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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarterly period ended March 31, 2009



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

For the transition period from  to

Commission File Number 0-30831





CAPITAL GROWTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)







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

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

(Address of principal executive offices)

(312) 673-2400

(Registrants telephone number including area code)





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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of June 30, 2009, the issuer had outstanding 163,591,018 shares of its $0.0001 par value common stock.

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



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









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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES



|                              |  |                                                                                                                           |  |         
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                           |  | Page No.
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                                          
|Item 1.                       |  | Financial Statements                                                                                                      |  | 1       
|                              |  |                                                                                                                          
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2009 [Unaudited] and December 31, 2008                              |  | 2       
|                              |  |                                                                                                                          
|                              |  | Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2009 and 2008
[Unaudited]     |  | 3       
|                              |  |                                                                                                                          
|                              |  | Condensed Consolidated Statements of Shareholders Equity (Deficit) from January 1 to March 31, 2009 and 2008 [Unaudited] |  | 4       
|                              |  |                                                                                                                          
|                              |  | Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2009 and 2008
[Unaudited]     |  | 5       
|                              |  |                                                                                                                          
|                              |  | Notes to Condensed Consolidated Financial Statements [Unaudited]                                                          |  | 6       
|                              |  |                                                                                                                          
|Item 2.                       |  | Managements Discussion and Analysis                                                                                      |  | 32      
|                              |  |                                                                                                                          
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk (Not Applicable)                                               |  | 39      
|                              |  |                                                                                                                          
|Item 4.                       |  | Controls and Procedures                                                                                                   |  | 39      
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                                         |  | 41      
|                              |  |                                                                                                                          
|Item 1A.                      |  | Risk Factors                                                                                                              |  | 41      
|                              |  |                                                                                                                          
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                               |  | 41      
|                              |  |                                                                                                                          
|Item 3.                       |  | Defaults upon Senior Securities                                                                                           |  | 41      
|                              |  |                                                                                                                          
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 41      
|                              |  |                                                                                                                          
|Item 5.                       |  | Other Information                                                                                                         |  | 41      
|                              |  |                                                                                                                          
|Item 6.                       |  | Exhibits                                                                                                                  |  | 41      
|                              | 
|SIGNATURES AND CERTIFICATIONS |  |                                                                                                                          



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PART I  FINANCIAL INFORMATION



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

CAUTIONARY NOTE REGARDING
FORWARD LOOKING STATEMENTS

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

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value
and share data)



|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                 |  | March 31,2009 |          |   | December 31,2008 |  
|                                                                                                                                                                 |  | (Unaudited)   |          |   |                  |  
|ASSETS                                                                                                                                                           |  |               |          |   |                  |   |          |  
|CURRENT ASSETS                                                                                                                                                   |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                        |  | $             | 2,727    |   |                  | $ | 4,598    |  
|Accounts receivable, net                                                                                                                                         |  |               | 6,688    |   |                  |   | 6,277    |  
|Prepaid expenses and other current assets                                                                                                                        |  |               | 870      |   |                  |   | 844      |  
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total Current Assets                                                                                                                                             |  |               | 10,285   |   |                  |   | 11,719   |  
|Property and equipment, net                                                                                                                                      |  |               | 1,457    |   |                  |   | 1,548    |  
|Intangible assets, net                                                                                                                                           |  |               | 25,231   |   |                  |   | 26,182   |  
|Goodwill                                                                                                                                                         |  |               | 13,993   |   |                  |   | 13,993   |  
|Other assets                                                                                                                                                     |  |               | 3,593    |   |                  |   | 3,875    |  
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|TOTAL ASSETS                                                                                                                                                     |  | $             | 54,559   |   |                  | $ | 57,317   |  
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                   |  |               |          |   |                  |   |          |  
|CURRENT LIABILITIES                                                                                                                                              |  |               |          |   |                  |   |          |  
|Current maturities of long-term debt                                                                                                                             |  | $             | 10,706   |   |                  | $ | 8,106    |  
|Accounts payable                                                                                                                                                 |  |               | 13,250   |   |                  |   | 12,636   |  
|Accrued expenses                                                                                                                                                 |  |               | 5,013    |   |                  |   | 4,971    |  
|Deferred revenue                                                                                                                                                 |  |               | 4,492    |   |                  |   | 4,349    |  
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total Current Liabilities                                                                                                                                        |  |               | 33,461   |   |                  |   | 30,062   |  
|Liabilities for warrants to purchase common stock                                                                                                                |  |               | 18,146   |   |                  |   | 12,153   |  
|Embedded derivatives of convertible debt instruments                                                                                                             |  |               | 23,818   |   |                  |   | 16,854   |  
|Long-term portion of debt                                                                                                                                        |  |               |         |   |                  |   |         |  
|Deferred revenue                                                                                                                                                 |  |               | 35       |   |                  |   | 45       |  
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total Liabilities                                                                                                                                                |  |               | 75,460   |   |                  |   | 59,114   |  
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                 |  |              
|SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                                   |  |               |          |   |                  |   |          |  
|Common stock, $.0001 par value; 350,000,000 authorized, 162,081,018 and 154,281,018 issued and outstanding at March 31, 2009 and
December 31, 2008, respectively |  |               | 16       |   |                  |   | 16       |  
|Additional paid-in capital                                                                                                                                       |  |               | 103,536  |   |                  |   | 101,606  |  
|Accumulated other comprehensive income                                                                                                                           |  |               | 32       |   |                  |   | 7        |  
|Accumulated deficit                                                                                                                                              |  |               | (124,485 | ) |                  |   | (103,426 | )
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total Shareholders Equity (Deficit)                                                                                                                             |  |               | (20,901  | ) |                  |   | (1,797   | )
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                             |  | $             | 54,559   |   |                  | $ | 57,317   |  
|                                                                                                                                                                 |  |               |          |   |                  |   |          |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except
share data)

(Unaudited)



|                                                               |  |                                     |         |   |                 |   |        |  
|-------------------------------------------------------------- |  | ----------------------------------- | ------- | - | --------------- | - | ------ | -
|                                                               |  | Three-month periods ended March 31, |        
|                                                               |  | 2009                                |         |   | 2008As Restated |  
|REVENUES                                                       |  | $                                   | 16,242  |   |                 | $ | 9,523  |  
|COST OF REVENUES                                               |  |                                     | 12,321  |   |                 |   | 4,418  |  
|                                                               |  |                                     |         |   |                 |   |        |  
|GROSS MARGIN                                                   |  |                                     | 3,921   |   |                 |   | 5,105  |  
|                                                               |  |                                     |         |   |                 |   |        |  
|OPERATING EXPENSES                                             |  |                                     |         |   |                 |   |        |  
|Compensation                                                   |  |                                     | 3,593   |   |                 |   | 4,289  |  
|Travel and entertainment                                       |  |                                     | 320     |   |                 |   | 281    |  
|Occupancy                                                      |  |                                     | 397     |   |                 |   | 247    |  
|Professional services                                          |  |                                     | 1,739   |   |                 |   | 2,142  |  
|Insurance                                                      |  |                                     | 112     |   |                 |   | 77     |  
|Depreciation and amortization                                  |  |                                     | 1,138   |   |                 |   | 536    |  
|Other operating expenses                                       |  |                                     | 362     |   |                 |   | 110    |  
|                                                               |  |                                     |         |   |                 |   |        |  
|TOTAL OPERATING EXPENSES                                       |  |                                     | 7,661   |   |                 |   | 7,682  |  
|                                                               |  |                                     |         |   |                 |   |        |  
|OPERATING LOSS                                                 |  |                                     | (3,740  | ) |                 |   | (2,577 | )
|Interest expense                                               |  |                                     | (3,132  | ) |                 |   | (3,712 | )
|Gain (loss) on warrants and derivatives                        |  |                                     | (14,011 | ) |                 |   | 10,778 |  
|Loss on extinguishment of debt and conversion of debt to stock |  |                                     | (176    | ) |                 |   | (5,217 | )
|                                                               |  |                                     |         |   |                 |   |        |  
|Loss from continuing operations                                |  |                                     | (21,059 | ) |                 |   | (728   | )
|Income (loss) from discontinued operations, net of tax         |  |                                     |        |   |                 |   | 308    |  
|                                                               |  |                                     |         |   |                 |   |        |  
|NET LOSS                                                       |  | $                                   | (21,059 | ) |                 | $ | (420   | )
|                                                               |  |                                     |         |   |                 |   |        |  
|                                                               |  |                                    
|INCOME (LOSS) PER SHARE OF COMMON STOCK  BASIC                |  |                                     |         |   |                 |   |        |  
|Loss from continuing operations                                |  | $                                   | (0.13   | ) |                 | $ | (0.01  | )
|Income (loss) from discontinued operations                     |  |                                     |        |   |                 |   |       |  
|                                                               |  |                                     |         |   |                 |   |        |  
|Net loss per share of common stock  basic                     |  | $                                   | (0.13   | ) |                 | $ | (0.01  | )
|                                                               |  |                                     |         |   |                 |   |        |  
|                                                               |  |                                    
|INCOME (LOSS) PER SHARE OF COMMON STOCK  DILUTED              |  |                                     |         |   |                 |   |        |  
|Loss from continuing operations                                |  | $                                   | (0.13   | ) |                 | $ | (0.05  | )
|Income (loss) from discontinued operations                     |  |                                     |        |   |                 |   |       |  
|                                                               |  |                                     |         |   |                 |   |        |  
|Net loss per share of common stock  diluted                   |  | $                                   | (0.13   | ) |                 | $ | (0.05  | )
|                                                               |  |                                     |         |   |                 |   |        |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

(in thousands, except share data)

(Unaudited)



|                                                                  |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------------------ |  | - | ------------------------------------------ | - |  | ---------------------------------- | --- | - |  | - | ------- | -
|                                                                  |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity (Deficit) |    
|Balance, January 1, 2008 (as restated)                            |  | 123,752,039  |  | $           | 12 |                          | $ | 77,462             |  | $ | (110,767                                   | ) |  | $                                  | (89 | ) |  | $ | (33,382 | )
|Cashless exercise of stock options                                |  | 804,626      |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    |    |   |  |   |        |  
|Conversion of debt to common stock                                |  | 19,591,890   |  |             | 2  |                          |   | 12,368             |  |   |                                           |   |  |                                    |    |   |  |   | 12,370  |  
|Exercise of warrants                                              |  | 2,358,506    |  |             |   |                          |   | 2,399              |  |   |                                           |   |  |                                    |    |   |  |   | 2,399   |  
|Registration rights penalty                                       |  | 477,185      |  |             |   |                          |   | 241                |  |   |                                           |   |  |                                    |    |   |  |   | 241     |  
|Stock-based compensation expense                                  |  |             |  |             |   |                          |   | 1,964              |  |   |                                           |   |  |                                    |    |   |  |   | 1,964   |  
|Foreign currency translation adjustment                           |  |             |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    | (6  | ) |  |   | (6      | )
|Net income (loss) for the three-month period ended March 31, 2008 |  |             |  |             |   |                          |   |                   |  |   | (420                                       | ) |  |                                    |    |   |  |   | (420    | )
|                                                                  |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|Balance, March 31, 2008                                           |  | 146,984,246  |  | $           | 14 |                          | $ | 94,434             |  | $ | (111,187                                   | ) |  | $                                  | (95 | ) |  | $ | (16,834 | )
|                                                                  |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|                                                                  |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|                                                                  |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|                                                                  |  |              |  |             |    |                         
|Balance, January 1, 2009                                          |  | 154,281,018  |  | $           | 16 |                          | $ | 101,606            |  | $ | (103,426                                   | ) |  | $                                  | 7   |   |  | $ | (1,797  | )
|Conversion of debt to common stock                                |  | 7,800,000    |  |             |   |                          |   | 1,137              |  |   |                                           |   |  |                                    |    |   |  |   | 1,137   |  
|Expired warrants                                                  |  |             |  |             |   |                          |   | 6                  |  |   |                                           |   |  |                                    |    |   |  |   | 6       |  
|Stock-based compensation expense                                  |  |             |  |             |   |                          |   | 787                |  |   |                                           |   |  |                                    |    |   |  |   | 787     |  
|Foreign currency translation adjustment                           |  |             |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    | 25  |   |  |   | 25      |  
|Net income (loss) for the three-month period ended March 31, 2009 |  |             |  |             |   |                          |   |                   |  |   | (21,059                                    | ) |  |                                    |    |   |  |   | (21,059 | )
|                                                                  |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|Balance, March 31, 2009                                           |  | 162,081,018  |  | $           | 16 |                          | $ | 103,536            |  | $ | (124,485                                   | ) |  | $                                  | 32  |   |  | $ | (20,901 | )
|                                                                  |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except
share data)

(Unaudited)



|                                                                                 |  |                                     |        |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                 |  | Three-month periods ended March 31, |       
|                                                                                 |  | 2009                                |        |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                             |  |                                     |        |   |      |   |        |  
|Net cash used in operating activities from continuing operations                 |  | $                                   | (1,790 | ) |      | $ | (3,852 | )
|Net cash used in operating activities from discontinued operations               |  |                                     |       |   |      |   | (524   | )
|                                                                                 |  |                                     |        |   |      |   |        |  
|NET CASH USED IN OPERATING ACTIVITIES                                            |  |                                     | (1,790 | ) |      |   | (4,376 | )
|                                                                                 |  |                                     |        |   |      |   |        |  
|                                                                                 |  |                                    
|CASH FLOWS FROM INVESTING ACTIVITIES                                             |  |                                     |        |   |      |   |        |  
|Purchase of property and equipment                                               |  |                                     | (96    | ) |      |   | (12    | )
|Proceeds from sales of Frontrunner                                               |  |                                     |       |   |      |   | 712    |  
|                                                                                 |  |                                     |        |   |      |   |        |  
|Net cash used in investing activities from continuing operations                 |  |                                     | (96    | ) |      |   | (12    | )
|Net cash provided by investing activities from discontinued operations           |  |                                     |       |   |      |   | 712    |  
|                                                                                 |  |                                     |        |   |      |   |        |  
|NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                              |  |                                     | (96    | ) |      |   | 700    |  
|                                                                                 |  |                                    
|CASH FLOWS FROM FINANCING ACTIVITIES                                             |  |                                     |        |   |      |   |        |  
|Proceeds from the issuance of debt                                               |  |                                     |       |   |      |   | 19,810 |  
|Repayment of long-term debt                                                      |  |                                     | (10    | ) |      |   | (8,347 | )
|Payment of financing costs                                                       |  |                                     |       |   |      |   | (1,710 | )
|                                                                                 |  |                                     |        |   |      |   |        |  
|Net cash provided by (used in) financing activities from continuing operations   |  |                                     | (10    | ) |      |   | 9,753  |  
|Net cash provided by (used in) financing activities from discontinued operations |  |                                     |       |   |      |   |       |  
|                                                                                 |  |                                     |        |   |      |   |        |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                              |  |                                     | (10    | ) |      |   | 9,753  |  
|                                                                                 |  |                                     |        |   |      |   |        |  
|Effect of exchange rate on cash and equivalents                                  |  |                                     | 25     |   |      |   | (6     | )
|                                                                                 |  |                                     |        |   |      |   |        |  
|Increase (decrease) in cash and cash equivalents                                 |  |                                     | (1,871 | ) |      |   | 6,071  |  
|Cash and cash equivalents  beginning of period                                  |  |                                     | 4,598  |   |      |   | 859    |  
|                                                                                 |  |                                     |        |   |      |   |        |  
|Cash and cash equivalents  end of period                                        |  | $                                   | 2,727  |   |      | $ | 6,930  |  
|                                                                                 |  |                                     |        |   |      |   |        |  
|                                                                                 |  |                                    
|SUPPLEMENTAL CASH FLOW INFORMATION                                               |  |                                     |        |   |      |   |        |  
|Cash paid for interest for continuing operations                                 |  | $                                   | 300    |   |      | $ | 632    |  
|Cash paid for interest for discontinued operations                               |  |                                     |       |   |      |   |       |  
|                                                                                 |  |                                    
|NON-CASH INVESTING AND FINANCING ACTIVITIES                                      |  |                                     |        |   |      |   |        |  
|Conversion of debt to common stock                                               |  |                                     | 1,860  |   |      |   | 12,370 |  
|Issuance of common stock for cashless conversion of warrants                     |  |                                     |       |   |      |   | 2,399  |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

March 31, 2009 (Unaudited)

NOTE 1. Organization and Basis of Presentation.

Description of Business

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

Basis of Presentation

The Companys unaudited consolidated financial statements as of and for the three-month periods ended March 31, 2009 and 2008, have been prepared in
accordance with generally accepted accounting principles for interim information and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of the Companys management, all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair
statement have been included. The results for the three-month period ended March 31, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009. Refer to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008 for the most recent disclosure of the Companys accounting policies.

The Company consolidates its
wholly-owned operating subsidiaries. The continuing operations presented in the accompanying consolidated financial statements include the accounts of Capital Growth Systems, Inc. (CGSI) and its wholly-owned operating subsidiaries: 20/20
Technologies, Inc. (20/20), Magenta netLogic Ltd. (Magenta) which operates in the United Kingdom, CentrePath, Inc. (CentrePath), and Global Capacity Group, Inc. (GCG). Also consolidated, effective November 20, 2008, is VDUL, now known as Global
Capacity Direct, LLC, in which the Company has a controlling financial interest. The Company also consolidated two other businesses, Nexvu Technologies, LLC (Nexvu) and Frontrunner Network Systems (Frontrunner) until their respective closure or sale
and the Company reports their results as discontinued operations. See the Discontinued Operations note for additional information. Except where necessary to distinguish the entities, together they are referred to as the Company.

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

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

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

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 regulatory insurance limit.

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.

Restricted Cash

At both
March 31, 2009 and December 31, 2008, the Company had $0.5 million of restricted cash for outstanding letters of credit. The letters of credit expire within one year of issuance; therefore, restricted cash is classified with other current
assets.

Accounts Receivable

Accounts
receivable represent amounts owed from billings to customers and are recorded at gross amounts owed less an allowance for potentially uncollectible accounts. The Company provides an allowance for potentially uncollectible accounts receivable based
upon prior experience and Managements assessment of the collectability of existing specific accounts. The total reserve for uncollectible accounts was $6.6 million and $6.8 million as of March 31, 2009 and December 31, 2008,
respectively. The March 31, 2009 allowance includes $0.7 million related to the acquisition of VDULs customers, $5.7 million related to one large international customer and $0.2 million related to GCG. The Companys policy is to
write-off accounts receivable balances once Management has deemed them to be uncollectible.

In February 2009, after numerous attempts to
resolve material open accounts receivable ($10.2 million) with a major customer, the Company filed suit in a foreign court. The Company had exhausted all efforts to cause mediation or other forms of compromise and was left with such collection
action as its last resort. The customer has denied the claim and has filed a counter claim seeking return of funds paid under the contract. Management believes the counter claim to be without merit. The Companys counsel has advised management
that a favorable outcome related to this lawsuit is probable, but that the amount to be recovered cannot be determined at this time. As a result, the Company has established an allowance for the entire balance as of December 31, 2008 and will
record any amounts recovered through future operating results.



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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 its estimated useful
lives of three to fifteen 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.

Impairment of Long-lived Assets

The Company assesses
the recoverability of its long-lived assets, which includes property and equipment and amortizable intangible assets, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long Lived Assets (SFAS 144). The impairment of long-lived assets held for sale is measured at the lower of book value or estimated fair value less cost to sell. The recoverability of long-lived assets held and used is assessed based on a
comparison of the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. Should the carrying value be higher than the undiscounted cash flows, an impairment
would be recorded to write the asset down to its estimated fair value. The Company generally determines estimated fair value based on the estimated discounted cash flows, as well as specific independent appraisal in certain instances.

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important, which could trigger an impairment review, include the following:



| |  |  | a significant decrease in the market price of a long-lived asset or asset group;
| | - |  | --------------------------------------------------------------------------------



| |  |  | a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse
action or assessment by a regulator;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing
losses associated with the use of a long-lived asset or asset group; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although the Company has a recent history of operating losses, Management has
determined that the long-lived assets that have material carrying values are expected to provide adequate cash flows to demonstrate the recoverability of the long-lived assets reported carrying value. As such, there were no impairment charges
recognized related to the long-lived assets of the continuing operations for the three month period ended March 31, 2009 or for the year ended December 31, 2008.

Goodwill

The Company accounts for goodwill and other intangible assets in accordance with SFAS
Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net assets at the dates of acquisition. Goodwill, which is not
subject to amortization, is tested for impairment annually as of December 31. The Company tests Goodwill and other intangible assets for impairment on an interim basis if an event occurs that might reduce the fair value of a reporting unit
below its carrying value. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its
fair value, then the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that
goodwill, an impairment loss is recognized in an amount equal to the excess. Management determined that the Company had only one reporting unit for the purposes of goodwill impairment testing in 2008. The Company re-evaluates its reporting units and
the goodwill and intangible assets assigned to the reporting units annually, prior to the completion of the impairment testing. The fair value of the Companys reporting unit is determined based upon Managements estimate of future
discounted cash flows and other factors. Managements estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows.

Other intangible assets consisting mainly of customer relationships, trade names, software licenses, databases, and
developed technology were all determined to have a definite life and are amortized over the shorter of the estimated useful life or contractual life of the these assets, which range from 3 to 15 years. Intangible assets with definite useful lives
are periodically reviewed to determine if facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the
recoverability of intangible assets is assessed by comparing the projected



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undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts.
Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. Newly acquired VDULs intangible assets are classified into two categories, developed technology and customer relationships. These assets
have a useful life ranging from five to fifteen years and are amortized using an economic benefit method.

Deferred Financing Costs

Deferred financings costs, included in other long-term assets on the consolidated balance sheets, were $3.4 million and $3.7 million as of March 31,
2009 and December 31, 2008, respectively, both net of accumulated amortization of $0.3 million and $0.1 million, respectively. These costs represent fees incurred and paid in either cash or warrants to obtain debt financing and are amortized
over the life of the related debt using the effective interest rate method.

Accounting for Debt Issued with Stock Purchase Warrants

Pursuant to Accounting Principles Board (APB) Opinion No. 14, Accounting for Convertible Debts and Debts issued with Stock Purchase Warrants
(APB 14), the accounting for debt issued with detachable stock purchase warrants provides for the proceeds of the debt to be allocated between the debt and the detachable warrants based on the relative estimated fair values of the debt security
without the warrants and the warrants themselves. The amount allocated to the warrants would then be reflected as both an increase to additional paid-in capital and as a debt discount that would be amortized over the term of the debt. However, in
circumstances where the warrants must be accounted for as a liability, based on other literature, predominantly Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Companys Own Stock (EITF 00-19), the full estimated fair value of the warrant is established as both a liability and as a debt discount. As of March 31, 2009 and December 31, 2008, the Company does not have any warrants
that merit equity classification.

Accounting for Convertible Instruments and Related Securities

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

Upon issuance of convertible debt instruments, the Company first determines whether the instrument and any conversion features and warrants, should be
accounted for as a liability pursuant to SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150) and its related guidance. None of the non-debt instruments issued by the
Company currently require accounting under SFAS 150. The Company then considers whether the conversion option or other embedded features (such as puts and calls) require bifurcation from the debt or preferred stock host pursuant to the relevant
accounting literature, predominantly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). This consideration includes, among other things, an assessment of whether the embedded feature would qualify as a
derivative, whether such a derivative is indexed to the Companys common stock and whether the derivative would, if freestanding, be classified in shareholders equity (deficit). If it is determined that one or more embedded features are
required to be bifurcated, those bifurcated features are separated from the debt as a bundle and accounted for as a liability or asset of the Company. The debt itself would then be recorded with a discount (if the separated features were a
liability) or a premium (if the separated features were an asset) which would be amortized over the term of the debt. The Company has no such derivative assets, but it does have various derivative liabilities.

To the extent that the initial estimated fair value of the derivative liability, along with the initial estimated fair value of detachable warrants also
issued with the same convertible instrument, exceeds the proceeds received upon issuance of the security, the resulting debt discount is capped at the amount of those proceeds and the excess of the initial derivative and warrant liability is charged
to the statement of operations as interest expense.

The derivative and warrant liabilities are required to
be accounted for at estimated fair value. As such, at each balance sheet date, all such outstanding securities are reported at the period ends estimated fair value and changes in that estimate from the prior period end are reflected in
Gain (loss) on warrants and derivatives in the statements of operations. The estimated fair values include, as appropriate, any contingency provisions related to the respective securities. The Company uses the Black-Scholes pricing model
to determine fair values of its warrants and derivatives. Valuations derived from any model are subject to ongoing internal verification and review. The models use, among other things, market-sourced inputs such as common stock price, interest
rates, exchange rates, and common stock price volatility. Selection of these inputs involves Managements judgment and has a direct impact on net income. The fair value of the derivative liabilities and certain of the warrant liabilities are
subject to changes in the trading value of the Companys common stock. Accordingly, the Companys financial statements may fluctuate from quarter-to-quarter based on factors such as the price of the Companys stock at the balance
sheet date, the amount of shares converted by note holders and/or exercised by warrant holders, and changes in the determination of market-sourced inputs. Consequently, the Companys financial position and results of operations may vary
materially from quarter-to-quarter based on conditions other than its operating revenues and expenses.



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These warrant and derivative liabilities are also marked-to-market prior to any related conversions,
exercises, modifications, or extinguishments with any necessary changes being reflected in Gain or loss related to warrants and derivatives. Upon such events, the carrying cost of the liability is eliminated (upon a conversion, exercise,
or extinguishment) or adjusted as may be necessary in a modification and such eliminations and adjustments are included in the overall accounting for the related event.

Generally, the Company follows extinguishment accounting, which indicates that in instances when the conversion features have been bifurcated from the convertible debt host contract and accounted for as liabilities,
there is no equity conversion feature remaining in the debt instrument for accounting purposes. Therefore, while there may be a legal conversion of the debt, for accounting purposes both liabilities (i.e., the debt host contract and the bifurcated
derivative liability) are subject to extinguishment accounting because such liabilities are being surrendered in exchange for common shares. As such, a gain or loss upon extinguishment of the two liabilities equal to the difference between the
recorded value of the liabilities and the fair value of the common stock issued to extinguish them should be recorded.

Upon a conversion
of a portion of debt associated with separated derivatives into common shares, the Company records a credit to capital equal to that dates fair value of the shares issued upon conversion. Concurrently, the Company eliminates the carrying value
of the debt, including its pro rata portion of deferred financing costs, debt discounts, and derivative liability, thereby resulting in a gain or loss on extinguishment upon the conversion.

In certain circumstances, the terms of the convertible securities and warrants require the Company to file and keep effective a registration statement in
regards to the common shares to be delivered upon conversion or exercise. In certain of those cases, the Company may incur penalties for not meeting those requirements on a timely basis. The Company records any related penalties upon its assessment
that such penalties will become due and payable to the holders in accordance with FASB Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements(EITF 00-19-2). If such determination is made upon issuance or modification
of the convertible securities or warrants, the related penalties are considered in the overall accounting for the issuance of those securities. If such determination is made subsequent to the issuance or modification, which is almost always the
case, the related penalties are charged to expense.

Fair Value Measurements

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurement (SFAS 157) for financial assets and liabilities. This
statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. SFAS 157 clarifies that the exchange price is the price in an orderly transaction between market participants
to sell an asset or transfer a liability at the measurement date and emphasizes that fair value is a market-based measurement and not an entity-specific measurement. Adoption of this portion of SFAS 157 did not have a significant impact on the
Companys financial statements.

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



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



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



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

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

The Company has embedded derivatives associated with its
convertible debt instruments and warrants classified as liabilities that are measured at fair value on a recurring basis. The embedded derivatives and the warrants are measured at fair value using the Black-Scholes valuation model with pricing
inputs that are observable in the market or that can be derived principally from or corroborated by observable market data. In selecting the appropriate fair value technique the Company considers the nature of the instrument, the market risks that
it embodies, and the expected means of settlement.



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



|                                 |  |                                                                  |  |                                           |      |                                        |   |                        |   |     
|-------------------------------- |  | ---------------------------------------------------------------- |  | ----------------------------------------- | ---- | -------------------------------------- | - | ---------------------- | - | ----
|                                 |  | Quoted Prices inActive Markets forIdentical Liabilities(Level 1) |  | SignificantOtherObservableInputs(Level 2) |      | SignificantUnobservableInputs(Level 3) |   | BalanceatMarch 31,2009
|Derivative financial instruments |  |                                                                 |  | $                                         | 23.8 |                                        |  |                        | $ | 23.8
|Warrant liability                |  |                                                                 |  |                                           | 18.1 |                                        |  |                        |   | 18.1

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

Revenue Recognition

The Company generates revenue from two business units: Optimization Solutions and Connectivity Solutions. The revenue offerings of Optimization Solutions
include Optimization Consulting, Automated Pricing Software, Remote Management Services, and Professional Services. Revenue offerings of Connectivity Solutions include delivering turnkey global networks and system management services.

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

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

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

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

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

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



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

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

Cost of Revenues

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

Cost of revenues for the connectivity solutions offerings includes the cost of accessing circuits and bandwidth needed for communication networks and fees paid to third-party sales agents.

Accounting for Stock-Based Compensation

The Company
measures and recognizes the cost of share-based awards granted to employees and directors based on the grant-date fair value of the award and recognizes expense over the vesting period. The Company estimates the grant date fair value of each award
using a Black-Scholes option-pricing model.

From time to time, in lieu of, or in addition to cash, the Company issues equity instruments
as a contract incentive or as payment for non-employee services. Such payments may include the issuance of stock, stock purchase warrants, or both. The amount recorded for shares issued is based on the closing price of the Companys common
stock on the effective date of the stock issuance or the agreement. The grant date fair value of warrants awarded is estimated using the Black-Scholes option-pricing model. The fair value of the awards is charged to expense as they are earned. The
Company has not classified outstanding stock options as liabilities because the underlying shares are not classified as liabilities and the Company is not required to settle the options by transferring cash or other assets.

Income Taxes

Income tax provisions are recorded for
taxes currently payable or refundable and for deferred income taxes arising from the future tax consequences of events that were recognized in the Companys financial statements or tax returns. The effects of income taxes are measured based on
enacted tax laws and rates applicable to periods in which the differences are expected to reverse. As necessary, a valuation allowance is established to reduce deferred income tax assets to an amount that will more likely than not be realized.

The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation (FIN) 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 SFAS No. 109,Accounting for Income Taxes (SFAS 109), 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 recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, and various state, local, and foreign jurisdictions. Based on its evaluation, the Company has concluded that it has no
significant unrecognized tax benefits. Generally, tax years ended December 31, 2005 and forward remain subject to examination by major tax jurisdictions as of March 31, 2009. The Company does not believe there will be any material changes
in its unrecognized tax positions over the next twelve 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, the Company has decided to classify interest and penalties as a component of income tax
expense.

Comprehensive Income (Loss)

Comprehensive income (loss) is as follows:



|                                        |  |                                    |         |   |                 |   |      |  
|--------------------------------------- |  | ---------------------------------- | ------- | - | --------------- | - | ---- | -
|                                        |  | Three-month periods endedMarch 31, |        
|                                        |  | 2009                               |         |   | 2008As Restated |  
|Net loss                                |  | $                                  | (21,059 | ) |                 | $ | (420 | )
|Foreign currency translation adjustment |  |                                    | 25      |   |                 |   | (6   | )
|                                        |  |                                    |         |   |                 |   |      |  
|Comprehensive loss                      |  | $                                  | (21,034 | ) |                 | $ | (426 | )
|                                        |  |                                    |         |   |                 |   |      |  



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Use of Estimates

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

NOTE 2. Recent Accounting Pronouncements.

In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140(SFAS 166), which amends the existing guidance on transfers of financial assets. The
amendments include: (1) eliminating the qualifying special-purpose entity concept, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting,
(3) clarifications and changes to the de-recognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial
interests are received by the transferor, and (5) extensive new disclosures. SFAS 166 is effective for new transfers of financial assets occurring on or after January 1, 2010. The adoption of FAS 166 is not expected to have a material
impact on the Companys condensed consolidated financial statements; however, it could impact future transactions entered into by the Company.

In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R)(SFAS 167), amending the consolidation guidance for variable-interest entities under FIN 46(R), Consolidation of Variable
Interest Entities: an interpretation of ARB No. 51, (FIN 46R). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a
variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 is effective January 1, 2010. The Company is currently evaluating the impact of this standard on the
condensed consolidated financial statements.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification (Codification) and the Hierarchy of GAAP(SFAS 168), which replaces SFAS No. 162, The Hierarchy of GAAP (SFAS 162), and establishes the Codification as the single source of authoritative U.S. GAAP recognized
by the FASB to be applied by non-governmental entities. Securities and Exchange Commission (SEC) rules and interpretive releases are also sources of authoritative GAAP for SEC registrants. SFAS 168 modifies the GAAP hierarchy to include only two
levels of GAAP: authoritative and non-authoritative. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. As SFAS 168 is not intended to change or alter existing GAAP, it will not impact the Companys
condensed consolidated financial statements. The Company will adjust historical GAAP references in its Form 10-Q for the third quarter of 2009 to reflect accounting guidance references included in the Codification.

In May 2009, the FASB issued Statement No. 165, Subsequent Events (SFAS 165), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 provides guidance on the period after the balance sheet date and the circumstances under
which Management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. SFAS 165 also requires certain disclosures about events or transactions occurring after the balance sheet
date. SFAS 165 is effective for interim and annual reporting periods ending after June 15, 2009. The Company plans to adopt the provisions of SFAS 165 in the three-month period ending June 30, 2009. The adoption is not expected to
have a material impact on the condensed consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments(FSP 107-1 and APB 28-1). This FSP requires disclosure about fair value of financial instruments for interim reporting periods and annual financial statements of publicly traded
companies. FSP 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. The Company plans to adopt FSP 107-1 and APB 28-1 in the three-month period ending June 30, 2009. As FSP 107-1 and APB 28-1 apply
only to financial statement disclosures, the adoption will not have a material impact on the Companys condensed consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activityfor the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are
Not Orderly(FSP 157-4). This FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157 when the volume and level of activity for the asset or liability have significantly decreased and provides
guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for interim reporting periods ending after June 15, 2009. The Company expects the adoption of FSP 157-4 will not have a material impact on
the Companys consolidated financial statements when it is applied in the three-month period ending June 30, 2009.



In April 2009, the FASB issued FSP No. SFAS 115-2 and FSP No. SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments(FSP
115-2 and FSP 124-2). This FSP provides a framework to perform an other-than-temporary impairment analysis, in compliance with GAAP, which determines whether the holder of an investment in a debt or equity security, for which changes in
fair value are not regularly recognized in earnings, should recognize a loss in earnings when the investment is



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impaired. Additionally this FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve
the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 is effective for interim reporting periods ending after June 15, 2009. The Company expects to adopt FSP
115-2 and FSP 124-2 in the three-month period ending June 30, 2009. We anticipate that the adoption of this guidance will not have a material impact on the Companys consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies(FSP 141R-1). The FSP requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value per SFAS No. 157, if the acquisition-date fair value can be
reasonably determined. If the fair value cannot be reasonably determined, then the asset or liability should be recognized in accordance with SFAS No. 5, Accounting for Contingencies, (SFAS 5) and FASB Interpretation No. 14,
Reasonable Estimation of the Amount of a Loss - an interpretation of FASB Statement No. 5 (FIN 14). The FSP also requires new disclosures for the assets and liabilities within the scope of the FSP. The Company is applying the guidance of
the FSP to business combinations completed on or after January 1, 2009.

In November 2008, the FASB issued EITF Issue No. 08-6,
Equity Method Investment Accounting Consideration(EITF 08-6), which is effective for the first annual reporting period beginning on or after December 15, 2008. EITF 08-6 clarifies the effects of the issuance of SFAS 141 (revised 2007),
Business Combinations (SFAS 141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements(SFAS 160). See further information on the issuance of SFAS 141R and SFAS 160 below. The Company is applying EITF
08-6 to any transactions within scope of this guidance.

In November 2008, the FASB issued EITF Issue No. 08-7, Accounting for
Defensive Intangible Assets(EITF 08-7), which is effective for the first annual reporting period beginning on or after December 15, 2008. EITF 08-7 provides guidance on intangible assets acquired after the effective date of SFAS 141R that
an entity does not intend to actively use but intends to hold to prevent others from using. The Company is applying EITF 08-7 to any transactions within scope of this guidance.

In October 2008, the FASB issued FASB Staff Position (FSP) No. FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active(FSP 157-3), which was effective upon issuance. FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example of key considerations to determine the fair value of financial assets when
the market for those assets is not active. The adoption of FSP 157-3 did not have a material effect on the Companys consolidated financial statements.

In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(FSP 03-6-1), which classifies unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend equivalents as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method described in SFAS
No. 128, Earnings per Share,(FAS 128). FSP 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years and requires all prior period earnings per
share data presented to be adjusted retrospectively. The adoption of FSP 03-6-1 did not have a material impact on the Companys consolidated financial statements.

In April 2008, the FASB issued FSP No. FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 also requires expanded disclosure related to the determination of intangible asset useful
lives. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of FSP 142-3 did not have a material effect on the Companys
consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement 133(SFAS 161). SFAS 161 intends to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures about their impact on an entitys
financial position, financial performance, and cash flows. SFAS 161 requires disclosures regarding the objectives for using derivative instruments, the fair value of derivative instruments and their related gains and losses, and the accounting for
derivatives and related hedged items. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted. Because the Company has only embedded derivatives and SFAS 161 impacts the
disclosure and not the accounting treatment for derivative instruments and related hedged items, the adoption of SFAS 161 did not have an impact on the Companys consolidated financial statements.



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In December 2007, the FASB issued SFAS 141R. SFAS 141R replaces SFAS No. 141, Business
Combinations (SFAS 141) and applies to all transactions or other events in which an entity obtains control of one or more businesses. SFAS 141R requires the acquiring entity in a business combination to recognize the acquisition-date fair value
of all assets acquired and liabilities assumed including contingent consideration and those relating to minority interests. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs to be expensed as incurred, rather
than capitalized as a component of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and may not be applied before that date. The Company is applying the guidance of SFAS 141R to business
combinations entered into on or after January 1, 2009.

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

In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair measurements. SFAS 157, as originally issued, was
effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. However, in February 2008, the FASB issued FSP 157-2, which deferred the effective date of SFAS 157 for one year, as it relates to the fair
value measurement requirements for non-financial assets and non-financial liabilities that are not required or permitted to be measured at fair value on a recurring basis. This statement provides a single definition of fair value, a framework for
measuring fair value, and expanded disclosures concerning fair value. SFAS 157 applies to other pronouncements that require or permit fair value measurements; but it does not require any new fair value measurements. The adoption of SFAS 157 for
non-financial assets and liabilities did not have a material effect on the Companys consolidated results of operations or financial position.

NOTE 3. Going Concern.

As of March 31, 2009, the Companys current liabilities exceeded its current assets by
$23.2 million. Included in the current liabilities is $10.7 million of current maturities of long-term debt, net of $26.6 million of debt discount associated with the initial fair value of related warrants and embedded derivatives and $18.3 million
associated with original issue discount and imputed interest. Cash on hand at March 31, 2009 was $2.7 million (not including $0.5 million restricted for outstanding letters of credit). The Company reported net losses from continuing operations
of $21.1 million and $0.7 million for the three-month periods ended March 31, 2009 and 2008, respectively. The results for 2009 include non-cash expenses of $0.8 million relating to the accounting treatment for stock and options, and a $0.2
million non-cash loss from the extinguishment of debt. The current quarter includes non-cash loss of $14.0 million from the change in fair value of embedded derivatives and warrants, and $2.8 million of amortization of debt discounts, interest
paid-in-kind and Original Issue Discount (OID). The results for 2008 include $2.0 million in non-cash expenses relating to the accounting treatment for stock and options, $0.9 million related to the amortization of debt discount, and a non-cash gain
on warrants and derivatives of $10.8 million. Cash used in operating activities from continuing operations was $1.8 million and $3.9 million for the three-month periods ended March 31, 2009 and December 31, 2008, respectively. The
Companys net working capital deficiency, recurring operating losses, and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. However, the successful delivery on major customer contracts
entered into since mid-2008 and continued success in closing these types of contracts will move the Company into profitability. In addition to those new contracts, Management believes that the inclusion of VDULs business and cash flows will
have a positive impact on future results. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

Notwithstanding the above, the Company continues to find support amongst its shareholders and other investors, as evidenced by the $35.8 million financing completed in 2008. This capital was used to fund the VDUL
acquisition, to strengthen its core logistics business model, and to support existing operations. See the Subsequent Event note regarding the 2009 financing activity.



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NOTE 4. Acquisition.

On November 14, 2008, CGSI, through its wholly-owned subsidiary Capital Growth Acquisition, Inc. (CGAI), entered into an Interest and Loan Purchase Agreement (the ILPA) with an administrator (Seller) for the
purchase of all of the outstanding membership interests (the Interests) of VDUL. For full details of the transaction, see the Companys Form 10-K for the year ended December 31, 2008.

The acquisition of Interests was accounted for using the purchase method in accordance with SFAS 141. Accordingly, the net assets were recorded at their
estimated fair values and operating results were included in the Companys consolidated financial statements from November 20, 2008, the date of acquisition. The purchase price, as adjusted, was allocated as of the Financial Closing and
resulted in goodwill of approximately $1.5 million. The purchase price allocation as of November 20, 2008 was as follows:



|                                                       |  |   |         |  
|------------------------------------------------------ |  | - | ------- | -
|Cash purchase price                                    |  | $ | 12,233  |  
|Seller debenture, as adjusted                          |  |   | 4,000   |  
|Less imputed interest at 19.0%                         |  |   | (1,503  | )
|Transaction Costs                                      |  |   | 250     |  
|Fair value of stock options transferred to Seller      |  |   | 290     |  
|                                                       |  |   |         |  
|Total purchase price                                   |  |   | 15,270  |  
|                                                       |  |   |         |  
|Assets acquired and liabilities assumed at fair value: |  |   |         |  
|Cash                                                   |  |   | 2,009   |  
|Accounts receivable, net                               |  |   | 5,709   |  
|Other current assets                                   |  |   | 224     |  
|Identifiable intangible assets                         |  |   | 19,360  |  
|Other assets                                           |  |   | 1,216   |  
|Accounts payable and accrued expenses                  |  |   | (10,456 | )
|Deferred revenue                                       |  |   | (4,272  | )
|                                                       |  |   |         |  
|Fair value of net assets acquired                      |  |   | 13,790  |  
|                                                       |  |   |         |  
|Goodwill                                               |  | $ | 1,480   |  
|                                                       |  |   |         |  

The following unaudited pro forma consolidated condensed results of continuing operations are
presented as though VDUL had been acquired as of January 1, 2008:



|                                                            |  |                                    |        |   |      |   |        |  
|----------------------------------------------------------- |  | ---------------------------------- | ------ | - | ---- | - | ------ | -
|                                                            |  | Three month periods endedMarch 31, |       
|                                                            |  | 2009                               |        |   | 2008 |  
|Revenues                                                    |  | $                                  | 16,242 |   |      | $ | 13,097 |  
|Loss from continuing operations                             |  |                                    | (3,739 | ) |      |   | (6,365 | )
|Basic and diluted loss per share from continuing operations |  |                                    | (0.02  | ) |      |   | (0.05  | )

The pro forma results of operations are not necessarily indicative of what actually would have
occurred had the VDUL acquisition occurred at an earlier date, nor are they necessarily indicative of future consolidated results. The Seller continued to support the operations of VDUL while marketing VDUL for sale. The historical results of
operations of VDUL in 2008 were impacted by Vanco plcs bankruptcy and the Sellers marketing of VDUL for sale.

NOTE 5. Discontinued
Operations.

During the first quarter of 2007, the Company determined the operations of Frontrunner and Nexvu were not core to the
Companys overall telecom logistics integrator strategy and therefore made the decision to dispose of these two entities. Since early 2007, the Company actively marketed the two companies. Development activity at Nexvu was ended effective
September 30, 2007 and shutdown costs of $0.2 million were accrued at that date to cover any residual costs, including severance and liquidation of fixed assets.

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



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

In accordance with SFAS 144, the Company has classified both of these entities as discontinued operations for the 2008
financial statements presented herein. Revenues for the three-month period ended March 31, 2008 were $1.0 million. Losses from discontinued operations for the three-month period ended March 31, 2008 were $0.1 million. The operating results
related to Frontrunner and Nexvu are included in discontinued operations of the Company through the sale date. Gain on sale of discontinued operations for the three-month period ended March 31, 2008 was $0.4 million.

The discontinued operations assets and liabilities are as follows:



|                                                     |  |                |   
|---------------------------------------------------- |  | -------------- | --
|                                                     |  | March 31, 2008
|                                                     |  | (Unaudited)   
|Current assets of discontinued operations            |  |                |   
|Other current assets                                 |  | $              | 3 
|                                                     |  |                |   
|Total current assets of discontinued operations      |  |                | 3 
|                                                     |  |                |   
|Non-current assets of discontinued operations        |  |                |   
|Other assets                                         |  |                | 10
|                                                     |  |                |   
|Non-current assets of discontinued operations        |  |                | 10
|                                                     |  |                |   
|Total assets from discontinued operations            |  | $              | 13
|                                                     |  |                |   
|Current liabilities of discontinued operations       |  |                |   
|Accounts payable                                     |  | $              | 6 
|Accrued expenses                                     |  |                | 10
|Deferred revenue, current portion                    |  |                | 14
|                                                     |  |                |   
|Total current liabilities of discontinued operations |  |                | 30
|                                                     |  |                |   
|Total liabilities of discontinued operations         |  | $              | 30
|                                                     |  |                |   

NOTE 6. Property and Equipment.

Property and equipment consists of the following:



|                           |  |               |        |   |                  |   |        |  
|-------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                           |  | March 31,2009 |        |   | December 31,2008 |  
|Furniture and fixtures     |  | $             | 343    |   |                  | $ | 343    |  
|Computer equipment         |  |               | 983    |   |                  |   | 963    |  
|Leasehold improvements     |  |               | 782    |   |                  |   | 782    |  
|Machinery and equipment    |  |               | 1,554  |   |                  |   | 1,478  |  
|                           |  |               |        |   |                  |   |        |  
|                           |  |               | 3,662  |   |                  |   | 3,566  |  
|Accumulated depreciation   |  |               | (2,205 | ) |                  |   | (2,018 | )
|                           |  |               |        |   |                  |   |        |  
|Net property and equipment |  | $             | 1,457  |   |                  | $ | 1,548  |  
|                           |  |               |        |   |                  |   |        |  

Depreciation of property and equipment was $0.2 million for the three-month periods ended
March 31, 2009 and 2008.

NOTE 7. Intangible Assets and Goodwill.

Intangible assets were acquired in business combinations. The assets have no significant residual values. All intangible assets are subject to amortization. Gross carrying amounts, accumulated amortization, and
amortization for the periods ending March 31, 2009 and December 31, 2008 for each major intangible asset class are as follows:



|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|-------------------- |  | ---------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | --- |  | - | ------
|                     |  |                              |  | March 31, 2009     
|                     |  | AmortizationPeriod in Years  |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | Net
|Developed technology |  | 5 to 15                      |  | $                   | 12,215 |                         | $ | (2,114 | )   |  | $ | 10,101
|Trade names          |  | 3                            |  |                     | 350    |                         |   | (275   | )   |  |   | 75    
|Customer base        |  | 6 to 15                      |  |                     | 16,510 |                         |   | (1,455 | )   |  |   | 15,055
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|Total                |  | 13.02 weighted average years |  | $                   | 29,075 |                         |   | (3,844 | )   |  | $ | 25,231
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       



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|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|-------------------- |  | ---------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | --- |  | - | ------
|                     |  |                              |  | December 31, 2008  
|                     |  | AmortizationPeriod in Years  |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | Net
|Developed technology |  | 5 to 15                      |  | $                   | 12,215 |                         | $ | (1,625 | )   |  | $ | 10,590
|Trade names          |  | 3                            |  |                     | 350    |                         |   | (246   | )   |  |   | 104   
|Customer base        |  | 6 to 15                      |  |                     | 16,510 |                         |   | (1,022 | )   |  |   | 15,488
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|Total                |  | 13.02 weighted average years |  | $                   | 29,075 |                         | $ | (2,893 | )   |  | $ | 26,182
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       

Amortization expense for the three-month periods ended March 31, 2009 and 2008 related to the
intangible assets was $0.9 million and $0.3 million, respectively.

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



|                           |  |   |       
|-------------------------- |  | - | ------
|Remaining 9 months of 2009 |  | $ | 2,841 
|2010                       |  |   | 3,434 
|2011                       |  |   | 3,206 
|2012                       |  |   | 2,810 
|2013                       |  |   | 2,527 
|Thereafter                 |  |   | 10,413
|                           |  |   |       
|Total                      |  | $ | 25,231
|                           |  |   |       

The Company did not recognize any impairment charges related to the long-lived assets of
continuing operations for the three-month period ended March 31, 2009 and the year ended December 31, 2008.

Goodwill is the
excess of cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment annually and will be tested for impairment between annual tests if an event occurs
or circumstances change that would indicate the carrying amount may be impaired. There have not been any current events or circumstances that would indicate an impairment of goodwill exists nor any changes in the carrying amount of goodwill for the
three-month period ended March 31, 2009 in the continuing operations.

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



|                          |  |                    |        |                   |   |                    |  |               |        |  |   |       
|------------------------- |  | ------------------ | ------ | ----------------- | - | ------------------ |  | ------------- | ------ |  | - | ------
|                          |  | March 31, 2009     |        | December 31, 2008
|                          |  | GrossCarrying Cost |        | AcquiredValue     |   | GrossCarrying Cost |  | AcquiredValue
|Acquisition of 20/20      |  | $                  | 8,810  |                   | $ | 8,810              |  | $             | 8,810  |  | $ | 8,810 
|Acquisition of CentrePath |  |                    | 1,754  |                   |   | 1,754              |  |               | 1,754  |  |   | 1,754 
|Acquisition of GCG        |  |                    | 1,949  |                   |   | 1,949              |  |               | 1,949  |  |   | 1,949 
|Acquisition of VDUL       |  |                    | 1,480  |                   |   | 1,480              |  |               | 1,480  |  |   | 1,480 
|                          |  |                    |        |                   |   |                    |  |               |        |  |   |       
|Total                     |  | $                  | 13,993 |                   | $ | 13,993             |  | $             | 13,993 |  | $ | 13,993
|                          |  |                    |        |                   |   |                    |  |               |        |  |   |       



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NOTE 8. Accrued Expenses.

Accrued expenses consist of the following:



|                               |  |               |       |                  |   |      
|------------------------------ |  | ------------- | ----- | ---------------- | - | -----
|                               |  | March 31,2009 |       | December 31,2008
|Compensation and payroll taxes |  | $             | 246   |                  | $ | 539  
|Interest expense               |  |               | 104   |                  |   | 103  
|Excise taxes                   |  |               | 521   |                  |   | 909  
|Professional services          |  |               | 1,136 |                  |   | 1,418
|Other expenses                 |  |               | 3,006 |                  |   | 2,002
|                               |  |               |       |                  |   |      
|Total accrued expenses         |  | $             | 5,013 |                  | $ | 4,971
|                               |  |               |       |                  |   |      

NOTE 9. Debt.

Debt consists of the following:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |               |        |                  |   |      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ---------------- | - | -----
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | March 31,2009 |        | December 31,2008
|Term loan, interest at the higher of prime or 5%, plus a margin of 14% (5% paid-in-kind), due November 2009, extends to November 2010
effective with the Final Closing, debt discount at issuance of $2.2 million, outstanding principal balance of $8.5 million, plus paid-in-kind interest of $0.2 million, net of unamortized debt discount of $1.8 million. At December 31, 2008, the
outstanding principal balance was $8.5 million, plus paid-in-kind interest of $0.1 million, net of unamortized debt discount of $2.0 million.                               |  | $             | 6,850  |                  | $ | 6,489
|Amended March Debentures, original issue discount and debt discount at issuance of $12.4 million and $18.4 million, respectively, due November
2009, extends to March 2015 effective with the Final Closing, outstanding principal balance of $28.0 million, net of unamortized original issue discount and debt discount of $11.4 million and $14.5 million, respectively. At December 31, 2008, the
outstanding principal balance was $29.9 million, net of unamortized original issue discount and debt discount of $12.1 million and $17.1 million, respectively. |  |               | 2,110  |                  |   | 695  
|November Debentures, original issue discount and debt discount at issuance of $5.9 million and $9.0 million, respectively, due November 2009,
extends to November 2015 effective with the Final Closing, outstanding principal balance of $14.9 million, net of unamortized original issue discount and debt discount of $5.6 million and $8.5 million, respectively. At December 31, 2008, the
outstanding principal balance was $14.9 million, net of unamortized original issue discount and debt discount of $5.8 million and $8.9 million, respectively.         |  |               | 792    |                  |   | 245  
|Seller Debenture, non-interest bearing, debt discount for imputed interest and conversion feature at issuance of $1.5 million and $2.0
million, respectively, due November 2009, extends to May 2011 effective with the Final closing and renewable monthly thereafter, outstanding principal balance of $4.0 million, net of unamortized debt discount of $3.1 million. At December 31, 2008,
the outstanding principal balance was $4.0 million, net of unamortized debt discount of $3.4 million.                                                                  |  |               | 904    |                  |   | 617  
|Unsecured loans from certain employees of Magenta, interest at 8.43%, due upon demand                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |               | 50     |                  |   | 60   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |               |        |                  |   |      
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |               | 10,706 |                  |   | 8,106
|Less: current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |               | 10,706 |                  |   | 8,106
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |               |        |                  |   |      
|Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | $             |       |                  | $ |     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |               |        |                  |   |      

All long-term debts are presented as current obligations as a result of the Company being in
default on certain reporting and administrative covenants. The long-term debt commitments including the maturity value of original issue discount securities are $55.6 million as of March 31, 2009. This amount does not include minimum interest
due on the term note per the default clause of the agreement.

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



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

The Term Loan matures November 2010. The Company may voluntarily prepay the Term Loan upon at least 30 days prior written
notice to the Borrowers. If the Term Loan is prepaid at any time within the first 12 months of the Term Loan, the Company is required to pay as an exit fee any shortfall to 12 months of interest, calculated by applying the then applicable interest
rate for the balance of the twelve-month period. The prepayment premium is 2% of the outstanding balance paid, or 1% of the $8.5 million original principal amount if the Company repays the Term Loan during months 12-18 or 19-24 from the origination
date, respectively. The Term Loan Agreement contains certain mandatory prepayments which, when made, do not trigger any of the prepayment premiums. If the Company sells assets outside of the ordinary course of business or incurs additional
indebtedness after the Financial Closing, the Company must use the net proceeds to pay down the Term Loan. Similarly, the Company has agreed that two-thirds of any collections it receives on its existing accounts receivable with its largest customer
as of September 30, 2008 will be used to pay down the Term Loan.

The Term Loan Agreement contains financial covenants that require
the Company to maintain a minimum cash balance and to achieve a minimum monthly recurring circuit revenue and margin. The Company was in compliance with these minimum requirements at December 31, 2008. Beginning with the first quarter of 2009,
the Company is subject to additional financial covenants related to a minimum ratio of EBITDA (defined as earnings before interest, taxes, depreciation, amortization, non-cash stock compensation and warrant expense and other items related to the
acquisition of VDUL) to fixed charges, as defined, and a maximum ratio of debt to EBITDA. As of March 31, 2009 the Company was not in compliance with the EBITDA covenant. The Term Loan Agreement also contains restrictive covenants that limit
additional indebtedness, liens, guarantees, acquisitions or other investments, the sale or disposal of assets outside the ordinary course of business, payments on other indebtedness, dividends or other capital distributions, stock repurchases,
capital expenditures or new capital leases and compensation increases to certain members of the Companys management. The Company has various reporting requirements under the Term Loan Agreement. The Term Loan Agreement contains an affirmative
covenant requiring the Company to increase its authorized common shares by 12 million within 75 days from the Financial Closing. The Term Loan Agreement also contains a default provision if the Final Closing does not occur by February 18,
2009. During the first quarter of 2009, the Company obtained waivers from its Senior Lender for its failure to provide timely reporting and an extension of time to complete the Final Closing and the 12 million authorized share increase.

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

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

The remaining March Debentures were held by two
affiliated holders, who held a total of $3.0 million of original principal amount. The two affiliated holders subsequently reduced their original principal amount to an aggregate outstanding balance of $2.5 million through conversions of their
principal to common stock. Pursuant to the Waiver Agreement, the Company exchanged their March Debentures for $2.9 million of Amended March Debentures (the Tranche 2 Amended March Debentures), which mirror the terms of the Tranche 1 Amended March
Debentures. The principal amount of the Tranche 2 Amended March Debentures is comprised of the $2.5 million outstanding balance of the March Debentures plus the sum of the following: (i) liquidated damages related to the Companys failure
to timely complete the registration of its common stock, as discussed below, equal to 12% of the original principal amount, or $0.4 million and (ii) legal fees incurred by the two affiliated holders in negotiation and documentation of the
revised transactions (collectively, the Tranche 2 Add-on Amount). In addition, at the Financial Closing, the Company made a one-time payment to the two affiliated holders in the aggregate of $0.9 million, which was the sum of the interest accrued on
the March Debentures up to the amendment date and the remainder of the interest that would have accrued under their March Debentures.



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

The holders of the Amended March Debentures retain the right at any time to convert up to an aggregate of $21.5 million of the face amount into common
stock of the Company at $0.24 per share or up to 89.5 million shares on an as converted basis. During the quarter ended March 31, 2009, holders converted $1.9 million of the Amended March Debentures into 7.8 million shares of common stock. During
2008, holders converted $1.0 million of the Amended March Debentures into 4.3 million shares of common stock. The write off of unamortized discount at the time of conversion of $1.8 million during the period ended March 31, 2009 is included in
loss on extinguishment of debt. During 2008, $1.0 million of unamortized debt discount at the time of conversion is included in extinguishment of debt. The warrants originally issued with the March Debentures, discussed below, remain outstanding.

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

The Company issued the March Debentures on March 11, 2008 through a private placement. The March Debentures were senior secured convertible
debentures with an aggregate principal amount of $19.0 million and had an interest rate of 5% in the first and second years and 10% in the next three years. Interest was payable quarterly in arrears and, at the Companys option, could be paid
in cash or in shares of common stock pursuant to certain prescribed calculations to determine value. A late fee of 16% per annum was payable with respect to any late payments. In connection with the issuance of the March Debentures, the Company
incurred debt issuance costs of $2.4 million. The remaining unamortized debt issuance costs as of the date of extinguishment of the March Debentures of $1.1 million were written-off to loss on extinguishment of debt in 2008.

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

Prior to the amendment and
restatement of the March Debentures, $0.6 million of original principal amount of March Debentures were converted into 1,420,000 shares of common stock. Pursuant to the terms of the March Debentures, the Company made additional interest payments on
the converted debt of $0.2 million. The write-off of unamortized debt discount and deferred debt costs at the time of debt conversion of $0.5 million and $0.1 million, respectively, and the additional payments are included in interest expense. The
write-off of the fair value of the embedded derivative liability at the time of conversion of $0.2 million was included in net (gains) losses on extinguishment in 2008.



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Pursuant to Registration Rights Agreement, on April 29, 2008, the Company filed a registration
statement with the Securities Exchange Commission (SEC) to register all or the maximum amount permitted by the SEC of the common stock underlying the March Debentures and warrants (subject to the obligation to file one or more subsequent
registration statements as necessary to register the remaining unregistered shares until all of the underlying securities are eligible for resale under Rule 144 without volume limitation), which contains certain liquidated damages if not timely
filed. The registration statement was to be filed on the earlier of the fifteenth calendar day following the date it files its annual report on Form 10-KSB or May 1, 2008 and was to be declared effective no later than sixty days following the
filing date (or ninety days following the filing date if the registration statement undergoes a full review by the SEC). Failure to meet any of these obligations would subject the Company to liquidated damages equal to 2% of the original
principal amount of the March Debentures for each month in which it occurs and on each monthly anniversary thereof, subject to an aggregate cap of 12% of the original principal amount of the March Debentures, payable in cash unless otherwise
agreeable to the Company and the March Debenture holder (and interest accrues on unpaid liquidated damages at 16% per annum).

The SEC
elected to undertake a full review of the Companys registration statement. Due to the complexity of the issues raised in that review and a resulting restatement of the Companys consolidated financial statements for the year ended
December 31, 2006, the Companys registration statement was not declared effective within the deadline. Accordingly, the Company accrued $2.3 million, the maximum amount of the related liquidated damages.

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

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

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

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

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



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

The Seller Debenture is convertible into shares of the Companys common stock at a conversion rate of $0.24 per share, or 12.5 million shares.
The Seller Debentures are convertible at any time at the option of the Seller, but not before the Companys Authorized Share Increase. The Company determined that the conversion feature of the Seller Debenture was an embedded derivative. The
estimated fair value of the embedded derivative as of the issuance date of the Seller Debenture, adjusted for the probability of the timing of the Authorized Share Increase, of $2.0 million was recorded as debt discount and an increase to embedded
derivative liability. The Company determined the fair value of the embedded derivative using the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.22 per share, expected volatility of 141.6%, risk-free
interest rate of 1.0%, expected term of 2.5 years and no dividends.

Junior Secured Facility: On January 19, 2007, the Company
entered into an agreement with a group of lenders that provided a $10.0 million junior secured facility. At closing, the Company was initially advanced $6.4 million under the facility and subsequently borrowed an additional $2.9 million during 2007,
bringing the aggregate outstanding borrowing under the facility to $9.3 million. An additional $0.4 million was borrowed under a short-term bridge facility as described below. In connection with certain borrowings under the junior secured facility,
the Company incurred debt issuance costs and fees of $0.3 million. The facility had a two-year term with simple interest at 12% per annum and all principal and interest due at maturity. The junior secured facility included a junior lien on the
Companys assets and the assets of its subsidiaries, which was subordinated to the senior secured line of credit facility and any refinancing of that facility.

The original principal amount issued pursuant to the junior secured facility was convertible at the holders option into Series AA preferred stock (or following its conversion to common stock, then the conversion
feature relates to common stock) at a price per share equal to a 20% discount to the trailing ten-day average for the Companys common stock as of the day immediately preceding the date of conversion. The agreement for the junior secured
facility was amended effective June 15, 2007 to: (i) eliminate the originally applicable floor of $0.65 and a ceiling of $1.25 per share for the conversion of loan amounts to equity; (ii) permit the cashless exercise of warrants under
the facility in lieu of an obligation to register the shares of capital stock underlying the warrants; and (iii) provide that with respect to advances under the facility after June 15, 2007, the warrant coverage was increased to 90.0
shares of Series AA preferred stock, or 200,000 shares of common stock, on an as converted basis, at an effective price of $0.45 per share for each $100,000 of principal amount advanced. Those lenders funding the facility on or before
January 22, 2007 received a warrant to purchase up to 67.5 shares of Series AA preferred stock for each $100,000 of monies advanced, or 150,000 shares of common stock on an as converted basis, at an effective price of $0.45 per share for each
$100,000 of principal amount advanced. In connection with the June 15, 2007 amendment, the Company obtained additional funding of $3.0 million and issued warrants for the purchase of 5,850,000 shares of common stock. After the amendment and on
an as converted basis, the warrants issued under the junior secured facility were exercisable for a total of 15,432,658 shares of the Companys common stock. The warrants under the junior secured facility expire in December 2009.

The fair value of the warrants issued to the junior secured lenders as of January 2007, on an as converted basis, was $7.6 million, and the aggregate
fair value of the additional warrants issued in connection with the June amendment was $3.3 million. The Company determined that the conversion features were embedded derivatives. The total fair value of the warrants and related embedded derivatives
as of the respective issuance dates was $10.9 million and $7.4 million, respectively, and was recorded as additional debt discount and an increase to liabilities for warrants to purchase common stock and embedded derivative liability, respectively.
The aggregate initial fair value of the warrants and embedded derivatives of $18.3 million exceeded the $9.3 million original principal amount of the junior secured facility by $9.0 million, which was recognized immediately as interest expense. The
fair values were determined using the Black-Scholes pricing model. The following assumptions were used to value the initial warrants, on an as converted basis: common stock fair value of $1.02 per share, expected volatility of 100.0%, risk-free
interest rate of 4.5%, expected term of 3.0 years and no dividends. The following average assumptions were used to value the additional warrants, on an as converted basis: common stock fair value of $0.68 per share, expected volatility of 126.2%,
risk-free interest rate of 3.9%, expected term of 4.2 years and no dividends. The following average assumptions were used to value the embedded derivatives: common stock fair value of $0.88 per share, expected volatility of 116.2%, risk-free
interest rate of 4.9%, expected term of 2.6 years and no dividends.

During the first quarter of 2008, $7.6 million of outstanding
principal and $0.7 million of accrued interest under the junior secured facility were converted into 19,486,324 shares of common stock. The remaining outstanding principal and accrued interest of $1.7 million and $0.1 million, respectively, were
repaid with proceeds from the issuance of the March Debentures. The write-off of the aggregate unamortized debt discount and deferred debt costs at the time of debt conversion and repayment of $5.2 million and $0.1 million, respectively, are
included in loss on extinguishment of debt. The aggregate fair value of the embedded derivative liability for the junior secured facility at the time of debt conversion and repayment of $8.3 million was also written-off to net (gain) loss on
extinguishment of debt.



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Short-Term Bridge Facility: In August 2007, the Company issued $0.4 million of unsecured,
short-term promissory notes under a bridge facility authorizing the issuance of up to $1.0 million of units of short-term promissory notes coupled with a warrant to purchase up to 125,000 shares of common stock for each $0.1 million of notes funded
(Units). The promissory notes had an annual interest rate of 12% and an original maturity of September 2007, which was ultimately extended until the issuance of the March Debentures when the promissory notes were repaid. The Company issued warrants
to purchase an aggregate of 437,500 shares of common stock exercisable at $0.55 per share and expiring in December 2010. The warrants had a grant-date fair value of $0.2 million determined using the Black-Scholes pricing model with the
following assumptions: common stock fair value of $0.70 per share, expected volatility of 90.0%, risk-free interest rate of 4.9%, expected term of 3.4 years and no dividends. The fair value of the warrants was recorded as a decrease to the carrying
value of the Short-Term Bridge Facility, or debt discount, and an increase to liabilities for warrants to purchase common stock.

During
the first quarter of 2008, $0.1 million of outstanding principal under the short-term bridge facility was converted into 105,566 shares of common stock. The remaining $0.1 million of outstanding principal was repaid with proceeds from the issuance
of the March Debentures. The write-off of the aggregate unamortized debt discount at the time of debt conversion and repayment of $0.1 million is included in loss on extinguishment of debt.

NOTE 10. Liability for Warrants and Embedded Derivatives.

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

The embedded derivative liability is re-valued at each balance sheet date and marked to fair value with the corresponding
adjustment recognized as gain or loss on warrants and derivatives in the statement of operations. As of March 31, 2009 and December 31, 2008, the fair value of the derivatives embedded in the convertible debt was $23.8 million
and $16.9 million, respectively. The assumptions used to value the embedded derivative liability at March 31, 2009 were: exercise price of $0.24, weighted average life of 5.8 years, volatility 146.4%, and risk free interest rate of 1.0%. At December
31, 2008, the assumptions used were: exercise price of $0.24, weighted average life of 6.1 years, volatility 145.3%, and risk free interest rate of 1.0%.

The Companys outstanding warrants also meet the definition of a liability based on the assessment above. The warrants are classified as a liability in the balance sheet (see liabilities for warrants to
purchase common stock) at fair value. The warrant liability is revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statements
of operations. As of March 31, 2009 and December 31, 2008, the fair value of the warrants was $18.1 million and $12.2 million, respectively. The assumptions used to value the warrant liability at March 31, 2009 were: exercise price of
$0.24, weighted average life of 5.6 years, volatility 151.0%, and risk free interest rate of 2.7%. At December 31, 2008, the assumptions used were: exercise price of $0.26, weighted average life of 3.6 years, volatility 145.3%, and risk free
interest rate of 0.8%.

The embedded derivatives and warrants associated with the Term Loan, the Amended March Debentures, the November
Debentures, and the Seller Debenture were valued using a Black-Scholes Model. The right to convert a portion of the debt to common stock, which creates the embedded derivative liability and certain warrants can only be exercised upon an increase in
the Companys authorized shares. Based on a management survey of available studies relative to shareholder resolution approvals, these valuations have been reduced 25% as a result of the uncertainty related to the share increase authorization.

NOTE 11. Warrants.

At March 31,
2009 and December 31, 2008, respectively, the Company had 167.8 million and 181.1 million warrants outstanding to purchase its common stock. These warrants were issued in connection with debt and equity offerings and in lieu of cash payments
for services provided and became exercisable when issued. The warrants expire two to five years from date of issuance. Warrants issued in connection with the November Debentures expire five years from the date of the authorized share increase.



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The table below summarizes the warrant expiration dates as of March 31, 2009:



|                           |  |                                 |  |                          |  |                               
|-------------------------- |  | ------------------------------- |  | ------------------------ |  | ------------------------------
|Expiration Date            |  | Numberof Warrants(in thousands) |  | Range of Exercise Prices |  | Weighted AverageExercise Price
|2009                       |  | 23,977                          |  | $0.27-$0.31              |  | 0.292                         
|2010                       |  | 675                             |  | $0.35-$0.36              |  | 0.317                         
|2011                       |  | 7,846                           |  | $0.45-$0.70              |  | 0.576                         
|2012                       |  | 13,000                          |  | $0.15-$0.27              |  | 0.204                         
|2013                       |  | 94,063                          |  | $0.24                    |  | 0.240                         
|2014                       |  | 28,203                          |  | $0.24                    |  | 0.240                         
|                           |  |                                 |  |                          |  |                               
|Total warrants outstanding |  | 167,764                         |  |                          |  | 0.261                         
|                           |  |                                 |  |                          |  |                               

All outstanding warrants expire no later than December 31, 2014.

Warrant activity from December 31, 2008 through March 31, 2009 is as follows:



|                                 |  |                                 |   |  |                                |       |                                                   |     |                                |   |   
|-------------------------------- |  | ------------------------------- | - |  | ------------------------------ | ----- | ------------------------------------------------- | --- | ------------------------------ | - | --
|                                 |  | Numberof Warrants(in thousands) |   |  | Weighted AverageExercise Price |       | Weighted AverageRemaining ContractualLife (Years) |     | AggregateIntrinsicValue ($000)
|Outstanding at December 31, 2008 |  | 181,083                         |   |  | $                              | 0.261 |                                                   |     |                                |   |   
|Warrants issued                  |  |                                |   |  |                                |      |                                                   |     |                                |   |   
|Exercised                        |  |                                |   |  |                                |      |                                                   |     |                                |   |   
|Forfeited/Cancelled              |  | (13,319                         | ) |  |                                | 0.270 |                                                   |     |                                |   |   
|                                 |  |                                 |   |  |                                |       |                                                   |     |                                |   |   
|Outstanding at March 31, 2009    |  | 167,764                         |   |  |                                | 0.261 |                                                   | 3.8 |                                | $ | 65
|                                 |  |                                 |   |  |                                |       |                                                   |     |                                |   |   

There were no warrants issued or exercised and a total of 13.3 million warrants expired
during the three month period ended March 31, 2009.

During the three-month period ended March 31, 2008, 5.0 million
warrants were exercised using the cashless method, 2.4 million shares were issued, and 2.6 million warrants were cancelled. The intrinsic value of the warrants exercised was $1.3 million.

NOTE 12. Share-Based Compensation.

Long-Term Incentive Plans

The Company has adopted various long-term incentive plans under which, at December 31, 2006, 7,505,000 shares of common stock and
equivalents were authorized to be granted and an additional 56,330,000 common stock, stock options, or other equity based compensation units were authorized during 2007. During 2007, the board of directors authorized an additional 56,330,000 shares
under the agreements. At December 31, 2007, these plans authorized a total of 70,335,000 shares of common stock, stock options, or other equity based compensation units for issuance.

On May 1, 2008, the Company adopted a 2008 Long-Term Incentive Plan (Plan) for providing stock options and other equity-based
compensation awards to its employees and other persons assisting the Company. Initially, up to 22,000,000 shares of common stock are issuable under the Plan. The Plan also contains an evergreen provision such that each year the number of
shares of common stock issuable under the Plan shall automatically increase, so that the amount of shares issuable under the Plan is equal to fifteen percent (15%) of the total number of shares of common stock outstanding on the last trading
day in December of the prior calendar year. In no event shall the number of shares of common stock issuable under the Plan exceed 30,000,000 shares. The Plan is to be administered by the Companys Compensation Committee or, in its absence, the
Board of Directors. Awards under the Plan have a term of up to ten years from the date of grant.

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



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Executive Stock Option Agreements

From time to time, the Company provides for the issuance of share-based compensation in conjunction with employment agreements or special arrangements with certain of its executives and directors. As of March 31,
2009, the Company has authorized up to 66,015,000 shares to be issued under these arrangements.

Under employment agreements with the four
current officers and one former senior executive of the Company, there are 26,300,000 options outstanding to acquire common stock of the Company at exercise prices ranging between $0.185 and $0.98. Approximately 3,000,000 options were issued during
2006 and 23,300,000 were issued during 2007, zero in 2008 and 2009. All of these options are subject to performance conditions. These performance option agreements are designed to incent the attainment of certain revenue objectives and 3,300,000
will vest on the following basis: (i) 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; and (ii) 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 Company achieving the target goals. In accordance with the terms of the former Chief Executive Officers employment agreement, 1,000,000 shares
immediately vested on his separation date of May 18, 2007. No other stock options have vested under these agreements.

In February
2008, a prior executive, converted options to acquire 1,000,000 shares at an exercise price of $0.185 per share in a cashless exercise, resulting in the issuance of 699,675 shares of common stock. Separately, another option holder exercised 150,000
options on a cashless basis resulting in 104,951 shares being issued for an aggregate of 804,626 shares issued upon cashless common stock option exercises during 2008.

Activity under the stock option plans and board approved stock grants with time based vesting for December 31, 2008 through March 31, 2009 is as follows:



|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|-------------------------------- |  | -------------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -
|                                 |  | Shares(in thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue
|Outstanding at December 31, 2008 |  | 32,573               |   |  | $                            | 0.502 |                                                 |     |                         |   |  
|Granted                          |  | 400                  |   |  |                              | 0.240 |                                                 |     |                         |   |  
|Exercised                        |  |                     |   |  |                              |      |                                                 |     |                         |   |  
|Forfeited/cancelled              |  | (387                 | ) |  |                              | 0.686 |                                                 |     |                         |   |  
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|Outstanding at March 31, 2009    |  | 32,586               |   |  |                              | 0.496 |                                                 | 7.4 |                         | $ | 
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|Exercisable at March 31, 2009    |  | 25,553               |   |  | $                            | 0.463 |                                                 | 7.6 |                         | $ | 
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  

Time based awards generally vest 25% upon issuance and 25% on the successive 3 anniversary dates
of the award. The Company estimates the fair value of stock option grants using the Black-Scholes pricing model with the assumptions detailed below. The weighted average grant-date fair value of options with time-based vesting granted during the
three-month periods ended March 31, 2009 and 2008 was $0.137 and $0.555, respectively. For the three-month periods ended March 31, 2009 and 2008, respectively, the Company recognized compensation expense for stock option awards totaling
$0.4 million and $1.6 million, respectively. At March 31, 2009, unamortized compensation associated with time-based options totaled $4.4 million with a remaining weighted average amortization period of 1.6 years

Activity under the stock option plans and board approved stock grants with performance-based vesting for the three-month period ended March 31, 2009
is as follows:



|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|-------------------------------- |  | -------------------- |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -
|                                 |  | Shares(in thousands) |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue
|Outstanding at December 31, 2008 |  | 31,050               |  | $                            | 0.355 |                                                 |     |                         |   |  
|Granted                          |  |                     |  |                              |      |                                                 |     |                         |   |  
|Exercised                        |  |                     |  |                              |      |                                                 |     |                         |   |  
|Forfeited/cancelled              |  |                     |  |                              |      |                                                 |     |                         |   |  
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|Outstanding at March 31, 2009    |  | 31,050               |  |                              | 0.355 |                                                 | 8.1 |                         | $ | 
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|Exercisable at March 31, 2009    |  | 1,000                |  | $                            | 0.700 |                                                 | 7.4 |                         | $ | 
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  



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Performance based awards generally vest 33% to 50% upon attaining targeted revenue growth, gross profit
margins and continued employment with the Company. The Company estimates the fair value of stock option grants using the Black-Scholes pricing model. There were no performance options issued during the first quarter of 2009. For the three-month
periods ended March 31, 2009 and 2008, respectively, the Company recognized compensation expense for performance-based stock option awards totaling $0.4 million and $0.4 million, respectively. At March 31, 2009, unamortized compensation
associated with performance-based options totaled $14.0 million with a remaining weighted average amortization period of 1.6 years.

The
assumptions used to calculate the fair value of stock option grants issued in the three-month period ending March 31, 2009 are as follows:



|                                         |  |                                        |  |                            
|---------------------------------------- |  | -------------------------------------- |  | ---------------------------
|                                         |  | Three-month period endedMarch 31, 2009 |  | Year endedDecember 31, 2008
|Expected volatility                      |  | 146.4%                                 |  | 130.8%-149.8%              
|Weighted-average expected volatility     |  | 146.4%                                 |  | 140.1%                     
|Expected term (in years)                 |  | 6.0                                    |  | 6.3                        
|Weighted-average risk-free interest rate |  | 1.79%                                  |  | 2.57%                      
|Expected dividends                       |  |                                       |  |                           

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

There were no options exercised during the first quarter of 2009. No tax benefit has been recorded related to stock-based compensation expense.

NOTE 13. Shareholders Equity (Deficit).

The Companys authorized common stock entitles holders to one vote for each share held of record. Effective June 25, 2007, an amendment to the Companys articles of incorporation increased the authorized shares of the
Companys common stock, par value $.0001 par value per share, from 25.0 million shares to 350.0 million shares (the 2007 Authorized Share Increase). During 2009, the Company intends to obtain an additional amendment to its articles of
incorporation to increase the authorized shares of common stock to not less than 990.0 million shares.

During 2009, the Company
issued 7.8 million shares of common stock upon the conversion of $1.9 million of outstanding principal under the amended and restated march debentures.

During 2008, the Company issued 25,312,890 shares of common stock in connection with the conversion of debt. During the first quarter of 2008, 19,591,890 shares of common stock were issued upon the conversion of $7.6
million of outstanding principal and $0.7 million of accrued interest under the junior secured facility and short-term bridge loan. The conversion was based upon a 20% discount to the ten-day average closing price of the Companys common stock
for the last ten trading days ended as of the conversion date (ten-day trailing average), which resulted in conversion prices of between $0.418 and $0.504. The Company also issued 5,721,000 shares in connection with the conversion of $0.6 million
original principal amount of March Debentures and $1.0 million of Amended March Debentures during 2008. The shares issued were based on a conversion price of $0.50 per share on $0.4 million of the original principal amount and all remaining shares
were based on a conversion price of $0.24 per share. See the Debt note for additional information about debt issued with conversion features and warrants.

From time to time, in lieu of, or in addition to cash, the Company issues shares of its common stock as a contract incentive or as payment for non-employee services. The amount recorded for such shares issued is based
on the closing price of the Companys common stock on the effective date of the stock issuance or the agreement and is included with professional services on the Companys consolidated statements of operations. During the years ended
December 31, 2008 and 2007, the Company entered into non-employee services agreements and as a contract incentive agreed to issue common stock of 2.0 million shares and 5.0 million shares, respectively. The shares were earned as of
the effective date of the agreements and, except for a breach of contract, are non-forfeitable. Accordingly, the Company recorded expense in 2008 and 2007 of $0.4 million and $2.0 million, respectively, based on the closing price per share on the
effective date of the agreement of $0.22 and $0.40, respectively. The 2.0 million shares under the 2008 contract incentive, although earned, are not issuable until the Authorized Share Increase expected in 2009. No agreements have been entered
into in 2009.



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##### Table of Contents

NOTE 14. Income Taxes.

Effective January 1, 2007, the Company adopted FIN 48, which prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 did not have a material impact on the financial statements. Additionally,
the adoption of FIN 48 had no impact on retained earnings or the gross liability for uncertain tax positions as the Company had no uncertain tax positions as of March 31, 2009 and December 31, 2008.

The Company did not have any material unrecognized tax benefits as of the date of the adoption. The Company recognizes potential accrued interest and
penalties related to unrecognized tax benefits as a component of income tax expense. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the
overall income tax provision. The Company recorded no interest and penalties during the three month period ended March 31, 2009 and the year ended December 31, 2008 nor had any accrued interest or penalties as of these dates. The Company
is no longer subject to U.S. Federal tax examinations by tax authorities for tax years before 2005. The Company is open to state tax audits until the applicable statutes of limitations expire.

Due to estimated tax losses at March 31, 2009 and December 31, 2008 on a consolidated as well as separate company basis, there is no income tax
provision.

Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has Federal net operating loss (NOL) carryforwards of $53.8 million in the United States (U.S.) and foreign (U.K.) NOL carryforwards of $6.1
million at March 31, 2009 and December 31, 2008. The Federal NOL and credit carryforwards have been reduced to reflect approximate annual limitations under Internal Revenue Code Sections 382 and 383 as a result of the various subsidiary
stock acquisitions in prior years. It is likely subsequent equity changes have since occurred to further limit the utilization of these NOLs and credit carryforwards. A formal analysis of Internal Revenue Code Section 382 impact on NOL
utilization, as well as U.K. NOL utilization rules, will be required when the Company begins to utilize the NOLs. If not used, the Federal NOLs begin to expire in 2011.

Realization of the NOL carryforwards, tax credits, and other deferred tax temporary differences is contingent on future taxable earnings. The deferred tax asset was reviewed for expected utilization using a more
likely than not approach by assessing the available positive and negative evidence surrounding its recoverability.

The Company has
recorded a full valuation allowance against the net deferred tax assets (whether acquired or otherwise generated) due to the uncertainty of future taxable income, which is necessary to realize the benefits of the deferred tax assets.

The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portions thereof, to be utilized and will reduce
the valuation allowance appropriately at such time when it is determined that the more likely than not criteria is satisfied. Reversal of the valuation allowance for those acquired deferred tax assets will generally be recorded on earnings as a
reduction to income tax expense.

NOTE 15. Income (Loss) per Share.

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



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|                                                                     |  |                                    |             |   |                 |   |             |  
|-------------------------------------------------------------------- |  | ---------------------------------- | ----------- | - | --------------- | - | ----------- | -
|                                                                     |  | Three-month periodsended March 31, |            
|                                                                     |  | 2009                               |             |   | 2008As Restated |  
|Diluted EPS Computation                                              |  |                                    |             |   |                 |   |             |  
|Loss from continuing operations                                      |  | $                                  | (21,059     | ) |                 | $ | (728        | )
|                                                                     |  |                                    |             |   |                 |   |             |  
|                                                                     |  |                                   
|Add back:                                                            |  |                                    |             |   |                 |   |             |  
|Debenture interest expense                                           |  |                                    |            |   |                 |   |            |  
|Debt discount and gain on derivatives and warrants                   |  |                                    |            |   |                 |   | (7,841      | )
|                                                                     |  |                                    |             |   |                 |   |             |  
|Total add-backs                                                      |  |                                    |            |   |                 |   | (7,841      | )
|                                                                     |  |                                    |             |   |                 |   |             |  
|                                                                     |  |                                   
|Loss from continuing operations, adjusted                            |  |                                    | (21,059     | ) |                 |   | (8,569      | )
|Income (loss) from discontinued operations                           |  |                                    |            |   |                 |   | 308         |  
|                                                                     |  |                                    |             |   |                 |   |             |  
|Net income (loss) applicable to common shareholders  diluted        |  | $                                  | (21,059     | ) |                 | $ | (8,261      | )
|                                                                     |  |                                    |             |   |                 |   |             |  
|                                                                     |  |                                   
|Weighted average common shares outstanding  basic                   |  |                                    | 159,304,351 |   |                 |   | 135,303,454 |  
|                                                                     |  |                                    |             |   |                 |   |             |  
|                                                                     |  |                                   
|Dilutive effect of common stock equivalents  options                |  |                                    |            |   |                 |   |            |  
|Dilutive effect of common stock equivalents  warrants               |  |                                    |            |   |                 |   | 26,608,179  |  
|Dilutive effect of common stock equivalents  convertible debentures |  |                                    |            |   |                 |   |            |  
|                                                                     |  |                                    |             |   |                 |   |             |  
|Total dilutive effect of common stock equivalents                    |  |                                    |            |   |                 |   | 26,608,179  |  
|                                                                     |  |                                    |             |   |                 |   |             |  
|                                                                     |  |                                   
|Weighted average common shares outstanding  diluted                 |  |                                    | 159,304,351 |   |                 |   | 161,911,633 |  
|                                                                     |  |                                    |             |   |                 |   |             |  
|                                                                     |  |                                   
|Loss from continuing operations                                      |  | $                                  | (0.13       | ) |                 | $ | (0.05       | )
|Loss from discontinued operations                                    |  |                                    | 0.00        |   |                 |   | 0.00        |  
|                                                                     |  |                                    |             |   |                 |   |             |  
|Net loss per share of common stock  diluted                         |  | $                                  | (0.13       | ) |                 | $ | (0.05       | )
|                                                                     |  |                                    |             |   |                 |   |             |  

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

Potentially dilutive shares, which were excluded from the above calculations in 2009 and
2008, as their inclusion would have had an anti-dilutive effect on the net income (loss) per share, are as follows:



|                       |  |                                     |  |                
|---------------------- |  | ----------------------------------- |  | ---------------
|                       |  | Three-month periods ended March 31,
|                       |  | 2009                                |  | 2008As Restated
|Stock options          |  | 63,635,787                          |  | 66,408,953     
|Warrants               |  | 167,764,295                         |  | 57,147,583     
|Convertible debentures |  | 195,269,005                         |  | 19,031,667     
|                       |  |                                     |  |                
|                       |  | 426,669,087                         |  | 142,588,203    
|                       |  |                                     |  |                

NOTE 16. Commitments and Contingencies.

Operating and Capital Leases: The Company has entered into or assumed certain non-cancelable operating and capital lease agreements related to
office and warehouse space, equipment, and vehicles. Total rent expense under operating leases, net of sublease income, was $0.3 million and $0.2 million for the three-month periods ended March 31, 2009 and 2008, respectively.



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



|                           |  |                 |      
|-------------------------- |  | --------------- | -----
|                           |  | OperatingLeases
|Remaining 9 months of 2009 |  | $               | 793  
|2010                       |  |                 | 1,008
|2011                       |  |                 | 856  
|2012                       |  |                 | 331  
|2013                       |  |                 | 134  
|Thereafter                 |  |                 |     
|                           |  |                 |      
|Total                      |  | $               | 3,122
|                           |  |                 |      

In February 2009, after numerous attempts to resolve material open accounts receivable ($10.2
million) with a major customer, the Company filed a suit in a foreign court. The Company had exhausted all efforts to cause mediation or other forms of compromise and was left with such collections action as its last resort. The customer has
denied the claim and has filed a counter claim seeking return of funds paid under the contract. Management believes the counter claim to be without merit.

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

NOTE 17. Related Parties.

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

Aequitas Capital Management, Inc., together with its
affiliates Aequitas Catalyst Fund, LLC, Aequitas Hybrid Fund, LLC and Aequitas Commercial Finance, LLC (collectively, Aequitas), owned approximately 9% of the Companys outstanding common stock and held warrants to purchase 14.8 million
shares of the Companys common stock as of March 31, 2009. During the three-month period ended March 31, 2009, in connection with advisory services provided, the Company paid Aequitas fees of $0.03 million.

During 2008, Aequitas purchased $2.0 million of the Companys November Debentures, convertible into 8.3 million shares of common stock and
received warrants to purchase 6.3 million shares of the Companys common stock. Aequitas applied to the purchase amount for the November Debentures $0.5 million due under a bridge loan made to the Company in September 2008. In addition, in
connection with other advisory services provided during 2008, the Company paid Aequitas advisory fees of $1.6 million and issued warrants to purchase 1.5 million shares of the Companys common stock at an exercise price of $0.24 per share.
The warrants had a grant date fair value, adjusted for the probability of the timing of the Authorized Share Increase, of $0.2 million. The Company determined the fair value of the warrants using the Black-Scholes pricing model with the following
assumptions: common stock fair value of $0.20 per share, expected volatility of 143.8%, risk-free interest rate of 2.1%, expected term of 5.1 years, and no dividends.

Capstone Investments, Inc. (Capstone) owned less than 1% of the Companys outstanding common stock and held warrants to purchase 12.5 million shares of the Companys common stock as of March 31,
2009. During 2008, Capstone provided financial advisory services to the Company in connection with the November Debentures and Term Loan. As consideration for these services, the Company issued to Capstone warrants to purchase 5.1 million
shares of common stock at an exercise price of $0.24 per share and paid Capstone $1.4 million in fees. The warrants had a grant date fair value, adjusted for to the probability of the timing of the Authorized Share Increase, of $0.8 million. The
Company determined the fair value of the warrants using the Black-Scholes pricing model with the following assumptions: Common stock fair value of $0.22 per share, expected volatility of 141.8%, risk-free interest rate of 2.1%, expected term of 5.1
years, and no dividends The Company paid $0.7 million of the fees to Capstone in cash and applied the remaining $0.7 million to Capstones purchase of $0.7 million of November Debentures. The November Debentures are convertible into
2.9 million shares of common stock and include warrants to purchase 2.2 million shares of common.

In March 2008, in connection
with the issuance of the March Debentures, the Company paid Capstone an advisory fee of $1.3 million and issued to Capstone warrants to purchase 2.7 million shares of common stock at an exercise price of $0.24 per share. The warrants had a
grant-date fair value of $1.5 million, determined using the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.60 per share, expected volatility of 147.2%, risk-free interest rate of 2.5%, expected term of 5
years and no dividends.

NOTE 18. Business Concentration.

During the three-month period ended March 31, 2009, a major customer represented $2.0 million (13%) of total revenues, while a different major customer represented $3.9 million (41%) of total revenues for the
three-month period ended March 31, 2008.

At March 31, 2009, three major customers represented $0.8 million (12%), $0.8 million (12%), and
$0.7 million (11%) of accounts receivable. At December 31, 2008, a major customer represented $1.0 million (17%) of accounts receivable.



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NOTE 19. Geographic and Other Information.

Revenues generated outside the United States during the three-month periods ended March 31, 2009 and 2008, respectively, totaled $0.2 million and
$4.2 million, respectively. Substantially all of the Companys international revenue was generated in the European Union and Canada. As of March 31, 2009 and December 31, 2008, the Companys international identifiable assets
outside the United States totaled less than $0.4 million for both periods. All of the Companys international identifiable assets were located in the United Kingdom.

The Companys Management team views the operations of 20/20, Magenta, CentrePath, GCG, CGSI, and VDUL operation as a single operating segment, for which it prepares discrete financial statement information and is
the basis for making decisions on how to allocate resources and assess performance. All of the Companys products and services are part of an integrated suite of offerings within telecom logistics solutions. Customer offerings are grouped into
two categories: Optimization Solutions and Connectivity Solutions. Customers may buy one or both of these product offerings.

NOTE 20. Subsequent
Events.

Completion of Acquisition of VDUL:Effective April 14, 2009, the Company completed the Final Closing of VDUL after
it had obtained the required Federal and state regulatory approvals as previously described in the Acquisitions note. No additional purchase consideration was paid at the Final Closing. Upon completion of the Final Closing, the maturities of the
Companys Term Loan, Amended March Debentures, and November Debentures automatically extended to their respective stated maturity dates. However, because of the reporting covenant defaults discussed below, all of the Companys debt is
classified as current as of March 31, 2009.

Notification of Late Filing Form 10-K:The Company was late in filing its Annual
Report on Form 10-K for the year ended December 31, 2008 by the extended due date of April 15, 2009. As a result, the Company is in default of the reporting covenants as well as certain administrative covenants contained in its debt
agreements. The Company is seeking the necessary waivers from its debt and debenture holders. Absent those waivers, liquidated damages would accrue until the above conditions are remediated.

Notification of Delisting:The Company received an OTCBB Delinquency Notification dated April 16, 2009 (Notification) advising the Company
that, pursuant to NASD Rule 6530, unless the delinquent filing were received by the Commissions EDGAR system by May 18, 2009, the securities of the Company would not be eligible for quotation on the OTCBB and would be removed therefrom
effective May 18, 2009. On May 13, 2009, the Company filed a notice of appeal of the outside date for the delisting qualification with the Financial Industry Regulatory Authority (FINRA). On June 1, 2009, an oral hearing was held by
the Company with FINRA as to the listing eligibility matter. On June 26, 2009, the Company received notice that the appeal was denied. The decision was effective upon service and constituted the final action of FINRA with respect to the
proceeding.

It is the Companys intention to apply for reinstatement of quotation of its Common Stock on the OTCBB promptly following
bringing its SEC filings current. During the period from delisting until reinstatement (if reinstatement is effected), it is expected that the Companys Common Stock will be subject to quotation by broker/dealers electing to make a market in
the Pink Sheets. There can be no assurances as to when, if at all, the Companys securities will be reinstated for trading on the OTCBB.

Loan Covenant Violations:On May 22, 2009, the Company received from ACF CGS, LLC, (Agent), a formal notification of certain covenant violations that occurred and continue to exist under the Loan Agreement dated
November 19, 2008, by and among the Company and its subsidiaries. The Borrowers have timely paid all debt service obligations under the Loan Agreement.

The Borrowers have agreed that the Forbearance Agreement constitutes an additional Loan Document under the Loan Agreement. The Forbearance Agreement contemplates that from May 1, 2009 until the date
that the Agent either waives all of the specified defaults or the parties otherwise agree, the Loan shall continue to bear interest at the default rate of interest as specified in the Loan Agreement. It also provides that, as of the Effective Date
(as defined therein), if certain specified conditions are met that the percentage of the collection that the Borrowers receive (if any) with respect to the accounts receivable with the foreign company subject to the U.K. lawsuit referenced above,
and to be applied toward pay down of obligations of the Borrowers under the Loan Agreement, shall be increased to 75%. The agreement also contains an acknowledgement that the $42,500 amendment fee paid by the Borrowers previously shall be in
consideration for the forbearance of the enumerated defaults through the Effective Date, and that the Borrowers remain obligated with respect to all reasonable fees and disbursements of Agents counsel in connection with the Forbearance
Agreement or other related matters. The Company has continued to work with the Agent following the expiration of the Forbearance Agreement to effect the transactions contemplated by the Forbearance Agreement.

Additional Financing: Effective July 31, 2009, the Company issued $7.0 million of principal amount original issue discount convertible senior
secured debentures (July Debentures), representing the funding of $4.0 million of subscription amount (inclusive of $0.5 million of subscriptions credited against liabilities of the Company to the respective holders) and $3.0 million of original
issue discount added to the subscription amount, coupled with warrants to purchase up to 12.5 million shares of Common Stock, all exercisable or convertible at $0.24 per share (the July Warrants and coupled with the July Debentures, the Units),
subject to adjustment (and with an adjustment to the exercise price on up to $15.0 million of existing debentures as discussed below). The transaction resulted in proceeds to the Company of $3.5 million, before $0.3 million of financing fees to
Aequitas.



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The purchase agreement for the July Units provides for the issuance of up to an additional $2.0 million
of cash subscription amount of July Units (representing up to an additional $3.5 million of principal amount of July Debentures inclusive of the OID factor and July Warrants to purchase up to an additional 6.25 million shares of Common Stock),
to be funded to the extent of the shortfall of collection by the Company of at least $2.0 million by August 31, 2009 of certain designated receivables or contract amounts.

The Company also authorized the issuance of up to $4.1 million of secured convertible original issue discount debentures to certain creditors of the
Company in exchange for release of up to $2.5 million of obligations to such creditors (with the debentures to contain an OID factor of up to $1.6 million), and coupled with warrants to purchase up to 12.9 million shares of Common Stock, all
exercisable or convertible at $0.24 per share, subject to adjustment.

At the same time, the Company entered into a Second Amendment and
Waiver Agreement (Second Amendment) with its senior secured lender, ACF CGS, LLC as Agent for itself and other lenders with respect to $8.5 million of senior secured financing, restoring the loan to good standing and setting adjusted covenants and
other terms and conditions.

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

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



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

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

Overview

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

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

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

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

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

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

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

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

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

Remote Management Services employs the Companys highly-integrated Operations Support Systems
(OSS) and state of the art Network Operations Center (NOC) to deliver network monitoring and management of customer networks. This service can be delivered as a stand-alone service for networks not provided by us or it can be bundled as part of a
complete network solution



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delivered via the Connectivity Solutions business unit. Remote Management Services are proactive, 7X24 monitoring and management services that leverage
automated fault and performance management systems, integrated trouble ticketing and reporting systems, and world-class network engineering and operations expertise to provide a premium level of service for a customers most critical networks.
Remote Management Services are contracted on a monthly recurring basis.

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

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

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

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

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

The Company is (and has been since its 2006 reorganization) investing its time, team resources and capital in the scaling of its systems and personnel in order to meet the demand among its clients for its novel products. The successful
delivery on major customer contracts entered into since mid-2008 and continued success in closing these types of contracts will move the Company into profitability. In addition to those new contracts, Management believes that the inclusion of
VDULs business and cash flows will have a positive impact on future results. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

As of March 31, 2009, the Companys current liabilities exceeded its current assets by $23.2 million. Included in the current liabilities is
$10.7 million of current maturities of long-term debt, net of $26.6 million of debt discount associated with the year-to-date fair value of related warrants and embedded derivatives and $18.3 million associated with original issue discount and
imputed interest. Cash on hand at March 31, 2009 was $2.7 million (not including $0.5 million restricted for outstanding letters of credit). The Company reported net losses from continuing operations of $21.1 million and $0.7 million for the
three-month periods ended March 31, 2009 and 2008, respectively. The results for 2009 include non-cash expenses of $0.8 million relating to the accounting treatment for stock and options. The current period includes non-cash loss of $14.0
million from the change in fair value of embedded derivatives and warrants. The results for the three-month period ended March 31, 2008 includes $2.0 million in non-cash expenses relating to the accounting treatment for stock and options, $0.9
million related to the amortization of debt discount, and non-cash gain on warrants and derivatives of $10.8 million.



Cash used in operating activities from continuing operations was $1.8 million and $3.9 million for the years ended March 31, 2009 and 2008,
respectively. The Companys net working capital deficiency, recurring operating losses, and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. However, the successful delivery on major



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customer contracts entered into since mid-2008 and continued success in closing these types of contracts will move the Company into profitability. In
addition to those new contracts, Management believes that the inclusion of VDULs business and cash flows will have a positive impact on future results. At the same time, expenses are managed closely and lower-cost outsource opportunities are
given case-by-case consideration.

The Companys net working capital deficiency, recurring losses, and negative cash flows from
operations raise doubt about its ability to continue as a going concern. Notwithstanding the above, the Company continues to find support amongst its shareholders and other investors.

There was significant capital activity during 2008. The major components are summarized below:



| |  |  | On March 11, 2008, the Company closed on $19.0 million of Senior Secured Convertible debentures. Approximately $8.8 million of the proceeds from the sale of
the debentures was used to pay off almost all previously outstanding indebtedness and $1.7 million was used to pay advisory fees. The remaining proceeds were used for working capital purposes and to support the Companys successful new business
development efforts.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | On November 20, 2008, the Company entered into an Interest and Loan Purchase Agreement (the ILPA) with Vanco plc, a U.K. corporation in
administration (Seller) to purchase all of the outstanding membership interests (the Interests) of Vanco Direct USA, LLC (VDUL). In order to finance the purchase of the Interests, the Company entered into the
following additional agreements, inter alia, to be effective as of the funding of the transaction: (i) a Term Loan and Security Agreement (Term Loan) pursuant to which the Company agreed to borrow $8.5 million from the senior
lender(s); (ii) a Consent, Waiver, Amendment, and Exchange Agreement with holders of its outstanding Senior Secured Convertible Debentures issued on March 11, 2008, pursuant to which the holders waived and amended certain conditions and
enabled the Company to enter into the Term Loan Agreement and issue the November Debentures (defined below) and the other transactions referenced below; (iii) a new Securities Purchase Agreement (the November SPA) pursuant to which
the Company agreed to issue to certain holders of the March Debentures and to certain additional designated purchasers (including Aequitas Catalyst Fund, LLC, which agreed to convert its September 30, 2008, $500,000 loan to the Company into a
November Debenture) an additional $9.0 million of purchase price amount of junior original issue discount secured convertible debentures (the November Debentures), convertible at $0.24 per share, subject to anti-dilution adjustment
coupled with warrants exercisable at $0.24 per share, subject to anti-dilution adjustment; and (iv) an unsecured $3.0 million convertible debenture to be issued to the Seller; and (v) certain intercreditor agreements among the parties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results for the three-month period ended March 31, 2009 compared to 2008

Continuing Operations

Total revenues for the
three-month period ended March 31, 2009 were $16.2 million compared to $9.5 million for the same period in 2008, representing a 71.0% increase. This increase is primarily due to the acquisition of VDUL

Revenues generated from Optimization Solutions totaled $2.9 million for the three-month period ended March 31, 2009 compared to $6.5 million for the
same period in 2008, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $13.3 million for the three-month period ended
March 31, 2009 compared to $3.0 million for the same period in 2008, which is from the delivery of turn-key global networks and system management services.

The consolidated gross margin rate was 24% for the three-month period ended March 31, 2009 compared to 54% for the same period in 2008. This decrease was driven primarily by the decrease in higher margin revenue
from Optimization Solutions. Optimization Solutions gross margin totaled $(0.3) million or (10%) for the three-month period ended March 31, 2009 as compared to $5.5 million or 85% for the same period in 2008. Connectivity
Solutions margin totaled $4.2 million or 32% compared to $(0.4) million or (13%) for the same period in 2008.



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Operating expenses for the first three-month periods of 2009 and 2008 consist of the following:



|                              |  |                                    |       |      |   |      
|----------------------------- |  | ---------------------------------- | ----- | ---- | - | -----
|                              |  | Three-month periods endedMarch 31,
|                              |  | 2009                               |       | 2008
|Compensation                  |  | $                                  | 3,593 |      | $ | 4,289
|Professional services         |  |                                    | 1,739 |      |   | 2,142
|Depreciation and amortization |  |                                    | 1,138 |      |   | 536  
|Other operating expenses      |  |                                    | 1,191 |      |   | 715  
|                              |  |                                    |       |      |   |      
|Total operating expenses      |  | $                                  | 7,661 |      | $ | 7,682
|                              |  |                                    |       |      |   |      

Compensation expense decreased $0.7 million for the three-month period ended March 31, 2009
as compared to 2008. Included in compensation expense for 2009 are non-cash charges of $0.8 million related to the accounting treatment (pursuant to SFAS 123R) of certain stock option grants as compared to $2.0 million for the same period in 2008.
Of the period over period increase in cash-based compensation, the division acquired in the fourth quarter of 2008 added $1.2 million. The balance of the Company reduced headcount and recorded net savings (period over period) of $0.7 million.

Professional services decreased $0.4 million for the three-month period ended March 31, 2009 as compared to the three-month period
ended March 31, 2008, due to fewer advisory expenses.

Depreciation and amortization expense relates primarily to the Network
Operating Center in the suburbs of Boston and the fair value assigned to the Companys intellectual property. Depreciation and amortization increased by $0.6 million for the three-month period ended March 31, 2009 as compared to
March 31, 2008. This increase was due primarily to the acquisition of $19.4 million of intangible assets in November 2008 with the acquisition of VDUL.

Other operating expenses increased $0.5 million for the three-month period ended March 31, 2009 as compared to the same period for 2008. Any significant increase in future operating costs is expected to be a
direct result of a corresponding increase in revenues, excluding any additional stock-based compensation expense. Any significant increase in revenues is anticipated to outpace the increase in related operating costs.

Results for the three-month period ended March 31, 2009 reflect interest of $3.1 million, a decrease of $0.6 million from the three-month period
ended March 31, 2008. Interest expense for the three-month periods ended March 31, 2009 and 2008 includes $2.4 million and $0.9 million, respectively, related to the amortization of the fair value assigned to the warrants and embedded
derivatives issued with debt, PLIC, and OID interest.

Results for the three-month period ended March 31, 2009 reflect a loss on
warrants and derivatives of $14.0 million compared to a gain of $10.8 million for the comparable period in 2008. The current years loss was driven mainly by the $0.05 increase of the December 31, 2008 closing price of $0.11 versus the
March 31, 2009 closing price of $0.16 in the Companys stock while 2008 included the effects of a modest amount of cashless exercises. In accordance with SFAS 133 AND EITF 00-19, the warrant and embedded derivatives liabilities are
revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the statement of operations.

Discontinued Operations

The gain from discontinued operations for the three-month periods
ended March 31, 2009 and December 31, 2008 was de minimis. The decreases in revenue and gain from discontinued operations were due to the sale of Frontrunner and Nexvu.

Liquidity and Capital Resources

Cash used in operating activities from continuing operations for the
three-month periods ended March 31, 2009 and 2008 was principally due to operating losses of $3.7 million and $2.6 million, respectively. The primary variance between operating loss and net cash used in operating activities from continuing
operations for the three-month period ended March 31, 2009 was due to $0.8 million for stock-based compensation expense, and $1.1 million of depreciation and amortization. The variance between the operating loss and net cash used in operating
activities from continuing operations during the three-month period ended March 31, 2008 was primarily due to the non-cash charges of $2.0 million for stock-based compensation, a $0.5 million of depreciation and amortization offset by an
increase in receivables.

The cash used in investing activities from continuing operations during the three-month periods ended
March 31, 2009 and 2008 was $0.1 million and $0.01 million, respectively. Our capital expenditures in both 2009 and 2008 consisted primarily of computer-related equipment. Although we currently do not anticipate any significant capital
expenditures in the near future, we may have a need to make similar additional capital expenditures related to the integration of our operations.

Net cash used by financing activities from continuing operations during the three-month periods ended March 31, 2009 and 2008 was $(0.01) million and $9.8 million, respectively.



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There are various financial and non-financial covenants that the Company must comply with in connection
with the Term Loan and Debentures. The financial covenants require a minimum cash balance and to achieve minimum monthly recurring circuit revenue and margin. Beginning in the first quarter of 2009, the Company was subject to covenants related to
EBITDA. Among other things, the non-financial covenants include restrictions on additional indebtedness, acquisitions, and capital expenditures except as permitted under the agreements. See Notes to Consolidated Financial Statements. A failure to
comply with one or more of the covenants could impact the Companys operating flexibility, impair strategic undertakings, and accelerate the repayment of debt.

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

All long-term debts are presented as current obligations as a result of the Company being in default on
certain reporting and administrative covenants. Long-term debt commitments include the maturity value of original issue discount securities and the minimum interest due on the Term Note consistent with the default clause of the agreement.

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

Recent Accounting Pronouncements

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

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements in place as of March 31, 2009 or 2008.

Factors Affecting Future Performance

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

We have historically lost money and losses may continue.We have incurred operating losses since our inception and cannot assure you that we will achieve profitability. Through March 31, 2009, we have
incurred cumulative losses of $124.5 million compared to a cumulative loss of $103.4 million through December 31, 2008. To succeed, we must continue to develop new client and customer relationships and substantially increase our revenues from
sales of offerings and services. We intend to continue to expend substantial resources to develop and improve our offerings and to market our offerings and services. These development and marketing expenses often must be incurred well in advance of
the recognition of revenue. There is no certainty that these expenditures will result in increased revenues. Incurring additional expenses while failing to increase revenues could have a material adverse effect on our financial condition.

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

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



We have incurred substantial debt in developing the business and in
acquiring our subsidiaries.There can be no assurances that the Company will be able to refinance or extend any existing debt. At December 31, 2007, we had incurred substantial debt with our primary secured lender and with the providers of
subordinated secured debt and short-term bridge debt. All of such debt was refinanced in March 2008 with a portion of the proceeds of $19 million of five-year senior secured convertible notes (the Convertible



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Notes). In November 2008, as part of the financing for the VDUL acquisition, the Company entered into agreements that modified the Convertible Notes and
created an additional $16.8 million of debt. See the Notes to Consolidated Financial Statements. There is a risk that the Company will be unable to meet all of the covenants contained in the loan documents, including the meeting of EBITDA covenants
on the term loan, repayment and interest obligations and the obligation to timely increase the Companys authorized common stock and to file its required Exchange Act filings on a current, ongoing basis. There is also a risk that on maturity we
will lack the funds to repay the obligations. Conversely, the debentures are convertible into common stock at $0.24 per share, with full ratchet anti-dilution protection. Conversion of the debentures and exercise of the warrants could be
substantially dilutive to existing shareholders.

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

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

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

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

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

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

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

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



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

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

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

Delisting. The Company received an OTCBB Delinquency Notification dated April 16, 2009 (Notification) advising the registrant that, pursuant
to NASD Rule 6530, unless the delinquent filing were received by the Commissions EDGAR system by May 18, 2009, the securities of the registrant would not be eligible for quotation on the OTCBB and will be removed therefrom effective
May 18, 2009. On May 13, 2009, the Company filed a notice of appeal of the outside date for the delisting qualification with the Financial Industry Regulatory Authority (FINRA). On June 1, 2009, an oral hearing was held by the Company
with FINRA as to the listing eligibility matter. On June 26, 2009, the Company received notice that the appeal was denied. The decision was effective upon service and constituted the final action of FINRA with respect to the proceeding.

As a result of the determination, the Companys Common Stock is currently ineligible for quotation on the OTCBB. The Company had
retained independent registered public accountants to complete the audit of its financial statements for the year ended December 31, 2008, as well as to review its interim financial statements for the three-month periods ended March 31,
and June 30, 2009. It is the Companys intention to apply for reinstatement of quotation of its Common Stock on the OTCBB promptly following such filings. During the period from delisting until reinstatement (if reinstatement is effected),
it is expected that the Companys Common Stock will be subject to quotation by broker/dealers electing to make a market in the Pink Sheets. There can be no assurances as to when, if at all, the Companys securities will be reinstated for
trading on the OTCBB.

Registration rights and failure to file penalties.The Company failed to file on a timely basis a
registration statement for common stock underlying a Units offering. There was a penalty of 1% of the purchase price of the Units per month for each month that the we are late in the initial filing or the declaration of effectiveness of the
registration statement, subject to a cap of 12% in the aggregate of the original Units purchase price, and with the penalty to be payable in common stock issuable based upon the ten-days average trailing value of our shares of common
stock for the applicable period. As of December 31, 2007, we had not filed a registration statement and therefore were obligated to issue 4,784,623 shares of common stock representing a non-cash registration rights penalty of $2.5 million.
Holders of the affected shares include certain members of our Board of Directors. Similarly, there is an obligation with respect to our debentures issued in 2008 to remain current in our required SEC filings, which obligations were breached due to
the delays in filing, inter alia, this Form 10-K. Failure to file penalties may also accrue in connection with the interim quarterly filings.



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



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





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

Evaluation of Disclosure Controls and
Procedures

Disclosure controls and procedures are the controls and other procedures designed to ensure information required to be
disclosed in the reports the Company files under the Exchange Act of 1934, as amended, are recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and to ensure information required to be
disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our Management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required
disclosure.

An evaluation was performed under the supervision and with the participation of the Companys Management, including the
Chief Executive Officer and the Chief Financial Officer, on the design and effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the
Exchange Act) as of December 31, 2008. Based on that evaluation and the material weaknesses described below under Managements Report on Internal Control over Financial Reporting, Management, including the Chief
Executive Officer and Chief Financial Officer, have concluded the Companys disclosure controls and procedures were not effective as of March 31, 2009.

Managements Report on Internal Control over Financial Reporting

Our Management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our Management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control over Financial Reporting  Guidance for Smaller Public
Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control over Financial Reporting  Guidance for Smaller Public Companies,Management
concluded our internal control over financial reporting was not effective as of March 31, 2009.

A material weakness in internal
control over financial reporting is a control deficiency, or combination of deficiencies, in internal control over financial reporting (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard
No. 5), such that there is a reasonable possibility that a material misstatement of the Companys annual or interim financial statements will not be prevented or detected on a timely basis.

As a result of the evaluation, Management identified two material weaknesses with respect to internal controls over financial reporting:



| |  |  | The Company did not maintain sufficient levels of qualified personnel in our financial reporting processes. As a result, our internal controls over financial
reporting did not include an effective control to ensure appropriate review and analysis of contingent terms in previous financing transactions, resulting in a restatement of the consolidated financial statements for the fiscal year ended
December 31, 2007 in fiscal year 2008. The restatement required a balance sheet reclassification of warrants and preferred stock from the consolidated statement of shareholders equity to a liability account. See Notes to the Consolidated
Financial Statements included in Item 8, herein. The Companys 10-KSB for fiscal year ended December 31, 2007 and 10-QSB (beginning balances) for the interim period ended March 31, 2008 were subsequently amended as a result of
the restatement, and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has not yet deployed our staff and systems in a manner that allows for the desired level of segregation of duties to operate and be documented in a
manner sufficient to meet Sarbanes-Oxley standards that will need to be evidenced in the next fiscal year.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In order to
determine whether a control deficiency, or combination of control deficiencies is a material weakness, Management considers all relevant information and evaluates the severity of each control deficiency that comes to its attention. Management also
evaluates the effect of its compensating controls, which serve to accomplish the objective of another control that did not function properly, helping to reduce risk to an acceptable level. To have a mitigating effect, the compensating control should
operate at a level of precision that would prevent or detect a misstatement that could be material. Based on our evaluation under the framework set forth in Internal Control over Financial Reporting  Guidance for Smaller Public
Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission, Management, including the Chief Executive Officer and Chief Financial Officer, have concluded the Companys internal controls over financial reporting
were not effective as of March 31, 2009 as a result of the aforementioned material weaknesses.



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Managements Plan to Address Material Weaknesses

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



| |  |  | utilization of external consultants to assist in the planning for, and in advance of the execution of, the accounting treatment of complex transactions and
financings given the unforeseen effects driven by complex accounting standards. The utilization of external consultants has provided additional accounting resources and initiated steps toward creating a desired level of segregation of duties; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

During the second quarter of 2008, a previously disclosed material weakness was addressed by increasing the number of members of our Board of Directors
to nine and completing our search for independent directors in order to have a majority of our Board of Directors become independent, as defined in Item 407(a) of Regulation S-K. Amongst the incoming directors, two were determined to be
audit committee financial experts as defined in Item 407(d)(5) of Regulation S-K. Subsequent to year-end, a member of the Board resigned and an additional, independent director was appointed. This member was determined to be an
additional audit committee financial expert and assumed chairmanship of the audit committee. In addition, we have begun to adopt audit committee best practices as recommended by the Treadway Commission and the major stock exchanges.

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

The Companys lack of resources resulted in the Company not establishing an adequate system for identifying, documenting, and testing its internal
control system. The Companys process did not include a sustainable process for identifying and documenting systems and the related key controls at operating locations throughout the Company and periodically evaluating control design and
operating effectiveness across the Company on an ongoing basis.

There were no changes in the internal control over financial reporting
identified in Managements evaluation during the first quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.



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PART II  OTHER INFORMATION



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

In February 2009, after
numerous attempts to resolve material open accounts receivable ($10.2 million) with a major customer, the Company filed suit in a foreign court. The Company had exhausted all efforts to cause mediation or other forms of compromise and was left with
such collection action as its last resort. The customer has denied the claim and has filed a counter claim seeking return of funds paid under the contract. Management believes the counter claim to be without merit. The Companys counsel has
advised management that a favorable outcome related to this lawsuit is probable, but that the amount to be recovered cannot be determined at this time. As a result, the Company has established an allowance for the entire balance as of
December 31, 2008 and will record any amounts recovered through future operating results. From time to time, we are also involved in various legal matters arising in the ordinary course of business. In the opinion of Management, the ultimate
disposition of such matters will not have a material adverse effect on our consolidated financial position or the results of operations.



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

For information about risk factors
affecting future performance, see the Risk Factors section in the footnotes to these financial statements.



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

None.



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

The Company was
late in filing its Annual Report on Form 10-K for the year ended December 31, 2008 by the extended due date of April 15, 2009. As a result, the Company is in default of the reporting covenants as well as certain administrative covenants
contained in many of its debt agreements. Accordingly, all outstanding debt has been classified as a current obligation as of December 31, 2008. The Company is seeking the necessary waivers from its debt and debenture holders.



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

None.



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

None.



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

Exhibits filed as a part of this
quarterly report on Form 10-Q are listed in the Index to Exhibits located on page 45 of this Report.



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SIGNATURES

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



CAPITAL GROWTH SYSTEMS, INC.By:

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


Dated: August 19, 2009



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



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