UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 FORM
10-KSB
 
 (Mark
One)
 
 [ X ]
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
 OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 For the
Fiscal Year ended December 31, 2004
 
 [  ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 For the
transition period from ______________ to ________________
 
 Commission
File Number 0-30831
 
 CAPITAL
      GROWTH SYSTEMS, INC.(Name
      of small business issuer in its charter)Florida
    
    65-0953505(State
      other Jurisdiction of Incorporation or Organization)
    
    (I.R.S.
      Employer Identification Number)50
      East Commerce Drive, Suite A, Schaumburg, Illinois
60173(Address
      of principal executive offices)630-872-5800(Issuer’s
      telephone number, Including Area Code)
 Securities
registered under Section 12(b) of the Exchange Act:
 
 Title of
each class:     None
 
 Name of
each exchange on which registered:  None
 
 Securities
registered under Section 12(g) of the Exchange Act:
 
 Title of
class:  common
stock, $.0001 par value
 
 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
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
 
 State
issuer’s revenues for its most recent fiscal year: $4,296,800
 
 The
issuer is unable to calculate the aggregate market value of voting stock held by
non-affiliates as of a recent date because the issuer is not aware of any market
for its shares of common stock.
  
 As of
April 25, 2005, the issuer had outstanding 16,940,754 shares of its $0.0001 par
value common stock.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 None
 
 Transitional
Small Business Disclosure Format: Yes  No X
  ii
  **Table
of Contents**
  **Page**
  Item
      1.
    Description
      of Business.
    1Item
      2.
    Description
      of Property.
    19Item
      3.
    Legal
      Proceedings.
    19Item
      4.
    Submission
      of Matters to a Vote of Security Holders.
    19Item
      5.
    Market
      for Common Equity and Related Stockholder Matters.
    20Item
      6.
    Management’s
      Discussion and Analysis and Plan of Operation.
    23Item
      7.
    Financial
      Statements.
    32Item
      8.
    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.
    32Item
      8A.
    Controls
      and Procedures.
    33Item
      9.
    Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act.
    33Item
      10.
    Executive
      Compensation.
    37Item
      11.
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
    41Item
      12.
    Certain
      Relationships and Related Transactions.
    43Item
      13.
    Exhibits.
    48Item
      14.
    Principal
      Accountant Fees and Services.
    51
 
   iii
  **CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS**
  This
report on Form 10-KSB 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.
  iv
  **PART
I**
  **Item
1.** **Description
of Business** **.**
 **Background**
  Capital
Growth Systems, Inc. was organized as a Florida corporation on September 29,
1999. We were a developmental stage company and had no revenue through
December 31, 2003. From our inception through December 31, 2003, our
activities were limited to actions related to our organization and the
preparation of the documents necessary for us to be registered with the
Securities and Exchange Commission. During this period, we operated as a “shell”
company conducting virtually no business operations, other than our efforts to
seek a merger partner or acquisition candidate. Throughout this period we had no
full time employees and owned no real estate. We were created to effect a
merger, exchange of capital stock, asset acquisition or other similar business
combination with an operating or development stage business, which we will refer
to as a “target business,” which desired to utilize our status as a reporting
company under the Securities Exchange Act of 1934.
  On
January 28, 2004, we effectuated a business combination by entering into an
Agreement and Plan of Merger whereby we acquired 100% of the ownership of Nexvu
Technologies, LLC, a Delaware limited liability company, which we will refer to
as “Nexvu,” by merging it in a reverse triangular merger with our wholly-owned
subsidiary, Nexvu MergerSub, LLC, a Delaware limited liability company. Nexvu
was originally formed on February 28, 2002 under the name of Siegler Technology
& Development, L.L.C. to develop and market software and hardware products
and solutions for communication networks. It changed its name to “Nexvu, LLC” on
January 29, 2003, and to “Nexvu Technologies, LLC” on October 22, 2003.
  Craig
Siegler organized Siegler Technology & Development and therefore is
considered Nexvu’s promoter. Siegler Partners, L.L.C., a company controlled by
Mr. Siegler, acted as the manager of Nexvu from its inception through June 2003.
Mr. Siegler’s only current relationship with us is as the beneficial owner of
over 5% of our common stock. From July 2003 through June 2004, Mr. Siegler
provided consulting services to Nexvu, which is now a wholly-owned subsidiary of
ours. For his services, Mr. Siegler was paid $50,000. On June 27, 2003, Nexvu
issued a total of 2,837,950 Class A membership interests to Craig Siegler, the
promoter of Nexvu. The consideration for these shares was $1,034,907, which had
been advanced by Mr. Siegler to Nexvu during the period from the inception of
Nexvu on February 28, 2002 through June 27, 2003. The issuance of the shares
eliminated our obligation to repay those advances.
  As a
result of the above merger, the owners of Nexvu became the majority owners of
our company and Nexvu became the surviving company for financial statement
purposes. We serve as Nexvu’s holding company. Nexvu is engaged in the
development and sale of application performance management software to large and
mid-sized companies for use in connection with their computer network systems
and applications.
  The
consummation of the business combination was simultaneous with our closing on
the proceeds of a private placement of our common stock, thereby affording Nexvu
ready access to in excess of $5,000,000 of capital, while avoiding what it might
deem to be the adverse consequences of undertaking a public offering itself,
such as the time delays and significant expenses incurred to comply with the
various federal and state securities laws governing initial public
offerings.
  1
 
 On
September 14, 2004, we completed a merger under which we acquired 100% of the
stock of Frontrunner Network Systems Corp., a Delaware corporation, which we
will refer to in this report as
“Frontrunner.” Frontrunner began in 1976 as the network integration arm of
Frontier Corporation in upstate New York. In April 1999, Frontrunner was
purchased from Frontier Corporation and taken private in combination with the
acquisition of certain assets and certain liabilities of Telecom Midwest, LLC.
Frontrunner is a single-source provider of business communications equipment and
multimedia integration services for data, voice, video and advanced
applications. Frontrunner designs, installs and services customer-premise voice,
data and video networks. It also resells communication equipment to the small
and mid-sized business segment. In 2003, Frontrunner shifted its business model
to concentrate more on services, focusing on applications and design services in
voice, video and data. Frontrunner launched its network products which leverage
the service center on a wholesale basis to other service providers who provide
these services on a retail basis to end users. This model leverages
Frontrunner’s centralized resource center which includes second and third level
voice, video and data engineers which enhance voice and data monitoring.
Frontrunner also provides network maintenance and monitoring services,
consulting and outsourcing with regard to networks and information technology.
Frontrunner has expanded its line of offerings to include larger systems,
multiple locations, call centers and integrated voice response applications.
Frontrunner is now a Voice over Internet Protocol (VoIP) certified company. Most
of Frontrunner’s customers are located in the northeast United States.
Frontrunner represents Nortel voice
and data, Siemens voice, Cisco data and Polycom video.
 The
addresses of our websites are www.nexvu.com and www.frontrunnernetworks.com . The
information in, or that can be accessed through, our websites is not part of
this report.
  **Business
Combination**
  ***Nexvu***
  The form
of the business combination with Nexvu was a merger in which we issued 8,558,500
shares of our common stock in exchange for 100% of the membership interests in
Nexvu. In addition, pursuant to a loan conversion agreement, we
issued:
  ·
    an
      additional number of shares of our common stock needed to convert the
      amount of new bridge loans funded by Nexvu members from November 15, 2003
      through the merger closing into shares of our common stock at a conversion
      price of approximately $0.95 per share, for a total of 577,500 shares;
      and
  ·
    warrants
      expiring December 31, 2006 to purchase 638,889 of our common stock at
      $1.35 per share.
  The
merger agreement also required a simultaneous closing of the issuance of a
private offering for our common stock of not less than $2,000,000, up to a
maximum of $7,000,000, subject to increase in our sole discretion, at $1.35 per
share, and the conversion of bridge loan principal amounts to equity so that we
would own 100% of Nexvu, which would be substantially debt free as of the merger
closing. We subsequently approved an increase in the maximum amount of the
private offering and raised a total of approximately $7,700,000 from the sale of
our common stock in the offering. The private offering closed on April 15,
2004.
  2
 The
merger agreement further provided that, on closing of the merger, at least three
designees of Nexvu, all of whom were Nexvu’s principal officers, would become
members of our board of directors. These persons were elected to the following
positions: Scott Allen, CEO and CFO; Rory Herriman, Chief Technology Officer;
and Robert T. Geras, Chairman of the Board. We also entered into an
indemnification agreement at the closing of the merger in which we agreed to
indemnify and hold harmless all five of our directors against certain
liabilities for actions taken in good faith on our behalf or on behalf of Nexvu.
Scott Allen resigned as the CEO, CFO and director on August 30, 2004. Rory
Herriman resigned as a director on August 31, 2004. We added David Beamish and
Philip Kenny to fill the board seats vacated by them.
  The
consideration for this transaction was arrived at arms-length negotiations
between Nexvu and us. In connection with the merger we changed our fiscal year
end from May 31 to December 31, which is the fiscal year end of
Nexvu.
  ***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 ,
L.P. ) 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.
 3
 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.
  Frontrunner
has a customer base of over 1,000 companies along with an installed, fully
functional Network Operating Center (“NOC”) which will enable us to extend
current Nexvu product offerings with a set of Remote Network and Application
Performance Monitoring Services.
  **Industry
Background**
  ***Nexvu***
  We
believe that there has been a shift in the way organizations view, use, and
purchase IT performance management tools that will have a long-term impact on
the overall competitive environment for these markets.
  We
believe there is an industry trend that will continue to place pressure on
organizations that rely on these technologies for revenue streams, with
increasing demand for products in a new, emerging market - that of application
performance management and monitoring.
  4
 The
International Standards Organization outlines the primary functions of network
management systems as being focused on the five conceptual areas, also known as
“FCAPS”:
  1.  *Fault
Management* . Fault
management encompasses the activities of detection, isolation and correction of
abnormal systems operation. Fault management provides the means to receive and
present fault indication, determine the cause of a fault, isolate the fault and
perform a corrective action if required.
  2.  *Configuration
Management* .
Configuration management activities include the configuration, maintenance and
updating of system components. Configuration management also includes
notification to network users of pending and performed configuration
changes.
  3.  *Accounting
Management* . The
ability to track usage to detect inefficient use and abuse of privileges or
usage patterns is included in accounting management - a key component for
capacity planning.
  4.  *Performance
Management* .
Performance management tools are used to recognize current or impending
performance issues that can cause problems for users. Activities include the
monitoring and maintenance of acceptable performance and the collection and
analysis of statistics critical to performance.
  5.  *Security
Management* .
Security management encompasses the activities of controlling and monitoring
access to the network and associated network management information. This
includes controlling passwords and user authorization and collecting and
analyzing security or access logs. The goal of a network management system is to
provide this functionality in a concise manner that views the entire network as
one homogeneous entity.
  A new
component of the performance management segment is application performance
management. This market is focused on delivering solutions designed to resolve
performance issues for business applications and systems.
  ***Frontrunner***
  The
market has been trending towards a convergence of voice, data and video
networks. While voice switching networks are still a viable commodity, increased
investment in LAN/WAN upgrades will enable these networks to support data, voice
and video applications over common Internet protocol transports. The
professional services required to build, monitor and maintain these complex
networks will be the differentiator.
  **Our
Products and Services**
  ***Nexvu***
  We have
developed a suite of software application performance management tools and
products which address a chronic problem facing companies today: how to measure
and ensure that a company’s business critical software applications function as
efficiently and effectively as intended. Organizations with highly distributed
operational environments, such as banks, retailers, health care organizations
and insurance companies, face the additional challenge of often having to
support these software applications remotely.
  5
 We
believe we have established a relatively low-cost means of significantly
improving the ability to manage remote applications. Our principal product is a
hardware appliance loaded with our proprietary software, which is installed at
points within a customer’s data network. The appliance can measure, monitor and
analyze over 900 protocols combining to support 3,200+ different applications
and network based services and sends an “alert” message every time the
application or services are not running within an acceptable level of
performance. This enables the customer to identify that a problem exists and to
pinpoint the cause of the problem, often before the “crash” of the application
occurs.
  On June
30, 2003, we introduced our performance management solution, the Nexvu
Application Performance Management System 2.0, also known as the “Nexvu Manager
System.” The system has since been renamed the “Nexvu Analyzer System.” We have
worked with several companies functioning as beta testers throughout the design
phase of the product. They have been instrumental in providing input as it
relates to business problems, particularly industry-specific challenges that
need to be met today and in the future.
  The Nexvu
Analyzer System has two major components - the Nexvu Analyzer Appliance and the
Nexvu Command Center Appliance. The Nexvu Analyzer Appliance is considered the
nerve center of the Nexvu Application Performance Management System. Residing
within the customer’s data network, the Nexvu Analyzer Appliance collects
performance management data by capturing and classifying information in a
passive, non-disruptive manner as it flows across the network. Once this
information is collected, the Nexvu Analyzer Appliance assesses the information
looking for performance trends and providing network operators with information
to avoid a negative impact on the user’s business.
  The Nexvu
Analyzer Appliance is engineered for highly distributed environments and is
designed to be easy to deploy and operate. Our software is loaded directly into
an appliance, which can be mounted onto a rack and installed by non-technical
personnel. Additionally, the Nexvu Analyzer Appliance contains a series of
analysis tools that provide network operators and field personnel the ability to
troubleshoot outages from remote locations and potentially restore an outage
without dispatching technical resources to the site. Once connected to our
appliance, service personnel can utilize trouble-shooting features included in
the appliance to evaluate potential problems and take action to resolve many
problems remotely. It also allows “packet capture,” which enables IT personnel
to understand what network components and services are working in a troubled
environment.
  Information
is transmitted to users by the Nexvu Command Center Appliance, which is
responsible for managing all Nexvu Analyzer Appliances throughout the customer’s
environment. This includes configuration and administration, centralized
software upgrades and common point of user access. The customer typically will
have one Nexvu Command Center Appliance for approximately every 500 Nexvu
Analyzer Appliances. As a self-contained appliance which can be mounted onto a
rack, the Nexvu Command Center Appliance can be easily installed in the data
center or network operations center without advanced technical support.
  6
 In August
of 2003, we received our first purchase order for the Nexvu Analyzer System
from Bally’s Total Fitness. Although we had only one order as of December
31, 2003, we do not believe that our business model will result in our having
significant reliance on any individual customer in the future.
  In
addition to seeking to make enhancements to the Nexvu Analyzer and Command
Center Appliances, we plan to extend the Nexvu Analyzer product line. We may
seek to develop products that assist information technology organizations in
monitoring Voice over Internet Protocol (VoIP) environments and products that
monitor business activity such as retail sales transactions, supply chain
delivery or call center activity. These products are in the discussion stages
only, no plans or products have been developed and there is no assurance that
any of them will be developed.
  ***Frontrunner***
  Frontrunner
markets a network solution approach through its field sales force directly to
the small and mid-sized business
segment. Frontrunner is an authorized distributor of premier vendors such as
Nortel, Cisco, Siemens-Rolm and Polycom. These solutions include Nortel and
Siemens voice hardware, Cisco and 3COM data hardware, and Polycom video units
and video network bridges. Frontrunner has traditionally sold follow-up services
into its established base and more recently has provided advanced professional
services including contact center design and installation, remote network
monitoring and management and network security. Frontrunner also maintains the
installed equipment for its customers.
 Frontrunner
operates its own service fleet for installation and repair in its core markets.
It also owns and operates a Network Operations Center (NOC) in Rochester, New
York. This NOC provides round-the-clock network fault management, service
response and repair processes for Frontrunner’s entire customer base.
  Frontrunner
has recently added advanced retail voice and data network applications
including, virtual private networks, VoIP networks, and several versions of IP
Telephony (or phone calls over the Internet) to its existing product set.
  **Product
Features**
  ***Nexvu***
  The Nexvu
Analyzer System is designed to apply the critical functions performance
management of the customer’s business-critical applications. We believe that the
following features will prove beneficial to information technology
departments:
  ·
    Comprehensive
      collections of data relating to business application performance,
      utilization and effectiveness;
  ·
    Real-time
      performance analysis at the distributed locations, ensuring minimal impact
      to wide area network bandwidth;
  7
 ·
    Support
      which is “pre-configured,” so that no additional programming is required,
      for 900+ protocols and 3200+ applications, includingVoice/Videoover Internet Protocol, or “VOIP”
      and Internet protocol security, or “IPSEC” and Cisco
  ISL;
  ·
    Alerts
      to management to ensure minimal impact on business
    operations;
  ·
    Solutions
      which are easy to deploy and operate, to be readily installed by
      non-technical personnel, yet centrally
managed;
  ·
    Cost-effective
      solutions designed for large-scale
deployments;
  ·
    New
      technology solutions integrating performance and fault management
      leveraging the data capture and trend analysis across each
      system;
  ·
    Architecture
      that supports the integration of third party tools to leverage existing
      technology investment; and
  ·
    System
      architecture designed for international deployment through the use of
      language catalogs.
  ***Frontrunner***
  Frontrunner
designs, installs and services customer-premise voice/data/video networks.
Frontrunner is a value-added reseller of communications equipment to the
small-mid business segment. Frontrunner represents NORTEL voice and data
equipment, Siemens voice, Cisco data,
and Polycom video.
Frontrunner’s professional services portfolio includes network maintenance and
monitoring, consulting and outsourcing in both the network and information
technology space to monitor, manage, impose network security, and repair service
outages for customer networks. Frontrunner has expanded its product line over
the last five years to include larger systems, multi-locations, call
center/Integrated Voice Response (IVR) applications and is now Voice over Internet
Protocol (VOIP) certified. Frontrunner offers PBX switching equipment and
supporting add-ons (e.g. voice mail, wireless customer premise equipment
extensions, business network (LAN/WAN) switches and routers, videoconferencing
equipment for private business networks, and contact center management hardware
and software). Frontrunner provides direct service in the Northeast, and has a
network of affiliated subcontractors providing service coverage for the
remaining 48 states and Hawaii.
 Frontrunner
plans to provide two new services for remote application monitoring and
management in the second quarter of 2005. Beta field testing is currently
underway. These services will be available on a nation-wide basis; both for
direct retail sale and resale (or private labeling) by Frontrunner business
partners.
  **Sales
and Marketing**
  ***Nexvu***
  *Target
Markets* . We have
targeted Fortune 2000 companies with highly distributed operating environments
comprised of hundreds to thousands of remote locations with thousands of
application users. We intend to focus on a subset of the Fortune 2000 market
within the retail, call center, insurance, banking and health care industries.
Future product offerings are expected to address vertical industry solutions
that will more comprehensively meet the needs of each company, resulting in
additional sales and increased penetration targeted for each segment. We believe
that these industry segments offer the greatest immediate opportunity based on
direct feedback from customers and suppliers relative to the challenges they
face, with each location critical to the business. It is imperative to ensure
the application performance, availability and usability in these locations based
on their mission-critical business activity, which includes the
following:
  8
  ·
    Customer
      transactions, such as in retail stores and branch banks, where customer
      revenue and customer satisfaction may be
affected;
  ·
    Transaction
      processing locations, such as in insurance companies or call centers,
      where customer satisfaction and productivity may be affected;
      and
  ·
    Communication
      transactions, such as for fire and police services, where safety/lives are
      affected.
  In
addition, some of these industries are highly regulated. Regulatory requirements
often drive the need for technology solutions to mitigate business risk. All of
these industries are faced with the challenge of reducing expense, particularly
the high cost of human capital. The value of technology is, in part, derived
from the automation of tasks that are otherwise carried out by technicians.
Since companies in these industries have service level agreements with their
customers, failure to reach minimum service levels, due to performance issues or
outages, may result in monetary penalties.
  *Sales
Approach.* We have
determined that a two-tiered approach that focuses on high-end enterprise
businesses in one effort and mid-sized enterprises in another effort will help
allow us to penetrate our target market effectively. We therefore intend to
carry forward with this two-tiered approach in our attempt to increase both
short-term revenues and long-term sources of revenue. We will focus on selling
our product to the high-end enterprise business through a direct sales
force.
  We intend
to utilize a channel approach to penetrate the mid-sized businesses. The channel
approach will allow value-added resellers, or “VARs” to market and sell our
product to end users. We anticipate that our VARs will be businesses that focus
only on high-end technology products and provide integrated systems and
networking products to mid-size companies and networks across the nation. We
currently have agreements with the following six VARs: Continental Resources,
Gee Communications, Meridian IT Solutions, Hartford Computer Group, Next Step
Technology, and JDM Infrastructure. Under these agreements, the value-added
resellers agree to sell the Nexvu Command Center Appliance and Analyzer
Appliances and our software maintenance support services to end users of the
products or services. The agreements grant the resellers the right to purchase
the Nexvu Command Center Appliance and Nexvu Analyzer Appliance at a 30%
discount to our list price, and an annual maintenance and support license for
each product at a 15% discount. These discounts are based on a commitment by
each reseller to sell $1.5 million worth of products and services. If a reseller
does not reach this level, we have the right to change the discount granted to
that reseller. If a reseller sells $1 million of our products and services in a
nine-month period, they are entitled to purchase the Command Center and Analyzer
appliances at a discount of 35% of the list price. Under the agreements the
resellers have the right to “co-brand” our products, which means that the
products could be sold under a name different from the Nexvu name which is
mutually agreed upon between us and the reseller, followed by the Nexvu name in
a phrase such as “powered by Nexvu.” Each agreement has a term of one-year, and
will automatically renew for successive one-year periods unless terminated by
either party on thirty days’ written notice. During 2004, we had approximately
$37,000 in revenues originating from our VAR’s.
  9
 Our
revenues will be generated from three major sources:
  ·
    Sales
      of licenses for our software and related cost of the hardware
      appliance;
  ·
    Maintenance
      contracts for our software licensing agreements;
and
  ·
    Professional
      services for consulting on related information technology infrastructure
      issues.
  ***Frontrunner***
  Frontrunner’s
distribution network is a direct sales force channel located in the Northeast.
Frontrunner also has a growing network of business partners who act as agents
who resell Frontrunner products and services to a wider geographic
area.
  **Suppliers
and Installation**
  ***Nexvu***
  We plan
to outsource non-strategic elements of our operations to bring our products to
market quickly, maximize return on investment and minimize risks from exposure
to unrelated operations unrelated to our core business. We plan to focus on
developing strong products, selling them into the marketplace and establishing
partnerships with organizations that can help accelerate the adoption of our
solutions.
  *Suppliers.* We have
no direct manufacturing requirements. Our software is designed for installation
on any Intel-based server. Although the hardware server appliance can be any
Intel based server, we are presently utilizing Gateway as our primary appliance
supplier and are currently in the process of adding support for additional tier
1 manufacturers including, but not limited to, IBM and Dell.
  *Installation.* We have
designed our products so that they may be installed by customers ensuring
minimal disruption to the customer’s business. Installations can be done by
non-technical personnel with minimal assistance. However, we expect to establish
partnerships with industry-leading professional services firms to accommodate
any unique customer requirements.
  10
 ***Frontrunner***
  *Suppliers* .
Frontrunner purchases the majority of its sold equipment (approximately 80%)
from four major manufacturers: Nortel, Siemens, Polycom and Cisco. Frontrunner
buys directly from Nortel and Siemens and uses distributors to purchase the
Polycom and Cisco gear. Remaining ancillary equipment of various types and
brands are purchased from a number of equipment resellers. For the major
manufacturers, this equipment would qualify as standard product, shipped
directly from the factory without any special manufacturing
requirements.
  *Installation* . The
equipment is installed by certified Frontrunner technicians trained in the
various manufacturers’ product lines, or by certified technicians subcontracted
by Frontrunner.
  **Competition**
  ***Nexvu***
  The
market for our products and services is highly competitive. There are a number
of publicly-held companies in the application performance management market with
which we compete. There is no assurance that we will be able to effectively
compete in this market. Prospective competitors vary in size and in the scope
and breadth of the products and services offered. Many of our potential
competitors have a number of significant advantages, including a longer
operating history, preferred vendor status with our potential customers, more
extensive name recognition and marketing power and significantly greater
financial, technical, marketing and other resources which would give them the
ability to respond more quickly to new or changing opportunities, technologies
and customer requirements. We may not be able to maintain or expand our revenue
base if competition increases and we are unable to respond effectively.
  There are
several organizations and companies who have combined many application
performance management functions into products and solutions that have
traditionally operated profitably. Many of the following companies have combined
key elements of network performance management, fault management and/or
accounting management into their products:
  11
  •Network
      General
      
      •Netscout
      
      •Concord
      Communications
      
      •Agilent
      
      •Acterna
      
      •Wildpackets
      
      •Network
      Instrument
    •Apogee
      Networks
      
      •Compuware
      
      •Micromuse
      
      •Tavve
      Networks
      
      •Niksun
      
      •Candle
      Communications
      
      •Lucent
 
 Many of
the application performance management products are developed, marketed and sold
by the following organizations:
  •Mercury
      Interactive
      
      •Cisco
      
      •NetQOS
    •Netiq
      
      •Concord
      Communications
      
      •Compuware
 ******
 ***Frontrunner***
  Business
competition comes from similar-sized firms
located in Frontrunner’s regional geographic markets and
national firms that largely compete for Frontrunner’s top strata of customers.
Competition is based upon price, quality of equipment sold, technical
service/support provided, and breadth of product line offered. Frontrunner’s
value proposition is to
provide superior services at affordable prices .
  **Dependence
on Major Customers**
  ***Nexvu***
  Through
December 31, 2004, Nexvu had only 12 customers. As this is still a startup
company, the company is highly dependent on most customers for repeat business.
However, the three most
critical customers for the company are DS Waters, LLC, Sears, and EDS. A loss of
any of these three customers could have a material adverse impact on the
company’s business operations.
  ***Frontrunner***
  Frontrunner
currently has over 1000 customers*.* Two
customers accounted for approximately 34% of the revenues of Frontrunner during
the stub period from September 15, 2004 through December 31, 2004. ITT
Industrial Space Systems accounted for 22% and Wegmans Supermarkets accounted
for 12% of Frontrunner’s business. A loss of
either of these customers would have a material adverse impact on the company’s
business operations.
 12
 **Seasonal
Trends**
  Seasonal
purchasing trends for technology capital spending may cause our quarterly
operating results to fluctuate. Typically, a disproportionate amount of
technology spending occurs during the fourth quarter of a calendar year, with a
significant drop-off in spending usually occurring in the first quarter of a
calendar year.
  **Research
and Development**
  ***Nexvu***
  During
the fiscal years ended December 31, 2004 and December 31, 2003, Nexvu spent $1.7
million and $1.4 million, respectively, on research and development activities.
Research and development costs include cost of developers and system engineers,
as well as overhead costs while developing our product. These costs are not
directly borne by customers, but rather are inherently built into the
pricing of our
products to our
customers.
  ***Frontrunner***
  During
fiscal years ended December 31, 2004 and December
31, 2003,
Frontrunner did not incur any research and development
expenditures.
  **Patents
and Proprietary Technology**
  ***Nexvu***
  We have a
proprietary technology and confidential software code. Virtually all of the
software used in our products has been developed by a product development team
of eight individuals, as well as, by our Chief Technology Officer, Rory
Herriman. None of the individuals involved in the development of our software
has any ownership interest in this technology. Two pieces of network monitoring
software used in one component of our products were developed by a third party.
On August 31, 2002, we entered into software licensing agreements with this
third party for each of the two pieces of software. Each agreement grants us a
non-exclusive license for the worldwide rights to market and distribute the
proprietary software. The license expressly grants us the right to sell or
license products incorporating the third party’s software. We have paid a total
licensing fee of $300,000 for the two pieces of software and, in addition,
agreed to pay a total royalty of $50 for each device we sell that includes the
software. The agreements call for minimum royalty payments totaling $500,000,
covering both products, payable on a quarterly basis beginning at the start of
the quarter following our first customer shipment. The quarterly payments range
from $12,500 for the first year to $37,500 for the fifth year. We made the first
payment for the quarter ended March 31, 2004 in the amount of $12,500. Once we
have paid a total of $500,000 in royalty payments, either in connection with
sales of our products or through the minimum payments, the licenses for both
pieces of software will be considered fully paid. The agreements give us the
option to receive upgrades for each piece of software in consideration for a
total annual fee of $15,000, payable for as long as we desire upgrades. The
agreements also call for an annual maintenance/update fee of $15,000, also
covering both pieces of software. The first payment, which was mandatory, was
made one year after the delivery of the software. We are obligated to make
further annual maintenance payments only if we desire the maintenance services.
We chose to retain maintenance services and paid the annual maintenance/update
fee. Each license agreement has a term of five years with provision for annual
renewals thereafter, and may be terminated by either party in the event of a
payment default or material breach, except that the licensor may not terminate
the agreement if we have made total royalty payments of $500,000. We intend to
make patent applications with respect to the Nexvu Analyzer and Command Center
Appliances, but have not yet done so. There is no assurance that, if these patent applications are filed, that they will be
approved.
 13
 ***Frontrunner***
  Frontrunner
entered into a Software Development Agreement with InfoSpectrum on March 16,
1994, for the development of a custom designed enterprise resource planning
system for a network integrator, including delivery of the system and user and
technical documentation (“SSI Agreement”). The SSI Agreement further provides
that upon termination of the SSI Agreement, for any reason, InfoSpectrum will
deliver to Frontrunner one copy of all data, information and other material
acquired or compiled by InfoSpectrum in respect of its services or the system,
including a source code, object code and technical documentation. Frontrunner
pays InfoSpectrum a monthly maintenance fee in the amount of $16,000. James
Cuppini, Frontrunner’s former President is a 49% owner of
InfoSpectrum.
  **Employees**
  As of
December 31, 2004, Nexvu had approximately 13 full
time employees who are employed in the following areas: product development,
quality assurance, product marketing and management, sales and sales support,
installation technicians, IT support and customer support. None of our employees
are covered by a collective bargaining agreement. Frontrunner has approximately
87 full time employees. We believe all relations with our employees are
satisfactory.
 **Factors** **** **Affecting
Future Performance**
  The
following are important factors which relate to our business:
  ***We
have historically lost money and losses may continue.*** We have
incurred losses since our inception, and cannot assure you that we will achieve
profitability. We incurred a net loss from operations of $21,362 in the fiscal
year ended May 31, 2003 and $14,929 in the seven-month transition period ended
December 31, 2003. Nexvu, which is considered our predecessor for accounting
purposes, lost $2,637,633 in the year ended December 31, 2003 and $1,126,917 in
the year ended December 31, 2002. Our losses for the year ended December 31,
2004 were $4,926,877. To succeed, we must develop new client and customer
relationships and substantially increase our revenues from sales of products and
services. We intend to continue to expend substantial resources to develop and
improve our products and to market our products and services. These development
and marketing expenses often must be incurred well in advance of the recognition
of revenue. There is no certainty that these expenditures will result in
increased revenues. Incurring additional expenses while failing to increase
revenues could have a material adverse effect on our financial
condition.
  14
 ***We
face the risk of product obsolescence if we fail to develop new
products.*** We
expect that the market for our products will be characterized by rapidly
changing technology and new product introductions. Our success will depend, in
part, upon our continued ability to provide products with the advanced
technological qualities desired by our customers, to enhance and expand our
existing product offerings and to develop in a timely manner new products that
achieve market acceptance. Failure to enhance and expand existing product
offerings or failure to develop new products could have a material adverse
effect on our business, results of operations and financial
condition.
  Competition
in the application performance management business is very intense, and it is
expected that existing and new competitors will seek to replicate much of the
functionality of our products. Additionally, there can be no assurances that we
will be able to successfully develop the next generation of products necessary
to establish a lead on the market or that if we are able to do so, that customer
acceptance for these products could continue. Replication by competitors of our
existing products, failure to develop new products or failure to achieve
acceptance of products could have a material adverse effect on our business and
financial condition.
  Given the
software intense nature of our business, once a product is developed,
competition has the ability to lower its pricing significantly to gain market
share, due to the minimal incremental cost to product production. Additionally,
certain aspects of the market may be lost to the extent over time “free”
software is developed to address this functionality. These factors could have a
material adverse effect on our business and financial condition.
  In the
high technology business, one of the largest barriers to entry for small and
start-up companies is the concern by enterprise customers as to the
survivability 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 to the extent we fail to attain break-even
profitability quickly. This resistance could have a material adverse effect on
our results of operations and financial condition.
  ***Risk
of Delayed Development of Application Performance
Market.*** Our
ability to achieve significant revenues is dependent in large part on companies’
recognizing the need for and allocating portions of their technology budget to
application performance management products. It is possible that the application
performance management market will not grow appreciably, or that it will not
grow fast enough to allow us to recognize significant revenues. We depend on a
relatively rapid acceptance of application performance management products to a
greater extent than companies with greater resources, failure could have a
material adverse effect on our results of operations and financial
condition.
  ***Dependence
on Continued Growth in Use of the Internet.*** Rapid
growth in use of and interest in the Internet is a recent phenomenon and there
can be no assurance that acceptance and use of the Internet will continue to
develop or that a sufficient base of users will emerge to support our business.
Our future revenues may, in part, depend on the widespread acceptance and use of
the Internet as a source of multimedia information and entertainment and as a
vehicle for commerce in goods and services.
  15
 The
Internet could lose its viability as a commercial medium due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased government
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet also could result in unacceptable response
times and could reduce Internet usage. If use of the Internet does not continue
to grow or grows more slowly than expected, or if the Internet infrastructure
does not effectively support the growth that may occur, the demand for our
products and our revenue may suffer, which could have a material adverse effect
on our business and financial condition.
  Defects
in our software could reduce demand for our products and expose us to costly
liability that would adversely affect our operating results. The Nexvu
Application Performance Management System product we offer is 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 products or enhancements until after they are sold. Although we
have not experienced any material software defects to date, any errors or
defects that may be discovered could result in:
  • L oss of
revenue;
  • P roduct
returns or order cancellations;
  • D elay in
market acceptance of our products;
  • D iversion
of our development resources;
  • D istraction
of our management;
  • D amage to
our customer relationships and our reputation;
  • I ncreased
service and warranty costs; and
  • C ostly
litigation defense.
  In
addition, our license and service agreements with our customers typically
contain provisions designed to limit our exposure to potential product 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 product liability claims to
date, sale and support of our products entails the risk of such claims, which
could be substantial in light of our customers' use of many of our products in
mission-critical applications. We do not maintain product 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.
  16
 ***We
face uncertainties regarding our patents and protecting our proprietary
technology.*** Although
we are exploring the possibility of patenting some of our technology, there can
be no assurances that we can obtain patent protection or that, if we obtain it,
that it will be enforceable or that there are not other ways to effectively gain
the benefits 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 can
be no assurance that third parties will not allege infringement by us of their
patents and proprietary rights. If infringement is alleged, there is no
assurance that we would prevail in any challenge by these parties, or that if a
challenge is successful, that we will be able to obtain a license to use such
technology on acceptable terms. Failure could have a material adverse effect on
our business and financial condition.
  ***We
may need additional capital.*** We may
need to obtain additional financing over time, the amount and timing of which
will depend on a number of factors including the pace of expansion of our
markets and customer base, services offered and 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 owners’ proportionate equity interests in us. Failure to obtain financing
could have a material adverse effect on our business.
  ***Frontrunner
has significant outstanding debt.*** Frontrunner is currently indebted to several entities, including but not limited
to Harris Bank and Trust Company in the amount of $3,690,000, Global Crossing
North America in the amount of $391,000, Nortel Networks Inc., in the amount of
$1,356,000 and Review Video Inc. in the amount of $272,000. Frontrunner is
currently in default under its obligation to Global Crossing North America.
Frontrunner’s management continues to devote significant time and resources to
managing Frontrunner’s outstanding debt and liabilities, which resources are not
being devoted to the growth of Frontrunner. If Frontrunner defaults on one or
more of these loan obligations, or if Frontrunner’s creditors determine not to
cooperate with Frontrunner, it could have a material adverse effect on our
financial condition.
  ***We
are dependent upon key members of management.*** Our
success depends to a significant degree upon the continuing contributions of our
key management: Lee Wiskowski and Douglas Stukel, our co-CEOs; Rory Herriman,
our Chief Technology Officer; and Robert T. Geras, our Chairman. These
individuals have the most familiarity with the products we offer and the markets
in which we offer them. The loss of any of these individuals could have a
material adverse effect on our business.
  ***We
are able to issue preferred stock which could prevent someone from taking us
over.*** Our
board of directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series, and to fix the number of shares
constituting any series, the voting powers, designations, preferences and
relative participating, optional, or other special rights and qualifications,
limitations, or restrictions of any series, including the dividend rights, terms
of redemption, conversion rights, and liquidation preferences of the shares,
without any further vote or action by shareholders. Our board of directors may,
therefore, in the future issue preferred stock with voting and conversion rights
which could adversely affect the voting power of the holders of common stock. In
addition, the issuance of preferred stock could potentially be used to
discourage attempts by others to obtain control of us through merger, tender
offer, proxy contest, or otherwise by making such attempts more difficult to
achieve or more costly. We are currently incorporated under Florida law but
expect to reincorporate shortly under Delaware law. Both Florida and Delaware
have statutory provisions which also could have the effect of discouraging a
takeover.
  17
 ***We
have not paid any dividends and do not expect to pay dividends in the near
future.*** We have
not paid any dividends upon our common stock since our formation. We do not
currently intend to pay any dividends upon the common stock in the foreseeable
future and anticipate that earnings, if any, will be used to finance the
development and expansion of our business. Our ability to pay dividends on our
common stock will be limited by the preferences of any preferred stock, which
may be outstanding from time to time and may be limited by future indebtedness.
Any payment of future dividends and the amounts thereof will be dependent upon
our earnings, financial requirements and other factors deemed relevant by our
board of directors, including our contractual obligations.
  ***An
active trading market may not develop for our common
stock.*** There is
no established market for our stock, and we do not know whether an active
trading market will develop. We intend to seek to have our shares of common
stock included in the Over the Counter Bulletin Board, but even if they are
included on the bulletin board there is no assurance that an active market will
develop for our stock. In addition, any market that develops will be less active
and liquid than would be the case if our shares were listed on an exchange or
included in Nasdaq. The lack of an active market for our shares would make it
difficult for investors to sell when they might deem it
advantageous.
  ***Our
common stock is considered a "penny stock," which may make it more difficult for
investors to sell their shares.*** Our
common stock is considered a "penny stock" as that term is defined under SEC
rules. Broker-dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of these stocks. Moreover,
broker-dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors and also making it more difficult for investors in our
common stock to sell or otherwise dispose of their shares. This could cause our
stock price to decline.
 
 ***Telecom
Midwest (Illinois) Obligations.*** In 1997,
Telecom Midwest, LLC an Illinois limited liability company (Telecom Midwest)
purchased assets from and delivered two notes to the corporation’s shareholders.
In 1999, Telecom Midwest sold its assets to Telecom Midwest, LLC, a Delaware
limited liability company (Telecom Delaware), which was a subsidiary of
Frontrunner. There was no assumption of the Telecom Midwest obligations for the
notes to shareholders by Telecom Delaware. Telecom Midwest defaulted on the
notes and the noteholders obtained judgments against Telecom Midwest in the
amounts of approximately $343,000 and approximately $89,000 respectively. The
assets of Telecom Midwest were inadequate to satisfy the judgments. Upon receipt
of a court order against Telecom Midwest, counsel for Frontrunner advised that
the Frontrunner common stock owned by Telecom Midwest (approximately 6.6%) would
be transferred to the two shareholders (judgment creditors). Frontrunner failed
to register the transfer of the Telecom Midwest shares to the judgment creditors
or reflect the transfer on its records. Frontrunner then merged with us in 2004.
In connection with the merger of Frontrunner, no consideration was provided to
the common stockholders of Frontrunner and $222.18 was paid to its preferred
stockholders. Since Frontrunner failed to register the transfer of the Telecom
Midwest shares to the creditors and reflect the transfer on its records, the
creditors were not provided notice of the merger transaction or the merger
consideration for the Telecom Midwest shares. The judgment creditors and other
former Frontrunner common shareholders have contacted Frontrunner seeking
compensation for their Frontrunner stock, but no formal demand has been made.
The company believes the judgment creditors and any other former Frontrunner
common shareholders are not entitled to compensation and further believes that
even had such individuals been listed as shareholders of record, the Frontrunner
common stock had no value. However, there is a risk that the judgment creditors
or other former Frontrunner common shareholders may be able to craft some form
of legal theory in an effort to recover the judgment amounts.
 Limited Board of Directors
 
 We currently have five directors on our board of
directors, three of which are independent outside (non-employee) directors. We
have purchased a Director and Officers Insurance Policy and will begin actively
recruiting up to two additional qualified outside directors. However, we cannot
guarantee that we will be able to attract or retain qualified
directors.
 
 Limitation of Officers' and Directors'
Liabilities
 
 Our by-laws limit directors' and officers' liabilities
to the maximum extent permitted under Florida Law. In addition, we are obligated
under our by-laws to indemnify our directors and officers against certain
liabilities incurred with respect to their service in such capacities. Each of
these measures could reduce the legal remedies available to us and the
shareholders against such individuals.
 18
 **Item
2.Description
of Property.**
Our
principal office is located at 50 East Commerce Drive, Suite A, Schaumburg,
Illinois 60173. A multi-year lease was signed that expires in April 2007, with
annual options to renew. Current rent at the Schaumburg location is $72,000 per
year. Another primary office, serving as headquarters for Northeast operations,
is located at 412 Linden Avenue, Rochester, New York 14625. The Rochester office
is leased through April 2006 with annual options to renew. Rent at this facility
is $127,000 per year. A secondary hub located at 40 British American Boulevard,
Albany, New York 12110, services downstate New York and the New England area. A
three year lease was signed that expires in March 2007, with options to renew.
Annual Albany rent is $83,500. Several small satellite offices housing limited
sales and operations are located at: (a) 415 Lawrence Bell Drive, Buffalo, New
York 14221; (b) 129 Brittany Lane, Pittsford, New York 14534; (c) 6700 Old
Collamer Road, Syracuse, New York 13057; (d) 216 Route #299, Highland, New York
12528; and (e) 7 Kimball Lane, Building C, Lynnfield, Massachusetts 01940. These
five satellite offices all have short-term leases that expire in 2005, each with
options to renew. The combined annual rent obligation for all five satellite
offices is currently $70,900 per year. In addition, we also lease a small office
at 2009 Fox Drive Suite 2, Champaign, Illinois 61820, which houses some of our
product development staff. This lease was entered into in January 2002, having
an original one-year term, with annual options to renew. The current rent for
this facility is $38,800 per year.
 **Item
3.** **Legal
Proceedings** **.**
 
 None.
  **Item
4.** **Submission
of Matters to a Vote of Security Holders** **.**
 None.
  **PART
II**
  **Item
5.** **Market
for Common Equity and Related Stockholder Matters.**
 **Market
Information**
  No public
trading market presently exists for our common stock; however, we intend to seek
to have our common stock quoted on the OTC Bulletin Board. We intend to file a
registration statement to register the shares of our common stock issued by us
in connection with the business combination, exclusive of those shares issued to
the former owners of Nexvu and upon the conversion of bridge loans. There is no
assurance that an active market will develop for our stock even if our stock is
quoted on the OTC Bulletin Board.
  **Holders**
  As of
April 25, 2005, there were approximately 210 holders of record of our common
stock.
  **Dividends**
  We have
not paid any cash dividends since our inception, and our board of directors does
not contemplate doing so in the near future. Any decisions as to future payment
of dividends will depend on our earnings and financial position and such other
factors, as our board of directors deems relevant.
  19
 **Recent
Sales of Unregistered Securities**
  The
following sets forth securities sold by us in the last three years without
registration under the Securities Act. Unless otherwise noted, in each case we
sold shares of our common stock or warrants to acquire common stock in private
transactions to persons we believed were “accredited investors” and/or
“sophisticated investors” not affiliated with us and
purchasing the shares with an investment intent. Each of the transactions
involved the offering of such securities to a limited number of persons. Each
person took the securities as an investment for his/her/its own account, and not
with a view to distribution. We relied upon exemptions contained in Section 4(2)
of the Securities Act or Regulation D promulgated thereunder in each of these
instances. In each case we did not engage in general solicitation and
advertising and the shares were purchased by investors with whom we, through our
officers and directors, had preexisting relationships. Each person had access to
information equivalent to that which would be included in a registration
statement on the applicable form under the Securities Act. We did not use
underwriters for any of the transactions described below, therefore, these
transactions did not involve underwriter discounts or commissions.
 Allen
Borowsky and Jeffrey Klein were considered our promoters. We initially issued a
total of 931,500 shares of our common stock to a total of 41 investors,
including 450,000 shares issued to each of Mr. Borowsky and Mr. Klein, for a
total consideration of $4,815.
  On
October 1, 2003, we entered into a Subscription Agreement with Grander, LLC,
d/b/a Capital Strategies Group, an Illinois limited liability company under
which Grander agreed to purchase 238,500 shares of our common stock in
consideration for Grander’s funding of certain of our operational requirements.
The offering price of the shares purchased was $13,000, for a purchase price of
$0.054 per share of our common stock. Mr. Lee Wiskowski, a director of ours and
the current Co-CEO, is the sole member of Grander. In connection with the
issuance to Grander we relied upon the exemption from registration available
under Section 4(2) of the Securities Act of 1933, as amended.
  On June
27, 2003, Nexvu issued a total of 2,837,950 Class A membership interests to
Craig Siegler, the promoter of Nexvu. The consideration for these shares was
$1,034,907, which had been advanced by Mr. Siegler to Nexvu during the period
from the inception of Nexvu on February 28, 2002 through June 27, 2003. The
issuance of the shares eliminated our obligation to repay those advances.
Between June and September 2003, Nexvu issued a total of 5,619,375 of Class B
member interests for total consideration of $1,825,000. In September and
December 2003, Nexvu issued a total of $1,725,000 in convertible promissory
notes to accredited investors. The notes were convertible into a total of
5,311,465 Class B membership interests in Nexvu. Promissory notes having a
principal value of $1,175,000 were converted into Class B membership interests
on December 31, 2003. The total dollar amount of loans converted to membership
interests was $2,209,907, consisting of this $1,175,000 and the $1,034,907
advanced by Mr. Siegler through June 27, 2003. Promissory notes having a
principal value of $550,000 were converted into shares of our common stock in
the merger, which took place in January 2004 and is described more fully below.
Nexvu also issued warrants to purchase a total of 638,889 membership interests
to the purchasers of the convertible notes.
  20
 On
January 28, 2004, under a loan conversion agreement, we issued: 577,500 shares
of common stock, the amount necessary for the conversion of bridge loans funded
by Nexvu members and outstanding prior to the merger, into shares of our common
stock at $0.9523809 per share, or approximately $550,000 in total; and issued
warrants to purchase 638,889 expiring December 31, 2006 to purchase common stock
at $1.35 per share. We further sold 26,250 shares to an accredited investor,
Robert Gold, at the same price at which the bridge loans were converted. This
individual did not receive warrants to purchase common stock. These issuances
were made in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act. All of the investors receiving shares or
warrants in these transactions were members of Nexvu and therefore had access to
information about Nexvu and the merger.
  On
January 28, 2004, we issued a total of 8,558,500 shares of our common stock in
connection with a merger between Nexvu Technologies, L.L.C. into our
wholly-owned subsidiary, Nexvu Mergersub, L.L.C. These shares were issued in
consideration for the membership interests in Nexvu which were determined to
have a value of approximately $11.5 million. These issuances were made in
reliance upon the exemption from registration available under Section 4(2) of
the Securities Act.
  Between
December 2003 and April 2004, we raised a total of $7,605,230 in an offering of
5,633,504 shares of our common stock. This offering was made in reliance upon
the exemption from registration available under Section 4(2) of the Securities
Act and on Rule 506 of Regulation D. All investors in the offering were
accredited as defined in Regulation D.
  On March
31, 2004, we entered into Advisory Services Agreements with each of Lee
Wiskowski and Douglas Stukel to provide advisory services on a going forward
basis. Pursuant to the agreements, we may request Mr. Wiskowski and Mr. Stukel
to provide financial advisory services in connection with mergers and
acquisitions and provide analysis as to strategic alternatives. As consideration
for such services, Mr. Wiskowski and Mr. Stukel were each granted a three-year
warrant, exercisable at $1.35 per share, to purchase 250,000 shares of our
common stock on or before March 31, 2007. Nothing contained in the agreement
precludes us from engaging any other person or entity to provide us financial
advisory services, provided that during the term of the agreement and for a
period of six months thereafter, we are required to give Mr. Wiskowski and Mr.
Stukel the right of first refusal to act as our advisor with respect to
financial advisory services, so long as Mr. Wiskowski or Mr. Stukel, as the case
may be, offers such services on terms no less favorable than we can obtain
elsewhere.
  The
warrants granted to Mr. Wiskowski and Mr. Stukel under the agreements contain a
cashless exercise provision which essentially provides that upon exercise of the
warrants, they have the right to either pay cash or receive “credit,” as if they
had paid cash, for the cancellation of a portion of their warrants with a value
equal to the spread, if any, between the fair-market value of our common stock
at the date of exercise and the exercise price of $1.35 per share, multiplied by
the number of warrants being cancelled. These issuances were made in reliance
upon the exemption from registration available under Section 4(2) of the
Securities Act.
  On
September 14, 2004, we completed a merger under which we acquired 100% of the
stock of Frontrunner Network Systems Corp., a Delaware corporation. Frontrunner
began in 1976 as the network integration arm of Frontier Corporation in upstate
New York. In April 1999, Frontrunner was purchased from Frontier Corporation and
taken private in combination with the acquisition of certain assets and certain
liabilities of Telecom Midwest, LLC.
  21
 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., 21st
Century Communications Partners L.P., 21st Century Communications T-E Partners,
L.P., 21st 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., 21st Century Communications Partners L.P., 21st Century
Communications T-E Partners, L.P., 21st 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 21st Century Communications T-E
Partners, L.P., 21st 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., 21st
Century Communications Partners L.P., 21st Century Communications T-E Partners,
L.P., 21st 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 was the president of Frontrunner until March
17, 2005.
  22
 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. Mr. Kenny is the owner of the
escrow agent for this account.
  The company relied
upon the exemption from registration available under Section 4(2) of the
Securities Act of 1933, as amended. The Creditors were accredited investors,
small in number, and all of them had access to information about the company ,
Frontrunner and the merger. No general solicitation or advertising was employed
in connection with any of the above sale of unregistered
securities.
  On
October 26, 2004, we issued 50,000 shares of our common stock to David Bernahl
for consulting services provided to the company. These issuances were made in
reliance upon the exemption from registration available under Section 4(2) of
the Securities Act.
  Item 6. Management’s
Discussion and Analysis and Plan of Operation.
  The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the accompanying consolidated
financial statements and related notes thereto.
****
**Overview**
  As of
December 31, 2003, we were a development stage company that had conducted
virtually no business operations, other than our efforts to effect a business
combination. On January 28, 2004, we completed a merger under 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 transactions 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 at the merger date 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 $228 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. Frontrunner generated
approximately $12 million of revenues during the previous twelve months and has
approximately 1,000 customers.
 
 As part
of the acquisition, we closed our corporate offices and moved into Frontrunner
offices in Schaumburg, IL. We subleased the vacated offices through the
remaining term (December 2005) and recorded a charge of $78,000 for the
remaining lease payments, net of sublease income. Additionally we charged
depreciation for the remaining furniture and fixtures for the facility in the
amount of $47,965.
 
 23
 As of
December 31, 2004, we had approximately $2.0 million of working capital
excluding current debt maturities of $4.8 million, primarily comprised of
callable notes. We have $3.7 million of 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 in the near
future unless additional acquisitions occur. In addition, there are no current
plans to significantly increase our capital spending on software or equipment.
  **Results
of Operations**
  ***2004
vs. 2003***
 Revenues
for the twelve month period ended December 31, 2004 were heavily influenced by
the acquisition of Frontrunner. During the period September 15 through December
31, 2004, Frontrunner generated approximately $3.8 million of revenue. This
revenue represented nearly 90% of the revenues for the full fiscal year. These
revenues were generated from installation of voice and data systems as well as
through maintenance contracts on installed systems. Total maintenance revenues
of $2.2 million represented approximately 58% of the total revenues, with
installation revenues of $1.4
million and other revenues of $.2
million comprising the remaining revenues. The Nexvu revenues for the twelve
month period ended December 31, 2004 of approximately $522.5
thousand are comprised primarily of sales of our product as well as consulting
fees and maintenance.
  The gross
margin rate was 41.7% for 2004. Frontrunner gross margins from September 15 through December 31, 2004 were 50%,
with installation margins of 32% and maintenance revenues having a 48% gross
margin. The Nexvu gross margin for 2004 was ($89.0 thousand). This negative
margin is the direct result of accelerating the expense for minimum royalty
payments due to a third party over the next 4 years. These royalty payments are
$50 for each Nexvu analyzer sold, with minimum payment requirements of $75,000,
$100,000, $125,000 and $150,000 for the years ended 2005, 2006, 2007 and 2008
respectively. The company performed an assessment at December 31, 2004 of the
reasonableness of the future minimum royalty payments that resulted in $435,550
of additional expense being recorded in addition to $50,000 recorded
contractually in 2004. This additional expense represents the excess of the
minimum annual royalty payments over the expected royalty payments that will be
due based upon the estimated amount of sales of the Nexvu product over the
contractual time period. No other future royalty payments will be due under this
agreement. No amortization of the licensing fees occurred during 2003. Excluding
the minimum royalty fee expense, the Nexvu gross margin rate for 2004 was 76%.
 Total
operating expenses were as follows:
 
 24
  Twelve
      months ended,December
      31, 2004
    
    December
      31, 2003Compensation
    
    $
    3,696,802
    
    $
    1,752,091Travel
      and entertainment
    
    
    274,197
    
    
    93,047Occupancy
    
    
    321,510
    
    
    120,508Professional
      services
    
    
    1,037,273
    
    
    264,599Insurance
    
    
    134,604
    
    
    8,231Depreciation
      and amortization
    
    
    659,548
    
    
    84,395Other
      operating expenses
    
    
    529,877
    
    
    97,393Total
      operating expenses
    
    $
    6,653,811
    
    $
    2,420,264
  The
majority of our operating expenses consist of compensation expenses and
professional fees. 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 $2.0 million due to decreased compensation, travel and
other incidental expenses. Nexvu currently has 12 full time employees, down from
a level during the second quarter that reached 30. The professional fees are
primarily related to legal fees related to acquisitions and securities work
related to filings with the Securities and Exchange Commission. Our travel and
entertainment expenses relate primarily to costs associated with our sales
force. The significant increase in these expenses in 2004 as compared with 2003
is due to the fact that we were still in the developmental stage of the business
in 2003 and are now fully staffed with a sales force to market our product. Our
occupancy expense represents the costs of our corporate offices in Schaumburg,
IL along with offices for Frontrunner in Rochester, NY, as well as 11 other
sales offices. During September, we made the decision to move our corporate
offices to another location in Schaumburg, IL, sharing space with the
Frontrunner division. The remaining 15 months of lease expense through December
31, 2005 was reserved
for, net of sublease income on the property. This reserve, which amounted to
$78,000, is included in occupancy expense. Additionally, the remaining
undepreciated costs of the office furniture and fixtures for this office were
also written off, resulting in an additional charge of $47,965 to depreciation
expenses in 2004. In addition to the above charges, Nexvu recorded a valuation
allowance for a software licensing fee paid to the same third party that the
minimum royalty payments are made. This valuation allowance was $217,800 and is
in addition to the $74,400 amortized during the year. No amortization on the
software licensing fee occurred in 2003.
  Interest
expense for 2004 was
$43.4 thousand compared to $146.6 thousand during 2003. The reduction in
interest expense from 2003 is the direct result of eliminating the previous
year ’s debt of
Nexvu, which was accomplished as part of the merger with the company .
Additionally, with the raise of approximately $7.6 million of capital, the
company started receiving interest income on invested cash. Subsequent to the
acquisition of Frontrunner, the company again
became a net borrower, with net interest expense in the 4 th quarter
of $70.3 thousand. The company expects the interest expense to follow this
4 th quarter
trend in 2005.
 25
 **Liquidity
and Capital Resources**
  We have
historically met our liquidity needs through loans and equity contributions. As
of December 31, 2004, we held $3.7 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
$7.6 million with net proceeds after advisory, legal and accounting fees
bringing the net total to $6.6 million. Additionally, $185,000 of the capital
raised was utilized to pay down long term debt, with the remaining debt of
$550,000 from December 31, 2003 converted into shares of our common stock
subsequent to the merger.
  As part
of the acquisition of Frontrunner, we assumed approximately $4.7 million in
debt. In addition, since the acquisition, we have negotiated the conversion of
approximately $1.6 million of old accounts payable from two vendors into
interest bearing promissory notes. These two notes bear interest at a rate of
7.25% and have maturities of 21 and 58 months. Two of the debt instruments have
callable features to them and are currently classified in current liabilities.
We currently have no knowledge that the noteholder plans to call the
debt.
  During
the twelve months ended December 31, 2004, we utilized $3.3 million cash from
operating activities. This use of cash was primarily the result of our net loss
of $4.9 million realized during the twelve months ended December 31, 2004.
During the year, Nexvu lost $4.2 million. Additionally, the corporate entity
expenses were $744.8 thousand. The majority of these expenses and losses
resulted in the utilization of cash. Frontrunner was a slight
provider of cash from the period of acquisition to year-end. However,
Frontrunner still maintains a high level of aged accounts payable that they are
attempting to pay down with their operating cash flow.
 We have
spent approximately $191.5 thousand on fixed assets during 2004. These
expenditures were primarily for computer equipment utilized in testing our
Application Performance Management product and other computer-related equipment
at Nexvu. We do not expect to require significant capital expenditures in the
near future.
  While we
believe we have sufficient capital to meet our working capital requirements
for the next twelve months, additional financing may be required to meet growth
opportunities in financing and/or investing activities. If additional capital is
required and we are not successful in generating liquidity from operations or in
raising sufficient capital resources on terms agreeable to us, this could have a
material adverse effect on our business, results of operations, liquidity and
financial condition.
 
 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 December
31, 2004:
  26
  OperatingLeases
    
    DebtObligations
    
    MinimumRoyaltyPayments2005
    
    $
    428,253
    
    $
    4,795,994
    
    $
    75,0002006
    
    
    198,870
    
    
    380,338
    
    
    100,0002007
    
    
    45,261
    
    
    280,792
    
    
    125,0002008
    
    
    -
    
    
    301,840
    
    
    150,0002009
    
    
    -
    
    
    268,746Total
      contractual obligations
    
    $
    672,384
    
    $
    6,027,710
    
    $
    450,000
 All debt
that is callable or not in compliance is reflected in the 2004 obligations.
However, we do not have reason to believe that these obligations will be called
by the lenders.
  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.
  ***2003
vs. 2002***
 As a
result of the merger, the Management and Discussion and Plan of Operation for the
prior year includes discussion on both Capital Growth Systems, Inc. and Nexvu,
separately.
 **Plan
of Operation - Capital Growth Systems, Inc.**
  Through
December 31, 2003, we were a development stage company conducting virtually
no business operations, other than our efforts to effect a business combination
with a target business which we considered to have significant growth potential.
As of December 31, 2003, we had neither engaged in any operations nor
generated any revenue or cash flow. As a result of the merger with Nexvu, we
intend to carry out our plan of business.
  We
incurred expenses of professional fees of $8,870 during the transition period
ended December 31, 2003 and $21,361 during the fiscal year ended May 31,
2003. As of December 31, 2003, we were not in a position to meet our cash
requirements for the next fiscal year as we did not generate any cash revenue or
receive any type of cash flow through December 31, 2003. After the end of
the transition period, our capital resources increased as the result of our
completion of a private offering in April 2004. Assuming there is no significant
change in our business, we believe that our cash and cash equivalent balances as
of December 31, 2003, and the proceeds from our private offering in 2004
will be sufficient to satisfy our anticipated cash needs for working capital and
capital expenditures for at least the next twelve months.
  27
 **Overview
- Nexvu Technologies, LLC**
  The
following discussion and analysis is based on the financial statements of Nexvu
alone, without giving effect to the merger which occurred on January 28, 2004,
as of the dates and for the periods presented in the financial statements. This
discussion and analysis should be read in conjunction with the financial
statements and related notes.
  Through
December 31, 2003, Nexvu was a development stage company engaged in the
development and sale of application performance management software and related
services to large and mid-sized companies for use in connection with their
computer network systems and applications. Nexvu has been in existence since
February 28, 2002. To date, Nexvu’s operations have been focused on developing
its proprietary software so that it can be marketed to the target audience. From
inception through December 31, 2003, total expenses incurred were
$3,823,577, with the majority of the expenses arising from salaries and related
tax benefits, consulting fees and occupancy costs. In late 2003, Nexvu closed
its first product sale in the amount of $59,027. This was the only revenue
generated by the company through December 31, 2003.
  **Results
of Operations - Nexvu Technologies, LLC**
  *Comparison
of twelve months ended December 31, 2003 Compared to ten months
ended December 31, 2002*
  Nexvu’s
revenues for the twelve months ended December 31, 2003 of $59,027 represent
the sale of the company’s application performance management tool, including the
software and related appliance that the software runs on, to its first customer.
Nexvu’s product was installed at a facility of a customer utilizing it on a
pilot basis. The customer subsequently made the decision to purchase the
product. Cost of goods sold represents the hardware appliance portion of the
product which was sold, as well as, costs associated with purchasing pilot
appliances for the sales process. These pilot appliances comprised the majority
of the cost of goods sold and were purchased to demonstrate the product to
potential customers. Nexvu does not expect to require additional pilot
appliances in the future, because the existing appliances can be re-used and
installed at different customer locations.
  The
following table sets forth Nexvu’s operating expenses for the year ended
December 31, 2003 and ten months ended December 31, 2002. This data
should be read in conjunction with the financial statements included. The
figures for 2002 cannot be directly compared to the 2003 figures because the
2002 figures represent only a ten month period.
  28
  **12
      Months**
      **Ended**
      **December**
      **31,
      2003**
    
    **Percentage**
      **Of
      Total**
      **Expenses**
    
    **10
      Months**
      **Ended**
      **December**
      **31,
      2002**
    
    **Percentage**
      **Of
      Total**
      **Expenses****OPERATING
      EXPENSES**Salaries,
      benefits and payroll taxes
    
    $
    1,752,091
    
    
    72.4%
    
    $
    882,003
    
    
    78.3%Marketing
      and advertising
    
    
    7,941
    
    
    0.3%
    
    
    -
    
    
    0.0%Occupancy
    
    
    120,508
    
    
    5.0%
    
    
    38,725
    
    
    3.4%Professional
      fees
    
    
    264,599
    
    
    10.9%
    
    
    67,121
    
    
    6.0%Depreciation
      and amortization
    
    
    84,395
    
    
    3.5%
    
    
    39,075
    
    
    3.5%Telecommunications
    
    
    36,438
    
    
    1.5%
    
    
    18,421
    
    
    1.6%Travel
      and entertainment
    
    
    93,047
    
    
    3.8%
    
    
    27,294
    
    
    2.4%General
      expenses
    
    
    61,245
    
    
    2.5%
    
    
    54,278
    
    
    4.8%**TOTAL
      EXPENSES**
    
    $
    2,420,264
    
    
    100.0%
    
    $
    1,126,917
    
    
    100.0%
 
 The
majority of Nexvu’s expenses are derived from salaries, benefits and payroll
taxes. Accordingly, the increase in total expenses from the ten months ended
December 31, 2002 to the twelve months ended December 31, 2003 was primarily due
to the increase in the number of Nexvu’s full-time employees. The employees
added were sales, marketing, customer support and management personnel.
Professional fees represent programmer consulting fees, as well as, legal and
accounting fees. The increase in professional expenses from the ten months ended
December 31, 2002 to the twelve months ended December 31, 2003 represents
additional contract programmers and higher legal costs associated with
organizational strategies in the company. Occupancy costs rose to support the
corporate headquarters in Schaumburg, IL, as well as, office space utilized in
Champaign, IL, which houses the programmers. Depreciation and amortization
increased to reflect purchases made during 2003 and the annualized effect of
capital expenditures made in 2002.
  **Liquidity
and Capital Resources - Nexvu Technologies, LLC**
  Nexvu has
historically met its liquidity needs through loans from individuals and through
member contributions. As of December 31, 2003, total cash on hand was
$616,880 compared to $0 as of December 31, 2002. Total debt as of
December 31, 2003 was $735,000. As a result of the January 28, 2004 merger
between Nexvu and us, Nexvu is now a wholly-owned subsidiary of ours.
Information on our liquidity and capital resources is included above the caption
“Plan of Operation - Capital Growth Systems, Inc.”.
  The
following table summarizes Nexvu’s future contractual obligations as of
December 31, 2003:
  29
  Total
    
    2004
    
    2005
    
    2006
      & beyondDebt:
    
    $
    735,000
    
    $
    735,000(1
    )
    
    -
    
    
    -Operating
      Leases
    
    $
    154,485
    
    $
    76,265
    
    $
    78,220
    
    
    -Minimum
      Royalty Payments
    
    $
    500,000
    
    $
    50,000
    
    $
    75,000
    
    $
    375,000
 (1) $185,000
of this balance was repaid, and the remaining $550,000 balance converted to
equity, during the 1 st quarter
of 2004.
 
 **Recent
Accounting Pronouncements**
  In May
2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 did not have a material impact on our results of
operations or financial position.
 
 In
December 2003, the FASB issued a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
pronouncement, SFAS No. 132-R, expands employers' disclosures about pension
plans and other post-retirement benefits, but does not change the measurement or
recognition of such plans required by SFAS No. 87, No. 88, and No. 106. SFAS No.
132-R retains the existing disclosure requirements of SFAS No. 132, and requires
certain additional disclosures about defined benefit post-retirement plans.
Except as described in the following sentence, SFAS No. 132-R is effective for
foreign plans for fiscal years ending after June 15, 2004; after the effective
date, restatement for some of the new disclosures is required for earlier annual
periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such
as the components of net periodic benefit cost, and certain key assumptions) are
effective for foreign plans for quarters beginning after December 15, 2003;
other interim-period disclosures will not be required for us until the first
quarter of 2005. Since we do not have any defined benefit post-retirement plans,
the adoption of this pronouncement did not have any impact on our results of
operations or financial condition.
 
 In
November 2004, the FASB issued SFAS 151, "Inventory Costs — an amendment of
ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and re-handling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this statement will have any
immediate material impact on us.
 
 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 cost 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.
  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
Companygenerates
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" ("SAB101").

SAB
101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4)
collectibility is reasonably assured. Determination of criteria (3) and (4) are
based on management's judgements 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.
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.**
 30
 Thecompanydefers
maintenance revenue and recognizes it ratably over the maintenance term. Thecompanydefers
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 its
inception, the Company has 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.
 
 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.
  31
 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
7.** **Financial
Statements** **.**
 
 **Index
to Consolidated Financial Statements**

**Capital
      Growth Systems, Inc. Consolidated Financial
      Statements**
    
    **Page**Report
      of Independent Registered  Certified Public Accounting
      Firm
    
    F-
      2Report
      of Prior Independent Registered  Certified Public Accounting
      Firm
    
    F-
      3Consolidated
      Balance Sheets as of December 31, 2004 and December 31,
      2003
    
    F-
      4Consolidated
      Statements of Operations for the two years ended December 31, 2004
      and 2003
    
    F-
      5Consolidated
      Statements of Shareholders’ Equity for the years ended December 31, 2004
      and 2003
    
    F-
      6Consolidated
      Statements of Cash Flows for the two years ended December 31, 2004,
      and 2003
    
    F-
      7Notes
      to Consolidated Financial Statements
    
    F-
      8 - F-24


CAPITAL
GROWTH SYSTEMS, INC.
CONSOLIDATED
FINANCIAL STATEMENTS

DECEMBER
31, 2004

F-1
REPORT
OF  INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM

To
the Board of Directors of
Capital
Growth Systems, Inc.
Schaumburg,
Illinois

We
have audited the accompanying consolidated balance sheet of Capital Growth
Systems, Inc. as of December 31, 2004 and the related consolidated
statements of operations and stockholders’ equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based upon our audit.

We
have conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Capital Growth
Systems, Inc. at December 31, 2004 and the results of its operations, and
its cash flows for the year December 31, 2004 in conformity with
accounting principles generally accepted in the United States of
America.

/s/
Russell Bedford Stefanou Mirchandani LLP
Russell
Bedford Stefanou Mirchandani LLP

April
27, 2005
New
York, NY


F-2


REPORT
OF PRIOR INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM

To
the Board of Directors and Stockholders
Capital
Growth Systems, Inc.

We
have audited the accompanying balance sheet of Capital Growth Systems, Inc.
(successor to Nexvu Technologies, LLC) as of December 31, 2003, and the related
statements of operations, stockholders' deficiency and cash flows for the year
ending December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Capital Growth Systems, Inc. as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.


/s/Russell
and Atkins, PLC

Russell
and Atkins, PLC
April
28, 2004
Oklahoma
City, Oklahoma

F-3

**CAPITAL
      GROWTH SYSTEMS, INC.****CONSOLIDATED
      BALANCE SHEETS****December
      31,**
    
    **December
      31,****2004**
    
    **2003****ASSETS****CURRENT
      ASSETS**Cash
    
    $
    3,660,894
    
    $
    616,880Accounts
      receivable, net
    
    
    1,454,579
    
    
    61,270Inventory,
      net
    
    
    1,982,102
    
    
    -Prepaid
      expenses
    
    
    90,303
    
    
    51,837Other
      current assets
    
    
    119,352
    
    
    -Total
      Current Assets
    
    
    7,307,230
    
    
    729,987**FIXED
      ASSETS -**net
      of accumulated depreciation
    
    
    1,099,805
    
    
    136,341**OTHER
      ASSETS**Software
      licensing fee, net
    
    
    43,311
    
    
    300,000Customer
      list acquired, net
    
    
    3,410,622
    
    
    -Goodwill
    
    
    3,452,369
    
    
    -Other
      Assets
    
    
    44,652
    
    
    -Total
      Other Assets
    
    
    6,950,954
    
    
    300,000**TOTAL
      ASSETS**
    
    $
    15,357,989
    
    $
    1,166,328**LIABILITIES
      AND SHAREHOLDERS' EQUITY****CURRENT
      LIABILITIES**Current
      maturities of long-term debt
    
    $
    4,795,994
    
    $
    -Accounts
      payable
    
    
    1,407,499
    
    
    120,567Accrued
      expenses
    
    
    1,081,199
    
    
    40,404Deferred
      revenue
    
    
    1,472,083
    
    
    -Advance
      billings
    
    
    1,214,030Warranty
      Reserve
    
    
    115,030
    
    
    -Total
      Current Liabilities
    
    
    10,085,835
    
    
    160,971**LONG-TERM
      LIABILITIES**Long
      term portion of debt
    
    
    1,231,716
    
    
    735,000Total
      Liabilities
    
    
    11,317,551
    
    
    895,971**SHAREHOLDERS'
      EQUITY**Common
      Stock, $.0001 par value, 25,000,000 shares
      authorized;16,940,754 issued and outstanding at December
      31, 2004; none at December 31, 2003
    
    
    1,694
    
    
    -Additional
      paid-in capital
    
    
    12,730,171
    
    
    -Members
      interest
    
    
    -
    
    
    4,034,907Accumulated
      deficit
    
    
    (8,691,427
    )
    
    (3,764,550
    )**SHAREHOLDERS'
      EQUITY**
    
    
    4,040,438
    
    
    270,357**TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY**
    
    $
    15,357,989
    
    $
    1,166,328

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

F-4

**CAPITAL
      GROWTH SYSTEMS, INC.****CONSOLIDATED
      STATEMENTS OF OPERATIONS****Twelve
      months ended, December 31,****2004**
    
    **2003****REVENUE**
    
    $
    4,296,800
    
    $
    59,027**COST
      OF GOODS SOLD**
    
    
    2,506,813
    
    
    129,806**GROSS
      MARGIN**
    
    
    1,789,987
    
    
    (70,779
    )**OPERATING
      EXPENSES**Compensation
    
    
    3,696,802
    
    
    1,752,091Travel
      and entertainment
    
    
    274,197
    
    
    93,047Occupancy
    
    
    321,510
    
    
    120,508Professional
      fees
    
    
    1,037,273
    
    
    264,599Insurance
    
    
    134,604
    
    
    8,231Depreciation
      and amortization
    
    
    659,548
    
    
    84,395Other
      operating expenses
    
    
    529,877
    
    
    97,393**TOTAL
      EXPENSES**
    
    
    6,653,811
    
    
    2,420,264**OPERATING
      LOSS**
    
    
    (4,863,824
    )
    
    (2,491,043
    )**INTEREST
      EXPENSE**
    
    
    43,447
    
    
    146,590**NET
      LOSS BEFORE INCOME TAXES**
    
    
    (4,907,271
    )
    
    (2,637,633
    )**INCOME
      TAXES**
    
    
    19,606
    
    
    -**NET
      LOSS**
    
    $
    (4,926,877
    )
    $
    (2,637,633
    )**Loss per
      Share**
    
    $
    (0.31
    )
    $
    (0.26
    )**Average
      Shares Outstanding**
    
    
    15,824,494
    
    
    10,306,000

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

F-5

**CAPITAL
      GROWTH SYSTEMS, INC.****CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY****Common
      Shares Outstanding**
    
    **Members'Interest**
    
    **Retained
      Deficit**
    
    **Common
      Stock**
    
    **Additional
      Paid-in Capital**
    
    **Total
      Equity**Balance,
      December 31, 2002
    
    
    -
    
    $
    -
    
    $
    (1,126,917
    )
    $
    -
    
    $
    -
    
    $
    (1,126,917
    )Net
      Loss, 2003
    
    
    
    
    
    
    
    
    (2,637,633
    )
    
    
    
    
    
    
    
    (2,637,633
    )Members'
      Contribution - Cash
    
    
    
    
    
    1,825,000
    
    
    
    
    
    
    
    
    
    
    
    1,825,000Members'
      Contribution - Loan Conversions
    
    
    
    
    
    2,209,907
    
    
    
    
    
    
    
    
    
    
    
    2,209,907Balance,
      December 31, 2003
    
    
    -
    
    
    4,034,907
    
    
    (3,764,550
    )
    
    -
    
    
    -
    
    
    270,357Net
      Loss - 2004
    
    
    
    
    
    
    
    
    (4,926,877
    )
    
    
    
    
    
    
    
    (4,926,877
    )Reflect
      reverse merger of CGSI
    
    
    1,170,000
    
    
    
    
    
    
    
    
    117
    
    
    19,678
    
    
    19,795Conversion
      of Members’ Interest to Stock
    
    
    8,558,500
    
    
    (4,034,907
    )
    
    
    
    
    856
    
    
    4,034,051
    
    
    -Conversion
      of Loans to Common Stock
    
    
    577,500
    
    
    
    
    
    
    
    
    58
    
    
    549,942
    
    
    550,000Issuance
      of Additional Stock
    
    
    26,250
    
    
    
    
    
    
    
    
    3
    
    
    24,997
    
    
    25,000Private
      Offering of Additional Stock
    
    
    5,633,504
    
    
    
    
    
    
    
    
    563
    
    
    6,650,128
    
    
    6,650,691Issuance
      of Stock for Frontrunner Acquisition
    
    
    925,000
    
    
    
    
    
    
    
    
    92
    
    
    1,248,658
    
    
    1,248,750Issuance
      of Stock for Consulting Services
    
    
    50,000
    
    
    
    
    
    
    
    
    5
    
    
    67,495
    
    
    67,500Issuance
      of Stock Warrants for Services
    
    
    -
    
    
    
    
    
    
    
    
    
    
    
    135,222
    
    
    135,222Balance,
      December 31, 2004
    
    
    16,940,754
    
    $
    -
    
    $
    (8,691,427
    )
    $
    1,694
    
    $
    12,730,171
    
    $
    4,040,438

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

F-6


**CAPITAL
      GROWTH SYSTEMS, INC.****CONSOLIDATED
      STATEMENTS OF CASH FLOWS********Twelve
      months ended December 31,******
    
    **2004**
    
    **2003****CASH
      FLOW FROM OPERATING ACTIVITIES****Net
      Loss**
    
    $
    (4,926,877
    )
    $
    (2,637,633
    )Adjustments
      to reconcile net loss to net cashused
      in operating activitiesDepreciation
      and amortization
    
    
    659,548
    
    
    84,395Write-off
      organizational costs
    
    
    19,795
    
    
    3,371Consulting
      expenses paid in common stock
    
    
    67,500Stock
      warrant expense
    
    
    135,222Changes
      in working capital items:Accounts
      receivable
    
    
    218,379
    
    
    (51,680
    )Inventory
    
    
    (833,202
    )
    
    -Prepaid
      expenses
    
    
    2,796
    
    
    (51,837
    )Other
      current assets
    
    
    (76,597
    )
    
    -Deposits
      and other assets
    
    
    (34,652
    )
    
    -Accounts
      payable
    
    
    306,449
    
    
    (66,302
    )Accrued
      expenses
    
    
    617,068
    
    
    7,754Deferred
      revenue
    
    
    (53,779
    )
    
    -Advance
      billings
    
    
    613,197
    
    
    -Warranty
      reserve
    
    
    13,326
    
    
    -1,655,050
    
    
    (74,299
    )Net
      Cash Used in Operating Activities
    
    
    (3,271,827
    )
    
    (2,711,932
    )**CASH
      FLOW FROM INVESTING ACTIVITIES**Acquisition
      of Frontrunner cash
    
    
    126,346
    
    
    -Purchase
      of fixed assets
    
    
    (191,549
    )
    
    (40,959
    )Payments
      for softweare license
    
    
    (40,000
    )
    
    -Net
      Cash Used In Investing Activities
    
    
    (105,203
    )
    
    (40,959
    )**CASH
      FLOW FROM FINANCING ACTIVITIES**Proceeds
      from (repayment of) debt
    
    
    (254,647
    )
    
    1,544,771Issuance
      of Common Stock
    
    
    6,675,691
    
    
    -Contributions
      by members - net of repayments
    
    
    -
    
    
    1,825,000Net
      Cash Provided By Financing Activities
    
    
    6,421,044
    
    
    3,369,771Increase
      in Cash
    
    
    3,044,014
    
    
    616,880Cash
      and Cash Equivalents - Beginning of Period
    
    
    616,880
    
    
    -Cash
      and Cash Equivalents - End of period
    
    $
    3,660,894
    
    $
    616,880**SUPPLEMENTAL
      CASH FLOW INFORMATION:**Cash
      paid for interest
    
    $
    143,148
    
    $
    108,141Cash
      paid for income taxes
    
    
    19,606
    
    
    -**NONCASH
      INVESTING AND FINANCING ACTIVITIES:**Contributions
      by members through conversions of loans
    
    $
    550,000
    
    $
    2,209,907Warrants
      issued in exchange for services
    
    
    135,222
    
    
    -Common
      stock issued in exchange for services
    
    
    67,500
    
    
    -Acquisition
      of Frontrunner for common stock:Total
      assets acquired, excluding cash
    
    
    11,102,370
    
    
    -Total
      liabilities assumed
    
    
    9,979,966
    
    
    -Common
      stock issued
    
    
    1,248,750
    
    
    -Conversion
      of accounts payable to notes payable
    
    
    1,666,620
    
    
    -

The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
****
**CAPITAL
GROWTH SYSTEMS, INC.**
**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**

NOTE 1 -
Organization and Basis of Presentation

The
accompanying consolidated financial statements include the accounts of Capital
Growth Systems, Inc. (“CGSI”) and its wholly-owned subsidiaries, Nexvu
Technologies, LLC (“Nexvu”) and Frontrunner Network Systems Corp.
(“Frontrunner”). Except where necessary to distinguish the three entities, we
will refer to all three as the “Company.” All intercompany accounts have been
eliminated in consolidation.


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. Accordingly, the Company’s financial
position as of December 31, 2004 and December 31, 2003, and the related results
of operations for the twelve months ended December 31, 2004 and 2003 reflect the
historical financial statements of Nexvu, with CGSI’s results consolidated from
the date of the merger.

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.

The
acquisition was completed by agreeing to issue 1 million shares of CGSI’s common
stock, with an estimated fair market value of $1.35 per share. This value was
determined by utilizing the last purchase price of shares of our common stock in
the private offering completed in April 2004. In consideration of these shares,
Frontrunner cancelled all of its common stock, junior preferred stock and all
stock options and warrants. The shares were distributed to certain creditors of
Frontrunner, with total indebtedness of $2.3 million in exchange for waiver of
this indebtedness, less than one percent of the total indebtedness was provided
by us to the former stockholders of Frontrunner per the Merger (although, the
holders of a majority of its shares also received our stock per their Creditor
Waiver Agreements). As of December 31, 2004, all but 75,000 shares of stock had
been issued pursuant to this transaction, with the remaining common stock to be
issued in our discretion in the event the final creditor waiver is received and
we choose to affect the exchange. These 75,000 shares were previously reflected
as a component of the overall consideration of acquiring Frontrunner. However,
as it is unlikely that the shares will in fact be issued, the total
consideration has been adjusted downward by $101,250 (75,000 shares at $1.35 per
share) from the $1,350,000 previously reported in the Company’s 3rdquarter 10QSB.

F-8

The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition. The resulting goodwill arises
from the Company’s perception of the value of the existing customer base of
Frontrunner to Nexvu. Additionally, the existing infrastructure at Frontrunner,
with their Network Operating Center (NOC) will enable Nexvu to expand the sales
opportunities for their existing product.

At
      September 14, 2004Current
      assets
    
    $
    3,220,951Property
      & equipment
    
    
    930,038Other
      asset
    
    
    10,000Customer
      list acquired
    
    
    3,615,358Goodwill
    
    
    3,452,369Total
      assets acquired
    
    
    11,228,716Liabilities,
      excluding debt
    
    
    5,299,229Debt
    
    
    4,680,737Total
      liabilities assumed
    
    
    9,979,966Net
      assets acquired
    
    $
    1,248,750

F-9

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

**Cash
and Cash Equivalents**

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

**Inventory**

Inventories
consist of work in progress and equipment and are stated at the lower of cost or
market. Cost is determined on a first-in, first-out basis. Work in process
consists of labor, inventory, and overhead costs relating to ongoing customer
projects. Generally, inventory for Nexvu is not purchased until an order for the
product is placed.

**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 $132,127 and $0
as of December 31, 2004 and 2003, respectively.

**Property
and Equipment**

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

**Software
Licensing Fee**

The
Company accounts for its software licenses in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets," effective October 1, 2001. The Company
also reviews its long-lived assets for impairments. Impairment losses on
long-lived assets are recognized when events or changes in circumstances
indicate that the undiscounted cash flows estimated to be generated by such
assets are less than their carrying value and, accordingly, all or a portion of
such carrying value may not be recoverable. Impairment losses are then measured
by comparing the fair value of assets to their carrying amounts. The Company
recognized an impairment loss of $217,800 during the 4thquarter of 2004. This loss is reflected in additional amortization expense in
the statement of operations for 2004. No impairment loss was recognized in prior
periods.

**Revenue
Recognition**

The
Companygenerates
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" ("SAB101").

SAB
101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4)
collectibility is reasonably assured. Determination of criteria (3) and (4) are
based on management's judgements 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.
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.

F-10

Concentrations
of Credit Risk

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

Product
Warranties

The
Company's subsidiary, Frontrunner, sells certain of its products to customers
with a product warranty that provides repairs at no cost to the customer or
issuance of credit to the customer for a one year period. The Company accrues
its estimated exposure to warranty claims based upon estimates of future costs
associated with fulfilling the warranty obligations. Management reviews these
obligations on a regular basis and adjusts the warranty provisions as actual
experience differs from historical estimates or other information becomes
available.

**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 milestone results have been
achieved. Company-sponsored research and development costs related to both
present and future products are expensed in the period incurred. Total
expenditures on research and product development for 2004 and 2003 were $1.7
million and $1.4 million, respectively.

**Comprehensive
Income**

SFAS No.
130. "Reporting Comprehensive Income," establishes standards for reporting and
displaying of  comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company does not have any
items of comprehensive income in any of the periods presented.

**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. 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. The Company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports for the
years ended December 31, 2004 and 2003 and will adopt the interim disclosure
provisions for its financial reports for the subsequent periods.

**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.
F-11

Income
Taxes

The
Company accounts for income taxes under SFAS No. 109 "Accounting for Income
Taxes," which requires the asset and liability approach to accounting for income
taxes. Under this method, deferred assets and liabilities are measured based on
differences between financial reporting and tax bases of assets and liabilities
measured using enacted tax rates and laws that are expected to be in effect when
differences are expected to reverse. We have recorded a valuation allowance for
the entire balance of the deferred taxes.

Net
Earnings (Loss) Per Share

Basic
and diluted net loss per share information is presented under the requirements
of SFAS No. 128, "Earnings per Share." Basic net loss per share is computed by
dividing the net loss by the weighted-average number of shares of common stock
outstanding for the period, less shares subject to repurchase. Diluted net loss
per share reflects potential dilution of securities by adding other common stock
equivalents, including stock options and warrants, in the weighted-average
number of common shares outstanding for a period, if dilutive. All potentially
dilutive securities, including stock options and warrants, have been excluded
from this computation, as their effect is anti-dilutive.

F-12

Intangible
assets

Intangible
assets represent purchased customer lists with respect to our acquisition of
Frontrunner. The intangible assets are carried at cost less accumulated
amortization. We amortize intangible assets over the expected benefits of the
list over the estimated useful life. The estimated useful life on this
identifiable intangible asset is 7 years. Total amortization of the customer
lists was $204,736 in 2004 and is expected to be $598,288, $557,011, $529,160,
$502,702 and $477,567 over the next five fiscal years.

Total
cost and accumulated amortization for the customer list is as
follows:

December
      31,
      2004Customer
      list cost
    
    $
    3,615,358Accumulated
      amortization
    
    
    204,736Customer
      list, net
    
    $
    3,410,622
Impairment
of long-lived assets

We
assess the recoverability of long-lived assets in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The impairment
of long-lived assets held for sale is measured at the lower of book value or
fair value less cost to sell. The recoverability of long-lived assets held and
used is assessed based on the carrying amount of the asset and its fair value,
which is generally determined based on the sum of the undiscounted cash flows
expected to result from the use and the eventual disposal of the asset, as well
as specific appraisal in certain instances. Additionally, SFAS No. 144 expands
the scope of discontinued operations to include all components of an entity with
operations that (1) can be distinguished from the rest of the entity and (2)
will be eliminated from the ongoing operations of the entity in a disposal
transaction.

We
assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important which could trigger an impairment review include the
following:

·
    a
      significant decrease in the market price of a long-lived asset (asset
      group);

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

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

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

F-13

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

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

See
Software Licensing Fee in this note for impairment of our software licensing fee
recorded during the year ended December 31, 2004. No impairment charges were
recorded prior to 2004.

Fair
Value of Financial Instruments

The
carrying amount of cash, accounts receivable, prepaid expenses and accounts
payable are considered representative of their respective fair values because of
the short-term nature of these financial instruments.

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.

Recent
Accounting Pronouncements

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
The adoption of SFAS 150 did not have a material impact on our results of
operations or financial position.

In
December 2003, the FASB issued a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
pronouncement, SFAS No. 132-R, expands employers' disclosures about pension
plans and other post-retirement benefits, but does not change the measurement or
recognition of such plans required by SFAS No. 87, No. 88, and No. 106. SFAS No.
132-R retains the existing disclosure requirements of SFAS No. 132, and requires
certain additional disclosures about defined benefit post-retirement plans.
Except as described in the following sentence, SFAS No. 132-R is effective for
foreign plans for fiscal years ending after June 15, 2004; after the effective
date, restatement for some of the new disclosures is required for earlier annual
periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such
as the components of net periodic benefit cost, and certain key assumptions) are
effective for foreign plans for quarters beginning after December 15, 2003;
other interim-period disclosures will not be required for us until the first
quarter of 2005. Since we do not have any defined benefit post-retirement plans,
the adoption of this pronouncement did not have any impact on our results of
operations or financial condition.

In
November 2004, the FASB issued SFAS 151, "Inventory Costs — an amendment of
ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and re-handling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this statement will have any
immediate material impact on us.

On
December 16, 2004, FASB published SFASNo.
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 cost in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact ourresults
of operations in 2006 and thereafter.

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.

F-14

NOTE 3 -
Inventories

Inventories
as of December 31, 2004, consist of the following:

Equipment
    
    $
    1,978,273Work
      in process
    
    
    1,080,332Less:
      Inventory reserve
    
    
    (1,076,503
    )Net
      inventory
    
    $
    1,982,102

Inventories
are stated at lower of cost or market as determined by the First-in, first out
(FIFO) method.The
entire inventory represents balances from Frontrunner as of December 31, 2004.
There were no inventory levels as of December 31, 2003. 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 -Software
License Agreement

On
August 31, 2003, the Company through Nexvu entered into a software licensing
agreement with a third party under which the Company acquired a non-exclusive
license for the worldwide rights to market and distribute the third party’s
proprietary software. This software is being utilized as a component of the
Company’s own proprietary software. The term of the agreement is for five years
with provision for annual renewals thereafter. The cost of the software
licensing fee was $300,000 with annual upgrade and maintenance charges of
$15,000. The software licensing fees will be amortized over a 36 month period
commencing in the 2004 calendar year. As stated in Note 2, the company recorded
a valuation allowance for this license in the amount of $217,800 during the
fourth quarter of 2004. This resulted in a total of $292,200 being amortized on
this asset during 2004.

The
agreement also calls for minimum annual royalty payments  over
the next four year period following customer shipment, payable quarterly as
follows:
2005
    
    
    75,0002006
    
    
    100,0002007
    
    
    125,0002008
    
    
    150,000

F-15

The
minimum annual royalty payments will be expensed quarterly, with any excess
royalties due expensed in the period earned. If in any year the calculation of
the royalty fee is greater than the minimum, this excess will reduce the final
amount due in the fifth year. During 2004. We made a $50,000 first year payment
on the minimum royalty payments and  also recorded a valuation allowance
against these future minimum royalty payments in the amount of $435,550. This
charge is reflected as additional cost of goods sold in the statement of
operations in 2004. It represents the excess of the minimum annual royalty
payments over the expected royalty payments that will be due based upon the
amount of sales of the Nexvu product over this time period. The minimum payments
will continue to be made in the year contractually bound by the
agreement.

NOTE 5 -
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
December 31, 2004, we have issued and outstanding 1,139,907 restricted shares
under the plan, net of forfeitures.

The
following table summarizes the activity under the stock option plan from
inception to December 31, 2004:

Number
      of Shares
    
    Price
      Per Share
    
    Weighted
      Average Price per ShareOutstanding,
      December 31, 2003
    
    
    -
    
    
    -
    
    
    -Granted
    
    
    1,769,907
    
    $
    0.95
      - 1.35
    
    $
    1.35Terminated
    
    
    630,000
    
    
    1.35
    
    
    1.35Outstanding
      at December 31, 2004
    
    
    1,139,907
    
    $
    0.95
      - 1.35
    
    $
    1.34Vested,
      December 31, 2004
    
    
    282,806
    
    $
    0.95
      - 1.35
    
    $
    1.32

Of
the outstanding options, 1,122,100 have an option price of $1.35 per share and
17,807 have an option price of $.95 per share. Of the vested shares as of
December 31, 2004, 264,999 have an option price of $1.35 per share and 17,807
have an option price of $.95 per share

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." 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.

F-16

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:


2004
    
    2003Estimated
      life (in years)
    
    
    5.0
    
    
    N/ARisk-free
      interest rate
    
    
    3.5
    %
    
    N/A

Had
compensation costs for the Company's stock options been determined based on the
fair value at the grant dates for the awards, the Company's net loss and losses
per share would have been as follows:

Twelve
      MonthsEnded
      December 31,2004
    
    2003Reported
      net loss
    
    $
    (4,926,877
    )
    $
    (2,637,633
    )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)
    
    
    (66,481
    )
    
    N/APro
      forma net loss
    
    $
    (4,993,358
    )
    
    (2,637,633
    )Earnings
      Per ShareAs
      reported
    
    $
    (0.31
    )
    $
    (0.26
    )Pro
      forma
    
    $
    (0.32
    )
    $
    (0.26
    )

F-17

**401(k)
Plan**

Frontrunner
has a qualified 401(k) plan available to eligible employees. Participants may
contribute up to a maximum percentage of their annual compensation to the plan
as determined by us, limited to a maximum annual amount set by the Internal
Revenue Service. Frontrunner matches employee contributions dollar for dollar up
to 3% per year per person. Matching contributions vest 20% after the first year,
40% after the second year and 100% after the third year. Total 401(k) matching
for the 2004 fiscal year was $34,710.

Nexvu
also has a qualified 401(k) plan available to employees. Participants may
contribute up to a maximum percentage of their annual compensation to the plan
as determined by us, limited to a maximum annual amount set by the Internal
Revenue Service. Nexvu can make voluntary contributions to the plan. However,
there have been no matching contributions under this plan since
inception.

NOTE 6 -
Debt

Debt
as of December 31, 2004 and 2003 consist of the following:

2004
    
    2003Demand
      note payable to Harris Bank, plus interest at 1.50% above prime rate;
      5.25% at December 31, 2004, 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.
    
    $
    3,690,000
    
    $
    -Promissory
      note payable to Nortel Networks, payable in monthly payments of $27,776
      through October 2009. Interest on the note is 7.25%.
    
    
    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 December 31, 2004,
      Frontrunner was in default under the terms of the
    agreement.
    
    
    390,720
    
    
    -Unsecured
      promissory note payable to Review Video, payable in monthly payments of
      $10,000 through September 2006. Interest on the note is
    7.25%.
    
    
    272,212Unsecured
      note payable to creditor, 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.
    
    
    232,829
    
    
    -Installment
      payment agreement to New York State Department of Taxation and Finance,
      payable in monthly installments of $5,455 through June 2006. Includes
      principal and imputed interest and penalties at 16.67%.
    
    
    86,361
    
    
    -Note
      payable to members, unsecured, interest at 8%, convertible to membership
      interest
    
    
    -
    
    
    625,000Note
      payable to bank, interest at 9%, interest only due monthly, principal due
      March 31, 2004, secured by certain personal assets of a member and all
      assets of Nexvu.
    
    
    -
    
    
    110,000Total
      debt
    
    
    6,027,710
    
    
    735,000Less:
      Current maturities
    
    
    4,795,994
    
    
    -Long
      term portion
    
    $
    1,231,716
    
    $
    735,000

F-18

As
of December 31, 2003, Nexvu had $735,000 of Notes Payable, of which $625,000 was
to its members and convertible to equity and $110,000 was a secured note payable
to a bank. Subsequent to the merger with CGSI, the Note Payable to the bank was
repaid, as was $75,000 of the Notes Payable to a member of the LLC. The
remaining $550,000 of Notes Payable was converted to 577,500 shares of common
stock of CGSI during the first quarter of 2004.

The
aggregate principal payments of long term debt are as follows:
2005
    
    $
    4,795,9942006
    
    
    380,3382007
    
    
    280,7922008
    
    
    301,8402009
    
    
    268,746
The
weighted average interest rate on the debt above is 6.2% and 8.1% for 2004 and
2003, respectively.

NOTE 7 -
Operating Leases

The
company leases buildings and machinery and equipment for several unrelated
companies. Total rent expense included in the statement of operations was
$306,568 and $111,336 in 2004 and 2003 respectively and includes the rent
expense for Frontrunner, since the acquisition in September 2004.

At
December 31, 2004, minimum annual lease payments under operating leases are as
follows:

2005
    
    $
    428,2532006
    
    
    198,8702007
    
    
    45,261

NOTE 8 -
Shareholders' Equity

During
the developmental stages of Nexvu, Craig Siegler, the founder of Nexvu, made
advances to Nexvu in the form of loans. These loans totaled $1,034,907 and were
made from the period February 28, 2002 through June 27, 2003. On June 27, 2003,
Nexvu issued 2,837,950 of Class A membership interests and subsequently
converted these advances to membership interests.

F-19

During
the period June through September of 2003, Nexvu issued 5,619,375 of Class B
membership interests for total cash consideration of $1,825,000. During the
period September through December of 2003, Nexvu issued $1,725,000 of promissory
notes to accredited investors. These shares were convertible into Class B
membership interest in Nexvu. In December, 2003 Nexvu converted $1,175,000 of
these notes into 3,617,954 Class B membership interest, with the remaining
$550,000 of notes outstanding as of December 31, 2003. The remaining convertible
notes are convertible into 1,693,511 of Class B membership
interest.

Additionally,
there were 3,320,268 of managing membership interest issued during 2003 (Nexvu
was a limited liability company at the time). Substantially all of these
interests were issued to employees at a par value of $0.0001 per interest. The
allocation of these interests among the employees and others assisting the
company was made in the discretion of senior management. At the time of their
issuance, the interests had no value and represented an opportunity to share in
a residual value of the company after a return of the investment and preferred
return to the other interest holders.

Each
share of membership interest outstanding had equal voting rights regardless of
class of membership interest. In the event of a distribution of net cash flow
and proceeds from the sale of capital items, the distribution was as
follows:

1.
    To
      the Class B membership interest equal to two times their aggregate Capital
      Contributions and Preferred Cumulative
Returns.

2.
    To
      the Class A membership interest equal to the aggregate Capital
      Contributions and Preferred Cumulative
Returns.

3.
    Any
      remaining distribution is based on a pro rata share of 60% to the Class B
      membership interest, 18.434% to the Class A membership interest and
      21.566% among the managing members’
interest.

As
part of the merger agreement with CGSI, these members' interest were converted
to Company Common Stock as follows:

**Member**
    ****
    **Common**
    ********
    ****
    **Interest**
    ****
    **Stock**Class
      A membership interest
    
    
    2,837,950
    
    
    991,145Class
      B membership interest
    
    
    9,237,329
    
    
    6,432,437Managing
      members interest
    
    
    3,320,268
    
    
    1,134,91815,395,547
    
    
    8,558,500

Additionally,
as part of the merger agreement, the Company converted $550,000 of convertible
notes into 577,500 shares of common stock as more fully described in Note 6.

During
the year ended December 31, 2004, the Company issued 5,633,504 shares of common
stock in exchange for $6,650,691, net of costs in a private offering.
Additionally in a separate offering the Company issued 26,250 shares of common
stock to one individual for $25,000.

The
Company also issued 925,000 shares of common stock in connection with its
acquisition of Frontrunner (See Note 1). The Company also issued 50,000 shares
of common stock for consulting services. These shares were valued at $1.35 per
share with the corresponding charge of $67,500 reflected in the results from
operations in 2004.

Share
amounts presented in the consolidated balance sheets and consolidated statements
of stockholders' equity reflect the actual share amounts
outstanding.

NOTE 9 -
Property and Equipment

Property
and equipment at December 31, 2004 and 2003 consists of the
following:
2004
    
    2003Furniture
      & fixtures
    
    $
    169,193
    
    $
    89,376Computer
      equipment
    
    
    882,923
    
    
    147,898Leasehold
      improvements
    
    
    88,154
    
    
    -Machinery
      & equipment
    
    
    240,456
    
    
    21,8651,380,726
    
    
    259,139Accumulated
      depreciation
    
    
    (280,921
    )
    
    (122,798
    )Net
      property and equipment
    
    $
    1,099,805
    
    $
    136,341

F-20

Depreciation
and amortization of property and equipment were $158,023 and $84,395 for the
years ended December 31, 2004 and 2003 respectively.

NOTE 10 -
Related Parties

On
December 1, 2003, the Company entered into an agreement for business and
financial advisory services to be provided by an entity controlled by one of the
Company’s directors. Fees for these services totaled $761 thousand and were all
paid in 2004. As these fees were related to the raise of capital described in
Note 1 above, they are reflected as a reduction in Paid-in-Capital in
Shareholders’ Equity.

In
addition, on March 31, 2004, the Company issued warrants to purchase 250,000
shares of common stock to two Board members in connection with advisory service
agreements with each of these individuals. These two board members are now
operating in the capacity of interim CEO’s of the Company. All warrants have an
exercise price of $1.35 per share and are exercisable on or before March 31,
2007.  (See Note 11)

Prior
to the acquisition announcement of Frontrunner, the Company had no relationship
with Frontrunner. However, between the announced merger and the final closing of
the merger, the Company issued a note to Frontrunner in the amount of $250,000,
which has been eliminated in consolidation.

Included
in accounts payable at 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 $55,200 from the acquisition date of Frontrunner to the end of the
year. Total annulized purchases for these services were $188,425 and $145,088
for the twelve months ended December 31, 2004 and 2003 respectively.

Included
in the financial statements is a note receivable from the President of
Frontrunner. This note originated in May 2002, prior to the acquisition of
Frontrunner, and allows the President to borrow $5,000 per month up to a maximum
of $325,000. The note does not bear interest and is forgivable if he is
terminated for anything other than cause. The balance on this receivable is
$146,000 at December 31, 2004. The company has reserved for the entire amount of
this note at December 31, 2004.


F-21

NOTE 11 -
Stock Warrants

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

**Issue
      Date**
    
    **Exp
      Date**
    
    **#
      of Warrants**
    
    **Exercise
      Price**Bridge
      lenders to Nexvu
    
    
    1/28/2004
    
    
    12/31/2006
    
    
    638,889
    
    $
    1.35Advisory
      services
    
    
    3/31/2004
    
    
    3/31/2007
    
    
    500,000
    
    
    1.35Separation
      agreement
    
    
    1/28/2004
    
    
    12/31/2006
    
    
    162,500
    
    
    1.35Total
      stock warrants outstanding
    
    
    
    
    
    
    
    
    1,301,389
    
    $
    1.35

All
of the stock warrants are exercisable and have a weighted average life of 2.3
years. The fair value of stock-based awards to non-employees is calculated
utilizing the minimum value model, as our shares are not publicly traded. Total
expense charged to operations for these warrants, which all immediately vested,
was $135,222 for the year ended December 31, 2004. No expense was recorded for
the year ended December 31, 2003. The weighted average fair value calculations
are based on the following assumptions:

2004
    
    2003Estimated
      life (in years)
    
    
    2.3
    
    
    N/ARisk-free
      interest rate
    
    
    3.5
    %
    
    N/A

NOTE 12 - Income Taxes


The
company accounts for income taxes in accordance with SFAS No. 109, " Accounting
for Income Taxes." This
standard requires, among other things, recognition of future tax effects,
measured by enacted tax rates, attributable to deductible temporary differences
between the financial statement and income tax bases of assets and
liabilities.







The
approximate income tax effects of these temporary differences and net operating
loss carryforwards are as follows:




December
      31, 2004Deferred
      taxes
    
    $
    1,679,462Net
      operating loss carryforward
    
    
    1,361,656Valuation
      allowance
    
    
    (3,041,118
    )Net
      deferred taxes
    
    $
    -







F-22





As
of December 31, 2004, the company hade available for federal income tax purposes
net operating loss carryforwards of approximately $3.9 million, which expire in
2019, subject to limitations of Section 382 of the Internal Revenue Codes, as
amended.  As required by SFAS No. 109, management of the Company has
evaluated the positive and negative evidence bearing upon the realizability of
the Company’s deferred tax assets, which consist principally of the net
operating loss carryforwards. For the year ended December 31, 2004, management
evaluated the deferred tax asset and as a result has recorded a valuation
allowance for the entire deferred tax net asset. The Company’s decision to
reserve for the entire balance was based on Nexvu’s startup status,
Frontrunner’s operating status as well as estimates of profitability in the
future. This allowance is based on management’s estimates. In the event that
actual results differ from these estimates or the Company adjusts these
estimates in the future, the company may adjust the valuation
allowance.




The
Company’s tax provision is comprised of state taxes for Frontrunner since
acquisition. On consolidated basis, the company is not benefiting the
losses.








The
change in the aggregate product warranty liability which relates to Frontrunner
for the year ended December 31, 2004, is as
follows:


Beginning
      balance at acquisition date
    
    $
    101,704Additional
      warranties issued
    
    
    104,695Claims
      paid
    
    
    (59,529
    )Revisions
      in estimates
    
    
    (31,840
    )Balance
      at December 31, 2004
    
    $
    115,030
    During
the year ended December 31, 2004, approximately, $1.3 million (30%) of total
2004 revenues were derived and $364 thousand (25%) of the total accounts
redeemable at 2004 were due from two customers.
  Amounts
for 2003 are not significant.
    As
permitted under Florida law, the Company has agreements indemnifying its
executive officers and directors for certain events and occurrences while the
officer or director is, or was, serving at the Company’s request in such
capacity. The maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is not estimable. The
Company has secured an insurance policy, which will enable the company to
recover a portion of any future amounts that may be paid. No liabilities have
been recorded for these indemnification agreements as of December 31, 2004 or
December 31, 2003.


NOTE 16 -
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. They also provide consulting
services to their customers. For purposes of segment reporting, the Company
considers Nexvu and Frontrunner as two separate identifiable businesses and will
report segment reporting from the date of acquisition of Frontrunner through the
end of December 31, 2004. These two segments have separate management teams and
financial statements. During the year, the Company also started splitting out
its corporate costs from the Nexvu financial statements. Accordingly, the
segment results reflect this change from August through the end of the
year.




F-23





Results
of Operation:




Twelve
months ended December 31, 2004




Frontrunner
    
    Nexvu
    
    Corp/elim
    
    TotalRevenues
    
    $
    3,774,292
    
    $
    522,508
    
    $
    -
    
    $
    4,296,800Gross
      margin
    
    
    1,878,915
    
    
    (88,928
    )
    
    -
    
    
    1,789,987Expenses
    
    
    1,706,212
    
    
    4,202,772
    
    
    744,827
    
    
    6,653,811Operating
      income
    
    
    172,703
    
    
    (4,291,700
    )
    
    (744,827
    )
    
    (4,863,824
    )Depreciation/amortization
    
    
    256,749
    
    
    402,799
    
    
    -
    
    
    659,548Capital
      expenditures
    
    
    9,421
    
    
    182,028
    
    
    -
    
    
    191,449




Twelve
months ended December 31, 2003




Frontrunner
    
    Nexvu
    
    Corp/elim
    
    TotalRevenues
    
    $
    -
    
    $
    59,027
    
    $
    -
    
    $
    59,027Gross
      margin
    
    
    -
    
    
    (70,779
    )
    
    -
    
    
    (70,779
    )Expenses
    
    
    -
    
    
    2,420,264
    
    
    -
    
    
    2,420,264Operating
      income
    
    
    -
    
    
    (2,491,043
    )
    
    -
    
    
    (2,491,043
    )Depreciation/amortization
    
    
    -
    
    
    84,395
    
    
    -
    
    
    84,395Capital
      expenditures
    
    
    -
    
    
    40,959
    
    
    -
    
    
    40,959





Segment
assets as of December 31, 2004




Frontrunner
    
    Nexvu
    
    Corp/elim
    
    TotalTangible
      assets
    
    $
    5,130,973
    
    $
    4,064,204
    
    $
    (700,179
    )
    $
    8,494,998Intangibles
      & Goodwill
    
    
    6,862,991
    
    
    -
    
    
    -
    
    
    6,862,991Total
      assets
    
    $
    11,993,964
    
    $
    4,064,204
    
    $
    (700,179
    )
    $
    15,357,989




F-24


**Item
8.** **Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure** **.**





On
November 10, 2004, we received written notification that Russell & Atkins,
PLC, hereinafter referred to in this document as “R&A” had withdrawn from
serving as our independent auditors. No action was required or taken by our
board of directors with respect to their withdrawal.




For the
period including the prior two fiscal years and the interim period ending as of
the date of withdrawal of R&A, R&A’s reports did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. During the reporting period,
there were no disagreements between us and R&A on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope of
procedure, which would have caused it to make reference to the subject matter of
the disagreement in connection with its reports. We provided R&A with a copy
of this disclosure on November 11, 2004. R&A provided us and the Securities
and Exchange Commission with a letter, which stated that R&A agreed with
these disclosures.




On
November 11, 2004, we engaged Russell Bedford Stefanou Mirchandani LLP,
hereinafter referred to in this report as “RBSM” to serve as our
independent auditor.




We did
not nor did anyone on our behalf consult with RBSM regarding (i) either: the
application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on our
financial statements; and as such, no written or oral advice was provided, and
none was an important factor considered by us in reaching a decision as to the
accounting, auditing or financial reporting issues; or (ii) any matter that was
a subject of a disagreement or event with R&A (as there were
none).




32


We
provided RBSM with a copy of this disclosure on November 11, 2004, providing
RBSM with the opportunity to furnish us with a letter addressed to the
Securities and Exchange Commission containing any new information, clarification
of our expression of our views, or the respect in which RBSM did not agree with
our statements. RBSM agreed with our statements and therefore did not provide a
letter.




**Item
8A.** **Controls
and Procedures.**




**Evaluation
of Disclosure Controls and Procedure**




Our
co-CEO’s and our CFO have evaluated our disclosure controls and procedures as of
the end of the fiscal year ended December 31, 2004, and have concluded
that, as of December 31, 2004, 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 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
III**




**Item
9.** **Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act** **.**


**Current
Officers and Directors**




The
composition and biographies of our directors and officers is as follows:




**Name**
    **Age**
    **Position**Robert
      T. Geras
    66
    Chairman
      of the Board of Directors, Assistant Secretary and Assistant
      TreasurerPhil
      Kenny
    51
    DirectorDavid
      A. Beamish
    41
    DirectorDouglas
      Stukel
    35
    Director
      and Assistant Secretary, Co-Chief Executive OfficerLee
      Wiskowski
    38
    Director,
      Co-Chief Executive OfficerD.
      Skip Behm
    45
    Chief
      Financial Officer


**


33





*Robert
T. Geras.* Mr. Geras
has served as our Chairman of the Board since the completion in January 2004 of
our merger with Nexvu. Mr. Geras served as the Chairman of Nexvu, from
June 2003 through the date of the merger. Mr. Geras’ sole occupation for the
last five years has been as a private investor. Among the companies in which Mr.
Geras has been an early-stage investor is Merge Technologies Inc., a public
company included in the Nasdaq National Market, which provides eHealth
connectivity products for medical imaging and other clinical information.
Mr. Geras has also served as a director and/or early stage investor in
VideoHome Tours, a provider of visual content management and marketing services
for large brokerage firms; ShowTime.com, a complete Internet scheduling and
productivity tool for real estate agents; Exadigm, Inc., a company engaged in
the development and sale of electronic payment processing equipment utilizing
wi-fi technology; and 20/20 Technologies, LLC, a provider of bandwidth and
connectivity to the high speed data transmission industry.


*Philip
B. Kenny.* Mr.
Kenny has served as a director of ours since August 2004. He is an owner of and
partner in Kenny Industries, a holding
company for Kenny
Construction Company, Seven K Construction, Northgate Investments, Casino Queen
and Clinton Industries . Mr.
Kenny serves as president of Seven K
Construction and Northgate Investments. In
addition, Mr. Kenny
recently served as CEO of K-2 Industrial, a $140 million service company, with
over 1,000 corporate clients across the United States. In
addition, he serves on the executive committee of Sports Publishing, a
Champaign , IL
publisher that produces and distributes 120 sports publications on an annual
basis. Mr. Kenny
also serves on the boards of Umbrella Entertainment, the largest production
manager of air shows in the United States, Fifth Media, a technology company in
Libertyville, IL, and Insight Productions, a designer and importer of custom
products based in Naperville, IL. He serves on the business advisory board at
Miami University in Oxford, OH, the board at Northern Illinois University School
of Engineering and Technology, and Loyola Academy, the largest Jesuit High
School in the United States. Mr. Kenny
is a graduate of the Business School at Arizona State University.


34


*David
A. Beamish* . Mr.
Beamish has served as a director of ours since August 2004. He has been in sales
and marketing for over 18 years. Mr. Beamish began his career in the
medical sales area, where he worked for Medline Industries for five years. He
successfully managed and built a four state territory to over $35 million in
sales. In 1987, he left Medline Industries to co-found Premier Medical
Industries Inc., which he and a partner built to $32 million in sales business
over a period of eight years. After Premier Medical Industries, Mr. Beamish
successfully formed, built and sold five local businesses: Premier Sales Inc. (a
linen and textile distributor), Premier Tax and Accounting LLC (an accounting
and tax firm), Premier Construction LLC (a small construction firm), Premier
Technologies (a computer distributor and Internet firm), and Premier Products
LLC (a nursing home supply company). Today, Mr. Beamish owns and operates
Premier Laundry Technologies LLC, the largest independently owned COG Healthcare
Laundry in the Midwest. PLT has three plants and employs over 150 people.




*Douglas
Stukel* .
Mr. Stukel has served as a director of ours since August 2003. Mr. Stukel
has served as our co-chief executive officer since August 30, 2004.
Mr. Stukel, together with Mr. Wiskowski, led the investor group which
purchased the current majority stake in our company. In addition,
Mr. Stukel is a co-founder of Premier Holdings of Illinois, LLC, a
distributor of medical supplies based in Joliet, Illinois. Mr. Stukel
served as the president of Cendant Home Funding, a residential mortgage company
based in Joliet, Illinois, from 1997 until 2001. Mr. Stukel is also a
co-founder of Momentum Capital, LLC, a privately held firm providing financial
advisory services in connection with mergers and acquisitions and analysis as to
strategic alternatives. As a co-founder of Momentum Capital, LLC, Mr. Stukel’s
responsibilities are related to the location of potential clients, the
negotiation of agreements with those clients and the provision of advisory
services related to the clients.


*Lee
Wiskowski* . Mr.
Wiskowski has served as a director of ours since the completion of our
merger with Nexvu. Mr. Wiskowski has served as our co-chief executive officer
since August 30, 2004. In 1994,
Mr. Wiskowski was the co-founder of Madison Securities (40-person team) and
early in 1999 was a co-founder of Advanced Equities (50-person team), both NASD
licensed broker-dealers focusing on emerging growth companies. During his tenure
with these two companies, Mr. Wiskowski had significant responsibility in the
companies’ raising in excess of $125 million and $250 million, respectively, for
private and public placements, primarily of high technology companies. Mr.
Wiskowski sold his interest to the other principals of Advanced Equities
approximately five years ago . Since
December 2002, Mr. Wiskowski has been engaged in the business of
providing financial and advisory services to emerging growth companies through
Grander, LLC and
Momentum Capital, LLC , both
privately held advisory and consulting firms. As the sole
owner of
Grander, LLC and co-founder
of Momentum
Capital, LLC, Mr. Wiskowski’s responsibilities are related to the location of
potential clients, the negotiation of agreements with those clients and the
provision of advisory services related to the clients .


*D.
Skip Behm.* Mr. Behm
has served as our chief financial officer since 2004. Mr. Behm served
as the chief financial officer of Spiegel Catalog, Inc. from 2000 to 2003 and as
the chief financial officer of Harrods Online, Inc. from 1999 to 2000. Prior to
1999, Mr. Behm was the corporate controller of The Spiegel Group.




35


All
directors hold office until their successors have been elected and qualified or
until their earlier resignation or removal. Directors are elected annually.
Officers serve at the discretion of our board of directors. Our board of
directors has determined that Mr. Geras, Mr. Beamish and Mr.
Kenny are independent within the meaning of Rule 4200 of the Nasdaq
Stock Market.




**Significant
Employees**




*Rory
Herriman.* Mr. Herriman is the president (2004) and chief technology officer (2002) of
Nexvu. He also served as a director of ours from the date of merger with Nexvu
until August 2004. From December 1997 until May 2002, Mr. Herriman served
as the senior director of technology architecture and engineering at Sears,
Roebuck & Company, where he defined and executed enterprise-wide technology
strategies in the areas of telecommunications, networking and computing. Mr.
Herriman is 34 years old.




*James
Cuppini.* Mr.
Cuppini served as the president of Frontrunner since the completion of the
Frontrunner acquisition in September, 2004 through his resignation on March 17,
2005. From 1999 to 2004, he was the chief executive officer of Frontrunner. Mr.
Cuppini resigned as the president of Frontrunner and has been replaced by Don
Hauschild on March 17, 2005. Mr. Cuppini is 49 years old.




*Kevin
Dipaolo.* Mr.
Dipaolo has served as the chief financial officer of Frontrunner since 2004.
From 2001 to 2004, he was the senior vice president of corporate sales and
marketing. Prior to working with Frontrunner, Mr. Dipaolo was a senior
manager/director in the management consulting division of Price-Waterhouse from
1999 to 2001. Mr. Dipaolo is 49 years old.


*Don
Hauschild.* On March
17, 2005, Don
Hauschild was appointed to serve as the new president of Frontrunner. Mr.
Hauschild is a senior operations and IT executive with over 25 years experience
in industry and management consulting with global consumer products and
manufacturing companies. From May 2002 to the present, Mr. Hauschild acted as an
independent consultant. He worked with Answerport Inc., in Milwaukee, WI
from May 2002 through June 2004 and with Independent Consultant, in
Milwaukee, WI from June 2004 to the present. From April 2000 through the
present, Mr. Hauschild has also served as the CEO and board member of QS
Software Co./CIDC in Chicago,
IL, which is a telecommunications start-up company. From August 1988 through
March 2000, Mr. Hauschild worked for Ernst & Young, LLP, Milwaukee, WI. He
served as a partner at Ernst & Young LLP from October 1993 through March
2000. Mr. Hauschild is 49 years old.


**Code
of Ethics**




On
January 29, 2004, our board of directors adopted a code of ethics which applies
to our principal executive officer, principal financial officer, principal
accounting officer and controller and persons performing similar functions. We
will provide a copy of the code of ethics, without charge, to any person who
sends a written request addressed to Capital Growth Systems, Inc., 50 East
Commerce Drive, Suite A, Schaumburg, Illinois 60173. A copy of the code of
ethics has been filed as an exhibit.




36


We intend
to disclose any waivers or amendments to our code of ethics in a report on Form
8-K with the Securities and Exchange Commission rather than on our
website.




**Audit
Committee**




We have
an audit committee and an audit committee charter, a copy of which is attached
to this report. The audit committee is presently comprised of Robert Geras, Lee
Wiskowski and Doug Stukel. The audit committee is responsible for selection and
oversights of our independent auditors, reviewing with the independent auditors
the scope and results of the audit engagement, establishing and monitoring our
financial policies and control procedures, reviewing and monitoring the
provision of non-audit services by our independent auditors and reviewing all
potential conflict of interest situations. We presently do not have a director
who would qualify as an “audit committee financial expert” as defined in Item
401(e) of Regulation S-B. Given our present situation, we feel it would be
overly costly, burdensome and unwarranted to retain an independent director who
would qualify as an “audit committee financial expert.” We will consider adding
an audit committee financial expert if our business grows and adding such a
person would be less burdensome.




**Compliance
with Section 16(a) of the Securities Exchange Act of 1934**




Our
executive officers, directors and shareholders beneficially owning more than 10%
of our common stock are required under the Exchange Act to file reports of
ownership of our common stock with the Securities and Exchange Commission.
Copies of those reports must also be furnished to us. Based solely upon a review
of the copies of reports furnished to us and written representations that no
other reports were required, we believe that during the preceding year all
filing requirements applicable to executive officers, directors and shareholders
beneficially owning more than 10% of our common stock have been complied with,
except for David A. Beamish, who failed to timely file a Form 4.




**Item
10.** **Executive
Compensation** **.**


We
presently have no formal agreement or arrangements in place regarding
compensation for our directors or officers, except as described below.




We have
entered into an employment agreement with Rory Herriman under which he is
entitled to a base salary of $175,000 per year. Under this agreement,
Mr. Herriman may receive a bonus in the discretion of the board of
directors, with a target bonus of 50% of base salary. Mr. Herriman was
entitled to receive under his employment agreement, options to acquire 430,000
shares of our common stock under our Long-Term Incentive Plan, vesting over a
four-year period through January 2, 2007, with acceleration on a change in
control. In addition, Mr. Herriman is entitled to a bonus in the event of a
successful change in control, such as a merger or sale of our company, equal to
the lesser of 299% of their base salary as of the date of the change in control,
or one percent of the amount by which the value of the transaction to our
shareholders exceeds the product of the highest prior price at which we sold our
shares, multiplied by the number of our outstanding shares of ours as of the
date the change of control occurs.




37


The
employment agreement has a term ending at the end of the calendar year and will
automatically renew for additional one-year periods unless terminated by us or
the executive on written notice at least two months before expiration of the
current term. Under the agreements, if employment is terminated without cause,
or the agreement does not automatically renew, he is entitled to receive
severance of one year’s pay, payable in regular monthly increments. The
agreements also provide for a lump sum payment of 90 days’ pay in the event of
death or disability.




**Summary
      Compensation Table****Annual**
      **Compensation**
    **Long-Term
      Compensation****Name
      and Principal Position**
    
    **Year**
    **Salary**
    **Bonus**
    **Restricted
      Stock**
      **Awards**
    **Securities**
      **Underlying**
      **Options**
    **All
      Other**
      **Compensation**Scott
      Allen
      Chief
      Executive and Chief Financial Officer(1)
    
    20042003
    $127,600$67,500
    --
    430,000772,092(2)
    -
    -Douglas
      Stukel(3)
      Co-Chief
      Executive Officer
    
    2004
    $29,200
    -
    250,000
    -
    -Lee
      Wiskowski(3)
      Co-Chief
      Executive Officer
    
    2004
    $29,200
    -
    250,000
    -
    -D.
      Skip Behm
      Chief
      Financial Officer
    
    2004
    $108,300
    
    
    200,000
    -Rory
      Herriman
      President,
      Chief Technology Officer, Nexvu
    
    2004
      2003
      2002
    $175,000
      $150,000
      $81,250
    $35,000
      -
      -
    430,000
      901,953(4)
    -
    -James
      Cuppini (5)
      President,
      Frontrunner
    
    2004
    $198,063
    -
    -
    -
    $11,595Kevin
      DiPaolo (6)
      CFO,
      Frontrunner
    
    2004
    $143,559
    $8,160
    -
    -
    -





(1)
Mr. Allen was employed by Nexvu effective July 2003. Mr. Allen’s
employment agreement with Nexvu Technologies included the issuance of various
options to acquire Class B interests upon achieving certain targets, which were
not met. The employment agreement was superseded by a new agreement with us on
April 26, 2004. Mr. Allen left the company in August  2004, and executed a
severance agreement. According to the terms of the severance agreement, Mr.
Allen agreed to serve as a consultant to the company until the earlier of (a)
his finding alternative employment, and (b) November 23, 2004. We paid Mr. Allen
at an annual rate of $175,000 per year, pro rated for the number of days between
the date of the severance agreement until the consulting termination date. Mr.
Allen continued to participate in our employee benefit plans (except vacation)
through the consulting termination date. Mr. Allen retained the vested portion
of his employee stock option (which allows him to purchase 107,500 shares of our
common stock), on or before April 25, 2014, at a price of $1.35 per share. Mr.
Allen has agreed not to disclose confidential information for a period of four
years and not to solicit our employees and customers for a period of two
years.





38


(2)
Consists of 212,093 managing member interests granted to Mr. Allen in
connection with the signing of his employment agreement, and 559,999 interests
granted to Mr. Allen in October 2003 as part of a discretionary award made
by the manager of Nexvu to various employees and service providers. Holders
of the managing member interests had no interest in the company other than the
right to share in its profits, if any, after the payment of preferred returns to
other holders. The managing member interests were deemed to have only nominal
value at the time of grant. The 772,092 interests owned by Mr. Allen were
converted into a total of 161,178 shares of our common stock in connection with
the merger between us and Nexvu which occurred on January 28, 2004. At that
time, Mr. Allen became our CEO.





(3) Mr.
Stukel and Mr. Wiskowski, directors, became co-chief executive officers in
August 2004 after the departure of Mr. Allen. Although there are no written
employment agreements at this time, Messrs. Wiskowski and Stukel received
employment compensation based on an annual salary of $87,500 each, commencing
September 1, 2004. Messrs. Wiskowski and Stukel are entitled to expense
reimbursements, customary health insurance coverage and customary fringe
benefits. It is anticipated that each of them will be employed by us on a


part-time
basis.





(4)
Consists of managing member interests granted to Mr. Herriman in October
2003 as part of a discretionary award made by the manager of Nexvu to various
employees and service providers. Holders of the managing member interests had no
interest in the company other than the right to share in its profits, if any,
after the payment of preferred returns to other holders. The managing member
interests were deemed to have only nominal value at the time of grant. The
901,953 interests owned by Mr. Herriman were converted into a total of
188,871 shares of our common stock in connection with the merger between us and
Nexvu  which occurred on January 28, 2004.





(5) Mr.
Cuppini served as the president of Frontrunner since the completion of the
Frontrunner acquisition in September 2004 through his resignation. From 1999 to
2004, he was the chief executive officer of Frontrunner. Mr. Cuppini received
other compensation in the form of a personal car allowance in the amount of
$11,595. Mr. Cuppini resigned as the president of Frontrunner March 17, 2005
and was replaced by Don Hauschild on March 17, 2005. Mr. Cuppini is 49
years old. Effective March 17, 2005, the Grid Note agreement between James
Cuppini and Frontrunner terminated. As of March 17, 2005, Frontrunner had
extended $156,000.00 to Mr. Cuppini. Pursuant to the terms of the Grid Note, the
loan was forgiven upon Mr. Cuppini’s resignation as the president of
Frontrunner. The Grid Note which included a forgiveness provision was entered
into prior to enactment of the Sarbanes-Oxley Act of 2002. As part of his
resignation, Mr. Cuppini entered into a Separation/Severance Agreement with
Frontrunner. Pursuant to the Separation/Severance Agreement, Mr. Cuppini will
continue to provide consulting services to Frontrunner. Frontrunner shall pay
Mr. Cuppini a salary at the rate of $90,600 pro rated across a 365 day period
and payable in accordance with Frontrunner’s regular pay roll practices.
Frontrunner has also agreed to reimburse Mr. Cuppini for expenses in the amount
of approximately $21,000, and grant him additional compensation in the forms of
cash bonuses and stock in the event certain transactions are closed. Mr. Cuppini
has agreed not to disclose confidential information of Frontrunner and Capital
Growth for a period of four years. He has agreed not to solicit for a period of
two years.





(6) Mr.
Dipaolo has served as the chief financial officer of Frontrunner since 2004.
From 2001 to 2004, he was the senior vice president of corporate sales and
marketing of Frontrunner. Prior to working with Frontrunner, Mr. Dipaolo was a
senior manager/director in the management consulting division of
Price-Waterhouse from 1999 to 2001. Mr. Dipaolo is 49 years old. The $8,160
bonus represents a commission earned for consulting services provided to a
customer.





***Employment
Agreement***




In July
2003, Nexvu entered into an employment agreement with Scott Allen, the company’s
Executive Vice President - Sales, under which Mr. Allen was entitled to a
base salary of $135,000 per year. Under the agreement Mr. Allen received
212,093 managing member interests in Nexvu, subject to downward adjustment if an
offering of Nexvu planned at the time was smaller than anticipated. Half of the
managing member interests were to vest on July 1, 2004, and the remaining half
were to vest equally over the subsequent twelve months, except that all of the
interests were to vest in the event of a change in control. For the first year
of the agreement, Mr. Allen was entitled to a bonus of up to $200,000,
based on Nexvu achieving various sales goals specified in the agreement.
Mr. Allen was also entitled to additional incentive compensation based on:
the first purchase order received by Nexvu, if Mr. Allen was the source of
the order; establishment of the company’s first original equipment manufacturer,
or “OEM,” relationship resulting in $5,000,000 of revenue in the first year of
Mr. Allen’s employment; or the sale of rights to any products or technology
for $5,000,000 or more, or sale of 51% or more of the company based on a
valuation of the company in excess of $7,500,000. The incentive based on the
purchase order was payable in cash, and the incentives based on the OEM
relationship or sale of products, technology or all or part of the company were
payable in managing member interests.




39


Mr.
Allen’s employment agreement had a one-year term, and was to automatically renew
for additional one-year periods unless terminated by Nexvu or Mr. Allen on
written notice at least two months before expiration of the current term. Under
the agreement, if Mr. Allen’s employment was terminated without cause, or the
agreement did not automatically renew, he was entitled to receive severance of
90 days’ pay. The agreement also provided for a lump sum payment of 90 days’ pay
in the event of death or disability. Mr. Allen’s employment agreement with Nexvu
was superseded by an agreement he entered into with us in April 2004. Mr.
Allen left the company in August 2004 and executed a severance agreement.
According to the terms of theseverance
agreement, Mr.
Allen agreed to serve as a consultant to the company until the earlier of (1)
his finding alternative employment, and (2) November 23, 2004. We paid Mr. Allen
at an annual rate of $175,000 per year, pro rated for the number of days between
the date of the severance agreement until the consulting termination date. Mr.
Allen continued to participate in our employee benefit plans (except vacation)
through the consulting termination date. Mr. Allen retained the vested portion
of his employee stock option (which allows him to purchase 107,500 shares of thecompany’s common
stock), on or before April 25, 2014, at a price of $1.35 per share. Mr. Allen
has agreed not to disclose confidential information for a period of four years
and not to solicit our employees and customers for a period of two
years.

On March
17,2005,Don
Hauschild was appointed to serve as the new president of Frontrunner. Although
Mr. Hauschild and Frontrunner have not entered into a written employment
agreement, Frontrunner has agreed to pay Mr. Hauschild a salary in the amount of
$195,000 per year and has granted him options to purchase 400,000 shares of our
common stock at $1.35 per share, 25% of which options vest immediately with the
remainder vesting 25% on each anniversary of his employment for a period of
three years.

**Long
Term Incentive Plan**

In
December 2003, we adopted the 2003 Long-Term Incentive Plan for key employees
and other persons providing assets or services to us. The2003
Planprovides
for the issuance of stock-based awards to key employees as part of their overall
compensation. A total of 2,285,000 restricted shares of common stock, stock
options or other equity-based compensation can be issued under the plan. It is
expected that a substantial portion of these options will be allocated to
existing management and other persons assisting us in our endeavors. Presently,
we have issued 1,139,907, net of forfeitures, restricted shares under the
2003 Plan. Our shareholders did not ratify the 2003 Plan for key employees
within one year of its adoption by our board of directors. Therefore, our
directors ratified the issuance of options to purchase 1,139,907 shares of
common stock, net of forfeitures, pursuant to the 2003 Plan. In March 2005, we
adopted the 2005 Plan which mirrors the 2003 Plan. Upon the 2005 Plan’s
ratification by our shareholders, the 2005 Plan will replace and supersede the
2003 Plan and the 2003 Plan will have no further force or
effect.




40




**Item
11.** **Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters** **.**


**Beneficial
Ownership**





The
following table sets forth, as of April 25, 2005, the names, addresses,
amount and nature of beneficial ownership and percent of such ownership
of:




·
    Each
      person known tobe
      the beneficial owner of more than five percent (5%) of our common stock;




·
    Each
      director; and




·
    All
      directors and executive officers, as a group.





Except as
otherwise indicated in the footnotes to the table, the persons named below have
sole voting and investment power with respect to the shares beneficially owned
by them. In general, a person is deemed to be a “beneficial owner” of a security
if that person has or shares the power to vote or direct the voting of the
security, or the power to dispose of or to direct the disposition of the
security. A person is also deemed to be a beneficial owner of any securities of
which the person has the right to acquire beneficial ownership within 60 days.
The beneficial ownership percentages are based on 16,940,754 shares outstanding
as of April 25, 2005.




**Name
      and Address of Beneficial Owner**
    **Amount
      and Nature ofBeneficial Ownership****(1)**
    **Percent
      of Class**Robert
      T. Geras
    2,257,837(2)
    
    12.67%Carl
      C. Greer Trust
    2,266,281(3)
    
    13.16%Craig
      Siegler
    1,401,091(4)
    
    8.19%David
      Lies
    1,304,375(5)
    
    7.65%Balkin
      Family Limited Partnership
    1,093,186(6)
    
    6.42%Philip
      B. Kenny(7)
    75,000
    
    .44%David
      A. Beamish(8)
    435,667
    
    2.57%Derry
      L. Behm(9)
    93,750(10)
    
    .55%Douglas
      Stukel(11)
    434,482(12)
    
    2.53%
  41
  **Name
      and Address of Beneficial Owner**
    **Amount
      and Nature ofBeneficial Ownership****(1)**
    **Percent
      of Class**
 Lee
      Wiskowski(11)
    325,407(13)
    
    1.89%Scott
      Allen(14)
    269,178
    
    1.58%Rory
      Herriman(15)
    618,871
    
    3.56%All
      Current Directors and Executive Officers as a Group (6
      persons)
    3,622,143
    
    20.65%




(1)
    Except
      pursuant to applicable marital property laws or as indicated in the
      footnotes to this table, to our knowledge, each stockholder identified in
      the table possesses sole voting and investment power with respect to all
      common stock shown as beneficially owned by the
    stockholder.(2)
    Mr.
      Geras is the chairman of the board. Mr. Geras’ business address is 55
      East Erie Street, Suite 2905, Chicago, IL 60611.(3)
    The
      Carl C. Greer Trust, of which Carl C. Greer is the sole trustee, is an
      estate planning trust established by Mr. Greer for the benefit of his
      family members. Includes warrants held by the Carl C. Greer Trust to
      acquire 277,778 shares. The business address of the trust is c/o Thomas
      Floyd, 4501 West 127th Street, Suite D, Alsip, IL
60803.(4)
    Includes
      162,500 shares issuable upon the exercise of warrants held by
      Mr. Siegler. Mr. Siegler’s business address is 388 Melford Road,
      Deerfield, IL 60035.(5)
    Includes
      111,111 shares issuable upon the exercise of warrants held by
      Mr. Lies, 97,392 shares owned by Mr. Lies’ wife, and 9,259
      shares issuable upon the exercise of warrants held by Mr. Lies’ wife.
      Mr. Lies disclaims beneficial ownership of shares held by his wife or
      issuable upon the exercise of warrants held by his wife. Mr. Lies’
      address is 1210 Sheridan Road, Wilmette, IL 60091.(6)
    The
      Balkin Family Limited Partnership, of which Michael Balkin is the sole
      general partner, is an estate planning partnership established by
      Mr. Balkin for the benefit of himself and his immediate family
      members. Includes warrants held by the Balkin Family Limited Partnership
      to acquire 92,593 shares. The address of the partnership is 1145 Green Bay
      Road, Glencoe, IL 60022.(7)
    Mr.
      Kenny is a director. The business address of Mr. Kenny is 250
      Northgate Parkway, Wheeling, IL 60090.(8)
    Mr.
      Beamish is a director. The business address of Mr. Beamish is 51 West
      Jackson Street, Joliet, IL 60432.(9)
    The
      business address of Mr. Behm is 50 E. Commerce Drive, Suite A, Schaumberg,
      IL 60173.(10)
    Mr.
      Behm is the chief financial and accounting officer. Mr. Behm holds options
      to purchase200,000shares of common stock, which vest over a period of four years. The first
      tranche (25% for 50,000 shares) vested immediately and a second tranche of
      43,750 shares vests in April 2005.(11)
    Messrs.
      Wiskowski and Stukel currently serve as co-chief executive officers and
      directors of thecompany.
      The business address of Mr. Wiskowski and Mr. Stukel is 875 N. Michigan
      Avenue, Suite 3335, Chicago, IL 60611.(12)
    Includes
      250,000 shares issuable upon the exercise of a warrant held by
      Mr. Stukel.(13)
    Includes
      72,407 shares owned by Grander, LLC, of which Mr. Wiskowski is
      the sole member, and 250,000 shares issuable upon the exercise of a
      warrant held by Mr. Wiskowski.(14)
    Mr.
      Allen served as a director and thecompany’s
      chief executive officer and chief financial officer since our completion
      of the merger with Nexvu, through August 30, 2004. Includes 107,500
      shares issuable upon the exercise of options held by Mr. Allen. Mr.
      Allen’s business address is 178 East Tasman Drive, San Jose, CA,
      95134.(15)
    Mr.
      Herriman served as a director and our chief technology officer since our
      completion of the merger with Nexvu, through August 30, 2004. He continues
      to serve as our chief technology officer. Includes 430,000 shares issuable
      upon the exercise of options held by Mr. Herriman. His business address is
      50 E. Commerce Drive, Suite A, Schaumburg, IL
60173.
  42





**Equity
Compensation Plan Information**




**Plan
      Category**
    **Number
      of Securitiesto be Issued UponExercise ofOutstanding
      Options,**
      **Warrants
      and Rights**
    **Weighted
      AverageExercise Price ofOutstanding
      Options,****Warrants
      and Rights**
    **Number
      of SecuritiesRemaining Availablefor Future IssuanceUnder
      EquityCompensation Plans(Excluding SecuritiesReflected
      in**
      **Column
      (a))**Equity
      Compensation Plans Approved by Security Holders
    --
    --
    --Equity
      Compensation Plans Not Approved by Security Holders
    1,139,907
    $1.34
    1,145,093*Total
    1,139,907
    $1.34
    1,145,093


*Consists
of securities issuable under our 2003 Long-Term Incentive Plan for key
employees, which was approved by our board of directors on December 16,
2003.




**Item
12.** **Certain
Relationships and Related Transactions** **.**


**Capital
Growth Systems, Inc.**




Allen
Borowsky and Jeffrey Klein were considered our promoters. We initially issued a
total of 931,500 shares of our common stock to a total of 41 investors,
including 450,000 issued to each of Mr. Borowsky and Mr. Klein, for
total consideration of $4,815. Other than the payment for their shares and
assistance with our formation, neither Mr. Borowsky nor Mr. Klein has provided
any assets or services to us. Neither individual has received any property from
us other than the purchased shares.




On
October 1, 2003, we entered into a Subscription Agreement with Grander, LLC,
whereby Grander agreed to purchase 238,500 shares of our common stock in
consideration for Grander’s funding of certain of our operational requirements.
The offering price of the shares purchased was $0.0545 per share. Total proceeds
of this issuance were $13,000. Mr. Lee Wiskowski, a director of ours, is
the sole member of Grander.




On
December 1, 2003, we entered into a Business and Financial Advisory Agreement
with Grander, LLC. For its services, Grander and its designees have been paid a
fee of $761,000 for advising us in connection with the structuring of our
acquisition of Nexvu, establishment of commercial and strategic partnerships and
joint ventures, development of our marketing plans, financial models, financial
strategies and structuring of our private offering. The agreement terminated
upon the closing of our private offering on April 15, 2004. The designees of
Grander are Lee Wiskowski and Douglas Stukel, both of whom are members of our
board of directors and the individuals who helped provide advisory services to
us under the agreement.




43


On March
31, 2004, we entered into Advisory Services Agreements with each of Lee
Wiskowski and Douglas Stukel to provide advisory services on a going forward
basis. Pursuant to the agreements, we may request Mr. Wiskowski and
Mr. Stukel to provide financial advisory services in connection with
mergers and acquisitions and provide analysis as to strategic alternatives. As
consideration for such services, Mr. Wiskowski and Mr. Stukel were
each granted a three-year warrant, exercisable at $1.35 per share, to purchase
250,000 shares of our common stock on or before March 31, 2007. Nothing
contained in the agreement precludes us from engaging any other person or entity
to provide us financial advisory services, provided that during the term of the
agreement and for a period of six months thereafter, we are required to give
Mr. Wiskowski and Mr. Stukel the right of first refusal to act as our
advisor with respect to financial advisory services, so long as
Mr. Wiskowski or Mr. Stukel, as the case may be, offers such services
on terms no less favorable than we can obtain elsewhere.




The
warrants granted to Mr. Wiskowski and Mr. Stukel under the agreements
contain a cashless exercise provision which essentially provides that upon
exercise of the warrants, they have the right to either pay cash or receive
“credit,” as if they had paid cash, for the cancellation of a portion of their
warrants with a value equal to the spread, if any, between the fair-market value
of our common stock at the date of exercise and the exercise price of $1.35 per
share, multiplied by the number of warrants being cancelled.


On August
30, 2004, Mr. Allen entered into a Severance Agreement with the company.
According to the terms of the Severance Agreement, Mr. Allen agreed to serve as
a consultant to the company until the earlier of (1) his finding alternative
employment, and (2) November 23, 2004. The
company paid Mr.
Allen at an annual rate of $175,000 per year, pro rated for the number of days
between the date of the Severance Agreement until November
23, 2004. Mr.
Allen continued to
participate in the company ’s
employee benefit plans (except vacation) through the Consulting Termination
Date. Mr. Allen retained the vested portion of his employee stock option (which
allows him to purchase 107,500 shares of the company ’s common
stock), on or before April 25, 2014, at a price of $1.35 per share. Mr. Allen
has agreed not to disclose confidential information for a period of four years
and not to solicit employees and customers of the company for a
period of two years.
  On August
30, 2004, Lee Wiskowski and Douglas Stukel, directors of ours, became the
co-chief executive officers of our company. Although there are no written
employment agreements at this time, Messrs. Wiskowski and Stukel will receive
employment compensation based on an annual salary of $87,500 each, commencing
September 1, 2004. Messrs. Wiskowski and Stukel are entitled to expense
reimbursements, customary health insurance coverage and customary fringe
benefits. It is anticipated that each of them will be employed by the company on a
part-time basis.


44


Effective
March 17, 2005, the Grid Note agreement between James Cuppini, the former
president of Frontrunner, and Frontrunner terminated. As of March 17, 2005,
Frontrunner had extended $156,000.00 to Mr. Cuppini. Pursuant to the terms of
the Grid Note, the loan was forgiven upon Mr. Cuppini’s resignation as the
president of Frontrunner, effective March 17, 2005. The Grid Note which included
a forgiveness provision was entered into prior to enactment of the
Sarbanes-Oxley Act of 2002. As part of his resignation, Mr. Cuppini entered into
a Separation/Severance Agreement with Frontrunner. Pursuant to the
Separation/Severance Agreement, Mr. Cuppini will continue to provide consulting
services to Frontrunner. Frontrunner will pay Mr. Cuppini a salary at the
rate of $90,600 pro rated across a 365 day period and payable in accordance with
Frontrunner’s regular pay roll practices. Frontrunner has also agreed to
reimburse Mr. Cuppini for expenses in the amount of approximately $21,000, and
grant him additional compensation in the forms of cash bonuses and  stock
in the event certain transactions are closed. Mr. Cuppini has agreed not to
disclose confidential information of Frontrunner and Capital Growth for a period
of four years. He has agreed not to solicit for a period of two
years




**Nexvu**


Craig
Siegler is considered the promoter of Nexvu, and owned over 5% of the company’s
membership interests. Upon formation of
Nexvu, Mr. Siegler received 90 of the company’s original 100 membership
interests. Siegler Partners, L.L.C., a company controlled by Mr. Siegler, who
owned over 5% of Nexvu's  membership interests, acted as the initial
manager of Nexvu. Under the amended and restated operating agreement for Nexvu
dated as of June 27, 2003, Mr. Siegler received a one-time expense reimbursement
of $15,000 from Nexvu, representing reimbursement for expenses incurred by Mr.
Siegler or his affiliates from Nexvu's inception through the date of the
agreement. The agreement also provided that Mr. Siegler would receive
compensation at an annual rate of $50,000 for the one-year period from July 1,
2003 through June 30, 2004. Under the amended and restated operating agreement
LaSalle Nexvu Manager, LLC, a company controlled by Robert Geras, who owned
over 5% of Nexvu's outstanding interests, became the manager of Nexvu  and
received compensation of $5,000 per month beginning on July 1, 2003. LaSalle
Nexvu Manager had the ability to increase this compensation to $10,000 per month
in its discretion if its time commitment increased substantially.


During
the period from the inception of Nexvu  on February 28, 2002 through the
June 27, 2003 effective date of the amended and restated operating agreement,
Mr. Siegler advanced $1,034,907 to Nexvu. There was no interest rate on
this advance. This amount was converted into a total of 2,837,950 Class A
membership interests in Nexvu on June 27, 2003, and the original 90 membership
interests issued to Mr. Siegler were canceled. In mid-January 2003,
Mr. Siegler received a $160,000 loan from a private bank that was
guaranteed by Nexvu, and then loaned this $160,000 to Nexvu. The $160,000 note
issued to Mr. Siegler had an interest rate of 9%. This loan, including all
accrued interest, was repaid by Nexvu in February 2004.




45


On May
20, 2003, Mr. Geras made a bridge loan to Nexvu in the amount of $150,000.
The note was payable on demand, and had an interest rate of 12%.
Mr. Siegler personally guaranteed this note. Mr. Geras subsequently
waived the interest on the note and converted the principal amount of the note
to Class B membership interests in Nexvu  at a price of approximately
$0.324 per interest.




Several
members of Nexvu who held over 5% of its Class B membership interests purchased
convertible promissory notes from the company in September and December 2003.
Each note had a one-year term and an interest rate of 8%. The notes provided
that past due principal and interest would bear interest at the lesser of the
maximum permitted rate or 10%. Each note was convertible into Class B membership
interests of Nexvu at a rate of approximately $0.324 in principal amount for
each Class B membership, and each note holder received a warrant to purchase
Class B membership interests at a price of $1.35 per interest. A $250,000 note
purchased by the Carl Greer Trust was automatically convertible if within 90
days of the date of the note the company both entered into a distribution
agreement with a nationally recognized brand distributor of hardware products
and received new purchase orders for at least $50,000 of products. The remaining
notes were convertible at the option of the lender. The dates, purchasers and
amounts of these notes, along with the number of Class B interests underlying
the warrants granted to each purchaser, are summarized in the following
table:




Date
    
    Holder
    
    Amount
    
    Class
      B Interestsunderlying
      Warrants9-9-03
    
    Carl
      Greer Trust(1)
    
    $
    250,000
    
    
    92,5939-10-03
    
    Robert
      Geras
    
    $
    300,000
    
    
    111,1119-10-03
    
    Karen
      Jaimovich
    
    $
    100,000
    
    
    37,0379-9-03
    
    Balkin
      Family Limited Partnership(2)
    
    $
    100,000
    
    
    37,03712-10-03
    
    Balkin
      Family Limited Partnership(2)
    
    $
    150,000
    
    
    55,55612-1-03
    
    David
      J. Lies
    
    $
    300,000
    
    
    111,11112-1-03
    
    Linda
      Lies(3)
    
    $
    25,000
    
    
    9,25912-22-03
    
    Carl
      Greer Trust(1)
    
    $
    500,000
    
    
    185,185TOTAL
    
    
    
    $
    1,725,000
    
    
    638,889





(1)
    The
      Carl C. Greer Trust, of which Carl C. Greer is the sole trustee, is an
      estate planning trust established by Mr. Greer for the benefit of his
      family members.(2)
    The
      Balkin Family Limited Partnership, of which Michael Balkin is the sole
      general partner, is an estate planning partnership established by
      Mr. Balkin for the benefit of himself and his immediate family
      members.(3)
    Ms.
      Lies is the wife of David Lies.


All of
the above interests converted into warrants to purchase an identical number of our shares upon the
closing of our merger with Nexvu on January 28, 2004. The note purchased by
the Carl Greer Trust in September 2003 automatically converted into a total of
769,777 Class B membership interests on December 30, 2003. Of the remaining
$1,375,000 of notes, $862,289 was converted into a total of 2,655,082 Class B
membership interests of Nexvu, and the remaining $512,711 was converted into a
total of 538,347 of our shares on January 28, 2004 in connection with the merger
between us and Nexvu.


46


On
January 28, 2004, Nexvu entered into an agreement with Mr. Siegler in
connection with a dispute relating to the issuance of membership interests in
Nexvu and a capital call by Nexvu in December 2003. Under the agreement, among
other things, Nexvu and Mr. Siegler each released the other and his or its
successors and assigns and, in the case of Nexvu, its manager and officers,
against any and all liabilities relating to us or Nexvu. Under the agreement
Nexvu  agreed to cause us to grant Mr. Siegler a warrant to purchase
162,500 shares of our common stock at a price of $1.35 per share in
consideration for Mr. Siegler’s release and for his employment with Nexvu.
The warrants issued to Mr. Siegler had a cashless exercise
provision.




**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., 21st
Century Communications Partners L.P., 21st Century Communications T-E Partners,
L.P., 21st 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., 21st Century Communications Partners L.P., 21st Century
Communications T-E Partners, L.P., 21st 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 21st Century Communications T-E
Partners L.P. and 21st 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., 21st Century Communications Partners L.P., 21st Century Communications T-E
Partners, L.P., 21st 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 from the merger through March 17, 2005.




47


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. Mr. Kenny is the owner of the
escrow agent for this account.


Frontrunner
has a customer base of over 1,000 companies and
a fully
functional Network Operating Center (“NOC”) . This
will allow Nexvu to market its Application Performance Monitoring products .


**Item
13.** **Exhibits.**





Exhibit
      Number
    
    Description
      of Document2.1
    
    Agreement
      and Plan of Merger Agreement by and among Capital Growth Systems, Inc.,
      Nexvu MergerSub, LLC, and Nexvu Technologies, L.L.C. dated January 28,
      2004.(1)2.2
    
    Agreement
      and Plan of Merger by and among Capital Growth Systems, Inc., Frontrunner
      Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of
      ours and Frontrunner Network Systems Corp., a Delaware corporation.(6)3.1
    
    Articles
      of Incorporation of Capital Growth Systems, Inc.(2)3.2
    
    By-laws
      of Capital Growth Systems, Inc.(2)4.1
    
    Registration
      Rights Agreement by and among Capital Growth Systems, Inc. and certain
      shareholders of the Company dated as of December 16, 2003.(1)4.2
    
    Form
      of Warrant to Purchase common stock of Capital Growth Systems, Inc. for
      bridge lenders.(3)
  48
  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.10.1
    
    Indemnification
      Agreement by and among Capital Growth Systems, Inc., Nexvu Technologies,
      L.L.C., Rory Herriman, Douglas Stukel and Lee Wiskowski dated as of
      January 28, 2004.(1)10.2
    
    Loan
      Conversion Agreement by and among Nexvu Technologies, L.L.C., Robert T.
      Geras, Balkin Family L.P., Carl Greer Trust, David J. Lies, Linda M. Lies
      and Karen Jaimovich dated as of December 31, 2003.(1)10.3
    
    Second
      Amended and Restated Operating Agreement of Nexvu Technologies,
      LLC.(3)10.4
    
    Advisory
      Services Agreement dated March 31, 2004 by and between Capital Growth
      Systems, Inc. and Lee Wiskowski.(3)10.5
    
    Advisory
      Services Agreement dated March 31, 2004 by and between Capital Growth
      Systems, Inc. and Douglas Stukel.(3)10.6
    
    Employment
      Agreement dated April 26, 2004 by and between Capital Growth Systems, Inc.
      and Scott Allen.(3)10.7
    
    Employment
      Agreement dated April 26, 2004 by and between Capital Growth Systems, Inc.
      and Rory Herriman.(3)10.8
    
    Subscription
      Agreement dated October 1, 2003 by and between Capital Growth
      Systems, Inc. and Grander, LLC.(10)10.9
    
    Software
      License Agreement dated as of August 31, 2002 by and between Hifn, Inc.
      and Siegler Technology & Development, L.L.C. for MeterFlow Software.(10)10.10
    
    Form
      of Agreement between Capital Growth Systems, Inc. and Value-Added
      Resellers(10)10.11
    
    Creditor
      Waiver and Consent Agreement by and among Frontrunner Network Systems
      Corp., Capital Growth Systems, Inc., and Bluestem Capital Partners II,
      Limited Partnership, Mesirow Capital Partners VI, The Edgewater Private
      Equity Fund II, L.P., Philip Kenny and James Cuppini.(8)
  49
  10.12
    
    Escrow
      Agreement by and among Capital Growth Systems, Inc., Frontrunner
      Representative, Inc., as the escrow agent, and Bluestem Capital Partners
      II, Limited Partnership, Mesirow Capital Partners VI, The Edgewater
      Private Equity Fund II, L.P., Philip Kenny and James Cuppini.(8)14
    
    Code
      of Ethics.(3)16.1
    
    Letter
      from Salberg & Co., P.A. regarding Change in Auditors.(4)16.2
    
    Letter
      from Salberg & Co., P.A. regarding Change in Auditors.(5)16.3
    
    Letter
      from Russell & Atkins, PLC, dated November 12, 2004.(9)20.1
    
    Shareholder
      Letter, dated November 12, 2004.(9)21
    
    List
      of Subsidiaries.23.1
    
    Consent
      of Registered IndependentCertified
      Public Accountants.31.1(a)
    
    Certification
      of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.1(b)
    
    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 2002.99.1
    
    Separation/Severance
      Agreement Between Capital Growth Systems, Inc. and Scott Allen, dated
      August 30, 2004.(7)99.2
    
    Separation/Severance
      Agreement Between Frontrunner Network Systems, Inc., Capital Growth
      Systems, Inc. and
      James
      Cuppini, dated April 14,
2005.
  (1)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on February
      11, 2004 (File No. 0-30831).(2)
    
    Incorporated
      herein by reference to the Form 10-SB filed with the Commission on June
      20, 2000 (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).
  50
  (4)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on May 3,
      2004 (File No. 0-30831).(5)
    
    Incorporated
      herein by reference to the Form 8-K/A filed with the Commission on May 13,
      2004 (File No. 0-30831).(6)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on August
      13, 2004 (File No. 0-30831).(7)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on September
      3, 2004 (File No. 0-30831).(8)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on September
      20, 2004 (File No. 0-30831).(9)
    
    Incorporated
      herein by reference to the Form 8-K/A filed with the Commission on
      November 15, 2004 (File No. 0-30831).(10)
    
    Incorporated
      herein by reference to the Form 8-KSB/A for fiscal year ended December 31,
      2003, filed with the Commission on August 26, 2004 (File No.
      0-30831).


****
 **Item
14.** **Principal
Accountant Fees and Services** **.**


(a) Audit
Fees.




The
aggregate fees billed by Russell & Atkins, PLC, our previous auditors for
the period ended December 31, 2003 and the 1 st and
2 nd quarter
interim period reviews for 2004 were $17,000 and $2,750 respectively. The
aggregate fees billed by Russell Bedford Stefanou Mirchandani LLP, our new
auditors effective November 11, 2004, for the 3 rd quarter
review and audit of the 2004 financial statements are $34,625.




(b) Audit-Related
Fees.




Fees
associated with reviewing our SBII registration filing were $1,050.




(c) Tax
Fees




None.




(d) All Other
Fees




None.




(e) Audit
Committee Pre-Approval Policy




We
presently have a separately-designed standing Audit Committee and an Audit
Committee Charter. Our Audit Committee intends to pre-approve all non-audit
services provided by our independent auditors.




51


(f) Percentage
of fees in items (b) - (d) approved by the audit committee.




The fees
in item (b) were not approved by the audit committee prior to being
incurred.




52





**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/ Lee
WiskowskiLee Wiskowski, Co-Chief Executive Officer


By:
    /s/ Douglas StukelDouglas Stukel, Co-Chief Executive OfficerTitle
 Dated: May 4, 2005
    By:
    /s/ Derry L. BehmDerry L. Behm, Chief Financial and Accounting
    Officer


In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:




**SIGNATURE**
    
    **TITLE**
    
    **DATE**/s/
      Douglas Stukel
    
    Director
      and Co-Chief Executive Officer
    
    May
      4, 2005Douglas
    Stukel/s/
      Lee Wiskowski
    
    Director
      and Co-Chief Executive Officer
    
    May
      4, 2005Lee Wiskowski/s/
      Robert T. Geras
    
    Director
    
    May
      4, 2005Robert T.
    Geras/s/
      Philip B. Kenny
    
    Director
    
    May
      4, 2005Philip B.
    Kenny/s/
      David A. Beamish
    
    Director
    
    May
      4, 2005David A.
    Beamish/s/
      Derry L. Behm
    
    Chief
      Financial and Accounting Officer
    
    May
      4, 2005Derry L.
    Behm







53





EXHIBIT
INDEX




Exhibit
      Number
    
    Description
      of Document2.1
    
    Agreement
      and Plan of Merger Agreement by and among Capital Growth Systems, Inc.,
      Nexvu MergerSub, LLC, and Nexvu Technologies, L.L.C. dated January 28,
      2004.(1)2.2
    
    Agreement
      and Plan of Merger by and among Capital Growth Systems, Inc., Frontrunner
      Acquisition, Inc., a Delaware corporation and wholly-owned subsidiary of
      ours and Frontrunner Network Systems Corp., a Delaware corporation.(6)3.1
    
    Articles
      of Incorporation of Capital Growth Systems, Inc.(2)3.2
    
    By-laws
      of Capital Growth Systems, Inc.(2)4.1
    
    Registration
      Rights Agreement by and among Capital Growth Systems, Inc. and certain
      shareholders of the Company dated as of December 16, 2003.(1)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.10.1
    
    Indemnification
      Agreement by and among Capital Growth Systems, Inc., Nexvu Technologies,
      L.L.C., Rory Herriman, Douglas Stukel and Lee Wiskowski dated as of
      January 28, 2004.(1)10.2
    
    Loan
      Conversion Agreement by and among Nexvu Technologies, L.L.C., Robert T.
      Geras, Balkin Family L.P., Carl Greer Trust, David J. Lies, Linda M. Lies
      and Karen Jaimovich dated as of December 31, 2003.(1)10.3
    
    Second
      Amended and Restated Operating Agreement of Nexvu Technologies,
      LLC.(3)10.4
    
    Advisory
      Services Agreement dated March 31, 2004 by and between Capital Growth
      Systems, Inc. and Lee Wiskowski.(3)
  54
  10.5
    
    Advisory
      Services Agreement dated March 31, 2004 by and between Capital Growth
      Systems, Inc. and Douglas Stukel.(3)10.6
    
    Employment
      Agreement dated April 26, 2004 by and between Capital Growth Systems, Inc.
      and Scott Allen.(3)10.7
    
    Employment
      Agreement dated April 26, 2004 by and between Capital Growth Systems, Inc.
      and Rory Herriman.(3)10.8
    
    Subscription
      Agreement dated October 1, 2003 by and between Capital Growth
      Systems, Inc. and Grander, LLC.(10)10.9
    
    Software
      License Agreement dated as of August 31, 2002 by and between Hifn, Inc.
      and Siegler Technology & Development, L.L.C. for MeterFlow Software.(10)10.10
    
    Form
      of Agreement between Capital Growth Systems, Inc. and Value-Added
      Resellers(10)10.11
    
    Creditor
      Waiver and Consent Agreement by and among Frontrunner Network Systems
      Corp., Capital Growth Systems, Inc., and Bluestem Capital Partners II,
      Limited Partnership, Mesirow Capital Partners VI, The Edgewater Private
      Equity Fund II, L.P., Philip Kenny and James Cuppini.(8)10.12
    
    Escrow
      Agreement by and among Capital Growth Systems, Inc., Frontrunner
      Representative, Inc., as the escrow agent, and Bluestem Capital Partners
      II, Limited Partnership, Mesirow Capital Partners VI, The Edgewater
      Private Equity Fund II, L.P., Philip Kenny and James Cuppini.(8)14
    
    Code
      of Ethics.(3)16.1
    
    Letter
      from Salberg & Co., P.A. regarding Change in Auditors.(4)16.2
    
    Letter
      from Salberg & Co., P.A. regarding Change in Auditors.(5)16.3
    
    Letter
      from Russell & Atkins, PLC, dated November 12, 2004.(9)20.1
    
    Shareholder
      Letter, dated November 12, 2004.(9)21
    
    List
      of Subsidiaries.23.1
    
    Consent
      of Registered IndependentCertified
      Public Accountants.31.1(a)
    
    Certification
      of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.
  55
  31.1(b)
    
    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 2002.99.1
    
    Separation/Severance
      Agreement Between Capital Growth Systems, Inc. and Scott Allen, dated
      August 30, 2004.(7)99.2
    
    Separation/Severance
      Agreement Between Frontrunner Network Systems, Inc., Capital Growth
      Systems, Inc.
      and
      James Cuppini, dated April 14,
2005.
  **_______________________**
  (1)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on February
      11, 2004 (File No. 0-30831).(2)
    
    Incorporated
      herein by reference to the Form 10-SB filed with the Commission on June
      20, 2000 (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 8-K filed with the Commission on May 3,
      2004 (File No. 0-30831).(5)
    
    Incorporated
      herein by reference to the Form 8-K/A filed with the Commission on May 13,
      2004 (File No. 0-30831).(6)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on August
      13, 2004 (File No. 0-30831).(7)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on September
      3, 2004 (File No. 0-30831).(8)
    
    Incorporated
      herein by reference to the Form 8-K filed with the Commission on September
      20, 2004 (File No. 0-30831).(9)
    
    Incorporated
      herein by reference to the Form 8-K/A filed with the Commission on
      November 15, 2004 (File No. 0-30831).(10)
    
    Incorporated
      herein by reference to the Form 8-KSB/A for fiscal year ended December 31,
      2003, filed with the Commission on August 26, 2004 (File No.
      0-30831).




56