UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      10-QSB




x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d)OF
                THE SECURITIES EXCHANGE ACT OF 1934For
                the quarterly period ended March 31, 2007o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THEEXCHANGE ACT





For
      the
      transition period from _______________ to _______________





Commission
      File Number 0-30831




CAPITAL
                GROWTH SYSTEMS, INC.(Exact
                name of small business issuer as specified in its
                charter)




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





125
                South Wacker Drive, Suite 300  Chicago, Illinois
                60606(Address
                of principal executive offices)





(312)
                673-2400(Issuer's
                telephone number)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports) and (2) has been subject
      to such filing requirements for the past 90 days.





Yes x No o





As
      of May
      10, 2007, the issuer had outstanding 21,710,880 shares of its $0.0001 par value
      common stock, 20,634.53 (rounded) shares of Series AA convertible
      preferred stock (representing 45,854,057 shares of common stock on an as
      converted basis) and 2,516.10 (rounded) shares of Series B convertible
      preferred stock (representing 3,700,147 shares of common stock on an as
      converted basis).





DOCUMENTS
      INCORPORATED BY REFERENCE




None




Transitional
      Small Business Disclosure Format: Yes o No x







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





Page
                  No.PART
                  I
              FINANCIAL
                  INFORMATION
              
              3Item
                  1.
              Financial
                  Statements
              
              3Interim
                  Consolidated Condensed Balance Sheets as of March 31, 2007 [Unaudited]
                  and
                  December 31, 2006 [Audited]
              
              5Consolidated
                  Condensed Statements of Operations for the three month periods
                  ended March
                  31, 2007 and 2006 [Unaudited]
              
              6Consolidated
                  Condensed Statement of Shareholders' Equity from January 1, 2007
                  to March
                  31, 2007 [Unaudited]
              
              7Consolidated
                  Condensed Statements of Cash Flows For the three month periods
                  ended March
                  31, 2007 and 2006 [Unaudited]
              
              8Notes
                  to Interim Consolidated Condensed Financial Statements.
              
              9Item
                  2.
              Management's
                  Discussion and Analysis.
              
              30Item
                  3.
              Controls
                  and Procedures.
              
              34PART
                  II.
              OTHER
                  INFORMATION
              
              34Item
                  1.
              Legal
                  Proceedings.
              
              34Item
                  2.
              Changes
                  in Securities and Small Business Issuer Purchases of Equity
                  Securities.
              
              34Item
                  3.
              Defaults
                  Upon Senior Securities.
              
              34Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              
              34Item
                  5.
              Other
                  Information.
              
              34Item
                  6.
              Exhibits.
              
              34Signatures
                and Certifications
              
              35




2





**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





NOTE
      REGARDING FORWARD-LOOKING STATEMENTS





Except
      with respect to historical financial information, the discussion contained
      in
      this report contains forward-looking statements that involve risk and
      uncertainties. These statements may be identified by use of forward-looking
      terminology such as “believes,” “expects,” “may,” “should,” or “anticipates,” or
      similar expressions, or by discussions of strategy. The cautionary statements
      made in this report should be read as being applicable to all related
      forward-looking statements wherever they appear in this report. Our actual
      results could differ materially from those discussed in this report. Factors
      that could cause our results to differ from those discussed in this report,
      include, but are not limited to, those discussed under the heading “Risk
      Factors” in our report on Form 10-KSB for the period ending December 31,
      2006.




3


CAPITAL
        GROWTH SYSTEMS, INC.
  Interim
        Consolidated Condensed Financial Statements
 (Unaudited)
  March
        31,
        2007
  4
 
  **CAPITAL
            GROWTH SYSTEMS, INC.**
 **CONSOLIDATED
            CONDENSED BALANCE SHEETS**


**March
                31,**
            
            **December
                31,****2007**
            
            **2006****ASSETS**
            
            **(Unaudited)**
            
            **(Audited)****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            1,684,974
            
            $
            1,203,819Accounts
                receivable, net
            
            
            1,522,822
            
            
            1,592,110Prepaid
                expenses
            
            
            1,479,650
            
            
            474,781Other
                current assets
            
            
            131,463
            
            
            41,811Current
                assets of discontinued operations
            
            
            2,512,534
            
            
            2,429,677Total
                Current Assets
            
            
            7,331,443
            
            
            5,742,198Fixed
                assets, net
            
            
            3,351,327
            
            
            3,915,820Intangible
                assets, net
            
            
            9,218,957
            
            
            9,493,179Goodwill
            
            
            12,513,090
            
            
            12,513,090Other
                assets
            
            
            38,710
            
            
            38,508Other assets
              of discontinued
              operations
            
            
            5,510,840
            
            
            5,677,953**TOTAL
                ASSETS**
            
            $
            37,964,367
            
            $
            37,380,748**LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Current
                maturities of long-term debt
            
            $
            6,970,213
            
            $
            21,200,138Current
                maturities of obligations under capital leases
            
            
            42,149
            
            
            42,872Accounts
                payable
            
            
            1,631,926
            
            
            1,429,882Accrued
                expenses
            
            
            1,580,798
            
            
            3,352,806Deferred
                revenue, current portion
            
            
            662,245
            
            
            608,461Current
                liabilities of discontinued operations
            
            
            4,148,204
            
            
            7,378,404Total
                Current Liabilities
            
            
            15,035,535
            
            
            34,012,563Deferred
                revenue, net of current portion
            
            
            76,111
            
            
            112,222Long
                term portion of debt
            
            
            3,380,880
            
            
            738,607Long
                term portion of obligations under capital leases
            
            
            28,373
            
            
            38,653Long
              term portion of discontinued
              operations
            
            
            497,160
            
            
            570,587Total
                Liabilities
            
            
            19,018,059
            
            
            35,472,632**SHAREHOLDERS'
                EQUITY**Preferred
                Stock, $.0001 par value, 5,000,000 authorized;2,516.10
                shares of Series B Convertible issued and outstanding as of March
                31, 2007
                and December 31, 2006.
            
            
            —
            
            
            —19,984.53
                shares of Series AA Convertible issued and outstanding as of March
                31,
                2007 and none outstanding as of December 31, 2006.
            
            
            2
            
            
            —Common
                stock,$.0001 par value, 25,000,000 authorized; 21,710,880 and 17,115,754
                issued and outstanding common stock at March 31, 2007 and December
                31,
                2006, respectively, 0 and 3,899,315 shares were issuable at March
                31, 2007
                and December 31, 2006, respectively.
            
            
            2,171
            
            
            2,101Additional
                paid-in capital
            
            
            49,015,889
            
            
            24,519,495Accumulated
                other comprehensive loss
            
            
            (49,996
            )
            
            (48,904
            )Accumulated
                deficit
            
            
            (30,021,758
            )
            
            (22,564,576
            )**SHAREHOLDERS'
                EQUITY**
            
            
            18,946,308
            
            
            1,908,116**TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            $
            37,964,367
            
            $
            37,380,748




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


5




**CAPITAL
      GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      CONDENSED STATEMENTS OF OPERATIONS**


(Unaudited)




**Three
                Months Ended March 31,****2007**
            
            **2006****Revenue**Networks
                and Circuits
            
            $
            2,084,262
            
            $
            —Services
            
            
            1,673,158
            
            
            —Software
            
            
            242,173
            
            
            —**Total
                revenues**
            
            
            3,999,593
            
            
            —**Cost
                of goods sold**
            
            
            
            
            
            —Networks
                and Circuits
            
            
            1,629,845
            
            
            —Services
            
            
            629,792
            
            
            —Software
            
            
            —
            
            
            —**Total
                cost of goods sold**
            
            
            2,259,637
            
            
            —**Gross
                margin**
            
            
            1,739,956
            
            
            —**Operating
                expenses:**Compensation
            
            
            3,501,858
            
            
            104,660Depreciation
                and amortization
            
            
            938,016
            
            
            —Other
                operating expenses
            
            
            1,393,153
            
            
            277,021**Total
                operating expenses**
            
            
            5,833,027
            
            
            381,681**Operating
                loss from continuing operations**
            
            
            (4,093,071
            )
            
            (381,681
            )**Interest
                expense**
            
            
            2,871,546
            
            
            1,642**Loss
                from continuing operations**
            
            
            (6,964,617
            )
            
            (383,323
            )**Loss
                from discontinued operations, net of tax of
                $7,500**
            
            
            (492,565
            )
            
            (402,297
            )**Net
                Loss**
            
            
            (7,457,182
            )
            
            (785,620
            )**Deemed
                dividend warrants issued to preferred
                shareholders**
            
            
            (9,182,990
            )
            
            —**Net
                loss applicable to common shareholders**
            
            
            (16,640,172
            )
            
            (785,620
            )**Net
                Loss per applicable to common shareholders:****Loss
                from continued operations**
            
            $
            (0.75
            )
            $
            (0.02
            )**Loss
                from discontinued operations**
            
            
            (0.02
            )
            
            (0.02
            )**Net
                loss applicable to common shareholders**
            
            $
            (0.77
            )
            $
            (0.05
            )**Average
                Shares Outstanding**
            
            
            21,566,700
            
            
            17,016,853





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


6




**CAPITAL
      GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY**


(Unaudited)





**Common
                Shares**
            
            **Series
                AA Preferred Shares**
            
            **Series
                B Preferred Shares**
            
            **Common
                Shares**
            
            **Preferred
                Stock**
            
            **Additional
                Paid-in Capital**
            
            **Accumulated
                Deficit**
            
            **Foreign
                Translation Adjustment**
            
            **Total
                Equity**
            
            **Comprehensive
                loss**Balance,
                January 1, 2007
            
            
            21,015,069
            
            
            -
            
            
            2,516.10
            
            $
            2,101
            
            $
            0
            
            $
            24,519,495
            
            
            ($22,564,576
            )
            
            ($48,904
            )
            $
            1,908,116Issuance
                of Common Stock
            
            
            695,811
            
            
            
            
            
            
            
            $
            70
            
            $
            0
            
            $
            326,387
            
            $
            0
            
            $
            0
            
            $
            326,457Issuance
                of Series AA Preferred Stock
            
            
            -
            
            
            19,984.53
            
            
            
            
            
            
            
            $
            2
            
            $
            17,553,656
            
            
            
            
            
            
            
            $
            17,553,658Issuance
                of Series AA Preferred Stock warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            9,182,990
            
            
            
            
            
            
            
            $
            9,182,990Deemed
                Dividend related to the issuance of convertible Series AA Preferred
                Stock
                warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            ($9,182,990
            )
            
            
            
            
            
            
            
            ($9,182,990
            )Stock
                warrants issued for debt issuance
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            5,183,673
            
            
            
            
            
            
            
            $
            5,183,673Stock
                based compensation expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,432,678
            
            
            
            
            
            
            
            $
            1,432,678Foreign
                translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            ($1,092
            )
            
            ($1,092
            )
            
            ($1,092
            )Net
                Loss for the three months ended March 31, 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            ($7,457,182
            )
            
            
            
            
            ($7,457,182
            )
            
            ($7,457,182
            )Balance,
                March 31, 2007
            
            
            21,710,880
            
            
            19,984.53
            
            
            2,516
            
            $
            2,171
            
            $
            2
            
            $
            49,015,889
            
            
            ($30,021,758
            )
            
            ($49,996
            )
            $
            18,946,308
            
            
            ($7,458,274
            )




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




7




**CAPITAL
      GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      CONDENSED STATEMENTS OF CASH FLOWS**


(Unaudited)





Three
                Months Ended March 31,2007
            
            2006Net
                cash used in continuing operating activities
            
            $
            (5,024,483
            )
            $
            (263,369
            )Net
                cash provided by (used in) discontinued operating
                activities
            
            
            (1,102,109
            )
            
            218,972Net
                cash used in operating activities
            
            
            (6,126,592
            )
            
            (44,397
            )Net
                investing cash flows used in continuing operations
            
            
            (149,960
            )
            
            —Net
                investing cash flows used in discontinued operations
            
            
            (30,184
            )
            
            (65,794
            )Net
                cash used in investing activities
            
            
            (180,144
            )
            
            (65,794
            )Net
                cash provided by financing activities from continuing
                operations
            
            
            6,070,838
            
            
            275,000Net
                cash provided by (used in) financing activities from discontinued
                operations
            
            
            718,145
            
            
            (338,353
            )Net
                cash provided by (used in) financing activities
            
            
            6,788,983
            
            
            (63,353
            )Effect
                of exchange rate changes on cash and equivalents
            
            
            (1,092
            )
            
            —Increase
                (Decrease) in Cash and Cash Equivalents
            
            
            481,155
            
            
            (173,544
            )Cash
                and Cash Equivalents - Beginning of Period
            
            
            1,203,819
            
            
            436,842Cash
                and Cash Equivalents - End of period
            
            $
            1,684,974
            
            $
            263,298SUPPLEMENTAL
                CASH FLOW INFORMATION:Cash
                paid for interest for continuing operations
            
            $
            688,885
            
            $
            —Cash
                paid for interest for discontinued operations
            
            $
            27,891
            
            $
            91,785Cash
                paid for income taxes for continuing operations
            
            $
            4,176
            
            $
            —Cash
                paid for income taxes for discontinued operations
            
            $
            7,500
            
            $
            2,446NONCASH
                INVESTING AND FINANCING ACTIVITIES:Conversion
                of short-term bridge notes into preferred stock
            
            $
            3,190,831
            
            $
            —Conversion
                of mandatory convertible notes into preferred stock
            
            $
            1,394,964
            
            $
            —Conversion
                of short-term bridge notes to new junior secured notes
            
            $
            5,388,438
            
            $
            —





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


8




**CAPITAL
      GROWTH SYSTEMS, INC.**


**Notes
      To Interim Consolidated Condensed Financial Statements**


**March
      31, 2007 (Unaudited)**




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




The
      accompanying consolidated financial statements include the accounts of Capital
      Growth Systems, Inc. (“CGSI”) and its wholly-owned subsidiaries, Nexvu
      Technologies, LLC (“Nexvu”), Frontrunner Network Systems Corp. (“Frontrunner”),
      CentrePath, Inc. (“CentrePath”), Global Capacity Group, Inc. (“GCG”), 20/20
      Technologies, Inc. (“20/20”) and its wholly-owned subsidiary, Magenta net Logic
      (“Magenta”). During the first quarter of 2007, the Company determined both
      Frontrunner and Nexvu met the definition of discontinued operations as
      prescribed in SFAS 144 “ *Accounting
      for Impairment or Disposal of Long-Lived Assets”* and
      therefore the financial results of these two entities are presented as
      discontinued operations for the three month periods ended March 31, 2007 and
      2006 (See Note 3 - Discontinued Operations for further discussion). Except
      where
      necessary to distinguish the entities, we will refer to CGSI, Centrepath, GCG,
      20/20 and Magenta as the “Company.” All intercompany accounts have been
      eliminated in consolidation.





These
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America for interim financial
      information and the rules and regulations of the Securities and Exchange
      Commission for interim financial statements. These financial statements reflect
      all adjustments and accruals of a normal recurring nature, which, in the opinion
      of management are necessary in order to make the financial statements not
      misleading. The results for the interim periods presented are not necessarily
      indicative of results to be expected for any future period.




These
      financial statements should be read in conjunction with the audited financial
      statements and the notes thereto of all the companies included in CGSI's 2006
      Annual Report on Form 10-KSB filed with the Securities Exchange Commission
      for
      the year ended December 31, 2006.




**Acquisition
      of 20/20 Technologies**





On
      September 8, 2006, the Company entered into an Agreement and Plan of Merger
      (the
“20/20 Merger Agreement”) with 20/20 Technologies, Inc., a Delaware corporation
      (“20/20”). Pursuant to the terms of the 20/20 Merger Agreement, the Company
      agreed to acquire all of the capital stock of 20/20 in exchange for certain
      cash, stock consideration and the assumption of certain indebtedness. The
      Company and 20/20 effected the transaction through a reverse triangular
      merger whereby a subsidiary established for the purpose of merger was
      merged with 20/20, and 20/20 was the surviving corporation (the
“Merger”).





The
      aggregate consideration paid to 20/20 in connection with the Merger was
      $8,727,050, comprised of debt refinanced in the amount of $3,559,416 and stock
      valued at $5,167,634. The stock consideration consisted of 3,899,315
      shares of the Company's common stock, par value of $0.0001 (“Common Stock”) and
      2,516.10 shares of the Company's Series B preferred stock, par value $.0001
      (the
“Series B Preferred Stock”, and collectively with the shares of Common Stock,
      the “Transaction Shares”). The value of the Transaction Shares was based on the
      average closing price of the Company's Common Stock for the ten trading days
      immediately preceding the Closing Date and was equal to $0.68 per share. The
      Series B Preferred Stock, by its terms will automatically convert into an
      additional 3,700,147 shares of common stock upon the filing of articles of
      amendment to the Company's articles of incorporation authorizing the issuance
      of
      not less than 50,000,000 shares of common stock, and it enjoys a liquidation
      preference prior to conversion equal to $0.68 per share. A portion of the
      Transaction Shares have been held back as security in connection with certain
      indemnification obligations of 20/20 and its stockholders.




The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of 20/20. Under the purchase method of accounting, the total
      estimated consideration as shown in the table below is allocated to 20/20's
      tangible and intangible assets and liabilities based on their estimated fair
      values as of the Closing Date. The consideration is allocated as
      follows:





Debt
                refinanced
            
            
            
            
            $
            3,559,416Value
                of stock issued
            
            
            
            
            
            5,167,634Professional
                fees
            
            
            
            
            
            250,000Total
                purchase price
            
            
            
            
            $
            8,977,050Assets
                and liabilities acquired/assumedCash
            
            $
            49,856Accounts
                receivable
            
            
            66,115Other
                current assets
            
            
            14,140Property
                and equipment, net
            
            
            9,904Other
                assets
            
            
            4,675Accounts
                payable
            
            
            (639,589
            )Accrued
                expenses and other current liabilities
            
            
            (357,783
            )Deferred
                revenue
            
            
            (258,254
            )Notes
                payable
            
            
            (3,247,479
            )Net
                liabilities assumed
            
            
            
            
            
            (4,358,415
            )Identifiable
                intangible assets
            
            
            
            
            
            4,525,400Goodwill
            
            
            
            
            
            8,810,065Total
            
            
            
            
            $
            8,977,050




9




The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:




**Fair Value**
            
            **Useful Life**
            
            **Annual Amortization**Developed
                technology
            
            $
            3,755,400
            
            
            11
                years
            
            $
            341,400Trade
                name
            
            
            50,000
            
            
            3
                years
            
            
            16,667Customer
                base
            
            
            720,000
            
            
            8
                years
            
            
            90,000$
            4,525,400
            
            
            
            
            $
            448,067




The
      amount allocated to goodwill is not deductible for tax purposes.




**Acquisition
      of CentrePath**




On
      November 22, 2006, the Company entered into an Agreement and Plan of Merger
      (the
“Merger Agreement”) with CentrePath, Inc., a Delaware corporation (“CentrePath”)
      pursuant to which CentrePath merged with and into a subsidiary of the Company
      established for that purpose. The merger consideration to be paid to the
      CentrePath stockholders was a cash amount equal to $6,750,000, subject to a
      post-closing net working capital adjustment. On November 30, 2006, the Company
      consummated the acquisition of CentrePath. Pursuant to the Merger Agreement,
      an
      additional payment of $750,000 related to the post-closing net working capital
      adjustment was agreed to, bringing the total amount of the merger consideration
      to $7,500,000. The additional payment due was recorded in accrued liabilities
      at
      December 31, 2006 and paid during the three months ended March 31,
      2007.





As
      part
      of this Merger, the Company had borrowed $7,850,000 original principal amount
      in
      November, 2006 with $6,750,000 of the proceeds used toward the purchase of
      Centrepath, and the balance of the proceeds used for working capital, which
      loans were secured by the stock and assets of CentrePath. The principal and
      accrued interest with respect to these loans was either paid off or rolled
      into
      the purchase of Units per the Units offering on January 19, 2007 (see Note
      8 -
      Shareholders Equity). In connection with the funding of this loan the Company
      issued warrants to purchase 2,261.27261 shares of Series AA Preferred Stock
      (representing 3,925,000 shares of Common Stock on an as converted to Common
      Stock basis), exercisable on or before December 31, 2009, at $1,000 per share
      ($0.45 per share on an as converted to Common Stock basis).





The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of CentrePath. Under the purchase method of accounting, the total
      consideration as shown in the table below is allocated to CentrePath's tangible
      and intangible assets and liabilities based on their fair values as of the
      date
      of completion of the CentrePath acquisition. The consideration is allocated
      as
      follows:




Cash
            
            
            
            
            $
            7,500,000Professional
                fees
            
            
            
            
            
            150,000Total
                consideration
            
            
            
            
            $
            7,650,000Assets
                and liabilities acquired/assumedCash
                and cash equivalents
            
            $
            2,488,328Accounts
                receivable
            
            
            889,608Prepaid
                expenses
            
            
            263,120Property
                and equipment, net
            
            
            3,910,000Accounts
                payable
            
            
            (282,012
            )Accrued
                expenses
            
            
            (2,438,583
            )Deferred
                revenue
            
            
            (415,009
            )Capital
                lease
            
            
            (59,272
            )Net
                assets acquired
            
            
            
            
            
            4,356,180Identifiable
                intangible assets
            
            
            
            
            
            1,540,000Goodwill
            
            
            
            
            
            1,753,820Total
            
            
            
            
            $
            7,650,000





The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:





**Fair Value**
            
            **Useful Life**
            
            **Annual Amortization**Developed
                technology
            
            $
            970,000
            
            
            9
                years
            
            $
            107,778Trade
                name
            
            
            90,000
            
            
            3
                years
            
            
            30,000Customer
                base
            
            
            480,000
            
            
            6
                years
            
            
            80,000$
            1,540,000
            
            
            
            
            $
            217,778




The
      amount allocated to goodwill is not deductible for tax
      purposes.


10




**Acquisition
      of Global Capacity**





Effective
      December 12, 2006, the Company consummated the acquisition of Global Capacity
      Group, Inc. (“GCG”) pursuant to which GCG became a wholly-owned subsidiary of
      the Company. The aggregate cash consideration paid at closing in connection
      with
      the merger was $5,300,000. The former Global Capacity Group, Inc. stockholders
      will also be entitled to additional contingent consideration after the second
      and third anniversary dates of the merger if certain revenue and profitability
      thresholds are reached by GCG after the merger . The parties agreed to various
      revenue and gross margin combinations that could result in additional
      consideration of an amount between $1,500,000 and $3,000,000 on each of the
      second and third anniversary dates. The Company requires the Executives to
      be
      employed in order to receive any such additional consideration payments.
      Therefore, any additional payments or stock issued related to the contingent
      consideration will be recorded as compensation in the Company's Statement of
      Operations in the period that it is earned. The revenue thresholds range between
      $9 million and $13.4 million and the gross profit thresholds range between
      27.5%
      and 30% of revenue. Any additional consideration paid on the second anniversary
      date must be paid in cash. Contingent consideration on the third anniversary
      date may be paid in cash or CGSI common stock at the Company's
      discretion.




The
      Company established a tranche of up to $5,500,000 of 60 day bridge notes that
      it
      was issuing pursuant to a Global Bridge Note Purchase Agreement dated as of
      December 11, 2006, by and among the Company and various lenders party thereto,
      to provide the cash necessary to fund the purchase of Global Capacity Group,
      Inc. ($5,300,000) plus an additional amount of up to $200,000 for general
      working capital purposes. Each bridge note bore interest at 8% per annum and
      was
      secured by a collateral pledge of the stock of Global Capacity Group, Inc.
      as
      well as a junior security interest in the assets of the Company. In addition,
      for each $1,000,000 of bridge notes funded the lenders received a detachable
      warrant to purchase up to 225.00225 shares of series AA convertible preferred
      stock of the Company, which by their terms are convertible into 500,000 shares
      of common stock upon the authorization of the underlying common stock, and
      with
      the warrants exercisable on or before December 31, 2009 at an as converted
      to
      common stock purchase price of $0.45 per share. The certificate of designations
      for the series AA convertible preferred stock provides that the series AA
      convertible preferred stock will automatically convert to common stock once
      the
      articles of incorporation for the Company are amended to authorize the issuance
      of not less than 200,000,000 shares of common stock.  On December 11,
      2006, an aggregate of $4,700,000 of bridge notes were issued. The balance of
      the
      merger consideration was provided by available cash from the
      Company. During
      the three months ended March 31, 2007, approximately $2.9 million of the
      principal and accrued interest related to the bridge notes were extended and
      became part of the Company’s new junior secured facility (see Note 5 - Debt for
      further discussion) and the remaining balance or $1.8 million was repaid. There
      was no further obligation related to the bridge notes outstanding as of March
      31, 2007.





The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of Global Capacity Group, Inc. Under the purchase method of
      accounting, the total consideration as shown in the table below is allocated
      to
      Global Capacity, Inc's tangible and intangible assets and liabilities based
      on
      their fair values as of the date of completion of the Global Capacity Group,
      Inc. acquisition. The consideration is allocated as follows:




Cash
            
            
            
            
            $
            5,300,000Professional
                fees
            
            
            
            
            
            150,000Total
                consideration
            
            
            
            
            $
            5,450,000Assets
                and liabilities acquired/assumedAccounts
                receivable
            
            
            415,481Prepaid
                expenses & other assets
            
            
            52,451Property
                and equipment, net
            
            
            192,002Cash
                overdraft
            
            
            (26,879
            )Accounts
                payable
            
            
            (364,575
            )Accrued
                expenses
            
            
            (303,917
            )Notes
                payable
            
            
            (75,398
            )Capital
                lease
            
            
            (28,370
            )Net
                liabilities assumed
            
            
            
            
            
            (139,205
            )Identifiable
                intangible assets
            
            
            
            
            
            3,640,000Goodwill
            
            
            
            
            
            1,949,205Total
            
            
            
            
            $
            5,450,000




The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:





**Fair Value**
            
            **Useful Life**
            
            **Annual Amortization**Developed
                technology
            
            $
            1,070,000
            
            
            5
                years
            
            $
            214,000Trade
                name
            
            
            210,000
            
            
            3
                years
            
            
            70,000Retail
                customer base
            
            
            2,210,000
            
            
            10
                years
            
            
            221,000Wholesale
                customer base
            
            
            150,000
            
            
            6
                years
            
            
            25,000$
            3,640,000
            
            
            
            
            $
            530,000




The
      amount allocated to goodwill is not deductible for tax purposes. The Company
      has
      eight months from the acquisition date to complete an IRS 338(h) election which
      would allow for the deductibility of the goodwill.




11




**Unaudited
      Pro Forma Financial Information**





The
      following unaudited pro forma condensed consolidated results of operations
      have
      been prepared as if the acquisition of 20/20, CentrePath and Global Capacity
      had
      occurred as of January 1, 2006:




**Three
                  Months Ended**
                **March 31,****2007**
              
              **2006**Net
                  revenues
              
              $
              3,999,593
              
              $
              4,951,324Net
                  loss applicable to common shareholders
              
              $
              (16,640,172
              )
              $
              (3,143,676
              )Net
                  loss per share:Basic
                  and diluted
              
              $
              (0.77
              )
              $
              (0.15
              )Weighted
                  average shares outstanding:Basic
                  and diluted
              
              
              21,566,700
              
              
              20,916,168




The
      unaudited pro forma condensed consolidated results of operations are not
      necessarily indicative of results that would have occurred had the acquisitions
      occurred as of January 1, 2006, nor are they necessarily indicative of the
      results that may occur in the future.




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




**Cash
      and Cash Equivalents**




The
      Company considers those short-term, highly liquid investments with original
      maturities of three months or less as cash and cash equivalents.




**Accounts
      Receivable**




Accounts
      receivable represent amounts owed from billings to customers and are recorded
      at
      gross amounts owed less an allowance for uncollectible accounts. The Company
      provides an allowance for uncollectible accounts receivable based upon prior
      experience and management's assessment of the collectibility of existing
      specific accounts. Total reserve for uncollectible accounts was $64,045 and
      $63,927 as of March 31, 2007 and December 31, 2006, respectively. The Company's
      policy is to write off accounts receivable balances once management has deemed
      them to be uncollectible.




**Property
      and Equipment**




Property
      and equipment are stated at cost less accumulated depreciation. Provision for
      depreciation is made generally at rates designed to allocate the cost of the
      property and equipment over their estimated useful lives of 3 - 15 years.
      Depreciation is calculated using the straight-line method. The cost of ordinary
      maintenance and repairs is charged to operations while renewals and replacements
      are capitalized.




12




**Revenue
      Recognition**




The
      Company ** generates
      revenue from selling and installing hardware, licensing its software and the
      provision of services.




For
      revenue from product sales and services, the Company recognizes revenue in
      accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition”
(“SAB104”), SAB 104 incorporates Emerging Issues Task Force 00-21 (“EITF
      00-21”), “Multiple-Deliverable Revenue Arrangements.” EITF 00-21 addresses
      accounting for arrangements that may involve the delivery or performance of
      multiple products, services and/or rights to use assets. Revenue from the sale
      of software is recognized in accordance with SOP97-2, *Software Revenue Recognition* , as
      amended by SOP98-9, modification of SOP97-2, *Software Revenue Recognition with Respect to Certain
      Transactions* .




Both
      SOP97-2 and SAB104 require that four basic criteria must be met before revenue
      can be recognized: (1) persuasive evidence of an arrangement exists; (2)
      delivery has occurred; (3) the selling price is fixed and determinable; and
      (4)
      collectibility is reasonably assured. Determination of criteria (3) and (4)
      are
      based on management's judgments regarding the fixed nature of the selling prices
      of the products delivered and the collectibility of those amounts. Provisions
      for discounts and rebates to customers, estimated returns and allowances, and
      other adjustments are provided for in the same period the related sales are
      recorded. The Company defers any revenue for which the product has not been
      delivered or is subject to refund until such time that the Company and the
      customer jointly determine that the product has been delivered or no refund
      will
      be required. The allocation of license and maintenance is based on the residual
      method of accounting as prescribed in SOP97-2. Under this method the Company
      has
      established Vendor Specific Objective Evidence (VSOE) for the value of its
      post-contract support agreements at 20% of the license amount, which is based
      on
      the amount charged to its customer in the renewal year. Therefore, of the total
      amount received under the arrangement, the Company allocates 20% to maintenance
      and the remaining amount to software license under the “residual method” of
      accounting as prescribed in SOP97-2.




The
      Company recognizes revenues and all related costs on installation contracts
      with
      revenues of $100,000 or more using the percentage of completion method. Progress
      is measured by the percentage of actual labor incurred to date to management's
      estimate of total labor to be incurred on each contract. This method is used
      as
      management considers labor incurred to be the best available measure of progress
      on these contracts. Contract costs include all direct subcontractor labor and
      supervisory labor costs and those indirect costs related to contract performance
      such as indirect labor, supplies, and other general expenses. Provisions for
      estimated losses on uncompleted contracts are made in the period in which such
      losses are determined. Changes in job performance, conditions and estimated
      profitability may result in revisions to costs and income and are recognized
      in
      the period in which revisions are determined. All installation contracts with
      revenues less than $100,000 are accounted for on the completed contract method.
      The Company recognizes revenue and all related costs on these contracts upon
      delivery and acceptance by the customer.




The
      Company also earns sales revenue from providing its customers ongoing access
      to
      broadband data services and from the installation of those services. Ongoing
      services are billed in advance and the installation of those services are billed
      in arrears. The Company recognizes sales revenue when persuasive evidence of
      an
      arrangement exists, delivery has occurred, the fee is fixed or determinable,
      and
      collectibility is probable. Advance billings are recorded as deferred revenue
      in
      the month prior to delivery.




The
      Company defers maintenance and services revenue related to providing network
      monitoring and the ongoing access to broadband. This revenue is recognized
      ratably over the term of such contracts. The Company defers recognition of
      revenue on consulting and training billings until the related services are
      performed.




**Concentrations
      of Credit Risk**




Financial
      instruments and related items, which potentially subject the Company to
      concentrations of credit risk, consist primarily of cash and cash equivalents.
      The Company places its cash and temporary cash investments with credit quality
      institutions. At times, such investments may be in excess of the FDIC insurance
      limit.





13




**Comprehensive
      loss**




SFAS
      No.
      130, “Reporting Comprehensive Income,” establishes standards for reporting and
      displaying of comprehensive income, its components and accumulated balances.
      Comprehensive income (loss) is defined to include all changes in equity except
      those resulting from investments by owners and distributions to owners. Among
      other disclosures, SFAS No. 130 requires that all items that are required to
      be
      recognized under current accounting standards as components of comprehensive
      loss be reported in a financial statement that is displayed with the same
      prominence as other financial statements. The following is the Company's
      comprehensive loss for the three months ended March 31, 2007 and
      2006:




**March 31,****2007**
            
            **2006**Net
                loss applicable to common shareholders as reported
            
            $
            (16,640,172
            )
            $
            (785,620
            )Exchange
                translation loss
            
            
            (1,092
            )
            
            —Comprehensive
                loss applicable to common shareholders
            
            
            (16,641,264
            )
            
            (785,620
            )Basic
                and diluted
            
            $
            (0.77
            )
            $
            (0.05
            )Weighted
                average shares outstanding:Basic
                and diluted
            
            
            21,566,700
            
            
            17,016,853




**Accounting
      for Stock-Based Compensation**





In
      the
      first quarter of 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123R, “Share-Based Payment” (SFAS 123R), which revises SFAS 123,
“Accounting for Stock-Based Compensation” (SFAS 123) and supersedes Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB
      25). SFAS 123R requires that share-based payment transactions with employees
      be
      recognized in the financial statements based on their fair value and recognized
      as compensation expense over the vesting period. Prior to SFAS 123R, the Company
      disclosed the pro forma effects of SFAS 123 under the minimum value method.
      The
      Company adopted SFAS 123R effective January 1, 2006, prospectively for new
      equity awards issued subsequent to January 1, 2006. The adoption of SFAS 123R
      resulted in the recognition of stock-based compensation expense during the
      three
      months ended March 31, 2007 and 2006 of $1,432,678 and $12,641 respectively.
      No
      tax benefit has been recorded due to the full valuation allowance on deferred
      tax assets that the Company has recorded.




The
      Company accounts for equity instruments issued for services and goods to
      non-employees under SFAS 123; EITF 96-18, “Accounting for Equity
      Instruments that are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services”; and EITF 00-18, “Accounting
      Recognition for Certain Transactions Involving Equity Instruments Granted to
      Other Than Employees”. Generally, the equity instruments issued for services and
      goods are for shares of the Company's common stock or warrants to purchase
      shares of the Company's common stock. These shares or warrants generally are
      fully-vested, nonforfeitable and exercisable at the date of grant and require
      no
      future performance commitment by the recipient. The Company expenses the fair
      market value of these securities over the period in which the related services
      are received.




14




**Income
      Taxes**





The
      Company adopted the provisions of FASB Interpretation No 48, *Accounting
      for* *Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109* (FIN
      48),
      on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income
      taxes recognized in an enterprise’s financial statements in accordance with FASB
      Statement 109, *Accounting
      for Income Taxes,* and
      prescribes a recognition threshold and measurement process for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on de-recognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition.





The
      Company, including any of its subsidiaries, files income tax returns in the
      U.S.
      federal jurisdiction, and various state and foreign jurisdictions. Based on
      its
      evaluation, the Company has concluded that there are no significant unrecognized
      tax benefits. The Company’s evaluation was performed for the tax years ended
      December 31, 2003, 2004, 2005, and 2006, the tax years that remain subject
      to
      examination by major tax jurisdictions as of March 31, 2007. The Company does
      not believe there will be any material changes in its unrecognized tax positions
      over the next 12 months.





The
      Company may from time to time be assessed interest or penalties by major tax
      jurisdictions, although any such assessments historically have been minimal
      and
      immaterial to its financial results. In accordance with FIN 48, paragraph 19,
      the Company has decided to classify interest and penalties as a component of
      income tax expense.




**Loss
      Per Share**




Basic
      and
      diluted net loss per share information is presented under the requirements
      of
      SFAS No. 128, “Earnings per Share.” Basic net loss per share is computed by
      dividing the net loss by the weighted-average number of shares of common stock
      outstanding for the period, less shares subject to repurchase. Diluted net
      loss
      per share reflects potential dilution of securities by adding other potential
      common shares, including stock options and warrants in the weighted-average
      number of common shares outstanding for a period, if dilutive. All potentially
      dilutive securities, including stock options and warrants, have been excluded
      from this computation, as their effect is anti-dilutive. As of March 31, 2007,
      there were 16,774,527 (see Note 4 - Stock Based Compensation) stock options
      and
      79,702,075 (see Note 6 -Stock Warrants) stock warrants outstanding that could
      be
      converted into potential common shares. There are also 2,516.10 and 19,984.53
      shares of Series B and Series AA Convertible preferred stock that could
      potentially be converted into 3,700,147 and 44,409,623 shares of common stock,
      respectively. The Company also had outstanding warrants to purchase 2,020.756
      Series A preferred stock which is potentially convertible into 2,245,262 shares
      of common stock.





**Goodwill
      and Intangible Assets**





Goodwill
      is the excess of cost of an acquired entity over the amounts assigned to assets
      acquired and liabilities assumed in a business combination. Goodwill is not
      amortized. Goodwill is tested for impairment annually, and will be tested for
      impairment between annual tests if an event occurs or circumstances change
      that
      would indicate the carrying amount may be impaired. Impairment testing for
      goodwill is done at a reporting unit level. Reporting units are one level below
      the business segment level, but can be combined when reporting units within
      the
      same segment have similar economic characteristics. The Company has determined
      that there are three reporting units, of which two are being reported as
      discontinued operations (see Note 3 -Discontinued Operations). There have been
      no events or circumstances subsequent to our year end that would indicate an
      impairment of goodwill exists. Excluding the reclassification of Frontrunner’s
      goodwill of $2.6 million as part of reporting this entity as a discontinued
      operations, there were no other changes in the carrying amount of goodwill
      for
      the three month period ended March 31, 2007.




15




Intangible
      assets are assets acquired from an independent party. The assets have no
      significant residual values. There are no intangible assets which are not
      subject to amortization. The acquired intangible assets are tested for
      impairment whenever events or circumstances indicate that a carrying amount
      of
      an asset (asset group) may not be recoverable. The Company has determined that
      no material impairments existed as of March 31, 2007. An impairment loss is
      recognized when the carrying amount of an asset exceeds the estimated
      undiscounted cash flows used in determining the fair value of the asset. The
      amount of the impairment loss to be recorded is calculated by the excess of
      the
      asset's carrying value over its fair value. Fair value is generally determined
      using a discounted cash flow analysis. The acquired intangible assets by major
      intangible asset class at March 31, 2007 were as follows:




**Acquired**
              **Value**
            
            **Amortization**
              **Period in Years**Developed
                technology
            
            $
            5,795,400
            
            
            5
                to 11Trade
                names
            
            
            350,000
            
            
            3Customer
                base
            
            
            3,560,000
            
            
            6
                to 10$
            9,705,400
            
            
            9.08
                weighted average years




Gross
      carrying amounts and accumulated amortization of the acquired other intangibles
      were as follows for each major intangible asset class:




**As of March 31, 2007****Gross Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net Balances**Developed
                technology
            
            $
            5,795,400
            
            $
            (293,303
            )
            $
            5,502,097Trade
                names
            
            
            350,000
            
            
            (40,756
            )
            
            309,244Customer
                base
            
            
            3,560,000
            
            
            (152,384
            )
            
            3,407,616$
            9,705,400
            
            $
            (486,443
            )
            $
            9,218,957




**As of December 31, 2006****Gross Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net Balances**Developed
                technology
            
            $
            5,795,400
            
            $
            (141,221
            )
            $
            5,654,179Trade
                names
            
            
            350,000
            
            
            (13,889
            )
            
            336,111Customer
                base
            
            
            3,560,000
            
            
            (57,111
            )
            
            3,502,889$
            9,705,400
            
            $
            (212,221
            )
            $
            9,493,179




Amortization
      expense for the three months ended March 31, 2007 and 2006 related to the
      acquired intangible assets was $274,222 and $0, respectively.





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




Remaining
                9 months of 2007
            
            $
            896,8832008
            
            
            1,195,8442009
            
            
            1,184,2552010
            
            
            1,079,1782011
            
            
            1,067,452Thereafter
            
            
            3,795,345$
            9,218,957




16





**Segment
      Information**




SFAS No.
      131, “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for reporting information regarding operating segments
      in
      annual financial statements and requires selected information for those segments
      to be presented in interim financial reports issued to stockholders. SFAS No.
      131 also establishes standards for related disclosures about products and
      services and geographic areas. Operating segments are identified as components
      of an enterprise about which separate discrete financial information is
      available for evaluation by the chief operating decision maker, or
      decision-making group, in making decisions how to allocate resources and assess
      performance. The information disclosed herein materially represents all of
      the
      financial information related to the Company's principal operating segments.
      During the first quarter of 2007, the Company completed the process of
      identifying which of the seven entities’ operations were core to its overall
      Telecom Integrator business model. As a result the Company determined that
      all
      operations were core to this business model, except Nexvu and Frontrunner and
      therefore made a decision to divest from these business activities (see Note
      3 -
      Discontinued Operations). The Company’s management team views the remaining
      combined operations of 20/20 Technologies, CentrePath, Inc., Global Capacity
      and
      Capital Growth Systems, Inc. the parent holding company as one operating
      segment, for which it prepares discrete financial statement information and
      is
      the basis for making decisions on how to allocate resources and assess
      performance.




**Fair
      Value of Financial Instruments**




The
      carrying amount of cash, accounts receivable, prepaid expenses, current
      maturities of long-term 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 rate on the promissory note approximating current rates.




**Use
      of Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosures of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from these
      estimates.




**Going
      Concern**




As
      of
      March 31, 2007, the Company's current liabilities exceeded its current assets
      by
      $2.7 million. Included in the current liabilities is approximately $6.8 million
      of current maturities of long-term debt and capital leases payable. This debt
      reflects indebtedness to its senior debt holder Hilco Financial, issuance of
      new
      subordinated debt and pre-existing balances assumed from our acquisition of
      20/20. Cash on hand at March 31, 2007 was $1.7 million and the Company’s
      borrowing capacity under the line of credit with Hilco Financial totaled $1.5
      million. The Company has incurred operating losses from both continuing and
      discontinued operations of $4.6 million and $0.8 million for the three months
      ended March 31, 2007 and 2006, respectively. Additionally, cash used in
      operating activities was $6.1 million and $44 thousand during the three months
      ended March 31, 2007 and 2006, respectively.





The
      Company's net working capital deficiency, recurring losses and negative cash
      flows from operations raise substantial doubt about its ability to continue
      as a
      going concern. On January 19, 2007, the Company successfully completed the
      initial closing of new private offering of Units comprised of Series AA
      Preferred Convertible Stock with 100% warrant coverage and the Company concluded
      the offering on April 9, 2007, at which time an aggregate of approximately
      $22.4
      million of equity was raised (from a combination of new cash infusion and
      conversions of debt to equity). In addition, at or about the time of the initial
      equity closing the Company raised approximately an additional $13.4 million
      of
      debt financing pursuant to a line of credit established with Hilco Financial,
      LLC. (initial draw of $7.0 million) and a secured subordinated term loan from
      a
      smaller number of individuals, bringing aggregate debt and equity funding to
      approximately $36 million. This capital raise allowed the Company to reduce
      the
      existing indebtedness and fund its current working capital needs. However,
      the
      Company continues to utilize cash to fund its current operations. The Company's
      cash balance as of May 10, 2007, combined with the ability to draw
      against a line of credit with Hilco Financial totaled $1.1 million. The Company
      now believes this level of working capital will not be sufficient to fund the
      operations until they start generating positive cash flow from operations in
      2007 as the timing of the revenues did not materialize as anticipated.
      Therefore, the Company will be forced to raise additional capital through either
      the issuance of new equity or increase its debt load, or a combination of both.
      There can be no assurance that the Company will be successful in raising
      additional capital or issuing additional indebtedness, or that any such raise
      may not be dilutive to existing shareholders.





**Reclassifications**




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




**Recent
      Accounting Pronouncements**




In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48 “Accounting for Uncertainty in Income Taxes” an interpretation of FASB
      Statement No. 109 “Accounting for Income Taxes”. FASB Interpretation No. 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with FASB Statement No. 109.
      The
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. The Interpretation also provides guidance
      on de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The Interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company’s adoption of the
      interpretation did not have a significant impact on the financial position
      and
      results of operations.




17




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 157 “Fair Value Measurements”, which defines fair value, establishes
      a framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements. SFAS No. 157
      will
      apply whenever another standard requires (or permits) assets or liabilities
      to
      be measured at fair value. The standard does not expand the use of fair value
      to
      any new circumstances, and is effective beginning after December 31, 2007.
      The
      Company is currently evaluating the impact of adopting SFAS No. 157 on its
      financial position and results of operations.




**Note
      3 - Discontinued Operations**





During
      the first quarter of 2007, the Company determined the operations of Frontrunner
      and Nexvu were not core to the Company’s overall Telecom Integrator strategy and
      therefore made the decision to dispose of these two entities. Since the
      beginning of the year, the Company has been actively marketing the two companies
      and as a result has entered into letters of intent for the sale of Nexvu and
      is
      continuing efforts to sell Frontrunner with an identified party. Although the
      Company currently anticipates closing on the sale of both entities by June
      2007,
      there can be no assurance we will be able to complete the sale with the current
      parties. In accordance with SFAS 144 *“Accounting
      for Impairment or Disposal of Long-Lived Assets”,* the
      Company has classified both of these entities as a discontinued operations
      for
      the financial statements presented herein. Revenues for the three months ended
      March 31, 2007 and 2006 were $2.1 million and $3.9 million, respectively. The
      loss from discontinued operations for the three months ended March 31, 2007
      and
      2006 was $0.5 million and $0.4 million, respectively. The discontinued
      operations assets and liabilities were as follows:




**March
                31,**
            
            **December
                31,****2007**
            
            **2006****(Unaudited)**
            
            **(Audited)****Current
                assets of discontinued operations**Accounts
                receivable, net
            
            $
            1,165,124
            
            $
            1,194,639Inventory,
                net
            
            
            1,229,780
            
            
            1,115,753Prepaid
                expenses
            
            
            86,588
            
            
            74,934Other
                current assets
            
            
            31,042
            
            
            44,351Total
                current assets from discontinued operations
            
            
            2,512,534
            
            
            2,429,677**Long-term
                assets of discontinued operations**Fixed
                assets, net
            
            
            806,203
            
            
            834,651Software
                licensing fee, net
            
            
            6,111
            
            
            10,244Intangible
                assets, net
            
            
            2,120,795
            
            
            2,255,327Goodwill
            
            
            2,565,543
            
            
            2,565,543Other
                assets
            
            
            12,188
            
            
            12,188Total
                long-term assets from discontinued operations
            
            
            5,510,840
            
            
            5,677,953**Total
                assets from discontinued operations**
            
            $
            8,023,374
            
            $
            8,107,630**Current
                liabilities of discontinued operations**Current
                maturities of long-term debt
            
            $
            441,346
            
            $
            2,947,562Accounts
                payable
            
            
            529,154
            
            
            1,244,435Accrued
                expenses
            
            
            1,224,727
            
            
            1,318,939Deferred
                revenue, current portion
            
            
            1,345,164
            
            
            1,394,373Advance
                billings
            
            
            526,204
            
            
            321,045Warranty
                Reserve
            
            
            81,609
            
            
            152,050Total
                current liabilities of discontinued operations
            
            
            4,148,204
            
            
            7,378,404**Long-term
                liabilities of discontinued operations**Long
                term portion of debt
            
            
            497,160
            
            
            570,587**Total
                Liabilities of discontinued operations**
            
            $
            4,645,364
            
            $
            $7,948,991**Net
                assets of discontinued operations**
            
            $
            3,378,010
            
            $
            158,639




18




**Note
      4 - Stock Based Compensation**





**2003
      Stock Option Plan**




In
      December 2003, the Company adopted the 2003 Long-Term Incentive Plan for key
      employees and other persons providing assets or services. The 2003 Plan provides
      for the issuance of stock-based awards to key employees as part of their overall
      compensation. The Company considers its option program a core component of
      its
      operating productivity. A total of 2,285,000 restricted shares of common stock,
      stock options or other equity-based compensation can be issued under the plan.
      As of March 31, 2007, the Company has issued and outstanding 1,524,527 stock
      options under the plan, net of forfeitures.




**Executive
      Stock Option Agreement**




On
      June
      29, 2006, pursuant to the terms of an Employee Option Agreement, as amended,
      the
      Company granted its former CEO, Mr. Thomas G. Hudson, an option to acquire
      1,496,993 shares of common stock of the Company at a strike price equal to
      the
      closing price of the Company's common stock as of that date ($.70 per share).
      On
      September 8, 2006, the Company amended this option agreement and increased
      the
      number of shares by 303,007 shares, also at an exercise price of $.70 per share.
      Additionally in conjunction with the acquisition of 20/20, the Company’s new
      Chief Executive Officer Patrick C. Shutt, who was formerly the Company’s Chief
      Operating Officer, and the Company’s new President George A. King, who was
      formerly the Company’s Head of Global Operations were each granted options to
      acquire 1,500,000 shares of common stock of the Company at $.70 per share.
      In
      the first quarter of 2007, the Company granted options to acquire 500,000 and
      300,000 share of common stock to its new Chief Operating Officer Robert A.
      Pollan, who was formerly the Company’s Chief Information and Strategy Officer
      and the Company’s new Chief Financial Officer Darin P. McAreavey at a price of
      $.98 and $.92, respectively. In accordance with the terms of each of these
      option agreements (i) 25% of such options vested upon execution of the
      Agreement, and (ii) 25% shall thereafter vest on the yearly anniversary of
      the
      Agreement over the next three (3) years. Accordingly, 1,400,000 of stock options
      are vested under these three agreements, as amended.





**Employee
      Stock Option Agreements**





On
      February 5, 2007 and March 5, 2007, pursuant to separate board resolutions,
      the
      Company granted options to acquire 400,000 and 1,950,000 shares of common stock
      of the Company at a strike price equal to $0.98 and $0.92, respectively. In
      accordance with the terms of each of these option agreements (i) 25% of such
      options vested upon execution of the Agreement, and (ii) 25% shall thereafter
      vest on the yearly anniversary of the Agreement over the next three (3) years.
      Accordingly, 587,500 of stock options are vested under these three agreements
      as
      of March 31, 2007.




**Executive
      Performance Option Agreement**




Under
      employment agreements with the four current and one former senior executives
      of
      the Company, there are 4,300,000 options to acquire common stock of the Company
      at a price ranging between $.70 and $.98. Approximately 3,000,000 were issued
      during 2006 and 1,300,000 were issued during the first quarter of 2007. All
      options are subject to vesting restrictions. These performance option agreements
      are designed to deliver and attain certain revenue objectives and approximately
      3,300,000 will vest on the following basis:  upon each realization by the
      Company of an incremental $20 million of third party service and/or maintenance
      revenue from new or existing customers, with gross margins in excess of 30%,
      pursuant to an agreement of one year or more, 50% of the options will vest;
      the
      remaining options vest upon realization by the Company of a second $20 million
      of third party service and/or maintenance revenue from new or existing
      customers, with gross margins in excess of 30%. Approximately 1,000,000
      performance options shall vest upon the realization by the Company of achieving
      a “Target MRR (monthly recurring revenue)”, which means the sum of the Base
      Amount plus $3.5 million of monthly recurring revenue for a period of at least
      90 days on or before April 1, 2009. For purposes of defining the Base Amount,
      this is equal to monthly recurring revenue with respect to the maintenance
      contracts and the installed circuits for Frontrunner Networks Systems
      Corporation and for Global Capacity Group, respectively. As of March 31, 2007,
      no options have vested under this plan.




**Employee
      Performance Option Agreements**





Under
      the
      terms of the stock option agreements approved by the board on March 5, 2007,
      there are 3,000,000 options to acquire common stock of the Company at a price
      of
      $0.92. All options are subject to vesting restrictions. The vesting requirements
      are conditional upon these employees achieving specific key objectives as
      outlined in their respective performance option agreements. The vesting
      requirements include delivering new revenue, creating value within their
      organization and/or achieving executive performance targets as outlined above.




19






The
      following table summarizes the activity under the 2003 stock option plan and
      other stock grants for January 1, 2007 to March 31, 2007:




Options
                Outstanding:
            
            **Number
                of Shares**
            
            **Price
                per Share**
            
            **Weighted
                Average PricePer Shares**January
                1, 2007
            
            
            9,324,527
            
            $
            0.70
                - 1.35
            
            
            0.81Granted
            
            
            7,450,000
            
            
            0.92
                - 0.98
            
            
            0.94Terminated
            
            
            -
            
            
            -
            
            
            -March
                31, 2007
            
            
            16,774,527
            
            
            0.70
                - 1.35
            
            
            0.86Vested
                Shares:Vested,
                March 31, 2007
            
            
            3,336,049
            
            $
            0.70
                - 1.35
            
            
            1.02





The
      aggregate intrinsic value for options vested and outstanding as of March 31,
      2007 totaled $1,326,000 and the weighted average remaining contractual life
      of
      those options was 9.85 years.




As
      of
      March 31, 2007, $7,220,520 of compensation expense remained to be
      recognized on the stock options above which include $4,271,077 related to
      options under Performance Agreements. The expense will be recognized over 3
      years. The Company has not recognized any deferred income tax benefit related
      to
      stock-based compensation due to its deferred tax asset being fully
      reserved.





The
      weighted average fair value per stock option issued during the three months
      ended March 31, 2007 was $0.68.




**Weighted-****Average****Options**
              
              **grant-date****Non-Vested
                  Options**
              
              **Outstanding**
              
              **fair
                  value****Balance
                  January 1, 2007**
              
              
              7,082,997
              
              $
              0.52**Grants**
              
              
              7,450,000
              
              
              0.76**Vested**
              
              
              (1,094,489
              )
              
              (0.60
              )**Expirations****Balance
                  March 31, 2007**
              
              
              **13,438,508**
              
              $
              0.64


A
      summary
      of compensation expense recognized for the issuance of stock options for the
      three months ended March 31, 2007 and 2006 are as follows:




**Three
                Months Ended March 31,****2007**
            
            **2006**Stock-based
                compensation costs included in:Compensation
            
            $
            1,432,678
            
            $
            12,641Total
                stock-based compensation costs
            
            $
            1,432,678
            
            $
            12,641




All
      stock
      awards granted by the Company have an exercise based on either the 10 day
      trailing average closing price or the closing market value on date of grant
      of the underlying common stock.




The
      fair
      value of each award is estimated on the date of the grant using the
      Black-Scholes option-pricing model, assuming no expected dividends and the
      following assumptions:




**2007
                Grants**
            
            **2006
                Grants**Expected
                volatility factors
            
            
            100
            %
            
            100
            %Approximate
                risk free interest rates
            
            
            4.54
            %
            
            3.85
            %Expected
                lives
            
            
            5
                Years
            
            
            5
                YearsForfeiture
                rate
            
            
            5
            %
            
            0
            %




The
      determination of the fair value of all awards is based on the above assumptions.




20




**NOTE
      5 - Debt**




On
      January 19, 2007, the Company closed the initial funding of $7.0 million of
      borrowings on an 18 month $12.0 million Senior Secured Facility issued to the
      Company by Hilco Financial, LLC. The Credit Agreement for the facility names
      the
      Company and its Magenta netLogic, Limited subsidiary as guarantors of the
      facility, and the Company’s remaining active subsidiaries, namely 20/20
      Technologies, Inc., 20/20 Technologies I, LLC, Nexvu Technologies, LLC,
      Frontrunner Network Systems Corporation, Centrepath, Inc. and Global Capacity
      Group, Inc., as co-borrowers. The Credit Agreement provides for a term loan
      of
      $6.5 million plus up to $5.5 million of borrowing availability based upon an
      advance rate of 85% against eligible accounts receivable. It requires the
      payment of interest on a monthly basis at the greater of 15% per annum or prime
      plus 7%, and has a $250 thousand prepayment penalty until the last 30 days
      of
      the facility. There is a $3 thousand per month collateral management fee, a
      0.5%
      per month unused line fee and an obligation to reimburse the lender for costs
      incurred by it in connection with the original issuance and ongoing
      administration of the facility. Further, the Company agreed to pay Hilco a
      fee
      of 5% of the maximum amount of the facility, with one half funded on the closing
      date and the second half due six months following the closing. The Company
      also
      paid a fee of $250 thousand to a placement agent in connection with the
      placement of the facility. As of March 31, 2007, the Company’s borrowing
      capacity was $1.5 million. The Company has also accrued $300 thousand as of
      March 31, 2007 related to the initial issuance costs payable to Hilco in July
      2007.




The
      Senior Secured Facility is secured by a blanket lien on all of the Company’s
      assets and all of the assets of the Company’s subsidiaries. Additionally, the
      Company pledged all of the capital stock or limited liability company interests
      of each of the Company’s subsidiaries as additional collateral. The Credit
      Agreement prohibits junior encumbrances on the Company’s assets with the
      exception of the Junior Secured Facility (discussed herein) and certain
      permitted purchase money security interests. The Credit Agreement includes
      a
      covenant limiting the Company’s capital expenditures and the parties have agreed
      to establish additional loan covenants post closing. The Credit Agreement
      contains numerous affirmative and negative covenants customary for facilities
      of
      this nature, as well as certain post closing obligations. The Company has agreed
      to EBITDA covenants (earnings before interest taxes, depreciation and
      amortization and before non-cash stock compensation and warrant expense) with
      Hilco as follows (at least 75% of the amount must be achieved on a cumulative
      basis: Q1 2007 ($2.4) million; Q2 2007 ($2.6) million; Q3 2007 ($600) thousand;
      and Q4 2007 $3.1 million. Hilco and the Company also agreed to a covenant
      capping capital expenditures at $500 thousand for 2007. The Company was in
      compliance with all the covenants required under this debt agreement as of
      March
      31, 2007.




In
      connection with the Senior Secured Facility, on January 19, 2007, the Company
      issued to Hilco two warrants to purchase an aggregate of 1,125.0 shares of
      Series AA Preferred Stock (2,500,000 shares of Common Stock on an as converted
      to Common Stock basis). Warrants with respect to one half of the shares are
      exercisable on or before December 31, 2008 at an exercise price equal to $0.45
      per share of Common Stock on an as-converted basis and warrants with respect
      to
      the one half of the shares are exercisable on or before December 31, 2009 at
      an
      exercise price equal to $0.65 per share of Common Stock on an as-converted
      basis. The warrants issued as part of the Senior Secured Facility are subject
      to
      similar extension and registration rights as those granted to the purchasers
      in
      the Units offering described in Note 8 Shareholders Equity.




On
      January 19, 2007 the Company entered into an agreement with a number of
      individuals and entities for the establishment of a Junior Secured Facility
      which permits the funding of up to $10,000,000 of original principal amount
      of
      advances. At the closing, an initial $5.9 million of funds was provided pursuant
      to the facility (as adjusted to reflect an additional $1 thousand of accrued
      interest converted to principal from the amount previously reported) and on
      January 22, 2007 an additional $500 thousand was added to the facility, bringing
      the aggregate principal amount of the facility to $6.4 million. All but $1.0
      million of the funding of the facility to date was provided by the exchange
      of
      existing bridge loans for the issuance of new notes with respect to the facility
      (valued dollar for dollar against outstanding principal plus accrued interest
      of
      the bridge loans; this included a bridge loan of $500 thousand plus accrued
      interest funded to the Company by its then chief executive officer). The
      facility has a two year term accruing simple interest at 12% per annum, with
      all
      principal and interest due on maturity. No points or fees were payable by the
      Company in connection with the issuance of the facility.





The
      original principal amount of each note issued pursuant to the Junior Secured
      Facility is convertible at the holder’s option into Series AA Preferred Stock
      (or following its conversion to Common Stock, then the conversion feature
      relates to Common Stock) at a price per share equal to a 20% discount to the
      average ten day trading average for the Company’s Common Stock as of the day
      immediately preceding the date of conversion, subject to a floor of $0.65 per
      share and a ceiling of $1.25 per share (subject to adjustment to account for
      stock splits and certain other extraordinary corporate circumstances). Based
      upon the foregoing range and assuming no more advances on the facility than
      those presently in effect, this equates to a minimum of 5,109,766 shares of
      Common Stock (on an as converted basis) in the event the Company’s stock value
      as computed per the above formula is at or above the $1.25 per share ceiling
      price, and a maximum of 9,826,473 shares of Common Stock (on an as converted
      basis) issuable in the event the Company’s stock value as computed per the above
      formula is at or below the $0.65 per share floor price.




In
      connection with the funding of Junior Secured Facility, each lender under that
      facility was issued a warrant to purchase up to 67.5 shares of Series AA
      Preferred Stock for each $100 thousand of monies advanced, which represents
      150,000 shares of Common Stock on an as converted basis, exercisable at $0.45
      per share and expiring December 31, 2009. To date, the Company has
      issued an aggregate of 4,312.24 (rounded) shares of Series AA
      Preferred Stock warrants (representing 9,582,658 shares of Common Stock on
      an as converted basis). Shares of Common Stock on an as converted basis are
      issuable in connection with the warrants so issued. The warrants issued as
      part
      of the Junior Secured Facility are subject to similar extension and registration
      rights as those granted to the purchasers in the Units offering described in
      Note 8 Shareholders Equity.




21




The
      Junior Secured Facility is secured by a junior lien on the Company’s assets and
      the assets of its subsidiaries, which is expressly contractually subordinated
      to
      the Senior Secured Facility and any refinancing of that facility.





The
      Company had previously entered into a series of bridge loans as summarized
      herein - Debt, all of which were either paid off, extended or converted under
      the terms of the Unit offering described in Note 8 Shareholders Equity. These
      bridge loans included the following (all of the warrants issued in connection
      with these loans have registration rights comparable to those with respect
      to
      the Units offering):




*20/20
      Bridge Loan* .
      The
      Company had borrowed approximately $6.0 million in original principal amount
      of
      monies simultaneous with or shortly following its purchase of 20/20
      Technologies, Inc., which loans had been secured by a blanket lien on the assets
      of 20/20. The principal and accrued interest with respect to these loans was
      either paid off or rolled into the purchase of Units per the Units offering
      on
      January 19, 2007. The holders of these notes were issued warrants to purchase
      Series A Preferred Stock which are convertible into Common Stock at the
      rate of 37,500 shares for each $100 thousand of funds advanced (2,245,263 shares
      of Common Stock on an as converted basis), exercisable on or before December
      31,
      2011, at $1 thousand per share ($0.45 per share on an as converted to Common
      Stock basis), subject to a call in favor of the Company in the event that the
      closing price of the Company’s Stock exceeds $4.00 per share for 30 consecutive
      days following the effectiveness of a registration statement registering the
      Common Stock underlying the warrants.




*Centrepath
      Bridge Loan* .
      The
      Company had borrowed approximately $7.9 million in original principal amount
      in
      November, 2007 with approximately $6.8 million of the proceeds used toward
      the
      purchase of Centrepath, and the balance of the proceeds used for working
      capital, which loans were secured by the stock and assets of CentrePath. The
      principal and accrued interest with respect to these loans was either paid
      off
      or rolled into the purchase of Units per the Units offering on January 19,
      2007.
      In connection with the funding of this loan the Company issued warrants to
      purchase 2,261.27 shares of Series AA Preferred Stock (representing 5,024,994
      shares of Common Stock on an as converted to Common Stock basis), exercisable
      on
      or before December 31, 2009, at $1 thousand per share ($0.45 per share on an
      as
      converted to Common Stock basis).




*Global
      Bridge Loan* .
      The
      Company had borrowed approximately $4.7 million in original principal amount
      in
      December, 2007, which proceeds were (together with an additional $500 thousand
      provided from working capital) used toward the purchase of Global Capacity.
      The
      principal and accrued interest with respect to these loans was secured by the
      stock of Global Capacity. The principal and accrued interest with respect to
      these loans was either paid off or rolled into the purchase of Units per the
      Units offering on January 19, 2007. In connection with the funding of this
      loan
      the Company issued warrants to purchase 1,057.5105 shares of Series AA Preferred
      Stock (representing 2,350,000 shares of Common Stock on an as converted to
      Common Stock basis), exercisable on or before December 31, 2009, at $1 thousand
      per share ($0.45 per share on an as converted to Common Stock
      basis).




*Mandatory
      Notes* .
      The
      Company issued an aggregate of approximately $3.7 million of Mandatory Notes
      through January 19, 2007, which by their terms were automatically converted
      to
      Units on the initial closing of the Units offering. In addition, each Mandatory
      Note holder was issued a warrant which is exercisable for 331.60 (rounded)
      shares of Series AA Preferred Stock, representing 20,000 shares of Common Stock
      (on an as converted to Common Stock basis) or 736,868 shares of Common Stock
      in
      the aggregate. The warrants associated with this issuance are exercisable at
      $0.45 per share on an as converted to Common Stock basis, expire on December
      31,
      2009 and are callable by the Company. From January 22, 2007 through
      March 25, 2007, an aggregate of approximately $4.3 million of additional
      Mandatory Notes were issued (increased by another $104 thousand thereafter
      through April 9, 2007), which were converted into Units of Series AA Preferred
      Stock and Warrants on the terms as described in Section above. In consideration
      for the funding of the Mandatory Notes, in addition to the conversion of the
      Mandatory Notes into Units (comprising a portion of the Units discussed in
      “Units Offering” above), warrants to purchase an additional 327.15327 shares of
      Series AA Preferred Stock (convertible into 727,000 shares of Common Stock)
      were
      issued to the Mandatory Note lenders for the funding through January 19, 2007,
      which was increased by the subsequent Mandatory Note issuances through March
      25,
      2007 to warrants for an additional 386.17946 shares of Series AA Preferred
      Stock
      (convertible into 858,168 shares of Common Stock) and again increased by the
      subsequent Mandatory Note issuances through April 9, 2007 to warrants for an
      additional 9.31514 shares of Series AA Preferred Stock (convertible into 20,700
      shares of Common Stock). The warrants associated with this issuance are
      exercisable at $0.45 per share on an as converted to Common Stock basis, expire
      on December 31, 2011 and are callable by the Company.




22




Debt
      as
      of March 31, 2007 and December 31, 2006 consist of the following:





March
                31,
              2007
            
            December
                31,
              2006Senior
                secured line of credit, with an outstanding balance of $7,343,876
                at March
                31, 2007, bearing interest at 15%, secured by all of the assets of
                Capital
                Growth Systems, Inc. and subsidiaries, due July 2008. The Company
                had
                $1,518,544 additional borrowing capacity under this line-of-credit
                as of
                March 31, 2007. The debt instrument also provided for the issuance
                of
                stock warrants allowing the holder to purchase 2,500,000 shares of
                common
                stock (or equivalent) of the Company at an exercise price between
                $.45 and
                $.65 per share. Using the Black Scholes Model, the Company estimated
                the
                fair value of the warrants to be $1,586,124 and allocated that amount
                of
                the proceeds to the warrants resulting in a discount on the notes
                payable.
                As of March 31, 2007, the balance of the debt due was reported net
                of a
                $1,377,578 discount.
            
            $
            5,966,298
            
            $
            —Junior
                secured notes payable, with a face amount of $6,388,438, bearing
                simple
                interest at 12%, due January 2009. The debt instrument also provided
                for
                the issuance of stock warrants allowing the holder to purchase 9,582,658
                shares of common stock (or equivalent) of the Company at an exercise
                price
                of $.45. The Company issued additional stock warrants as part of
                securing
                this notes which allow the purchase of 237,788 shares of common stock
                (or
                equivalent) of the Company at an exercise price between $.45 and
                $.65 per
                share. Using the Black Scholes Model, the Company estimated the fair
                value
                of the warrants to be $3,597,549 and allocated that amount of the
                proceeds
                to the warrants resulting in a discount on the notes payable. As
                of March
                31, 2007, the balance of the debt due was reported net of a $3,247,651
                discount.
            
            
            3,140,787
            
            
            —Secured
                short term notes payable to various parties, with a face amount of
                $5,987,367 bearing interest at 18%, secured by all of the assets
                of 20/20
                and Nexvu, due January 2007. The debt instrument also provided for
                the
                issuance of stock warrants allowing the holders to purchase 4,787,137
                shares of common stock (or equivalent) of the Company at an exercise
                price
                between $.45 and $.70 per share. Using the Black Scholes Model, the
                Company estimated the fair value of the warrants to be $1,554,219
                and
                allocated that amount of the proceeds to the warrants resulting in
                a
                discount on the notes payable. As of December 31, 2006, the balance
                of the
                debt due was reported net of a $64,758 discount. The remaining discount
                was recognized during the three months ended March 31, 2007,
                as the amount outstanding was either repaid, converted into the Junior
                secured note payable or converted into Series AA Preferred Stock
                (see Note
                8-Shareholders Equity).
            
            
            —
            
            
            5,922,609Secured
                short term notes payable to various parties, with a face amount of
                $7,950,000 bearing interest at 8%, secured by all of the assets of
                CentrePath, due January 2007. The debt instrument also provided for
                the
                issuance of stock warrants allowing the holder to purchase 4,925,000
                shares of common stock (or equivalent) of the Company at an exercise
                price
                of $.45 per share. Using the Black Scholes Model, the Company estimated
                the fair value of the warrants to be $1,349,181 and allocated that
                amount
                of the proceeds to the warrants resulting in a discount on the notes
                payable. As of December 31, 2006, the balance of the debt due was
                reported
                net of a $652,104 discount. The remaining discount was recognized
                during
                the three months ended March 31, 2007, as the amount outstanding
                was
                either repaid, converted into the Junior secured note payable or
                converted
                into Series AA Preferred Stock (see Note 8-Shareholders
                Equity).
            
            
            —
            
            
            7,197,896Secured
                short term notes payable to various parties, with a face amount of
                $4,700,000 bearing interest at 8%, secured by all of the assets of
                Global
                Capacity Group, due January 2007. The debt instrument also provided
                for
                the issuance of stock warrants allowing the holder to purchase 2,350,000
                shares of common stock (or equivalent) of the Company at an exercise
                price
                of $.45 per share. Using the Black Scholes Model, the Company estimated
                the fair value of the warrants to be $810,077 and allocated that
                amount of
                the proceeds to the warrants resulting in a discount on the notes
                payable.
                As of December 31, 2006, the balance of the debt due was reported
                net of a
                $540,051 discount. The remaining discount was recognized during the
                three
                months ended March 31, 2007, as the amount outstanding was either
                repaid,
                converted into the Junior secured note payable or converted into
                Series AA
                Preferred Stock (see Note 8-Shareholders Equity).
            
            
            —
            
            
            4,159,949




23




Mandatory
                convertible promissory notes to various parties, with a face amount
                of
                $1,275,000 bearing interest at 8% per annum and mandatory convertible
                into
                the securities issued by the Company on the terms of the offering
                completed on January 19, 2007. The debt instrument also provided
                for the
                issuance of stock warrants allowing the holder to purchase 255,000
                shares
                of common stock (or equivalent) of the Company at an exercise price
                of
                $.45 per share. Using the Black Scholes Model, the Company estimated
                the
                fair value of the warrants to be $149,887 and allocated that amount
                of the
                proceeds to the warrants resulting in a discount on the notes payable.
                As
                of December 31, 2006, the balance of the debt due was reported net
                of a
                $131,151 discount. The remaining discount was recognized during the
                three
                months ended March 31, 2007, as the amount outstanding was converted
                into
                Series AA Preferred Stock (see Note 8-Shareholders
                Equity).
            
            
            —
            
            
            1,143,849Promissory
                notes to US Bank bearing interest at the rate of 6.75%, secured by
                vehicles of Global Capacity Group. One of the notes requires monthly
                payments in the amount of $1,027 and expires in September 2010 and
                the
                other note requires monthly payments in the amount of $873 and expires
                in
                October 2010.
            
            
            70,955
            
            
            75,398Promissory
                note payable to DTD Investments, LLC, secured by the Company’s accounts
                receivable from CNT Telecom Services, Inc., which has as its interest
                rate
                the right to participate in the proceeds the Company receives with
                respect
                to this contract (anticipated over the life to the contact to return
                the
                original principal and pay “participation interest” equal to approximately
                $470,000).
            
            
            —
            
            
            406,187




24




Unsecured
                note payable to various creditors of 20/20, past due, bearing interest
                rates between 8% and 16%. All notes were either repaid or converted
                into
                Junior secured notes payable during the three months ended March
                31,
                2007.
            
            
            —
            
            
            1,610,000Unsecured
                note payable to various creditors with interest rates at HSBC plus
                4%,
                principal payments commencing in January 2007, maturing December
                2008.
            
            
            1,012,861
            
            
            1,257,992




Various
                unsecured loans from employees of Magenta netLogic, bearing interest
                at
                8.43%, due upon demand.
            
            
            160,192
            
            
            164,865Total
                debt
            
            
            10,351,093
            
            
            21,938,745Less:
                current maturities
            
            
            6,970,213
            
            
            21,200,138Long
                term portion
            
            $
            3,380,880
            
            $
            738,607





As
      of
      March 31, 2007, the Company is only in default on unsecured notes payable to
      two
      of the Company’s law firms and on one note to an entity affiliated with one of
      the Company’s board members. No acceleration of the indebtedness evidenced by
      these notes has been declared as of this date by any of such creditors.




The
      weighted-average interest rate on the debt listed above is 12.5% as of March
      31,
      2007.




The
      aggregate principal re-payments of long term debt for the remaining nine months
      of 2007 and annual thereafter are as follows (not including discount on notes
      payable):




2007
            
            $
            7,867,6452008
            
            
            556,2552009
            
            
            6,433,1252010
            
            
            40,6642011
            
            
            23,836Thereafter
            
            
            45,685Total
            
            
            14,967,210




**NOTE 6
      - Stock Warrants**




The
      Company has issued stock warrants to various individuals. The following table
      summarizes the stock warrants issued, share issue price, grant date and
      expiration date:





**Issue
                Date**
            
            **Exp
                Date**
            
            **#
                of Warrants**
            
            **Exercise
                Price**Preliminary
                bridge notes
            
            
            9/8/2006
            
            
            12/31/2011
            
            
            678,766
            
            
            .50
                - .70Secured
                bridge notes
            
            
            9/8/2006
            
            
            9/8/2011
            
            
            2,250,000
            
            
            .45Inducement
                agreements
            
            
            9/8/2006
            
            
            12/31/2011
            
            
            2,061,875
            
            
            .45Board
                and executive warrants
            
            
            9/14/2008
            
            
            9/14/2011
            
            
            2,330,000
            
            
            .70Consulting
                Services
            
            
            9/14/2006
            
            
            9/14/2011
            
            
            100,000
            
            
            .70CentrePath
                bridge notes
            
            
            11/30/2006
            
            
            12/31/2009
            
            
            4,925,000
            
            
            .45Advisory
                services
            
            
            11/30/2006
            
            
            12/31/2009
            
            
            100,000
            
            
            .45Global
                Capacity bridge notes
            
            
            12/11/2006
            
            
            12/31/2009
            
            
            2,350,000
            
            
            .45Advisory
                services
            
            
            12/11/2006
            
            
            12/31/2009
            
            
            50,000
            
            
            .45National
                Securities - equity issuance
            
            
            1/19/2007
            
            
            12/31/2008
            
            
            12,141,010
            
            
            .45National
                Securities - equity issuance
            
            
            1/19/2007
            
            
            12/31/2009
            
            
            12,141,010
            
            
            .65Conversion
                of bridge notes to equity
            
            
            1/19/2007
            
            
            12/31/2008
            
            
            3,001,661
            
            
            .45Conversion
                of bridge notes to equity
            
            
            1/19/2007
            
            
            12/31/2009
            
            
            3,001,661
            
            
            .65Mandatory
                convertible notes
            
            
            (1)
            
            
            (2)
            
            
            1,605,868
            
            
            .45Mandatory
                convertible notes
            
            
            (1)
            
            
            (3)
            
            
            8,965,172
            
            
            .45Mandatory
                convertible notes
            
            
            (1)
            
            
            (4)
            
            
            8,965,150
            
            
            .65Advisory
                fees - mandatory convertible notes
            
            
            3/22/2007
            
            
            3/22/2008
            
            
            778,892
            
            
            .45Advisory
                fees - mandatory convertible notes
            
            
            3/22/2007
            
            
            3/22/2009
            
            
            778,891
            
            
            .65Junior
                secured facility
            
            
            1/19/2007
            
            
            12/31/2009
            
            
            9,582,658
            
            
            .45Advisory
                fees - Junior secured facility
            
            
            3/22/2007
            
            
            3/22/2008
            
            
            118,894
            
            
            .45Advisory
                fees - Junior secured facility
            
            
            3/22/2007
            
            
            3/22/2009
            
            
            118,894
            
            
            .65Conversion
                of 20/20 unsecured convertible notes payable
            
            
            1/19/2007
            
            
            12/31/2008
            
            
            233,327
            
            
            .45Conversion
                of 20/20 unsecured convertible notes payable
            
            
            1/19/2007
            
            
            12/31/2009
            
            
            233,327
            
            
            .65DTD
                Investment loan
            
            
            1/19/2007
            
            
            12/31/2009
            
            
            300,000
            
            
            .45Senior
                secured facility
            
            
            1/19/2007
            
            
            12/31/2008
            
            
            1,250,000
            
            
            .45Senior
                secured facility
            
            
            1/19/2007
            
            
            12/31/2009
            
            
            1,250,000
            
            
            .65Advisory
                fees - 20/20 Bridge
            
            
            3/22/2007
            
            
            3/22/2008
            
            
            195,010
            
            
            .45Advisory
                fees - 20/20 Bridge
            
            
            3/22/2007
            
            
            3/22/2009
            
            
            195,009
            
            
            .65Total
                stock warrants outstanding
            
            
            
            
            
            
            
            
            79,702,075
            
            $
            .53





25


All
      of
      the stock warrants are exercisable and have a weighted average life of 2.6
      years. Certain of the stock warrants were issued as Series A Preferred Stock
      Warrants and Series AA Preferred Stock Warrants. These warrants shall be
      converted to warrants to acquire Common Stock of the Company, upon the amendment
      to the Company’s articles of incorporation to authorize not less than 20,000,000
      shares of Common Stock. Warrant expense recognized as interest expense during
      the three months ended March 31, 2007 and 2006 totaled $1,946,508 and $0,
      respectively.




(1)
            The
                warrants related to the mandatory convertible notes offering were
                issued
                between December 31, 2006 and March 31,
                2007.


(2)
              The
                  expiration dates of the warrants issued with the mandatory convertible
                  offering are between December 31, 2011 and March 31,
                  2012.


(3)
              The
                  expiration dates of the warrants issued with the mandatory convertible
                  offering are between December 31, 2008 and March 31,
                  2009.


(4)
              The
                  expiration dates of the warrants issued with the mandatory convertible
                  offering are between December 31, 2009 and March 31,
                  2010.





**NOTE
      7 - Transactions with Related Parties**




The
      Company currently has an $85 thousand unsecured note payable to an entity that
      includes one of its board members. Although the Company is in default under
      this
      agreement, no demands have been made by this creditor to pay the loan as of
      March 31, 2007.




Two
      current and one former members of the Company’s board of directors had lent a
      total of $418 thousand, plus accrued interest to the Company as part of the
      short term secured financing completed by the Company during 2006. These
      balances were transferred from secured debt of 20/20 at the time of acquisition
      to the secured short term note payables of the Company. The loans bore interest
      at a rate of 18% and matured on January 6, 2007. Additionally, as part of the
      secured loan agreement, these individuals were issued stock warrants to
      ultimately purchase 156,611 shares of common stock at an exercise price of
      $0.50
      per share. These warrants expire on August 24, 2009. Additionally, the Company’s
      chairman of the board of directors, had a total of $468 thousand of principal
      secured debt with 20/20 prior to the acquisition. As part of the acquisition
      of
      20/20 a portion of this secured debt was paid to him totaling $231 thousand
      of
      principal balance and $29 thousand of accrued interest. On January 19, 2007,
      the
      two current and one former members of the Company’s board of directors were all
      repaid the principal and interest amounts owed totaling $445
      thousand.





In
      connection with the acquisition of CentrePath and Global Capacity, the Company
      issued two short-term bridge notes bearing interest at a rate of 8%. Of this
      amount, the Company’s then Chief Executive Officer and its current Chairman of
      the board lent approximately $2.0 million each and in turn received stock
      warrants to purchase 1123.00112 Series AA Preferred Shares (2,000,000 common
      shares on an as converted basis) and 464.62965 Series AA Preferred Stock
      (1,032,500 common shares on an as converted basis), respectively. The Company’s
      then Chief Executive Officer received an additional warrant to purchase 450.0045
      AA Preferred Shares (1,000,000 common shares on an as converted basis) for
      putting $1.0 million at risk in connection with the completion of our
      acquisition of CentrePath at a time when the remaining financing for the
      acquisition of CentrePath had not been committed. The Company’s then Chief
      Executive Officer was not paid any cash compensation related to his investment
      in the Company. The above mentioned stock warrants have an exercise price of
      $1
      thousand per Series AA Preferred Shares ($0.45 per share of common stock on
      an
      as converted basis expiring on December 31, 2009. In addition, the Chairman
      of
      the board of directors was also paid $280 thousand for providing personal
      guarantees and pledging his own collateral to secure bridge loans in the amount
      of approximately $3.7 million. These loans were accomplished on very short
      notice, and therefore without the Chairman of the board of directors providing
      his personal guarantees and the pledge of his own assets, it is likely that
      both
      of the CentrePath and Global Capacity acquisitions would have been in
      jeopardy.





In
      2007,
      two board members each received cash payments totaling $319 thousand in
      connection with all the transactions completed by the Company in 2006 and 2007.
      In addition, they were each issued warrants to purchase 374.53110 shares of
      Series AA Preferred Stock (representing in the aggregate 832,117 shares of
      common stock on an as converted basis) , with one half at an exercise price
      of
      $1 thousand per share ($0.45 per share on an as converted to common stock basis)
      expiring on December 31, 2008 and the other half at an exercise price of
      $1,444.44 per share ($0.65 per share on an as converted to common stock basis)
      expiring on December 31, 2009. Also, as part of securing the various short
      terms
      notes, we issued warrants to purchase 33.75034 shares of Series AA Preferred
      Stock (75,000 shares of common stock on an as converted basis) each to both
      board members. The stock warrants have an exercise price of $1 thousand per
      Series AA Preferred Share ($0.45 per share of common stock on an as converted
      basis) expiring on December 31, 2009.




26




**NOTE
      8 - Shareholders Equity**




On
      January 19, 2007, the Company closed on an equity funding of approximately
      $15.9
      million toward the issuance of Units comprised of 15,869.4 (rounded) shares
      of
      Series AA Preferred Stock (convertible into Common Stock at $0.45 per Share)
      and
      warrants to purchase an additional 15,869.4 (rounded) shares of Series AA
      Preferred Stock. Each Unit was priced at $1 thousand comprised of: (i) one
      share
      of Series AA Preferred Stock; (ii) one warrant to purchase one half share of
      Series AA Preferred Stock at $1 thousand per share expiring December 31, 2008
      (“Two Year Warrant); and (ii) one warrant to purchase one half share of Series
      AA Preferred Stock at $1,444.43 per share, expiring December 31, 2009 (Three
      Year Warrant). Since January 20, 2007 through April 9, 2007, the Company has
      closed on equity funding of an additional approximately $5.0 million,
      representing an additional 5,044.4(rounded) shares of Series AA Preferred Stock
      constituting 11,209,626 shares of Common Stock on an as converted basis and
      warrants to purchase an additional like amount of Series AA Preferred Stock,
      with one-half or 2,522.2 Series AA Preferred Shares (5,604,827 shares of
      Common Stock as converted) exercisable at $1,000 per share on or before December
      31, 2008 ($0.45 per share on an as converted to Common Stock basis); and the
      other one-half or 2,522.2 Series A Preferred Shares (5,604,799 shares of
      Common Stock as converted) exercisable at approximately $1 thousand per share
      (or $0.65 per share on an as converted to Common Stock basis). This financing
      brings aggregate issued and outstanding Series AA Preferred Stock
      to 20,634.5 (rounded) shares representing 46,549,894 shares of Common
      Stock on an as converted basis, assuming the anti-dilution protection described
      below does not result in the issuance of additional shares. The Series AA
      Preferred Stock also contains certain full ratchet anti-dilution rights in
      the
      event that there are any issuances of capital stock or rights to acquire capital
      stock (other than certain exempted transactions) at a price of below $0.45
      per
      share (on an as converted to Common Stock basis in the event the issuance is
      of
      a security other than Common Stock). The Company filed a Certificate of
      Designations and Preferences authorizing the issuance of up to 120,000 shares
      of
      Series AA Preferred Stock (convertible into up to 266,664,000 shares of Common
      Stock, subject to adjustment as noted above) on December 29, 2006 with the
      Florida Secretary of State.




On
      an
      as-converted basis, the Two Year Warrants issued as part of the Units may be
      exercised to purchase an aggregate of 23,237,501 shares of Common Stock
      exercisable at $0.45 per share, and the Three Year Warrants may be exercised
      to
      purchase an aggregate of 23,237,344 shares of Common Stock exercisable at
      $0.65 per share, assuming the anti-dilution protection described above is not
      triggered.




In
      addition, the placement agent and designees in connection with the Units
      financing received warrants to purchase 928.37 (rounded) shares of Series AA
      Preferred Stock (2,063,030 shares of Common Stock on an as converted basis),
      with one half of the warrants expiring December 31, 2008 and exercisable at
      $0.45 per share (on an as converted to Common Stock basis) and one half expiring
      December 31, 2009 and exercisable at $0.65 per share (on an as converted to
      Common Stock basis) in connection with the initial equity closing on January
      19,
      2007. The placement agent and its designees were awarded from January 20, 2007
      to April 9, 2007 warrants to purchase an additional 65.000 (rounded) shares
      of
      Series AA Preferred Stock (144,443 shares of Common Stock on an as converted
      basis), with one half of the warrants expiring December 31, 2008 and exercisable
      at $0.45 per share (on an as converted to Common Stock basis) and one half
      expiring December 31, 2009 and exercisable at $0.65 per shares (on an as
      converted to Common Stock basis).




The
      Company also entered into a Registration Rights Agreement with the Units
      purchasers which obligates the Company to file a registration statement to
      register the shares of Common Stock underlying the Units within 90 days
      following the termination of the Units offering and to cause the registration
      statement to be declared effective no later than 180 days following the date
      of
      termination of the offering. There is a penalty of 1% of the purchase price
      of
      the Units per month for each month that the Company is late in the initial
      filing or the declaration of effectiveness of the registration statement,
      subject to a cap of 12% in the aggregate of the original Units’ purchase price,
      and with the penalty to be payable in Common Stock issuable based upon the
      10
      days’ average trading value of the Company’s shares of Common Stock for the
      applicable period. The Two Year Warrants and Three Year Warrants are exercisable
      only by payment of cash, however, in the event of delays in the registration
      of
      the shares of Common Stock underlying the Warrants, the Warrants require the
      Company to modify the terms of the warrants to either: (i) extend the outside
      date for the warrants to a year following the date of declaration of
      effectiveness of a registration statement with respect to the shares underlying
      the warrants, or (ii) modify the exercise rights under the warrants to be
      cashless.





In
      connection with the Senior Secured Facility, on January 19, 2007, the Company
      issued to Hilco two warrants to purchase an aggregate of 1,125.0 shares of
      Series AA Preferred Stock (2,500,000 shares of Common Stock on an as converted
      to Common Stock basis). Warrants with respect to one half of the shares are
      exercisable on or before December 31, 2008 at an exercise price equal to $0.45
      per share of Common Stock on an as-converted basis and warrants with respect
      to
      the one half of the shares are exercisable on or before December 31, 2009 at
      an
      exercise price equal to $0.65 per share of Common Stock on an as-converted
      basis. The warrants issued as part of the Senior Secured Facility are subject
      to
      similar extension and registration rights as those granted to the purchasers
      in
      the Units offering described above.




27





The
      original principal amount of each note issued pursuant to the Junior Secured
      Facility is convertible at the holder’s option into Series AA Preferred Stock
      (or following its conversion to Common Stock, then the conversion feature
      relates to Common Stock) at a price per share equal to a 20% discount to the
      average ten day trading average for the Company’s Common Stock as of the day
      immediately preceding the date of conversion, subject to a floor of $0.65 per
      share and a ceiling of $1.25 per share (subject to adjustment to account for
      stock splits and certain other extraordinary corporate circumstances). Based
      upon the foregoing range and assuming no more advances on the facility than
      those presently in effect, this equates to a minimum of 5,109,766 shares of
      Common Stock (on an as converted basis) in the event the Company’s stock value
      as computed per the above formula is at or above the $1.25 per share ceiling
      price, and a maximum of 9,826,473 shares of Common Stock (on an as converted
      basis) issuable in the event the Company’s stock value as computed per the above
      formula is at or below the $0.65 floor price.




In
      connection with the funding of Junior Secured Facility, each lender under that
      facility was issued a warrant to purchase up to 67.5 shares of Series AA
      Preferred Stock for each $100 thousand of monies advanced, which represents
      150,000 shares of Common Stock on an as converted basis, exercisable at $0.45
      per share and expiring December 31, 2009. To date, we have issued an
      aggregate of 4,312.24 (rounded) shares of Series AA Preferred
      Stock warrants (representing 9,582,658 shares of Common Stock on an as
      converted basis). Shares of Common Stock on an as converted basis are issuable
      in connection with the warrants so issued. The warrants issued as part of the
      Junior Secured Facility are subject to similar extension and registration rights
      as those granted to the purchasers in the Units offering described
      above.




The
      Company has engaged a number of consultants and has agreed to compensate them
      for financial consulting services with warrants issued as of the dates set
      forth
      below, in each instance with: (i) one half of the warrants set for the below
      exercisable at $1000 per share of Series AA Preferred Stock (convertible into
      2222.2 shares of Common Stock at $0.45 per share) expiring December 31, 2007;
      and (ii) one half exercisable at approximately $1 thousand per share of Series
      AA Preferred Stock (convertible into 2222.2 shares of Common Stock at $0.65
      per
      share). The agreed upon issuances were as follows:




Date
            
            Number
                of Series AA Preferred Shares Purchasable(1)1.
            
            March
              22, 2007
            
            
            374.45594
            (2)
            
            (832,117
                Common as converted)2.
            
            March
              22, 2007
            
            
            374.45639
            (2)
            
            (832,117
                Common as converted)3.
            
            March
              22, 2007
            
            
            109.9208
            
            
            (244,266
                Common as converted)4.
            
            March
              22, 2007
            
            
            14.16569
            
            
            (31,479
                Common as converted)5.
            
            March
              22,2007
            
            
            45.28665
            
            
            (100,636
                Common as converted)6.
            
            March
              22, 2007
            
            
            31.29061
            
            
            (69,534
                Common as converted)7.
            
            March
              22, 2007
            
            
            33,95014
            
            
            (75,444
                Common as converted)







(1)
            
            Allocated
                one-half to $0.45 warrants and one half to $0.65 warrants as outlined
                above.(2)
            
            An
                additional 4.75025 Series AA Preferred Warrants (1,555 Common as
                converted) was issuable as of termination of the
                offering.




In
      connection with completing all the transactions in 2007, the Company
      paid two of the directors of the Company, Lee Wiskowski and Douglas Stukel,
      each in the amount of approximately $307 thousand in 2007 for services rendered
      in 2007 plus warrants to purchase 280.58 shares of Series AA Preferred
      Stock.




Pursuant
      to the guidance in paragraph 5 of EITF 00-27 “Application of Issue No. 98-5 to
      Certain Convertible Instruments” we allocated the proceeds from the Series AA
      financing between the Series AA Preferred Stock and the warrants based upon
      their estimated fair value as of the closing date. The Company calculated the
      intrinsic value of the beneficial conversion feature embedded in the Series
      AA
      Preferred Stock and warrants. As the amount of the beneficial conversion feature
      exceeded the value allocated to the Series AA Preferred Stock and warrants,
      the
      amount of the beneficial conversion feature to be recorded is limited to the
      proceeds allocated to the Series Preferred Stock and warrants. The beneficial
      conversion values related to the Series AA Preferred Shareholders and warrants
      of approximately $11.2 million and $14.5 million, respectively, was recognized
      as an additional discount on the Series AA Preferred Stock which amounts will
      be
      accreted and treated as a deemed dividend to the holder of the Series AA
      Preferred Stock once the Common Shareholders authorize the increase of Common
      Stock from 25 million to 350 million on the Company’s shareholder meeting to be
      held on June 11, 2007.




28




**NOTE
      9 - Segment Reporting**




The
      Company follows the provisions of SFAS No. 131, “Disclosures about Segments of
      an Enterprise and Related Information.” This standard establishes standards for
      reporting information regarding operating segments in annual financial
      statements and requires selected information for those segments to be presented
      in interim financial reports issued to stockholders. Operating segments are
      identified as components of an enterprise about which separate, discrete
      financial information is available for evaluation by the chief operating
      decision makers in making decisions on how to allocate resources and assess
      performance. During the first quarter of 2007, the Company completed the process
      of identifying which of the seven entities’ operations were core to its overall
      Telecom Integrator business model. As a result the Company determined that
      all
      operations were core to this business model, except Nexvu and Frontrunner and
      therefore made a decision to divest from these business activities (see Note
      3 -
      Discontinued Operations). The Company’s management team views the remaining
      combined operations of 20/20 Technologies, CentrePath, Inc., Global Capacity
      and
      Capital Growth Systems, Inc. the parent holding company as one operating
      segment, for which it prepares discrete financial statement information and
      is
      the basis for making decisions on how to allocate resources and assess
      performance.





The
      core
      Telecom Integrator operating segment has three primary lines of revenue. The
      first line of revenue is from network and circuits business, which is broken
      down between enterprise & wholesale circuits and strategic networks.
      Enterprise & wholesale circuits is the procurement of new telecommunication
      circuits for the Company’s enterprise companies and for customers who are
      telecommunication providers. The strategic network sales are for contracts
      whereby the Company takes a principal position on existing circuits and will
      work with its suppliers to renegotiate more favorable terms for those circuits
      that are out of contractual term. This revenue is being provided from the
      recently acquired operations of both Global Capacity Group and 20/20
      Technologies. The second line of revenue is the Company’s services offerings,
      which includes both our remote monitoring services and professional services.
      The remote monitoring services revenue includes 24x7x365 remote monitoring
      and
      management services for data replication networks encompassing the entire data
      path (Storage area network switches, channel extension equipment and DWDM and
      SONET devices). This revenue is primarily generated from the Company’s
      acquisition of CentrePath, Inc. In addition, the Company generates professional
      services revenue from the initial design and deployment of these networks.
      Also,
      the Company generates professional fees related to the implementation and
      customization of 20/20’s pricing and quotation database system through its
      Magenta netLogic subsidiary (Magenta 20/20). The third line of revenue is sales
      generated from Magenta 20/20’s global pricing and quotation software.




During
      the three months ended March 31, 2007, the
      Company generated $342 thousand of revenue outside of the United States,
      compared to $0 in the prior year period.




**NOTE
      10 - Subsequent Event**




In
      May
      2007, Thomas G. Hudson resigned as the Company’s Chief Executive Officer and
      board of directors, subject to the parties’ agreement to fully honor the
      remaining economic terms of his employment agreement. Patrick Shutt, the
      Company’s president, will assume the role of CEO of the Company on a going
      forward basis.




29




**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation.**




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**




Our
      net
      working capital deficiency, recurring losses and negative cash flows from
      operations raise substantial doubt about our ability to continue as a going
      concern. During 2006, we completed three acquisitions which significantly
      increased the amount of debt and overall losses for the year. On January 19,
      2007, we successfully completed the initial closing of a new private offering
      of
      Units comprised of Series AA Preferred Convertible Stock with 100% warrants
      coverage and we concluded the offering on April 9, 2007, at which time an
      aggregate of approximately $22.4 million of equity was raised (from a
      combination of new cash infusion and conversions of debt to equity). In
      addition, at or about the time of the initial equity closing we raised an
      additional approximately $13.4 million of debt financing pursuant to a line
      of
      credit established with Hilco Financial, LLC. (initial draw of $7.0 million)
      and
      a secured subordinated term loan from a smaller number of individuals, bringing
      aggregate debt and equity funding to approximately $36 million. This capital
      raise allowed us to reduce the existing indebtedness and fund our current
      working capital needs. However, we continue to utilize cash to fund its current
      operations. Our cash balance as of May 10, 2007 and our ability to draw against
      our line of credit with Hilco Financial totaled $1.1 million. We currently
      believe this level of working capital will not be sufficient to fund the
      operations until we start generating positive cash flow from operations in
      2007 as our revenues to date have not materialized as anticipated. Therefore,
      we
      will be forced to raise additional capital through the issuance of new equity
      or
      increasing our debt load, or a combination of both. There can be no assurance
      that we will be successful in raising additional capital or issuing additional
      indebtedness, or that any such raise will not be dilutive to existing
      shareholders.





We
      presently have approximately 171 full time employees between all seven entities
      (the Company and all six operating subsidiaries) as of May 10, 2007. Of these
      employees, approximately 92 of them are with our continuing operations. We
      do
      not anticipate that this number will increase in the near future unless
      additional acquisitions occur or our revenue significantly increases. In
      addition, although we are in the process of integrating our operations, we
      are
      currently not anticipating any significant increases in our capital spending
      on
      software or equipment. We currently have a debt covenant with Hilco Financial
      which limits our capital expenditures to $500 thousand per year.




30




**Results
      of Operations**




**Three
      months ended March 31, 2007 compared to 2006**




Revenues
      for the three month period ended March 31, 2007 were provided entirely by our
      acquisitions of 20/20, CentrePath and Global Capacity, all of which were
      completed subsequent to March of 2006. The revenue generated by Nexvu and
      Frontrunner were reported in our discontinued operations for both periods
      presented. Revenue generated from our circuits and networks business totaled
      $2.8 million, which were circuit sales to our enterprise and wholesale
      customers. We did not recognize any revenue during the first three months of
      2007 or 2006 from strategic networks, which is revenue generated by us taking
      a
      principal position in existing circuits and through our pricing and quotation
      system can renegotiate more favorable pricing terms for our customers. We
      currently believe revenue generated from strategic networks will account for
      the
      majority of our revenue and growth, as these circuit contracts are often quite
      large and typically fixed for several years.




Our
      consolidated gross margin rate was 45% compared to 0% last year. Our gross
      profit generated by our circuits and networks business was 17%. We currently
      anticipate generating gross margins from our circuits and networks business
      will
      increase in the range of 25% and 30% as we continue to sell new and renegotiate
      the pricing on existing circuits. Gross margins generated from services were
      62%
      during the first three months of 2007, compared to 0% for the same period in
      2006. Since revenues generated from our software license is entirely
      proprietary, we are able to achieve a 100% gross margin on those licenses.
      If in
      the future we elect to embed a third party product into our technology, we
      could
      see our gross margins on our software sales decrease.




Total
      operating expenses were as follows:




Three
                months ended,March
                31, 2007
            
            March
                31, 2006Compensation
            
            $
            3,501,858
            
            $
            104,660Travel
                and entertainment
            
            
            285,010
            
            
            3,052Occupancy
            
            
            456,937
            
            
            —Professional
                services
            
            
            360,230
            
            
            244,071Insurance
            
            
            63,545
            
            
            28,242Depreciation
                and amortization
            
            
            938,016
            
            
            —Other
                operating expenses
            
            
            227,431
            
            
            1,656Total
                operating expenses
            
            $
            5,833,027
            
            $
            381,681





The
      majority of our operating expenses consist of compensation expenses,
      professional fees and depreciation and amortization expenses. The increase
      in
      all of our operating expense is the result of our acquisition of 20/20
      Technologies, CentrePath, Inc. and Global Capacity Group, which were all
      subsequent to March 31, 2006. The costs in the prior year represent
      administrative costs associated with the holding Company Capital Growth Systems,
      Inc., as the holding company for Nexvu and Frontrunner; operating costs have
      been reclassified as a discontinued operations (see Note 3 Discontinued
      Operations). The professional fees in 2006 are primarily related to legal fees
      related to securities work related to filings with the Securities and Exchange
      Commission and NASD and other general legal work as well as, accounting fees.
      In
      addition, the Company agreed to issue an additional 100,000 shares of its common
      stock to two of the guarantors on the Harris demand loan (repaid at the time
      of
      the initial Unit closing) in connection with the continuance of such guarantees.
      The Company has not yet issued such shares, but has expensed $135 thousand
      during the three months ended March 31, 2006, with respect to such obligation
      to
      issue shares expenses.




The
      current period results reflect interest related to the existing debt that
      totaled $2.9 million as of March 31, 2007. It also includes the amortization
      of
      the fair value assigned to the warrants issued with the debt, which totaled
      approximately $1.9 million. The debt had a weighted average interest rate of
      12.5%.




31




**Liquidity
      and Capital Resources**




Cash
      used
      in operating activities during the three months ended March 31, 2007 and 2006
      was $6.1 million and $44 thousand, respectively. The cash used in operating
      activities was principally due to the net loss for the year and to fund certain
      previously accrued obligations. The primary variance between operating loss
      and
      net cash used in operating activities during the three months ended March 31,
      2007 due to stock option expense of $1.4 million and warrant expense of $1.9
      million. These amounts were partially offset by a $1.9 million reduction in
      accrued expenses.




The
      cash
      used in investing activities was $179 thousand and $66 thousand for the three
      months ended March 31, 2007 and 2006, respectively. Our capital expenditures
      for
      the three months ended 2007 and 2006 totaled approximately $55 thousand and
      $66
      thousand, respectively. Our capital expenditures in both 2007 and 2006 consisted
      primarily of computer related equipment and vehicles for our Frontrunner
      business. Although we currently do not anticipate any significant capital
      expenditures in the near future, we may have a need to make additional capital
      expenditures related to the integration of our operations. As part of our debt
      covenant with Hilco Financial, our capital expenditures are limited to $500
      thousand per year. We also purchased $125 thousand of software licenses during
      the three months ended March 31, 2007.





Cash
      provided by financing activities during the three months ended 2007 totaled
      approximately $6.8 million. This was the result of the equity offering funded
      primarily during the three months ended March 31, 2007, which totaled $18.3
      million, net of issuance fees. Of this amount approximately $4.6 million was
      the
      result of a non-cash conversion of existing debt into the equity offering (see
      Note 8 - Shareholder Equity). We also issued generated cash from the issuance
      of
      a new senior secured line of credit with Hilco Financial and a junior secured
      two year credit facility funded by a small number of lenders. The outstanding
      balance on our senior debt line of credit as of March 31, 2007 was $7.3 million.
      The totaled amount issued with our junior secured notes payable was $6.4
      million, of which $5.4 million was generated through the non-cash conversion
      of
      existing short-term borrowings. These amounts were partially offset by the
      repayment of debt totaling approximately $15 million during the three months
      ended March 31, 2007. Total cash utilized in financing activities during the
      three months ended March 31, 2006 was $63 thousand and represents a $338
      thousand reduction in Frontrunner debt partially offset by an additional
      $275 thousand of debt taken by CGSI (the holding company).




Historically
      our working capital requirements have been met through proceeds of common stock
      private equity offerings and debt issuances. As of March 31, 2007, we had $3.2
      million of cash, cash equivalents and borrowing capacity under our senior
      secured line of credit with Hilco Financial. We currently believe this level
      of
      working capital will not be sufficient to fund the operations until we start
      generating positive cash flow from operations in 2007 as to date, revenues
      have
      not materialized as anticipated. Therefore, we will 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 we will be able to raise
      additional capital or issuance additional indebtedness, or if we do so that
      it
      will not be dilutive of existing shareholders.





We
      have future contractual obligations for leases of our offices and for minimum
      future royalty payments related to a software licensing agreement with a third
      party. This software is being utilized as a component of our own proprietary
      software. We also have entered into several purchase commitments with various
      telecommunication companies for the provisioning of bandwidth, which is resold
      by Global Capacity. The following table summarizes our future contractual
      obligations for both continuing and discontinuing operations as of March 31,
      2007:




For
                the years ended December 31,
            
            Operating
              Leases
            
            Capital
              Leases
            
            Debt
              Obligations
            
            Minimum
                Royalty PaymentsRemaining
                nine of 2007
            
            $
            846,248
            
            
            43,798
            
            
            11,619,646
            
            $
            225,0002008
            
            
            769,378
            
            
            36,880
            
            
            932,089
            
            
            150,0002009
            
            
            237,463
            
            
            5,121
            
            
            8,255,039
            
            
            —2010
            
            
            221,864
            
            
            —
            
            
            50,793
            
            
            —2011
            
            
            97,009
            
            
            —
            
            
            32,820
            
            
            —Thereafter
            
            
            —
            
            
            —
            
            
            62,905
            
            
            —Total
                contractual obligations
            
            $
            2,171,962
            
            
            85,799
            
            $
            20,953,292
            
            $
            375,000




The
      above
      table does not include two $3.0 million dollar earn-out payments related to
      our
      acquisition of Global Capacity in December 2006. Both payments are based upon
      achieving certain revenue and gross margin targets over the next two years.
      The
      first $3.0 million payment is due in cash and payable in October 2008 and the
      second $3.0 million payment is payable either through the issuance of our common
      stock (based on the fair market value of our common stock as of the relevant
      pay
      out period) or in cash or a combination of the two at our discretion in October
      2009. The Company will record any such payments as additional
      consideration as compensation in the period the revenue objectives
      have been met. Included in Debt Obligation for 2007 is $8.8 million of principal
      and interest due under our senior debt facility, which is due in full in July
      of
      2008.




32




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.




33




**Item
      3. Controls and Procedures**




**Evaluation
      of Disclosure Controls and Procedure**




As
      required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
      under the supervision and with the participation of our management, including
      our chief executive officer and our chief financial officer, of the
      effectiveness and the design and operation of our disclosure controls and
      procedures as of March 31, 2007, the end of the period covered by this report.
      Based upon that evaluation, our chief executive officer and our chief financial
      officer concluded that our disclosure controls and procedures are effective
      to
      ensure that information required to be disclosed in the reports that we file
      or
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the Securities and Exchange Commission’s
      rules and forms and includes controls and procedures designed to ensure that
      information required to be disclosed in these reports is accumulated and
      communicated to our management, including our chief executive officer and our
      chief financial officer, as appropriate to allow timely decisions regarding
      the
      required disclosure.




**Changes
      in Internal Control Over Financial Reporting**




No
      changes in our internal control over financial reporting have come to
      management’s attention during our last fiscal quarter that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting in addition to those described above. Review and
      evaluation of disclosure controls and procedures is an ongoing process that
      we
      will continue to refine as we perform quarterly evaluations.





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**




None.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**




All
      unregistered securities issued during the quarter ended March 31, 2007 have
      been
      disclosed in our previous 8-K filings.





**Item
      3. Defaults Upon Senior Securities**




None.




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




None.





**Item
      5. Other Information**




None.





**Item
      6.** **Exhibits**




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




34





**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 Shutt
              Patrick
                C. Shutt, Chief Executive Officer




/s/ Darin
                  P. McAreavey
              Darin
                  P. McAreavey, Chief Financial and Accounting
                  Officer




**Dated:
      May 21, 2007**




35




**EXHIBIT
      INDEX**





Exhibit
                Number
            
            Description
                of Document3.1
            
            Articles
                of Incorporation of Capital Growth Systems, Inc.(1)3.2
            
            Amendment
                to Articles of Incorporation of Capital Growth Systems, Inc.(2)3.3
            
            By-laws
                of Capital Growth Systems, Inc.(1)10.1
            
            Employment
                Agreement by and between Robert A. Pollan and the Company, dated
                February
                5, 2007.(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.








(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 10QSB for the quarter ended September 30, 2006
                filed
                with the Commission on November 20, 2006 (SEC File No.
                0-30831)(4)
            
            Incorporated
                by reference to Form 8-K filed February 9, 2006 (file
                No.0-30831)




36