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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended March 31, 2010



| ̈ | TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)







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

200 S. Wacker Drive, Suite 1650, Chicago, IL 60606

(Address of principal executive offices)

(312) 673-2400

(Registrants telephone number including area code)





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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of March 31, 2010, the issuer had outstanding 168,233,180 shares of its $0.0001 par value common stock.

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



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









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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES



|                              |  |                                                                                                                                                                           |  |         
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                                                           |  | Page No.
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                                                          
|                              |  |                                                                                                                                                                          
|Item 1.                       |  | Financial Statements                                                                                                                                                      |  | 1       
|                              |  |                                                                                                                                                                          
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2010 [Unaudited] and December 31,
2009                                                                              |  | 2       
|                              |  |                                                                                                                                                                          
|                              |  | Condensed Consolidated Statements of Operations for the three-month period ended March 31, 2010 and 2009 [Unaudited]                                                      |  | 3       
|                              |  |                                                                                                                                                                          
|                              |  | Condensed Consolidated Statements of Shareholders Equity (Deficit) for the three-month period ended March
 31, 2010 [Unaudited] and for the year ended December 31, 2009 |  | 4       
|                              |  |                                                                                                                                                                          
|                              |  | Condensed Consolidated Statements of Cash Flows for the three-month period ended March 31, 2010 and 2009 [Unaudited]                                                      |  | 5       
|                              |  |                                                                                                                                                                          
|                              |  | Notes to Condensed Consolidated Financial Statements [Unaudited]                                                                                                          |  | 6       
|                              |  |                                                                                                                                                                          
|Item 2.                       |  | Managements Discussion and Analysis                                                                                                                                      |  | 27      
|                              |  |                                                                                                                                                                          
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk (Not Applicable)                                                                                               |  | 37      
|                              |  |                                                                                                                                                                          
|Item 4.                       |  | Controls and Procedures                                                                                                                                                   |  | 37      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                                                          
|                              |  |                                                                                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                                                                                         |  | 38      
|                              |  |                                                                                                                                                                          
|Item 1A.                      |  | Risk Factors                                                                                                                                                              |  | 38      
|                              |  |                                                                                                                                                                          
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                               |  | 38      
|                              |  |                                                                                                                                                                          
|Item 3.                       |  | Defaults upon Senior Securities                                                                                                                                           |  | 38      
|                              |  |                                                                                                                                                                          
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                                                       |  | 38      
|                              |  |                                                                                                                                                                          
|Item 5.                       |  | Other Information                                                                                                                                                         |  | 38      
|                              |  |                                                                                                                                                                          
|Item 6.                       |  | Exhibits                                                                                                                                                                  |  | 38      
|                              | 
|SIGNATURES AND CERTIFICATIONS |  |                                                                                                                                                                          



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PART I  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
The forward-looking statements are contained principally in the sections entitled Business and Managements Discussion and Analysis and Plan of Operation. These statements involve known and unknown risks, uncertainties,
and other factors, which may cause our actual results, performance, or achievements to be materially different from any future results, performances, or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as may, should, could,
would, expects, plans, anticipates, believes, estimates, projects, predicts, potential, and similar expressions intended to identify
forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these
forward-looking statements. We discuss many of these risks in this report in greater detail under the heading Factors Affecting Future Performance. These forward-looking statements represent our estimates and assumptions only as of the
date of this report and we do not assume any obligation to update any of these statements.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)



|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                 |  | March 31,2010 |          |   | December 31,2009 |  
|                                                                                                                                                 |  | (Unaudited)   |          |   |                  |  
|ASSETS                                                                                                                                           |  |               |          |   |                  |   |          |  
|CURRENT ASSETS                                                                                                                                   |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                        |  | $             | 1,686    |   |                  | $ | 3,377    |  
|Accounts receivable, net                                                                                                                         |  |               | 5,229    |   |                  |   | 9,739    |  
|Prepaid expenses and other current assets                                                                                                        |  |               | 819      |   |                  |   | 907      |  
|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total Current Assets                                                                                                                             |  |               | 7,734    |   |                  |   | 14,023   |  
|Property and equipment, net                                                                                                                      |  |               | 902      |   |                  |   | 980      |  
|Intangible assets, net                                                                                                                           |  |               | 15,873   |   |                  |   | 16,462   |  
|Goodwill                                                                                                                                         |  |               | 1,480    |   |                  |   | 1,480    |  
|Other assets                                                                                                                                     |  |               | 981      |   |                  |   | 1,434    |  
|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                                                     |  | $             | 26,970   |   |                  | $ | 34,379   |  
|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                   |  |               |          |   |                  |   |          |  
|CURRENT LIABILITIES                                                                                                                              |  |               |          |   |                  |   |          |  
|Current maturities of long-term debt, net                                                                                                        |  | $             | 17,146   |   |                  | $ | 16,107   |  
|Accounts payable                                                                                                                                 |  |               | 13,063   |   |                  |   | 13,119   |  
|Accrued expenses                                                                                                                                 |  |               | 5,149    |   |                  |   | 5,839    |  
|Deferred revenue                                                                                                                                 |  |               | 3,986    |   |                  |   | 4,095    |  
|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total Current Liabilities                                                                                                                        |  |               | 39,344   |   |                  |   | 39,160   |  
|Liabilities for warrants to purchase common stock                                                                                                |  |               | 15,922   |   |                  |   | 17,960   |  
|Embedded derivatives of convertible debt instruments                                                                                             |  |               | 24,191   |   |                  |   | 28,214   |  
|Deferred income taxes                                                                                                                            |  |               | 49       |   |                  |   | 40       |  
|Deferred revenue, long-term portion                                                                                                              |  |               | 13       |   |                  |   | 13       |  
|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total Liabilities                                                                                                                                |  |               | 79,519   |   |                  |   | 85,387   |  
|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                 |  |              
|SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                   |  |               |          |   |                  |   |          |  
|Preferred stock, $.0001 par value; 5,000,000 authorized, none issued or outstanding as of March 31, 2010 and
December 31, 2009                   |  |               |         |   |                  |   |         |  
|Common stock, $.0001 par value; 350,000,000 authorized, 168,233,180 issued and outstanding at March 31, 2010 and
December 31, 2009, respectively |  |               | 17       |   |                  |   | 17       |  
|Additional paid-in capital                                                                                                                       |  |               | 105,805  |   |                  |   | 105,290  |  
|Accumulated other comprehensive income (loss)                                                                                                    |  |               | (64      | ) |                  |   | (55      | )
|Accumulated deficit                                                                                                                              |  |               | (158,307 | ) |                  |   | (156,260 | )
|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total Shareholders Equity (Deficit)                                                                                                             |  |               | (52,549  | ) |                  |   | (51,008  | )
|                                                                                                                                                 |  |               |          |   |                  |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                             |  | $             | 26,970   |   |                  | $ | 34,379   |  
|                                                                                                                                                 |  |               |          |   |                  |   |          |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share data)

(Unaudited)



|                                                                                   |  |                                    |        |   |      |   |         |  
|---------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                   |  | Three-month period ended March 31, |       
|                                                                                   |  | 2010                               |        |   | 2009 |  
|REVENUES                                                                           |  | $                                  | 14,676 |   |      | $ | 16,242  |  
|COST OF REVENUES                                                                   |  |                                    | 10,981 |   |      |   | 12,321  |  
|                                                                                   |  |                                    |        |   |      |   |         |  
|GROSS MARGIN                                                                       |  |                                    | 3,695  |   |      |   | 3,921   |  
|                                                                                   |  |                                    |        |   |      |   |         |  
|OPERATING EXPENSES                                                                 |  |                                    |        |   |      |   |         |  
|Compensation                                                                       |  |                                    | 2,935  |   |      |   | 3,593   |  
|Travel and entertainment                                                           |  |                                    | 317    |   |      |   | 320     |  
|Occupancy                                                                          |  |                                    | 347    |   |      |   | 397     |  
|Professional services                                                              |  |                                    | 1,639  |   |      |   | 1,739   |  
|Depreciation and amortization                                                      |  |                                    | 685    |   |      |   | 1,138   |  
|Bad debt expense                                                                   |  |                                    | 130    |   |      |   | 89      |  
|Other operating expenses                                                           |  |                                    | 282    |   |      |   | 385     |  
|                                                                                   |  |                                    |        |   |      |   |         |  
|TOTAL OPERATING EXPENSES                                                           |  |                                    | 6,335  |   |      |   | 7,661   |  
|                                                                                   |  |                                    |        |   |      |   |         |  
|OPERATING LOSS                                                                     |  |                                    | (2,640 | ) |      |   | (3,740  | )
|Interest expense, including amortization of deferred financing costs and discounts |  |                                    | (5,430 | ) |      |   | (3,132  | )
|Gain (loss) on warrants and derivatives                                            |  |                                    | 6,061  |   |      |   | (14,011 | )
|Loss on extinguishment of debt                                                     |  |                                    |       |   |      |   | (176    | )
|Income tax expense                                                                 |  |                                    | (38    | ) |      |   |        |  
|                                                                                   |  |                                    |        |   |      |   |         |  
|NET LOSS                                                                           |  | $                                  | (2,047 | ) |      | $ | (21,059 | )
|                                                                                   |  |                                    |        |   |      |   |         |  
|                                                                                   |  |                                   
|LOSS PER SHARE OF COMMON STOCK  BASIC                                             |  | $                                  | (0.01  | ) |      | $ | (0.13   | )
|                                                                                   |  |                                    |        |   |      |   |         |  
|                                                                                   |  |                                   
|LOSS PER SHARE OF COMMON STOCK  DILUTED                                           |  | $                                  | (0.01  | ) |      | $ | (0.13   | )
|                                                                                   |  |                                    |        |   |      |   |         |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

(in thousands, except share data)

(Unaudited)



|                                                         |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|-------------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------------------ |  | - | ------------------------------------------ | - |  | ---------------------------------- | --- | - |  | - | ------- | -
|                                                         |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity (Deficit) |    
|Balance, January 1, 2009                                 |  | 154,281,018  |  | $           | 16 |                          | $ | 101,606            |  | $ | (103,426                                   | ) |  | $                                  | 7   |   |  | $ | (1,797  | )
|Conversion of debt to common stock                       |  | 13,952,162   |  |             | 1  |                          |   | 1,981              |  |   |                                           |   |  |                                    |    |   |  |   | 1,982   |  
|Stock-based compensation expense                         |  |             |  |             |   |                          |   | 1,703              |  |   |                                           |   |  |                                    |    |   |  |   | 1,703   |  
|Foreign currency translation adjustment                  |  |             |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    | (62 | ) |  |   | (62     | )
|Net loss for 2009                                        |  |             |  |             |   |                          |   |                   |  |   | (52,834                                    | ) |  |                                    |    |   |  |   | (52,834 | )
|                                                         |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|Balance, December 31, 2009                               |  | 168,233,180  |  | $           | 17 |                          | $ | 105,290            |  | $ | (156,260                                   | ) |  | $                                  | (55 | ) |  | $ | (51,008 | )
|Stock-based compensation expense                         |  |             |  |             |   |                          |   | 515                |  |   |                                           |   |  |                                    |    |   |  |   | 515     |  
|Foreign currency translation adjustment                  |  |             |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    | (9  | ) |  |   | (9      | )
|Net loss for the three-month period ended March 31, 2010 |  |             |  |             |   |                          |   |                   |  |   | (2,047                                     | ) |  |                                    |    |   |  |   | (2,047  | )
|                                                         |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|Balance, March 31, 2010                                  |  | 168,233,180  |  | $           | 17 |                          | $ | 105,805            |  | $ | (158,307                                   | ) |  | $                                  | (64 | ) |  | $ | (52,549 | )
|                                                         |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except share data)

(Unaudited)



|                                                        |  |                                    |        |   |      |   |        |  
|------------------------------------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ------ | -
|                                                        |  | Three-month period ended March 31, |       
|                                                        |  | 2010                               |        |   | 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                    |  |                                    |        |   |      |   |        |  
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     |  | $                                  | 2,385  |   |      | $ | (1,790 | )
|                                                        |  |                                    |        |   |      |   |        |  
|                                                        |  |                                   
|CASH FLOWS FROM INVESTING ACTIVITIES                    |  |                                    |        |   |      |   |        |  
|Change in deposits                                      |  |                                    | 4      |   |      |   |       |  
|Purchase of property and equipment                      |  |                                    | (18    | ) |      |   | (96    | )
|                                                        |  |                                    |        |   |      |   |        |  
|NET CASH USED IN INVESTING ACTIVITIES                   |  |                                    | (14    | ) |      |   | (96    | )
|                                                        |  |                                   
|CASH FLOWS FROM FINANCING ACTIVITIES                    |  |                                    |        |   |      |   |        |  
|Repayment of long-term debt                             |  |                                    | (4,003 | ) |      |   | (10    | )
|Payment of financing costs                              |  |                                    | (50    | ) |      |   |       |  
|                                                        |  |                                    |        |   |      |   |        |  
|NET CASH USED IN FINANCING ACTIVITIES                   |  |                                    | (4,053 | ) |      |   | (10    | )
|                                                        |  |                                    |        |   |      |   |        |  
|Effect of exchange rate on cash and cash equivalents    |  |                                    | (9     | ) |      |   | 25     |  
|                                                        |  |                                    |        |   |      |   |        |  
|Decrease in cash and cash equivalents                   |  |                                    | (1,691 | ) |      |   | (1,871 | )
|Cash and cash equivalents  beginning of period         |  |                                    | 3,377  |   |      |   | 4,598  |  
|                                                        |  |                                    |        |   |      |   |        |  
|Cash and cash equivalents  end of period               |  | $                                  | 1,686  |   |      | $ | 2,727  |  
|                                                        |  |                                    |        |   |      |   |        |  
|                                                        |  |                                   
|SUPPLEMENTAL CASH FLOW INFORMATION                      |  |                                    |        |   |      |   |        |  
|Cash paid for interest                                  |  | $                                  | 462    |   |      | $ | 300    |  
|Cash paid for income taxes                              |  |                                    | 42     |   |      |   |       |  
|                                                        |  |                                   
|NON-CASH INVESTING AND FINANCING ACTIVITIES             |  |                                    |        |   |      |   |        |  
|Conversion of debt to common stock                      |  |                                    |       |   |      |   | 1,860  |  
|Issuance of July Debentures to satisfy debt obligations |  |                                    | 1,451  |   |      |   |       |  

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 Condensed Consolidated Financial Statements

March 31, 2010 (Unaudited)

NOTE 1. Organization and Basis of Presentation.

Description of Business

Capital Growth Systems, Inc. (CGSI) and its subsidiaries (the Company) operate in one reportable segment as a single source telecom
logistics provider in North America and the European Union. The Company helps customers improve efficiency, reduce cost, and simplify operations of their complex global networks  with a particular focus on access networks.

Basis of Presentation

The Companys unaudited condensed consolidated financial statements as of and for the three-month period ended March 31, 2010
and 2009, have been prepared in accordance with generally accepted accounting principles for interim information and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not
contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of the Companys management, all adjustments, consisting of normal, recurring
adjustments, considered necessary for a fair statement have been included. The results for the three-month period ended March 31, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010.
Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for the most recent disclosure of the Companys accounting policies.

The Companys condensed consolidated financial statements include the accounts of Capital Growth Systems, Inc. (CGSI) and its
wholly-owned operating subsidiaries: 20/20 Technologies, Inc. (20/20), Magenta netLogic Ltd. (Magenta) which operates in the United Kingdom, CentrePath, Inc. (CentrePath), Global Capacity Group, Inc. (GCG), and Global Capacity Direct, LLC, (GCD).
Except where necessary to distinguish the entities, together they are referred to as the Company.

All material
intercompany transactions and balances have been eliminated in consolidation.

The foreign currency translation adjustments
resulting from the consolidation of Magenta, the Companys United Kingdom subsidiary, have not been significant.

Amounts, exclusive of shares and per share data, are shown in thousands of dollars unless otherwise noted.

Comprehensive Income (Loss)

Comprehensive loss is as follows:



|                                        |  |                                    |        |   |      |   |         |  
|--------------------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ------- | -
|                                        |  | Three-month period 
endedMarch 31, |       
|                                        |  | 2010                               |        |   | 2009 |  
|Net loss                                |  | $                                  | (2,047 | ) |      | $ | (21,059 | )
|Foreign currency translation adjustment |  |                                    | (9     | ) |      |   | 25      |  
|                                        |  |                                    |        |   |      |   |         |  
|Comprehensive loss                      |  | $                                  | (2,056 | ) |      | $ | (21,034 | )
|                                        |  |                                    |        |   |      |   |         |  

Use of Estimates

The preparation of financial statements 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 prior period operating expenses previously reported on the condensed consolidated statement of operations have been reclassified
to conform to the current period presentation. These reclassifications had no impact on the Companys previously reported net loss for the three-month period ended March 31, 2009.



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Going Concern

The accompanying condensed consolidated statements have been prepared on a going concern basis, which contemplates the realization of
assets and the discharge of liabilities in the normal course of business for the foreseeable future. As of March 31, 2010, the Companys current liabilities exceeded its current assets by $31.6 million. Included in the current liabilities
is $17.1 million of current maturities of long-term debt, net of $27.6 million of debt discount associated with the initial fair value of related warrants and embedded derivatives and $20.6 million associated with OID and imputed interest. Cash on
hand at March 31, 2010 was $1.7 million (not including $0.4 million restricted for outstanding letters of credit).

The
Companys net working capital deficiency, accumulated deficit and recurring operating losses raise substantial doubt about its ability to continue as a going concern. In addition, due to covenant violations, the Companys Term Loan is
callable by its Senior Lender. The Senior Lenders previous forbearance agreement expired on April 12, 2010. On March 25, 2010, the Senior Lender advised that it did not extend such forbearance, requested payment of default interest,
and reasserted the requirement for the Company to maintain $1.5 million in cash at all times. The Senior Lender had been reiterating its desire that the Term Loan be paid in full at the earliest date possible. The Company had been pursuing
alternative sources of financing during this period.

On May 3, 2010, Pivotal Global Capacity, LLC, an affiliate of the
Pivotal Group of companies engaged in the private equity business and based in Phoenix, Arizona (Pivotal), successfully closed on its purchase of all the rights and obligations of the Senior Lender (ACF CGS, L.L.C.) with respect to
the Term Loan and Security Agreement dated November 19, 2008, as amended, with no changes in the terms and conditions. Pivotal has been assigned the same rights and obligations of the previous holder and has stepped into the role as the new
Senior Lender in the same capacity as ACF CGS, L.L.C. The Company is currently in default and is in breach of certain covenants of the Term Loan, as it had been with the previous Lender. See the Subsequent Events note for further details.

Management is also actively pursuing sources of capital to refinance or refund the Term Loan and provide additional working
capital. If our lenders or vendors do not maintain their forbearance, we may be forced to raise additional capital through issuance of new equity or increasing our debt load, or a combination of both. There can be no assurance that the Company will
be successful in completing any of these activities on terms that would be favorable to the Company, if at all.

NOTE 2. Recent Accounting
Pronouncements.

Recently Adopted Accounting Pronouncements

In December 2009, the FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities,which amends ASC 810, Consolidation to address the elimination of the concept of a qualifying special purpose entity. The standard also replaces the quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the
entity or the right to receive benefits from the entity. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE whereas previous accounting guidance required reconsideration of whether an
enterprise was the primary beneficiary of a VIE only when specific events had occurred. The standard provides more timely and useful information about an enterprises involvement with a variable interest entity and will be effective as of the
beginning of interim and annual reporting periods that begin after November 15, 2009. The Company adopted the standard on January 1, 2010.

In January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair Value Measurements, which provides
amendments to ASC 820 Fair Value Measurements and Disclosures, including requiring reporting entities to make more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the
valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements including information on purchases, sales, issuances, and settlements on a gross basis and (4) the transfers between Levels 1, 2, and 3. The standard
is effective for annual reporting period beginning after December 15, 2009, except for Level 3 reconciliation disclosures, which are effective for annual periods beginning after December 15, 2010. The Company adopted the standard for
Levels 1 and 2 on January 1, 2010, and does not expect the adoption of the standard for Level 3, on January 1, 2011, to have a material impact on its consolidated financial statements.

The FASB updated ASC Topic 810, Consolidations, and ASC Topic 860, Transfers and Servicing, which significantly changed the
accounting for transfers of financial assets and the criteria for determining whether to consolidate a variable interest entity (VIE). The update to ASC Topic 860 eliminates the qualifying special purpose entity (QSPE) concept, establishes
conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the financial asset de-recognition criteria, revises how interests retained by the transferor in a sale of financial assets initially are measured, and
removes the guaranteed mortgage securitization re-characterization provisions. The update to ASC Topic 810 requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining a VIEs primary beneficiary
from a mainly quantitative assessment to an exclusively qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of
a VIE. The Company adopted the provisions of these staff positions effective January 1, 2010.



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The adoption of the pronouncements above did not have a material effect on the
Companys financial position or results of operations.

New Accounting Pronouncements Not Yet Effective

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue
Recognition)(ASU 2009-13) and ASU 2009-14, Certain Arrangements that Include Software Elements, (amendments to ASC Topic 985, Software) (ASU 2009-14). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated
selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14
removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance.
ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company is currently
evaluating the impact of the adoption of these ASUs on its consolidated results of operations of financial condition. The Company will implement the standard effective January 1, 2011.

In April 2010, the FASB issued ASU 2010-13, Topic 718, CompensationStock Compensation, which addressed the classification of
an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. ASU 2010-13 specifies that a share-based payment awarded that contains a condition that is not a
market, performance, or service condition is required to be classified as a liability unless it otherwise qualifies as equity. The amendment is effective for fiscal years, and interim period beginning on or after December 15, 2010. The Company
is currently evaluating the impact of the adoption of this ASU on its consolidated results of operations of financial condition. The Company will implement the standard effective January 1, 2011.

NOTE 3. Property and Equipment.

Property and equipment consist of the following:



|                           |  |               |        |   |                  |   |        |  
|-------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                           |  | March 31,2010 |        |   | December 31,2009 |  
|Furniture and fixtures     |  | $             | 343    |   |                  | $ | 343    |  
|Computer equipment         |  |               | 976    |   |                  |   | 972    |  
|Leasehold improvements     |  |               | 813    |   |                  |   | 813    |  
|Machinery and equipment    |  |               | 1,645  |   |                  |   | 1,630  |  
|                           |  |               |        |   |                  |   |        |  
|                           |  |               | 3,777  |   |                  |   | 3,758  |  
|Accumulated depreciation   |  |               | (2,875 | ) |                  |   | (2,778 | )
|                           |  |               |        |   |                  |   |        |  
|Net property and equipment |  | $             | 902    |   |                  | $ | 980    |  
|                           |  |               |        |   |                  |   |        |  

Depreciation of property and equipment was $0.1 million and $0.2 million for the three month period ended
March 31, 2010 and 2009, respectively.

NOTE 4. Intangible Assets and Goodwill.

Intangible Assets

Intangible assets were acquired in business combinations. The assets have no significant residual values. All intangible assets are
subject to amortization.

The Company did not recognize any impairment charges related to long-lived assets for the
three-month period ended March 31, 2010. The following tables reflect the components of intangible assets as of March 31, 2010 and December 31, 2009, respectively:



|                       |  |                              |  |                |        |                         |   |        |                    |  |   |       
|---------------------- |  | ---------------------------- |  | -------------- | ------ | ----------------------- | - | ------ | ------------------ |  | - | ------
|                       |  |                              |  | March 31, 2010
|                       |  | Amortization Period in Years |  | GrossAmount    |        | AccumulatedAmortization |   |        | Net 
CarryingValue
|Developed technology   |  | 15                           |  | $              | 8,546  |                         | $ | (3,841 | )                  |  | $ | 4,705 
|Customer relationships |  | 15                           |  |                | 14,256 |                         |   | (3,088 | )                  |  |   | 11,168
|                       |  |                              |  |                |        |                         |   |        |                    |  |   |       
|Total                  |  | 13.7 remaining average years |  | $              | 22,802 |                         | $ | (6,929 | )                  |  | $ | 15,873
|                       |  |                              |  |                |        |                         |   |        |                    |  |   |       



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|                       |  |                              |  |                   |        |                         |   |        |                  |  |   |                    |   |  |   |       
|---------------------- |  | ---------------------------- |  | ----------------- | ------ | ----------------------- | - | ------ | ---------------- |  | - | ------------------ | - |  | - | ------
|                       |  |                              |  | December 31, 2009
|                       |  | Amortization Period in Years |  | GrossAmount       |        | AccumulatedAmortization |   |        | ImpairmentLosses |  |   | Net 
CarryingValue
|Developed technology   |  | 5 to 15                      |  | $                 | 12,215 |                         | $ | (3,581 | )                |  | $ | (3,669             | ) |  | $ | 4,965 
|Customer relationships |  | 6 to 15                      |  |                   | 16,510 |                         |   | (2,759 | )                |  |   | (2,254             | ) |  |   | 11,497
|                       |  |                              |  |                   |        |                         |   |        |                  |  |   |                    |   |  |   |       
|Total                  |  | 13.9 weighted average years  |  | $                 | 28,725 |                         | $ | (6,340 | )                |  | $ | (5,923             | ) |  | $ | 16,462
|                       |  |                              |  |                   |        |                         |   |        |                  |  |   |                    |   |  |   |       

Amortization expense for the three-month period ended
March 31, 2010 and 2009 related to the long-lived intangible assets was $0.6 million and $0.9 million, respectively.

During the fourth quarter of 2009, the Company recorded an impairment loss with respect to the long-lived intangible assets totaling $5.9
million. Throughout 2009, certain previously acquired customer relationships and related technology developed to provide services to those customers became impaired as a result of the certain existing customer relationships effectively ending during
2009. The significant operating loss incurred by the Company during 2009, coupled with the fact that it became clear in the fourth quarter that certain acquired customer relationships had ended and there were no major customers utilizing certain
previously acquired developed technology, represented a triggering event which led Management to test its long-lived assets for impairment. Management performed the undiscounted cash flows recoverability test and noted that carrying amounts of
certain customer relationship assets and developed technology exceeded its projected future undiscounted cash flows indicating that impairment existed. Management then utilized a discounted cash flow model in order to determine the fair value of
these assets which were identified as impaired during the recoverability test. Managements assessment resulted in a $5.9 million write-down of the carrying value of certain developed technology and customer relationship assets associated with
the legacy business components to fair value.

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



|                           |  |   |       
|-------------------------- |  | - | ------
|Remaining 9 months of 2010 |  | $ | 1,766 
|2011                       |  |   | 2,141 
|2012                       |  |   | 1,953 
|2013                       |  |   | 1,767 
|2014                       |  |   | 1,571 
|2015                       |  |   | 1,392 
|Thereafter                 |  |   | 5,283 
|                           |  |   |       
|Total                      |  | $ | 15,873
|                           |  |   |       

Goodwill

Management determined that the Company had only one reporting unit for the purposes of goodwill impairment testing in 2009. The fair value
of the Companys reporting unit was determined using a discounted cash flow method. The results of the annual impairment test indicated that there was a $12.5 million impairment of goodwill recorded in the fourth quarter of 2009.

The value at acquisition and current carrying value of goodwill for the acquired companies are as follows:



|      |  |                    |        |                             |   |         |                  |  |                    |       |                             |   |        |                  |   |         |   |  |   |      
|----- |  | ------------------ | ------ | --------------------------- | - | ------- | ---------------- |  | ------------------ | ----- | --------------------------- | - | ------ | ---------------- | - | ------- | - |  | - | -----
|      |  | March 31, 2010     |        | December 31, 2009          
|      |  | ValueatAcquisition |        | AccumulatedImpairmentLosses |   |         | NetCarryingValue |  | ValueatAcquisition |       | AccumulatedImpairmentLosses |   |        | NetCarryingValue
|Total |  | $                  | 13,993 |                             | $ | (12,513 | )                |  | $                  | 1,480 |                             | $ | 13,993 |                  | $ | (12,513 | ) |  | $ | 1,480
|      |  |                    |        |                             |   |         |                  |  |                    |       |                             |   |        |                  |   |         |   |  |   |      

The Company is considered to be a single business
reporting unit as discrete financial information is not fully developed nor are the operations of the business managed at any segment level. The Company provides integrated services, markets integrated solutions, utilizes shared management and
technology, and has a shared sales force across all business components. Under U.S. GAAP, a reporting unit for the purposes of the goodwill impairment test is the same as, or one level below, an operating segment. One level below an operating
segment is referred to as a component. Once components are identified, an entity would consider whether any components of an operating segment should be aggregated into one or more reporting units based on whether the components have similar
economic characteristics.

The first step of the goodwill impairment test used to identify potential
impairment compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step
of the impairment test is unnecessary. Under Step 2, the implied fair value of goodwill is estimated by subtracting the estimated current fair value of identifiable net assets from the estimated fair value as of the measurement date. The Company
conducts its annual impairment test as of
December 31st.



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In 2009, the fair value of goodwill was determined using a discounted cash flow model from
projections of the future operations of the business utilizing forecasts of operations, financial position, and cash flows provided by Management. The resultant fair value of the Companys reporting unit was less than its carrying value at
December 31, 2009, requiring step two of the goodwill impairment test to be performed. As a result of the step two analysis, the Company assigned the fair value to the assets and liabilities and determined that the calculated
implied fair value of goodwill was approximately $1.5 million, resulting in a $12.5 million impairment charge to write-down the carrying value of goodwill to the implied fair value.

Determining the fair value of a reporting unit is a matter of judgment and often involves the use of significant estimates and
assumptions. The use of different assumptions would increase or decrease estimated discounted future cash flows and could increase or decrease an impairment charge. If the use of these assets or the projections of future cash flows change in the
future, the Company may be required to record additional impairment charges. An erosion of future business could create additional impairment in goodwill or other long-lived assets and require a significant charge in future period.

NOTE 5. Accrued Expenses.

Accrued expenses consist of the following:



|                               |  |               |       |                  |   |      
|------------------------------ |  | ------------- | ----- | ---------------- | - | -----
|                               |  | March 31,2010 |       | December 31,2009
|Accrued carrier disputes       |  | $             | 1,207 |                  | $ | 1,661
|Compensation and payroll taxes |  |               | 1,320 |                  |   | 1,067
|Accrued professional services  |  |               | 1,039 |                  |   | 997  
|Accrued excise taxes           |  |               | 908   |                  |   | 858  
|Accrued interest expense       |  |               | 66    |                  |   | 620  
|Other accrued expenses         |  |               | 609   |                  |   | 636  
|                               |  |               |       |                  |   |      
|Total accrued expenses         |  | $             | 5,149 |                  | $ | 5,839
|                               |  |               |       |                  |   |      



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NOTE 6. Debt.

Debt consists of the following:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |               |        |                   |   |       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | March 31,2010 |        | December 
31,2009
|Term Loan, interest at the higher of prime or 5%, plus a margin of 14% (5% paid-in-kind), due November 2010, debt discount at
issuance of $2.2 million, outstanding principal balance of $8.5 million. At March 31, 2010, the outstanding principal balance was $5.3 million, plus paid-in-kind interest of $0.1 million, net of unamortized debt discount of $0.5 million. At
December 31, 2009, the outstanding principal balance was $8.5 million, plus paid-in-kind interest of $0.8 million, net of unamortized debt discount of $1.0 million                                                                                                                                 |  | $             | 4,941  |                   | $ | 8,314 
|July Debentures, $10.5 million, issued in July 2009 and August 2009, Original Issue Discount (OID) and debt discount at issuance
of $4.5 million and $5.2 million, respectively, interest at the higher of prime or 5%, plus a margin of 14% (5% paid-in-kind), and due May 2011. At March 31, 2010, the outstanding principal balance was $11.9 million plus $0.2 million
payment-in-kind interest, net of unamortized OID and debt discount of $3.4 million each. At December 31, 2009, the outstanding principal balance was $10.5 million, plus $0.1 million payment-in-kind interest, net of unamortized OID and debt
discount of $3.6 million and $4.1 million, respectively |  |               | 5,279  |                   |   | 2,931 
|Amended March Debentures, OID and debt discount at issuance of $12.4 million and $18.4 million, respectively, due March 2015,
outstanding principal balance of $30.8 million at issue. At March 31, 2010, the outstanding principal balance was $26.9 million, net of unamortized OID and debt discount of $10.6 million and $13.5 million, respectively. At December 31,
2009, the outstanding principal balance was $26.9 million, net of unamortized OID and debt discount of $11.0 million and $14.1 million, respectively.                                                                                                                                                    |  |               | 2,776  |                   |   | 1,764 
|November Debentures, OID and debt discount at issuance of $5.9 million and $9.0 million, respectively, due November 2015,
outstanding principal balance of $14.9 million at issue. At March 31, 2010, the outstanding principal balance was $14.9 million, net of unamortized OID and debt discount of $5.3 million and $8.2 million, respectively. At December 31, 2009,
the outstanding principal balance was $14.9 million, net of unamortized OID and debt discount of $5.6 million and $8.5 million, respectively                                                                                                                                                             |  |               | 1,344  |                   |   | 840   
|VPP Debentures, outstanding principal balance of $2.0 million issued in July 2009, OID and debt discount at issuance of $0.8
million and $1.2 million, respectively, and due November 2011. As of March 31, 2010 the outstanding principal balance was $2.0 million, net of unamortized OID and debt discount of $0.5 million and $0.9 million, respectively. As of
December 31, 2009, the outstanding principal balance was $2.0 million, net of unamortized OID and debt discount of $0.6 million and $1.0 million, respectively                                                                                                                                                 |  |               | 585    |                   |   | 380   
|Seller Debenture, $4.0 million non-interest bearing note, net of debt discount for imputed interest and conversion feature at
issuance of $1.5 million and $2.0 million, respectively, due May 2011, and renewable monthly thereafter. As of March 31, 2010, the outstanding principal balance was $4.0 million, net of unamortized debt discount of $1.8 million. At
December 31, 2009, the outstanding principal balance was $4.0 million, net of unamortized debt discount of $2.1 million                                                                                                                                                                                      |  |               | 2,197  |                   |   | 1,851 
|Unsecured loans from certain employees of Magenta, interest at 8.43%, due upon demand                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |               | 24     |                   |   | 27    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |               |        |                   |   |       
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |               | 17,146 |                   |   | 16,107
|Less: current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |               | 17,146 |                   |   | 16,107
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |               |        |                   |   |       
|Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | $             |       |                   | $ |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |               |        |                   |   |       

All long-term debts are presented as current
obligations as a result of the Company being in default on certain reporting and administrative covenants. The long-term debt commitments, including the maturity value of OID securities, are $65.3 million as of March 31, 2010 and $67.7 million
as of December 31, 2009. This amount does not include minimum interest due on the term note per the default clause of the Agreement.

The reporting and administrative covenants established under the term note and the other debt instruments issued in November 2008 were
created assuming an ongoing relationship with a significant customer. As that relationship effectively ended in 2009, the Company had received a number of default notices, amendments to the loan agreements and forbearance agreements. On May 3,
2010, Pivotal Global Capacity, LLC, an affiliate of the Pivotal Group of Companies, successfully closed on its purchase of rights and obligations of the Senior Lender (ACF CGS, L.L.C.) with respect to the Term Loan and Security Agreement dated
November 19, 2008, as amended, with no changes in terms and conditions. The Company will seek to raise additional capital as necessary to meet future capital and liquidity requirements. See the Subsequent Events note for details of this
financing agreement.



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Term Loan: The Term Loan Agreement provided for a senior secured term loan (Term Loan
or Senior Debt) of $8.5 million effective November 19, 2008. The Company, each of its subsidiaries and GCD (Borrowers) granted to ACF CGS, L.L.C. (Senior Lender or Agent) a security interest in substantially all of its assets and a collateral
pledge of all of the common stock or limited liability company interests of its wholly-owned subsidiaries. Interest on the Term Loan is payable monthly at the higher of prime or 5% plus a margin of 14%, with 5% of that rate paid-in-kind.
Paid-in-kind interest compounds monthly and is added to the outstanding principal balance of the Term Loan. The Company incurred debt issuance costs of $1.8 million in connection with the Term Loan Agreement, which included a Term Loan origination
fee of 2.5%, financial advisory services, legal fees and other costs.

The Term Loan matures November 2010. The Company may
voluntarily prepay the Term Loan upon at least 30 days prior written notice to the Borrowers. The Term Loan prepayment premium is 2% of the outstanding balance paid, or 1% of the $8.5 million original principal amount if the Company repays the Term
Loan during months 12-18 or 19-24 from the origination date, respectively. The Term Loan Agreement contains certain mandatory prepayments which, when made, do not trigger any of the prepayment premiums. If the Company sells assets outside of the
ordinary course of business or incurs additional indebtedness after the Financial Closing, the Company must use the net proceeds to pay down the Term Loan. Similarly, the Company has agreed that two-thirds of any collections it receives on its
existing accounts receivable with its largest customer as of September 30, 2008 will be used to pay down the Term Loan. The Term Loan Agent waived the right to apply the proceeds of the July Debentures and the VPP Debentures to pay down the
Term Loan in the Intercreditor Agreement. During the period ended March 31, 2010, $3.7 million received from the previously noted customer was used to reduce the Term Loan outstanding balance.

The Term Loan Agreement contains financial covenants that require the Company to maintain a minimum cash balance and to achieve a minimum
monthly recurring circuit revenue and margin. Beginning with the first quarter of 2009, the Company was subject to additional financial covenants related to a minimum ratio of EBITDA (defined as earnings before interest, taxes, depreciation,
amortization, non-cash stock compensation and warrant expense and other items related to the acquisition of GCD) to fixed charges, as defined, and a maximum ratio of debt to EBITDA. As of December 31, 2009, the Company was not in compliance
with the EBITDA covenant, and a forbearance agreement as described below was obtained with the Agent. The Term Loan Agreement also contains restrictive covenants that limit additional indebtedness, liens, guarantees, acquisitions or other
investments, the sale or disposal of assets outside the ordinary course of business, payments on other indebtedness, dividends or other capital distributions, stock repurchases, capital expenditures or new capital leases and compensation increases
to certain members of the Companys management. The Company has various reporting requirements under the Term Loan Agreement. The Term Loan Agreement contains an affirmative covenant requiring the Company to increase its authorized common
shares by 12 million. In connection with the July Debentures, the increase in authorized shares was to have been finalized by January 26, 2010. A waiver extending the authorized share increase to March 19, 2010 was obtained from the
Senior Lender. Per the Senior Lenders letter of March 25, 2010, this forbearance was not extended and several items of default exist.

In connection with entering into the Term Loan Agreement, the Company issued to the Agent a warrant (Agent Warrant) to purchase up to
12 million shares of its Common Stock with a term of five years and an exercise price of $0.24 per share. The Agent Warrant is exercisable upon an increase in the Companys authorized shares of common stock (Authorized Share Increase) and
expires in November 2013. The Agent Warrant had a grant date fair value of $2.2 million determined using the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.27 per share, expected volatility of 141.2%,
risk-free interest rate of 2.1%, expected term of 5.0 years and no dividends. The fair value of the warrants, adjusted for the uncertainty related to the Authorized Share Increase, was recorded as a decrease to the carrying value of the Term Loan,
or debt discount, and an increase to liabilities for warrants to purchase common stock.

In April 2009, the Company entered
into a First Amendment, Waiver, Extension and Consent Agreement (the First Amendment) with the Agent, pursuant to which the holders waived and amended certain conditions contained in the Term Loan and governs the priorities and payments in favor of
the Senior Lender. In addition, the Lender exercised their right to assign a consultant to provide comfort to the Lender concerning the Companys business models and the ability to repay the loan. The Company paid fees of $0.3 million to the
consultant in connection with this review.

The Borrowers had entered into a Forbearance Agreement on July 9, 2009
(effective as of July 7, 2009), which constituted an additional Loan Document under the Loan Agreement, and which was subsequently superseded by Second Amendment and Waiver Agreement which amended the Term Loan Agreement effective
as of July 31, 2009 and introduced certain additional financial and reporting covenants. The Forbearance Agreement provided that, as of the Effective Date (as defined therein), if certain specified conditions were met that the percentage of the
collection that the Borrowers received (if any) with respect to the accounts receivable subject to the lawsuit referenced above, were to be applied toward the pay down of obligations of the Borrowers under the Loan Agreement, was to be increased to
75%. The agreement also contained an acknowledgement that the $0.04 million amendment fee paid by the Borrowers previously should be in consideration for the forbearance of the enumerated defaults through the Effective Date, and that the Borrowers
remained obligated with respect to all reasonable fees and disbursements of Agents counsel in connection with the Forbearance Agreement or other related matters.



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On December 22, 2009, the Borrowers entered into another Forbearance Agreement which
constituted an additional Loan Document under the Loan Agreement, pursuant to which the Agent agreed to forbear from exercising its rights and remedies until January 26, 2010, with respect to the defaults specified, including
violation of the minimum EBITDA covenant, and deviation by more than 15% from its vendor payment plan. The Company incurred fees of $0.1 million in connection with the Forbearance Agreement.

On December 31, 2009, the Agent and Borrowers entered into the first amendment to the Forbearance Agreement extending the
forbearance termination date to the earlier of February 22, 2010, or the date on which the Borrowers violate any financial covenant or other term, other than the specified defaults, and to extend the date the Borrowers were required to enter
into a definitive transaction that will result in a mandatory loan pay down in an amount not less than $4.0 million to the Senior Lender, on or before December 31, 2009. Because of this First Amendment, Borrowers agreed to pay a total of $0.1
million in default interest accruing from November 6, 2009 to February 22, 2010. In addition, Borrowers are required to pay 100% of any British Telecom receivable payment received; make a mandatory pay down of the Term Loan in an amount
not less than $4.0 million on the date the Initial Closing occurs under that certain Asset Purchase Agreement by and among the Company, GCG, GCD, and Global Telecom & Technology Americas, Inc., dated on December 31, 2009
(the APA); and deliver to the Agent, on or before January 7, 2010, a consent letter (the Consent Letter), countersigned by each applicable service provider, confirming that all cash obligations of the Company, GCG, and GCD for fees and expenses
incurred in connection with those transactions contemplated by the APA (including all associated brokerage fees) shall, in no event, exceed $0.5 million in the aggregate. The APA, as amended, has lapsed due to no closing occurring by the outside
date (April 30, 2010) called for in the APA.

A third Forbearance Agreement extending the forbearance termination date to
April 12, 2010, was entered into on March 30, 2010, under substantially the same terms and conditions of the prior forbearance agreements. See Subsequent Events note regarding the assignment of the Term Loan.

2009 Financings

In July
2009, the Company entered into the following new financing agreements: (i) a Second Amendment, and Waiver Agreement (the Second Amendment) with the Agent, which amends certain conditions contained in the Term Loan and governs the priorities and
payments in favor of the Senior Lender, (ii) a July Debt Subordination and Intercreditor Agreement (the July Debentures) with the holders of its junior secured convertible debentures issued on November 20, 2008 (November Debentures and
Amended March Debentures), pursuant to which the holders waived and amended certain conditions contained in the November and Amended March Debentures and the corresponding securities purchase agreement which enabled the Company to enter into the
Second Amendment and Waiver Agreement, and agree to subordinate the debt to the Senior Lender, (iii) a Vendor Payment Plan Debt Subordination and Intercreditor Agreement (the VPP Debenture) with the holders of its junior secured convertible
debentures issued on November 20, 2008 (November Debentures) and (Amended March Debentures), pursuant to which the VPP holders agreed to subordinate the debt to all debt outstanding as of July 31, 2009, (iv) a Securities Purchase
Agreement (the July SPA) with the holders of its junior secured convertible debentures, and a Securities Purchase Agreement with the holders of its junior secured VPP Debentures, pursuant to which the Company issued the July Debentures and VPP
Debentures, respectively.

July Debentures: Effective July 31, and August 24, 2009, the Company issued two
tranches that totaled $10.5 million of principal amount of OID senior secured convertible debentures (July Debentures), representing the funding of $6.0 million of subscription amount (inclusive of $0.4 million of subscriptions credited to the
holders of the March and November Debentures for entering into a waiver and amendment agreement which, among other things, consented to the issuance of the July Debentures, and inclusive of $0.1 million against liabilities of the Company to Aequitas
Capital Management, Inc.) and $4.5 million of OID added to principal, coupled with warrants to purchase up to 18.8 million shares of common stock, all exercisable or convertible at $0.24 per share (the July Warrants and coupled with the July
Debentures, the Units). The transaction resulted in proceeds to the Company of $5.6 million, before $0.5 million of financing fees. The July Debentures are secured by a security interest in the assets of the Company and its subsidiaries, and
Aequitas Capital Management, Inc. was appointed collateral agent for the July Debenture holders.

At issuance, the July
Debentures are convertible into 43.8 million shares of common stock at $0.24 per share, based on the aggregate maturity value, at any time at the option of the holders, but not before the Companys Authorized Share Increase. In addition,
the Company issued to the purchasers of the July Debentures warrants to purchase an aggregate of 18.8 million shares of its common stock at an exercise price of $0.24 per share. The warrants are exercisable at any time prior to their expiration
date, but not before the Authorized Share Increase and expire five years after the date of such share increase. The Company determined that the conversion feature of the July Debentures was an embedded derivative. The estimated fair value of the
warrants and embedded derivative as of the issuance date of the July Debentures, adjusted for the probability of the timing of the Authorized Share Increase, was $2.0 million and $3.2 million, respectively, and was recorded as debt discount and an
increase to liabilities for warrants to purchase common stock and embedded derivative liability, respectively. The Company determined the fair value of the warrants and embedded derivative using the Black-Scholes pricing model with these average
assumptions: common stock fair value of $0.16 per share, expected volatility of 152.4% for warrants and 154.5% for embedded derivatives, risk-free interest rate of 2.6% for warrants and 1.0% for embedded derivatives, expected term of 5.3 years for
warrants and 1.8 years for embedded derivatives and no dividends.



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The Company realized a shortfall in collection of certain designated receivables or contract
amounts by August 31, 2009. As a result, the July Units purchase agreement required a reduction in the conversion price of the July Debentures and the exercise price of the associated warrants from $0.24 per share to $0.15 per share. At the
same time, the Company entered into a Second Amendment and Waiver Agreement (Second Amendment) with its Senior Lender, the Agent and other lenders with respect to $8.5 million of senior secured financing, restoring the loan to good standing and
setting adjusted covenants and other terms and conditions.

In addition to the OID amount, the Cash Subscription Amount of the
July Debentures bears interest in an amount equal to the Cash Subscription Amount Interest, comprised of the sum of: (i) the prime rate of interest as announced in the Wall Street Journal (subject to a floor of 5%); plus
(ii) 14% per annum (the Applicable Margin). Basic Interest (comprised of the prime rate component plus 9% of the total 14% of the Applicable Margin) is payable monthly in arrears (twenty days following the end of each month), with the
remaining 5% to be paid at the option of the Company in either cash or as paid-in-kind (PIK) Interest, whereby such amount can be accrued and added to principal (in which event an additional OID factor of 75% of such amount is also added to
principal of the July Debenture). The Senior Lender July Purchaser Intercreditor Agreement permits the payment in cash of the Cash Subscription Amount Interest for so long as the Senior Loan is not in default and a blockage on payment of interest on
the July Debentures is not in effect. In the event that payment of the Cash Subscription Amount Interest is prohibited by such intercreditor agreement, then it is to be accrued and added to the principal amount of the July Debentures in the same
manner as the addition of the PIK Interest to the July Debentures (and failure to pay such interest shall in such instance not be an Event of Default under the July Debenture).

The July Debentures also require that the Company redeem 1/7 of the original OID Amount of the July Debentures forty five days following
the end of each calendar quarter, commencing with the quarter ended December 31, 2009. Cash payments of the redemption amount will only be permitted under the Senior Loan Agreement to the extent of funds available from 25% of Excess Cash Flow,
and provided that the Company is not otherwise in default under the Senior Loan Agreement or subject to a blockage period under the applicable intercreditor agreement. Provided that certain equity conditions of the Company have been met, the Company
at its option may elect to pay the Quarterly Redemption Amount (discussed below) either in cash or with Common Stock of the Company whereby the common stock would be credited with a value equal to the lesser of (i) the then existing conversion
price; or (ii) 90% of the volume weighted average price (VWAP) for the ten consecutive trading days of the common stock ended on the trading day that is immediately prior to the applicable Quarterly Redemption Date.

As required by the debenture agreement, the amount due at maturity was increased by $1.4 million during the period ended March 31,
2010, representing unpaid monthly interest of $0.5 million and additional OID amounts due on the unpaid monthly interest and the unpaid quarterly redemption payment due of $0.9 million.

The Company utilized the services of both Aequitas and Capstone Investments in accomplishing the July Debentures. The substantial
majority of the investors in the July Debentures are from the same pool of investors that participated in the 2008 financings.

In addition to the items disclosed above, during negotiation of the July 31, 2009 debt instruments, the holders of the November
Debentures and Amended March Debentures waived their rights to $1.4 million in registration rights penalties and received a portion of the July Debentures in connection with such waiver. The waiver of the registration rights penalties was accounted
for as a recovery of registration rights penalties in 2009.

VPP Debentures: The Company established a vendor payment
plan (VPP) designed to reduce past due obligations to certain of its vendors over time. In conjunction with the Second Amendment to the Loan Agreement, the Company issued $1.2 million subscription value, equal to the amount of vendor obligations,
with a 65% OID factor as Vendor Payment Plan Debentures, due November 2011. Participants in the VPP Debentures included Shefsky and Froelich, Ltd. ($0.6 million), Capstone Investments ($0.4 million), and Aequitas Capital Management, Inc., ($0.2
million) at subscription. The VPP Security Agreement is substantially a similar form of security agreement (the VPP Security Agreement) as applicable to the July Security Agreement, with Aequitas Capital Management, Inc. to serve as the Collateral
Agent.

At issuance, the VPP Debentures are convertible into common stock at $0.24 per share, or 8.3 million shares based
on the aggregate maturity value, at any time at the option of the holders, but not before the Companys Authorized Share Increase. In addition, the Company issued to the VPP Debenture holders warrants to purchase an aggregate of
3.8 million shares of its common stock at an exercise price of $0.24 per share. The warrants are exercisable at any time prior to their expiration date, but not before the Authorized Share Increase and expire five years after the date of such
share increase. The Company determined that the conversion feature of the VPP Debentures was an embedded derivative. The estimated fair value of the warrants and embedded derivative as of the issuance date of the VPP Debentures, adjusted for the
probability of the timing of the Authorized Share Increase, was $0.4 million and $0.7 million, respectively, and was recorded as debt discount and an increase to liabilities for warrants to purchase common stock and embedded derivative liability,
respectively. The Company determined the fair value of the warrants and embedded derivative using the Black-Scholes pricing model with these average assumptions: common stock fair value of $0.17 per share, expected volatility of 152.5% for warrants
and 145.8% for embedded derivatives, risk-free interest rate of 2.6% for warrants and 1.3% for embedded derivatives, expected term of 5.3 years for warrants and 2.3 years for embedded derivatives and no dividends.



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In November 2008, the Company entered into the following agreements to amend debentures
issued March 11, 2008, and issue additional debentures: (i) a Term Loan and Security Agreement (Term Loan Agreement) with the Senior Lender; (ii) a Consent, Waiver, Amendment, and Exchange Agreement (the Waiver Agreement) with the
holders of its senior secured convertible debentures issued on March 11, 2008 (March Debentures), pursuant to which the holders waived and amended certain conditions contained in the March Debentures and the corresponding securities purchase
agreement, and which enabled the Company to enter into the Term Loan Agreement, to amend and restate the March Debentures (Amended March Debentures) and to issue Junior Secured Convertible Debentures (November Debentures); (iii) a new
Securities Purchase Agreement (November SPA), pursuant to which the Company issued the November Debentures; (iv) a $3 million unsecured subordinated convertible debenture issued to the Seller of GCD (Seller Debenture), which, by its terms,
subsequently increased by $1 million to $4 million; (v) an intercreditor agreement which governs the priorities and payments in favor of the Senior Lender (Senior Lender Intercreditor Agreement) relative to the holders of the Amended March
Debentures and the November Debentures (collectively, the Debentures or Junior Secured Creditors); and (vi) an intercreditor agreement which governs the priorities and payments in favor of the Junior Secured Creditors (the Junior Lender
Intercreditor Agreement) relative to the holder of the Seller Debenture.

Amended March Debentures: Pursuant to the
November 20, 2008 Waiver Agreement, the holders of $16 million of original principal amount of March Debentures exchanged their March Debentures due March, 2013 for $28.0 million of Amended March Debentures, convertible into common stock at
$0.24 per share (the Tranche 1 Amended March Debentures). The principal amount of the Tranche 1 Amended March Debentures is comprised of the $16 million original principal amount of the March Debentures plus the sum of the following: (i) the
remainder of the interest that would have accrued under the March Debentures, $6.0 million; (ii) 25% of the original principal amount of the March Debentures, $4.0 million; (iii) liquidated damages related to the Companys failure to
timely complete the registration of its common stock, as discussed below, equal to 12% of the original principal amount, $1.9 million; and (iv) interest on the liquidated damages at 16% per annum, $0.1 million (collectively, the Tranche 1
Add-on Amount).

The remaining March Debentures were held by two affiliated holders, who held a total of $3.0 million of
original principal amount. The two affiliated holders subsequently reduced their original principal amount to an aggregate outstanding balance of $2.5 million through conversions of their principal to common stock. Pursuant to the November 20,
2008 Waiver Agreement, the Company exchanged their March Debentures for $2.9 million of Amended March Debentures (the Tranche 2 Amended March Debentures), which mirror the terms of the Tranche 1 Amended March Debentures. The principal amount of the
Tranche 2 Amended March Debentures is comprised of the $2.5 million outstanding balance of the March Debentures plus the sum of the following: (i) liquidated damages related to the Companys failure to timely complete the registration of
its common stock, as discussed below, equal to 12% of the original principal amount, $0.4 million and (ii) legal fees incurred by the two affiliated holders in negotiation and documentation of the revised transactions (collectively, the Tranche
2 Add-on Amount). In addition, at the Financial Closing, the Company made a one-time payment to the two affiliated holders in the aggregate of $0.9 million, which was the sum of the interest accrued on the March Debentures up to the amendment date
and the remainder of the interest that would have accrued under their March Debentures. At December 31, 2009, and March 31, 2010, the balances owed to these holders were not material.

The Amended March Debentures are due March 2015. The warrants originally issued with the March Debentures, discussed below, remain
outstanding and the March 2013 expiration date of the warrants was unchanged. The Amended March Debentures are OID securities and do not call for the payment of interest over their term. The Company is required to make quarterly redemption payments
of the Add-on Amounts beginning July 1, 2009 through the maturity date, at which time the remaining principal balance will also be due. The November 20, 2008 Senior Lender Intercreditor Agreement contains certain conditions to the cash
payment of the quarterly redemption amounts. To the extent the Company fails to satisfy those conditions, the Amended March Debenture holders, at their election, can accept either payment of such amount with shares of common stock, provided the
Company has completed the Authorized Share Increase and met certain other conditions as defined by the March Amended Debentures, or, alternatively, accrue the unpaid portion with interest until maturity.

In July 2009, in conjunction with the issuance of the July Debentures, Amended March Debenture holders were allowed the right to exercise
up to the lesser of their Amended March Debenture balance or five times the subscription price of the July Debentures purchased by them, at $0.15 per share and the quarterly redemption payments due July 1, 2009 through April, 2012 were deferred
until the Maturity date, March 11, 2015.

The holders of the Amended March Debentures retain the right at any time to
convert up to an aggregate of $14.4 million of the face amount into common stock of the Company at $0.24 per share or up to 60.0 million shares on an as converted basis and convert up to an aggregate of $3.2 million of the face amount into
common stock of the Company at $0.15 per share or up to 21.0 million shares on an as converted basis. During the year ended December 31, 2009, holders converted $2.9 million of the Amended March Debentures into 13.9 million shares of
common stock. There were no debt conversions during the three-month period ended March 31, 2010.



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The November 20, 2008 amendment and restatement of the March Debentures was deemed a
debt extinguishment and the Company recorded a loss on extinguishment of the March Debentures of $4.8 million. The write-off includes unamortized debt discount and deferred financing costs related to the March Debentures of $16.0 million and $1.1
million, respectively, the one-time payment to the holders of the Tranche 2 Amended March Debentures of $0.9 million, offset by the write-off of the fair value of the embedded derivative liability related to the March Debentures of $10.8 million and
the restructuring of the accrued registration rights penalties related to the March Debentures of $2.3 million. Upon issuance of the Amended March Debentures, the Company recorded OID of $12.4 million based upon the difference between the aggregate
$30.9 million face amount of the Amended March Debentures and the original principal amount of the March Debentures at the amendment date of $18.5 million. The Company determined that the conversion feature of the Amended March Debentures was an
embedded derivative. Accordingly, the estimated fair value at the amendment date, adjusted for the probability of the Authorized Share Increase, was recorded as additional debt discount and an increase to embedded derivative liability. The initial
fair value of the embedded derivative of $24.2 million exceeded the $18.5 million original principal amount of the Amended March Debentures by $5.7 million, which was recognized immediately as interest expense. The Company determined the fair value
of the embedded derivative using the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.22 per share, expected volatility of 141.8%, risk-free interest rate of 1.0%, expected term of 6.3 years and no dividends.

The July 31, 2009 modification to the Amended March Debentures was also deemed a debt extinguishment and the Company
recorded a gain on extinguishment of the Amended March Debentures of $2.2 million. The extinguishment includes the write-off of unamortized debt discount and unamortized original issuance discount related to the Amended March Debentures of $13.2
million and $10.6 million, respectively, offset by the write-off the fair value of the embedded derivative liability related to the Amended March Debentures of $16.4 million. In connection with the modification of the Amended March Debentures, the
Company recorded OID of $12.0 million based upon the difference between the aggregate $27.6 million face amount of the modified Amended March Debentures and the principal amount of the Amended March Debentures at the amendment date of $15.6 million.
The Company determined that the conversion feature of the modified Amended March Debentures was an embedded derivative. Accordingly, the estimated fair value at the amendment date, adjusted for the probability of the Authorized Share Increase (i.e.,
the obligation of the Company to subsequently amend its Articles of Incorporation to authorize the issuance of additional shares of common stock sufficient to enable the holders of the Amended March Debentures, November Debentures, and July
Debentures to convert all of such indebtedness to common stock, as well as to exercise all warrants issued to them in connection with the funding of such debt), was recorded as additional debt discount and an increase to embedded derivative
liability. The initial fair value of the embedded derivative of $18.0 million exceeded the $15.6 million principal amount of the modified Amended March Debentures by $2.4 million, which was recognized with the gain on extinguishment. The Company
determined the fair value of the embedded derivative using the Black-Scholes pricing model with the following assumptions: weighted average exercise price of $0.22 per share, expected volatility of 152.1%, risk-free interest rate of 2.71%, expected
term of 5.6 years and no dividends. The warrants issued with the March Debentures were not changed by the July 31, 2009 modifications.

The Company issued the March Debentures on March 11, 2008 through a private placement. The March Debentures were senior secured
convertible debentures with an aggregate principal amount of $19.0 million and had an interest rate of 5% in the first and second years and 10% in the next three years. Interest was payable quarterly in arrears and, at the Companys option,
could 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 was payable with respect to any late payments. In connection with the issuance of the March
Debentures, the Company incurred debt issuance costs of $2.4 million. The remaining unamortized debt issuance costs as of the date of extinguishment of the March Debentures of $1.1 million were written-off to loss on extinguishment of debt in 2008.

The March Debentures were convertible into common stock initially at $0.50 per share, or 38 million shares. In addition,
the Company issued to the purchasers of the March Debentures warrants to purchase an aggregate of 19 million shares of its common stock at an exercise price of $0.73 per share. The warrants were immediately exercisable and expire in March 2013.
The Company determined that the conversion feature and certain other provisions of the March Debentures were embedded derivatives. The estimated fair value of the warrants and embedded derivatives as of the issuance date of the March Debentures was
$10.2 million and $10.5 million, respectively, and was recorded as additional debt discount and an increase to liabilities for warrants to purchase common stock and embedded derivative liability, respectively. The aggregate initial fair value of the
warrants and embedded derivatives of $20.7 million exceeded the $19 million original principal amount of the March Debentures by $1.7 million, which was recognized immediately as interest expense. On October 7, 2008, in accordance with the
reset provision of the March Debentures, the conversion price of the debentures outstanding and the exercise price of the warrants outstanding was reduced to $0.24 per share. Effective with the reduction in exercise price of the warrants, the total
number of warrants for common stock under the March Debentures increased from 19.0 million shares to 57.8 million shares.



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November Debentures: On November 20, 2008, pursuant to the November securities
purchase agreement (SPA), the Company completed the private placement of $9.0 million of November Debentures with a maturity value of $14.9 million, and due November 2015. The Company incurred $2.0 million of debt issuance costs in connection with
the SPA. The November Debentures are OID securities and do not call for the payment of interest over their term. In connection with their issuance, the Company recorded OID of $5.9 million based upon the difference between the principal amount due
at maturity of $14.9 million and the subscription amount of $9.0 million. The Company is required to make quarterly redemption payments beginning July 1, 2009 through the maturity date, at which time the remaining principal balance will be due.
The Senior Lender Intercreditor Agreement contains certain conditions to the cash payment of the quarterly redemption amounts. To the extent the Company fails to satisfy those conditions, the November Debenture holders, at their election, can accept
either payment of such amount with shares of common stock, provided the Company has completed the Authorized Share Increase and met certain other conditions as defined by the November Debentures, or, alternatively, accrue the unpaid portion until
maturity.

The November Debentures are convertible into common stock at $0.24 per share, or 62.0 million shares based on
the aggregate maturity value, at any time at the option of the holders, but not before the Companys Authorized Share Increase. In addition, the Company issued to the purchasers of the November Debentures warrants to purchase an aggregate of
28.2 million shares of its common stock at an exercise price of $0.24 per share. The warrants are exercisable at any time prior to their expiration date, but not before the Authorized Share Increase and expire five years after the date of
Authorized Share Increase. The Company determined that the conversion feature of the November Debentures was an embedded derivative. The estimated fair value of the warrants and embedded derivative as of the issuance date of the November Debentures,
adjusted for the probability of the timing of the Authorized Share Increase, was $4.2 million and $9.6 million, respectively, and was recorded as additional debt discount and an increase to liabilities for warrants to purchase common stock and
embedded derivative liability, respectively. The aggregate initial fair value of the warrants and embedded derivative of $13.8 million exceeded the $9.0 million original principal amount of the November Debentures by $4.8 million, which was
recognized immediately as interest expense. The Company determined the fair value of the warrants and embedded derivative using the Black-Scholes pricing model with the following average assumptions: common stock fair value of $0.22 per share,
expected volatility of 141.6%, risk-free interest rate of 1.0%, expected term of 7.0 years for the derivative liability, 5.3 years for warrants, and no dividends.

In July 2009, in conjunction with the issuance of the July Debentures, November Debenture holders were allowed the right, upon an
increase in Authorized Shares, to exercise up to the lesser of their November Debenture balance or five times the subscription price of the July Debentures purchased by them, at $0.15 per share and the quarterly redemption payments due July 1,
2009 through April 1, 2012 were deferred until the Maturity date, November 20, 2015. The modification to the November Debentures was deemed a debt extinguishment and the Company recorded a loss on extinguishment of the November Debentures
of $1.7 million. The extinguishment includes the write-off of unamortized debt discount and unamortized OID related to the November Debentures of $8.1 million and $5.3 million, respectively, offset by the write-off of the fair value of the embedded
derivative liability related to the November Debentures of $7.4 million. In connection with the modification of the November Debentures, the Company recorded OID of $5.9 million based upon the difference between the aggregate $14.9 million face
amount of the modified November Debentures and the principal amount of the November Debentures at the amendment date of $9.0 million. The Company determined that the conversion feature of the modified November Debentures was an embedded derivative.
Accordingly, the estimated fair value at the amendment date, adjusted for the probability of the Authorized Share Increase, was recorded as additional debt discount of $9.0 million and an increase to embedded derivative liability. The Company
determined the fair value of the embedded derivative using the Black-Scholes pricing model with the following assumptions: weighted average exercise price of $0.20 per share, expected volatility of 152.5%, risk-free interest rate of 2.93%, expected
term of 6.3 years and no dividends. The warrants issued with the November Debentures were not changed by the July 31, 2009 modifications.

Pursuant to the Senior Lender Intercreditor Agreement, the Amended March Debentures and the November Debentures are subordinate to the
Term Loan. Under the security agreements for the Debentures, the Company granted to the Debenture holders a security interest in all assets of the Company. In addition, under the security agreement for the Amended March Debentures, the Company
pledged the capital stock of each of its subsidiaries, subordinate to the collateral pledge of such securities to the Senior Lender.

The Amended March Debentures and the November Debentures contain negative covenants, which can be waived by the holders of at least 67%
of each of the outstanding Amended March Debentures and November Debentures. The negative covenants, among other things, limit additional indebtedness, liens, guarantees, payments on indebtedness (other than as required by the Term Loan Agreement,
scheduled payments under the Amended March Debentures and the November Debentures or pro rata nonscheduled repayments of the Amended March Debentures and the November Debentures), stock repurchases and dividends or other capital distributions. Upon
an event of default and subject to the subordination provisions of the Senior Lender Intercreditor Agreement, the Debenture holders may take possession of the collateral and operate the business.



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Under the November SPA, except for certain exempt issuances including the conversion of the
Amended March Debentures, the Company is prohibited from issuing any common stock or securities convertible or exercisable into shares of common stock until the Companys shareholders approve the Authorized Share Increase. In addition, the
November SPA contained an affirmative covenant requiring the Company to complete the Authorized Share Increase within 75 days from the Financial Closing. In February 2009, the Company obtained an amendment to the November SPA that extended the time
for completion of the Authorized Share Increase to within 175 days from the Financial Closing (and which was further modified as provided in the July Debentures).

Seller Debenture: The $4.0 million Seller Debenture, due May 2011, was issued as partial consideration in the November 2008 GCD
acquisition. The Debenture is non-interest bearing so the Company discounted the note at a 19% imputed interest rate resulting in an initial carrying value of $2.5 million. Management determined the 19% rate was applicable based on the interest rate
at which the Company obtained other financing at the date of Closing. The Seller Debenture is subject to the terms of the Senior Lender Intercreditor Agreement and the Junior Lender Intercreditor Agreement.

The Seller Debenture is convertible into shares of the Companys common stock at a conversion rate of $0.24 per share, or
16.7 million shares. The Seller Debenture is convertible at any time at the option of the Seller, but not before the Companys Authorized Share Increase. The Company determined that the conversion feature of the Seller Debenture was an
embedded derivative. The estimated fair value of the embedded derivative as of the issuance date of the Seller Debenture, adjusted for the probability of the timing of the Authorized Share Increase, of $2.0 million was recorded as debt discount and
an increase to embedded derivative liability. The Company determined the fair value of the embedded derivative using the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.22 per share, expected volatility of
141.6%, risk-free interest rate of 1.0%, expected term of 2.5 years and no dividends.

NOTE 7. Fair Value Measurements.

The Company has adopted a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. In this
valuation, 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 fair value is a market-based measurement and not an entity-specific measurement.

The Company utilizes the following hierarchy in fair value measurements:



| |  |  | 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.

The Company has embedded
derivatives associated with its convertible debt instruments and warrants classified as liabilities, which are measured at fair value on a recurring basis. The embedded derivatives and the warrants are measured at fair value using the Black-Scholes
valuation model with pricing inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. 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.



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Recurring Fair Value Measurements: Liabilities measured at fair value on a recurring
basis at March 31, 2010 and December 31, 2009 are as follows, in millions:



|                                 |  |                                                                   |  |                                           |      |                                        |   |                           |   |     
|-------------------------------- |  | ----------------------------------------------------------------- |  | ----------------------------------------- | ---- | -------------------------------------- | - | ------------------------- | - | ----
|                                 |  | Quoted Prices inActive Markets 
forIdentical Liabilities(Level 1) |  | SignificantOtherObservableInputs(Level 2) |      | SignificantUnobservableInputs(Level 3) |   | BalanceatMarch 31,2010   
|Derivative financial instruments |  |                                                                  |  | $                                         | 24.2 |                                        |  |                           | $ | 24.2
|Warrant liability                |  |                                                                  |  |                                           | 15.9 |                                        |  |                           |   | 15.9
|                                 |  |                                                                   |  |                                          
|                                 |  | Quoted Prices inActive Markets 
forIdentical Liabilities(Level 1) |  | SignificantOtherObservableInputs(Level 2) |      | SignificantUnobservableInputs(Level 3) |   | BalanceatDecember 31,2009
|Derivative financial instruments |  |                                                                  |  | $                                         | 28.2 |                                        |  |                           | $ | 28.2
|Warrant liability                |  |                                                                  |  |                                           | 18.0 |                                        |  |                           |   | 18.0

Fair Value of
Financial Instruments not measured at fair value on a recurring basis: The carrying amount of cash, accounts receivable, debt, and accounts payable are considered representative of their respective fair values because of the short-term nature of
these financial instruments. Long-term debt approximates fair value due to the interest rates on the promissory notes approximating current rates.

Non-Recurring Fair Value Measurements: Assets measured at fair value on a non-recurring basis at December 31, 2009 are as
follows, in millions:



|                                |  |                                                              |  |                                             |  |                                        |      |                              |   |                                                         |  |   |       |  
|------------------------------- |  | ------------------------------------------------------------ |  | ------------------------------------------- |  | -------------------------------------- | ---- | ---------------------------- | - | ------------------------------------------------------- |  | - | ----- | -
|                                |  | Quoted Prices InActive Markets 
forIdentical Assets(Level 1) |  | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservableInputs(Level 3) |      | Balance atDecember 31, 
2009 |   | TotalGains 
(Losses)For the 
YearEndedDecember 31, 2009 | 
|Long-lived assets  Intangibles |  |                                                             |  |                                            |  | $                                      | 16.5 |                              | $ | 16.5                                                    |  | $ | (5.9  | )
|Goodwill                        |  |                                                             |  |                                            |  |                                        | 1.5  |                              |   | 1.5                                                     |  |   | (12.5 | )

There were no assets or
liabilities measured at fair value on a non-recurring basis at March 31, 2010.

Intangible assets and goodwill are tested
annually, or more frequently, if a change in circumstances or the occurrence of events indicates that potential impairment exists. The Company recorded an impairment charge during the fourth quarter of 2009, as detailed below. Circumstances and
events since December 31, 2009 do not indicate a need for impairment testing for the three-month period ending March 31, 2010.

In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsection of the FASBs Accounting Standards
Codification (ASC) Topic 360-10, intangible assets with a carrying amount of $22.4 million were written down to their fair value of $16.5 million, resulting in an impairment charge of $5.9 million, which was included in results of operations for the
fourth quarter of 2009.

Pursuant to the provisions of ASC Topic 350, Intangibles  Goodwill and Other, goodwill
with a carrying amount of $14.0 million was written down to its fair value of $1.5 million, resulting in an impairment charge of $12.5 million, which was included in results for the fourth quarter of 2009.

See the Intangible Assets and Goodwill note for a discussion of the valuation techniques and a description of the information used to
determine fair value in 2009.



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##### Table of Contents

NOTE 8. Embedded Derivatives and Warrants.

Embedded Derivatives

Conversion features of the debt are considered embedded derivatives requiring bifurcation from the debt host and are included on the
balance sheet as a liability at fair value. The embedded derivative is revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the
statements of operations.

As of March 31, 2010 and December 31, 2009, the fair value of the derivatives embedded in
the convertible debt was $24.2 million and $28.2 million, respectively. The assumptions used to value the embedded derivative liability at March 31, 2010 were: weighted average exercise price of $0.20, weighted average life of 3.9 years,
volatility 149.3%, and risk free interest rate of 1.9%. At December 31, 2009, the assumptions used were: weighted average exercise price of $0.20, weighted average life of 4.1 years, volatility 155.3%, and risk free interest rate of 2.2%.

Warrants

The Companys outstanding warrants also meet the definition of a liability based on the fact that the Company does not have enough
authorized shares of its common stock to settle these warrants upon exercise. Thus, the warrants are classified as a liability on the balance sheet and recorded at fair value. The warrant liability is revalued at each balance sheet date and marked
to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statements of operations.

As of March 31, 2010 and December 31, 2009, the fair value of the warrants was $15.9 million and $18.0 million, respectively.
The assumptions used to value the warrant liability at March 31, 2010 were: weighted average exercise price of $0.23, weighted average life of 4.1 years, volatility 148.8%, and risk free interest rate of 2.1%. At December 31, 2009, the
assumptions used were: weighted average exercise price of $0.23, weighted average life of 4.4 years, volatility 149.8%, and risk free interest rate of 2.3%.

At both March 31, 2010 and December 31, 2009, the Company had 181.3 million warrants outstanding to purchase its common
stock. These warrants were issued in connection with debt and equity offerings and in lieu of cash payments for services provided and became exercisable when issued. The warrants expire two to five years from date of issuance.

The table below summarizes the warrant expiration dates as of March 31, 2010:



|                           |  |                                  |  |                          |            |                                 |   |      
|-------------------------- |  | -------------------------------- |  | ------------------------ | ---------- | ------------------------------- | - | -----
|Expiration Date            |  | Numberof 
Warrants(in thousands) |  | Range of Exercise Prices |            | Weighted AverageExercise 
Price
|2010                       |  | 675                              |  | $                        | 0.27-$0.35 |                                 | $ | 0.306
|2011                       |  | 7,846                            |  | $                        | 0.25-$0.70 |                                 |   | 0.416
|2012                       |  | 13,000                           |  | $                        | 0.15-$0.25 |                                 |   | 0.198
|2013                       |  | 60,452                           |  | $                        | 0.24       |                                 |   | 0.240
|2014                       |  |                                 |  |                          |           |                                 |   |     
|2015                       |  | 99,335                           |  | $                        | 0.15-$0.24 |                                 |   | 0.209
|                           |  |                                  |  |                          |            |                                 |   |      
|Total warrants outstanding |  | 181,308                          |  |                          |            |                                 | $ | 0.228
|                           |  |                                  |  |                          |            |                                 |   |      

All outstanding warrants expire no later than
June 30, 2015.

Warrant activity from December 31, 2009 through March 31, 2010 is as follows:



|                                 |  |                                  |  |                                 |       |                                                   |     |                                |   |  
|-------------------------------- |  | -------------------------------- |  | ------------------------------- | ----- | ------------------------------------------------- | --- | ------------------------------ | - | -
|                                 |  | Numberof 
Warrants(in thousands) |  | Weighted AverageExercise 
Price |       | Weighted AverageRemaining ContractualLife (Years) |     | AggregateIntrinsicValue ($000)
|Outstanding at December 31, 2009 |  | 181,308                          |  | $                               | 0.228 |                                                   |     |                                |   |  
|Warrants issued                  |  |                                 |  |                                 |      |                                                   |     |                                |   |  
|Exercised                        |  |                                 |  |                                 |      |                                                   |     |                                |   |  
|Forfeited/Cancelled              |  |                                 |  |                                 |      |                                                   |     |                                |   |  
|                                 |  |                                  |  |                                 |       |                                                   |     |                                |   |  
|Outstanding at March 31, 2010    |  | 181,308                          |  | $                               | 0.228 |                                                   | 4.1 |                                | $ | 
|                                 |  |                                  |  |                                 |       |                                                   |     |                                |   |  

There was no warrant activity during the three-month
period ended March 31, 2010.



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##### Table of Contents

NOTE 9. Share-Based Compensation.

Long-Term Incentive Plans

The Company has adopted various long-term incentive plans. Shares under all plans generally vest 25% upon issuance and 25% on the grant
anniversary date until fully vested for service grants. Performance options granted under the plans vest as objectives outlined are achieved. Vesting requirements include new revenue goals, creating value within the organization, and/or achieving
performance targets. When performance objectives are not attained, that portion of the award is cancelled.

Executive Stock Option
Agreements

From time to time, the Company provides for the issuance of share-based compensation in conjunction with
employment agreements or special arrangements with certain of its executives and directors. As of March 31, 2010, the Company has authorized up to 65.2 million shares to be issued under these arrangements.

Activity under the stock option plans and board approved stock grants with time based vesting for the three-month period ended
March 31, 2010 is as follows:



|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|-------------------------------- |  | -------------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -
|                                 |  | Shares(in thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue
|Outstanding at December 31, 2009 |  | 23,366               |   |  | $                            | 0.565 |                                                 |     |                         |   |  
|Granted                          |  | 400                  |   |  |                              | 0.240 |                                                 |     |                         |   |  
|Exercised                        |  |                     |   |  |                              |      |                                                 |     |                         |   |  
|Forfeited/cancelled              |  | (18                  | ) |  |                              | 0.590 |                                                 |     |                         |   |  
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|Outstanding at March 31, 2010    |  | 23,748               |   |  |                              | 0.559 |                                                 | 6.4 |                         | $ | 
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|Exercisable at March 31, 2010    |  | 20,658               |   |  | $                            | 0.567 |                                                 | 6.4 |                         | $ | 
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  

Time based awards generally vest 25% upon issuance and
25% on the successive 3 anniversary dates of the award. The Company estimates the fair value of stock option grants using the Black-Scholes pricing model with the assumptions detailed below. The weighted average grant-date fair value of options with
time-based vesting granted during the three-month period ended March 31, 2010 and 2009 was $0.100 and $0.137, respectively. For the three-month period ended March 31, 2010 and 2009, respectively, the Company recognized compensation expense
for stock option awards totaling $0.3 million and $0.4 million, respectively. At March 31, 2010, unamortized compensation associated with time-based options totaled $1.0 million with a remaining weighted average amortization period of 1.0 year.

Activity under the stock option plans and board approved stock grants with performance-based vesting for the three-month
period ended March 31, 2010 is as follows:



|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|-------------------------------- |  | -------------------- |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -
|                                 |  | Shares(in thousands) |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue
|Outstanding at December 31, 2009 |  | 14,367               |  | $                            | 0.488 |                                                 |     |                         |   |  
|Granted                          |  |                     |  |                              |      |                                                 |     |                         |   |  
|Exercised                        |  |                     |  |                              |      |                                                 |     |                         |   |  
|Forfeited/cancelled              |  |                     |  |                              |      |                                                 |     |                         |   |  
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|Outstanding at March 31, 2010    |  | 14,367               |  |                              | 0.488 |                                                 | 4.5 |                         | $ | 
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|Exercisable at March 31, 2010    |  | 1,333                |  | $                            | 0.571 |                                                 | 5.5 |                         | $ | 
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  

Performance based awards generally vest 33% to 50%
upon attaining targeted revenue growth, gross profit margins and continued employment with the Company. The Company estimates the fair value of stock option grants using the Black-Scholes pricing model. There were no performance options issued
during the first three-month period of 2010 or 2009. For the three-month period ended March 31, 2010 and 2009, the Company recognized compensation expense for performance-based stock option awards totaling $0.2 million and $0.4 million,
respectively. At March 31, 2010, unamortized compensation associated with performance-based options totaled $4.9 million with a remaining weighted average amortization period of 1.7 years.



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##### Table of Contents

The assumptions used to calculate the fair value of stock option grants issued in the
three-month period ending March 31, 2010 are as follows:



|                                         |  |                                         |  
|---------------------------------------- |  | --------------------------------------- | -
|                                         |  | Three-month period endedMarch 
31, 2010 |  
|Expected volatility                      |  | 148.6                                   | %
|Weighted-average expected volatility     |  | 148.6                                   | %
|Expected term (in years)                 |  | 6.1                                     |  
|Weighted-average risk-free interest rate |  | 2.77                                    | %
|Expected dividends                       |  |                                        |  

Expected
volatility is based on the Companys trading history over a three-year period. Weighted average volatility uses the volatility on the grant date and the number of options granted throughout the year. The expected term is the time management
estimates options will be outstanding. The weighted average risk free interest rate is taken from the US Treasury rate of similar lived instruments on the date of the option grant. The Company does not anticipate issuing dividends for the
foreseeable future. A forfeiture rate of 5.0% is currently being used.

There were no options exercised during the three-month
period ended March 31, 2010 and 2009. No tax benefit has been recorded related to stock-based compensation expense.

NOTE 10.
Shareholders Equity (Deficit).

The Companys authorized common stock entitles holders to one vote for each
share held of record. As of March 31, 2010, the Company has authorized 350 million shares of the $.0001 par value common stock.

During 2009, the Company issued approximately 14 million shares of common stock upon the conversion of $2.9 million of outstanding debt.

From time to time, in lieu of, or in addition to cash, the Company issues shares of its common stock as a contract incentive
or as payment for non-employee services. The amount recorded for such shares issued is based on the closing price of the Companys common stock on the effective date of the stock issuance or the agreement and is included with professional
services on the Companys consolidated statements of operations.

The Company has previously entered into non-employee
services agreements and as a contract incentive agreed to issue common stock of 2.3 million and 2.0 million shares, respectively. The shares were earned as of the effective date of the agreements and, except for a breach of contract, are
non-forfeitable. Under the 2009 and 2008 contract incentive, although earned, shares are not issuable until the Authorized Share Increase expected in 2010. No additional non-employee service agreements requiring share issuance were entered into
during the three-month period ended March 31, 2010.



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##### Table of Contents

NOTE 11. Income (Loss) per Share.

Basic net income (loss) per share is computed by dividing the net income (loss) applicable to common shareholders by the weighted-average
number of shares of common stock outstanding for the period. Diluted net income (loss) per share reflects potential dilution of all applicable common stock equivalents. Such common stock equivalents would include shares issuable pursuant to common
stock options and warrants using the treasury stock method and shares issuable pursuant to convertible debt and preferred stock using the if-converted method to the extent such inclusion would be dilutive. Because the Companys warrants are
accounted for as liabilities, the treasury stock method is supplemented by adjusting net income (loss) applicable to common shareholders to an amount that excludes any gains or losses related to the warrants otherwise reflected in net income (loss).
Similarly, the if-converted method for convertible securities includes a similar adjustment to net income (loss) applicable to common shareholders. Because the Company has several potentially dilutive securities outstanding, its earnings (loss) per
share computations include appropriate consideration of the sequencing of potentially dilutive assumptions.



|                                                                     |  |                                   |             |   |      |   |             |  
|-------------------------------------------------------------------- |  | --------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                     |  | Three-month periodended
March 31, |            
|                                                                     |  | 2010                              |             |   | 2009 |  
|Diluted EPS Computation                                              |  |                                   |             |   |      |   |             |  
|Net loss                                                             |  | $                                 | (2,047      | ) |      | $ | (21,059     | )
|                                                                     |  |                                   |             |   |      |   |             |  
|                                                                     |  |                                  
|Add back:                                                            |  |                                   |             |   |      |   |             |  
|Debenture interest expense                                           |  |                                   |            |   |      |   |            |  
|Debt discount and gain on derivatives and warrants                   |  |                                   |            |   |      |   |            |  
|                                                                     |  |                                   |             |   |      |   |             |  
|Total add-backs                                                      |  |                                   |            |   |      |   |            |  
|                                                                     |  |                                   |             |   |      |   |             |  
|Net loss applicable to common shareholders  diluted                 |  | $                                 | (2,047      | ) |      | $ | (21,059     | )
|                                                                     |  |                                   |             |   |      |   |             |  
|                                                                     |  |                                  
|Weighted average common shares outstanding  basic                   |  |                                   | 168,233,180 |   |      |   | 159,304,351 |  
|                                                                     |  |                                   |             |   |      |   |             |  
|                                                                     |  |                                  
|Dilutive effect of common stock equivalents  options                |  |                                   |            |   |      |   |            |  
|Dilutive effect of common stock equivalents  warrants               |  |                                   |            |   |      |   |            |  
|Dilutive effect of common stock equivalents  convertible debentures |  |                                   |            |   |      |   |            |  
|                                                                     |  |                                   |             |   |      |   |             |  
|Total dilutive effect of common stock equivalents                    |  |                                   |            |   |      |   |            |  
|                                                                     |  |                                   |             |   |      |   |             |  
|                                                                     |  |                                  
|Weighted average common shares outstanding  diluted                 |  |                                   | 168,233,180 |   |      |   | 159,304,351 |  
|                                                                     |  |                                   |             |   |      |   |             |  
|                                                                     |  |                                  
|Net loss per share of common stock  diluted                         |  | $                                 | (0.01       | ) |      | $ | (0.13       | )
|                                                                     |  |                                   |             |   |      |   |             |  

The diluted earnings per share calculations include the add-back of interest expense, debt discount, and
derivative/warrant gain or (loss).

Potentially dilutive shares, which were excluded from the above calculations in 2010 and
2009, as their inclusion would have had an anti-dilutive effect on the net income (loss) per share, are as follows:



|                       |  |                                    |  |            
|---------------------- |  | ---------------------------------- |  | -----------
|                       |  | Three-month period ended March 31,
|                       |  | 2010                               |  | 2009       
|Stock options          |  | 38,114,949                         |  | 63,635,787 
|Warrants               |  | 181,308,076                        |  | 167,764,295
|Convertible debentures |  | 289,806,961                        |  | 195,269,005
|                       |  |                                    |  |            
|                       |  | 509,229,986                        |  | 426,669,087
|                       |  |                                    |  |            



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##### Table of Contents

NOTE 12. Commitments and Contingencies.

Operating Leases: The Company has entered into or assumed certain non-cancelable operating lease agreements related to office
and warehouse space and equipment. Total rent expense under operating leases, net of sublease income, was $0.2 million and $0.3 million for the three-month period ended March 31, 2010 and 2009, respectively.

Future contractual obligations are as follows for the years ending December 31:



|                           |  |                 |      
|-------------------------- |  | --------------- | -----
|                           |  | OperatingLeases
|Remaining 9 months of 2010 |  | $               | 894  
|2011                       |  |                 | 1,038
|2012                       |  |                 | 507  
|2013                       |  |                 | 179  
|Thereafter                 |  |                 |     
|                           |  |                 |      
|Total                      |  | $               | 2,618
|                           |  |                 |      

Other Commitments:As of March 31, 2010,
$1.4 million of the Companys accounts payable were over one year past due.

As part of the Vendor Payment Plan initiated
by the Company in July 2009, certain vendors agreed to extend the due dates of trade payables or otherwise defer collection action until additional working capital was raised. As of March 31, 2010, approximately $0.1 million of those payables
remained unpaid.

During the period ended March 31, 2010, in connection with the Separation and Transition Services
Agreement between the Company and the former Chief Financial Officer, with an effective date of February 15, 2010, the Company has committed to issue a warrant to purchase 5.0 million shares of the Companys common stock at $0.24 per
share. Under the Separation and Transition Services Agreement, the Company is prohibited from issuing the warrant until receiving the consent of the Subordinated Debenture holders or after all Subordinated Debentures have been satisfied by
conversion to common stock or full payment has been made. Because the Company cannot determine if, and when, consent of the Subordinated Debenture holders will be obtained or the Subordinated Debenture balances will be satisfied, uncertainty exists
concerning the warrant issuance date and term. As a result, no value has been assigned to this transaction in the financial statements.

Legal Matters:In February 2009, after numerous attempts to collect accounts receivable of $10.2 million (including the $4.5
million deferred revenue component of the billings) from a unit of BT Group plc (aka British Telecommunications plc), the Company filed suit in a foreign court. The Company had exhausted all efforts to cause mediation or other forms of compromise
and was left with such collection action as its last resort. The customer denied the claim and filed a counter claim seeking return of funds paid under the contract. The Company established an allowance for the entire balance as of December 31,
2008. In February 2010, the Company received $3.7 million in full settlement of the dispute. These proceeds were immediately used to pay down the Companys Term Loan with its Senior Lender. As the accounts had been fully reserved in 2008, the
$3.7 million was restored to net accounts receivable as of December 31, 2009 and was recorded as a credit to bad debt expense.

The Company is also involved in various legal actions arising in the ordinary course of business. In Managements opinion, the
ultimate disposition of those matters will not have a material adverse effect on our consolidated financial position or the results of operations.

NOTE 13. Related Parties.

Certain of the Companys significant shareholders, directors and executive officers perform financing and other services for the
Company or otherwise participated in financing transactions.

Aequitas Capital Management, Inc., together with its affiliates
Aequitas Catalyst Fund, LLC, Aequitas Hybrid Fund, LLC, Aequitas Commercial Finance, LLC, and Evolute Consolidated Holdings, formerly known as Resolute Solutions Corporation, (collectively, Aequitas), owned 13.4 million shares or approximately
8% of the Companys outstanding common stock and held warrants to purchase 25.0 million shares of the Companys common stock as of March 31, 2010. At March 31, 2010, the Company was indebted to Aequitas for debentures issued
for a subscription amount of $5.7 million which at maturity have a face amount of $9.8 million. The Company also owed Aequitas $0.03 million of accounts payable at March 31, 2010. Recent transactions with Aequitas are discussed in detail below.

During the three months ended March 31, 2010, Aequitas was issued additional July Debentures with a face amount of $0.7
million as a result of the Company not making scheduled interest and OID payments on the July Debentures and Aequitas funding of the cash subscription amount for such additional July Debentures. Also during the three months end March 31,
2010, in connection with all advisory services provided, the Company incurred Aequitas fees of $0.03 million and made cash payments of $0.01 million.



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##### Table of Contents

During the three months ended March 31, 2009, in connection with all advisory services
provided, the Company incurred Aequitas fees of $0.03 million and made cash payments of $0.02 million.

In 2009, the Company
designated Aequitas as Collateral Agent to administer the July Securities Purchase Agreement. Aequitas was entitled to a Collateral Agent Fee of $0.3 million with $0.1 million paid at July 31, 2009, $0.1 million payable on October 31, 2009
and $0.1 million payable on January 31, 2010. As of March 31, 2010, $0.2 million of the Collateral Agent Fee remains unpaid. The Company also incurred $0.05 million to Aequitas for expenses incurred in connection with the July Securities
Purchase Agreement.

During 2009, Aequitas purchased $5.2 million of the Companys July Debentures, convertible into 34.7
millions shares of common stock and received warrants to purchase 9.3 million shares of the Companys common stock. In addition, during 2009 Aequitas received $0.05 million of July Debentures, convertible into 0.3 million shares of
common stock and received warrants to purchase 0.09 million shares of the Companys common stock as their proportionate shares of a debenture allocation to remedy prior covenant defaults in the November and March Debentures.

Also during 2009, the Company issued a VPP Debenture to Aequitas, as part of the July Securities Purchase Agreement, with a cash
subscription amount of $0.2 million in exchange for an equal amount of trade accounts payable owed to Aequitas. The VPP Debenture includes an OID factor of .65 and is convertible to 1.2 million shares of common stock and Aequitas received
warrants to purchase 0.5 million shares of the Companys common stock. The terms of the VPP Debenture include quarterly OID payments beginning October 1, 2009, with the balance due November 30, 2011. The Company did not make the
OID payments due October 1, 2009 and January 1, 2010, as it was not permitted at that time under the provisions of the Senior Lender intercreditor agreement.

Additionally, during 2009, Aequitas was issued July Debentures with a cash subscription amount of $0.1 million in exchange for $0.1
million of trade accounts payable. The July Debenture includes an OID factor of .75, is convertible into 1.2 million shares of common stock and received warrants to purchase 0.3 million shares of the Companys common stock.

A significant shareholder of the Company owned approximately 13% of the Companys outstanding common stock and held
warrants to purchase 5.3 million shares of the Companys common stock as of March 31, 2010. At March 31, 2010, the Company was indebted to this shareholder for debentures issued for a subscription amount of $1.6 million which at
maturity have a face amount of $2.7 million.

During the three months ended March 31, 2010, the same significant
shareholder was issued additional July Debentures with a face amount of $0.1 million as a result of the Company not making scheduled interest and OID payments on the July Debentures.

NOTE 14. Business Concentration.

During the three-month period ended March 31, 2010, a major customer represented $3.4 million (23%) of total revenues, while a
different major customer represented $2.0 million (13%) of total revenues for the three-month period ended March 31, 2009.

At March 31, 2010, two major customers each represented $1.1 million (21%) of net accounts receivable. At December 31,
2009, one of those same major customers represented $1.1 million (11%), while another major customer represented $3.7 million (38%) of net accounts receivable.

NOTE 15. Geographic and Other Information.

Revenues generated outside the United States during the three-month period ended March 31, 2010 and 2009, totaled $0.3 million and
$0.2 million, respectively. Substantially all of the Companys international revenue was generated in the European Union, Canada, and Central America. As of March 31, 2010 and December 31, 2009, the Companys international
identifiable assets outside the United States totaled $0.2 million and $0.4 million, respectively. All of the Companys international identifiable assets were located in the United Kingdom.

The Companys Management team views the operations of 20/20, Magenta, CentrePath, GCG, CGSI, and GCD operation as a single 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. All of the Companys products and services are part of an integrated suite of
offerings within telecom logistics solutions. Customer offerings are grouped into two categories: Optimization Solutions and Connectivity Solutions. Customers may buy one or both of these product offerings.



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##### Table of Contents

NOTE 16. Subsequent Events.

On April 30, 2010, a previously announced asset purchase agreement expired. On December 31, 2009, the Company entered into an
asset purchase agreement for the assignment of certain off network circuit contracts (the APA) with Global Telecom & Technology Americas, Inc. (the Buyer), which was subsequently amended to call for an initial
closing date to occur no later than April 30, 2010. The conditions precedent to the initial closing of the APA, which included certain customer, supplier and lender consents, along with regulatory approvals, were not met and the APA has
therefore lapsed. The Company plans to continue to operate the assets that were subject to the APA on a going forward basis in the ordinary course of business.

On May 3, 2010, Pivotal Global Capacity, LLC, an affiliate of the Pivotal Group of companies engaged in the private equity
business and based in Phoenix, Arizona (Pivotal), closed on its purchase of all rights and obligations of the senior lender (ACF CGS, L.L.C. as agent for itself and any other named lenders) with respect to the Term Loan and Security
Agreement dated November 19, 2008, as amended between ACF CGS, L.L.C. on the one hand and the Company and all of its active 100% owned subsidiaries on the other hand. As of the date of the closing, the indebtedness under the Loan Agreement
totaled $5.3 million. As part of the Loan Agreement assignment, Pivotal, ACF CGS, L.L.C. and the Company and its subsidiaries entered into a Resignation, Appointment and Amendment Agreement whereby Pivotal was substituted as the
Agent and sole lender under the Loan Agreement with no changes in terms and conditions. The Company agreed to reimburse Pivotal for its third party expenses incurred in connection with the transactions leading to the assignment of the
loan from ACF CGS, L.L.C. Pivotal has been assigned the same rights and obligations of the previous holder and has stepped into the role as the new Senior Lender in the same capacity as ACF CGS, L.L.C. The Company will be working toward refinancing
objectives to address the working capital deficiency and upcoming maturity date of the Term Loan, due in November 2010. There can be no assurances that the Company will be successful in these initiatives. The company is currently in default and is
in breach of certain covenants of the Term Loan, as it had been with the previous Lender.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

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:

Capital Growth Systems, Inc., dba Global Capacity (CGSI, we, our, us, or the
Company), is a publicly traded corporation that delivers telecom information and logistics solutions to a global client set consisting of systems integrators, telecommunications companies, and enterprise customers. These solutions enable
clients to address the inefficiencies inherent in access networks globally. The global market for access networks, estimated at over $200 billion annually, is highly inefficient, plagued by market fragmentation, regionalized rules and regulations,
and lack of transparency related to pricing and supply. This creates an environment where clients pay unnecessarily inflated prices due to inefficient procurement practices and margin stacking. The market is characterized by a large number of
suppliers that offer piece parts of a customers end-to-end network requirement that must be effectively combined with assets from other providers to deliver a complete network solution. This dynamic creates challenges for customers seeking to
procure network connectivity globally. Lack of transparency relative to the supply and pricing of network assets creates inefficient procurement practices, and lack of expertise to effectively provision and manage these integrated services creates
complex and costly operating environments.

Global Capacity addresses this market inefficiency through two lines of business
 Optimization Solutions and Connectivity Solutions  each of which leverages the Companys core intellectual property to drive transparency and automation into the market.

Optimization Solutionsprovides clients license access to Global Capacitys automated quotation management platform,
CLM, enabling them to automatically generate accurate quotes for access circuits based on tariffs appropriate for the particular service. CLM acts as an electronic trading platform, allowing customers to match their demand against a
global catalog of pricing and supply data, creating a level of market transparency not available elsewhere. CLM may also be customized using a customers specific infrastructure and contract data, creating an automated mechanism to
generate customer pricing, reducing back office cost and accelerating sales. Optimization Solutionsclients may also leverage the CLM platform, along with proprietary network optimization tools, to deliver network optimization
consulting services, in which the Company assesses existing inventories of access networks, identifying opportunities to reduce cost through both financial and physical network grooming. Realized savings are typically between 10-40% of current
spend. Optimization Solutions clients also leverage Global Capacitys engineering and remote network management services on a professional services basis, selectively deploying these services against specific opportunities to implement
and manage private network solutions that increase efficiency and reduce cost.

Connectivity Solutions clients utilize
Global Capacitys logistics expertise to implement access network solutions that improve efficiency and reduce cost. One Marketplace, the Companys physical network trading platform, aggregates network capacity from multiple
suppliers at strategically deployed pooling points, using Global Capacity switching equipment to efficiently deploy capacity against market demand. One Marketplace reduces network costs for clients, while delivering gross margin more
similar to facilities-based providers than to resellers. Global Capacitys Network Novation practice offers outsourced access network operations, including pricing, procurement, and provisioning and network management. These solutions deliver
lower access network costs by aggregating customer demand, while also reducing client SG&A associated with managing access network operations. Off-net extension services enable Global Capacity to identify, price, procure, provision and support
competitive off-net access services for large clients, providing access to a broad universe of providers with transparency and efficiency.

Going to market as Global Capacity, the Company has integrated the core systems, processes, and personnel of its five operating
subsidiaries and organized them into two business units: Optimization Solutions and Connectivity Solutions. These business units leverage the systems, processes and expertise of the Company to deliver a set of offerings comprising tariff quotation
management software, custom pricing software, network optimization consulting, engineering services, remote management services, One Marketplace network services, network novation services, and off-net extension services. Utilizing its
depth of global telecom supply and pricing data in an automated fashion with powerful tools and expert analysis, the Company helps bring transparency to the fragmented and inefficient global telecom market  resulting in dramatically reduced
cost and improved efficiency for the Companys clients, while producing revenue and margin for the Company.

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

The Company is (and has been since its 2006 reorganization) investing its time, team resources, and capital in the development of its
intellectual property and the scaling of its systems in order to meet the growing demand among its clients for its services. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.



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Business Overview

CGSI integrates the assets of its subsidiary companies to create a suite of capabilities which management believes has never before been
available from a single source telecom information and logistics provider. These capabilities include:



| |  |  | Global market intelligence of telecom supply and pricing data;
| | - |  | --------------------------------------------------------------



| |  |  | Automated quotation management;
| | - |  | -------------------------------



| |  |  | Customized access network pricing;
| | - |  | ----------------------------------



| |  |  | Powerful network optimization algorithms, tools and practices;
| | - |  | --------------------------------------------------------------



| |  |  | Robust network engineering process and expertise;
| | - |  | -------------------------------------------------



| |  |  | World-class remote network management systems, processes, and expertise; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | Strategically deployed network aggregation pooling points.
| | - |  | ----------------------------------------------------------

The successful execution of this strategy provides customers a suite of solutions that individually or collectively will help them
address the challenges they face in managing the complex market for global networks. Significant customer contracts in both lines of business in 2010 demonstrate the acceptance by the market of the Companys telecom information and logistics
model.

CGSIs goal is to become the leading global telecom information and logistics company providing optimization and
connectivity solutions to systems integrators, telecommunications companies, and enterprise customers.

Services

Management believes organizing the Company and its offerings between Optimization Solutions and Connectivity Solutions provide the
greatest opportunity to deliver targeted solutions that maximize value to the customer while simultaneously maximizing revenue and margin opportunities for the Company. Customers may buy Optimization Solutions only, Connectivity Solutions only, or
they may buy both. Management believes there are significant opportunities to leverage offerings from one line of business to drive demand for the solutions of the other line of business. Furthermore, the mix of offerings and their different
characteristics (non-recurring and monthly recurring revenue streams) provide diversity of revenue and protect the Company from being overly dependent or exposed by a single offering or line of business.

Optimization Solutions

The Optimization Business provides five offerings:



| |  |  | Automated quotation management;
| | - |  | -------------------------------



| |  |  | Customized access network pricing;
| | - |  | ----------------------------------



| |  |  | Network optimization consulting;
| | - |  | --------------------------------



| |  |  | Network engineering services; and
| | - |  | ---------------------------------



| |  |  | Remote network management services (RMS).
| | - |  | -----------------------------------------

Automated quotation management software (an annual software license) enables customers to use Global Capacitys CLM system to match
customer demand against a global catalog of telecom supply and pricing data to generate an accurate, tariff-based quote for the selected services and locations. This automated 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 serves as a baseline for the customer to obtain a competitive market price, which CLM supports through
workflow management functionality. This results in a competitive sales advantage for our customers, while also reducing their operating costs.

Customized access network pricing software (an annual software license) uses the CLM automated quotation management system as a baseline
capability, but customizes the system to include customer specific information such as customer points of presence, negotiated / contracted rates, interconnect points, and business rules. This customization enables the customer to quickly and
accurately generate an automated price, using the customers contracts, infrastructure, and business rules, dramatically improving the speed and responsiveness to customer pricing requests. This capability reduces the cost of generating a
customer price quote, automating the generation of customized pricing at a fraction of the cost of generating the same price manually.



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

Engineering services help customers
implement optimized network infrastructure through a suite of services that include the design, engineering, build out, testing and turn-up of complex networks. These services leverage well-developed processes, repeatable methodologies, and deep
expertise of the Company to deliver targeted engagements. The Company has built or augmented hundreds of customer networks. These engagements are delivered as non-recurring revenue on a statement of work (SOW) basis.

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.

Connectivity Solutions

The Connectivity Solutions Business provides three offerings:



| |  |  | One Marketplace
| | - |  | -----------------



| |  |  | Network Novations
| | - |  | -----------------



| |  |  | Off-net Extension
| | - |  | -----------------

One Marketplace, the Companys physical network trading platform, aggregates network capacity from multiple suppliers at
strategically deployed pooling points, using Global Capacity switching equipment to efficiently deploy capacity against market demand. One Marketplace reduces network costs for clients, while delivering gross margin more similar to
facilities-based providers than to resellers. The Company is continuously expanding One Marketplace by installing additional aggregation points, and creating interconnections with suppliers (national, regional, and local) to expand the
reach and increase the capacity of the platform. Increased client demand, as evidenced by its 160% growth experienced during 2009, enables continued profitable expansion of the platform.

Global Capacitys Network Novation practice offers outsourced access network operations, including pricing, procurement,
provisioning and network management. These solutions deliver lower access network costs by aggregating customer demand, while also reducing client SG&A associated with managing access network operations solutions. Global Capacitys Network
Novation practice has developed proven processes to seamlessly assume the management of existing network contracts, freeing the client to focus on their core business, while reducing the overall cost of their access network.

Off-net extension services enable Global Capacity to identify, price, procure, provision and support competitive off-net access services
for large clients, providing access to a broad universe of providers with transparency and efficiency. 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. 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

Significant progress in gaining customer acceptance of our offerings during 2010 underlies 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.



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Markets and customers

The global market for access networks is estimated at over $200 billion annually and represents a significant percentage of the overall
network cost that service providers and large systems integrators incur in delivering network solutions to their global customers. The global access market is served by over 900 primary suppliers, none of whom has a ubiquitous footprint. The market
is further confused by varying business rules, customs, and regulations in different regions of the world. These factors, coupled with the rapid pace of technology change and advancement, result in an inefficient, fragmented market where cost
structures are unnecessarily high  creating margin pressure on service providers and systems integrators. Because there is no market transparency relative to the supply and price of networks globally, most telecommunication companies and
systems integrators have a lengthy, manual, inefficient process to design and price global networks. This results in extended sales cycles, high operating costs, and inefficient procurement of networks.

One of the fundamental challenges for corporations and other institutions with complex and/or geographically dispersed data
communications networks is the number of service providers and pricing alternatives that must be pieced together in order to create an end-to-end data connectivity solution. Between any two locations, there are a varying number of service
alternatives and we do not believe there is one single information source, other than our systems, that enables a buyer to determine the most cost-effective and technically sound alternative. Large multinational corporations are increasingly seeking
to work with fewer vendors and a single network provider that they can look to for provisioning end-to-end network solutions fits that design. Additionally, service providers, particularly in regions where facilities-based competition has been
introduced, actively market their services with price as the primary differentiator and network reach being the primary limiting factor. This price-based competition has stressed already challenged gross margins and, as a result, service providers
are actively seeking means to reduce the costs associated with network quotation management and off-network procurement.

Beyond the telecommunication service providers, expanding enterprises, multi-national corporations, information service providers, and
systems integrators are deploying and managing private network-based solutions that provide seamless connections in support of the ever-increasing demand for business continuity, disaster recovery, regulatory compliance, and collaboration
capabilities. These private networks can rival the connections of network service providers. Procuring these networks is achieved utilizing negotiated pricing through a few trusted providers or via an expensive and often deficient
bidding solicitation process. Because telecommunications is not the primary line of business for these private network operators, but rather a facilitator to their end business goals, inefficiencies in the procurement process result in most
companies paying more than they should for connectivity. In a competitive environment, such a drain on profitability can be significant.

This confusion is increased by global deregulation, physical fragmentation of the network layer  whether copper, fiber, coaxial
cable, or wireless spectrums  and geographic fragmentation. Due to financial and operational constraints, no one company can provide a ubiquitous global network. Competing entities therefore buy and sell from each other to extend their network
reach and meet customer demands, which frequently extend globally outside their networks. Commonly, this buying and selling is done with little efficiency or transparency on an individual transaction basis or under the auspices of a supply agreement
(often called a Master Services Agreement) negotiated at arms-length between the principal parties. The absence of a global benchmarking source for regional, market-based pricing further impairs the ability to manage costs.

This market environment appears ideal for an information-driven logistics model focused on minimizing the confusion and inefficiency that
plagues the telecom market. The Company believes that it has such a business model and operating capability, as well as a management team experienced in executing such an information-leveraged and technology-leveraged approach.

We have assembled a vast global knowledgebase of critical information with respect to tariffs, competitive pricing, physical locations of
facilities, and carriers connected to such buildings and nearby points of presence. We also have combined this information with sophisticated software tools and algorithms to enable us to often obtain automated best of breed connectivity
solutions in seconds, rather than weeks or months. This ability to automate the supply chain of connectivity provides the Company with a competitive advantage. This process also requires continuous refreshing, updating, and validation of
data and is therefore a continually evolving process to stay current with changing information and new information. This requirement to constantly acquire and manage new and updated data sets, combined with the Companys investment in systems,
tools, and processes, provides the basis for the Companys unique positioning as a telecom logistics company.

The
Company believes its investment in market intelligence and efficiency tools, combined with the robust processes and deep expertise of its staff, make it uniquely positioned to capitalize on this market opportunity with its unique, telecom logistics
business model.



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Sales and marketing

Optimization Solutions

Target Markets.Optimization Solutions are targeted at global, national, and regional telecommunications carriers, systems
integrators, and enterprise customers with large, complex global network requirements.

Sales Approach.We have an
international sales team that uses a consultative approach to sell Optimization Solutions to a financial buyer highly placed within our target customers. We employ a combination of direct and channel sales to maximize market penetration and coverage
and we offer limited scope pilot engagements to quickly demonstrate the value of the solution. We then use a high-touch, relationship-based approach to extend and expand our pilot engagements into more meaningful engagements that provide
a steady stream of revenue and margin for the Company.

Connectivity Solutions

Target Markets.Connectivity Solutions are targeted at enterprise, system integrator, and telecommunications companies seeking a
simplified, turnkey network connectivity solution.

Sales Approach.We have an international sales team that employs a
combination of direct and channel sales to maximize market penetration and coverage. The sales team is tasked with identifying and closing new business, which is then transitioned to account managers to maintain the ongoing relationship, creating
additional revenue and margin from the account. The sales teams work closely with the carrier management teams to insure the most robust, cost effective solutions are sold and delivered.

Competition

Management
believes that the combination of capabilities and solutions the Company has integrated and organized into the Optimization Solutions business and the Connectivity Solutions business is unique in the marketplace. However, there are competitors in the
market for some of the individual solutions that the Company brings to market.

Optimization Solutions

Optimization Consulting: There are a number of consulting firms that purport to offer network optimization services. Most of these,
however, are focused on a specific area of network optimization  typically overcharge analysis. This narrow focus misses the largest opportunity to identify and implement network savings available from financial and physical grooming.
Furthermore, Management is not aware of any other company that owns or deploys a database of global supply and pricing data along with proprietary network optimization tools to deliver an automated network optimization solution.

Automated Pricing Software: Management is not aware of any other company that has an automated pricing system that leverages a similar
global base of supply and pricing data along with robust pricing algorithms. The primary competition that we encounter is the legacy pricing system and related processes that are entrenched in existing suppliers.

Remote Management Services and Professional Services: There is a wide range of telecommunications carriers, hardware manufacturers, and
services firms that offer NOC services and network implementation services. Management believes that the unusually high degree of integration and automation used in the delivery of the Companys NOC services is a competitive differentiator in
the marketplace. Further, the tight integration of the network management systems with the Companys unique pricing and provisioning systems and technologies make these solutions very valuable in the highly integrated service delivery model
employed by Global Capacity.

Connectivity Solutions

The marketplace for connectivity solutions is highly competitive, including Facility-based Carriers, Virtual Network Operators (VNOs), and
Systems Integrators. Despite this, the Company does provide services to carriers and VNOs and at times will collaborate with our competition to provide a seamless solution for their end users.



| |  |  | Some examples of competition from the three sectors are the following:
| | - |  | ----------------------------------------------------------------------



| |  |  | Facility-based Carriers: AT&T, Verizon, Sprint, and Level 3
| | - |  | -----------------------------------------------------------



| |  |  | VNOs: Virtela; Global Telecommunications and Technology of America
| | - |  | ------------------------------------------------------------------



| |  |  | Systems Integrators: IBM
| | - |  | ------------------------



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Financial Performance

The Company reported operating losses of $2.6 million and $3.7 million for the three-month period ended March 31, 2010 and 2009,
respectively. As of March 31, 2010, the Companys current liabilities exceeded its current assets by $31.6 million. Included in the current liabilities is $17.1 million of current maturities of long-term debt, net of $27.6 million of debt
discount associated with the initial fair value of related warrants and embedded derivatives and $20.6 million associated with OID and imputed interest. Excluding these discounts, the working capital deficiency is $79.8 million. Cash on hand at
March 31, 2010 was $1.7 million (not including $0.4 million restricted for outstanding letters of credit). Cash provided (used) in operating activities was $2.4 million and $(1.8) million for the three-month period ended March 31, 2010 and
2009, respectively. The Companys net working capital deficiency, accumulated deficit and recurring operating losses raise substantial doubt about its ability to continue as a going concern.

Expenses are being managed closely and lower-cost outsource opportunities are given case-by-case consideration. On May 3, 2010,
Pivotal Global Capacity, LLC, an affiliate of the Pivotal Group of Companies, successfully closed on its purchase of rights and obligations of the Senior Lender (ACF CGS, L.L.C.) with respect to the Term Loan and Security Agreement dated
November 19, 2008, as amended, with no changes in terms and conditions. See the Subsequent Events footnote for additional details on this transaction. The Company continues to pursue additional capital as necessary to meet certain future
capital and liquidity requirements of the business.

Critical Accounting Policies and Estimates

There has been no change to our critical accounting policies and estimates contained in Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K filed for the year ended December 31, 2009.

Results for the three-month period ended March 31, 2010 compared to 2009

Operations

Total
revenues for the three-month period ended March 31, 2010 were $14.7 million compared to $16.2 million for the same period in 2009, representing a 9.3% decrease. This decrease is primarily due to disconnects from two major customers resulting
from a shift in circuitry strategy.

Revenues generated from Optimization Solutions totaled $2.6 million for the three-month
period ended March 31, 2010 compared to $2.9 million for the same period in 2009, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business
recorded $12.1 million for the three-month period ended March 31, 2010 compared to $13.3 million for the same period in 2009, which is from the delivery of turn-key global networks and system management services.

The consolidated gross margin rate was 25% for the three-month period ended March 31, 2010 compared to 24% for the same period in
2009. This increase was driven primarily by a higher margin revenue mix within Optimization Solutions. Optimization Solutions gross margin totaled $1.5 million or 58% of Optimization Solutions revenue for the three-month period
ended March 31, 2010 as compared to $(0.3) million or (10 %) for the same period in 2009. Connectivity Solutions margin totaled $2.2 million or 18% of Connectivity Solutions revenue for the three-month period ended March 31,
2010 as compared to $4.2 million or 32% for the same period in 2009.

Operating expenses for the three-month period ended
March 31, 2010 and 2009 consist of the following:



|                              |  |                                    |       |      |   |      
|----------------------------- |  | ---------------------------------- | ----- | ---- | - | -----
|                              |  | Three-month period 
endedMarch 31,
|                              |  | 2010                               |       | 2009
|Compensation                  |  | $                                  | 2,935 |      | $ | 3,593
|Professional services         |  |                                    | 1,639 |      |   | 1,739
|Depreciation and amortization |  |                                    | 685   |      |   | 1,138
|Other operating expenses      |  |                                    | 1,076 |      |   | 1,191
|                              |  |                                    |       |      |   |      
|Total operating expenses      |  | $                                  | 6,335 |      | $ | 7,661
|                              |  |                                    |       |      |   |      

Compensation expense decreased $0.7 million for the
three-month period ended March 31, 2010 as compared to 2009. Included in compensation expense for 2010 are non-cash charges of $0.5 million related to the accounting treatment of certain stock option grants as compared to $0.8 million for the
same period in 2009. The period over period decrease in cash-based compensation is related to reduced headcount.



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Professional services decreased $0.1 million for the three-month period ended March 31,
2010 as compared to the three-month period ended March 31, 2009, due to fewer advisory expenses.

Depreciation and
amortization expense relates primarily to the Network Operating Center in the suburbs of Boston and the developed technology and customer relationships intangible assets acquired through acquisitions. Depreciation and amortization decreased by $0.5
million for the three-month period ended March 31, 2010 as compared to March 31, 2009. This decrease was due primarily to the $5.9 million impairment of certain intangible assets during the fourth quarter of 2009.

Other operating expenses decreased $0.1 million for the three-month period ended March 31, 2010 as compared to the same period for
2009. 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-month period ended March 31, 2010, reflect
interest expense of $5.4 million, an increase of $2.3 million from the three-month period ended March 31, 2009. Interest expense for the three-month period ended March 31, 2010 and 2009 includes $4.1 million and $2.4 million, respectively,
related to the amortization of the fair value assigned to the warrants and embedded derivatives issued with debt, paid-in-kind interest, and OID interest.

Results for the three-month period ended March 31, 2010 reflect a gain on warrants and derivatives of $6.1 million compared to a
loss of $14.0 million for the comparable period in 2009. The current years gain was driven primarily by the change in the period end price of the Companys stock. The 2009 loss on warrants and derivatives included the effects of a $0.05
increase in the per share closing price of the Companys stock during the three-month period and a modest amount of cashless exercises. The warrant and embedded derivatives liabilities are revalued at each balance sheet date and marked to fair
value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statement of operations.

Liquidity
and Capital Resources

Cash provided by operating activities for the three-month period ended March 31, 2010 was $2.4
million. The primary variance between the loss of $2.0 million and net cash provided by operating activities for the three-month period ended March 31, 2010 was due to non-cash charges from amortization and depreciation of $0.7 million,
amortization of debt discount, interest paid-in-kind, and OID of $4.1 million, stock-based compensation of $0.5 million, amortization of deferred financing costs of $0.5 million, and a credit due to the change in fair value of embedded derivatives
and warrants of $6.1 million. There was a reduction in accounts receivable of $4.5 million, mainly due to the collection of the BT settlement proceeds during the quarter.

Cash used in operating activities in the amount of $1.8 million for the three-month period ended March 31, 2009 was due to a loss of
$21.1 million. The variance between the loss and net cash used in operating activities during the three-month period ended March 31, 2009 was primarily due to the non-cash charges of $0.8 million for stock-based compensation, $1.1 million of
depreciation and amortization, a $0.2 million non-cash extinguishment of debt, $14.0 million from the change in fair value of embedded derivatives and warrants, and $2.8 million of amortization of debt discounts, interest paid-in-kind, and OID.

The cash used in investing activities during the three-month period ended March 31, 2010 and 2009 was $0.01 million and
$0.1 million, respectively. Our capital expenditures in both 2010 and 2009 consisted primarily of computer-related equipment. Although we currently do not anticipate any significant capital expenditures in the near future, we may have a need to make
similar additional capital expenditures related to the integration of our operations.

Net cash used by financing activities
during the three-month period ended March 31, 2010 and 2009 was $4.1 million and $0.01 million, respectively. During the three-month period ended March 31, 2010 there was a $4.0 million repayment of debt to the Senior Lender.

If our revenues do not materialize as anticipated or our lenders or vendors do not maintain their forbearance, we may be forced to raise
additional capital through issuance of new equity or increasing our debt load, or a combination of both. Management is actively pursuing sources of capital to refund the Term Loan and provide working capital. The Companys net working capital
deficiency, accumulated deficit, recurring operating losses and debt covenant defaults raise substantial doubt about its ability to continue as a going concern. There can be no assurance that the Company will be successful in completing any of these
activities on terms that would be favorable to the Company, if at all.

The Company must
comply with various financial and non-financial covenants in connection with the term loan in the original principal amount of $8.5 million (the Term Loan) and the March Debentures, November Debentures, and July Debentures (the Debentures). See the
Debt note to the Companys condensed consolidated financial statements for additional information. The financial covenants require a minimum cash balance and to achieve minimum monthly recurring circuit revenue and margin. Beginning in the
first quarter of 2009, the Company was subject to covenants related to EBITDA pursuant to the Term Loan. Among other things, the non-financial covenants include restrictions on additional indebtedness, acquisitions, and capital expenditures except
as permitted under the agreements. At March 31, 2010, the Company was not in compliance with the minimum financial covenants. A failure to comply with one or more of the covenants could impact the Companys operating flexibility, impair
strategic undertakings, and accelerate the repayment of debt. A forbearance agreement with the Senior Lender expired on April 12, 2010. In a letter dated March 25, 2010, the Lender requested payment of default interest starting as of
February 22, 2010 and reasserted the requirement for the Company to maintain $1.5 million in cash at all times. The Senior Lender had been reiterating its desire that the Term Loan be paid in full at the earliest date possible. The Company had
been pursuing alternative sources of financing during this period.



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On May 3, 2010 Pivotal Global Capacity, LLC, an affiliate of the Pivotal Group of
companies engaged in the private equity business and based in Phoenix, Arizona (Pivotal), successfully closed on its purchase of all the rights and obligations of the Senior Lender (ACF CGS, L.L.C.) with respect to the Term Loan and
Security Agreement dated November 19, 2008, as amended, with no changes in the terms and conditions. Pivotal has been assigned the same rights and obligations of the previous holder and has stepped into the role as the new Senior Lender in
the same capacity as ACF CGS, L.L.C. The Company is currently in default and is in breach of certain covenants of the Term Loan, as it had been with the previous Lender. See the Subsequent Events note for details of this transaction. The Company
will be working toward refinancing objectives to address the working capital deficiency and upcoming maturity date of the Term Loan, due in November 2010. There can be no assurances that the Company will be successful in such efforts.

Due to the dynamic nature of the industry and unforeseen circumstances, if the Company were unable to fully fund cash requirements
through operations and current cash on hand, the Company would need to obtain additional financing through a combination of equity and debt financings and/or renegotiation of terms on the existing debt. If any such activities become necessary, there
can be no assurance that the Company would be successful in completing any of these activities on terms that would be favorable to the Company, if at all.

The Companys cost structure is somewhat variable and provides the Companys management an ability to manage costs as
appropriate. Management regularly monitors the cash flow and liquidity requirements of the business. Based on the Companys cash and cash equivalents, and analysis of the anticipated working capital requirements, management continues to finance
the working capital requirements of the business through vendor payment programs and pursuit of additional financing. The Companys current planned cash requirements for 2010 are based upon certain assumptions, including its ability to manage
expenses and the growth of revenues from service arrangements. In connection with the activities associated with the services, the Company expects to incur expenses, including employee compensation and consulting fees, professional fees, sales and
marketing, insurance and interest expense. Should the expected cash flows not be available, management believes it would have the ability to revise its operating plan and make continued reductions in expenses.

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

For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations or
financial condition, see the Notes to Consolidated Financial Statements.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements in place as of March 31, 2010 or 2009.

Factors Affecting Future Performance

In evaluating our business and us, you should carefully consider the following risks. These risk factors contain, in addition to
historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from the results discussed in the forward-looking statements. The order in which the following risks are presented
is not intended to represent the magnitude of the risks described. Many of the risks set forth below are written as they apply to our business as presently constituted, but have similar if not identical application to the businesses of any companies
that we may acquire in the future.

We have historically lost money and losses may continue.We have incurred operating
losses since our inception and cannot assure you that we will achieve profitability. Through March 31, 2010, we have incurred cumulative losses of $158.3 million compared to a cumulative loss of $156.3 million through December 31, 2009. To
succeed, we must continue to develop new client and customer relationships and substantially increase our revenues from sales of offerings and services. We intend to continue to expend substantial resources to develop and improve our offerings and
to market our offerings and services. These development and marketing expenses often must be incurred well in advance of the recognition of revenue. There is no certainty that these expenditures will result in increased revenues. Incurring
additional expenses while failing to increase revenues could have a material adverse effect on our financial condition.

Going concern.Our net working capital deficiency, recurring operating losses, negative cash flows from operations, shareholders
deficit and the related debt covenant violations and penalties related to such covenant violations, raise substantial doubt about our ability to continue as a going concern.



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We may need additional capital.We may need to obtain additional financing over time
to fund operations and/or to strengthen our balance sheet to attract customers and to ensure credit from suppliers, the amount and timing of which will depend on a number of factors including the pace of expansion of our markets and customer
relationships, development efforts and the cash flow generated by our operations. We cannot predict the extent to which we will require additional financing, and cannot assure you that additional financing will be available on favorable terms or at
all times. The rights of the holders of any debt or equity we may issue in the future could be senior to the rights of shareholders, and any future issuance of equity could result in the dilution of our shareholders proportionate equity
interests in us (including due to the full ratchet anti-dilution rights in favor of the holders of our secured debt and financing on unattractive terms). Failure to obtain financing or obtaining of financing on unattractive terms could have a
material adverse effect on our business.

We have incurred substantial debt in developing the business and in acquiring our
subsidiaries.There can be no assurances that the Company will be able to refinance or extend any existing debt. At December 31, 2007, we had incurred substantial debt with our primary secured lender and with the providers of subordinated
secured debt and short-term bridge debt. All of such debt was refinanced in March 2008 with a portion of the proceeds of $19 million of five-year senior secured convertible notes (the Convertible Notes). In November 2008, as part of the financing
for the GCD acquisition, the Company entered into agreements that modified the Convertible Notes and created an additional $16.8 million of debt. In the third quarter of 2009, we issued additional convertible debentures in connection with raising
$5.6 million for working capital purposes. See the Notes to Consolidated Financial Statements. There is a risk that the Company will be unable to meet all of the covenants contained in the loan documents, including the meeting of EBITDA covenants on
the term loan, repayment and interest obligations, the obligation to timely increase the Companys authorized common stock, and to file its required Exchange Act filings on a current, ongoing basis. There is also a risk that at maturity we will
lack the funds to repay the obligations. Certain debentures are convertible into common stock at prices ranging from $0.15 to $0.24 per share, with full ratchet anti-dilution protection. In addition, most of the debentures were issued together with
warrants, some of which are exercisable at $0.24 per share and others at $0.15 per share. These debentures and warrants have full-ratchet anti-dilution rights and contain cross default language as it relates to our default under our other
indebtedness. Our Senior Secured Lender has, as of December 31, 2009, entered into a forbearance agreement based upon certain covenant violations and has further blocked (pursuant to intercreditor agreements with our underlying subordinated
debt lenders) certain payments required with respect to our convertible debentures issued in July and August of 2009. In the event we are unable to resolve the covenant violations with respect to the Senior Debt as it relates to payment of the
subordinated debt, there is a risk that such indebtedness can be accelerated. Conversion of the debentures and exercise of the warrants could be substantially dilutive to existing shareholders. The forbearance agreement with our Senior Secured
Lender has lapsed as of the date of the filing of this Form 10-Q.

We may choose to effect additional acquisitions.
Should we choose to effect additional acquisitions, any such future acquisition should be subject to all of the risks inherent in purchasing a new business. Shareholders must rely upon Managements estimates as to fair market value and future
opportunities with respect to acquisitions of such companies. In addition, in order to attract and retain key personnel with respect to any acquisitions (including 20/20, Magenta, CentrePath, GCG, and GCD), we may be obligated to increase
substantially the benefits with respect to employment agreements and equity participation rights (through the issuance of stock, warrants, options, phantom stock rights, or other assets with equity participation features) which could be
substantially dilutive of existing shareholders.

We face operational challenges. We have lost money over our operating
history and there can be no assurances that either our historical business or our business as centered on our new Telecom Logistics Integrator strategy will prove profitable. This risk is further heightened by the fact that the integration of an
acquired business often results in the incurring of substantial costs and possible disruption of the business once acquired due to differences in the culture between the entities and the possibility that key employees may either elect not to
continue with the integrated entity or work under a different motivation than prior to the acquisition. In addition, customers and suppliers may modify the way they do business due to their perception of the Company post-acquisition and/or due to
certain preconceived issues that they may have with the acquiring company.

Barriers to entry.In the high technology
business, one of the largest barriers to entry for small and start-up companies is the concern by enterprise customers and suppliers as to the viability of the Company. Even if we are profitable, we may experience significant resistance from
prospective customers due to our relatively small size. This could be exacerbated as we have not attained profitability since our inception and we continue to maintain significant debt on our balance sheet. This resistance could have a material
adverse effect on our results of operations and financial condition.

Competition.Competition in our current and
anticipated future markets is very intense, and it is expected that existing and new competitors will seek to replicate much of the functionality of our offerings and services. Additionally, there can be no assurances that we will be able to
successfully develop the next generation of offerings and services necessary to establish a lead on the market or that if we are able to do so, that customer acceptance for these offerings could continue. Replication by competitors of our existing
offerings, failure to develop new offerings, or failure to achieve acceptance of offerings could have a material adverse effect on our business and financial condition.



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Given the software-intense nature of our business, once an offering or service is developed,
competition has the ability to lower its pricing significantly to gain market share, due to the minimal incremental cost to production. Additionally, certain aspects of the market may be lost to the extent that free software is developed
to address this functionality. These factors could have a material adverse effect on our business and financial condition.

We face the risk of service obsolescence if we fail to develop new offerings.We expect that the market for our offerings and
services will be characterized by rapidly changing technology and introduction of new offerings. Our success will depend, in part, upon our continued ability to provide offerings with the advanced technological qualities desired by our customers, to
enhance and expand our existing offerings and to develop in a timely manner new offerings that achieve market acceptance. Failure to enhance and expand existing offerings or failure to develop new offerings could have a material adverse effect on
our business, results of operations and financial condition.

We face various Software, and Software License Issues.
Defects in our software could reduce demand for our offerings and expose us to costly liability that would adversely affect our operating results. Our technology solutions are internally complex. Complex software may contain errors or defects,
particularly when first introduced or when new versions or enhancements are released. Although we conduct extensive testing, we may not discover software defects that affect our current or new offerings or enhancements until after they are sold.

Service liability claims.Our license and service agreements with our customers typically contain provisions designed
to limit our exposure to potential offering liability claims. It is possible, however, that the limitation of liability provisions contained in our license and service agreements may not be effective as a result of existing or future federal, state,
or local laws, ordinances, or judicial decisions. Although we have not experienced any offering liability claims to date, sale and support of our offerings entails the risk of such claims, which could be substantial in light of our customers
use of many of our offerings in mission-critical applications. We do not maintain offering liability insurance. If a claimant brings a product liability claim against us, it could have a material adverse effect on our results of operations and
financial condition.

We face uncertainties regarding protection of our proprietary technology.We may lack the
resources to enforce any patents or other intellectual property rights we may have or a court may subsequently determine that the scope of our intellectual property protection is not as broad as presently envisioned. In any event, proprietary rights
litigation can be extremely protracted and expensive and we may lack the resources to enforce our intellectual property rights. There is not patent protection for those technologies that are the subject of trade secrets, and our ability to protect
such competitive advantages will be a function of many factors that are not fully within our control, including maintenance of confidentiality agreements and general efforts to keep trade secret information from coming into the public domain.
Failure to protect our patents and our confidential information (as well as associated business techniques) could have a material adverse impact upon the way in which we do business.

Our success is highly dependent on us taking principal positions in telecommunication circuit contracts, especially with
novations.The significant revenue growth in our business plan is predicated on our ability to successfully take principal positions in large telecommunication circuit contracts. A novation is the assumption of existing circuits from
a client and managing this position over time to an improved cost basis with the same or better quality of services. Since these contracts tend to have a high dollar value, any delay in securing them or in improving the cost structure post-closing
will have a significant impact on our current years revenue and cash from operations. Customers and suppliers alike will demand credit worthiness as well. We have many such opportunities in our sales pipeline and the market appears ready to
accept our innovative approach to outsourcing of these functions. In the event we do experience a delay or are ultimately unsuccessful in closing these orders, we may be forced to raise additional capital through issuance of new equity or increased
debt load, or a combination of both to fund our current operations. However, there can be no assurance we will be able to raise additional capital or issue additional indebtedness, or if we do so that it will not be dilutive of existing investors.
There is a risk that prospective customers may delay or not issue orders until our balance sheet is stronger and that potential suppliers of bandwidth may cut back supply of bandwidth absent cash or cash collateral. There is also a risk that current
customers may reduce their ongoing use of our services due to credit concerns with the Company.



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If we fail to meet all applicable continued listing requirements of the Over the Counter
Bulletin Board Market (OTCBB), we may be delisted. According to the OTCBB rules relating to the timely filing of periodic reports with the SEC, any OTCBB issuer who fails to file a periodic report (Quarterly Report on Form 10-Q or Annual Report
on Form 10-K) by the due date of such report three times during any 24-month period may be delisted from the OTCBB. Such removed issuer would not be eligible to be listed on the OTCBB for a period of one year, during which time any subsequent late
filing would reset the one-year period of delisting. As we were late in filing our Annual Report on Form 10-K for the year ended December 31, 2008, our common stock was delisted from trading on the OTCBB. We were also late in filing our Form
10-Q for the period ended March 31, 2009. We were able to have the trading of our common stock reinstated on the OTCBB following the bringing current of our filings for such period. However, if we are late in filing a periodic report within the
timelines mentioned above, we will not be permitted to re-list our stock for trading for a period of one year from when such reports are brought forward. In the event our common stock is traded on the Pink Sheets, the market for our common stock
will be adversely affected and our liquidity and business operations may be adversely impacted.

We are dependent upon key
members of Management.Our success depends to a significant degree upon the continuing contributions of our key Management. These individuals have the most familiarity with our offerings and services and the markets in which we present them. The
loss of any of these individuals could have a material adverse effect on our business, and we do not maintain key man insurance on any of these individuals.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (NOT APPLICABLE)
|------- | ---------------------------------------------------------------------------



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

Our Chief Executive Officer and Interim Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report, have
concluded that, based on the evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the Companys first fiscal quarter
of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

In
February 2009, after numerous attempts to collect accounts receivable of $10.2 million (including the $4.5 million deferred revenue component of the billings) from a unit of BT Group plc (aka British Telecommunications plc), the Company filed suit
in a foreign court. The Company had exhausted all efforts to cause mediation or other forms of compromise and was left with such collection action as its last resort. The customer denied the claim and filed a counter claim seeking return of funds
paid under the contract. The Company established an allowance for the entire balance as of December 31, 2008. In February 2010, the Company received $3.7 million in full settlement of the dispute. These proceeds were immediately used to pay
down the Companys Term Loan with its Senior Lender. As the accounts had been fully reserved in 2008, the $3.7 million was restored to net accounts receivable as of December 31, 2009 and was recorded as a credit to bad debt expense.

Additionally, from time to time, we are involved in various legal matters arising in the ordinary course of business. In the
opinion of Management, the ultimate disposition of such matters will not have a material adverse effect on our consolidated financial position or the results of operations.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

For
information about risk factors affecting future performance, see the Risk Factors section in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

As a result of the Company being in default on certain reporting and administrative covenants related to the Senior Debt, all long-term
debts are presented as current obligations.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

None.



|ITEM 6. | EXHIBITS.
|------- | ---------

Exhibits filed
as a part of this quarterly report on Form 10-Q are listed in the Index to Exhibits located on page 40 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/ George A. KingGeorge A. King, Interim Chief Financial
Officer


Dated:
May 12, 2010



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|                 |  |                                                                                                                                                          
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number   |  | 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                |  | 2008 Long Term Incentive Plan.(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. *                                
|                 | 
|Reference
Number |  | 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).                                                   



40