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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 June 30, 2010



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

For the transition period from  to

Commission File Number 0-30831





CAPITAL GROWTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)







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

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

(Address of principal executive offices)

(312) 673-2400

(Registrants telephone number including area code)





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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

As of June 30, 2010, the issuer had outstanding 168,233,180 shares of its $0.0001 par value common stock.

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



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









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Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES



|                              |  |                                                                                                                                                                 |  |         
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                                                 |  | Page No.
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                                                                                
|Item 1.                       |  | Financial Statements                                                                                                                                            |  | 1       
|                              |  |                                                                                                                                                                
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2010 [Unaudited] and December 31,
2009                                                                     |  | 2       
|                              |  |                                                                                                                                                                
|                              |  | Condensed Consolidated Statements of Operations for the three and six-month periods ended June 30, 2010 and
 2009 [Unaudited]                                   |  | 3       
|                              |  |                                                                                                                                                                
|                              |  | Condensed Consolidated Statements of Shareholders Equity (Deficit) from January 1, 2010 to June 30, 2010
 and January 1, 2009 to December 31, 2009 [Unaudited] |  | 4       
|                              |  |                                                                                                                                                                
|                              |  | Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2010 and 2009 [Unaudited]                                              |  | 5       
|                              |  |                                                                                                                                                                
|                              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                                |  | 6       
|                              |  |                                                                                                                                                                
|Item 2.                       |  | Managements Discussion and Analysis                                                                                                                            |  | 24      
|                              |  |                                                                                                                                                                
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk (Not Applicable)                                                                                     |  | 32      
|                              |  |                                                                                                                                                                
|Item 4.                       |  | Controls and Procedures                                                                                                                                         |  | 32      
|                             
|PART II. OTHER INFORMATION   
|                              |  |                                                                                                                                                                
|Item 1.                       |  | Legal Proceedings                                                                                                                                               |  | 33      
|                              |  |                                                                                                                                                                
|Item 1A.                      |  | Risk Factors                                                                                                                                                    |  | 34      
|                              |  |                                                                                                                                                                
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                     |  | 38      
|                              |  |                                                                                                                                                                
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                                                 |  | 38      
|                              |  |                                                                                                                                                                
|Item 4.                       |  | (Removed and Reserved)                                                                                                                                          |  | 38      
|                              |  |                                                                                                                                                                
|Item 5.                       |  | Other Information                                                                                                                                               |  | 38      
|                              |  |                                                                                                                                                                
|Item 6.                       |  | Exhibits                                                                                                                                                        |  | 38      
|                              | 
|SIGNATURES AND CERTIFICATIONS |  | 39                                                                                                                                                             



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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)

(Unaudited)



|                                                                                                                                                |  |              |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                |  | June 30,2010 |          |   | December 31,2009 |  
|ASSETS                                                                                                                                          |  |              |          |   |                  |   |          |  
|CURRENT ASSETS                                                                                                                                  |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                       |  | $            | 1,706    |   |                  | $ | 3,377    |  
|Accounts receivable, net                                                                                                                        |  |              | 4,415    |   |                  |   | 9,739    |  
|Prepaid expenses and other current assets                                                                                                       |  |              | 800      |   |                  |   | 907      |  
|                                                                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|Total Current Assets                                                                                                                            |  |              | 6,921    |   |                  |   | 14,023   |  
|Property and equipment, net                                                                                                                     |  |              | 872      |   |                  |   | 980      |  
|Intangible assets, net                                                                                                                          |  |              | 15,284   |   |                  |   | 16,462   |  
|Goodwill                                                                                                                                        |  |              | 1,480    |   |                  |   | 1,480    |  
|Other assets                                                                                                                                    |  |              | 931      |   |                  |   | 1,434    |  
|                                                                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|TOTAL ASSETS                                                                                                                                    |  | $            | 25,488   |   |                  | $ | 34,379   |  
|                                                                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                                  |  |              |          |   |                  |   |          |  
|CURRENT LIABILITIES                                                                                                                             |  |              |          |   |                  |   |          |  
|Current maturities of long-term debt                                                                                                            |  | $            | 21,010   |   |                  | $ | 16,107   |  
|Accounts payable                                                                                                                                |  |              | 16,490   |   |                  |   | 13,119   |  
|Accrued expenses                                                                                                                                |  |              | 4,787    |   |                  |   | 5,839    |  
|Deferred revenue                                                                                                                                |  |              | 3,615    |   |                  |   | 4,095    |  
|                                                                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|Total Current Liabilities                                                                                                                       |  |              | 45,902   |   |                  |   | 39,160   |  
|Liabilities for warrants to purchase common stock                                                                                               |  |              | 10,675   |   |                  |   | 17,960   |  
|Embedded derivatives of convertible debt instruments                                                                                            |  |              | 15,381   |   |                  |   | 28,214   |  
|Deferred income taxes                                                                                                                           |  |              | 49       |   |                  |   | 40       |  
|Deferred revenue, Long-term portion                                                                                                             |  |              | 11       |   |                  |   | 13       |  
|                                                                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|Total Liabilities                                                                                                                               |  |              | 72,018   |   |                  |   | 85,387   |  
|                                                                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|COMMITMENTS AND CONTINGENCIES                                                                                                                   |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|SHAREHOLDERS EQUITY (DEFICIT)                                                                                                                  |  |              |          |   |                  |   |          |  
|Preferred stock, $.0001 par value; 5,000,000 authorized, none issued or outstanding as of June 30, 2010 and
December 31, 2009                   |  |              |          |   |                  |   |          |  
|Common stock, $.0001 par value; 350,000,000 authorized, 168,233,180 issued and outstanding at June 30, 2010 and
December 31, 2009, respectively |  |              | 17       |   |                  |   | 17       |  
|Additional paid-in capital                                                                                                                      |  |              | 106,037  |   |                  |   | 105,290  |  
|Accumulated deficit                                                                                                                             |  |              | (152,514 | ) |                  |   | (156,260 | )
|Accumulated other comprehensive income (loss)                                                                                                   |  |              | (70      | ) |                  |   | (55      | )
|                                                                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|Total Shareholders Equity (Deficit)                                                                                                            |  |              | (46,530  | ) |                  |   | (51,008  | )
|                                                                                                                                                |  |              |          |   |                  |   |          |  
|                                                                                                                                                |  |             
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)                                                                                            |  | $            | 25,488   |   |                  | $ | 34,379   |  
|                                                                                                                                                |  |              |          |   |                  |   |          |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share data)

(Unaudited)



|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|-------------------------------------------------------------- |  | ---------------------------------- | ----------- | - | -------------------------------- | - | ----------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                               |  | Three-month periods ended June 30, |             |   | Six-month periods ended June 30, |  
|                                                               |  | 2010                               |             |   | 2009                             |   |             | 2010 |  |   | 2009        |  
|REVENUES                                                       |  | $                                  | 13,874      |   |                                  | $ | 15,879      |      |  | $ | 28,550      |   |  | $ | 32,121      |  
|COST OF REVENUES                                               |  |                                    | 10,536      |   |                                  |   | 12,566      |      |  |   | 21,517      |   |  |   | 24,887      |  
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|GROSS MARGIN                                                   |  |                                    | 3,338       |   |                                  |   | 3,313       |      |  |   | 7,033       |   |  |   | 7,234       |  
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|OPERATING EXPENSES                                             |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|Compensation                                                   |  |                                    | 2,408       |   |                                  |   | 3,119       |      |  |   | 5,343       |   |  |   | 6,712       |  
|Travel and entertainment                                       |  |                                    | 376         |   |                                  |   | 355         |      |  |   | 693         |   |  |   | 675         |  
|Occupancy                                                      |  |                                    | 482         |   |                                  |   | 420         |      |  |   | 830         |   |  |   | 817         |  
|Professional services                                          |  |                                    | 1,593       |   |                                  |   | 1,604       |      |  |   | 3,232       |   |  |   | 3,343       |  
|Insurance                                                      |  |                                    | 68          |   |                                  |   | 49          |      |  |   | 141         |   |  |   | 161         |  
|Depreciation and amortization                                  |  |                                    | 679         |   |                                  |   | 1,138       |      |  |   | 1,364       |   |  |   | 2,276       |  
|Bad debt expense                                               |  |                                    | 207         |   |                                  |   | 188         |      |  |   | 336         |   |  |   | 277         |  
|Other operating expenses                                       |  |                                    | 168         |   |                                  |   | 172         |      |  |   | 377         |   |  |   | 445         |  
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|TOTAL OPERATING EXPENSES                                       |  |                                    | 5,981       |   |                                  |   | 7,045       |      |  |   | 12,316      |   |  |   | 14,706      |  
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|OPERATING LOSS                                                 |  |                                    | (2,643      | ) |                                  |   | (3,732      | )    |  |   | (5,283      | ) |  |   | (7,472      | )
|Interest expense                                               |  |                                    | (5,581      | ) |                                  |   | (3,057      | )    |  |   | (11,010     | ) |  |   | (6,189      | )
|Registration rights and failure to file penalties              |  |                                    |            |   |                                  |   | (1,395      | )    |  |   |            |   |  |   | (1,395      | )
|Gain (loss) on warrants and derivatives                        |  |                                    | 14,056      |   |                                  |   | (5,816      | )    |  |   | 20,117      |   |  |   | (19,827     | )
|Loss on extinguishment of debt and conversion of debt to stock |  |                                    |            |   |                                  |   | (186        | )    |  |   |            |   |  |   | (362        | )
|Income tax expense                                             |  |                                    | (40         | ) |                                  |   |            |      |  |   | (78         | ) |  |   |            |  
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|NET INCOME (LOSS)                                              |  | $                                  | 5,792       |   |                                  | $ | (14,186     | )    |  | $ | 3,746       |   |  | $ | (35,245     | )
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|INCOME (LOSS) PER SHARE OF COMMON STOCK  BASIC                |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|Net income (loss) per share of common stock  basic            |  | $                                  | 0.03        |   |                                  | $ | (0.09       | )    |  | $ | 0.02        |   |  | $ | (0.22       | )
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|INCOME (LOSS) PER SHARE OF COMMON STOCK  DILUTED              |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|Net income (loss) per share of common stock  diluted          |  | $                                  | 0.03        |   |                                  | $ | (0.09       | )    |  | $ | 0.02        |   |  | $ | (0.22       | )
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  
|                                                               |  |                                    |             |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING  BASIC AND DILUTED |  |                                    | 168,233,180 |   |                                  |   | 163,557,831 |      |  |   | 168,233,180 |   |  |   | 161,442,841 |  
|                                                               |  |                                    |             |   |                                  |   |             |      |  |   |             |   |  |   |             |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

(in thousands, except share data)

(Unaudited)



|                                                        |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|------------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------------------ |  | - | ------------------------------------------ | - |  | ---------------------------------- | --- | - |  | - | ------- | -
|                                                        |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | TotalShareholdersEquity (Deficit) |    
|Balance, January 1, 2009                                |  | 154,281,018  |  | $           | 16 |                          | $ | 101,606            |  | $ | (103,426                                   | ) |  | $                                  | 7   |   |  | $ | (1,797  | )
|Conversion of debt to common stock                      |  | 13,952,162   |  |             | 1  |                          |   | 1,981              |  |   |                                           |   |  |                                    |    |   |  |   | 1,982   |  
|Stock-based compensation expense                        |  |             |  |             |   |                          |   | 1,703              |  |   |                                           |   |  |                                    |    |   |  |   | 1,703   |  
|Foreign currency translation adjustment                 |  |             |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    | (62 | ) |  |   | (62     | )
|Net loss for 2009                                       |  |             |  |             |   |                          |   |                   |  |   | (52,834                                    | ) |  |                                    |    |   |  |   | (52,834 | )
|                                                        |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|                                                        |  |              |  |             |    |                         
|Balance, December 31, 2009                              |  | 168,233,180  |  | $           | 17 |                          | $ | 105,290            |  | $ | (156,260                                   | ) |  | $                                  | (55 | ) |  | $ | (51,008 | )
|                                                        |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|                                                        |  |              |  |             |    |                         
|Balance, January 1, 2010                                |  | 168,233,180  |  | $           | 17 |                          | $ | 105,290            |  | $ | (156,260                                   | ) |  | $                                  | (55 | ) |  | $ | (51,008 | )
|Stock-based compensation expense                        |  |             |  |             |   |                          |   | 747                |  |   |                                           |   |  |                                    |    |   |  |   | 747     |  
|Foreign currency translation adjustment                 |  |             |  |             |   |                          |   |                   |  |   |                                           |   |  |                                    | (15 | ) |  |   | (15     | )
|Net income for the six-month period ended June 30, 2010 |  |             |  |             |   |                          |   |                   |  |   | 3,746                                      |   |  |                                    |    |   |  |   | 3,746   |  
|                                                        |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  
|                                                        |  |              |  |             |    |                         
|Balance, June 30, 2010                                  |  | 168,233,180  |  | $           | 17 |                          | $ | 106,037            |  | $ | (152,514                                   | ) |  | $                                  | (70 | ) |  | $ | (46,530 | )
|                                                        |  |              |  |             |    |                          |   |                    |  |   |                                            |   |  |                                    |     |   |  |   |         |  

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)



|                                                        |  |                                   |        |   |      |   |        |  
|------------------------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                                        |  | Six-months periods ended June 30, |       
|                                                        |  | 2010                              |        |   | 2009 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                    |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     |  | $                                 | 3,878  |   |      | $ | (3,083 | )
|                                                        |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|CASH FLOWS FROM INVESTING ACTIVITIES                    |  |                                   |        |   |      |   |        |  
|Purchase of property and equipment                      |  |                                   | (90    | ) |      |   | (164   | )
|                                                        |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|NET CASH (USED IN) INVESTING ACTIVITIES                 |  |                                   | (90    | ) |      |   | (164   | )
|                                                        |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|CASH FLOWS FROM FINANCING ACTIVITIES                    |  |                                   |        |   |      |   |        |  
|Repayment of long-term debt                             |  |                                   | (4,455 | ) |      |   | (23    | )
|Payment of financing costs                              |  |                                   | (989   | ) |      |   |       |  
|                                                        |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|NET CASH (USED IN) FINANCING ACTIVITIES                 |  |                                   | (5,444 | ) |      |   | (23    | )
|                                                        |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|Effect of exchange rate on cash and equivalents         |  |                                   | (15    | ) |      |   | (50    | )
|                                                        |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|Decrease in cash and cash equivalents                   |  |                                   | (1,671 | ) |      |   | (3,320 | )
|Cash and cash equivalents  beginning of period         |  |                                   | 3,377  |   |      |   | 4,598  |  
|                                                        |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|Cash and cash equivalents  end of period               |  | $                                 | 1,706  |   |      | $ | 1,278  |  
|                                                        |  |                                   |        |   |      |   |        |  
|                                                        |  |                                  
|SUPPLEMENTAL CASH FLOW INFORMATION                      |  |                                   |        |   |      |   |        |  
|Cash paid for interest                                  |  | $                                 | 1,485  |   |      | $ | 710    |  
|Cash paid for income taxes                              |  |                                   | 100    |   |      |   |       |  
|                                                        |  |                                  
|NON-CASH INVESTING AND FINANCING ACTIVITIES             |  |                                   |        |   |      |   |        |  
|Conversion of debt to common stock                      |  |                                   |       |   |      |   | 2,234  |  
|Issuance of July debentures to satisfy debt obligations |  |                                   | 1,802  |   |      |   |       |  
|Registration rights and failure to file penalties       |  |                                   |       |   |      |   | 1,395  |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements

June 30, 2010 (Unaudited)

NOTE 1. Organization and Basis of Presentation.

Description of Business

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

Basis of Presentation

The Companys unaudited consolidated financial statements as of and for the three and six months ended June 30, 2010 and 2009,
have been prepared in accordance with generally accepted accounting principles for interim information and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not contain all of
the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of the Companys management, all adjustments, consisting of normal, recurring adjustments, considered
necessary for a fair statement have been included. The results for the three and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. Refer to our Annual Report
on Form 10-K for the fiscal year ended December 31, 2009 for the most recent disclosure of the Companys accounting policies.

The Companys condensed consolidated financial statements include the accounts of Capital Growth Systems, Inc. (CGSI) and its
wholly-owned operating subsidiaries: 20/20 Technologies, Inc. (20/20), Magenta netLogic Ltd. (Magenta) which operates in the United Kingdom, Centre Path, Inc. (Centre Path), Global Capacity Group, Inc. (GCG), Global Capacity Direct, LLC (GCD) and
Global Capacity Holdco, LLC. Except where necessary to distinguish the entities, together they are referred to as the Company. Global Capacity Holdco, LLC was organized for the sole purpose of holding the FCC 214 licenses previously held
by GCG and GCD.

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.

Bankruptcy Filing and Going Concern

The accompanying condensed consolidated statements have been prepared on a going concern basis, which contemplates the realization
of assets and the discharge of liabilities in the normal course of business for the foreseeable future. As of June 30, 2010, the Companys current liabilities exceeded its current assets by $39.0 million. Included in the current
liabilities is $21.0 million of current maturities of long-term debt, net of $25.4 million of debt discount associated with the initial fair value of related warrants and embedded derivatives and $19.0 million associated with OID and imputed
interest. Cash on hand at June 30, 2010 was $1.7 million (not including $0.2 million restricted for outstanding letters of credit).

On July 23, 2010, the Company and its United States (U.S.) subsidiaries (the Debtors) filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). The Debtors Chapter 11
cases are being jointly-administered under Case No.10-12302 .The Debtors will continue to operate their business as debtors-in-possession under the supervision of the Bankruptcy Court and in accordance with the applicable provisions of
the Bankruptcy Code and orders of the Bankruptcy Court. The Companys subsidiary in the United Kingdom was not included in the filing and will continue their business without supervision from the Bankruptcy Court and will not be subject to the
requirements of the Bankruptcy Code. See Note 16, Subsequent Events.

The Company remains in possession of its assets and
properties, and continues to operate its businesses. The Company has obtained and the Bankruptcy Court has approved debtor-in possession financing which will provide up to $10.25 million, of which $9.25 million was funded on August 2, 2010. The
proceeds of the DIP Financing were used to pay-off the pre-petition senior secured indebtedness of Pivotal Global Capacity, LLC (the Senior Lender), pay critical vendors and utility deposits, assist in the restructuring and prevent an
immediate shutdown of the Companys operations.

The financing will enable the Company to continue to operate its
businesses in the ordinary course pending a proposed reorganization of the Companys businesses. However, there can be no assurance that the Company will be successful in gaining approval of its plan for reorganization.

The Plan Support and Restructuring Agreement provides for among other things the right of the Junior Debenture Holders to credit bid for
the purchase of the Debtors assets all or some of the liens and pre-petition amounts due under the Debentures including accrued OID and Tranche B amounts under the DIP Facility plus accrued interest.



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



On August 2, 2010, $9.3 million was advanced to the Company by the Lenders under
the terms of the DIP Financing. In addition to paying critical vendors and utility deposits, the funds were used on August 3, 2010 to pay $5.2 million to the Senior Lender (Pivotal Global Capacity, LLC or Pivotal) which represents
payment in full of the outstanding Senior Secured Loan. Pivotal closed, on May 3, 2010, on its purchase of all the rights and obligations of the previous Senior Lender (ACF CGS, L.L.C.) with respect to the Term Loan and Security Agreement dated
November 19, 2008, as amended, with no changes in terms and conditions. Pivotal was assigned the same rights and obligations of the previous holder and stepped into the role as the new Senior Lender in the same capacity as ACF CGS, L.L.C.

The Company is currently operating pursuant to Chapter 11 under the Bankruptcy Code and continuation of the Company as a
going- concern is contingent upon, among other things, the Companys ability (i) to comply with the terms and conditions of the DIP Financing Agreement described in Note 16, Subsequent Events ; (ii) to develop a plan of reorganization
and obtain confirmation under the Bankruptcy Code; (iii) to reduce unsustainable debt and other liabilities and simplify its complex and restrictive capital structure through the bankruptcy process; (iv) to return to profitability;
(v) to generate sufficient cash flow from operations; and (vi) to obtain financing sources to meet its future obligations. These matters create uncertainty relating to the Companys ability to continue as a going-concern. The
accompanying condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of assets or liabilities that might result from the outcome of these uncertainties. In addition, any plan of
reorganization could materially change amounts reported in the Companys condensed consolidated financial statements, which do not give effect to any adjustments of the carrying value of assets and liabilities.

Reorganization

Accounting Standards Codification (ASC) 852 Reorganizations (ASC 852),which is applicable to companies in
Chapter 11, generally does not change the manner in which financial statements are prepared. However, it does require that the financial statements for periods subsequent to the filing of the Chapter 11 petition distinguish transactions and
events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and
restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the quarter ending September 30, 2010. The balance sheet must distinguish pre-petition liabilities subject to
compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if
they may be settled for lesser amounts. In addition, cash provided by reorganization items must be disclosed separately in the statements of cash flows. The Company adopted ASC 852 effective on July 23, 2010 and will segregate those items as
outlined above for all reporting periods subsequent to such date.

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 $0.6 million and $1.0 million as of June 30, 2010 and December 31, 2009, respectively. The Companys policy is to write-off accounts receivable balances once management has deemed them to be
uncollectible.

Fair Value Measurements

The Company has adopted a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair
value. In this valuation, the exchange price is the price in an orderly transaction between market participants to sell an asset or transfer a liability at the measurement date and fair value is a market-based measurement and not an entity-specific
measurement.

The Company utilizes the following hierarchy in fair value measurements:



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



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



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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



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

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

Recurring Fair Value
Measurements: Liabilities measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009 are as follows, in millions:



|                                 |  |                                                                  |  |                                           |      |                                        |   |                           |   |     
|-------------------------------- |  | ---------------------------------------------------------------- |  | ----------------------------------------- | ---- | -------------------------------------- | - | ------------------------- | - | ----
|                                 |  | Quoted Prices inActive Markets forIdentical Liabilities(Level 1) |  | SignificantOtherObservableInputs(Level 2) |      | SignificantUnobservableInputs(Level 3) |   | BalanceatJune 30,2010    
|Derivative financial instruments |  |                                                                 |  | $                                         | 15.4 |                                        |  |                           | $ | 15.4
|Warrant liability                |  |                                                                 |  |                                           | 10.7 |                                        |  |                           |   | 10.7
|                                 |  |                                                                  |  |                                          
|                                 |  | Quoted Prices inActive Markets forIdentical Liabilities(Level 1) |  | SignificantOtherObservableInputs(Level 2) |      | SignificantUnobservableInputs(Level 3) |   | BalanceatDecember 31,2009
|                                 |  |                                                                  |  |                                           |      |                                        |   |                           |   |     
|Derivative financial instruments |  |                                                                 |  | $                                         | 28.2 |                                        |  |                           | $ | 28.2
|Warrant liability                |  |                                                                 |  |                                           | 18.0 |                                        |  |                           |   | 18.0

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

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



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

There were no assets or
liabilities measured at fair value on a non-recurring basis at June 30, 2010.

Intangible assets and goodwill are tested
annually, or more frequently, if a change in circumstances or the occurrence of events indicates that potential impairment exists. As a result of the Company continuing to incur operating losses and the contemplation of filing for Chapter 11
bankruptcy which subsequently occurred in July 2010, the Company evaluated its goodwill and other long-lived assets for impairment as of June 30, 2010. Based on the results of the impairment testing, no impairment was recorded on the
Companys goodwill and other long-lived assets as of June 30, 2010. The Company recorded an impairment charge during the fourth quarter of 2009, as detailed below.

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

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

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



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



Comprehensive Income (Loss)

Comprehensive income (loss) is as follows:



|                                        |  |                                    |       |   |                                  |   |         |      |  |   |       |   |  |   |         |  
|--------------------------------------- |  | ---------------------------------- | ----- | - | -------------------------------- | - | ------- | ---- |  | - | ----- | - |  | - | ------- | -
|                                        |  | Three-month periods ended June 30, |       |   | Six-month periods ended June 30, |  
|                                        |  | 2010                               |       |   | 2009                             |   |         | 2010 |  |   | 2009  |  
|Net income (loss), as reported          |  | $                                  | 5,792 |   |                                  | $ | (14,186 | )    |  | $ | 3,746 |   |  | $ | (35,245 | )
|Foreign currency translation adjustment |  |                                    | (6    | ) |                                  |   | (75     | )    |  |   | (15   | ) |  |   | (50     | )
|                                        |  |                                    |       |   |                                  |   |         |      |  |   |       |   |  |   |         |  
|                                        |  |                                    |       |  
|Comprehensive income (loss)             |  | $                                  | 5,786 |   |                                  | $ | (14,261 | )    |  | $ | 3,731 |   |  | $ | (35,295 | )
|                                        |  |                                    |       |   |                                  |   |         |      |  |   |       |   |  |   |         |  

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.

Recently Adopted Accounting Pronouncements

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

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

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

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



New Accounting Pronouncements Not Yet Effective

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

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

NOTE 3. Property and Equipment.

Property and equipment consists of the following:



|                           |  |              |        |   |                  |   |        |  
|-------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                           |  | June 30,2010 |        |   | December 31,2009 |  
|Furniture and fixtures     |  | $            | 343    |   |                  | $ | 343    |  
|Computer equipment         |  |              | 998    |   |                  |   | 972    |  
|Leasehold improvements     |  |              | 823    |   |                  |   | 813    |  
|Machinery and equipment    |  |              | 1,671  |   |                  |   | 1,630  |  
|                           |  |              |        |   |                  |   |        |  
|                           |  |             
|                           |  |              | 3,835  |   |                  |   | 3,758  |  
|Accumulated depreciation   |  |              | (2,963 | ) |                  |   | (2,778 | )
|                           |  |              |        |   |                  |   |        |  
|                           |  |             
|Net property and equipment |  | $            | 872    |   |                  | $ | 980    |  
|                           |  |              |        |   |                  |   |        |  

Depreciation of property and equipment was $ 0.1 million and $0.2 million for the three-months ended
June 30, 2010 and June 30, 2009, and $0.2 million and $0.4 million for the six-month periods ended June 30, 2010 and June 30, 2009, respectively.

NOTE 4. 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 June 30, 2010 and December 31, 2009 for each major intangible asset class are as follows:



|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|-------------------- |  | ---------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | --- |  | - | ------
|                     |  |                              |  | June 30, 2010      
|                     |  | AmortizationPeriod in 
Years |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | Net
|Developed technology |  | 15                           |  | $                   | 8,546  |                         | $ | (4,101 | )   |  | $ | 4,445 
|Customer base        |  | 15                           |  |                     | 14,256 |                         |   | (3,417 | )   |  |   | 10,839
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       
|                     |  |                              |  |                    
|Total                |  | 13.4 weighted average years  |  | $                   | 22,802 |                         |   | (7,518 | )   |  | $ | 15,284
|                     |  |                              |  |                     |        |                         |   |        |     |  |   |       



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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



Amortization expense related to the intangible assets was $0.6 million and $1.0 million
for the three-months ended June 30, 2010 and 2009, and $1.2 million and $1.9 million for the six-month periods ended June 30, 2010 and 2009, respectively.

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



|                           |  |   |       
|-------------------------- |  | - | ------
|Remaining 6 months of 2010 |  | $ | 1,177 
|2011                       |  |   | 2,141 
|2012                       |  |   | 1,953 
|2013                       |  |   | 1,767 
|2014                       |  |   | 1,571 
|2015                       |  |   | 1,392 
|Thereafter                 |  |   | 5,283 
|                           |  |   |       
|                           | 
|Total                      |  | $ | 15,284
|                           |  |   |       

As a result of the Company continuing to incur
operating losses and the contemplation of filing for Chapter 11 bankruptcy which subsequently occurred in July 2010, the Company evaluated its specifically identifiable intangible assets for impairment as of June 30, 2010. Based on the results
of the impairment testing, the future expected undiscounted cash flows to be generated from the Companys intangible assets exceeded its carrying value, therefore, no impairment was recorded as of June 30, 2010.

Goodwill

Management determined that the Company had only one reporting unit for the purposes of goodwill impairment testing in 2009. The results of
the annual impairment test indicated that there was a $12.5 million impairment of goodwill recorded in the fourth quarter of 2009.

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



|      |  |                    |        |                             |   |         |                  |  |                    |       |                             |   |        |                  |   |         |   |  |   |      
|----- |  | ------------------ | ------ | --------------------------- | - | ------- | ---------------- |  | ------------------ | ----- | --------------------------- | - | ------ | ---------------- | - | ------- | - |  | - | -----
|      |  | June 30, 2010      |        | December 31, 2009          
|      |  | ValueatAcquisition |        | AccumulatedImpairmentLosses |   |         | NetCarryingValue |  | ValueatAcquisition |       | AccumulatedImpairmentLosses |   |        | NetCarryingValue
|Total |  | $                  | 13,993 |                             | $ | (12,513 | )                |  | $                  | 1,480 |                             | $ | 13,993 |                  | $ | (12,513 | ) |  | $ | 1,480
|      |  |                    |        |                             |   |         |                  |  |                    |       |                             |   |        |                  |   |         |   |  |   |      

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

Due to the impairment triggers noted above, the Company conducted an interim goodwill impairment test as of June 30, 2010. The fair
value of the Companys reporting unit, determined using a discounted cash flow model, was greater than its carrying value at June 30, 2010. As a result, no impairment of goodwill was recorded as of June 30, 2010.

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

NOTE 5. Accrued Expenses.

Accrued expenses consist of the following:



|                               |  |              |       |                  |   |      
|------------------------------ |  | ------------ | ----- | ---------------- | - | -----
|                               |  | June 30,2010 |       | December 31,2009
|Accrued carrier disputes       |  | $            | 538   |                  | $ | 1,661
|Compensation and payroll taxes |  |              | 889   |                  |   | 1,067
|Interest expense               |  |              | 111   |                  |   | 620  
|Excise and sales taxes         |  |              | 1,162 |                  |   | 858  
|Professional services          |  |              | 1,057 |                  |   | 997  
|Other expenses                 |  |              | 1,030 |                  |   | 636  
|                               |  |              |       |                  |   |      
|                               |  |             
|Total accrued expenses         |  | $            | 4,787 |                  | $ | 5,839
|                               |  |              |       |                  |   |      



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



NOTE 6. Debt.

Debt consists of the following:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |              |        |                  |   |       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | June 30,2010 |        | December 31,2009
|Term loan, interest at the higher of prime or 5%, plus a margin of 14% (5% paid-in-kind), due November 2010, debt discount at
issuance of $2.2 million, outstanding principal balance of $8.5 million. At June 30, 2010, the outstanding principal balance was $4.8 million, plus paid-in-kind interest of $0.2 million, net of unamortized debt discount of $0.3 million. At
December 31, 2009, the outstanding principal balance was $8.5 million, plus paid-in-kind interest of $0.8 million, net of unamortized debt discount of $1.0 million                                                                                                                                                          |  | $            | 4,744  |                  | $ | 8,314 
|July Debentures, $10.5 million, issued in July 2009 and August 2009, Original Issue Discount (OID) and Debt discount at issuance
of $4.5 million and $5.2 million, respectively, interest at the higher of prime or 5%, plus a margin of 14% (5% paid-in-kind), and due May 2011. At June 30, 2010, the outstanding principal balance was $12.3 million plus $0.3 million
payment-in-kind interest, net of unamortized OID and debt discount of $2.7 million and $2.7 million, respectively. At December 31, 2009, the outstanding principal balance was $10.5 million plus $0.1 million payment-in-kind interest, net of
unamortized OID and debt discount of $3.6 million and $4.1 million, respectively |  |              | 7,193  |                  |   | 2,931 
|Amended March Debentures, original issue discount and debt discount at issuance of $12.4 million and $18.4 million, respectively,
due March 2015, outstanding principal balance of $30.8 million at issue. At June 30, 2010, the outstanding principal balance was $26.9 million, net of unamortized OID and debt discount of $10.1 million and $13.0 million, respectively. At
December 31, 2009, the outstanding principal balance was $26.9 million, net of unamortized original issue discount and debt discount of $11.0 million and $14.1 million, respectively.                                                                                                                                     |  |              | 3,827  |                  |   | 1,764 
|November Debentures, original issue discount and debt discount at issuance of $5.9 million and $9.0 million, respectively, due
November 2015, outstanding principal balance of $14.9 million at issue. At June 30, 2010, the outstanding principal balance was $14.9 million, net of unamortized original issue discount and debt discount of $5.1 million and $7.9 million,
respectively. At December 31, 2009, the outstanding principal balance was $14.9 million, net of unamortized original issue discount and debt discount of $5.6 million and $8.5 million, respectively.                                                                                                                         |  |              | 1,866  |                  |   | 840   
|VPP Debentures, outstanding principal balance of $2.0 million issued in July 2009, OID and debt discount at issuance of $0.8
million and $1.2 million, respectively, and due November 2011. As at June 30, 2010 the outstanding principal balance was $2.0 million, net of unamortized OID and debt discount of $0.5 million and $0.7 million, respectively. As of
December 31, 2009, the outstanding principal balance was $2.0 million, net of unamortized OID and debt discount of $0.6 million and $1.0 million, respectively.                                                                                                                                                                         |  |              | 797    |                  |   | 380   
|Seller Debenture, $4.0 million non-interest bearing, debt discount for imputed interest and conversion feature at issuance of
$1.5 million and $2.0 million, respectively, due May 2011 and renewable monthly thereafter. At June 30, 2010, the outstanding principal balance was $4.0 million, net of unamortized debt discount of $1.4 million. At December 31, 2009, the
outstanding principal balance was $4.0 million, net of unamortized debt discount of $2.1 million.                                                                                                                                                                                                                              |  |              | 2,561  |                  |   | 1,851 
|Unsecured loans from certain employees of Magenta, interest at 8.43%, due upon demand                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |              | 22     |                  |   | 27    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |              |        |                  |   |       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |             
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |              | 21,010 |                  |   | 16,107
|Less: current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |              | 21,010 |                  |   | 16,107
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |              |        |                  |   |       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |             
|Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | $            |       |                  | $ |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |              |        |                  |   |       

All long-term debts are presented as current
obligations as a result of the Company being in default on certain reporting and administrative covenants. The long-term debt commitments including the maturity value of original issue discount securities are $65.4 million as of June 30, 2010
and $67.7 million as of December 31, 2009. This amount does not include minimum interest due on the term note per the default clause of the agreement. As part of the Companys formal reorganization, the Company is currently negotiating
alternatives to restructure its debt instruments.

The reporting and administrative covenants
established under the term note and the other debt instruments issued in November 2008 were created assuming an ongoing relationship with a significant customer. As that relationship effectively ended in 2009, the Company had received a number of
default notices and entered into a number of amendments to the loan agreements and forbearance agreements. On May 3, 2010, Pivotal Global Capacity, LLC, an affiliate of the Pivotal Group of Companies, successfully closed on its purchase of
rights and obligations of the Senior Lender (ACF CGS, L.L.C.) with respect to the Term Loan and Security Agreement dated November 19, 2008, as amended, with no changes in terms and conditions. During the three months ended June 30, 2010,
the Company paid Pivotal fees of $0.8 million including $0.7 million for due diligence fees for a future investment of $3 million by Pivotal. The company expensed the due diligence fees as the $3 million investment was not made. Additionally,
Capstone Investments was paid a fee of $0.2 million for their advice with respect to this transaction. The Company will seek to raise additional capital as necessary to meet capital and liquidity requirements.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



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 GCD (Borrowers) granted to ACF CGS, L.L.C. (Senior Lender or Agent) a security interest in substantially all of their assets and a collateral pledge of
all of the common stock or limited liability company interests of its wholly-owned subsidiaries.

On May 3, 2010, Pivotal
Global Capacity, LLC, an affiliate of the Pivotal Group of companies engaged in the private equity business (Pivotal), closed on its purchase of all rights and obligations of the Senior Lender (ACG CGS, L.L.C., as agent for itself and
any other named lenders) with respect to the Term Loan and Security Agreement dated November 19, 2008, as amended between ACF CGS, L.L.C. on the one hand and the Company and all of its active 100% owned subsidiaries on the other hand. As part
of the Loan Agreement assignment, Pivotal, ACF CGS, L.L.C. and the Company and its subsidiaries entered into a Resignation, Appointment and Amendment Agreement whereby Pivotal was substituted as the Agent and sole lender under the Loan
Agreement with no changes in terms and conditions. The Company agreed to reimburse Pivotal for its third party expenses incurred in connection with the transactions leading to the assignment of the loan from ACF CGS, L.L.C. Pivotal has been assigned
the same rights and obligations of the previous holder and has stepped into the role as the new Senior Lender in the same capacity as ACF CGS, L.L.C. Interest on the Term Loan is payable monthly at the higher of prime or 5% plus a margin of 14%,
with 5% of that rate paid-in-kind. Paid-in-kind interest compounds monthly and is added to the outstanding principal balance of the Term Loan. The Company incurred debt issuance costs of $1.8 million in connection with the Term Loan Agreement, which
included a Term Loan origination fee of 2.5%, financial advisory services, legal fees and other costs.

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

The Term Loan Agreement contains financial covenants that require the Company to maintain a minimum cash balance and to achieve a minimum
monthly recurring circuit revenue and margin. The Company was in compliance with these minimum requirements at December 31, 2008. Beginning with the first quarter of 2009, the Company became subject to additional financial covenants related to
a minimum ratio of EBITDA (defined as earnings before interest, taxes, depreciation, amortization, non-cash stock compensation and warrant expense and other items related to the acquisition of GCD) to fixed charges, as defined, and a maximum ratio
of debt to EBITDA. As of 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. In connection with the July Debentures, the increase in authorized shares was to have been finalized by January 26, 2010. A waiver extending the authorized share increase to March 19, 2010 was obtained from the
Senior Lender. On March 25, 2010, the Senior Lender notified the Company that the forbearance was not extended and that several items of default existed.

In connection with entering into the Term Loan Agreement, the Company issued to the Agent a warrant (Agent Warrant) to purchase up to
12 million shares of its Common Stock with a term of five years and an exercise price of $0.24 per share. The Agent Warrant is exercisable upon an increase in the Companys authorized shares of common stock (Authorized Share Increase) and
expires in November 2013. The Agent Warrant had a grant date fair value of $2.2 million determined using the Black-Scholes pricing model with the following assumptions: common stock fair value of $0.27 per share, expected volatility of 141.2%,
risk-free interest rate of 2.1%, expected term of 5.0 years and no dividends. The fair value of the warrants, adjusted for the uncertainty related to the Authorized Share Increase, was recorded as a decrease to the carrying value of the Term Loan,
or debt discount, and an increase to liabilities for warrants to purchase common stock. See Note 16. Subsequent Events for a discussion of the payment in full of the Senior Secured Term Loan.

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



At issuance, the July Debentures are convertible into 43.8 million shares of common
stock at $0.24 per share, based on the aggregate maturity value, at any time at the option of the holders, but not before the Companys Authorized Share Increase. In addition, the Company issued to the purchasers of the July Debentures warrants
to purchase an aggregate of 18.8 million shares of its common stock at an exercise price of $0.24 per share. The warrants are exercisable at any time prior to their expiration date, but not before the Authorized Share Increase and expire five
years after the date of such share increase. The Company determined that the conversion feature of the July Debentures was an embedded derivative. As a result of a shortfall in the collection of certain designated receivables or contract amounts by
August 31, 2009, the July Units purchase agreement required a reduction in the conversion price of the July Debentures and the exercise price of the warrants from $.24 per share to $.15 per share with respect to all July Debentures held by
persons that funded a portion of the shortfall with respect to subsequently issued Debentures (August Debentures), and all of the July Debenture holders did fund their ratable shares of the shortfall.

The estimated fair value of the warrants and embedded derivative as of the issuance date of the July Debentures, adjusted for the
probability of the timing of the Authorized Share Increase, was $2.0 million and $3.2 million, respectively, and was recorded as debt discount and an increase to liabilities for warrants to purchase common stock and embedded derivative liability,
respectively. The Company determined the fair value of the warrants and embedded derivative using the Black-Scholes pricing model with these average assumptions: common stock fair value of $0.16 per share, expected volatility of 152.4% for warrants
and 154.5% for embedded derivatives, risk-free interest rate of 2.6% for warrants and 1.0% for embedded derivatives, expected term of 5.3 years for warrants and 1.8 years for embedded derivatives and no dividends.

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

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

As required by the debenture
agreement, the amount due at maturity was increased by $1.4 million during the period ended March 31, 2010, representing unpaid monthly interest of $0.5 million and additional OID amounts due on the unpaid monthly interest and the unpaid
quarterly redemption payment due of $0.9 million. During the three months ended June 30, 2010, the Company had not made the required redemption payment in the month following the quarter ended March 31, 2010.

Amended March Debentures: Pursuant to the November 20, 2008 Waiver Agreement, the holders of $16 million of original
principal amount of March Debentures exchanged their March Debentures due March, 2013 for $28.0 million of Amended March Debentures, convertible into common stock at $0.24 per share (the Tranche 1 Amended March Debentures). The principal amount of
the Tranche 1 Amended March Debentures is comprised of the $16 million original principal amount of the March Debentures plus the sum of the following: (i) the remainder of the interest that would have accrued under the March Debentures, 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 November 20, 2008 Waiver Agreement, the
Company exchanged their March Debentures for $2.9 million of Amended March Debentures (the Tranche 2 Amended March Debentures), which mirror the terms of the Tranche 1 Amended March Debentures.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



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. At June 30, 2010 and December 31, 2009, the balances owed to these holders were not material.

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

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

The holders of the Amended March Debentures retain the right at any time to convert
up to an aggregate of $14.4 million of the face amount into common stock of the Company at $0.24 per share or up to 60.0 million shares on an as converted basis and convert up to an aggregate of $3.2 million of the face amount into common stock
of the Company at $0.15 per share or up to 21.0 million shares on an as converted basis. There were no debt conversions during the six-month period ended June 30, 2010. During the year ended December 31, 2009, holders converted $2.9
million of the Amended March Debentures into 13.9 million shares of common stock.

November Debentures: On
November 20, 2008, pursuant to the November Securities Purchase Agreement (SPA), the Company completed the private placement of $9.0 million of November Debentures with a maturity value of $14.9 million and due November 2015. The Company
incurred $2.0 million of debt issuance costs in connection with the SPA. The November Debentures are OID securities and do not call for the payment of interest over their term. In connection with 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.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



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 (and which was further modified as provided in the July Debentures).

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

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

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

The Seller Debenture is convertible into shares of the Companys common stock at a conversion rate of $0.24 per share, or
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.

NOTE 7. Liability for Embedded Derivatives and
Warrants.

Embedded Derivatives

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 (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.

As of June 30, 2010
and December 31, 2009, the fair value of the derivatives embedded in the convertible debt was $15.4 million and $28.2 million, respectively. The weighted average assumptions used to value the embedded derivative liability at June 30, 2010
were: exercise price of $.20, life of 3.7 years, volatility 141.8 %, and risk free interest rate of 1.2%. At December 31, 2009, the weighted average assumptions used were: exercise price of $0.20, life of 4.1 years, volatility 155.3%, and
risk free interest rate of 2.2%.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



Warrants

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 June 30, 2010 and December 31, 2009, the fair value of the warrants was $10.7 million and $18.0 million, respectively. The weighted average
assumptions used to value the warrant liability at June 30, 2010 were: exercise price of $0.23 life of 3.9 years, volatility 146.8%, and risk free interest rate of 1.35%. At December 31, 2009, the weighted average assumptions used were:
exercise price of $0.23, life of 4.4 years, volatility 149.8%, and risk free interest rate of 2.3%.

At June 30, 2010 and
December 31, 2009, respectively, the Company had 181.3 million warrants outstanding to purchase its common stock. These warrants were issued in connection with debt and equity offerings and in lieu of cash payments for services provided
and became exercisable when issued. The warrants expire two to five years from date of issuance.

The table below summarizes
the warrant expiration dates as of June 30, 2010:



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

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

Warrant activity from December 31, 2009 through June 30, 2010 is as follows:



|                                 |  |                                 |  |                                |       |                                                   |     |                                |   |  
|-------------------------------- |  | ------------------------------- |  | ------------------------------ | ----- | ------------------------------------------------- | --- | ------------------------------ | - | -
|                                 |  | Numberof Warrants(in thousands) |  | Weighted AverageExercise Price |       | Weighted AverageRemaining ContractualLife (Years) |     | AggregateIntrinsicValue ($000)
|Outstanding at December 31, 2009 |  | 181,308                         |  | $                              | 0.228 |                                                   |     |                                |   |  
|Warrants issued                  |  |                                |  |                                |      |                                                   |     |                                |   |  
|Exercised                        |  |                                |  |                                |      |                                                   |     |                                |   |  
|Forfeited/cancelled              |  |                                |  |                                |      |                                                   |     |                                |   |  
|                                 |  |                                 |  |                                |       |                                                   |     |                                |   |  
|                                 |  |                                 |  |                               
|Outstanding at June 30, 2010     |  | 181,308                         |  |                                | 0.228 |                                                   | 3.9 |                                | $ | 
|                                 |  |                                 |  |                                |       |                                                   |     |                                |   |  

There was no warrant activity during the six-month
period ended June 30, 2010.

NOTE 8. Share-Based Compensation.

Long-Term Incentive Plans

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

Executive
Stock Option Agreements

From time to time, the Company provides for the issuance of
share-based compensation in conjunction with employment agreements or special arrangements with certain of its executives and directors. As of June 30, 2010, the Company has authorized up to 65.2 million shares to be issued under these
arrangements.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



Activity under the stock option plans and board approved stock grants with time based
vesting for the six-months ended June 30, 2010 is as follows:



|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|-------------------------------- |  | -------------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -
|                                 |  | Shares(in thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue
|Outstanding at December 31, 2009 |  | 23,366               |   |  | $                            | 0.565 |                                                 |     |                         |   |  
|Granted                          |  | 400                  |   |  |                              | 0.240 |                                                 |     |                         |   |  
|Exercised                        |  |                     |   |  |                              |      |                                                 |     |                         |   |  
|Forfeited/cancelled              |  | (141                 | ) |  |                              | 0.670 |                                                 |     |                         |   |  
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|                                 |  |                      |   | 
|Outstanding at June 30, 2010     |  | 23,625               |   |  | $                            | 0.559 |                                                 | 6.2 |                         | $ | 
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  
|                                 |  |                      |   | 
|Exercisable at June 30, 2010     |  | 21,523               |   |  | $                            | 0.568 |                                                 | 6.1 |                         | $ | 
|                                 |  |                      |   |  |                              |       |                                                 |     |                         |   |  

Time based awards generally vest 25% upon issuance and
25% on the successive three 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 six-month periods ended June 30, 2010 and 2009 was $0.10 and $0.124, respectively. For the six-month periods ended June 30, 2010 and 2009, respectively, the Company recognized compensation expense
for stock option awards totaling $0.7 million and $ 0.8 million, respectively. In the three-month period ended June 30, 2010 and 2009, compensation expense was $0.2 million and $0.4 million, respectively. At June 30, 2010, unamortized
compensation associated with time-based options totaled $0.8 million with a remaining weighted average amortization period of 0.8 years.

Activity under the stock option plans and board approved stock grants with performance-based vesting for the six-months ended
June 30, 2010 is as follows:



|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|-------------------------------- |  | -------------------- |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | -
|                                 |  | Shares(in thousands) |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue
|Outstanding at December 31, 2009 |  | 14,367               |  | $                            | 0.488 |                                                 |     |                         |   |  
|Granted                          |  |                     |  |                              |      |                                                 |     |                         |   |  
|Exercised                        |  |                     |  |                              |      |                                                 |     |                         |   |  
|Forfeited/cancelled              |  |                     |  |                              |      |                                                 |     |                         |   |  
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|                                 |  |                      |  |                             
|Outstanding at June 30, 2010     |  | 14,367               |  |                              | 0.488 |                                                 | 4.3 |                         | $ | 
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  
|                                 |  |                      |  |                             
|Exercisable at June 30, 2010     |  | 1,333                |  | $                            | 0.571 |                                                 | 5.3 |                         | $ | 
|                                 |  |                      |  |                              |       |                                                 |     |                         |   |  

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 six-month period ended June 30, 2010. For the six-month periods ended June 30, 2010 and 2009, respectively, the Company recognized compensation expense for performance-based stock option awards totaling $0.2 million and $0.2
million, respectively. For the three-month period ended June 30, 2010, there was no compensation expense recognized and no shares were cancelled. During the three-months ended June 30, 2009, compensation expense was reduced by $0.2 million
as performance criteria was not attained and 0.9 million shares were cancelled. At June 30, 2010, unamortized compensation associated with performance-based options totaled $4.9 million with a remaining weighted average amortization period
of 1.4 years.

The assumptions used to calculate the fair value of stock option grants issued are as follows:



|                                         |  |                                      |  
|---------------------------------------- |  | ------------------------------------ | -
|                                         |  | Six-month period endedJune 
30, 2010 |  
|Expected volatility                      |  | 148.6                                | %
|Weighted-average expected volatility     |  | 148.6                                | %
|Expected term (in years)                 |  | 6.1                                  |  
|Weighted-average risk-free interest rate |  | 2.77                                 | %
|Expected dividends                       |  |                                     |  

Expected
volatility is based on the Companys trading history over a three-year period. Weighted average volatility uses the volatility on the grant date and the number of options granted throughout the year. The expected term is the time Management
estimates options will be outstanding. The weighted average risk free interest rate is taken from the US Treasury rate of similar lived instruments on the date of the option grant.

The Company does not anticipate issuing dividends for the foreseeable future. A forfeiture rate of 5.0% is currently being used.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



No options were exercised during the six-month period ended June 30, 2010. No tax
benefit has been recorded related to stock-based compensation expense.

NOTE 9. Shareholders Equity (Deficit).

The Companys authorized common stock entitles holders to one vote for each share held of record. As of June 30, 2010, the
Company has authorized 350 million shares of the $.0001 par value common stock. During the three and six-month periods ended June 30, 2010, the Company did not issue any shares of common stock.

During 2009, the Company issued 14.0 million shares of common stock upon the conversion of $2.9 million of outstanding debt.

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

The Company has previously entered into non-employee
service agreements and as a contract incentive agreed to issue common stock of 2.3 million and 2.0 million shares, respectively. The shares were earned as of the effective date of the agreements and, except for a breach of contract, are
non-forfeitable. Under the 2009 and 2008 contract incentive, although earned, shares are not issuable until the Authorized Share Increase expected in 2010. No additional non-employee service agreements requiring share issuance were entered into
during the three and six-month periods ended June 30, 2010.

NOTE 10. Income Taxes.

The Company did not identify any uncertain tax positions as of June 30, 2010 and December 31, 2009. 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 six-month period ended June 30, 2010 and the year ended December 31, 2009 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 2006. The Company is open to state tax audits until the applicable statutes of limitations expire.

The current tax expense for the three and six months ended June 30, 2010 relates to state income taxes imposed primarily to GCD as a
result of its profitability from a separate company tax perspective. The deferred tax expense relates to book and income tax basis difference in goodwill created in the GCD acquisition. There was no tax provision recorded for the three and six
months ended June 30, 2009.

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) carry forwards of $68.5 million in the United States (U.S.) and
foreign (U.K.) NOL carry forwards of $10.0 million at June 30, 2010 and December 31, 2009. The Federal NOL and credit carry forwards 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 carry forwards.

Realization of the NOL carry forwards, 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.

NOTE 11. Income (Loss)
per Share.

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



Potentially dilutive shares, which were excluded in computing diluted loss per share, as
their inclusion would have had an anti-dilutive effect on the net income (loss) per share, are as follows:



|                       |  |                                    |  |                                  |  |             |  |            
|---------------------- |  | ---------------------------------- |  | -------------------------------- |  | ----------- |  | -----------
|                       |  | Three-month periods ended June 30, |  | Six-month periods ended June 30,
|                       |  | 2010                               |  | 2009                             |  | 2010        |  | 2009       
|Stock options          |  | 37,991,199                         |  | 62,906,202                       |  | 37,991,199  |  | 62,906,202 
|Warrants               |  | 181,308,076                        |  | 167,764,295                      |  | 181,308,076 |  | 167,764,295
|Convertible debentures |  | 289,806,961                        |  | 193,759,005                      |  | 289,806,961 |  | 193,759,005
|                       |  |                                    |  |                                  |  |             |  |            
|                       |  |                                    |  |                                 
|                       |  | 509,106,236                        |  | 424,429,502                      |  | 509,106,236 |  | 424,429,502
|                       |  |                                    |  |                                  |  |             |  |            



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



NOTE 12. 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 $0.5 million and $0.4 million for the six-month periods ended June 30, 2010 and 2009, respectively.

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



|                           |  |                 |      
|-------------------------- |  | --------------- | -----
|                           |  | OperatingLeases
|Remaining 6 months of 2010 |  | $               | 607  
|2011                       |  |                 | 1,038
|2012                       |  |                 | 507  
|2013                       |  |                 | 179  
|Thereafter                 |  |                 |     
|                           |  |                 |      
|                           | 
|Total                      |  | $               | 2,331
|                           |  |                 |      

Other Commitments: As of June 30, 2010,
$2.2 million of the Companys accounts payable were over one year past due.

As part of the Vendor Payment Plan initiated
by the Company in July 2009, certain vendors agreed to extend the due dates of trade payables or otherwise defer collection action until additional working capital was raised. As of June 30, 2010, approximately $0.1 million of those payables
remained unpaid.

On February 1, 2010, the Company entered into a Separation and Transition Services Agreement with the
former Chief Financial Officer and committed to issue a warrant to purchase 5.0 million shares of the Companys common stock at $0.24 per share. Under the Separation and Transition Services Agreement, the Company is prohibited from issuing
the warrant until receiving the consent of the Subordinated Debenture holders or after all Subordinated Debentures have been satisfied by conversion to common stock or full payment has been made. Because the Company cannot determine if, and when,
consent of the Subordinated Debenture holders will be obtained or the Subordinated Debenture balances will be satisfied, uncertainty exists concerning the warrant issuance date and term. As a result, no value has been assigned to this transaction in
the financial statements.

Simultaneous with the execution of the Separation and Transition Services Agreement entered into by
the Company with the former Chief Financial Officer, the Company entered into a Consulting Agreement (Agreement) with the former Chief Financial Officer. The Agreement provides for a total of $0.4 million to be paid to the former Chief
Financial Officer in twenty-four equal semi-monthly installments. The Agreement commences on February 15, 2010 and will terminate on January 31, 2011 unless both parties agree to extend the Agreement beyond the termination date.

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 13. 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 owned 13.4 million shares or approximately 8% of the Companys outstanding common stock and held warrants to purchase 25.0 million shares of the Companys common stock as of June 30, 2010.
At June 30, 2010, the Company was indebted to Aequitas for debentures issued for a subscription amount of $5.7 million which at maturity have a face amount of $9.8 million. The Company also owed Aequitas $0.3 million of accounts payable at
June 30, 2010.

During the six-month period ended June 30, 2010, Aequitas was issued additional July Debentures with
a face amount of $0.7 million as a result of the Company not making scheduled interest and OID payments on the July Debentures and Aequitas funding of the cash subscription amount for such additional July Debentures. Also during the six months
ended June 30, 2010 and June 30, 2009, in connection with advisory services provided, the Company incurred fees of $0.08 million and $0.03 million, and made cash payments of $0.05 million and $0.02 million, respectively.

In 2009, the Company designated Aequitas as Collateral Agent to administer the July Securities Purchase Agreement. Aequitas was entitled
to a Collateral Agent Fee of $0.3 million. As of June 30, 2010, $0.2 million of the Collateral Agent Fee remains unpaid. The Company also incurred $0.05 million to Aequitas for expenses incurred in connection with the July Securities Purchase
Agreement.

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



During the six months ended June 30, 2010, a significant shareholder was issued
additional July Debentures with a face amount of $0.1 million as a result of the Company not making scheduled interest and OID payments on the July Debentures.

NOTE 14. Business Concentration.

During the six-month period ended June 30, 2010 and 2009, a major customer represented $6.8 million (24 %) of total revenues and
$4.3 million (13 %) of total revenues, respectively.

At June 30, 2010 and December 31, 2009, a major customer
represented $1.2 million (26%) and $1.1 million of accounts receivable, respectively. A different major customer represented $1.1 million (25%) and $1.1. million (11%) of accounts receivable at June 30, 2010 and December 31,
2009. At December 30, 2009, a third customer represented $3.7 million (38%) of accounts receivable.

NOTE 15. Geographic and
Other Information.

Revenues generated outside the United States for the three- month periods ended June 30, 2010 and
2009 totaled $0.4 million and $0.3 million, respectively, and for six-month periods ended June 30, 2010 and 2009 totaled $0.7 million and $0.5 million, respectively. Substantially all of the Companys international revenue was generated in
the European Union, Canada and Central America. As of June 30, 2010 and December 31, 2009, the Companys international identifiable assets outside the United States totaled approximately $0.2 million and $0.4 million, respectively.
All of the Companys international identifiable assets were located in the United Kingdom.

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

NOTE 16. Subsequent Events.

a) Bankruptcy Filing

On July 23, 2010, Capital Growth Systems, Inc. (CGSY.OBQ) (the Company) announced that it, together with the following
wholly owned subsidiaries: Global Capacity Direct, LLC, Global Capacity Group, Inc., CentrePath, Inc., FNS 2007, Inc., 20/20 Technologies, Inc., 20/20 Technologies I, LLC, Global Capacity Holdco, LLC, and Nexvu Technologies, LLC (each a
Debtor and collectively with the Company, the Debtors) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware. The Debtors remain in possession of their assets and properties, and continue to operate their businesses and with Bankruptcy Court approval have obtained debtors- in- possession financing provided by a consortium of lenders including
Downtown Capital Partners and a group of certain of the current holders of secured convertible debentures of the Company. The financing will enable the Debtors to continue to operate their business in the ordinary course pending a proposed
reorganization of the Debtors businesses.

The Company has retained Capstone Investments as its financial advisor to
manage the process.

b) Debtor- in Possession Financing and Payoff of the Senior Term Loan

With the filing of voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code, the Company entered into
a Debtor in Possession Loan and Security Agreement (the DIP Loan Agreement) with Downtown CP-CGSY, LLC (the Tranche A Lender), the holders of certain debentures issued by the Company (the Pre-Petition Debenture
Lenders), and certain other investors that were approved by the Pre-Petition Debenture Lenders (collectively, the Tranche B Lenders and together with the Tranche A Lender, collectively, the Lenders). The DIP Loan
Agreement was effective as of July 30, 2010 and was approved on an interim basis on that date (the Interim Order), pending a final hearing on the matter.

The DIP Loan Agreement provides for an aggregate financing of up to $10.25 million to be provided through a $3 million Tranche A Loan and
a $7.25 million Tranche B Loan.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements(Continued)

June 30, 2010 (Unaudited)



The Terms of the DIP Financing are as follows:



| | a) | DIP Facility/Availability: upon entry of the Interim Order, an initial advance of: (i) $9.25 million (consisting of a $3 million Tranche A Loan and $6.25
million Tranche B Loan), (ii) such additional amount as may be agreed to by Downtown Capital in writing, or (iii) such other sum as is approved by the Bankruptcy Court on an interim basis. Upon entry of a Final Order, up to $10.25 million
outstanding at any time.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Purpose: Principally short-term working capital, utility deposits, critical vendor payments, payment of pre-petition secured indebtedness of Secured Lien Lender.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | Financial Terms: Interest on Tranche A Loan will be payable at the end of each month in arrears at 12% per annum. Interest on the Tranche B Loan, including
PIK interest added to the principal amount of the Tranche B Loans, shall accrue at 12% payment in kind which shall accrue and be added to the principal monthly, but be paid in full upon the earlier of the Effective Date of a plan of reorganization,
upon an Event of Default or the Maturity Date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Maturity: The Borrowers shall repay ant outstanding advances and loans under the DIP Financing on the earliest of: (i)(a) the occurrence of an Event of Default
and (b) the Effective Date of a Plan of Reorganization; provided that subject to the Lenders written consent the Borrowers may extend such date by up to two periods of sixty days each; (ii) the date of the acceleration of any
outstanding extensions of credit under the DIP Financing; (iii) entry of an order reversing in any respect either of the DIP Financing Orders (unless waived in writing by DIP Lenders); (iv) the conversion of any of the Chapter 11 Cases to
a case under Chapter 7 of the Bankruptcy Code; (v) the appointment of a trustee or an examiner with special powers; and (vi) the dismissal of any of the Chapter 11 Cases.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | Fees:The Tranche A Lender has received a Structuring fee of $.02 million and a Commitment Fee of $.06 million. In addition, the Tranche A Lender shall receive
an Extension Fee of 1% for each of the two sixty day extensions of the Maturity Date, which extensions must be consented to by the DIP Lenders in writing.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) | Mandatory Prepayment: (i) 100% of the net sale proceeds from non-ordinary course assets sales; (ii) 100% of insurance and condemnation proceeds and tax
refunds, in each case received by the Borrowers or any of the Guarantors.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g) | Financial Covenants:
| | -- | --------------------



| | a) | EBITDA of at Least:
| | -- | -------------------



|                                           |  |   |             
|------------------------------------------ |  | - | ------------
|1-     Month Ended August 31, 2010         |  | $ | 0.1 million 
|2-     Two Months Ended September 30, 2010 |  | $ | 0.2 million 
|3-     Three Months Ended October 31, 2010 |  | $ | 0.3 million 
|4-     Four Months Ended November 30, 2010 |  | $ | 0.45 million



| | b) | Monthly Recurring Circuit Revenue of at least $3.65 million for the months ended August 31, 2010, September 30, 2010, October 31, 2010 and
November 30, 2010.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | Monthly Recurring Circuit Margin Percentages of 19.5% each for August, September, October and November, 2010 and Cumulative Recurring Circuit Margin Percentage of
19.5 % for August and 20.0% for September, October and November 2010.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Shall not have on a consolidated basis outstanding Accounts Payable of more than $4.1 million as at August 31, September 30, October 31 and
November 30, 2010.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

On August 2, 2010, $9.25 million was advanced by the Lenders to the Debtors under
the terms of the DIP Financing. The remaining $1.0 million of the total financing will be funded by the Tranche B Lenders contingent upon entry of a final order by the Bankruptcy Court approving the Loan and satisfaction by the Debtors of certain
affirmative and negative covenants. The funds were used to pay, on August 3, 2010, $5.2 million in full settlement of the Senior Secured Loan due to Pivotal Global Capacity, LLC (the Senior Lender); assurance deposits in the amount
of $3.2 million to the Debtors carriers and the remaining $0.8 million for critical vendors and working capital.

The
Loans bear interest at 12% per annum and require mandatory prepayments in the amount of 100% of the net sale proceeds from non-ordinary course assets sales and 100% of insurance and condemnation proceeds, and tax refunds. The Debtors paid
commitment fees of $.06 million and a $.02 million structuring fee to the Tranche A Lender. If the Tranche A Loan is extended beyond the maturity date, an extension fee of 1% of the Tranche A Loan amount is due for up to two 60 day extensions. The
Loans are secured by all the assets of the Debtors.



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

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

Overview

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

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

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

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

On July 23, 2010, the Company and its United States (U.S.) subsidiaries (the Debtors) filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court). The Debtors will continue to
operate their business as debtors-in-possession under the supervision of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Companys subsidiary in
the United Kingdom was not included in the filing and will continue their business without supervision from the Bankruptcy Court and will not be subject to the requirements of the Bankruptcy Code. See Note 16, Subsequent Events.

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

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



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Services

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

Optimization Solutions

The Optimization Business provides five offerings:

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

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

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

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

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

Connectivity Solutions

The Connectivity Solutions Business provides three offerings:

One Marketplace, the Companys physical network trading platform, aggregates network capacity from multiple
suppliers at strategically deployed pooling points, using Global Capacity switching equipment to efficiently deploy capacity against market demand. One Marketplace reduces network costs for clients, while delivering gross margin more
similar to facilities-based providers than to resellers.



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The Company is continuously expanding One Marketplace by installing additional
aggregation points, and creating interconnections with suppliers (national, regional, and local) to expand the reach and increase the capacity of the platform. Increased client demand, as evidenced by its 160% growth experienced during 2009, enables
continued profitable expansion of the platform.

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

Off-net extension services enable Global Capacity to identify, price, procure,
provision and support competitive off-net access services for large clients, providing access to a broad universe of providers with transparency and efficiency. Using the Companys pricing systems, we generate an automated, accurate price
quote. We then manage that quote from initial pricing through ordering, procurement, provisioning, test and turn up, and operations hand-off, utilizing the Companys proprietary Circuit Lifecycle Manager (CLM) system. Networks are then
monitored and managed by our 7X24 Network Operations Center (NOC). By leveraging automated systems across the entire telecom supply chain, the Company is able to accelerate the delivery of an optimal network.

Significant progress in gaining customer acceptance of our offerings during 2010 underlies Managements belief that our technology,
systems, and logistics capabilities make the Companys business offerings more efficient, faster, and less expensive for systems integrators, telecommunications companies, and enterprise customers to manage the telecom supply chain for their
complex global networks. By purchasing our solutions to create market-pricing transparency and improve the efficiency of the entire telecom supply chain, our customers are able to improve the responsiveness of sales, reduce operating expense,
improve margins, and deliver better service.

Markets and customers

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

One of the fundamental challenges for corporations and other institutions with complex and/or geographically dispersed data
communications networks is the number of service providers and pricing alternatives that must be pieced together in order to create an end-to-end data connectivity solution. Large multinational corporations are increasingly seeking to work with
fewer vendors and a single network provider that they can look to for provisioning end-to-end network solutions fits that design. Additionally, service providers, particularly in regions where facilities-based competition has been introduced,
actively market their services with price as the primary differentiator and network reach being the primary limiting factor. This price-based competition has stressed already challenged gross margins and, as a result, service providers are actively
seeking means to reduce the costs associated with network quotation management and off-network procurement.

Beyond the
telecommunication service providers, expanding enterprises, multi-national corporations, information service providers, and systems integrators are deploying and managing private network-based solutions that provide seamless connections in support
of the ever-increasing demand for business continuity, disaster recovery, regulatory compliance, and collaboration capabilities. Because telecommunications is not the primary line of business for these private network operators, but rather a
facilitator to their end business goals, inefficiencies in the procurement process result in most companies paying more than they should for connectivity. In a competitive environment, such a drain on profitability can be significant.

This confusion is increased by global deregulation, physical fragmentation of the network layer  whether copper, fiber, coaxial
cable, or wireless spectrums  and geographic fragmentation. This market environment appears ideal for an information-driven logistics model focused on minimizing the confusion and inefficiency that plagues the telecom market. The Company
believes that it has such a business model and operating capability, as well as a management team experienced in executing such an information-leveraged and technology-leveraged approach.



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

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

Sales and marketing

Optimization Solutions

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

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

Connectivity Solutions

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

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

Competition

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

Optimization Solutions

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

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

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



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Connectivity Solutions

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

Financial Performance

The Company reported operating losses of $2.6 million, $5.3 million, $3.7 million and $7.5 million for the three and six-month periods
ended June 30, 2010 and 2009, respectively. As of June 30, 2010, the Companys current liabilities exceeded its current assets by $39.0 million. Included in the current liabilities is $21.0 million of current maturities of long-term
debt, net of $25.4 million of debt discount associated with the initial fair value of related warrants and embedded derivatives and $19.0 million associated with OID and imputed interest. Excluding these discounts, the working capital deficiency is
$83.4 million. Cash on hand at June 30, 2010 was $1.7 million (not including $0.2 million restricted for outstanding letters of credit). Cash provided (used) in operating activities was $3.9 million and $(3.1) million for the six-month period
ended June 30, 2010 and 2009, respectively. The Companys net working capital deficiency, accumulated deficit and recurring operating losses raise substantial doubt about its ability to continue as a going concern.

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

On July 23, 2010, the Company and its domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. With these filings, the Debtors entered into and the Bankruptcy Court approved, a Debtor in Possession Financing Facility (DIP Financing) which
will provide up to an aggregate of $10.25 million. On August 2, 2010 the Debtors received $9.25 million under the DIP Financing. On August 3, 2010, in accordance with the provisions of the DIP Financing, the Debtors paid $5.2 million to
Pivotal representing payment in full of the outstanding Senior Secured Loan together with accrued interest.

Critical
Accounting Policies and Estimates

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

Results for the three-month period ended June 30, 2010 compared to 2009

Total revenues for the three-month period ended June 30, 2010 were $13.9 million compared to $15.9 million for the same period in
2009, representing a 13 % decrease. This decrease is primarily due to disconnects from three major customers resulting from a shift in circuitry strategy.

Revenues generated from Optimization Solutions totaled $1.4 million for the three-month period ended June 30, 2010 compared to $2.9
million for the same period in 2009, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $12.5 million for the three-month period
ended June 30, 2010 compared to $13.0 million for the same period in 2009, which is from the delivery of turn-key global networks and system management services.

The consolidated gross margin rate was 24% for the three-month period ended June 30, 2010 compared to 21% for the same period in
2009. This increase was driven primarily by an improvement in the Optimization Solutions margins from lower costs and partially offset by a decrease in the Connectivity Solutions margin. Optimization Solutions gross margin totaled $0.4 million
or 31% for the three-month period ended June 30, 2010 as compared to ($0.6 million) or (20%) for the same period in 2009. Connectivity Solutions margin totaled $2.8 million or 23 % compared to $3.9 million or 30% for the
same period in 2009.

Operating expenses for the three-months ending June 30, 2010 and 2009 consist of the following:



|                              |  |                                   |       |      |   |      
|----------------------------- |  | --------------------------------- | ----- | ---- | - | -----
|                              |  | Three-month periods endedJune 30,
|                              |  | 2010                              |       | 2009
|Compensation                  |  | $                                 | 2,408 |      | $ | 3,119
|Professional services         |  |                                   | 1,593 |      |   | 1,604
|Depreciation and amortization |  |                                   | 679   |      |   | 1,138
|Other operating expenses      |  |                                   | 1,301 |      |   | 1,184
|                              |  |                                   |       |      |   |      
|                              |  |                                  
|Total operating expenses      |  | $                                 | 5,981 |      | $ | 7,045
|                              |  |                                   |       |      |   |      



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Compensation expense decreased $0.7 million (23%) for the three-month period ended
June 30, 2010 as compared to 2009. Included in compensation expense for 2010 and 2009 are non-cash charges of $0.2 million and $0.2 million, respectively, related to stock-based compensation. The decrease was due primarily to a reduction of 16
staff positions since June 30, 2009.

Professional services for the three-month period ended June 30, 2010 were
consistent as compared to the three-month period ended June 30, 2009.

Depreciation and amortization expense relates
primarily to the Network Operating Center in the suburbs of Boston and the fair value assigned to the Companys intellectual property. Depreciation and amortization decreased by $0.5 million (40%) for the three-month period ended
June 30, 2010 as compared to June 30, 2009. This decrease was due primarily to the write down of certain intangible assets in the fourth quarter of 2009.

Other operating expenses for the three-month period ended June 30, 2010 were consistent as compared to the three-month period ended
June 30, 2009.

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

Results for the three-month period ended June 30, 2010 reflect interest of $5.6 million, an increase of $2.5 million from the
three-month period ended June 30, 2009. Interest expense for the three-month periods ended June 30, 2010 and 2009 includes $3.9 million and $2.8 million, respectively, related to the amortization of the fair value assigned to the warrants
and embedded derivatives issued with debt. Interest expense for the three-month period ended June 30, 2010 also includes $1.0 million of accrued interest and $0.7 million of fees incurred to Pivotal Group with respect to exploring additional
financing options.

Results for the three-month period ended June 30, 2010 reflect a gain on warrants and derivatives of
$14.1 million compared to a loss of $5.8 million for the comparable period in 2009. The current years gain was driven primarily by the $0.03 decrease in the period end price of the Companys stock as of June 30, 2010 as compared to
the March 31, 2010 closing price of the Companys stock. The 2009 loss on warrants and derivatives was driven primarily by the $0.02 increase in the per share closing price of the Companys stock as of June 30, 2009 as compared
to the March 31, 2009 closing price. 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.

Results for the six-month period ended June 30, 2010 compared to 2009

Total revenues for the six-month period ended June 30, 2010 were $28.6 million compared to $32.1 million for the
same period in 2009, representing an 11 % decrease. This decrease is primarily due to disconnects from three major customers resulting from a shift in circuitry strategy.

Revenues generated from Optimization Solutions totaled $4.0 million for the six-month period ended June 30, 2010 compared to $5.8
million for the same period in 2009, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $24.5 million for the six-month period
ended June 30, 2010 compared to $26.3 million for the same period in 2009, which is from the delivery of turn-key global networks and system management services.

The consolidated gross margin rate was 25 % for the six-month period ended June 30, 2010 compared to 23% for the same period in
2009. This increase was driven primarily by the improvement in the margins from Optimization Solutions as a result of lower costs. Optimization Solutions gross margin totaled $2.0 million or 49% for the six-month period ended
June 30, 2010 as compared to $(0.9) million or (15%) for the same period in 2009. Connectivity Solutions margin totaled $5.1 million or 21 % compared to $8.1 million or 31% for the same period in 2009.

Operating expenses for the six-months ended June 30, 2010 and 2009 consist of the following:



|                              |  |                                 |        |      |   |       
|----------------------------- |  | ------------------------------- | ------ | ---- | - | ------
|                              |  | Six-month periods endedJune 30,
|                              |  | 2010                            |        | 2009
|Compensation                  |  | $                               | 5,343  |      | $ | 6,712 
|Professional services         |  |                                 | 3,232  |      |   | 3,343 
|Depreciation and amortization |  |                                 | 1,364  |      |   | 2,276 
|Other operating expenses      |  |                                 | 2,377  |      |   | 2,375 
|                              |  |                                 |        |      |   |       
|                              |  |                                
|Total operating expenses      |  | $                               | 12,316 |      | $ | 14,706
|                              |  |                                 |        |      |   |       

Compensation expense decreased $1.4 million
(20%) for the six-month period ended June 30, 2010 as compared to 2009. Included in compensation expense for 2010 are non-cash charges of $0.7 million related to the accounting treatment of certain stock option grants as compared to $1.0
million for the same period in 2009. The decrease was due primarily to a reduction of 16 staff positions since June 30, 2009.



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Professional services decreased $0.1 million (3%) for the six-month period ended
June 30, 2010 as compared to the six-month period ended June 30, 2009, due to fewer advisory fees incurred.

Depreciation and amortization expense relates primarily to the Network Operating Center in the suburbs of Boston and the fair value
assigned to the Companys intellectual property. Depreciation and amortization decreased by $0.9 million (40%) for the six-month period ended June 30, 2010 as compared to June 30, 2009. This decrease was due primarily due to
impairment of certain intangible assets in the fourth quarter of 2009.

Other operating expenses were essentially the same for
the six-month period ended June 30, 2010 as compared to the same period for 2009. Any significant increase in future operating costs is expected to be a direct result of a corresponding increase in revenues, excluding any additional stock-based
compensation expense. Any significant increase in revenues is anticipated to outpace the increase in related operating costs.

Results for the six-month period ended June 30, 2010 reflect interest of $11.0 million, an increase of $4.8 million from the
six-month period ended June 30, 2009. Interest expense for the six-month periods ended June 30, 2010 and 2009 includes $8.0 million and $5.5 million, respectively, related to the amortization of the fair value assigned to the warrants and
embedded derivatives issued with debt. Interest expense for the six-month period ended June 30, 2010 also includes $1.5 million of accrued interest and $0.7 million of fees incurred to Pivotal Group with respect to exploring additional
financing options.

Results for the six-month period ended June 30, 2010 reflect a gain on warrants and derivatives of
$20.1 million compared to a loss of $19.8 million for the comparable period in 2009. The current years gain was driven primarily by the $0.04 decrease in the period end price of the Companys stock as of June 30, 2010 as compared to
the December 31, 2009 closing price of the Companys stock. The 2009 loss on warrants and derivatives was driven primarily by the $0.07 increase in the period end closing price of the Companys stock as compared to the
December 31, 2008 closing price. The warrant and embedded derivatives liabilities are revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the
statement of operations.

Liquidity and Capital Resources

Cash provided by operating activities for the six-month period ended June 30, 2010 was $3.9 million. The primary variance between the
net income of $3.7 million and net cash provided by operating activities for the six-month period ended June 30, 2010 was due to non-cash charges from amortization and depreciation of $1.4 million, amortization of debt discount, interest
paid-in-kind, and OID of $8.0 million, stock-based compensation of $0.7 million, amortization of deferred financing costs of $1.5 million, and a credit due to the change in fair value of embedded derivatives and warrants of $20.1 million. There was
a reduction in accounts receivable of $5.3 million, mainly due to the collection of the BT settlement proceeds during the first quarter.

Cash used in operating activities in the amount of $3.1 million for the six-month period ended June 30, 2009 was due to a loss of
$35.2 million. The variance between the loss and net cash used in operating activities during the six-month period ended June 30, 2009 was primarily due to the non-cash charges of $1.0 million for stock-based compensation, $2.3 million of
depreciation and amortization, a $1.5 million non-cash extinguishment of debt, $18.5 million from the change in fair value of embedded derivatives and warrants, and $5.1 million of amortization of debt discounts, interest paid-in-kind, and OID.

The cash used in investing activities during the six-month period ended June 30, 2010 and 2009 was $0.1 million and $0.2
million, respectively. Our capital expenditures in both 2010 and 2009 consisted primarily of computer-related equipment. Although we currently do not anticipate any significant capital expenditures in the near future, we may have a need to make
similar additional capital expenditures related to the integration of our operations.

Net cash used by financing activities
during the six-month period ended June 30, 2010 and 2009 was $5.4 million and $0.02 million, respectively. During the six-month period ended June 30, 2010 there was a $4.5 million repayment of debt to the Senior Lender and payment of $1.0
million for financing costs.

The accompanying condensed consolidated statements have been prepared on a going concern basis,
which contemplates the realization of its assets and the discharge of its liabilities in the normal course of business for the foreseeable future. As of June 30, 2010, the Companys current liabilities exceeded its current assets by $39.0
million. Included in the current liabilities is $21.0 million of current maturities of long-term debt, net of $25.4 million of debt discount associated with the initial fair value of related warrants and embedded derivatives, and $19.0 million
associated with OID and imputed interest. Cash on hand at June 30, 2010 was $1.7 million (not including $0.2 million restricted for outstanding letters of credit).



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

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

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

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

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

On July 23, 2010, the Company and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code. The Company remains in possession of its assets and properties and continues to operate its businesses. The Company has obtained and the Bankruptcy Court has approved debtor-in possession financing (DIP
Financing).

The DIP Financing has been entered into with Downtown CP-CGSY, LLC or its nominee (Downtown
Capital or Tranche A Lender) in the amount of $3 million (Tranche A) and with certain holders of Junior Convertible Debentures (Junior Debentures, and collectively with Downtown Capital, the DIP
Lenders) in the amount of $7.25 million for a total aggregate amount not to exceed $10.25 million.

The Debtors have
entered into a Debtor in Possession Loan and Security Agreement (DIP Credit Agreement) in order to provide funds to the Debtors to assist in the restructuring, to pay critical vendors and utility deposits, to prevent an immediate
shutdown of the Companys operations, and to pay off the pre-petition secured indebtedness of Pivotal Global Capacity, LLC (the Senior Lender or Pivotal). The Junior Debentures have voluntarily agreed to subordinate
their pre-petition liens to the Tranche A Lender.

The DIP Financing provides for the following:



| | a) | Borrowers: Global Capacity Group, Inc. and the other debtors, as debtors-in possession.
| | -- | ----------------------------------------------------------------------------------------



| | b) | DIP Lenders: Downtown Capital or its nominee, and the Junior Debentures.
| | -- | ------------------------------------------------------------------------



| | c) | DIP Facility/Availability: upon entry of the Interim Order, an initial advance of: (i) $9.25 million (consisting of a $3 million Tranche A Loan and $6.25
million Tranche B Loan), (ii) such additional amount as may be agreed to by Downtown Capital in writing, or (iii) such other sum as is approved by the Bankruptcy Court on an interim basis. Upon entry of a Final Order, up to $10.25 million
outstanding at anytime.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Purpose: Principally short-term working capital, utility deposits, critical vendor payments, payment of pre-petition secured indebtedness of Secured Lien Lender.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | Financial Terms: Interest on Tranche A Loan will be payable at the end of each month in arrears at 12% per annum. Interest on the Tranche B Loan, including
PIK interest added to the principal amount of the Tranche B Loans, shall accrue at 12% payment in kind which shall accrue and be added to the principal monthly, but be paid in full upon the earlier of the Effective Date of a plan of reorganization,
upon an Event of Default or the Maturity Date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) | Maturity: The Borrowers shall repay ant outstanding advances and loans under the DIP Financing on the earliest of: (i)(a) the occurrence of an Event of Default
and (b) the Effective Date of a Plan of Reorganization; provided that subject to the Lenders written consent the Borrowers may extend such date by up to two periods of sixty days each; (ii) the date of the acceleration of any
outstanding extensions of credit under the DIP Financing; (iii) entry of an order reversing in any respect either of the DIP Financing Orders (unless waived in writing by DIP Lenders); (iv) the conversion of any of the Chapter 11 Cases to
a case under Chapter 7 of the Bankruptcy Code; (v) the appointment of a trustee or an examiner with special powers; and (vi) the dismissal of any of the Chapter 11 Cases.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g) | Fees:The Tranche A Lender has received a Structuring fee of $.02 million and a Commitment Fee of $.06 million. In addition, the Tranche A Lender shall receive
an Extension Fee of 1% for each of the two sixty day extensions of the Maturity Date, which extensions must be consented to by the DIP Lenders in writing.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h) | Mandatory Prepayment: (i) 100% of the net sale proceeds from non-ordinary course assets sales; (ii) 100% of insurance and condemnation proceeds and tax
refunds, in each case received by the Borrowers or any of the Guarantors.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i) | Financial Covenants:
| | -- | --------------------



| | a) | EBITDA of at Least:
| | -- | -------------------



|                                           |  |   |             
|------------------------------------------ |  | - | ------------
|1-     Month Ended August 31, 2010         |  | $ | 0.1 million 
|2-     Two Months Ended September 30, 2010 |  | $ | 0.2 million 
|3-     Three Months Ended October 31, 2010 |  | $ | 0.3 million 
|4-     Four Months Ended November 30, 2010 |  | $ | 0.45 million



| | b) | Monthly Recurring Circuit Revenue of at least $3.65 million for the months ended August 31, 2010, September 30, 2010, October 31, 2010 and
November 30, 2010.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | Monthly Recurring Circuit Margin Percentages of 19.5% each for August, September, October and November, 2010 and Cumulative Recurring Circuit Margin Percentage of
19.5 % for August and 20.0% for September, October and November 2010.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Shall not have on a consolidated basis outstanding Accounts Payable of more than $4.1 million as at August 31, September 30, October 31 and
November 30, 2010.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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Prior to making the filings, the Debtors entered into a Plan Support and Restructuring
Agreement (the Plan) with the Junior Debentures which provides a plan for the Debtors exit out of Bankruptcy. In accordance with the terms of the Plan, the Junior Debentures can credit bid to purchase the assets of the Debtors all
or some of the liens and pre-petition amounts due under the Debentures including accrued OID and Tranche B amounts due under the DIP Facility plus accrued interest.

On August 2, 2010, $9.3 million was advanced to the Company by the Lenders under the terms of the DIP Financing. In addition to
paying critical vendors and utility deposits, the funds were used to pay $5.2 million to the Senior Secured Lender (Pivotal Global Capacity, LLC or Pivotal) which represents payment in full of the outstanding Senior Secured Loan.

The Company is currently operating pursuant to Chapter 11 under the Bankruptcy Code and continuation of the Company as a
going- concern is contingent upon, among other things, the Companys ability (i) to comply with the terms and conditions of the DIP Financing Agreement described above ; (ii) to develop a plan of reorganization and obtain confirmation
under the Bankruptcy Code; (iii) to reduce unsustainable debt and other liabilities and simplify the its complex and restrictive capital structure through the bankruptcy process; (iv) to return to profitability; (v) to generate
sufficient cash flow from operations; and (vi) to obtain financing sources to meet its future obligations. These matters create uncertainty relating to the Companys ability to continue as a going-concern. The accompanying condensed
consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of assets or liabilities that might result from the outcome of these uncertainties. In addition, any plan of reorganization could
materially change amounts reported in the Companys condensed consolidated financial statements, which do not give effect to any adjustments of the carrying value of assets and liabilities.

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 June 30, 2010 or December 31, 2009.



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



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

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the Companys second fiscal quarter
ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



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PART II  OTHER INFORMATION



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

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

On July 23, 2010, Capital Growth Systems, Inc. (CGST.OBQ) (the Company) and
its domestic subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court in the District of Delaware. The Debtors will continue to operate their business as
debtors-in-possession under the jurisdiction of the bankruptcy court and in accordance with the applicable provisions of the Bankruptcy Code. The bankruptcy court approved the Companys motion to have the Chapter 11 cases jointly administered
under Case No.10-12302. The Companys subsidiary in the United Kingdom was not included in the filings and will continue to operate their business without supervision from the Bankruptcy Court and will not be subject to the requirements of the
Bankruptcy Code.

Plan Support and Restructuring Agreement.

Prior to making these filings, we entered into a Plan Support and Restructuring Agreement (Plan) with the Junior Debentures
which provides a plan for the Debtors exit out of bankruptcy. Pursuant to the Plan, the parties agreed to the terms of a pre-negotiated consensual plan of reorganization to be filed with the Bankruptcy Court. Pursuant to the Plan , the parties
thereto have agreed to support a financial reorganization of the Debtors consistent with the terms and conditions set forth in the term sheets attached as Exhibit A to the Plan Support and Restructuring Agreement.

The Terms of the Plan Support and Restructuring Agreement include:



| | a) | The Participating Debenture Holders will form a Newco with which to purchase the assets of the Company
| | -- | ------------------------------------------------------------------------------------------------------



| | b) | A $10.25 million DIP Facility will be provided for the purpose of
| | -- | -----------------------------------------------------------------



| | 1- | Pay in full the Senior Secured Lender
| | -- | -------------------------------------



| | 2- | Pay critical vendors and utility deposits
| | -- | -----------------------------------------



| | c) | If Newco is winning bidder, Newco will purchase assets of the Company.
| | -- | ----------------------------------------------------------------------

The DIP Financing provides for the following:



| | a) | Borrowers: Global Capacity Group, Inc. and the other debtors, as debtors-in possession.
| | -- | ----------------------------------------------------------------------------------------



| | b) | DIP Lenders: Downtown Capital or its nominee, and the Junior Debentures.
| | -- | ------------------------------------------------------------------------



| | c) | DIP Facility/Availability: upon entry of the Interim Order, an initial advance of: (i) $9.25 million (consisting of a $3 million Tranche A Loan and $6.25
million Tranche B Loan), (ii) such additional amount as may be agreed to by Downtown Capital in writing, or (iii) such other sum as is approved by the Bankruptcy Court on an interim basis. Upon entry of a Final Order, up to $10.25 million
outstanding at anytime.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Purpose: Principally short-term working capital, utility deposits, critical vendor payments, payment of pre-petition secured indebtedness of Secured Lien Lender.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | Financial Terms: Interest on Tranche A Loan will be payable at the end of each month in arrears at 12% per annum. Interest on the Tranche B Loan, including
PIK interest added to the principal amount of the Tranche B Loans, shall accrue at 12% payment in kind which shall accrue and be added to the principal monthly, but be paid in full upon the earlier of the Effective Date of a plan of reorganization,
upon an Event of Default or the Maturity Date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) | Maturity: The Borrowers shall repay ant outstanding advances and loans under the DIP Financing on the earliest of: (i)(a) the occurrence of an Event of Default
and (b) the Effective Date of a Plan of Reorganization; provided that subject to the Lenders written consent the Borrowers may extend such date by up to two periods of sixty days each; (ii) the date of the acceleration of any
outstanding extensions of credit under the DIP Financing; (iii) entry of an order reversing in any respect either of the DIP Financing Orders (unless waived in writing by DIP Lenders); (iv) the conversion of any of the Chapter 11 Cases to
a case under Chapter 7 of the Bankruptcy Code; (v) the appointment of a trustee or an examiner with special powers; and (vi) the dismissal of any of the Chapter 11 Cases.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g) | Fees:The Tranche A Lender has received a Structuring fee of $.02 million and a Commitment Fee of $.06 million. In addition, the Tranche A Lender shall receive
an Extension Fee of 1% for each of the two sixty day extensions of the Maturity Date, which extensions must be consented to by the DIP Lenders in writing.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h) | Mandatory Prepayment: (i) 100% of the net sale proceeds from non-ordinary course assets sales; (ii) 100% of insurance and condemnation proceeds and tax
refunds, in each case received by the Borrowers or any of the Guarantors.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i) | Financial Covenants:
| | -- | --------------------



| | a. | EBITDA of at Least:
| | -- | -------------------



|     |  |                                     |  |   |             
|---- |  | ----------------------------------- |  | - | ------------
|i.   |  | Month Ended August 31, 2010         |  | $ | 0.1 million 
|ii.  |  | Two Months Ended September 30, 2010 |  | $ | 0.2 million 
|iii. |  | Three Months Ended October 31, 2010 |  | $ | 0.3 million 
|iv.  |  | Four Months Ended November 30, 2010 |  | $ | 0.45 million



| | b. | Monthly Recurring Circuit Revenue of at least $3.65 million for the months ended August 31, 2010, September 30, 2010, October 31, 2010 and
November 30, 2010.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Monthly Recurring Circuit Margin Percentages of 19.5% each for August, September, October and November, 2010 and Cumulative Recurring Circuit Margin Percentage of
19.5 % for August and 20.0% for September, October and November 2010.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Shall not have on a consolidated basis outstanding Accounts Payable of more than $4.1 million as at August 31, September 30, October 31 and
November 30, 2010.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

The Plan Support and Restructuring Agreement contains customary terms, are subject to material
conditions and may be terminated upon the occurrence of certain events.



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

We have filed
voluntary petitions for reorganization under the bankruptcy code that may have an adverse effect on our business, financial condition and results of operation.

On July 23, 2010, we filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware in order to consummate a financial reorganization of the Company and its domestic subsidiaries.

We plan to file a Joint Plan of Reorganization with the bankruptcy court. There can be no assurance, however, that key stakeholders, or
the Company itself, will not cease to support this proposed plan. Moreover, if filed, there can be no assurance that the plan will satisfy all requirements for confirmation under the bankruptcy code, that the plan will be approved by the bankruptcy
court or that the conditions precedent to its implementation will be satisfied. If we are unable to file the plan or are unable to obtain confirmation or satisfy such conditions to implementation, it may result in lengthier bankruptcy proceedings as
we attempt to negotiate and implement an alternative plan of reorganization. Any alternative plan of reorganization may be on terms less favorable to the holders of claims against the Company. Additionally, if the plan is not confirmed, the
bankruptcy case may not continue as a Chapter 11 case and could be converted into a Chapter 7 liquidation case. If a liquidation or protracted reorganization were to occur, there is a substantial risk that our going concern value would be
substantially eroded to the detriment of all stakeholders.



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We may have insufficient liquidity to successfully operate our business.

The Company expects to incur significant costs as a result of the bankruptcy case. We are currently financing our operations during the
reorganization using cash on hand and cash generated by operations. In the event that we do not have sufficient liquidity to fund our operations such that we need to obtain additional financing, there can be no assurance as to our ability to obtain
sufficient financing on acceptable terms or at all. The challenges of obtaining financing, if necessary, would be exacerbated by adverse conditions in the general economy and the volatility and the tightness in the financial and credit markets.
These conditions and our bankruptcy case would make it more difficult for us to obtain financing.

We expect that the plan of
reorganization will call for the successful bidder to fund our DIP Loan and all other needs of the Company from the date of confirmation as the successful bidder until the date of closing of the transfer of ownership of our operations to the
successful bidder. We expect that one of the conditions to the closing of the transfer will be the obtaining of FCC and state regulatory authority for a change in control of our operations to the successful bidder, which approval could take 90 days
or more. We further expect that during this interim period, the successful bidder would seek to be responsible for oversight and control of our operations, although we expect that day to day operations will continue to be run primarily by the
current management team in place. There is a risk that the conditions precedent to the ultimate disposition of our operations may not be satisfied, or that the successful bidder will lack the funds to consummate the closing as consummated (which is
anticipated to require the provision of additional financing to cover obligations to critical vendors and working capital needs), which could result in a failure to close the contemplated sale. In such event, we would be required to seek another
buyer for our assets, and there can be no assurances that a subsequent successful buyer could be located on terms favorable to stakeholders, as well as a risk that our operations may not be successfully run during the interim period from turn over
of managerial authority of the Company to the initial bidder, until ultimate disposition of our business.

Our inability to take
advantage of business opportunities during the bankruptcy case, without court approval.

Transactions outside the
ordinary course of business are subject to the prior approval of the bankruptcy court, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. In addition, the bankruptcy code limits our ability to
incur additional indebtedness, make investments, sell assets, consolidate, merge or sell or otherwise dispose of all or substantially all of our assets or grant liens. These restrictions may place us at a competitive disadvantage. We may be unable
to continue to grow our business through acquisitions and these restrictions will limit our ability to pursue pother business strategies, unless we obtain bankruptcy court approval for these transactions.

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
us 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 June 30, 2010, we have incurred cumulative losses of $152.5 million compared to a cumulative loss of $156.3 million through December 31, 2009. To
succeed, we must continue to develop new client and customer relationships and substantially increase our revenues from sales of offerings and services. We intend to continue to expend substantial resources to develop and improve our offerings and
to market our offerings and services.



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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 to obtain financing on unattractive terms could have a material adverse effect on our business.

We have incurred substantial debt in developing the business and in acquiring our subsidiaries. There can be no assurances that
the Company will be able to refinance or extend any existing debt. At December 31, 2007, we had incurred substantial debt with our primary secured lender and with the providers of subordinated secured debt and short-term bridge debt. All of
such debt was refinanced in March 2008 with a portion of the proceeds of $19 million of five-year senior secured convertible notes (the Convertible Notes). In November 2008, as part of the financing for the GCD acquisition, the Company entered into
agreements that modified the Convertible Notes and created an additional $16.8 million of debt. In the third quarter of 2009, we issued additional convertible debentures in connection with raising $5.6 million for working capital purposes.

See the Notes to Consolidated Financial Statements. There is a risk that the Company will be unable to meet all of the
covenants contained in the loan documents, including the meeting of EBITDA covenants on the term loan, repayment and interest obligations, the obligation to timely increase the Companys authorized common stock and to file its required Exchange
Act filings on a current, ongoing basis. There is also a risk that on maturity we will lack the funds to repay the obligations. Certain debentures and warrants are convertible into common stock at prices ranging from $0.15 to $0.24 per share, with
full ratchet anti-dilution protection and contain cross default provisions as it relates to our default under our other indebtedness.

Our Senior Lender had, as of December 31, 2009, entered into a forbearance agreement based upon certain covenant violations and had
further blocked (pursuant to intercreditor agreements with our underlying subordinated debt lenders) certain payments required with respect to our convertible debentures issued in July and August of 2009. The forbearance agreement with our Senior
Secured Lender has lapsed as of the date of the filing of the Companys Form 10-Q for the period ended June 30, 2010 and was subsequently replaced by a DIP Loan, of which $9.25 million has been funded to date. There can be no assurances
that we will be able to meet the debt service requirements or other covenants with respect to the DIP Loan; any such default could result in acceleration of the DIP Loan and liquidation or sale of the Company in order to pay off the DIP Loan.

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

We face operational challenges and have a history of losses. 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.



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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.

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 no patent protection for those technologies that are the subject of trade secrets, and our ability to protect such
competitive advantages will be a function of many factors that are not fully within our control, including maintenance of confidentiality agreements and general efforts to keep trade secret information from coming into the public domain. Failure to
protect our patents and our confidential information (as well as associated business techniques) could have a material adverse impact upon the way in which we do business.

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

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 were also late in filing our Form 10-Q for the period ended March 31, 2009. We were able to have trading of our common stock reinstated on the OTCBB following the bringing current of our
filings for such period.



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However, if we are late in filing a periodic report within the timelines mentioned above, we
will not be permitted to re-list our common 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.

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

None.



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

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



|ITEM 4. | (REMOVED AND RESERVED)
|------- | ----------------------

None.



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

None.



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

Exhibits filed
as a part of this quarterly report on Form 10-Q are listed in the Index to Exhibits located on page 40 of this Report.



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SIGNATURES

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



CAPITAL GROWTH SYSTEMS, INC.By:

/S/    PATRICK C.
SHUTTPatrick C. Shutt, Chief Executive Officer/S/    GEORGE A.
KINGGeorge A. King, Interim Chief Financial Officer


Dated: August 10, 2010



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|              |  |                                                                                                                          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                  
|              | 
|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. *



|* | Furnished herewith.
|- | -------------------



40