, 2007                 |  | 21,710,880   |  | 19,984                   |  | 2,516                   |  | $           | 2 |                | $ |                         |  | $                  | 21,056 |  | $                                    | (91,085 | ) |                           | $ | (50 | )                 |  | $ | (70,077 | ) |  | $ | (41,708 | )
|                                        |  |              |  |                          |  |                         |  |             |   |                |   |                          |  |                    |        |  |                                      |         |   |                           |   |     |                   |  |   |         |   |  |   |         |  

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 DEFICIT

(in thousands, except share amounts)

(Unaudited)

(As Restated)



|                                        |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                           |     |   |                     |   |         |   |  |   |       |  
|--------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------------------ |  | - | ------------------------------------ | - |  | ------------------------- | --- | - | ------------------- | - | ------- | - |  | - | ----- | -
|                                        |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | TotalShareholdersDeficit |     |   | ComprehensiveIncome |  
|Balance, January 1, 2008                |  | 123,752,039  |  | $           | 12 |                          | $ | 77,462             |  | $ | (110,767                             | ) |  | $                         | (89 | ) |                     | $ | (33,382 | ) |  |   |      |  
|Cashless warrant conversion             |  | 2,358,506    |  |             |   |                          |   | 2,399              |  |   |                                     |   |  |                           |    |   |                     |   | 2,399   |   |  |   |      |  
|Cashless exercise of stock options      |  | 804,626      |  |             |   |                          |   |                   |  |   |                                     |   |  |                           |    |   |                     |   |        |   |  |   |      |  
|Registration rights penalty             |  | 477,185      |  |             |   |                          |   | 241                |  |   |                                     |   |  |                           |    |   |                     |   | 241     |   |  |   |      |  
|Debt to equity conversion               |  | 19,591,890   |  |             | 2  |                          |   | 8,406              |  |   |                                     |   |  |                           |    |   |                     |   | 8,408   |   |  |   |      |  
|Stock-based compensation expense        |  |             |  |             |   |                          |   | 1,964              |  |   |                                     |   |  |                           |    |   |                     |   | 1,964   |   |  |   |      |  
|Foreign currency translation adjustment |  |             |  |             |   |                          |   |                   |  |   |                                     |   |  |                           | (6  | ) |                     |   | (6      | ) |  |   | (6    | )
|Net income                              |  |             |  |             |   |                          |   |                   |  |   | 2,888                                |   |  |                           |    |   |                     |   | 2,888   |   |  |   | 2,888 |  
|                                        |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                           |     |   |                     |   |         |   |  |   |       |  
|Balance, March 31, 2008                 |  | 146,984,246  |  | $           | 14 |                          | $ | 90,472             |  | $ | (107,879                             | ) |  | $                         | (95 | ) |                     | $ | (17,488 | ) |  | $ | 2,882 |  
|                                        |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                           |     |   |                     |   |         |   |  |   |       |  

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)



|                                                                       |  |                              |        |   |      |   |        |  
|---------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                       |  | Three Months Ended March 31, |       
|                                                                       |  | 2008                         |        |   | 2007 |  
|Net cash used in operating activities from continuing operations       |  | $                            | (3,852 | ) |      | $ | (5,025 | )
|Net cash used in operating activities from discontinued operations     |  |                              | (524   | ) |      |   | (1,102 | )
|                                                                       |  |                              |        |   |      |   |        |  
|Net cash used in operating activities                                  |  |                              | (4,376 | ) |      |   | (6,127 | )
|                                                                       |  |                              |        |   |      |   |        |  
|Net cash used in investing activities from continuing operations       |  |                              | (12    | ) |      |   | (150   | )
|Net cash provided by investing activities from discontinued operations |  |                              | 712    |   |      |   | (30    | )
|                                                                       |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                    |  |                              | 700    |   |      |   | (180   | )
|                                                                       |  |                              |        |   |      |   |        |  
|Net cash provided by financing activities from continuing operations   |  |                              | 9,753  |   |      |   | 6,071  |  
|Net cash provided by financing activities from discontinued operations |  |                              |       |   |      |   | 718    |  
|                                                                       |  |                              |        |   |      |   |        |  
|Net cash provided by financing activities                              |  |                              | 9,753  |   |      |   | 6,789  |  
|                                                                       |  |                              |        |   |      |   |        |  
|Effect of exchange rate on cash and equivalents                        |  |                              | (6     | ) |      |   | (1     | )
|                                                                       |  |                              |        |   |      |   |        |  
|Increase in cash and cash equivalents                                  |  |                              | 6,071  |   |      |   | 481    |  
|Cash and cash equivalents  beginning of period                        |  |                              | 859    |   |      |   | 1,204  |  
|                                                                       |  |                              |        |   |      |   |        |  
|Cash and cash equivalents  end of period                              |  | $                            | 6,930  |   |      | $ | 1,685  |  
|                                                                       |  |                              |        |   |      |   |        |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                     |  |                              |        |   |      |   |        |  
|Cash paid for interest for continuing operations                       |  | $                            | 632    |   |      | $ | 717    |  
|Cash paid for interest for discontinued operations                     |  |                              |       |   |      |   |       |  
|                                                                       |  |                             
|NON-CASH INVESTING AND FINANCING ACTIVITIES                            |  |                              |        |   |      |   |        |  
|Conversion of Junior Secured Facility into common stock                |  | $                            | 8,408  |   |      | $ |       |  
|Conversion of short-term bridge notes to Junior Secured Facility       |  |                              |       |   |      |   | 5,388  |  
|Issuance of common stock for cashless conversion of warrants           |  |                              | 2,399  |   |      |   |       |  
|Issuance of common stock for cashless conversion of options            |  |                              | 213    |   |      |   |       |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Condensed Financial Statements

March 31, 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 3) 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 March 31, 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 March 31, 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 March 31, 2008
|                     |  | AmortizationPeriod in Years |  | GrossCarryingAmount  |       | AccumulatedAmortization |   |        | Net
|                     |  |                             |  |                      |       | (in thousands)          |   |        |    
|Developed technology |  | 5 to 11                     |  | $                    | 5,805 |                         | $ | (976   | )   |  | $ | 4,829
|Trade names          |  | 3                           |  |                      | 350   |                         |   | (159   | )   |  |   | 191  
|Customer base        |  | 6 to 10                     |  |                      | 3,560 |                         |   | (572   | )   |  |   | 2,988
|                     |  |                             |  |                      |       |                         |   |        |     |  |   |      
|Total                |  | 8.52 weighted-average years |  | $                    | 9,715 |                         | $ | (1,707 | )   |  | $ | 8,008
|                     |  |                             |  |                      |       |                         |   |        |     |  |   |      



|                     |  |                         |       |                         |   |        |     |  |   |      
|-------------------- |  | ----------------------- | ----- | ----------------------- | - | ------ | --- |  | - | -----
|                     |  | 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 three months ended March 31, 2008 and 2007 related to the
intangible assets was $0.3 million and $0.3 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 nine months of 2008 |  | $              | 897  
|2009                          |  |                | 1,183
|2010                          |  |                | 1,079
|2011                          |  |                | 1,066
|2012                          |  |                | 857  
|Thereafter                    |  |                | 2,926
|                              |  |                |      
|                              |  | $              | 8,008
|                              |  |                |      

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 March 31, 2008 and December 31, 2007 in the continuing operations.

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



|                          |  |                |        |                  |   |       
|------------------------- |  | -------------- | ------ | ---------------- | - | ------
|                          |  | March 31,2008  |        | 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 (As Restated)

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 and 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 (As Restated)

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 collectability of the resulting receivable is reasonable assured.

While customers may
purchases services separately, sales often 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 Issue
No. 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



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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 is has not been established for all items under the arrangement, no allocation can be made, and revenue is recognized on all items over the term of the arrangement.

As part of the revenue recognition process, the Company records provisions for estimated product returns and allowances as determined by historical sales
returns, reviewing economic trends and changes to customers demands. Cancellation charges which 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. Therefore, the Company allocates 20% of the revenue
of the arrangement to maintenance and the remaining amount to the software license.

Remote Management Services. The Company
recognizes revenue from the installation and servicing of the arrangement ratably over the term of the contract with no allocation to either installation or monthly monitoring since, as prescribed in EITF 00-21, 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 the 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 the Connectivity Solutions products includes the cost of accessing circuits and bandwidth needed for communication networks, and fees paid to third-party sales agents.

Comprehensive 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 months ended March 31, 2008 and 2007:



|                                        |  |                              |       |   |      |   |         |  
|--------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ------- | -
|                                        |  | Three Months Ended March 31, |      
|                                        |  | 2008                         |       |   | 2007 |  
|                                        |  | (in thousands)               |      
|Net income (loss)                       |  | $                            | 2,888 |   |      | $ | (41,707 | )
|Foreign currency translation adjustment |  |                              | (6    | ) |      |   | (1      | )
|                                        |  |                              |       |   |      |   |         |  
|Comprehensive income (loss)             |  | $                            | 2,882 |   |      | $ | (41,708 | )
|                                        |  |                              |       |   |      |   |         |  



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Earnings (loss) per Share (As Restated)

Basic and diluted earnings (loss) per share information is presented under the requirements of SFAS No. 128, Earnings per Share (SFAS 128). Basic
earnings (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 earnings 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.

The following table presents a reconciliation of the numerators and denominators of basic and diluted income (loss) per share from continuing
operations:



|                                                           |  |                                         |       |               |   |       |  
|---------------------------------------------------------- |  | --------------------------------------- | ----- | ------------- | - | ----- | -
|                                                           |  | Three Months Ended                      |      
|                                                           |  | March 31,2008                           |       | March 31,2007 |  
|                                                           |  | (In millions, except per share amounts) |      
|Numerator:                                                 |  |                                         |       |               |   |       |  
|Net income (loss) from continuing operations               |  | $                                       | 2.6   |               | $ | (41.2 | )
|Interest expense for convertible notes                     |  |                                         | 0.2   |               |   |      |  
|                                                           |  |                                         |       |               |   |       |  
|Net income (loss) from continuing operations - diluted     |  | $                                       | 2.8   |               | $ | (41.2 | )
|                                                           |  |                                         |       |               |   |       |  
|Denominator:                                               |  |                                         |       |               |   |       |  
|Weighted average common shares outstanding - basic         |  |                                         | 135.3 |               |   | 21.5  |  
|Convertible notes converted to common stock                |  |                                         | 16.3  |               |   |      |  
|Warrants to purchase stock                                 |  |                                         | 26.7  |               |   |      |  
|Employee options                                           |  |                                         | 14.6  |               |   |      |  
|                                                           |  |                                         |       |               |   |       |  
|Weighted average common shares outstanding - dilutive      |  |                                         | 192.9 |               |   | 21.5  |  
|                                                           |  |                                         |       |               |   |       |  
|Basic income (loss) per share from continuing operations   |  | $                                       | 0.02  |               | $ | (1.92 | )
|                                                           |  |                                         |       |               |   |       |  
|Diluted income (loss) per share from continuing operations |  | $                                       | 0.01  |               | $ | (1.92 | )
|                                                           |  |                                         |       |               |   |       |  

Excluded from the dilutive securities described above are warrants to acquire 57.2 million
and 79.7 million shares for the three months ended March 31, 2008 and March 31, 2007, respectively. Also excluded are employee stock options to acquire 51.8 million and 16.7 million shares for the three months ended
March 31, 2008 and March 31, 2007, respectively. The outstanding stock warrants at March 31, 2007 include, on an as converted to common stock basis, warrants issued in conjunction with Series A, B, and AA preferred stock.
These exclusions are made if the exercise prices of these warrants and options are greater than the average market price of the Companys common stock for the period, or if the Company has net losses, both of which have an anti-dilutive effect.

The Company is required to use the if-converted method for computing diluted earnings per share with respect to the shares
reserved for issuance upon conversion of the notes. Under this method, the interest expense on the convertible notes is added back to net income and then divided by total outstanding shares, including those shares reserved for issuance upon
conversion of the notes. At March 31, 2007, there were 2,516.1 and 19,984.5 shares of Series B and Series AA Convertible preferred stock that potentially could have been converted into 3,700,147 and 44,409,623 shares of common stock,
respectively.

On June 25, 2007, the Companys shareholders approved an increase in the number of authorized common shares from
25,000,000 to 350,000,000, resulting in the conversion of all series of preferred stock into common stock. At that date, the Company had a total of 2,516.1 and 20,634.5 shares of Series B and Series AA Convertible preferred stock that converted into
3,700,147 and 45,852,567 shares of common stock, respectively. Also outstanding were warrants to purchase 2,020.8 Series A preferred stock, which were convertible into 2,245,262 shares of common stock upon exercise.

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



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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 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 and No. 157-2 (FSP 157-1 and 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 consolidated result 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.

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.

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 three months ended March 31, 2008 and March 31, 2007 were $1.0 million and $2.1 million, respectively. The loss from discontinued operations for the three months ended March 31, 2008 and 2007 were $0.1 million and
$0.5 million, respectively. The operating results related to Frontrunner are included in discontinued operations of the Company through the sale date. Gain on sale of discontinued operations for the three months ended March 31, 2008 was $0.4
million.



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##### Table of Contents

The discontinued operations assets and liabilities were as follows:



|                                                     |  |               |    |                  |   |      
|---------------------------------------------------- |  | ------------- | -- | ---------------- | - | -----
|                                                     |  | March 31,2008 |    | December 31,2007
|                                                     |  | (Unaudited)   |    | (Audited)       
|Current assets of discontinued operations            |  |               |    |                  |   |      
|Accounts receivable, net                             |  | $             |   |                  | $ | 1,298
|Inventory                                            |  |               |   |                  |   | 864  
|Prepaid expenses and other current assets            |  |               |   |                  |   | 58   
|Other current assets                                 |  |               | 3  |                  |   | 167  
|                                                     |  |               |    |                  |   |      
|Total current assets of discontinued operations      |  |               | 3  |                  |   | 2,387
|                                                     |  |               |    |                  |   |      
|Long-term assets of discontinued operations          |  |               |    |                  |   |      
|Property and equipment, net                          |  |               |   |                  |   | 505  
|Intangible assets, net                               |  |               |   |                  |   | 526  
|Other assets                                         |  |               | 10 |                  |   |     
|                                                     |  |               |    |                  |   |      
|Non-current assets of discontinued operations        |  |               | 10 |                  |   | 1,031
|                                                     |  |               |    |                  |   |      
|Total assets from discontinued operations            |  | $             | 13 |                  | $ | 3,418
|                                                     |  |               |    |                  |   |      
|Current liabilities of discontinued operations       |  |               |    |                  |   |      
|Accounts payable                                     |  | $             | 6  |                  | $ | 326  
|Accrued expenses                                     |  |               | 10 |                  |   | 644  
|Advanced billing                                     |  |               |   |                  |   | 390  
|Warranty reserve                                     |  |               |   |                  |   | 99   
|Deferred revenue, current portion                    |  |               | 14 |                  |   | 1,368
|                                                     |  |               |    |                  |   |      
|Total current liabilities of discontinued operations |  |               | 30 |                  |   | 2,827
|                                                     |  |               |    |                  |   |      
|Long-term liabilities of discontinued operations     |  |               |    |                  |   |      
|Long-term portion of notes                           |  |               |   |                  |   | 727  
|                                                     |  |               |    |                  |   |      
|Non-current liabilities of discontinued operations   |  |               |   |                  |   | 727  
|                                                     |  |               |    |                  |   |      
|Total liabilities of discontinued operations         |  | $             | 30 |                  | $ | 3,554
|                                                     |  |               |    |                  |   |      

NOTE 4. Debt (As Restated).

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



|                                                                                                                                                                                                                                                                                                                                                                           |  |                |     |                  |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --- | ---------------- | - | -----
|                                                                                                                                                                                                                                                                                                                                                                           |  | March 31,2008  |     | December 31,2007
|                                                                                                                                                                                                                                                                                                                                                                           |  | (in thousands)
|Secured convertible debenture, with an outstanding balance of $19.0 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 $21.6 million. As of March 31, 2008, the balance was reported net of $18.8 million, which represents the unamortized value of the debt discount. |  | $              | 208 |                  |   |     
|                                                                                                                                                                                                                                                                                                                                                                           |  |               
|Senior secured line of credit, with an outstanding balance of $5.4 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 $1.0 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 $0.1 million, which represents the unamortized value of the debt discount.                      |  |                |    |                  |   | 48   
|                                                                                                                                                                                                                                                                                                                                                                           |  |               
|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.                                                                                                                                                                                                                                                                             |  |                | 124 |                  |   | 138  
|                                                                                                                                                                                                                                                                                                                                                                           |  |               
|Capital lease obligations.                                                                                                                                                                                                                                                                                                                                                 |  |                | 18  |                  |   | 36   
|                                                                                                                                                                                                                                                                                                                                                                           |  |                |     |                  |   |      
|Total                                                                                                                                                                                                                                                                                                                                                                      |  |                | 350 |                  |   | 8,574
|Less: current maturities                                                                                                                                                                                                                                                                                                                                                   |  |                | 36  |                  |   | 5,084
|                                                                                                                                                                                                                                                                                                                                                                           |  |                |     |                  |   |      
|Long-term portion                                                                                                                                                                                                                                                                                                                                                          |  | $              | 314 |                  | $ | 3,490
|                                                                                                                                                                                                                                                                                                                                                                           |  |                |     |                  |   |      



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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 Conversion
price can also be reset for (i) forward and reverse splits and other extraordinary transactions and (ii) a full ratchet clause which 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).

Proceeds pursuant to the 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. 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.

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.

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.

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



|                     |  |                    |       
|-------------------- |  | ------------------ | ------
|                     |  | Initial Fair Value
|Warrants             |  | $                  | 10,543
|Embedded derivatives |  |                    | 11,141
|                     |  |                    |       
|Total debt discount  |  | $                  | 21,684
|                     |  |                    |       

The initial fair value of the warrants and embedded derivatives exceeded the proceeds from the
Debentures by $92.6 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



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##### Table of Contents

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 18% per annum). See the Subsequent Events note for further discussion.

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.

The Company had previously entered into a Senior Secured Facility and a Junior Secured Facility, all of which were either converted or paid off with the
net proceeds from the sale of the aforementioned debentures and the related deferred financing costs were recognized.

Senior Secured
Facility. On January 19, 2007, the Company closed the initial funding of $7.0 million of borrowings on an 18-month $12 million Senior Secured Facility issued to the Company by Hilco Financial, LLC (Senior Lender). The Credit
Agreement for the facility names the Company and its remaining active subsidiaries as co-borrowers. The Credit Agreement provides for a term loan of $6.5 million plus up to $5.5 million of borrowing availability based upon an advance rate of 85%
against eligible accounts receivable. It requires the payment of interest on a monthly basis at the greater of 15% per annum or prime plus 7% and has a $250,000 prepayment penalty until the last thirty days of the facility. There is a $3,000
per month collateral management fee, a 0.5% per month unused line fee, and an obligation to reimburse the lender for costs incurred by it in connection with the original issuance and ongoing administration of the facility. Further, the Company
agreed to pay 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.

The Senior Secured
Facility is secured by a blanket lien on all of the Companys assets and all of the assets of the Companys subsidiaries. Additionally, the Company pledged all of the capital stock or limited liability company interests of each of the
Companys subsidiaries as additional collateral. The Credit Agreement prohibits junior encumbrances on the Companys assets with the exception of the junior secured facility (discussed herein) and certain permitted purchase money security
interests. The Credit Agreement contains numerous affirmative and negative covenants customary for facilities of this nature. The Company had agreed to EBITDA covenants (earnings before interest taxes, depreciation and amortization and before
non-cash stock compensation and warrant expense) as follows (at least 75% of the amount must be achieved on a cumulative basis: Q1 2007 ($2.4) million; Q2 2007 ($2.6) million; Q3 2007 ($600,000); and Q4 2007 $3.1 million. The Company also agreed to
a covenant capping capital expenditures at $500,000 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 warrants to purchase an aggregate of
1,125.0 shares of Series AA preferred stock (2,500,000 shares of common stock, on an as-converted basis). Warrants with respect to one half of the shares were exercisable on or before December 31, 2008 at an exercise price equal to $0.45 per
share of common stock, on an as-converted basis and warrants with respect to the one half of the shares were exercisable on or before December 31, 2009 at an exercise price equal to $0.65 per share of common stock on an as-converted basis In
connection with the October 31, 2007 Waiver and Amendment to the 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
provides 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 FairValue
|Warrants issued on January 19, 2007                                     |  | $                 | 1,828
|Fair value increase for replacement warrants issued on October 31, 2007 |  |                   | 534  
|                                                                        |  |                   |      
|Total debt discount                                                     |  | $                 | 2,362
|                                                                        |  |                   |      



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During the first quarter of 2008, this debt was paid in full. See the Subsequent Events note
for further discussion.

Junior Secured Facility. On January 19, 2007, the Company entered into an agreement with a
number of individuals and entities for the establishment of a junior secured facility that permits the funding of up to $10.0 million of original principal amount of advances. At the closing, $6.3 million 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 has a two-year term accruing simple interest at 12% per annum, with all principal and interest due on
maturity. The junior secured facility is secured by a junior lien on the Companys assets and the assets of its subsidiaries, which is expressly contractually subordinated to the Senior Secured Facility and any refinancing of that facility.

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 has issued warrants to purchase an aggregate of 15,432,658 shares of its common stock under the junior secured facility. The warrants issued as part of the junior secured facility are subject to
similar extension and registration rights as those granted to the purchasers in the Units offering described in the Shareholders Equity note. All of the warrants under the facility expire December 31, 2009.

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



|                                             |  |                   |       
|-------------------------------------------- |  | ----------------- | ------
|                                             |  | Initial FairValue
|Warrants issued on January 19, 2007          |  | $                 | 7,570 
|Warrants issued with June 15, 2007 amendment |  |                   | 3,340 
|Embedded derivatives                         |  |                   | 7,369 
|                                             |  |                   |       
|Total debt discount                          |  | $                 | 18,279
|                                             |  |                   |       

The initial fair value of the warrants and embedded derivatives exceeded the proceeds from the
Junior Secured Facility 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 $1,000,000 of Units comprised of short-term promissory notes bearing interest at 12% per annum and maturing September 30, 2007, coupled with a warrant to purchase up to 125,000
shares of common stock for each $100,000 of notes funded. 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. During the first
quarter of 2008, each note was converted to common stock or paid in full. See the Subsequent Events note.

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



|                    |  |                   |        
|------------------- |  | ----------------- | -------
|                    |  | Initial FairValue
|Warrants            |  | $                 | 205,211
|                    |  |                   |        
|Total debt discount |  | $                 | 205,211
|                    |  |                   |        



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During 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 March 31, 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 nine months of 2008 |  | $              | 41    
|2009                          |  |                | 18    
|2010                          |  |                | 19    
|2011                          |  |                | 21    
|2012                          |  |                | 22    
|Thereafter                    |  |                | 19,021
|                              |  |                |       
|Total                         |  | $              | 19,142
|                              |  |                |       

NOTE 5. Warrants. (As Restated)

At March 31, 2008 and December 31, 2007, the Company had 83,755,762 and 67,107,343 warrants outstanding, respectively, to purchase common stock.
Certain warrants were originally issued as Series A preferred stock warrants, Series B preferred stock warrants, and Series AA preferred stock warrants. Under the terms of the warrant agreement, these preferred warrants automatically converted to
warrants to purchase common stock of the Company (which became effective June 25, 2007) upon the approval of an amendment to the Companys articles of incorporation authorizing 350,000,000 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 are exercisable when issued. The warrants expire two to five years from date of issuance.

The table below summarizes the warrant expiration dates as of March 31, 2008.



|                           |  |                    |  |                          |  |                                |      
|-------------------------- |  | ------------------ |  | ------------------------ |  | ------------------------------ | -----
|Expiration Date            |  | Number of Warrants |  | Range of Exercise Prices |  | Weighted AverageExercise Price
|2009                       |  | 40,575,030         |  | $0.30-$0.65              |  | $                              | 0.331
|2010                       |  | 675,000            |  | $0.35-$0.36              |  |                                | 0.356
|2011                       |  | 7,845,732          |  | $0.45-$0.90              |  |                                | 0.576
|2012                       |  | 13,000,000         |  | $0.15-$0.50              |  |                                | 0.263
|2013                       |  | 21,660,000         |  | $0.73                    |  |                                | 0.730
|                           |  |                    |  |                          |  |                                |      
|Total warrants outstanding |  | 83,755,762         |  |                          |  | $                              | 0.447

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



|                                                  |  |                |   |  |                              |       |                                                 |     |                                |   |       
|------------------------------------------------- |  | -------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ------------------------------ | - | ------
|Summary of warrant activity                       |  | Warrants (000) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (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                                         |  | (5,011         | ) |  |                              | 0.330 |                                                 |     |                                |   |       
|Forfeited/canceled                                |  |               |   |  |                              |      |                                                 |     |                                |   |       
|                                                  |  |                |   |  |                              |       |                                                 |     |                                |   |       
|Outstanding at March 31, 2008                     |  | 83,756         |   |  | $                            | 0.447 |                                                 | 3.1 |                                | $ | 12,539
|                                                  |  |                |   |  |                              |       |                                                 |     |                                |   |       



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



|                                                          |  |               |       |                  |   |      
|--------------------------------------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                                                          |  | March 31,2008 |       | December 31,2007
|Warrants issued in connection with debt financing         |  | $             | 0.556 |                  | $ | 0.606
|Warrants issued in connection with equity financing       |  | $             |      |                  | $ | 0.675
|Warrants issued for services received                     |  | $             | 0.556 |                  | $ | 0.502
|Weighted average fair value all grants issued in the year |  | $             | 0.556 |                  | $ | 0.641

The fair value of warrants issued is calculated using the Black Scholes pricing model generally
using the Company 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 and 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.



|                                         |  |               |       |   |                  |   |       |  
|---------------------------------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                                         |  | March 31,2008 |       |   | December 31,2007 |  
|Weighted-average exercise price          |  | $             | 0.730 |   |                  | $ | 0.530 |  
|Weighted-average volatility              |  |               | 161.0 | % |                  |   | 100.0 | %
|Expected dividends                       |  |               |      |   |                  |   |      |  
|Expected term (in years)                 |  |               | 5.0   |   |                  |   | 2.5   |  
|Weighted-average risk-free interest rate |  |               | 2.46  | % |                  |   | 4.56  | %

The total fair value of warrants issued and immediately exercisable during the periods ending
March 31, 2008 and 2007, respectively, was $12.0 million and $43.8 million. The warrants expire on various dates through March, 2013.

During the
quarters ended March 31, 2008 and 2007, the Company issued warrants in conjunction with debt issuances, for advisory services and as part of the preferred stock units offering. The total initial fair value of warrants issued was as follows:
debt issuances  $10.5 million and $10.8 million; advisory services  $1.5 million and zero; and preferred stock units offering  zero and $33.1 million, for the quarters ended March 31, 2008 and 2007, respectively. At
March 31, 2007, warrants issued for advisory fees during the year of $1.1 million, are reported in pre-paid expenses on the consolidated balances and will be expensed during 2008.

All warrants exercised in the quarter ended March 31, 2008 were a cashless exercise. There was no cash received from the exercise; 2,652,259
warrants were surrendered as payment of the warrant exercise price. The intrinsic value of warrants exercised was $1.5 million. There were no exercises of warrants in the quarter ended March 31, 2007; 500,000 warrants with a weighted average
exercise price of $1.35 were cancelled. No tax liability or benefit has been recorded in connection with the warrant expenses due to the net loss carry forward position of the company.

NOTE 6. Liability for Warrants and Embedded Derivatives (As Restated).

The Company has entered into
derivative financial instruments which required evaluation 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 an as converted basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 25,000,000 to 350,000,000. 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | On March 11, 2008, the Company entered into the Purchase Agreement. The conversion features of the 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to SFAS 133 and EITF 00-19, the
conversion features of the debt are considered embedded derivatives requiring bifurcation from the debt host and they are included on the consolidated 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 consolidated statements
of operations.

The Companys outstanding warrants also meet the definition of a liability based on the assessment above. The warrants
are recorded at fair value and classified as a liability in the consolidated balance sheet (see liabilities for warrants to purchase common stock). 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 consolidated statements of operations. As of March 31, 2008 and December 31, 2007, the fair value of the warrants was $37.3 million and
$35.9 million, respectively.

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 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 consolidated statement of operations. As of March 31, 2008 and December 31, 2007, the fair value of the derivatives embedded in preferred stock and convertible debt was $11.4
million and $9.2 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. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. 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.



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Liabilities measured at Fair Value on a recurring basis at March 31, 2008 were as follows:



|                                 |  |                                                                  |   |                                             |   |                                         |  |                             |   |  |   |     
|-------------------------------- |  | ---------------------------------------------------------------- | - | ------------------------------------------- | - | --------------------------------------- |  | --------------------------- | - |  | - | ----
|(in millions)                    |  | Quoted Prices inActive Markets forIdentical Liabilities(Level 1) |   | Significant OtherObservableInputs (Level 2) |   | SignificantUnobservableInputs (Level 3) |  | Fair Value atMarch 31, 2008
|Derivative financial instruments |  | $                                                                |  |                                             | $ | 11.4                                    |  | $                           |  |  | $ | 11.4
|Warrant Liability                |  | $                                                                |  |                                             | $ | 37.3                                    |  | $                           |  |  | $ | 37.3

NOTE 7. Share-Based Compensation (As Restated).

The Company applies SFAS No. 123R,Share-Based Payments (SFAS 123R), which revises SFAS No. 123,Accounting for Stock-Based
Compensation (SFAS 123) and supersedes Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the
financial statements based on their fair value and recognized as compensation expense over the vesting period. During the first quarter of 2008, the Company issued 7,375,000 options, of which 2,550,000 are performance based. Share-based compensation
expense recognized under SFAS 123R for the three months ended March 31, 2008 and 2007 was $2.0 million and $1.4 million, respectively.

On February 22, 2008, the Company amended its 2007 Long Term Incentive Plan to increase the number of shares issuable under the Plan from 5,000,000 to 6,500,000.

The following table summarizes the activity under the stock option plan and other stock grants for the three months ended March 31, 2008:



|                                 |  |             |   |  |                                |       |                                                    |     |                                 |   |       
|-------------------------------- |  | ----------- | - |  | ------------------------------ | ----- | -------------------------------------------------- | --- | ------------------------------- | - | ------
|Summary of option activity       |  | Shares(000) |   |  | Weighted AverageExercise Price |       | Weighted Average RemainingContractual Life (Years) |     | Aggregate IntrinsicValue ($000)
|Outstanding at December 31, 2007 |  | 60,708      |   |  | $                              | 0.383 |                                                    |     |                                 |   |       
|Granted                          |  | 7,375       |   |  |                                | 0.559 |                                                    |     |                                 |   |       
|Exercised                        |  | (1,150      | ) |  |                                | 0.185 |                                                    |     |                                 |   |       
|Forfeited/canceled               |  | (524        | ) |  |                                | 1.029 |                                                    |     |                                 |   |       
|                                 |  |             |   |  |                                |       |                                                    |     |                                 |   |       
|Outstanding at March 31, 2008    |  | 66,409      |   |  | $                              | 0.401 |                                                    | 9.4 |                                 | $ | 14,849
|                                 |  |             |   |  |                                |       |                                                    |     |                                 |   |       
|Exercisable at March 31, 2008    |  | 28,507      |   |  | $                              | 0.376 |                                                    | 9.4 |                                 | $ | 7,039 
|                                 |  |             |   |  |                                |       |                                                    |     |                                 |   |       

The weighted average grant-date fair value of options granted during the three months ended
March 31, 2008 and 2007 was $0.550 and $0.691, 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:



|                                     |  |               |   |  |                  |  
|------------------------------------ |  | ------------- | - |  | ---------------- | -
|                                     |  | March 31,2008 |   |  | December 31,2007 |  
|Expected Volatility                  |  | 130.8         | % |  | 100.0            | %
|Expected Life (in years)             |  | 5.0           |   |  | 5.0              |  
|Risk-free interest rate              |  | 2.23          | % |  | 3.85             | %
|No dividend payments are anticipated |  |               |   |  |                  |  

The intrinsic value of options exercised during the three months ended March 31, 2008 was
$0.5 million. All exercises were made under a cashless exercise; 345,373 share options were surrendered as payment of the exercise price. There were no exercises during the period ended March 31, 2007.

For the three months ended March 31, 2008 and 2007, the company recognized compensation expense for stock option awards totaling $2.0 million and
$1.4 million, respectively. No tax benefit has been recorded related to stock based compensation expense. At March 31, 2008, unrecognized compensation expense related to stock options totaled $22.4 million with a remaining weighted average
amortization period of 2.6 years.



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NOTE 8. Shareholders Deficit (As Restated).

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. 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. The Series A and Series B shares
enjoy liquidation privileges of $1.00 per share until converted to common stock and do not have dividend privileges. The Series AA shares enjoy liquidation privileges of $1,000 per share until converted to common stock. Series A, B and AA shares
have voting rights on an as converted basis.

2007 Events

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 15,590.1 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 exercisable at $0.45 per share and the Three-Year Warrants are exercisable to purchase an aggregate of 22,927,245 shares of common stock
exercisable 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 1995.4 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.

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. As of March 31, 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 representing a non-cash registration
rights penalty of $0.2 million and $2.5 million during the quarter ended March 31, 2008 and year ended December 31, 2007, respectively. Holders of the affected shares include certain members of the Companys Board of Directors.

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 (2,500,000 shares of common stock, on an as-converted basis). Warrants with respect to one half of the shares were exercisable on or before
December 31, 2008 at an exercise price equal to $0.45 per share of common stock, on an as-converted basis, and warrants with respect to the one half of the shares were exercisable on or before December 31, 2009 at an exercise price equal
to $0.65 per share of common stock on an as-converted basis. In connection with the October 31, 2007 Waiver and Amendment to the Agreement, a new five-year warrant to purchase up to 3.5 million shares of common stock at $0.15 was issued
and the previously issued warrants above were cancelled. The new warrant provides for, among other things, cashless exercise, anti-dilution, and registration rights. Using the Black-Scholes model, this modification resulted in a $0.5 million
increase to the fair value of the warrants.



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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 67.5 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 has issued an aggregate
of 15,432,658 shares of common stock warrants in connection with the junior secured facility. Shares of common stock are issuable in connection with the warrants so issued. The warrants issued as part of the junior secured facility are subject to
similar extension and registration rights as those granted to the purchasers in the Units offering described above.

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 model.

2008 Events

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 (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. The Warrants may be exercised for
cash or on a cashless basis and are subject to certain other conditions.

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 most recently ended as of the conversion date (ten-day trailing average), which resulted in effective conversion prices between $0.418 and $0.504. Principal and 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. The exercise price of the
options converted was $0.185. The market price of the common stock during the period these options were exercised was $0.616. The Company also issued 2,358,506 of common shares related to the cashless conversion of warrants. The exercise price of
the warrants was between $0.30 and $0.45. The market price of the common stock during the period these warrants were exercised was between $0.656 and $0.630.

NOTE 9. Related Parties (As Restated).

On February 25, 2008, the Companys former CEO received a total of
1,174,735 shares of the Companys common stock upon conversion of the principal and accrued interest owed to him with respect to the Junior Secured Facility.

On March 3, 2008, the Companys CEO received a total of 105,566 shares of the Companys common stock upon conversion of the principal and accrued interest owed to him with respect to the Junior Secured
Facility.

In September 2007, the Company entered into an advisory agreement with Aequitas Capital Management, an investor. During the
first quarter of 2008, pursuant to the completed private placement of $19.0 million of securities, the Company paid Aequitas an advisory fee of $0.4 million. On February 12, 2008, Aequitas received a total of 6,086,398 shares of the
Companys common stock upon conversion of the principal and accrued interest owed to it with respect to the Junior Secured Facility.

In November 2007, the Company entered into an advisory agreement with Capstone Investments, an investor. During the first quarter of 2008, pursuant to the completed private placement of $19.0 million of securities, the Company paid Capstone
an advisory fee of $1.3 million and issued warrants to purchase 2,660,000 shares of common stock at $0.73 per share with an initial fair value of $1.5 million, exercisable for five years.



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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 $6.5 million and $1.9 million for the three months ended March 31, 2008 and 2007, respectively, which represents professional services, remote network
management services, and the use of automated pricing software. Revenues generated from Connectivity Solutions revenues totaled $3.0 million and $2.1 million for the three months ended March 31, 2008 and 2007, respectively, from the design,
delivery, and management of networks. A major Optimization Solutions customer represented 41% of total 2008 revenues and 58% of total accounts receivable at March 31, 2008.

Revenues generated outside the United States during the three months ended March 31, 2008 and totaled $0.6 million and $0.3 million, respectively.
All of the Companys international revenue was generated in the European Union. As of March 31, 2008 and December 31, 2007, the Companys identifiable assets outside the United States totaled $0.3 million and $0.04 million,
respectively. All of the Companys international identifiable assets were located in the United Kingdom.

NOTE 11. Going Concern.

Cash on hand at March 31, 2008 was $6.7 million (not including $0.2 million restricted for outstanding letters of credit). The Company has
incurred operating losses of $2.6 million and $4.1 million, respectively. The results for the three months ended March 31, 2008 and 2007 included non-cash charges of $2.0 million and $1.4 million, respectively, related to stock-based
compensation expense. Cash used in operating activities from continuing operations was $3.9 million and $5.0 million for the three months ended March 31, 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 in the last three quarters 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.

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 will be used for operations and to support the Companys successful new business development efforts.

NOTE 12. Subsequent Events.

On April 29, 2008, pursuant to the terms of the Secured Convertible Debentures discussed
in the Debt footnote above, the Company filed a Form S-1 Registration Statement to register 57 million shares of its common stock  which is the amount of shares underlying the debentures and related warrants.

On May 1, 2008, the Companys Board of Directors amended and restated the Companys By-laws to increase the number of Board members to
nine. As a result of filling the vacancies created by the expansion of the Board and the resignation of certain Board members, the Board now includes financial experts and meets independence thresholds. The Company granted options to purchase
625,000 shares of its common stock at an exercise price of $0.59 per share to each of the three resigning Directors. In addition, options to purchase 400,000 shares of common stock at an exercise price of $0.60 per share were granted to each of the
six new Board members. The exercise price is equal to the average closing price of the Companys common stock on the OTCBB for the last ten trading days immediately preceding the date of grant. The options expire in May 2018.

Also on May 1, 2008, the Company adopted a 2008 Long Term Incentive Plan (Plan) for providing stock options and other equity-based
compensation awards to its employees and other persons assisting the Company. Initially, up to 22,000,000 shares of common stock are issuable under the Plan; however, the Plan contains an evergreen provision such that each year the
number of



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shares of common stock issuable under the Plan shall automatically increase, so that the amount of shares issuable under the Plan is equal to fifteen percent
(15%) of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year. In no event shall the number of shares of common stock issuable under the Plan exceed 30,000,000
shares. At the date of adoption of the Plan, options to purchase 1,875,000 shares of common stock were issued under the plan.

NOTE 13: Restatement of
Consolidated Financial Statements.

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, on an as converted basis, and required evaluation in accordance with SFAS 133 and EITF 00-19.

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 consolidated 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 consolidated balance sheet. These liabilities are revalued at each balance sheet date and mark to fair value with
the corresponding adjustment recognized as a gain or loss on warrants and derivatives in the consolidated statements of operations.

This restatement requires a balance sheet reclassification of warrants and preferred stock from the consolidated statement of shareholders equity to a liability account. In addition, it requires a non-cash charge to mark the
liabilities to fair value at each balance sheet date. In accordance with SFAS No. 154, Accounting Changes and Error Corrections, the Company has restated its previously issued financial statements, as described below.

The following table sets forth effects of the restatement on the Companys previously reported consolidated balance sheets,
consolidated statements of operations, consolidated statements of shareholders equity and the consolidated statements of cash flow for the year ended December 31, 2006.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|------------------------------------------------- |  | ----------------------- | ----------- | - | ----------- | - | ----------- | ---------- |  | - | ----------- | -
|                                                  |  | As of December 31, 2006 |            
|                                                  |  | As PreviouslyReported   |             |   | Adjustments |   |             | AsRestated | 
|                                                  |  |                        
|ASSETS                                            |  |                         |             |   |             |   |             |            |  |   |             |  
|CURRENT ASSETS                                    |  |                         |             |   |             |   |             |            |  |   |             |  
|Cash and cash equivalents                         |  | $                       | 1,203,819   |   |             | $ |            |            |  | $ | 1,203,819   |  
|Accounts receivable, net                          |  |                         | 1,592,110   |   |             |   |            |            |  |   | 1,592,110   |  
|Prepaid expenses and other current assets         |  |                         | 516,592     |   |             |   |            |            |  |   | 516,592     |  
|Current assets of discontinued operations         |  |                         | 2,429,677   |   |             |   |            |            |  |   | 2,429,677   |  
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|Total Current Assets                              |  |                         | 5,742,198   |   |             |   |            |            |  |   | 5,742,198   |  
|Property and equipment, net                       |  |                         | 3,915,820   |   |             |   |            |            |  |   | 3,915,820   |  
|Intangibles, net                                  |  |                         | 9,493,179   |   |             |   |            |            |  |   | 9,493,179   |  
|Goodwill                                          |  |                         | 12,513,090  |   |             |   |            |            |  |   | 12,513,090  |  
|Other assets                                      |  |                         | 38,508      |   |             |   |            |            |  |   | 38,508      |  
|Long-term assets of discontinued operations       |  |                         | 5,677,953   |   |             |   |            |            |  |   | 5,677,953   |  
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|TOTAL ASSETS                                      |  | $                       | 37,380,748  |   |             | $ |            |            |  | $ | 37,380,748  |  
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|LIABILITIES AND SHAREHOLDERS DEFICIT             |  |                         |             |   |             |   |             |            |  |   |             |  
|CURRENT LIABILITIES                               |  |                         |             |   |             |   |             |            |  |   |             |  
|Current maturities of long-term debt              |  | $                       | 21,243,010  |   |             | $ | (1,782,500  | ) A        |  | $ | 19,460,510  |  
|Accounts payable                                  |  |                         | 1,429,882   |   |             |   |            |            |  |   | 1,429,882   |  
|Accrued expenses                                  |  |                         | 3,352,806   |   |             |   |            |            |  |   | 3,352,806   |  
|Deferred revenue                                  |  |                         | 608,461     |   |             |   |            |            |  |   | 608,461     |  
|Current liabilities of discontinued operations    |  |                         | 7,378,404   |   |             |   |            |            |  |   | 7,378,404   |  
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|Total Current Liabilities                         |  |                         | 34,012,563  |   |             |   | (1,782,500  | )          |  |   | 32,230,063  |  
|Liabilities for warrants to purchase common stock |  |                         |            |   |             |   | 15,024,383  | B          |  |   | 15,024,383  |  
|Embedded derivatives of convertible debt          |  |                         |            |   |             |   | 18,742,378  | C          |  |   | 18,742,378  |  
|Long-term portion of debt                         |  |                         | 777,260     |   |             |   | 51,648      | A          |  |   | 828,908     |  
|Deferred revenue                                  |  |                         | 112,222     |   |             |   |            |            |  |   | 112,222     |  
|Long-term liabilities of discontinued operations  |  |                         | 570,587     |   |             |   |            |            |  |   | 570,587     |  
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|Total Liabilities                                 |  |                         | 35,472,632  |   |             |   | 32,035,909  |            |  |   | 67,508,541  |  
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|SHAREHOLDERS DEFICIT                             |  |                         |             |   |             |   |             |            |  |   |             |  
|Preferred stock                                   |  |                         |            |   |             |   |            |            |  |   |            |  
|Common stock                                      |  |                         | 2,101       |   |             |   |            |            |  |   | 2,101       |  
|Additional paid-in capital                        |  |                         | 24,519,495  |   |             |   | (5,222,840  | ) D        |  |   | 19,296,655  |  
|Foreign currency translation adjustment           |  |                         | (48,904     | ) |             |   |            |            |  |   | (48,904     | )
|Accumulated deficit                               |  |                         | (22,564,576 | ) |             |   | (26,813,069 | ) E        |  |   | (49,377,645 | )
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|Total Shareholders Deficit                       |  |                         | 1,908,116   |   |             |   | (32,035,909 | )          |  |   | (30,127,793 | )
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT       |  | $                       | 37,380,748  |   |             | $ |            |            |  | $ | 37,380,748  |  
|                                                  |  |                         |             |   |             |   |             |            |  |   |             |  



|A | Adjust long-term debt and current maturities as a result of embedded derivatives valuation.
|- | -------------------------------------------------------------------------------------------

|B | Record fair value of outstanding warrants to purchase common stock
|- | ------------------------------------------------------------------

|C | Record fair value of embedded derivative.
|- | -----------------------------------------

|D | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|E | Restatement adjustments to income statement for the year ended December 31, 2006.
|- | ---------------------------------------------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|---------------------------------------------- | --------------------- | ---------------------------- | ----------- | ----------- |  | - | ----------- | - |  | - | ----------- | -
|                                               |                       | Year Ended December 31, 2006 |            
|                                               | As PreviouslyReported |                              |             | Adjustments |  |   | AsRestated  |  
|                                               |                       |                             
|REVENUE                                        |                       | $                            | 1,557,251   |             |  | $ |            |   |  | $ | 1,557,251   |  
|COST OF SALES                                  |                       |                              | 804,667     |             |  |   |            |   |  |   | 804,667     |  
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|GROSS MARGIN                                   |                       |                              | 752,584     |             |  |   |            |   |  |   | 752,584     |  
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|OPERATING EXPENSES:                            |                       |                              |             |             |  |   |             |   |  |   |             |  
|Compensation                                   |                       |                              | 3,770,237   |             |  |   |            |   |  |   | 3,770,237   |  
|Travel and entertainment                       |                       |                              | 216,730     |             |  |   |            |   |  |   | 216,730     |  
|Occupancy                                      |                       |                              | 133,703     |             |  |   |            |   |  |   | 133,703     |  
|Professional services                          |                       |                              | 1,153,177   |             |  |   |            |   |  |   | 1,153,177   |  
|Insurance                                      |                       |                              | 130,224     |             |  |   |            |   |  |   | 130,224     |  
|Depreciation and amortization                  |                       |                              | 406,442     |             |  |   |            |   |  |   | 406,442     |  
|Other operating expenses                       |                       |                              | 262,377     |             |  |   |            |   |  |   | 262,377     |  
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|TOTAL OPERATING EXPENSES                       |                       |                              | 6,072,890   |             |  |   |            |   |  |   | 6,072,890   |  
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|OPERATING LOSS                                 |                       |                              | (5,320,306  | )           |  |   |            |   |  |   | (5,320,306  | )
|(Gain) loss on warrants and derivatives        |                       |                              |            |             |  |   | 18,180,881  | A |  |   | 18,180,881  |  
|Interest expense                               |                       |                              | 3,524,991   |             |  |   | 8,632,188   | B |  |   | 12,157,179  |  
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|Loss from continuing operations                |                       |                              | (8,845,297  | )           |  |   | (26,813,069 | ) |  |   | (35,658,366 | )
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|Loss from discontinued operations, net of tax  |                       |                              | (2,734,964  | )           |  |   |            |   |  |   | (2,734,964  | )
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|NET LOSS                                       |                       | $                            | (11,580,261 | )           |  | $ | (26,813,069 | ) |  | $ | (38,393,330 | )
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|LOSS PER SHARE OF COMMON STOCK                 |                       |                              |             |             |  |   |             |   |  |   |             |  
|Loss from continuing operations                |                       |                              | (0.48       | )           |  |   | (1.46       | ) |  |   | (1.95       | )
|Loss from discontinued operations              |                       |                              | (0.15       | )           |  |   | 0.00        |   |  |   | (0.15       | )
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|Net loss per common share                      |                       |                              | (0.63       | )           |  |   | (1.46       | ) |  |   | (2.10       | )
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  
|Weighted average shares outstanding - Restated |                       |                              | 18,316,358  |             |  |   | 18,316,358  |   |  |   | 18,316,358  |  
|                                               |                       |                              |             |             |  |   |             |   |  |   |             |  



|A | Record (gain) loss on fair value of stock warrants issued and beneficial conversion feature of convertible debt and preferred stock issued.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|B | Adjust for amortization of fair value of convertible debt warrants and beneficial conversion feature recorded as debt discount.
|- | -------------------------------------------------------------------------------------------------------------------------------



29



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

As Previously Reported



|                                        |  |              |  |                         |  |             |       |                           |   |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|--------------------------------------- |  | ------------ |  | ----------------------- |  | ----------- | ----- | ------------------------- | - | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | ------- | - | ----------------- | - | ----------- | - |  | - | ----------- | -
|                                        |  | CommonShares |  | Series BPreferredShares |  | CommonStock |       | Additional Paid-inCapital |   | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |         |   | ComprehensiveLoss |  
|Balance, January 1, 2006                |  | 17,015,754   |  |                        |  | $           | 1,701 |                           | $ | 12,831,414         |  | $ | (10,984,315                          | ) |  | $                     |        |   |                   | $ | 1,848,800   |   |  | $ |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Stock issued for acquisition of 20/20   |  | 3,899,315    |  | 2,516                   |  |             | 390   |                           |   | 5,167,244          |  |   |                                     |   |  |                       |        |   |                   |   | 5,167,634   |   |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Stock-based compensation expense        |  |              |  |                         |  |             |      |                           |   | 1,297,769          |  |   |                                      |   |  |                       |         |   |                   |   | 1,297,769   |   |  |   |             |  
|                                        |  |              |  |                         |  |             |       |                          
|Stock issued for consulting services    |  | 100,000      |  |                        |  |             | 10    |                           |   | 134,990            |  |   |                                     |   |  |                       |        |   |                   |   | 135,000     |   |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Warrants issued to employees            |  |             |  |                        |  |             |      |                           |   | 502,591            |  |   |                                     |   |  |                       |        |   |                   |   | 502,591     |   |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Warrants issued to consultants          |  |             |  |                        |  |             |      |                           |   | 388,366            |  |   |                                     |   |  |                       |        |   |                   |   | 388,366     |   |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Warrants issued with debt financing     |  |             |  |                        |  |             |      |                           |   | 4,197,121          |  |   |                                     |   |  |                       |        |   |                   |   | 4,197,121   |   |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Foreign currency translation adjustment |  |             |  |                        |  |             |      |                           |   |                   |  |   |                                     |   |  |                       | (48,904 | ) |                   |   | (48,904     | ) |  |   | (48,904     | )
|Net loss for 2006                       |  |              |  |                         |  |             |       |                           |   |                    |  |   | (11,580,261                          | ) |  |                       |         |   |                   |   | (11,580,261 | ) |  |   | (11,580,261 | )
|                                        |  |              |  |                         |  |             |       |                           |   |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|Balance, December 31, 2006              |  | 21,015,069   |  | 2,516                   |  | $           | 2,101 |                           | $ | 24,519,495         |  | $ | (22,564,576                          | ) |  | $                     | (48,904 | ) |                   | $ | 1,908,116   |   |  | $ | (11,629,165 | )
|                                        |  |              |  |                         |  |             |       |                           |   |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  



30



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

As Restated



|                                        |  |              |  |                         |  |             |       |                           |   |            |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|--------------------------------------- |  | ------------ |  | ----------------------- |  | ----------- | ----- | ------------------------- | - | ---------- | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | ------- | - | ----------------- | - | ----------- | - |  | - | ----------- | -
|                                        |  | CommonShares |  | Series BPreferredShares |  | CommonStock |       | Additional Paid-inCapital |   |            | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |         |   | ComprehensiveLoss |  
|Balance, January 1, 2006                |  | 17,015,754   |  |                        |  | $           | 1,701 |                           | $ | 12,831,414 |                    |  | $ | (10,984,315                          | ) |  | $                     |        |   |                   | $ | 1,848,800   |   |  | $ |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Stock issued for acquisition of 20/20   |  | 3,899,315    |  | 2,516                   |  |             | 390   |                           |   | 5,167,244  |                    |  |   |                                     |   |  |                       |        |   |                   |   | 5,167,634   |   |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Stock-based compensation expense        |  |              |  |                         |  |             |      |                           |   | 1,243,864  |                    |  |   |                                     |   |  |                       |        |   |                   |   | 1,243,864   |   |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Stock issued for consulting services    |  | 100,000      |  |                         |  |             | 10    |                           |   | 134,990    |                    |  |   |                                     |   |  |                       |        |   |                   |   | 135,000     |   |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Reclass of warrants to liability        |  |              |  |                         |  |             |      |                           |   | (80,857    | )                  |  |   |                                     |   |  |                       |        |   |                   |   | (80,857     | ) |  |   |            |  
|                                        |  |              |  |                         |  |             |       |                          
|Foreign currency translation adjustment |  |              |  |                         |  |             |       |                           |   |            |                    |  |   |                                      |   |  |                       | (48,904 | ) |                   |   | (48,904     | ) |  |   | (48,904     | )
|                                        |  |              |  |                         |  |             |       |                          
|Net loss for 2006                       |  |              |  |                         |  |             |      |                           |   |           |                    |  |   | (38,393,330                          | ) |  |                       |        |   |                   |   | (38,393,330 | ) |  |   | (38,393,330 | )
|                                        |  |              |  |                         |  |             |       |                           |   |            |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|Balance, December 31, 2006              |  | 21,015,069   |  | 2,516                   |  | $           | 2,101 |                           | $ | 19,296,655 |                    |  | $ | (49,377,645                          | ) |  | $                     | (48,904 | ) |                   | $ | (30,127,793 | ) |  | $ | (38,442,234 | )
|                                        |  |              |  |                         |  |             |       |                           |   |            |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|                                        |  |              |  |                         |  |             |       |                           |   | A          |                    |  |   | B                                    |   |  |                       |         |   |                   |   |             |   |  |   |             |  



|A | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|B | Restatement adjustments to income statement.
|- | --------------------------------------------



31



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                           |  |                           |             |   |                |   |             |  
|------------------------------------------------------------------------------------------ |  | ------------------------- | ----------- | - | -------------- | - | ----------- | -
|                                                                                           |  | Year Ended December 31    |            
|                                                                                           |  | 2006As PreviouslyReported |             |   | 2006AsRestated |  
|                                                                                           | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                       |  |                           |             |   |                |   |             |  
|Net loss from continuing operations                                                        |  | $                         | (8,845,297  | ) |                | $ | (35,658,366 | )
|                                                                                           |  |                           |             |   |                |   |             |  
|Adjustments to reconcile note loss to net cash provided by (used in) operating activities: |  |                           |             |   |                |   |             |  
|Depreciation and amortization                                                              |  |                           | 406,442     |   |                |   | 406,442     |  
|Consulting expenses paid in common stock and warrants                                      |  |                           | 523,366     |   |                |   | 523,366     |  
|Amortization of debt discount                                                              |  |                           | 2,809,057   |   |                |   | 11,441,245  |  
|Stock-based compensation                                                                   |  |                           | 1,800,359   |   |                |   | 1,800,359   |  
|Change in fair value of embedded derivatives and warrants                                  |  |                           |            |   |                |   | 18,180,881  |  
|Changes in working capital items, net of amounts acquired:                                 |  |                           |             |   |                |   |             |  
|Accounts receivable                                                                        |  |                           | (220,906    | ) |                |   | (220,906    | )
|Prepaid expenses and other current assets                                                  |  |                           | (200,478    | ) |                |   | (200,478    | )
|Accounts payable                                                                           |  |                           | (406,295    | ) |                |   | (406,295    | )
|Accrued expenses                                                                           |  |                           | 141,583     |   |                |   | 141,583     |  
|Deferred revenue                                                                           |  |                           | 47,420      |   |                |   | 47,420      |  
|                                                                                           |  |                           |             |   |                |   |             |  
|Total Adjustments                                                                          |  |                           | 4,900,548   |   |                |   | 31,713,617  |  
|                                                                                           |  |                           |             |   |                |   |             |  
|Net cash used in continuing operations                                                     |  |                           | (3,944,749  | ) |                |   | (3,944,749  | )
|Net cash used in discontinued operations                                                   |  |                           | (1,389,074  | ) |                |   | (1,389,074  | )
|                                                                                           |  |                           |             |   |                |   |             |  
|Net cash used in operating activities                                                      |  |                           | (5,333,823  | ) |                |   | (5,333,823  | )
|                                                                                           |  |                           |             |   |                |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                       |  |                           |             |   |                |   |             |  
|Acquisition of 20/20, net of cash acquired                                                 |  |                           | 49,856      |   |                |   | 49,856      |  
|Acquisition of CentrePath, net of cash acquired                                            |  |                           | (5,011,672  | ) |                |   | (5,011,672  | )
|Acquisition of Global Capacity Group, net of cash overdraft                                |  |                           | (5,326,879  | ) |                |   | (5,326,879  | )
|                                                                                           |  |                           |             |   |                |   |             |  
|Net cash used in investing activities                                                      |  |                           | (10,288,695 | ) |                |   | (10,288,695 | )
|                                                                                           |  |                           |             |   |                |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                       |  |                           |             |   |                |   |             |  
|Proceeds from debt                                                                         |  |                           | 16,438,399  |   |                |   | 16,438,399  |  
|                                                                                           |  |                           |             |   |                |   |             |  
|Net cash provided by financing activities                                                  |  |                           | 16,438,399  |   |                |   | 16,438,399  |  
|                                                                                           |  |                           |             |   |                |   |             |  
|Effect of exchange rates on cash and cash equivalents                                      |  |                           | (48,904     | ) |                |   | (48,904     | )
|                                                                                           |  |                           |             |   |                |   |             |  
|Increase (decrease) in cash and cash equivalents                                           |  |                           | 766,977     |   |                |   | 766,977     |  
|                                                                                           |  |                          
|Cash and cash equivalents, beginning                                                       |  |                           | 436,842     |   |                |   | 436,842     |  
|                                                                                           |  |                           |             |   |                |   |             |  
|Cash and cash equivalents, ending                                                          |  | $                         | 1,203,819   |   |                | $ | 1,203,819   |  
|                                                                                           |  |                           |             |   |                |   |             |  



|                                                                            |  |                           |  |               
|--------------------------------------------------------------------------- |  | ------------------------- |  | --------------
|                                                                            |  | Year Ended December 31   
|                                                                            |  | 2006As PreviouslyReported |  | 2006AsRestated
|                                                                            | 
|SUPPLEMENTAL CASH FLOWS INFORMATION                                         |  |                           |  |               
|Cash paid for interest for continuing operations                            |  | 403,701                   |  | 403,701       
|                                                                            |  |                          
|NON-CASH INVESTING AND FINANCING ACTIVITIES                                 |  |                           |  |               
|Common stock issued for the acquisition of 20/20                            |  | 5,167,634                 |  | 5,167,634     
|Debt refinanced for the acquisition of 20/20                                |  | 3,559,416                 |  | 3,559,416     
|Reclassification of warrants from additional paid-in capital to liabilities |  |                          |  | 80,857        



32



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The following table sets forth effects of the restatement on the Companys previously reported
consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders equity and the consolidated statements of cash flow for the year ended December 31, 2007 and the effect of the restatement on the
previously reported consolidated statements of operations for the three months ended March 31, 2007, June 30, 2007 and September 30, 2007.

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|------------------------------------------------- | --------------------- | ----------------------- | ----------- | ----------- |  | - | ----------- | --- |  | - | ------------ | -
|                                                  |                       | As of December 31, 2007 |            
|                                                  | As PreviouslyReported |                         |             | Adjustments |  |   | AsRestated  |    
|                                                  |                       |                        
|ASSETS                                            |                       |                         |             |             |  |   |             |     |  |   |              |  
|CURRENT ASSETS                                    |                       |                         |             |             |  |   |             |     |  |   |              |  
|Cash and cash equivalents                         |                       | $                       | 859,410     |             |  | $ |            |     |  | $ | 859,410      |  
|Accounts receivable, net                          |                       |                         | 1,781,944   |             |  |   |            |     |  |   | 1,781,944    |  
|Prepaid expenses and other current assets         |                       |                         | 1,645,797   |             |  |   |            |     |  |   | 1,645,797    |  
|Current assets of discontinued operations         |                       |                         | 2,386,392   |             |  |   |            |     |  |   | 2,386,392    |  
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|Total Current Assets                              |                       |                         | 6,673,543   |             |  |   |            |     |  |   | 6,673,543    |  
|Property and equipment, net                       |                       |                         | 1,418,432   |             |  |   |            |     |  |   | 1,418,432    |  
|Intangibles, net                                  |                       |                         | 8,307,802   |             |  |   |            |     |  |   | 8,307,802    |  
|Goodwill                                          |                       |                         | 12,513,090  |             |  |   |            |     |  |   | 12,513,090   |  
|Other assets                                      |                       |                         | 477,597     |             |  |   |            |     |  |   | 477,597      |  
|Long-term assets of discontinued operations       |                       |                         | 1,031,490   |             |  |   |            |     |  |   | 1,031,490    |  
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|TOTAL ASSETS                                      |                       | $                       | 30,421,954  |             |  | $ |            |     |  | $ | 30,421,954   |  
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|LIABILITIES AND SHAREHOLDERS DEFICIT             |                       |                         |             |             |  |   |             |     |  |   |              |  
|CURRENT LIABILITIES                               |                       |                         |             |             |  |   |             |     |  |   |              |  
|Current maturities of long-term debt              |                       | $                       | 5,182,023   |             |  | $ | (97,909     | ) A |  | $ | 5,084,114    |  
|Accounts payable                                  |                       |                         | 2,750,186   |             |  |   |            |     |  |   | 2,750,186    |  
|Accrued expenses                                  |                       |                         | 3,231,261   |             |  |   |            |     |  |   | 3,231,261    |  
|Deferred revenue                                  |                       |                         | 536,599     |             |  |   |            |     |  |   | 536,599      |  
|Current liabilities of discontinued operations    |                       |                         | 2,827,272   |             |  |   |            |     |  |   | 2,827,272    |  
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|Total Current Liabilities                         |                       |                         | 14,527,341  |             |  |   | (97,909     | )   |  |   | 14,429,432   |  
|Liabilities for warrants to purchase common stock |                       |                         |            |             |  |   | 35,882,879  | B   |  |   | 35,882,879   |  
|Embedded derivatives of convertible debt          |                       |                         |            |             |  |   | 9,198,576   | C   |  |   | 9,198,576    |  
|Long-term portion of debt                         |                       |                         | 6,365,985   |             |  |   | (2,876,251  | ) A |  |   | 3,489,734    |  
|Deferred revenue                                  |                       |                         | 76,270      |             |  |   |            |     |  |   | 76,270       |  
|Long-term liabilities of discontinued operations  |                       |                         | 727,276     |             |  |   |            |     |  |   | 727,276      |  
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|Total Liabilities                                 |                       |                         | 21,696,872  |             |  |   | 42,107,295  |     |  |   | 63,804,167   |  
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|SHAREHOLDERS DEFICIT                             |                       |                         |             |             |  |   |             |     |  |   |              |  
|Preferred stock                                   |                       |                         |            |             |  |   |            |     |  |   |             |  
|Common stock                                      |                       |                         | 12,374      |             |  |   |            |     |  |   | 12,374       |  
|Additional paid-in capital                        |                       |                         | 81,849,171  |             |  |   | (4,387,184  | ) D |  |   | 77,461,987   |  
|Foreign currency translation adjustment           |                       |                         | (89,533     | )           |  |   |            |     |  |   | (89,533      | )
|Accumulated deficit                               |                       |                         | (73,046,930 | )           |  |   | (37,720,111 | ) E |  |   | (110,767,041 | )
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|Total Shareholders Deficit                       |                       |                         | 8,725,082   |             |  |   | (42,107,295 | )   |  |   | (33,382,213  | )
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT       |                       | $                       | 30,421,954  |             |  | $ |            |     |  | $ | 30,421,954   |  
|                                                  |                       |                         |             |             |  |   |             |     |  |   |              |  



|A | Adjust long-term debt and current maturities as a result of embedded derivatives valuation.
|- | -------------------------------------------------------------------------------------------

|B | Record fair value of outstanding warrants to purchase common stock
|- | ------------------------------------------------------------------

|C | Record fair value of embedded derivative.
|- | -----------------------------------------

|D | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|E | Restatement adjustments to income statement for the year ended December 31, 2007.
|- | ---------------------------------------------------------------------------------



33



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|-------------------------------------------------------------------------------------------- | --------------------- | ---------------------------- | ----------- | ----------- |  | - | ----------- | --- |  | - | ----------- | -
|                                                                                             |                       | Year Ended December 31, 2007 |            
|                                                                                             | As PreviouslyReported |                              |             | Adjustments |  |   | AsRestated  |    
|                                                                                             |                       |                             
|REVENUE                                                                                      |                       | $                            | 17,228,050  |             |  | $ |            |     |  | $ | 17,228,050  |  
|COST OF SALES                                                                                |                       |                              | 12,175,462  |             |  |   |            |     |  |   | 12,175,462  |  
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|GROSS MARGIN                                                                                 |                       |                              | 5,052,588   |             |  |   |            |     |  |   | 5,052,588   |  
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|OPERATING EXPENSES:                                                                          |                       |                              |             |             |  |   |             |     |  |   |             |  
|Compensation                                                                                 |                       |                              | 21,370,425  |             |  |   |            |     |  |   | 21,370,425  |  
|Travel and entertainment                                                                     |                       |                              | 1,369,711   |             |  |   |            |     |  |   | 1,369,711   |  
|Occupancy                                                                                    |                       |                              | 1,776,331   |             |  |   |            |     |  |   | 1,776,331   |  
|Professional services                                                                        |                       |                              | 6,595,209   |             |  |   |            |     |  |   | 6,595,209   |  
|Insurance                                                                                    |                       |                              | 316,766     |             |  |   |            |     |  |   | 316,766     |  
|Depreciation and amortization                                                                |                       |                              | 3,497,262   |             |  |   |            |     |  |   | 3,497,262   |  
|Other operating expenses                                                                     |                       |                              | 738,437     |             |  |   |            |     |  |   | 738,437     |  
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|TOTAL OPERATING EXPENSES                                                                     |                       |                              | 35,664,141  |             |  |   |            |     |  |   | 35,664,141  |  
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|OPERATING LOSS                                                                               |                       |                              | (30,611,553 | )           |  |   |            |     |  |   | (30,611,553 | )
|Loss on disposal of assets                                                                   |                       |                              | 500,914     |             |  |   |            |     |  |   | 500,914     |  
|Registration rights penalty                                                                  |                       |                              | 2,531,428   |             |  |   |            |     |  |   | 2,531,428   |  
|(Gain) loss on warrants and derivatives                                                      |                       |                              |            |             |  |   | (14,538,890 | ) A |  |   | (14,538,890 | )
|Interest expense                                                                             |                       |                              | 11,877,806  |             |  |   | 27,091,298  | B   |  |   | 38,969,104  |  
|Extinguishment of debt                                                                       |                       |                              |            |             |  |   | (1,645,366  | ) C |  |   | (1,645,366  | )
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|Loss from continuing operations                                                              |                       |                              | (45,521,701 | )           |  |   | (10,907,042 | )   |  |   | (56,428,743 | )
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|Loss from discontinued operations, net of tax                                                |                       |                              | (4,960,653  | )           |  |   |            |     |  |   | (4,960,653  | )
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|NET LOSS                                                                                     |                       |                              | (50,482,354 | )           |  |   | (10,907,042 | )   |  |   | (61,389,396 | )
|Deemed dividend warrants and beneficial conversion features issued to preferred shareholders |                       |                              | (20,424,432 | )           |  |   | 20,424,432  | D   |  |   |            |  
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|Net income (loss) applicable to common shareholders                                          |                       | $                            | (70,906,786 | )           |  | $ | 9,517,390   |     |  | $ | (61,389,396 | )
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|LOSS PER SHARE OF COMMON STOCK                                                               |                       |                              |             |             |  |   |             |     |  |   |             |  
|Income (loss) from continuing operations                                                     |                       |                              | (1.22       | )           |  |   | 0.18        |     |  |   | (1.04       | )
|Loss from discontinued operations                                                            |                       |                              | (0.10       | )           |  |   | (0.00       | )   |  |   | (0.10       | )
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|Net income (loss) applicable to common shareholders                                          |                       |                              | (1.32       | )           |  |   | 0.18        |     |  |   | (1.14       | )
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  
|Weighted average shares outstanding - Restated                                               |                       |                              | 53,801,855  |             |  |   | 53,801,855  |     |  |   | 53,801,855  |  
|                                                                                             |                       |                              |             |             |  |   |             |     |  |   |             |  



|A | Record (gain) loss on fair value of stock warrants issued and beneficial conversion feature of convertible debt and preferred stock issued.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|B | Adjust for amortization of fair value of convertible debt warrants and beneficial conversion feature recorded as debt discount.
|- | -------------------------------------------------------------------------------------------------------------------------------

|C | Payoff of bridge loans not previously reported as extinguishment of debt.
|- | -------------------------------------------------------------------------

|D | Reverse deemed dividend recorded as issuance of preferred stock as a result of EITF 00-19 liability change.
|- | -----------------------------------------------------------------------------------------------------------



34



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

As Previously Reported



|                                                                                   |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |             |   |                      |   |         |                   |  |   |             |   |  |   |             |  
|---------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | - |  | ----------------------- | - |  | ----------- | ------ | -------------- | - | -- | ------------------------ |  | - | ------------------ | - |  | ------------------------------------ | ----------- | - | -------------------- | - | ------- | ----------------- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                   |  | CommonShares |  | Series AAPreferredShares |   |  | Series BPreferredShares |   |  | CommonStock |        | PreferredStock |   |    | AdditionalPaid-inCapital |  |   | AccumulatedDeficit |   |  | ForeignCurrencyTranslationAdjustment |             |   | TotalEquity(Deficit) |   |         | ComprehensiveLoss | 
|Balance, January 1, 2007                                                           |  | 21,015,069   |  |                         |   |  | 2,516                   |   |  | $           | 2,101  |                | $ |   |                          |  | $ | 24,519,495         |   |  | $                                    | (22,564,576 | ) |                      | $ | (48,904 | )                 |  | $ | 1,908,116   |   |  | $ |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Issuance of Series AA preferred stock warrants                                     |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 9,182,990          |   |  |                                      |            |   |                      |   |        |                   |  |   | 9,182,990   |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Beneficial conversion feature of Series AA preferred stock                         |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 11,241,442         |   |  |                                      |            |   |                      |   |        |                   |  |   | 11,241,442  |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Deemed dividend related to conversion of Series AA preferred stock to common stock |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | (20,424,432        | ) |  |                                      |            |   |                      |   |        |                   |  |   | (20,424,432 | ) |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Issuance of Series AA preferred stock                                              |  |             |  | 20,635                   |   |  |                        |   |  |             |       |                |   | 2  |                          |  |   | 17,930,608         |   |  |                                      |            |   |                      |   |        |                   |  |   | 17,930,610  |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Conversion of preferred stock to common stock                                      |  | 49,552,714   |  | (20,635                  | ) |  | (2,516                  | ) |  |             | 4,955  |                |   | (2 | )                        |  |   | (4,953             | ) |  |                                      |            |   |                      |   |        |                   |  |   |            |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Beneficial conversion feature of junior credit facility                            |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 3,010,451          |   |  |                                      |            |   |                      |   |        |                   |  |   | 3,010,451   |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Stock warrants issued with debt financing                                          |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 8,453,916          |   |  |                                      |            |   |                      |   |        |                   |  |   | 8,453,916   |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Stock and warrants issued for services                                             |  | 5,000,000    |  |                         |   |  |                        |   |  |             | 500    |                |   |   |                          |  |   | 5,202,455          |   |  |                                      |            |   |                      |   |        |                   |  |   | 5,202,955   |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Warrant conversion                                                                 |  | 25,279,502   |  |                         |   |  |                        |   |  |             | 2,528  |                |   |   |                          |  |   | 3,789,397          |   |  |                                      |            |   |                      |   |        |                   |  |   | 3,791,925   |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Registration rights penalty                                                        |  | 4,784,623    |  |                         |   |  |                        |   |  |             | 478    |                |   |   |                          |  |   | 2,530,950          |   |  |                                      |            |   |                      |   |        |                   |  |   | 2,531,428   |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Debt to equity conversion                                                          |  | 1,019,723    |  |                         |   |  |                        |   |  |             | 102    |                |   |   |                          |  |   | 152,814            |   |  |                                      |            |   |                      |   |        |                   |  |   | 152,916     |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Stock-based compensation expense                                                   |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 13,791,601         |   |  |                                      |            |   |                      |   |        |                   |  |   | 13,791,601  |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Issuance of common stock                                                           |  | 17,100,408   |  |                         |   |  |                        |   |  |             | 1,710  |                |   |   |                          |  |   | 2,472,437          |   |  |                                      |            |   |                      |   |        |                   |  |   | 2,474,147   |   |  |   |            |  
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Foreign currency translation adjustment                                            |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   |                   |   |  |                                      |            |   |                      |   | (40,629 | )                 |  |   | (40,629     | ) |  |   | (40,629     | )
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|Net loss for 2007                                                                  |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   |                   |   |  |                                      | (50,482,354 | ) |                      |   |        |                   |  |   | (50,482,354 | ) |  |   | (50,482,354 | )
|                                                                                   |  |              |  |                          |   |  |                         |   |  |            
|                                                                                   |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |             |   |                      |   |         |                   |  |   |             |   |  |   |             |  
|Balance, December 31, 2007                                                         |  | 123,752,039  |  |                         |   |  |                        |   |  | $           | 12,374 |                | $ |   |                          |  | $ | 81,849,171         |   |  | $                                    | (73,046,930 | ) |                      | $ | (89,533 | )                 |  | $ | 8,725,082   |   |  | $ | (50,522,983 | )
|                                                                                   |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |             |   |                      |   |         |                   |  |   |             |   |  |   |             |  



35



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

As Restated



|                                                                  |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                      |   |         |                   |  |   |             |   |  |   |             |  
|----------------------------------------------------------------- |  | ------------ |  | ------------------------ | - |  | ----------------------- | - |  | ----------- | ------ | -------------- | - | -- | ------------------------ |  | - | ------------------ | - |  | ------------------------------------ | ------------ | - | -------------------- | - | ------- | ----------------- |  | - | ----------- | - |  | - | ----------- | -
|                                                                  |  | CommonShares |  | Series AAPreferredShares |   |  | Series BPreferredShares |   |  | CommonStock |        | PreferredStock |   |    | AdditionalPaid-inCapital |  |   | AccumulatedDeficit |   |  | ForeignCurrencyTranslationAdjustment |              |   | TotalEquity(Deficit) |   |         | ComprehensiveLoss | 
|Balance, January 1, 2007                                          |  | 21,015,069   |  |                         |   |  | 2,516                   |   |  | $           | 2,101  |                | $ |   |                          |  | $ | 19,296,655         |   |  | $                                    | (49,377,645  | ) |                      | $ | (48,904 | )                 |  | $ | (30,127,793 | ) |  | $ |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Issuance of Series AA preferred stock                             |  |             |  | 20,635                   |   |  |                        |   |  |             |       |                |   | 2  |                          |  |   |                   |   |  |                                      |             |   |                      |   |        |                   |  |   | 2           |   |  |   |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Conversion of Series AA preferred stock liability to common stock |  | 45,854,513   |  | (20,635                  | ) |  |                        |   |  |             | 4,585  |                |   | (2 | )                        |  |   | 25,219,983         |   |  |                                      |             |   |                      |   |        |                   |  |   | 25,224,566  |   |  |   |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Conversion of Series B preferred stock to common stock            |  | 3,700,147    |  |                         |   |  | (2,516                  | ) |  |             | 370    |                |   |   |                          |  |   | (485,969           | ) |  |                                      |             |   |                      |   |        |                   |  |   | (485,599    | ) |  |   |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Warrant conversion                                                |  | 25,277,556   |  |                         |   |  |                        |   |  |             | 2,528  |                |   |   |                          |  |   | 12,484,016         |   |  |                                      |             |   |                      |   |        |                   |  |   | 12,486,544  |   |  |   |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Registration rights penalty                                       |  | 4,784,623    |  |                         |   |  |                        |   |  |             | 478    |                |   |   |                          |  |   | 2,530,950          |   |  |                                      |             |   |                      |   |        |                   |  |   | 2,531,428   |   |  |   |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Stock issued for services                                         |  | 5,000,000    |  |                         |   |  |                        |   |  |             | 500    |                |   |   |                          |  |   | 1,999,500          |   |  |                                      |             |   |                      |   |        |                   |  |   | 2,000,000   |   |  |   |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Stock-based compensation expense                                  |  |             |  |                         |   |  |                        |   |  |             |       |                |   |   |                          |  |   | 13,791,601         |   |  |                                      |             |   |                      |   |        |                   |  |   | 13,791,601  |   |  |   |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Issuance of common stock                                          |  | 18,120,131   |  |                         |   |  |                        |   |  |             | 1,812  |                |   |   |                          |  |   | 2,625,251          |   |  |                                      |             |   |                      |   |        |                   |  |   | 2,627,063   |   |  |   |            |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Foreign currency translation adjustment                           |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                      |   | (40,629 | )                 |  |   | (40,629     | ) |  |   | (40,629     | )
|                                                                  |  |              |  |                          |   |  |                         |   |  |            
|Net loss for 2007                                                 |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   |                   |   |  |                                      | (61,389,396  | ) |                      |   |        |                   |  |   | (61,389,396 | ) |  |   | (61,389,396 | )
|                                                                  |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                      |   |         |                   |  |   |             |   |  |   |             |  
|Balance, December 31, 2007                                        |  | 123,752,039  |  |                         |   |  |                        |   |  | $           | 12,374 |                | $ |   |                          |  | $ | 77,461,987         |   |  | $                                    | (110,767,041 | ) |                      | $ | (89,533 | )                 |  | $ | (33,382,213 | ) |  | $ | (61,430,025 | )
|                                                                  |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                      |   |         |                   |  |   |             |   |  |   |             |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   | A                  |   |  |                                      | B            |   |                      |   |         |                   |  |   |             |   |  |   |             |  



|A | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|B | Restatement adjustments to income statement.
|- | --------------------------------------------



36



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                            |                           |                           |             |                |                |   |             |  
|--------------------------------------------------------------------------- | ------------------------- | ------------------------- | ----------- | -------------- | -------------- | - | ----------- | -
|                                                                            |                           | Year Ended December 31    |            
|                                                                            | 2007As PreviouslyReported |                           |             | 2007AsRestated |               
|                                                                            |                          
|CASH FLOW FROM OPERATING ACTIVITIES                                         |                           |                           |             |                |                |   |             |  
|Net loss from continuing operations                                         |                           | $                         | (45,521,701 | )              |                | $ | (56,428,743 | )
|                                                                            |                           |                           |             |                |                |   |             |  
|Adjustments to reconcile net loss to net cash used in operating activities: |                           |                           |             |                |                |   |             |  
|Depreciation and amortization                                               |                           |                           | 3,497,262   |                |                |   | 3,497,262   |  
|Loss on disposal of assets                                                  |                           |                           | 500,914     |                |                |   | 500,914     |  
|Consulting expenses paid in common stock and warrants                       |                           |                           | 4,318,858   |                |                |   | 4,318,858   |  
|Amortization of debt discount                                               |                           |                           | 11,464,367  |                |                |   | 38,555,665  |  
|Registration rights penalty                                                 |                           |                           | 2,531,428   |                |                |   | 2,531,428   |  
|Stock-based compensation                                                    |                           |                           | 13,791,601  |                |                |   | 13,791,601  |  
|Extinguishment of debt                                                      |                           |                           |            |                |                |   | (1,645,366  | )
|Change in fair value of embedded derivatives and warrants                   |                           |                           |            |                |                |   | (14,538,890 | )
|Changes in working capital items, net of amounts acquired:                  |                           |                           |             |                |                |   |             |  
|Accounts receivable                                                         |                           |                           | (189,834    | )              |                |   | (189,834    | )
|Prepaid expenses and other current assets                                   |                           |                           | (1,129,205  | )              |                |   | (1,129,205  | )
|Deposits and other assets                                                   |                           |                           | (63,340     | )              |                |   | (63,340     | )
|Accounts payable                                                            |                           |                           | 1,320,304   |                |                |   | 1,320,304   |  
|Accrued expenses                                                            |                           |                           | (121,545    | )              |                |   | (121,545    | )
|Deferred revenue                                                            |                           |                           | (107,814    | )              |                |   | (107,814    | )
|                                                                            |                           |                           |             |                |                |   |             |  
|Total Adjustments                                                           |                           |                           | 35,812,996  |                |                |   | 46,720,038  |  
|                                                                            |                           |                           |             |                |                |   |             |  
|Net cash used in continuing operations                                      |                           |                           | (9,708,705  | )              |                |   | (9,708,705  | )
|Net cash used in discontinued operations                                    |                           |                           | (2,187,226  | )              |                |   | (2,187,226  | )
|                                                                            |                           |                           |             |                |                |   |             |  
|Net cash used in operating activities                                       |                           |                           | (11,895,931 | )              |                |   | (11,895,931 | )
|                                                                            |                           |                           |             |                |                |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                        |                           |                           |             |                |                |   |             |  
|Purchase of property and equipment                                          |                           |                           | (365,232    | )              |                |   | (365,232    | )
|                                                                            |                           |                           |             |                |                |   |             |  
|Net cash used in investing activities                                       |                           |                           | (365,232    | )              |                |   | (365,232    | )
|                                                                            |                           |                           |             |                |                |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                        |                           |                           |             |                |                |   |             |  
|Increase (decrease) in debt, net                                            |                           |                           | (10,422,441 | )              |                |   |            |  
|Proceeds from the issuance of long-term debt                                |                           |                           |            |                |                |   | 11,621,259  |  
|Repayment of long-term debt                                                 |                           |                           |            |                |                |   | (29,997,758 | )
|Net proceeds from line of credit                                            |                           |                           |            |                |                |   | 7,954,058   |  
|Issuance of stock                                                           |                           |                           | 25,233,695  |                |                |   | 25,233,695  |  
|Payment of financing costs                                                  |                           |                           | (375,749    | )              |                |   | (375,749    | )
|                                                                            |                           |                           |             |                |                |   |             |  
|Net cash provided by financing activities from continuing operations        |                           |                           | 14,435,505  |                |                |   | 14,435,505  |  
|Net cash used in financing activities from discontinued operations          |                           |                           | (2,478,122  | )              |                |   | (2,478,122  | )
|                                                                            |                           |                           |             |                |                |   |             |  
|Net cash provided by financing activities                                   |                           |                           | 11,957,383  |                |                |   | 11,957,383  |  
|                                                                            |                           |                           |             |                |                |   |             |  
|Effect of exchange rates on cash and cash equivalents                       |                           |                           | (40,629     | )              |                |   | (40,629     | )
|                                                                            |                           |                           |             |                |                |   |             |  
|Increase (decrease) in cash and cash equivalents                            |                           |                           | (344,409    | )              |                |   | (344,409    | )
|                                                                            |                           |                          
|Cash and cash equivalents, beginning of period                              |                           |                           | 1,203,819   |                |                |   | 1,203,819   |  
|                                                                            |                           |                           |             |                |                |   |             |  
|Cash and cash equivalents, end of period                                    |                           | $                         | 859,410     |                |                | $ | 859,410     |  
|                                                                            |                           |                           |             |                |                |   |             |  
|                                                                            |                           |                          
|                                                                            |                           | 2007As PreviouslyReported |             |                | 2007AsRestated |  
|                                                                            |                          
|                                                                            |                          
|SUPPLEMENTAL CASH FLOWS INFORMATION                                         |                           |                           |             |                |                |   |             |  
|Cash paid for interest for continuing operations                            |                           | $                         | 1,761,919   |                |                | $ | 1,761,919   |  
|Cash paid for interest for discontinued operations                          |                           |                           | 86,581      |                |                |   | 86,581      |  
|                                                                            |                           |                          
|NON-CASH INVESTING AND FINANCING ACTIVITIES                                 |                           |                           |            |                |                |   |            |  
|Conversion of short-term bridge and convertible notes into preferred stock  |                           |                           | 4,585,795   |                |                |   |            |  
|Conversion of short-term bridge notes to junior secured facility            |                           |                           | 5,388,438   |                |                |   | 5,388,438   |  
|Issuance of common stock                                                    |                           |                           | 313,457     |                |                |   | 313,457     |  
|Conversion of warrants to common stock                                      |                           |                           |            |                |                |   | 8,694,911   |  
|Conversion of preferred stock to common stock                               |                           |                           |            |                |                |   | 24,738,967  |  



37



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

As Restated



|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|------------------------------------------------------ |  | --------------------------------------------------------------- | ----------- | - | ------------- | - | ----------- | ------------ |  | - | ------------- | - |  | -------- | ----------- | - |  | - | ----------- | -
|                                                       |  | Four Quarters (Unaudited) and Full Year Ended December 31, 2007 |            
|                                                       |  | FirstQuarter                                                    |             |   | SecondQuarter |   |             | ThirdQuarter |  |   | FourthQuarter |   |  | FullYear |            
|REVENUE                                                |  | $                                                               | 3,999,593   |   |               | $ | 4,227,063   |              |  | $ | 4,369,632     |   |  | $        | 4,631,762   |   |  | $ | 17,228,050  |  
|COST OF SALES                                          |  |                                                                 | 2,734,430   |   |               |   | 2,843,213   |              |  |   | 3,176,152     |   |  |          | 3,421,667   |   |  |   | 12,175,462  |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|GROSS MARGIN                                           |  |                                                                 | 1,265,163   |   |               |   | 1,383,850   |              |  |   | 1,193,480     |   |  |          | 1,210,095   |   |  |   | 5,052,588   |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|OPERATING EXPENSES:                                    |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Compensation                                           |  |                                                                 | 3,250,429   |   |               |   | 4,787,808   |              |  |   | 3,498,617     |   |  |          | 9,833,571   |   |  |   | 21,370,425  |  
|Depreciation and amortization                          |  |                                                                 | 938,016     |   |               |   | 776,737     |              |  |   | 879,379       |   |  |          | 903,130     |   |  |   | 3,497,262   |  
|Other operating expenses                               |  |                                                                 | 1,169,789   |   |               |   | 1,568,134   |              |  |   | 1,464,701     |   |  |          | 6,593,830   |   |  |   | 10,796,454  |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|TOTAL OPERATING EXPENSES                               |  |                                                                 | 5,358,234   |   |               |   | 7,132,679   |              |  |   | 5,842,697     |   |  |          | 17,330,531  |   |  |   | 35,664,141  |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|OPERATING LOSS                                         |  |                                                                 | (4,093,071  | ) |               |   | (5,748,829  | )            |  |   | (4,649,217    | ) |  |          | (16,120,436 | ) |  |   | (30,611,553 | )
|                                                       |  |                                                                 |             |   |              
|Loss on disposal of assets                             |  |                                                                 |            |   |               |   |            |              |  |   |              |   |  |          | 500,914     |   |  |   | 500,914     |  
|Registration rights penalty                            |  |                                                                 |            |   |               |   |            |              |  |   |              |   |  |          | 2,531,428   |   |  |   | 2,531,428   |  
|(Gain) loss on warrants and derivatives                |  |                                                                 | 9,198,834   |   |               |   | (38,663,122 | )            |  |   | (15,262,707   | ) |  |          | 30,188,105  |   |  |   | (14,538,890 | )
|Interest expense                                       |  |                                                                 | 29,567,929  |   |               |   | 2,796,384   |              |  |   | 3,408,744     |   |  |          | 3,196,047   |   |  |   | 38,969,104  |  
|Extinguishment of debt                                 |  |                                                                 | (1,645,366  | ) |               |   |            |              |  |   |              |   |  |          |            |   |  |   | (1,645,366  | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Income (loss) from continuing operations               |  |                                                                 | (41,214,468 | ) |               |   | 30,117,909  |              |  |   | 7,204,746     |   |  |          | (52,536,930 | ) |  |   | (56,428,743 | )
|Income (loss) from discontinued operations, net of tax |  |                                                                 | (492,565    | ) |               |   | (341,953    | )            |  |   | (4,649,075    | ) |  |          | 522,940     |   |  |   | (4,960,653  | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Net income (loss)                                      |  | $                                                               | (41,707,033 | ) |               | $ | 29,775,956  |              |  | $ | 2,555,671     |   |  | $        | (52,013,990 | ) |  | $ | (61,389,396 | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK        |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|                                                       |  |                                                                 |             |   |              
|Income (loss) from continuing operations               |  |                                                                 | (1.92       | ) |               |   | 1.23        |              |  |   | 0.10          |   |  |          | (0.54       | ) |  |   | (1.04       | )
|Loss from discontinued operations                      |  |                                                                 | (0.02       | ) |               |   | (0.01       | )            |  |   | (0.06         | ) |  |          | 0.00        |   |  |   | (0.10       | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Net income (loss)                                      |  |                                                                 | (1.94       | ) |               |   | 1.22        |              |  |   | 0.04          |   |  |          | (0.54       | ) |  |   | (1.14       | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Weighted average shares outstanding - Restated         |  |                                                                 | 21,491,069  |   |               |   | 24,433,557  |              |  |   | 71,829,042    |   |  |          | 96,353,226  |   |  |   | 53,801,855  |  
|                                                       |  |                                                                 |             |   |              
|DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK      |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Loss from continuing operations                        |  |                                                                 |            |   |               |   | 0.54        |              |  |   | 0.08          |   |  |          |            |   |  |   |            |  
|Loss from discontinued operations                      |  |                                                                 |            |   |               |   | (0.01       | )            |  |   | (0.05         | ) |  |          |            |   |  |   |            |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Net income (loss)                                      |  |                                                                 |            |   |               |   | 0.53        |              |  |   | 0.03          |   |  |          |            |   |  |   |            |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Weighted average shares outstanding - Restated         |  |                                                                 | 21,491,069  |   |               |   | 55,726,807  |              |  |   | 97,688,710    |   |  |          | 96,353,226  |   |  |   | 53,801,855  |  



38



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##### Table of Contents

The following table sets forth effects of the restatement on the Companys previously reported
consolidated condensed balance sheets for the period ended March 31, 2008 and the consolidated condensed statements of operations and the consolidated condensed statements of shareholders equity for the three months ended March 31, 2008 and
March 31, 2007. There was no impact to cash flows from operating activities, investing activities or financing activities for the three months ended March 31, 2008 or March 31, 2007.

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS

(in thousands, except share amounts)



|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|-------------------------------------------------- |  | --------------------- | ------- | - | -------------------------- | - | ------- | ----------- |  | - | --------- | - |  | - | -------- | -
|                                                   |  | As of March 31, 2008  |         |   | December 31,2007AsRestated |  
|                                                   | 
|                                                   |  | As PreviouslyReported |         |   | Adjustments                |   |         | AsRestated  |  |  
|                                                   |  | (Unaudited)           |         |   |                            |   |         | (Unaudited) |  |   | (Audited) |  
|ASSETS                                             |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|CURRENT ASSETS                                     |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|Cash and cash equivalents                          |  | $                     | 6,930   |   |                            | $ |        |             |  | $ | 6,930     |   |  | $ | 859      |  
|Accounts receivable, net of allowances             |  |                       | 6,634   |   |                            |   |        |             |  |   | 6,634     |   |  |   | 1,782    |  
|Prepaid expenses and other current assets          |  |                       | 1,400   |   |                            |   |        |             |  |   | 1,400     |   |  |   | 1,646    |  
|Current assets of discontinued operations          |  |                       | 3       |   |                            |   |        |             |  |   | 3         |   |  |   | 2,387    |  
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|Total Current Assets                               |  |                       | 14,967  |   |                            |   |        |             |  |   | 14,967    |   |  |   | 6,674    |  
|Property and equipment, net                        |  |                       | 1,193   |   |                            |   |        |             |  |   | 1,193     |   |  |   | 1,418    |  
|Intangible assets, net                             |  |                       | 8,008   |   |                            |   |        |             |  |   | 8,008     |   |  |   | 8,308    |  
|Goodwill                                           |  |                       | 12,513  |   |                            |   |        |             |  |   | 12,513    |   |  |   | 12,513   |  
|Other assets                                       |  |                       | 1,916   |   |                            |   |        |             |  |   | 1,916     |   |  |   | 478      |  
|Non-current assets of discontinued operations      |  |                       | 10      |   |                            |   |        |             |  |   | 10        |   |  |   | 1,031    |  
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|TOTAL ASSETS                                       |  | $                     | 38,607  |   |                            | $ |        |             |  | $ | 38,607    |   |  | $ | 30,422   |  
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT              |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|CURRENT LIABILITIES                                |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|Current maturities of long-term debt               |  | $                     | 36      |   |                            | $ |        | A           |  | $ | 36        |   |  | $ | 5,084    |  
|Accounts payable                                   |  |                       | 1,940   |   |                            |   |        |             |  |   | 1,940     |   |  |   | 2,750    |  
|Accrued expenses                                   |  |                       | 4,465   |   |                            |   |        |             |  |   | 4,465     |   |  |   | 3,231    |  
|Deferred revenue                                   |  |                       | 560     |   |                            |   |        |             |  |   | 560       |   |  |   | 537      |  
|Current liabilities of discontinued operations     |  |                       | 30      |   |                            |   |        |             |  |   | 30        |   |  |   | 2,827    |  
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|Total Current Liabilities                          |  |                       | 7,031   |   |                            |   |        |             |  |   | 7,031     |   |  |   | 14,429   |  
|Liabilities for warrants to purchase common stock  |  |                       | 32,086  |   |                            |   | 5,184   | B           |  |   | 37,270    |   |  |   | 35,883   |  
|Embedded derivatives of convertible debt           |  |                       | 1,513   |   |                            |   | 9,904   | C           |  |   | 11,417    |   |  |   | 9,199    |  
|Long-term portion of debt                          |  |                       | 9,752   |   |                            |   | (9,438  | ) A         |  |   | 314       |   |  |   | 3,490    |  
|Deferred revenue                                   |  |                       | 63      |   |                            |   |        |             |  |   | 63        |   |  |   | 76       |  
|Non-current liabilities of discontinued operations |  |                       |        |   |                            |   |        |             |  |   |          |   |  |   | 727      |  
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|Total Liabilities                                  |  |                       | 50,445  |   |                            |   | 5,650   |             |  |   | 56,095    |   |  |   | 63,804   |  
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|SHAREHOLDERS DEFICIT                              |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|Preferred stock                                    |  |                       |        |   |                            |   |        |             |  |   |          |   |  |   |         |  
|Common stock                                       |  |                       | 14      |   |                            |   |        |             |  |   | 14        |   |  |   | 12       |  
|Additional paid-in capital                         |  |                       | 64,635  |   |                            |   | 25,837  | D           |  |   | 90,472    |   |  |   | 77,462   |  
|Foreign currency translation adjustment            |  |                       | (95     | ) |                            |   |        |             |  |   | (95       | ) |  |   | (89      | )
|Accumulated deficit                                |  |                       | (76,392 | ) |                            |   | (31,487 | ) E         |  |   | (107,879  | ) |  |   | (110,767 | )
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|Total Shareholders Deficit                        |  |                       | (11,838 | ) |                            |   | (5,650  | )           |  |   | (17,488   | ) |  |   | (33,382  | )
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT        |  | $                     | 38,607  |   |                            | $ |        |             |  | $ | 38,607    |   |  | $ | 30,422   |  
|                                                   |  |                       |         |   |                            |   |         |             |  |   |           |   |  |   |          |  



|A | Adjust long-term debt and current maturities as a result of embedded derivatives valuation.
|- | -------------------------------------------------------------------------------------------

|B | Record fair value of outstanding warrants to purchase common stock
|- | ------------------------------------------------------------------

|C | Record fair value of embedded derivative.
|- | -----------------------------------------

|D | EITF 00-19 liability accounting adopted on January 1, 2008, with restatement, prior year impact is now recorded in proper period.
|- | ---------------------------------------------------------------------------------------------------------------------------------

|E | Restatement adjustments to income statement for the three months ended March 31, 2008.
|- | --------------------------------------------------------------------------------------



39



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)



|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|--------------------------------------------------- |  | --------------------------------- | ----------- | - | ----------- | - | ----------- | ---------- |  | - | ----------- | -
|                                                    |  | Three Months Ended March 31, 2008 |            
|                                                    |  | As PreviouslyReported             |             |   | Adjustments |   |             | AsRestated | 
|REVENUE                                             |  | $                                 | 9,523       |   |             | $ |            |            |  | $ | 9,523       |  
|COST OF SALES                                       |  |                                   | 4,418       |   |             |   |            |            |  |   | 4,418       |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|GROSS MARGIN                                        |  |                                   | 5,105       |   |             |   |            |            |  |   | 5,105       |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Operating Expenses:                                 |  |                                   |             |   |             |   |             |            |  |   |             |  
|Compensation                                        |  |                                   | 4,289       |   |             |   |            |            |  |   | 4,289       |  
|Depreciation and amortization                       |  |                                   | 536         |   |             |   |            |            |  |   | 536         |  
|Other operating expenses                            |  |                                   | 2,857       |   |             |   |            |            |  |   | 2,857       |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Total Operating Expenses                            |  |                                   | 7,682       |   |             |   |            |            |  |   | 7,682       |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Operating Loss                                      |  |                                   | (2,577      | ) |             |   |            |            |  |   | (2,577      | )
|Interest expense                                    |  |                                   | 5,845       |   |             |   | 5,761       | B          |  |   | 11,606      |  
|Gain on warrants and derivatives                    |  |                                   | (4,769      | ) |             |   | (11,994     | ) A        |  |   | (16,763     | )
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Income (loss) from continuing operations            |  |                                   | (3,653      | ) |             |   | 6,233       |            |  |   | 2,580       |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Discontinued Operations:                            |  |                                   |             |   |             |   |             |            |  |   |             |  
|Loss from discontinued operations, net of tax       |  |                                   | (91         | ) |             |   |            |            |  |   | (91         | )
|Gain on sale of discontinued operations, net of tax |  |                                   | 399         |   |             |   |            |            |  |   | 399         |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Income from discontinued operations, net of tax     |  |                                   | 308         |   |             |   |            |            |  |   | 308         |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Net income (loss) applicable to common shareholders |  | $                                 | (3,345      | ) |             | $ | 6,233       |            |  | $ | 2,888       |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|BASIC EARNINGS PER SHARE OF COMMON STOCK            |  |                                   |             |   |             |   |             |            |  |   |             |  
|                                                    |  |                                   |            
|Income (loss) from continuing operations            |  |                                   | (0.03       | ) |             |   | 0.05        |            |  |   | 0.02        |  
|Loss from discontinued operations                   |  |                                   |            |   |             |   |            |            |  |   |            |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Net income (loss) applicable to common shareholders |  |                                   | (0.03       | ) |             |   | 0.05        |            |  |   | 0.02        |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Weighted average shares outstanding - Restated      |  |                                   | 135,303,454 |   |             |   | 135,303,454 |            |  |   | 135,303,454 |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|DILUTED EARNINGS PER SHARE OF COMMON STOCK          |  |                                   |             |   |             |   |             |            |  |   |             |  
|                                                    |  |                                   |            
|Loss from continuing operations                     |  |                                   |            |   |             |   |            |            |  |   | 0.01        |  
|Loss from discontinued operations                   |  |                                   |            |   |             |   |            |            |  |   |            |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Net income (loss) applicable to common shareholders |  |                                   |            |   |             |   |            |            |  |   | 0.01        |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  
|Weighted average shares outstanding - Restated      |  |                                   |            |   |             |   |             |            |  |   | 192,922,548 |  
|                                                    |  |                                   |             |   |             |   |             |            |  |   |             |  



|A | Record (gain) loss on fair value of stock warrants issued and beneficial conversion feature of convertible debt and preferred stock issued.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|B | Adjust for amortization of fair value of convertible debt warrants and beneficial conversion feature recorded as debt discount.
|- | -------------------------------------------------------------------------------------------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)



|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|-------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | ----------- | - | ---------- | ---------- |  | - | ---------- | -
|                                                                                             |  | Three Months Ended March 31, 2007 |           
|                                                                                             |  | As PreviouslyReported             |            |   | Adjustments |   |            | AsRestated | 
|REVENUE                                                                                      |  | $                                 | 4,000      |   |             | $ |           |            |  | $ | 4,000      |  
|COST OF SALES                                                                                |  |                                   | 2,260      |   |             |   | 475        | A          |  |   | 2,735      |  
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|GROSS MARGIN                                                                                 |  |                                   | 1,740      |   |             |   | (475       | ) A        |  |   | 1,265      |  
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Operating Expenses                                                                           |  |                                   |            |   |             |   |            |            |  |   |            |  
|Compensation                                                                                 |  |                                   | 3,502      |   |             |   | (252       | ) A        |  |   | 3,250      |  
|Depreciation and amortization                                                                |  |                                   | 938        |   |             |   |           |            |  |   | 938        |  
|Other operating expenses                                                                     |  |                                   | 1,393      |   |             |   | (223       | ) A        |  |   | 1,170      |  
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Total Operating Expenses                                                                     |  |                                   | 5,833      |   |             |   | (475       | ) A        |  |   | 5,358      |  
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Operating Loss                                                                               |  |                                   | (4,093     | ) |             |   |           |            |  |   | (4,093     | )
|Interest expense                                                                             |  |                                   | 2,872      |   |             |   | 26,696     | B          |  |   | 29,568     |  
|Loss on warrants and derivatives                                                             |  |                                   |           |   |             |   | 9,199      | C          |  |   | 9,199      |  
|Gain on extinguishment of debt                                                               |  |                                   |           |   |             |   | (1,645     | ) D        |  |   | (1,645     | )
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Loss from continuing operations                                                              |  |                                   | (6,965     | ) |             |   | (34,250    | )          |  |   | (41,215    | )
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Loss from discontinued operations, net of tax                                                |  |                                   | (492       | ) |             |   |           |            |  |   | (492       | )
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Net income (loss)                                                                            |  |                                   | (7,457     | ) |             |   | (34,250    | )          |  |   | (41,707    | )
|                                                                                             |  |                                   |           
|Deemed dividend warrants and beneficial conversion features issued to preferred shareholders |  |                                   | (9,183     | ) |             |   | 9,183      | E          |  |   |           |  
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Net income (loss) applicable to common shareholders                                          |  | $                                 | (16,640    | ) |             | $ | (25,067    | )          |  | $ | (41,707    | )
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|LOSS PER SHARE OF COMMON STOCK                                                               |  |                                   |            |   |             |   |            |            |  |   |            |  
|                                                                                             |  |                                   |           
|Income (loss) from continuing operations                                                     |  |                                   | (0.75      | ) |             |   | (1.17      | )          |  |   | (1.92      | )
|Loss from discontinued operations                                                            |  |                                   | (0.02      | ) |             |   |           |            |  |   | (0.02      | )
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Net income (loss) applicable to common shareholders                                          |  |                                   | (0.77      | ) |             |   | (1.17      | )          |  |   | (1.94      | )
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  
|Weighted average shares outstanding - Restated                                               |  |                                   | 21,491,069 |   |             |   | 21,491,069 |            |  |   | 21,491,069 |  
|                                                                                             |  |                                   |            |   |             |   |            |            |  |   |            |  



|A | Reclassification between operating expenses and cost of goods sold to conform with current period presentation
|- | --------------------------------------------------------------------------------------------------------------

|B | Record (gain) loss on fair value of stock warrants issued and beneficial conversion feature of convertible debt and preferred stock issued.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|C | Adjust for amortization of fair value of convertible debt warrants and beneficial conversion feature recorded as debt discount.
|- | -------------------------------------------------------------------------------------------------------------------------------

|D | Payoff of bridge loans not previously reported as extinguishment of debt.
|- | -------------------------------------------------------------------------

|E | Reverse deemed dividend recorded as issuance of preferred stock as a result of EITF 00-19 liability change.
|- | -----------------------------------------------------------------------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

In thousands, except share data

(Unaudited)

As Previously Reported



|                                                                                       |  |              |  |                          |  |                         |  |             |   |                          |   |        |                    |  |   |                                      |   |  |                       |     |   |                   |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ |  | ----------------------- |  | ----------- | - | ------------------------ | - | ------ | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | --- | - | ----------------- | - | ------ | - |  | - | ------ | -
|                                                                                       |  | CommonShares |  | Series AAPreferredShares |  | Series BPreferredShares |  | CommonStock |   | AdditionalPaid-inCapital |   |        | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |     |   | ComprehensiveLoss |  
|Balance, January 1, 2007                                                               |  | 21,015,069   |  |                         |  | 2,516                   |  | $           | 2 |                          | $ | 24,520 |                    |  | $ | (22,565                              | ) |  | $                     | (49 | ) |                   | $ | 1,908  |   |  | $ |       |  
|                                                                                       |  |              |  |                          |  |                         |  |             |  
|Issuance of Series AA preferred stock                                                  |  |             |  | 19,984                   |  |                        |  |             |  |                          |   | 17,554 |                    |  |   |                                     |   |  |                       |    |   |                   |   | 17,554 |   |  |   |       |  
|                                                                                       |  |              |  |                          |  |                         |  |             |  
|Deemed dividend related to the conversion of Series AA preferred stock to common stock |  |             |  |                         |  |                        |  |             |  |                          |   | (9,183 | )                  |  |   |                                     |   |  |                       |    |   |                   |   | (9,183 | ) |  |   |       |  
|                                                                                       |  |              |  |                          |  |                         |  |             |  
|Issuance of Series AA preferred stock warrants                                         |  |             |  |                         |  |                        |  |             |  |                          |   | 9,183  |                    |  |   |                                     |   |  |                       |    |   |                   |   | 9,183  |   |  |   |       |  
|                                                                                       |  |              |  |                          |  |                         |  |             |  
|Stock warrants issued with debt financing                                              |  |             |  |                         |  |                        |  |             |  |                          |   | 5,184  |                    |  |   |                                     |   |  |                       |    |   |                   |   | 5,184  |   |  |   |       |  
|                                                                                       |  |              |  |                          |  |                         |  |             |  
|Stock-based compensation expense                                                       |  |             |  |                         |  |                        |  |             |  |                          |   | 1,432  |                    |  |   |                                     |   |  |                       |    |   |                   |   | 1,432  |   |  |   |       |  
|                                                                                       |  |              |  |                          |  |                         |  |             |  
|Issuance of common stock                                                               |  | 695,811      |  |                         |  |                        |  |             |  |                          |   | 326    |                    |  |   |                                     |   |  |                       |    |   |                   |   | 326    |   |  |   |       |  
|                                                                                       |  |              |  |                          |  |                         |  |             |  
|Foreign currency translation adjustment                                                |  |              |  |                          |  |                         |  |             |   |                          |   |        |                    |  |   |                                      |   |  |                       | (1  | ) |                   |   | (1     | ) |  |   | (1     | )
|                                                                                       |  |              |  |                          |  |                         |  |             |  
|Net loss for the three months ended March 31, 2007                                     |  |             |  |                         |  |                        |  |             |  |                          |   |       |                    |  |   | (7,457                               | ) |  |                       |    |   |                   |   | (7,457 | ) |  |   | (7,457 | )
|                                                                                       |  |              |  |                          |  |                         |  |             |   |                          |   |        |                    |  |   |                                      |   |  |                       |     |   |                   |   |        |   |  |   |        |  
|Balance, March 31, 2007                                                                |  | 21,710,880   |  | 19,984                   |  | 2,516                   |  | $           | 2 |                          | $ | 49,016 |                    |  | $ | (30,022                              | ) |  | $                     | (50 | ) |                   | $ | 18,946 |   |  | $ | (7,458 | )
|                                                                                       |  |              |  |                          |  |                         |  |             |   |                          |   |        |                    |  |   |                                      |   |  |                       |     |   |                   |   |        |   |  |   |        |  



42



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

In thousands, except share data

(Unaudited)

As Restated



|                                                   |  |              |  |                          |  |                         |  |             |   |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |         |  
|-------------------------------------------------- |  | ------------ |  | ------------------------ |  | ----------------------- |  | ----------- | - | ------------------------ | - | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | --- | - | ----------------- | - | ------- | - |  | - | ------- | -
|                                                   |  | CommonShares |  | Series AAPreferredShares |  | Series BPreferredShares |  | CommonStock |   | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |     |   | ComprehensiveLoss |  
|Balance, January 1, 2007                           |  | 21,015,069   |  |                         |  | 2,516                   |  | $           | 2 |                          | $ | 19,297             |  | $ | (49,378                              | ) |  | $                     | (49 | ) |                   | $ | (30,128 | ) |  | $ |        |  
|                                                   |  |              |  |                          |  |                         |  |             |  
|Issuance of Series AA preferred stock              |  |             |  | 19,984                   |  |                        |  |             |  |                          |   |                   |  |   |                                     |   |  |                       |    |   |                   |   |        |   |  |   |        |  
|                                                   |  |              |  |                          |  |                         |  |             |  
|Stock-based compensation expense                   |  |             |  |                         |  |                        |  |             |  |                          |   | 1,432              |  |   |                                     |   |  |                       |    |   |                   |   | 1,432   |   |  |   |        |  
|                                                   |  |              |  |                          |  |                         |  |             |  
|Issuance of common stock                           |  | 695,811      |  |                         |  |                        |  |             |  |                          |   | 327                |  |   |                                     |   |  |                       |    |   |                   |   | 327     |   |  |   |        |  
|                                                   |  |              |  |                          |  |                         |  |             |  
|Foreign currency translation adjustment            |  |              |  |                          |  |                         |  |             |   |                          |   |                    |  |   |                                      |   |  |                       | (1  | ) |                   |   | (1      | ) |  |   | (1      | )
|                                                   |  |              |  |                          |  |                         |  |             |  
|Net loss for the three months ended March 31, 2007 |  |             |  |                         |  |                        |  |             |  |                          |   |                   |  |   | (41,707                              | ) |  |                       |    |   |                   |   | (41,707 | ) |  |   | (41,707 | )
|                                                   |  |              |  |                          |  |                         |  |             |   |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |         |  
|Balance, March 31, 2007                            |  | 21,710,880   |  | 19,984                   |  | 2,516                   |  | $           | 2 |                          | $ | 21,056             |  | $ | (91,085                              | ) |  | $                     | (50 | ) |                   | $ | (70,077 | ) |  | $ | (41,708 | )
|                                                   |  |              |  |                          |  |                         |  |             |   |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |         |  
|                                                   |  |              |  |                          |  |                         |  |             |   |                          |   | A                  |  |   | B                                    |   |  |                       |     |   |                   |   |         |   |  |   |         |  



|A | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|B | Restatement adjustments to income statement.
|- | --------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

In thousands, except share data

(Unaudited)

As Previously Reported



|                                                  |  |              |  |             |    |                          |   |         |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |        |  
|------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------- | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | --- | - | ----------------- | - | ------- | - |  | - | ------ | -
|                                                  |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   |         | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |     |   | ComprehensiveLoss |  
|Balance, January 1, 2008                          |  | 123,752,039  |  | $           | 12 |                          | $ | 81,849  |                    |  | $ | (73,047                              | ) |  | $                     | (89 | ) |                   | $ | 8,725   |   |  | $ |       |  
|                                                  |  |              |  |             |    |                          |  
|Stock warrants issued with debt financing         |  |             |  |             |   |                          |   | 1,083   |                    |  |   |                                     |   |  |                       |    |   |                   |   | 1,083   |   |  |   |       |  
|                                                  |  |              |  |             |    |                          |  
|Reclassification of warrants to liability         |  |             |  |             |   |                          |   | (28,908 | )                  |  |   |                                     |   |  |                       |    |   |                   |   | (28,908 | ) |  |   |       |  
|                                                  |  |              |  |             |    |                          |  
|Cashless warrant conversion                       |  | 2,358,506    |  |             |   |                          |   |        |                    |  |   |                                     |   |  |                       |    |   |                   |   |        |   |  |   |       |  
|                                                  |  |              |  |             |    |                          |  
|Cashless exercise of stock options                |  | 804,626      |  |             |   |                          |   |        |                    |  |   |                                     |   |  |                       |    |   |                   |   |        |   |  |   |       |  
|                                                  |  |              |  |             |    |                          |  
|Registration rights penalty                       |  | 477,185      |  |             |   |                          |   | 241     |                    |  |   |                                     |   |  |                       |    |   |                   |   | 241     |   |  |   |       |  
|                                                  |  |              |  |             |    |                          |  
|Debt to equity conversion                         |  | 19,591,890   |  |             | 2  |                          |   | 8,406   |                    |  |   |                                     |   |  |                       |    |   |                   |   | 8,408   |   |  |   |       |  
|                                                  |  |              |  |             |    |                          |  
|Stock-based compensation expense                  |  |              |  |             |   |                          |   | 1,964   |                    |  |   |                                     |   |  |                       |    |   |                   |   | 1,964   |   |  |   |       |  
|                                                  |  |              |  |             |    |                          |  
|Foreign currency translation adjustment           |  |              |  |             |   |                          |   |        |                    |  |   |                                     |   |  |                       | (6  | ) |                   |   | (6      | ) |  |   | (6     | )
|                                                  |  |              |  |             |    |                          |  
|Net loss for the three months endedMarch 31, 2008 |  |              |  |             |   |                          |   |        |                    |  |   | (3,345                               | ) |  |                       |    |   |                   |   | (3,345  | ) |  |   | (3,345 | )
|                                                  |  |              |  |             |    |                          |   |         |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |        |  
|March 31, 2008                                    |  | 146,984,246  |  | $           | 14 |                          | $ | 64,635  |                    |  | $ | (76,392                              | ) |  | $                     | (95 | ) |                   | $ | (11,838 | ) |  | $ | (3,351 | )
|                                                  |  |              |  |             |    |                          |   |         |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |        |  



44



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

In thousands, except share data

(Unaudited)

As Restated



|                                                     |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |       |  
|---------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | --- | - | ----------------- | - | ------- | - |  | - | ----- | -
|                                                     |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |     |   | ComprehensiveLoss |  
|Balance, January 1, 2008                             |  | 123,752,039  |  | $           | 12 |                          | $ | 77,462             |  | $ | (110,767                             | ) |  | $                     | (89 | ) |                   | $ | (33,382 | ) |  | $ |      |  
|                                                     |  |              |  |             |    |                          |  
|Cashless warrant conversion                          |  | 2,358,506    |  |             |   |                          |   | 2,399              |  |   |                                     |   |  |                       |    |   |                   |   | 2,399   |   |  |   |      |  
|                                                     |  |              |  |             |    |                          |  
|Cashless exercise of stock options                   |  | 804,626      |  |             |   |                          |   |                   |  |   |                                     |   |  |                       |    |   |                   |   |        |   |  |   |      |  
|                                                     |  |              |  |             |    |                          |  
|Registration rights penalty                          |  | 477,185      |  |             |   |                          |   | 241                |  |   |                                     |   |  |                       |    |   |                   |   | 241     |   |  |   |      |  
|                                                     |  |              |  |             |    |                          |  
|Debt to equity conversion                            |  | 19,591,890   |  |             | 2  |                          |   | 8,406              |  |   |                                     |   |  |                       |    |   |                   |   | 8,408   |   |  |   |      |  
|                                                     |  |              |  |             |    |                          |  
|Stock-based compensation                             |  |              |  |             |   |                          |   | 1,964              |  |   |                                     |   |  |                       |    |   |                   |   | 1,964   |   |  |   |      |  
|                                                     |  |              |  |             |    |                          |  
|Foreign currency translation adjustment              |  |              |  |             |   |                          |   |                   |  |   |                                     |   |  |                       | (6  | ) |                   |   | (6      | ) |  |   | (6    | )
|                                                     |  |              |  |             |    |                          |  
|Net income for the three months ended March 31, 2008 |  |             |  |             |   |                          |   |                   |  |   | 2,888                                |   |  |                       |    |   |                   |   | 2,888   |   |  |   | 2,888 |  
|                                                     |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |       |  
|Balance, March 31, 2008                              |  | 146,984,246  |  | $           | 14 |                          | $ | 90,472             |  | $ | (107,879                             | ) |  | $                     | (95 | ) |                   | $ | (17,488 | ) |  | $ | 2,882 |  
|                                                     |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |       |  
|                                                     |  |              |  |             |    |                          |   | A                  |  |   | B                                    |   |  |                       |     |   |                   |   |         |   |  |   |       |  



|A | EITF 00-19 liability accounting adopted on January 1, 2008, with restatement, prior year impact is now recorded in proper period.
|- | ---------------------------------------------------------------------------------------------------------------------------------

|B | Restatement adjustments to income statement.
|- | --------------------------------------------



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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



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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.

Remote Management Services employ 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 recent remarkable demand among its clients for its novel products. The successful delivery on major contracts signed in the last three quarters is anticipated to
put the Company into a sustained period of rapid growth of profitability. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.



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Cash on hand at March 31, 2008 was $6.7 million (not including $0.2 million restricted for
outstanding letters of credit). The Company has incurred operating losses of $2.6 million and $4.1 million, respectively. The results for the three months ended March 31, 2008 and 2007 included non-cash charges of $2.0 million and $1.4 million,
respectively, related to stock-based compensation expense. Cash used in operating activities from continuing operations was $3.9 million and $5.0 million for the three months ended March 31, 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 in the last three quarters is anticipated to mover the Company
into profitability. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

Notwithstanding the above, the Company continues to find support 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 will be used for operations and to support the Companys successful new business development efforts.

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 of Continuing Operations

Three months ended March 31, 2008 compared to 2007

Total revenues for the three months ended March 31, 2008 were $9.5 million compared to $4.0 million for the same period in 2007, representing a 138%
increase. This increase is primarily due to the recognition of revenue in the first quarter of 2008 in connection with a significant new contract in our Optimization Solutions line of business.

Revenues generated from Optimization Solutions totaled $6.5 million for the three months ended March 31, 2008 compared to $1.9 million for the same
period in 2007, which represents professional services, remote network management services, and the use of our automated pricing software. The Connectivity Solutions business recorded $3.0 million for the three months ended March 31, 2008
compared to $2.1 million for the same period in 2007, which is from the design, delivery, and management of networks.

The consolidated
gross margin rate was 54% for the three months ended March 31, 2008 compared to 32% for the same period in 2007. This increase was driven primarily by the delivery of optimization services to the new customer mentioned above.

Gross margin for Optimization Solutions totaled $5.5 million or 84% for the three-month period ended March 31, 2008 as compared to $0.9 million or
48% for the same period in 2007. Connectivity Solutions cost of sales exceeded sales by $0.4 million or 12% for the first quarter of 2008 compared to margin of $0.4 million or 17% for the same period in 2007. Additional novation expenses were
incurred for a new customer that were recognized immediately but which are part of a multi-year service delivery relationship.

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



|                              |  |                              |       |      |   |      
|----------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                              |  | Three Months Ended March 31,
|                              |  | 2008                         |       | 2007
|                              |  | (in thousands)              
|Compensation                  |  | $                            | 4,289 |      | $ | 3,250
|Professional services         |  |                              | 2,142 |      |   | 360  
|Depreciation and amortization |  |                              | 536   |      |   | 938  
|All other operating expenses  |  |                              | 715   |      |   | 810  
|                              |  |                              |       |      |   |      
|Total operating expenses      |  | $                            | 7,682 |      | $ | 5,358
|                              |  |                              |       |      |   |      



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Compensation expense increased $1.0 million for the three months ended March 31, 2008 as compared to
the three months ended March 31, 2007, due in part to higher commission expense, which is consistent with the increase in revenue. Also included in compensation expense for 2008 are non-cash charges of $2.0 million related to the accounting
treatment (pursuant to SFAS 123R) of certain stock option grants as compared to $1.4 million for the same period in 2007.

Professional
services increased $1.8 million for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007, due in part to the pay-off of the senior and junior secured facilities. In addition, we incurred additional
advisory expenses and utilized outside contractors in lieu of full-time staff for certain projects.

Depreciation and amortization expense
relates primarily to the Network Operating Center in 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 months ended March 31, 2008 as compared to the three months end March 31, 2007. This decrease was due primarily to lower depreciation resulting from the sale of
certain fixed assets during 2007.

Other operating expenses decreased $0.3 million for the three months ended March 31, 2008 as
compared to the same period for 2007. This decease is due to decreased occupancy expense resulting from a reduction in our leased space.

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

Results for the three months ended March 31, 2008 reflect interest of $11.6 million,
a decrease of $18.0 million over the three months ended March 31, 2007. During the quarters ended March 31, 2008 and 2007, interest expense includes $10.1 million and $24.6 million related to the amortization of the fair value assigned to
the warrants issued with debt, respectively. Weighted average interest rate was 8.0% and 12.5% for the three months ended March 31, 2008 and 2007, respectively.

Results for the three months ended March 31, 2008 reflect a gain on warrants and derivative of $16.8 million compared to a loss on warrants and derivatives of $9.2 million for the three months ended
March 31, 2007. In accordance with SFAS 133 and EITF 00-19, the warrant and embedded derivatives liabilities are revalued at each balance sheet and marked to fair value with the corresponding adjustment recognized as a gain or loss on warrants
and derivatives in the consolidated statements of operations.

Results of Discontinued Operations

Three months ended March 31, 2008 compared to March 31, 2007

Total revenues for the three months ended March 31, 2008 were $1.0 million compared to $2.1 million for the same period in 2007. The loss from discontinued operations for the three months ended March 31,
2008 were $0.1 million compared to $0.5 million for the same period in 2007. The decreases in revenue and loss from discontinue operations were due to the sale of Frontrunner.

On February 19, 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. The gain on sale of discontinued operations for the three months ended
March 31, 2008 was $0.4 million.

Liquidity and Capital Resources

Cash used in operating activities from continuing operations during the three months ended March 31, 2008 and 2007 was $3.9 million and $5.0 million, respectively. The Company had net income from continuing
operations of $2.6 million for the three months ended March 31, 2008 and a net loss from continuing operations of $41.2 million for the three months ended March 31, 2007. The primary variance between operating income and net cash used in
operating activities from continuing operations during the three months ended March 31, 2008 was due to non-cash charges of $2.0 million and $10.1 million related to stock-based compensation expense and amortization of debt discount,
respectively. In addition, accounts receivable increased by $4.9 million in connection with billings under a significant new contract. These amounts were partially offset by a $16.8 million change in the fair value of embedded derivatives and
warrants and a $1.4 million reduction in accrued expenses. The primary variance between operating loss and net cash used in operating activities from continuing operations during the three months ended March 31, 2007 was due to non-cash charges
of



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$1.4 million, $26.7 million and $9.2 million related to stock-based compensation expenses, amortization of debt discount and the change in the fair value of
embedded derivatives and warrants, respectively. These amounts were partially offset by a $1.9 million reduction in accrued expenses.

The
cash used in investing activities from continuing operations during the three months ended March 31, 2008 and 2007 was $0.01 million and $0.2 million for the three months ended March 31, 2008 and 2007, 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 additional capital expenditures related
to the integration of our operations.

Net cash provided by financing activities from continuing operations during the three months ended
March 31, 2008 and 2007 was $9.8 million and $6.1 million, respectively. The cash provided from financing activities during the three months ended March 31, 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 three months ended March 31, 2007 was the result of the debt and equity offerings funded primarily during the three months ended March 31, 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 three months ended March 31, 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 the second quarter of 2008. 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 March 31, 2008 are as follows:



|                              |  |                 |       |                 |   |       
|----------------------------- |  | --------------- | ----- | --------------- | - | ------
|                              |  | OperatingLeases |       | DebtObligations
|Remaining nine months of 2008 |  | $               | 381   |                 | $ | 41    
|2009                          |  |                 | 434   |                 |   | 18    
|2010                          |  |                 | 442   |                 |   | 19    
|2011                          |  |                 | 371   |                 |   | 21    
|2012                          |  |                 | 272   |                 |   | 22    
|Thereafter                    |  |                 |      |                 |   | 19,021
|                              |  |                 |       |                 |   |       
|Total contractual obligations |  | $               | 1,900 |                 | $ | 19,142
|                              |  |                 |       |                 |   |       

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 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.



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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.

In February 2008, the FASB issued FASB Staff Positions (FSP) No. 157-1 and No. 157-2 (FSP 157-1 and 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 nonrecurring basis
(at least annually). The Company does not currently expect the adoption the recently issued Staff Positions to have a material effect on its consolidated result of operations and financial condition.



|Item 3(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
March 31, 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 Companies issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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



| |  |  | We did not maintain a majority of independent directors and no financial expert on our Board has been designated;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | 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 and;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



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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 will implement the following remediation activities to improve the Companys internal control over financial reporting:



| |  |  | Continuation of our search for an independent director to fill the remaining vacancy on our seven-member Board of Directors. We are also considering whether to add
two independent directors or to replace an inside director with an independent director, in both cases, in order to have a majority of our Board of Directors become independent. We will determine whether any of its current directors is a financial
expert and, if not, will ensure that one of the new directors is a financial expert. (See the Subsequent Events footnote to the financial statements for further information.) In addition, we will adopt audit committee best practices as
recommended by the Treadway Commission and the major stock exchanges;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 and;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

As described below, there were changes in our internal control over financial reporting that occurred during
the fiscal quarter ended December 31, 2007 that did materially affect, or were reasonably likely to materially affect, our internal control over financial reporting. As of March 31, 2008, these changes in our internal control over
financial reporting continue to materially affect, or are reasonable likely to materially affect, our internal control over financial reporting.

Late in 2006, we completed our acquisitions of 20/20, Magenta, CentrePath, and GCG. Since these entities had limited resources for processing accounting information and financial reporting, we concluded a material weakness existed at that
time related to proper segregation of duties at those locations. In the fourth quarter of 2007 and the first quarter of 2008, we continued our integration of existing accounting systems and processes by means of centralization and additional
staffing. In the fourth quarter of 2007 we initiated new risk assessment and documentation standards.

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-QSB 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 3(T) for a more complete understanding of the matters covered by the certifications.



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PART II - OTHER INFORMATION



|Item 6. | Exhibits.
|------- | ---------

Exhibits filed as a part of this
quarterly report on Form 10-QSB are listed in the Index to Exhibits located on page 29 of this Report.



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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: August 14, 2008



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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             |  | Amendment to Registration Rights Agreement re: Hilco Financial, LLC.(5)                                                                                  
|                | 
|10.1            |  | Asset Purchase Agreement re: Frontrunner Network Systems.(6)                                                                                             
|                | 
|10.2            |  | Securities Purchase Agreement and Exhibits.(7)                                                                                                           
|                | 
|10.3            |  | Form of Capstone Investments Warrant for 2,660,000 Shares.(7)                                                                                            
|                | 
|10.4            |  | Amendment to 2007 Long Term Incentive Plan.(6)                                                                                                           
|                | 
|10.5            |  | 2008 Long Term Incentive Plan.(4)                                                                                                                        
|                | 
|10.6            |  | Form of Director Indemnification Agreement.(4)                                                                                                           
|                | 
|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 February 15, 2008 (SEC File No. 0-30831).                                             
|                | 
|(6)             |  | Incorporated by reference to Form 8-K filed with the Commission on February 25, 2008 (SEC File No. 0-30831).                                             
|                | 
|(7)             |  | Incorporated by reference to Form 8-K filed with the Commission on March 12, 2008 (SEC File No. 0-30831).                                                



55