UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-QSB
 
 x  QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
 OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 For the
quarterly period ended March 31, 2005
 
 o  TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE
 EXCHANGE
ACT
 
 For the
transition period from _______________ to _______________
 
 Commission
File Number 0-30831
 
 CAPITAL
      GROWTH SYSTEMS, INC.(Exact name of small business issuer as
      specified in its charter)
 Florida
    
    65-0953505(State of other jurisdiction
      of
    
    (I.R.S.
      Employer Identification No.)incorporation or
    organization)
 50 East Commerce Drive, Schaumburg,
      Illinois 60173(Address of principal executive
      offices)630-872-5800(Issuer’s telephone
number)
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
 
 Yes x No o
 The total
number of shares outstanding of the issuer’s common stock, par value $.0001, as
of May 13, 2005 is 16,940,754.
 
 Transitional
Small Business Disclosure Format: Yes o No x
   
  **CAPITAL
GROWTH SYSTEMS, INC. AND SUBSIDIARIES**
 Page
      NoPART
      I
    FINANCIAL
      INFORMATION
    3Item
      1.
    Financial
      Statements
    3Interim
      Consolidated Condensed Balance Sheets as ofMarch
      31, 2005 [Unaudited] and December 31, 2004 [Audited]
    4Consolidated
      Condensed Statements of OperationsFor
      the three month periods ended March 31, 2005 and 2004
      [Unaudited]
    5Consolidated
      Condensed Statement of Shareholders' Equity fromJanuary
      1, 2005 to March 31, 2005 [Unaudited]
    6Consolidated
      Condensed Statements of Cash FlowsFor
      the three month periods ended March 31, 2005 and 2004
      [Unaudited]
    7Notes
      to Interim Consolidated Condensed Financial Statements.
    8Item
      2.
    Management's
      Discussion and Analysis.
    17Item
      3.
    Controls
      and Procedures.
    24PART
      II.
    OTHER
      INFORMATION
    24Item
      1.
    Legal
      Proceedings.
    24Item
      2.
    Changes
      in Securities and Small Business Issuer Purchases of Equity
      Securities.
    24Item
      3.
    Defaults
      Upon Senior Securities.
    25Item
      4.
    Submission
      of Matters to a Vote of Security Holders.
    25Item
      5.
    Other
      Information.
    25Item
      6.
    Exhibits.
    25Signatures
      and Certifications.
    27
 2
 **PART
I - FINANCIAL INFORMATION**
  **Item
1. Financial Statements**
 
 
 NOTE
REGARDING FORWARD-LOOKING STATEMENTS
 
 Except
with respect to historical financial information, the discussion contained in
this report contains forward-looking statements that involve risk and
uncertainties. These statements may be identified by use of forward-looking
terminology such as “believes,” “expects,” “may,” “should,” or “anticipates,” or
similar expressions, or by discussions of strategy. The cautionary statements
made in this report should be read as being applicable to all related
forward-looking statements wherever they appear in this report. Our actual
results could differ materially from those discussed in this report. Factors
that could cause our results to differ from those discussed in this report,
include, but are not limited to, those discussed under the heading “Factors
Affecting Future Performance” in our report on Form 10-KSB for the period ending
December 31, 2004.
 
  CAPITAL
GROWTH SYSTEMS, INC.
  Interim
Consolidated Condensed Financial Statements
 (Unaudited)
  March 31,
2005
 
 3
  **CAPITAL
      GROWTH SYSTEMS, INC.****CONSOLIDATED
      CONDENSED BALANCE SHEETS****(Unaudited)**
    
    **(Audited)****March
      31, 2005**
    
    **December
      31, 2004****ASSETS:**Current
      Assets:Cash
    
    $
    2,239,480
    
    $
    3,660,894Accounts
      receivable, net
    
    
    2,008,477
    
    
    1,454,579Inventories,
      net
    
    
    1,525,901
    
    
    1,982,102Prepaid
      expenses
    
    
    95,427
    
    
    90,303Other
      current assets
    
    
    109,038
    
    
    119,352Total
      current assets
    
    
    5,978,323
    
    
    7,307,230Fixed
      assets, net of accumulated depreciation
    
    
    1,050,643
    
    
    1,099,805Software
      license fees
    
    
    39,178
    
    
    43,311Customer
      list acquired, net
    
    
    3,257,070
    
    
    3,410,622Goodwill
    
    
    3,452,369
    
    
    3,452,369Other
      assets
    
    
    44,652
    
    
    44,652Total
      Assets
    
    $
    13,822,235
    
    $
    15,357,989**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**Current
      Liabilities:Current
      maturities of debt
    
    $
    4,607,322
    
    $
    4,795,994Accounts
      payable
    
    
    1,016,677
    
    
    1,407,499Accrued
      expenses
    
    
    1,042,407
    
    
    1,081,199Deferred
      revenues
    
    
    1,357,825
    
    
    1,472,083Advance
      billings
    
    
    878,289
    
    
    1,214,030Other
      current liabilities
    
    
    159,176
    
    
    115,030Total
      current liabilities
    
    
    9,061,696
    
    
    10,085,835Long-term
      liabilitiesDebt
    
    
    1,124,318
    
    
    1,231,716Total
      Liabilities
    
    
    10,186,014
    
    
    11,317,551Stockholders’
      EquityCommon
      Stock, 25,000,000 authorized and 16,940,754 issued and outstanding as of
      March 31, 2005 and December 31, 2004
    
    
    1,694
    
    
    1,694Additional
      paid-in capital
    
    
    12,730,171
    
    
    12,730,171Retained
      earnings, (deficit)
    
    
    (9,095,644
    )
    
    (8,691,427
    )Total
      Stockholders’ Equity
    
    
    3,636,221
    
    
    4,040,438Total
      Liabilities and Stockholders’ Equity
    
    $
    13,822,235
    
    $
    15,357,989
 **The
accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.**
  4
  **CAPITAL
      GROWTH SYSTEMS, INC.****CONSOLIDATED
      CONDENSED STATEMENTS OF OPERATIONS**(Unaudited)**Three
      Months Ended March 31,****2005**
    
    **2004****Revenue**
    
    $
    4,054,746
    
    $
    29,333**Cost
      of Goods Sold**
    
    
    2,141,654
    
    
    28,477**Gross
      Margin**
    
    
    1,913,092
    
    
    856**Operating
      Expenses:**Compensation
    
    
    1,296,843
    
    
    674,582Other
      operating expenses
    
    
    928,254
    
    
    356,792**Total
      Operating Expenses**
    
    
    2,225,097
    
    
    1,031,374**Operating
      Loss**
    
    
    (312,005
    )
    
    (1,030,518
    )**Interest
      expense**
    
    
    83,996
    
    
    4,898**Net
      Loss Before Income Taxes**
    
    
    (396,001
    )
    
    (1,035,416
    )**Income
      taxes**
    
    
    8,216
    
    
    -**Net
      Loss**
    
    $
    (404,217
    )
    $
    (1,035,416
    )**Loss
      per Share**
    
    $
    (0.02
    )
    $
    (0.07
    )**Average
      Shares Outstanding**
    
    
    16,940,754
    
    
    14,262,412
 
 **The
accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.**
   5
  
  **CAPITAL
      GROWTH SYSTEMS, INC.****CONSOLIDATED
      CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY**(Unaudited)**Common
      Shares Outstanding**
    
    **Members'
      Contributions**
    
    **Retained
      Deficit**
    
    **Common
      Stock**
    
    **Additional
      Paid-in Capital**
    
    **Total
      Equity**Balance,
      January 1, 2005
    
    
    16,940,754
    
    
    -
    
    $
    (8,691,427
    )
    $
    1,694
    
    $
    12,730,171
    
    $
    4,040,438Net
      loss
    
    
    -
    
    
    -
    
    
    (404,217
    )
    
    -
    
    
    -
    
    
    (404,217
    )Balance,
      March 31, 2005
    
    
    16,940,754
    
    
    -
    
    $
    (9,095,644
    )
    $
    1,694
    
    $
    12,730,171
    
    $
    3,636,221
 
 **The
accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.**
   6
   **CAPITAL
      GROWTH SYSTEMS, INC.****CONSOLIDATED
      CONDENSED STATEMENTS OF CASH FLOWS**(Unaudited)Three
      Months Ended March 31,2005
    
    2004Net
      Cash Used in Operating Activities
    
    $
    (1,115,269
    )
    $
    (1,041,136
    )Net
      Cash Used In Investing Activities
    
    
    (10,075
    )
    
    (130,265
    )Net
      Cash Provided By (Used in) Financing Activities
    
    
    (296,070
    )
    
    6,484,493Increase
      (Decrease) in Cash and Cash Equivalents
    
    
    (1,421,414
    )
    
    5,313,092Cash
      and Cash Equivalents - Beginning of Period
    
    
    3,660,894
    
    
    616,880Cash
      and Cash Equivalents - End of period
    
    $
    2,239,480
    
    $
    5,929,972SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid for interest
    
    $
    102,478
    
    $
    5,622Cash
      paid for income taxes
    
    $
    8,216
    
    $
    -NONCASH
      INVESTING AND FINANCING ACTIVITIES:Contributions
      by members through conversions of loans
    
    $
    -
    
    $
    550,000
 
 **The
accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.**
    7
   **CAPITAL
GROWTH SYSTEMS, INC.**
 **Notes
To Interim Consolidated Condensed Financial Statements**
 **March
31, 2005 (Unaudited)**
  **NOTE
1 - Organization and Basis of Presentation**
  The
accompanying unaudited consolidated condensed financial statements include the
accounts of Capital Growth Systems, Inc. (“CGSI”) and its wholly-owned
subsidiaries, Nexvu Technologies, LLC (“Nexvu”) and Frontrunner Network Systems
Corp. (“Frontrunner”). Except where necessary to distinguish the three entities,
we will refer to all three as the “Company.” Significant intercompany
transactions and balances have been eliminated in consolidation.
  These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and the rules and regulations of the Securities and Exchange
Commission for interim financial statements. These financial statements reflect
all adjustments and accruals of a normal recurring nature, which, in the opinion
of management are necessary in order to make the financial statements not
misleading. The results for the interim periods presented are not necessarily
indicative of results to be expected for any future period.
  These
financial statements should be read in conjunction with the audited financial
statements and the notes thereto of both companies included in CGSI’s 2004
Annual Report on Form 10-KSB filed with the Securities Exchange Commission for
the year ended December 31, 2004.
  **Corporate
Restructure**
  On
January 28, 2004, CGSI completed a merger under which it acquired 100% of the
ownership of Nexvu, a Delaware limited liability company. From its inception up
to the time of the merger, CGSI was an inactive publicly registered shell
corporation with no significant assets or operations. Simultaneously with the
closing of the merger, a closing was held under a private offering of CGSI’s
common stock in which approximately 3.9 million shares of common stock were
issued for approximately $5.3 million of total gross consideration. The private
offering was completed in April 2004 and, including the approximately 3.9
million shares of common stock issued simultaneously with the closing of the
merger, resulted in a total of 5,633,504 shares being issued for total gross
consideration of $7,605,230. Additionally, simultaneously with the merger,
$550,000 of bridge loans of Nexvu were converted to 577,500 shares of CGSI
common stock as part of a loan conversion agreement. As a result of this merger,
the financial statements of Nexvu became the financial statements of the
surviving entity for accounting purposes. CGSI’s assets were recorded at fair
value, with the net assets of Nexvu reflected at historical costs. In addition,
as CGSI was a public shell company acquiring a privately-held company, no
goodwill was reported. The accumulated deficit of Nexvu survived the merger with
the accumulated deficit of CGSI eliminated.
  8
 
 **Acquisition
of Frontrunner**
  On
September 14, 2004, CGSI acquired 100% of the outstanding common stock of
Frontrunner. The results of Frontrunner’s operations have been included in the
consolidated financial statements since the acquisition date. Frontrunner is a
single-source provider of business communications equipment and multimedia
integration services for data, voice, video and advanced applications. Most of
Frontrunner’s customers are located in the northeast United States. This
acquisition enables CGSI’s existing subsidiary, Nexvu to better leverage its
application performance monitoring product into the market as well as provide
leverage for Frontrunner to further expand its existing infrastructure. We also
expect to reduce costs through economies of scale from the
combination.
  In
consideration for the Frontrunner shares, we paid $222.18 in the aggregate in
exchange for all of the Senior Preferred Stock, upon their surrender. All of the
shares of Junior Preferred Stock, Convertible Preferred Stock and Frontrunner
common stock, and all outstanding unexpired and unexercised options and warrants
to acquire Frontrunner common stock were cancelled without receipt of
consideration. As additional consideration, 1 million shares of CGSI’s common
stock, with an estimated fair market value of $1.35 per share was issued to
certain creditors in exchange for the cancellation of indebtedness by those
creditors in the approximate amount of $2.3 million. This $1.35 value was
determined by utilizing the last purchase price of shares of our common stock in
the private offering completed in April 2004. As of March 31, 2005, all but
75,000 shares of stock had been issued pursuant to this transaction. We may
issue the remaining 75,000 shares, in our discretion, in the event the final
creditor waiver is received.
  **NOTE
2 - Summary of Significant Accounting Policies**
  **Allowance
for Doubtful Accounts**
  The
Company provides an allowance for uncollectible accounts receivable based upon
prior experience and management’s assessment of the collectibility of existing
specific accounts. Total reserve for uncollectible accounts was $139,910 and
$132,127 as of March 31, 2005 and December 31, 2004, respectively.
  **Research
and Development**
  The
Company accounts for research and development costs in accordance with
the SFAS No. 2 “Accounting for Research and Development Costs.” Under SFAS
No. 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and developments costs are expensed when the
contracted work has been performed or as milestones are achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. Total research and
development costs incurred during the three months ended March 31, 2005 and 2004
were $335,405 and $427,306, respectively.
  9
 
 **Goodwill
and Purchased Intangible Assets**
  In July
2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”
Effective for fiscal years beginning after December 15, 2001, SFAS No. 142
requires goodwill to be tested for impairment on an annual basis and between
annual tests in certain circumstances, and written down when impaired, rather
than being amortized as previous accounting standards required. Furthermore,
SFAS No. 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to be
indefinite. Intangible assets, consisting of software licenses and customer
lists, are amortized on a straight-line basis over periods ranging 3 to 7 years,
representing the remaining life of the assets.
  Based on
the impairment tests performed by management, there was no impairment of
goodwill in 2004. The company has no reason to believe that goodwill impairment
has occurred in 2005. There can be no assurance that future goodwill impairment
tests will not result in a charge to earnings.
  **Stock-Based
Compensation**
  In
December 2002, the FASB issued SFAS No. 148, “Accounting for
Stock-Based-Compensation Transition and Disclosure-an Amendment of SFAS 123.”
This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,”
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting, for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair market value of the Company's stock at the date of the grant
over the exercise price of the related option. To date the company has not
issued any stock options where the exercise price of the option is different
than the fair market value of the Company’s stock at grant date. The Company has
adopted the annual disclosure provisions of SFAS No. 148 in its financial
reports for the three-month period ended March 31, 2005, and 2004.
  **Segment
Information**
  SFAS No.
131, “Disclosures about Segments of an Enterprise and Related Information”
establishes standards for reporting information regarding operating segments in
annual financial statements and requires selected information for those segments
to be presented in interim financial reports issued to stockholders. SFAS No.
131 also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as components
of an enterprise about which separate discrete financial information is
available for evaluation by the chief operating decision maker, or
decision-making group, in making decisions how to allocate resources and assess
performance. The information disclosed herein materially represents all of the
financial information related to the Company's principal operating
segments.
  10
 **Use
of Estimates**
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
  **Reclassifications**
  Certain
amounts previously reported have been reclassified to conform to the current
period presentation.
  **NOTE
3 - Inventories**
  Inventories
as of March 31, 2005 and December 31, 2004 consist of the
following:
  March
      31, 2005
    
    Dec
      31,2004Equipment
    
    $
    1,954,048
    
    $
    1,978,273Work
      in process
    
    
    772,231
    
    
    1,080,332Less:
      Inventory reserve
    
    
    (1,200,378
    )
    
    (1,076,503
    )Net
      inventory
    
    $
    1,525,901
    
    $
    1,982,102
 
 Inventories
are stated at lower of cost or market as determined by the First-in, First-out
(FIFO) method. The reserve balance is estimated by management based on previous
experience and considers the on-hand inventory needs based on the networks under
maintenance service agreements.
  **NOTE
4 - Employee Benefit Plans**
  **2003
Stock Option Plan**
  In
December 2003, we adopted the 2003 Long-Term Incentive Plan for key employees
and other persons providing assets or services to us. The plan provides for the
issuance of stock-based awards to key employees as part of their overall
compensation. We consider our option program a core component of our operating
productivity. A total of 2,285,000 restricted shares of common stock, stock
options or other equity-based compensation can be issued under the plan. As of
March 31, 2005, we have issued and outstanding 1,531,707 restricted shares under
the plan, net of forfeitures.
  11
  The
following table summarizes the activity under the stock option plan from
inception to March 31, 2005:
  Number
      of Shares
    
    Price
      Per Share
    
    Weighted
      Average Price per ShareOptions
      Outstanding:December
      31, 2003
    
    -
    
    -
    
    -Granted
    
    
    1,769,907
    
    $
    0.95
      - 1.35
    
    $
    1.35Terminated
    
    
    630,000
    
    
    1.35
    
    
    1.35December
      31, 2004
    
    
    1,139,907
    
    
    0.95
      - 1.35
    
    
    1.34Granted
    
    
    400,000
    
    
    1.35
    
    
    1.35Terminated
    
    
    8,200
    
    
    1.35
    
    
    1.35March
      31, 2005
    
    
    1,531,707
    
    
    0.95
      - 1.35
    
    $
    1.35Vested
      Shares:Vested
      at $1.35
    
    
    571,951
    
    
    1.35
    
    
    1.35Vested at
      $0.95
    
    
    17,807
    
    
    0.95
    
    
    0.95Vested,
      March 31, 2005
    
    
    589,758
    
    $
    0.95
      - 1.35
    
    $
    1.34
 
  We
account for stock-based compensation for our employee stock plans using the
intrinsic value method as prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation, requires
disclosure of pro forma earnings as if we had adopted the SFAS No. 123 fair
value method since our inception. The fair value of stock-based awards to
employees is calculated utilizing the minimum value model, as our shares are not
publicly traded.
  The
weighted-average fair value of stock-based compensation to our employees is
based on the single option value approach. Forfeitures are recognized as they
occur, and it is assumed that no dividends will be declared. The
weighted-average fair-value calculations are based on the following
assumptions
   Three
      monthsEnded
      March 31,2004
    
    2005Estimated
      life (in years)
    
    
    5.0
    
    
    5.0Risk-free
      interest rate
    
    
    3.85
    %
    
    3.5
    %
 
 12
 For
pro-forma purposes, the estimated fair value of stock-based compensation awards
to employees are amortized using the straight-line method over the vesting
period of the options.
  Three
      monthsEnded
      March 31,2005
    
    2004Reported
      net loss
    
    $
    (404,217
    )
    $
    (1,035,416
    )Employee
      stock-based compensation under the intrinsic value method (APB No. 25)
    
    
    -
    
    
    -Employee
      stock-based compensation as calculated under the fair value method (SFAS
      No. 123)
    
    
    12,033
    
    
    13,316Pro
      forma net loss
    
    $
    (416,250
    )
    $
    (1,048,732
    )Loss
      Per ShareAs
      reported
    
    
    (0.02
    )
    
    (0.07
    )Pro
      forma
    
    
    (0.02
    )
    
    (0.07
    )
 
 **NOTE
5 - Property and Equipment**
  Property
and equipment at March 31, 2005 and December 31, 2004 consists of the
following:
  
 March
      31, 2005
    
    Dec.
      31, 2004Furniture
      & fixtures
    
    $
    169,193
    
    $
    169,193Computer
      equipment
    
    
    883,787
    
    
    882,923Leasehold
      improvements
    
    
    88,154
    
    
    88,154Machinery
      & equipment
    
    
    249,668
    
    
    240,4561,390,802
    
    
    1,380,726Accumulated
      depreciation
    
    
    (340,159
    )
    
    (280,921
    )Net
      property and equipment
    
    $
    1,050,643
    
    $
    1,099,805
   13
 **NOTE
6 - Debt**
  Debt as
of March 31, 2005 and December 31, 2004 consist of the following:
  March
      31, 2005
    
    
    December
      31,
      2004Demand
      note payable to Harris Bank, plus interest at 1.50% above prime rate;
      5.25% at March 31, 2005, until the loan is paid in full or demand is made
      by the bank. Secured by substantially all of the assets of Frontrunner and
      personal guarantee by a separate entity and three
    individuals.
    
    $
    3,605,000
    
    $
    3,690,000Promissory
      note payable to Nortel Networks, payable in monthly payments of $27,776
      through October 2009. Interest on the note is fixed at
    7.25%.
    
    
    1,296,476
    
    
    1,355,588Note
      payable to Global Crossing North America, due in monthly installments of
      $16,667 through May 2006. The note bears interest (imputed at 8%) and is
      subordinated to the outstanding bank debt. As of March 31, 2005,
      Frontrunner was in default under the terms of the
    agreement.
    
    
    388,072
    
    
    390,720Unsecured
      promissory note payable to Review Video, payable in monthly payments of
      $10,000 through September 2006. Interest on the note is fixed at
      7.25%
    
    
    170,627
    
    
    272,212Unsecured
      note payable to creditor, unsecured, payable in monthly installments of
      $12,500, including interest at 8.25%, through December 2005. The company
      is in default under the terms of this note.
    
    
    198,050
    
    
    232,829Installment
      payment agreement to New York State Department of Taxation and Finance,
      payable in monthly payments of $5,455 through June 2006. Includes
      principle and imputed interest and penalties at 16.67%.
    
    
    73,415
    
    
    86,361Total
      debt
    
    
    5,731,640
    
    
    6,027,710Less:
      Current maturities
    
    
    4,607,322
    
    
    4,795,994Long
      term portion
    
    $
    1,124,318
    
    $
    1,231,716
 
 The
weighted-average interest rate on the debt listed above is 6.2% for
2005.
  
 14
  The
aggregate principal re-payments of long term debt are as follows:
  2005
    
    $
    4,607,3222006
    
    
    341,2462007
    
    
    285,9132008
    
    
    307,3442009
    
    
    189,815
 
  **NOTE
7 - Transactions with Related Parties**
  Included
in accounts payable at March 31, 2005 and December 31, 2004 is $48,000 due to an
entity owned by the President of Frontrunner for software support. Purchases of
services to this entity were $48,000 for the three month period ended March 31,
2005.
  **NOTE
8 - Segment Reporting**
  The
Company follows the provisions of SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information.” This standard establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. Operating segments are
identified as components of an enterprise about which separate, discrete
financial information is available for evaluation by the chief operating
decision makers in making decisions on how to allocate resources and assess
performance. Frontrunner is a single-source provider of business communications
equipment and multimedia integration services for data, voice, video, and
advanced applications. Most of Frontrunner’s customers are located in the
northeast United States. Nexvu licenses its proprietary application performance
monitoring software along with related hardware. It also provides consulting
services to its customers. For purposes of segment reporting, the Company
considers Nexvu and Frontrunner as two separate identifiable businesses. These
two segments have separate management teams and financial statements. During the
third quarter of 2004, the Company also started splitting out its corporate
costs from the Nexvu financial statements. Accordingly, the segment results
reflect this change during the first quarter of 2005.
  15
 **Results
of Operation:**
  Three
months ended March 31, 2005.
  Frontrunner
    
    Nexvu
    
    Corp/elim
    
    TotalRevenues
    
    $
    3,727,562
    
    $
    327,184
    
    $
    -
    
    $
    4,054,746Gross
      margin
    
    
    1,757,032
    
    
    156,060
    
    
    -
    
    
    1,913,092Expenses
    
    
    1,590,260
    
    
    425,604
    
    
    209,233
    
    
    2,225,097Operating
      income (loss)
    
    
    166,772
    
    
    (269,544
    )
    
    (209,233
    )
    
    (312,005
    )Depreciation
      / amortization
    
    
    197,115
    
    
    19,807
    
    
    -
    
    
    216,922Capital
      expenditures
    
    
    9,212
    
    
    863
    
    
    -
    
    
    10,075
 
 Three
months ended March 31, 2004.
  Frontrunner
    
    Nexvu
    
    Corp/elim
    
    TotalRevenues
    
    $
    -
    
    $
    29,333
    
    $
    -
    
    $
    29,333Gross
      margin
    
    
    -
    
    
    856
    
    
    -
    
    
    856Expenses
    
    
    -
    
    
    1,031,374
    
    
    **-**
    
    
    1,031,374Operating
      loss
    
    
    -
    
    
    (1,030,518
    )
    
    **-**
    
    
    (1,030,518
    )Depreciation
      / amortization
    
    
    -
    
    
    17,754
    
    
    -
    
    
    17,754Capital
      expenditures
    
    
    -
    
    
    123,910
    
    
    -
    
    
    123,910
 
 **Segment
assets as of March 31, 2005.**
  Frontrunner
    
    Nexvu
    
    Corp/elim
    
    TotalTangible
      assets
    
    $
    4,085,664
    
    $
    3,730,977
    
    $
    (703,845
    )
    $
    7,112,796Intangibles
      & goodwill
    
    
    6,709,439
    
    
    -
    
    
    -
    
    
    6,709,439Total
      assets
    
    
    10,795,103
    
    $
    3,730,977
    
    $
    (703,845
    )
    $
    13,822,235
 
  16
  **Item
2. Management’s Discussion and Analysis**
  THE
FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION SHOULD
BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS REPORT.
  **Overview**
  As of
December 31, 2003, we were a development-stage company that had conducted
virtually no business operations, other than efforts to effect a business
combination. On January 28, 2004, we completed a merger through which Nexvu
became a subsidiary of ours. As a result of the merger, the owners of Nexvu
became the majority owners of our company, which resulted in the transaction
being deemed a reverse acquisition for accounting purposes. Under this
treatment, Nexvu became the surviving company for financial statement purposes.
Our net assets were recorded at fair value, with the net assets of Nexvu
reflected at historical costs. In addition, as we were a public shell company
acquiring a privately-held company, no goodwill was reported. Our financial
statements after the merger reflect the historical financial statements of
Nexvu, the operating company. Our accumulated deficit prior to the merger was
eliminated as of the merger and only the accumulated deficit of Nexvu is
reflected in our consolidated balance sheet.
  On
September 14, 2004, we completed a merger under which we acquired 100% of the
stock of Frontrunner Network Systems Corp. This transaction was a stock-based
transaction whereby we issued 925,000 shares of our common stock in exchange for
cancellation of indebtedness from certain creditors in the approximate amount of
$2.3 million dollars. There also was a nominal payment of $222.18 in exchange
for all of the Senior Preferred Stock of Frontrunner. An additional 75,000
shares of common stock may be issued with respect to this transaction and is
subject to one creditor waiver being signed. This waiver may or may not be
signed.  We are under no obligation to consummate this share exchange.
However, if we do issue the shares, the resulting increase in shares outstanding
would result in an increase in the goodwill of $101,250 at the current estimated
market price of our stock of $1.35 per share. Frontrunner generated
approximately $12 million of revenues during 2004 and has approximately 1,000
customers.
  As of
March 31, 2005, we had approximately $1.5 million of working capital excluding
current debt maturities of debt and $2.2 million in cash and cash equivalents.
We believe that our working capital levels are sufficient to fund our operations
for the next twelve months.
  We
presently have approximately 100 full time employees between Nexvu and
Frontrunner. We do not anticipate that this number will increase significantly
in the near future. In addition, there are no current plans to significantly
increase our capital spending on software or equipment.
  **Results
of Operations**
  Revenues
for the three month period ended March 31, 2005 were heavily influenced by the
acquisition of Frontrunner. Frontrunner is generating over 90% of the
consolidated revenue. Total revenues from Frontrunner were $3.7 million with
revenues generated from installation of voice and data systems, as well as,
through managed services and maintenance contracts on installed systems.
Installation revenues represented approximately 46% of total Frontrunner
revenues with managed services and maintenance revenues representing
approximately 37% of the total revenues. The Nexvu revenues for the three month
period ended March 31, 2005 were approximately $327 thousand and are comprised
primarily of sales of our product, as well as, consulting fees and maintenance.
The percentage of total revenue for Nexvu was 78% for consulting services and
18% for product sales. Maintenance revenues comprised the remaining
revenues.
  17
 Gross
margins for Frontrunner were 47% with the managed services and maintenance
revenues having a 48% gross margin and installation revenues having a 26% gross
margin. There is significant competition in this market and margins have been
decreasing over the last year. The Nexvu gross margin rates were 48% for the
three month period ended March 31, 2005. Gross margin includes the costs of the
appliances included in the product sales, outside labor on consulting
arrangements, amortization of software licensing fees related to the development
of our product, sales commissions and incidental expenses billable to
customers.
  Total
operating expenses were as follows:
  Three
      months ended,March
      31, 2005
    
    March
      31, 2004Compensation
    
    $
    1,296,843
    
    $
    674,582Travel
      and entertainment
    
    
    46,293
    
    
    48,634Occupancy
    
    
    128,721
    
    
    29,628Professional
      services
    
    
    118,336
    
    
    157,293Insurance
    
    
    40,152
    
    
    6,098Depreciation
      and amortization
    
    
    216,922
    
    
    17,754Other
      operating expenses
    
    
    377,830
    
    
    97,385Total
      operating expenses
    
    $
    2,225,097
    
    $
    1,031,374
 
 The
majority of our operating expenses consist of compensation expenses,
professional fees and depreciation and amortization expenses. During 2004, we
took steps to reduce the overall number of Nexvu employees by over 50%. This was
accomplished by a partial reduction in July and another reduction in August.
Annual savings from this reduction are estimated to be over $1.5 million due to
decreased compensation, travel and other incidental expenses. Nexvu currently
has 12 full time employees, down from a level during early 2004 that reached 30.
Total compensation expense for Nexvu was approximately $350 thousand, down from
the $675 thousand during the 1 st quarter
2004. Frontrunner compensation was approximately $855 thousand with corporate
salaries of approximately $92 thousand. The professional fees are primarily
related to legal fees related to acquisitions and securities work related to
filings with the Securities and Exchange Commission, as well as, accounting
fees. Our travel and entertainment expenses relate primarily to costs associated
with our sales force. Our occupancy expense represents the costs of our
corporate offices in Schaumburg, IL, our Frontrunner office in Rochester, NY, as
well as, 11 other sales offices. During September 2004, we made the decision to
move our corporate offices to another location in Schaumburg, IL, sharing space
with the Frontrunner division. We subleased the vacated offices through the
remaining term (December 2005) and recorded a charge of $78 thousand for the
remaining lease payments, net of future sublease income. The majority of the
depreciation is comprised of the amortization of the acquired customer list of
Frontrunner, with $153.6 thousand of expense recorded during the quarter. Other
expenses are principally comprised of operations and marketing expenses at
Frontrunner.
  18
 The
current period results reflect interest expense on the $5.7 million of debt. The
debt has a weighted average interest rate of 6.2%. Partially offsetting the debt
is interest income on the invested cash balances. The 2004 results reflect
interest expense on the remaining debt of Nexvu prior to the raise of capital
and subsequent conversion and repayment of the debt.
  **Liquidity
and Capital Resources**
  We have
historically met our liquidity needs through loans from individuals and through
equity contributions. As of March 31, 2005, we held approximately $2.2 million
of cash and cash equivalents. The cash was generated from the private placement
of our common stock primarily during the first quarter of 2004. Total gross
proceeds from this offering were approximately $7.6 million with net proceeds
after advisory, legal and accounting fees bringing the net total to
approximately $6.6 million. During the three months ended March 31, 2005, we
utilized approximately $1.1 million of cash in operations. We continue to
utilize cash, primarily to fund the losses being experienced at Nexvu, funding
working capital requirements and paying down existing levels of
debt.
  As part
of the acquisition of Frontrunner, we assumed approximately $4.7 million in debt
and subsequently converted $1.6 million of old accounts payable from two vendors
into interest bearing promissory notes. The majority of debt is a callable
demand loan and is currently classified in current liabilities. We currently
have no knowledge that the noteholder plans to call the debt.
  During
the quarter we spent $10 thousand on fixed assets. We do not expect to require
significant capital expenditures in the near future.
 
 19
  We have
future contractual obligations for leases of our offices and for minimum future
royalty payments related to a software licensing agreement with a third party.
This software is being utilized as a component of our own proprietary software.
The following table summarizes our future contractual obligations as of March
31, 2005:
  Operating
      Leases
    
    Debt
      Obligations
    
    Minimum
      Royalty Payments2005
    
    $
    412,683
    
    $
    4,607,322
    
    $
    56,2502006
    
    
    198,870
    
    
    341,246
    
    
    100,0002007
    
    
    45,261
    
    
    285,913
    
    
    125,0002008
    
    
    -
    
    
    307,344
    
    
    150,0002009
    
    
    -
    
    
    189,815
    
    
    -Total
      contractual obligations
    
    $
    656,814
    
    $
    5,731,640
    
    $
    431,250
 
 All debt
that is callable or not in compliance is reflected in the 2005 obligations.
However, we currently have no knowledge that the noteholder plans to call the
debt.
  At the
present time we believe that our current cash and cash equivalent balances will
be sufficient to satisfy our anticipated cash needs for working capital for at
least the next 12 months.
  From time
to time, we may evaluate potential acquisitions of businesses, products or
technologies. A portion of our cash may be used to acquire or invest in
complementary businesses or products or to obtain the right to use third party
technologies. In addition, in making such acquisitions or investments, we may
assume obligations or liabilities that may require us to make payments or
otherwise use additional cash in the future.
  **Recent
Accounting Pronouncements**
  On
December 16, 2004, FASB published SFAS No. 123 (Revised 2004), “Share-Based
Payment.” SFAS 123R requires that compensation costs related to share-based
payment transactions be recognized in the financial statements. Share-based
payment transactions within the scope of SFAS 123R include stock options,
restricted stock plans, performance-based awards, stock appreciation rights, and
employee share purchase plans. The provisions of SFAS 123R are effective as of
the first fiscal year that begins after June 15, 2005. Accordingly, we will
implement the revised standard in fiscal year 2006. Currently, we account for
our share-based payment transactions under the provisions of APB 25, which does
not necessarily require the recognition of compensation costs in the financial
statements. Management is assessing the implications of this revised standard,
which may materially impact our results of operations in 2006 and
thereafter.
  20
 On
December 16, 2004, FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.”
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.
This statement amends APB Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. Under
SFAS 153, if a nonmonetary exchange of similar productive assets meets a
commercial-substance criterion and fair value is determinable, the transaction
must be accounted for at fair value resulting in recognition of any gain or
loss. SFAS 153 is effective for nonmonetary transactions in fiscal periods that
begin after June 15, 2005. We do not anticipate that the implementation of this
standard will have a material impact on our financial position, results of
operations or cash flows.
  **Critical
Accounting Policies**
  The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting policies involve the most complex, difficult and subjective
estimates and judgments.
  **Revenue
Recognition**
  The
Company generates revenue from selling and installing hardware, licensing its
software and the provision of services.
  For
revenue from product sales and services, the Company recognizes revenue in
accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition”
(“SAB104”), which superceded Staff Accounting Bulletin No. 101, “Revenue
Recognition in Financial Statements” (“SAB 101”).
  SAB 101
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence that an arrangement exists; (2) delivery has occurred;
(3) the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the selling prices of the
products delivered and the collectibility of those amounts. Provisions for
discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
The Company defers any revenue for which the product has not been delivered or
is subject to refund until such time that the Company and the customer jointly
determine that the product has been delivered or no refund will be
required.
  SAB 104
incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”),
“Multiple-Deliverable Revenue Arrangements.” EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF 00-21 on
the Company's consolidated financial position and results of operations was not
significant.
  21
 The
Company recognizes revenues and all related costs on installation contracts with
revenues of $100,000 or more using the percentage of completion method. Progress
is measured by the percentage of actual labor incurred to date to management’s
estimate of total labor to be incurred on each contract. This method is used as
management considers labor incurred to be the best available measure of progress
on these contracts. Contract costs include all direct subcontractor labor and
supervisory labor costs and those indirect costs related to contract performance
such as indirect labor, supplies, and other general expenses. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, conditions and estimated
profitability may result in revisions to costs and income and are recognized in
the period in which revisions are determined. All installation contracts with
revenues less than $100,000 are accounted for on the completed contract method.
The Company recognizes revenue and all related costs on these contracts upon
delivery and acceptance by the customer.
  The
company defers maintenance revenue and recognizes it ratably over the
maintenance term. The company defers consulting and training billings and
recognizes them as those services are performed.
  **Stock-Based
Compensation**
  In
December 2002, the FASB issued SFAS No. 148 - “Accounting for Stock-Based
Compensation - Transition and Disclosure.” This statement amends SFAS No. 123 -
“Accounting for Stock-Based Compensation,” providing alternative methods of
voluntarily transitioning to the fair-market value-based method of accounting
for stock-based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2003.
  We
elected to continue to account for stock-based compensation plans using the
intrinsic value-based method of accounting prescribed by APB No. 25, “Accounting
for Stock Issued to Employees,” and related interpretations. Under the
provisions of APB No. 25, compensation expense is measured at the grant date for
the difference between the fair value of the stock and the exercise
price.
  From our
inception, we have incurred significant costs in connection with the issuance of
equity-based compensation, which is comprised primarily of our common stock and
warrants to acquire our common stock, to non-employees. We anticipate continuing
to incur such costs in order to conserve our limited financial resources.
The determination of the volatility, expected term and other assumptions used to
determine the fair value of equity-based compensation issued to non-employees
under SFAS 123 involves subjective judgment and the consideration of a variety
of factors, including our historical stock price, option exercise activity to
date and the review of assumptions used by comparable enterprises.
  22
 We
account for equity-based compensation, issued to non-employees in exchange for
goods or services, in accordance with the provisions of SFAS No. 123 and EITF
No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.”
  **Merger
with Frontrunner**
  On
September 14, 2004, we completed a merger under which we acquired 100% of the
stock of Frontrunner. The form of the business combination with Frontrunner was
a reverse triangular merger in which we issued 925,000 shares of our common
stock and $222.18 in exchange for 100% of the ownership of Frontrunner and the
cancellation of indebtedness of Frontrunner in the amount of $2,252,423
(excluding accrued unpaid interest and other claims). The merger was approved by
our board of directors and the boards of directors of Frontrunner and our
subsidiary. The merger was also approved by a majority of the shareholders of
Frontrunner. At the time of the merger, Frontrunner had assets principally in
the form of inventory, fixed assets and receivables in the amount of
approximately $3,800,000.
  The
merger agreement contained certain conditions precedent including: (i) requiring
certain creditors of Frontrunner to execute creditor waiver agreements; (ii)
James Cuppini entering into an employment agreement with Frontrunner, (iii)
entry by Frontrunner into certain payment agreements calling for amortization of
outstanding past due obligations of Frontrunner plus a market rate of interest
with certain other of its creditors, and (iv) Frontrunner obtaining from Harris
Trust and Savings Bank, a consent to the merger and a commitment that it would
extend and maintain a loan to Frontrunner with a principal amount of not less
than the principal balance outstanding as of the date of the merger
(approximately $3,920,000). We waived all of the conditions precedent except the
entry into certain creditor waiver agreements and our issuance of common stock
to those creditors.
  Frontrunner
entered into creditor waiver agreements with several of its identified
creditors. All but one of these identified creditors (John Jellinek) executed
the creditor waiver agreements. The following identified creditors entered into
the creditor waiver agreements and we, in turn, issued a total of 925,000 shares
of our common stock to Bluestem Capital Partners II, Limited Partnership,
Mesirow Capital Partners VI, The Edgewater Private Equity Fund II, L.P.,
21 st Century
Communications Partners L.P., 21 st Century
Communications T-E Partners, L.P., 21 st Century
Communications Foreign Partners, L.P., Philip Kenny and James Cuppini, and
reserved the remaining 75,000 shares, for possible later issuance to John
Jellinek. The shares of common stock distributed among the creditors was
determined pursuant to negotiations between the creditors and Frontrunner,
rather than allocated pursuant to a formula. The most recent private placement
of our common stock was made at $1.35 per share, which was assumed to constitute
its fair market value. Bluestem Capital Partners II, Limited Partnership,
Mesirow Capital Partners VI, The Edgewater Private Equity Fund II, L.P.,
21 st Century
Communications Partners L.P., 21 st Century
Communications T-E Partners, L.P., 21 st Century
Communications Foreign Partners, L.P. and Mr. Cuppini, in addition to being
creditors were also shareholders of Frontrunner. Each of the entities (other
than 21 st Century
Communications T-E Partners L.P. and 21 st Century
Communications Foreign Partners) had one director sitting on Frontrunner’s
six-member board of directors. Mr. Kenny, who currently sits on our board of
directors, also sat on the Frontrunner board of directors and received common
stock. Bluestem Capital Partners II, Limited Partnership, Mesirow Capital
Partners VI, The Edgewater Private Equity Fund II, L.P., 21 st Century
Communications Partners L.P., 21 st Century
Communications T-E Partners, L.P., 21 st Century
Communications Foreign Partners, L.P. and Mr. Kenny, together were the majority
shareholders of each class of voting stock of Frontrunner that authorized the
merger. Mr. Cuppini served as the President of Frontrunner through the merger
until his resignation on March 17, 2005.
  23
 Fifteen
percent (15%) of the 925,000 shares issued to the participating creditors,
approximately 138,750 shares was deposited in escrow to be held for a year for
the purpose of settling or litigating claims. Each of the creditors agreed to
indemnify and hold us harmless against the creditor’s pro rata portion of any
merger agreement losses incurred by us. Merger agreement losses are those losses
or liabilities that we incur as a result of a breach or an inaccuracy of any of
the representations or warranties made by Frontrunner to us pursuant to the
merger agreement. This indemnity obligation is limited to and satisfied solely
from the creditor shares held in escrow. No merger agreement loss claims have
been filed with us, nor do we have any knowledge of any pending merger agreement
loss claims. Mr. Kenny is the owner of the escrow agent for this
account.
  **Item
3. Controls and Procedures**
  **Evaluation
of Disclosure Controls and Procedure**
  Our
co-chief executive officers and chief financial officer have evaluated our
disclosure controls and procedures as of March 31, 2005, and have concluded
that, as of March 31, 2005, these controls and procedures have been effectively
designed to ensure that information required to be disclosed in reports that we
file with or submit to the United States Securities and Exchange Commission is
recorded, processed, summarized and reported within the time periods specified
in the Commission’s rules and forms and is accumulated and communicated to
management as appropriate to allow timely decisions regarding this
disclosure.
  **Changes
in Internal Control Over Financial Reporting**
  No
changes in our internal control over financial reporting have come to
management’s attention during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. Review and evaluation of disclosure controls and
procedures is an ongoing process that we will continue to refine as we perform
quarterly evaluations.
  **PART
II - OTHER INFORMATION**
  **Item
1. Legal Proceedings**
  None.
  **Item
2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities**
  None.
  24
 **Item
3. Defaults Upon Senior Securities**
  None.
  **Item
4. Submission of Matters to a Vote of Security Holders**
  None.
  **Item
5. Other Information**
  None.
  **Item
6.** **Exhibits**
  Exhibit
      Number
    Description
      of Document
  3.i
    Articles
      of Incorporation of Capital Growth Systems, Inc.(1)
  3.ii
    By-laws
      of Capital Growth Systems, Inc.(1)
  4.1
    Registration
      Rights Agreement by and among Capital Growth Systems, Inc. and certain
      shareholders of the company dated as of December 16, 2003.(2)
  4.2
    Form
      of Warrant to Purchase common stock of Capital Growth Systems, Inc. for
      bridge lenders.(3)
  4.3
    Form
      of Warrant to Purchase common stock of Capital Growth Systems, Inc. for
      Advisory Service Agreements.(3)
  4.4
    Form
      of Warrant to Purchase common stock of Capital Growth Systems, Inc. for
      selling shareholder.(3)
  4.5
    2003
      Long-Term Incentive Plan.(3)
  4.6
    2005
      Long-Term Incentive Plan.(4)
  23.1
    Consent
      of Registered Independent Certified Public
Accountants.
  31.1
    Certification
      of co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.
  31.2
    Certification
      of co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.
  31.3
    Certification
      of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.
  25
 32
    Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
  99.1
    Separation/Severance
      Agreement Between Frontrunner Network Systems, Inc., Capital Growth
      Systems, Inc. and James Cuppini, dated April 14, 2005.(4)
 
 
 (1)
    Incorporated
      herein by reference to the Form 10-SB filed with the Commission on June
      20, 2000 (File No. 0-30831)
 
 (2)
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on February
      11, 2004 (File No. 0-30831).
 
 (3)
    Incorporated
      herein by reference to the Form 10-KSB for fiscal year ended December 31,
      2003, filed with the Commission on May 6, 2004 (File No.
      0-30831).
 
 (4)
    Incorporated
      herein by reference to the Form 10-KSB for fiscal year ended December 31,
      2004, filed with the Commission on May 4, 2005 (File No.
      0-30831).
  26
  **SIGNATURES**
  In
accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed by the undersigned, thereunto duly
authorized.
  CAPITAL GROWTH SYSTEMS,
      INC.By:
    /s/ Lee WiskowskiLee Wiskowski, Co-Chief Executive
Officer
 
 ****By:
    /s/ Douglas StukelDouglas Stukel, Co-Chief Executive
Officer
 ****By:
    /s/ Derry L. BehmDerry L. Behm, Chief Financial and Accounting
      OfficerDated: May 16, 2005 27
  **EXHIBIT
INDEX**
   Exhibit
      Number
    Description
      of Document
  3.i
    Articles
      of Incorporation of Capital Growth Systems, Inc.(1)
  3.ii
    By-laws
      of Capital Growth Systems, Inc.(1)
  4.1
    Registration
      Rights Agreement by and among Capital Growth Systems, Inc. and certain
      shareholders of the company dated as of December 16, 2003.(2)
  4.2
    Form
      of Warrant to Purchase common stock of Capital Growth Systems, Inc. for
      bridge lenders.(3)
  4.3
    Form
      of Warrant to Purchase common stock of Capital Growth Systems, Inc. for
      Advisory Service Agreements.(3)
  4.4
    Form
      of Warrant to Purchase common stock of Capital Growth Systems, Inc. for
      selling shareholder.(3)
  4.5
    2003
      Long-Term Incentive Plan.(3)
  4.6
    2005
      Long-Term Incentive Plan.(4)
  23.1
    Consent
      of Registered Independent Certified Public
Accountants.
  31.1
    Certification
      of co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.
  31.2
    Certification
      of co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.
  31.3
    Certification
      of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.
  28
 32
    Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.
  99.1
    Separation/Severance
      Agreement Between Frontrunner Network Systems, Inc., Capital Growth
      Systems, Inc. and James Cuppini, dated April 14, 2005.(4)
 
 
 (1)
    Incorporated
      herein by reference to the Form 10-SB filed with the Commission on June
      20, 2000 (File No. 0-30831)
 
 (2)
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on February
      11, 2004 (File No. 0-30831).
 
 (3)
    Incorporated
      herein by reference to the Form 10-KSB for fiscal year ended December 31,
      2003, filed with the Commission on May 6, 2004 (File No.
      0-30831).
 
 (4)
    Incorporated
      herein by reference to the Form 10-KSB for fiscal year ended December 31,
      2004, filed with the Commission on May 4, 2005 (File No.
      0-30831).
 29