UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


FORM
      10-KSB





(Mark
      One)





xANNUAL
      REPORT UNDER
      SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      Fiscal Year ended December 31, 2005





o
      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
                or 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)




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 is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B 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. o




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








State
      issuer’s revenues for its most recent fiscal year: $15,656,000





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 14, 2006, the issuer had outstanding 17,015,754 shares of its $0.0001
      par
      value common stock.





DOCUMENTS
      INCORPORATED BY REFERENCE




None


Transitional
      Small Business Disclosure Format: Yes o No
x







**Table
      of Contents**


**Page**Item
                  1.
              Description
                  of Business.
              1Item
                  2.
              Description
                  of Property.
              18Item
                  3.
              Legal
                  Proceedings.
              18Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              18Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters.
              19Item
                  6.
              Management’s
                  Discussion and Analysis and Plan of Operation.
              23Item
                  7.
              Financial
                  Statements.
              34Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure.
              35Item
                  8A.
              Controls
                  and Procedures.
              36Item
                  8B.
              Other
                  Information.
              36Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act.
              36Item
                  10.
              Executive
                  Compensation.
              40Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters.
              42Item
                  12.
              Certain
                  Relationships and Related Transactions.
              44Item
                  13.
              Exhibits.
              49Item
                  14.
              Principal
                  Accountant Fees and Services.
              51





**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.








**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 at such time 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 $7,600,000 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 1,000,000 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.




3


The
      following creditors entered into creditor waiver agreements and we, in turn,
      issued a total of 1,000,000 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, John Jellinek and James
      Cuppini. The shares issued to John Jellinek were issued in 2005 after the credit
      waiver was executed. 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.




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.




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.




4


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 function is application performance
      management. This market is focused on delivering solutions designed to identify
      and help 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 application performance management 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.




We
      believe we have established a relatively low-cost means of significantly
      improving the ability to manage remote applications. Our principal product,
      the
      NEXVU Analyzer, is a software based solution that can measure, monitor and
      analyze over 3,200 different applications and network based services. This
      enables the customer to identify a problem exists and to pinpoint the cause
      of
      the problem, often before it impacts the end user of the
      application.




The
      Nexvu
      Analyzer System has two major components - the Nexvu Analyzer and the Nexvu
      Command Center. The Nexvu Analyzer is considered the nerve center of the Nexvu
      Analyzer System. Residing within the customer’s data network, the Nexvu Analyzer
      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.




5


The
      Nexvu
      Analyzer is engineered for highly distributed environments and is designed
      to be
      easy to deploy and operate. Our software is loaded directly into customer
      provided server. 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. Information is transmitted
      to users by the Nexvu Command Center, which is responsible for managing all
      Nexvu Analyzers 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 for
      approximately every 500 Nexvu Analyzers.




In
      addition to making enhancements to the Nexvu Analyzer and Command Center
      products, 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
      designs, installs and services customer-premise voice, data and video networks.
      Frontrunner is a value-added reseller of communications and data equipment
      to
      the small-mid business segment. Frontrunner represents NORTEL voice and data
      equipment, Siemens voice, Cisco data, and Polycom video. Frontrunner provides
      professional services in the voice, data, application monitoring and video
      space. Professional services include: maintenance, network monitoring,
      application monitoring, consulting and outsourcing services. 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 Midwest, and has a network of affiliated subcontractors providing
      service coverage across all fifty states.




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 network operations center 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.




6


**Product
      Features**




***Nexvu***




The
      Nexvu
      Analyzer System is designed to apply the critical functions of performance
      management. 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;




·
            Support
                which is “pre-configured,” so that no additional programming is required,
                for 900+ protocols and 3200+ applications, including Voice/Video
                over
                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 provides
      professional services in the voice, data, application monitoring and video
      space. Professional services include: maintenance, network monitoring,
      application monitoring, consulting and outsourcing services. 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 across all fifty states.




7


**Sales
      and Marketing**




***Nexvu***




*Target
      Markets* .
      We have
      targeted Fortune 5000 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 5000 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:




·
            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.




*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.




Our
      revenues are generated from three major sources:




·
            Sales
                of licenses for our software;




·
            Maintenance
                contracts for our software licensing agreements;
                and




8


·
            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
      and Midwest. 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***




*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 supporting IBM, DELL, HP and Gateway
      servers.




*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, for customers wishing
      to outsource the installation and configuration efforts, we offer an
      Installation/Configuration/Training service as part of our Professional Services
      offerings.




***Frontrunner***




*Suppliers* .
      Frontrunner purchases the majority of its sold equipment (approximately 72%)
      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.




9


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:




•Network
                General
              
              •Netscout
              
              •Computer
                Associates
              
              •Agilent
              
              •Acterna
              
              •Wildpackets
            •Apogee
                Networks
              
              •Compuware
              
              •Niksun
              
              •Lucent
              
              •Network
                Instrument




Many
      of
      the application performance management products are developed, marketed and
      sold
      by the following organizations:




•Mercury
                Interactive
              
              •Cisco
              
              •NetQOS
            •Netiq
              
              •Computer
                Associates
              
              •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.




10


**Dependence
      on Major Customers**




***Nexvu***




Through
      December 31, 2005, Nexvu had only 15 customers. The company is highly dependent
      on most customers for repeat business. A loss of any of these 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
      25%
      of the revenues of Frontrunner during 2005. ITT Industrial Space Systems
      accounted for 12% and Wegmans Supermarkets accounted for 13% of Frontrunner’s
      business. A loss of either of these customers would have a material adverse
      impact on the company’s business operations.




**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, 2005 and December 31, 2004, Nexvu
      spent $1.4 million and $1.7 million, respectively, on research and development
      activities. Research and development costs include cost of developers and system
      engineers, outside contractors, 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, 2005 and December 31, 2004, Frontrunner did
      not
      incur any research and development expenditures.




11


**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. Through December 31, 2005 we have paid
      a
      total of $150,000 towards the royalty payments. The agreements also 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
      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
      have 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. During 2004, the company performed an assessment
      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 represented the excess of the
      minimum annual royalty payments over the expected royalty payments that would
      have been due based upon the estimated amount of sales of the Nexvu product
      over
      the contractual time period.




During
      2006 we applied for a patent on our network flow analysis method and system
      and
      expect to receive responses from the patent office during 2006. There is no
      assurance that this patent will be approved. We also expect to apply for
      additional patents as we further develop our products.




***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. SSI will
      retain title to the developed software and has granted Frontrunner a license
      to
      utilize this software. Frontrunner paid InfoSpectrum a monthly maintenance
      fee
      in the amount of $16,000 through May, 2005. Effective June 2005, the agreement
      was revised to a monthly minimum retainer of $1,400. Actual time and material
      costs are accumulated against this retainer, with any costs exceeding the
      retainer requiring additional payment to InfoSpectrum. James Cuppini,
      Frontrunner’s former President, is a 49% owner of InfoSpectrum.




12


**Employees**




As
      of
      December 31, 2005, Nexvu had 12 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. Frontrunner has 88 full time employees. We believe all
      relations with our employees are satisfactory. None of our employees are covered
      by a collective bargaining agreement.




**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. Through December 31, 2005, we have incurred cumulative losses
      of
      $10,984,315. Although our loss in 2005 narrowed to $2.3 million from $4.9
      million during 2004, 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. Our
      independent auditors have issued a going concern opinion on our consolidated
      financial statements as further discussed in item 6 and 7 hereof.




***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.




13


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.




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:




•  Loss
      of
      revenue;




•  Product
      returns or order cancellations;




•  Delay
      in
      market acceptance of our products;




•  Diversion
      of our development resources;




14


•  Distraction
      of our management;




•  Damage
      to
      our customer relationships and our reputation;




•  Increased
      service and warranty costs; and




•  Costly
      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.




***We
      face uncertainties regarding our patents and protecting our proprietary
      technology.*** Although
      we have applied for certain patents, and may apply for additional patents,
      regarding our product, 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 $3,155,000, Global Crossing
      North America in the amount of $178,070, Nortel Networks Inc. in the amount
      of
      $1,112,591, creditor in the amount of $96,976 and Review Video Inc. in the
      amount of $87,926. As of December 31, 2005 the Company is in default on two
      of
      the loan agreements. The Company is in arrears by $59,887 for the Global
      Crossing note and the entire balance on the unsecured note payble to a creditor
      is in arrears. There have been no adverse actions from these creditors
      concerning the arrearage amount.




15


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.




***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
      currently no established market for our stock, and we do not know whether an
      active trading market will develop. We, through an independent broker-dealer,
      are seeking to have our common stock quoted on the OTC Bulletin Board Quotation.
      However, even if the Company’s stock is quoted on the OTC 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.




16


***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
      September 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 did not 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 the Company further
      believes that if such individuals had 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 pursue
      legal measures to recover the judgment amounts which could cause the Company
      to
      incur material costs in defending any such claims.




17


**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. The Company is actively recruiting up to two
      additional qualified outside directors. However, we cannot guarantee that we
      will be able to attract or retain qualified outside 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.




**Item
      2.**  **Description
      of Propert** **y.**




Our
      principal office is located at 50 East Commerce Drive, Suite A, Schaumburg,
      Illinois 60173. A multi-year lease for such location was signed that expires
      in
      April 2007, with annual options to renew. Current rent at the Schaumburg
      location is $73 thousand 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 $128 thousand 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
      $83.5 thousand. Several small satellite offices housing limited sales and
      operations are located in Buffalo, NY, Pittsford, NY, Syracuse, NY Highland,
      NY
      and Lynnfield, MA. These five satellite offices all have short-term leases
      that
      expire in 2006, each with options to renew. The combined annual rent obligation
      for all five satellite offices is currently $41 thousand per year. In addition,
      we also lease a small office in Champaign, IL which houses our product
      development staff of Nexvu. This lease was entered into in December 2005,
      expiring in January 2009, with options to renew. The current rent for this
      facility is $26 thousand per year.




**Item
      3.**  **Legal
      Proceedings** **.**




None.




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




None.




18


**PART
      II**




**Item
      5.**  **Market
      for Common Equity and Related Stockholder Matters.**




**Market
      Information**




No
      public
      trading market presently exists for our common stock. The Company, through
      an
      independent broker-dealer, is seeking to have our common stock quoted on the
      OTC
      Bulletin Board Quotation. This broker-dealer has submitted a Form 211 with
      respect to the Company in pursuit of such an OTC Bulletin Board Quotation.
      The
      broker-dealer and the Company are in the process of resolving comments with
      respect to such Form 211. There is no assurance that an active market will
      develop for our stock even if our stock is quoted on the OTC Bulletin
      Board.




In
      connection with the Form 211, the Company withdrew its registration statement
      pending with the U.S. Securities and Exchange Commission with respect to certain
      of its shares of common stock. In
      the
      event the Company is not successful in the pursuit of the OTC Bulletin Board
      Quotation, the Company intends to file a new registration statement to register
      the resale of 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.




**Holders**




As
      of
      April 14, 2006, there were approximately 200 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.




**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.




19


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.




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.




20


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.




The
      form
      of the business combination with Frontrunner was a reverse triangular merger
      in
      which we issued 1,000,000 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.




21


The
      following creditors entered into creditor waiver agreements with Frontrunner
      and
      we, in turn, issued a total of 1,000,000 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, John Jellinek and James
      Cuppini. 925,000 of the shares were issued on September 14, 2004 and 75,000
      shares were issued on May 19, 2005, each effective upon delivery of the
      applicable credit waiver agreement. 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 was the president of
      Frontrunner until March 17, 2005.




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.




Information
      with respect to “Securities authorized for issuance under equity compensation
      plans” has been provided under Section 12 of this report.




22


**Item
                6.**
            **Management’s
                Discussion and Analysis or Plan of
                Operation.**




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




**Overview**




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 transaction being deemed
      a
      reverse acquisition for accounting purposes. Under this treatment, Nexvu became
      the surviving company for financial statement purposes. Our net assets were
      recorded at fair value, with the net assets of Nexvu reflected at historical
      costs. In addition, as we were a public shell company acquiring a privately-held
      company, no goodwill was reported. Our financial statements after the merger
      reflect the historical financial statements of Nexvu, the operating company.
      Our
      accumulated deficit prior to the merger was eliminated as of the merger and
      only
      the accumulated deficit of Nexvu 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 1,000,000 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.




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.




As
      of
      December 31, 2005, the Company’s current liabilities exceeded its current assets
      by $5.1 million. Included in the current liabilities is $3.8 million of current
      maturities of long-term debt, including a $3.2 million demand note payable
      to
      Harris Bank. This debt reflects pre-existing balances assumed from the
      acquisition of Frontrunner during 2004. Cash on hand at December 31, 2005 was
      $437 thousand. The Company has incurred operating losses of $2.3 million and
      $4.9 million for the two years ended December 31, 2005 and 2004 respectively.
      Additionally, cash used in operating activities were $1.8 million and $3.3
      million for the two years ended December 31, 2005 and 2004
      respectively.




23


The
      Company’s net working capital deficiency, recurring losses and negative cash
      flows from operations raise substantial doubt about the Company’s ability to
      continue as a going concern. During 2005, the Company improved its revenue
      and
      reduced its operating losses and still had sufficient cash from its equity
      raise
      that was completed in January 2004. However, the Company has continued to
      utilize cash in operations during 2006. Through April 14, 2006, the Company
      has
      raised $200 thousand in bridge loans and intends to raise additional funds
      through this method in order to fund current working capital needs. $100
      thousand of these loans was made by Momentum Capital, LLC, an entity co-owned
      by
      our co-CEO's. Additionally, the Company plans to raise additional capital which
      may involve the issuance of shares of our common stock in order to fund working
      capital needs, reduce debt and provide for additional funding. However, no
      assurance can be made that additional bridge loans or an adequate capital raise
      can be completed.




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**




***2005
      vs 2004***




Revenues
      for the twelve month period ended December 31, 2005 were heavily influenced
      by
      the acquisition of Frontrunner. The total revenues during 2005 were $15.6
      million of which $14.3 million were derived by Frontrunner segment, representing
      over 90% of our consolidated revenues. During the period September 15 (the
      acquisition date) 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 of 2005. The Frontrunner revenues were generated from
      installation of voice and data systems as well as through maintenance contracts
      on installed systems. Maintenance revenues for Frontrunner, whether contractual
      or time and material based, represented $7.9 million or 55% of the total
      revenues, with installation revenues of $6.4 million or 45% of revenues. The
      Nexvu revenues for the twelve month period ended December 31, 2005 were $1.3
      million of which $1 million was derived from consulting services with the
      remaining revenues related to software licensing sales and related maintenance
      fees.




The
      gross
      margin rate was 45.6% for 2005 compared to 41.7% in 2004. Frontrunner gross
      margins were 45.5%, with installation margins of 27% and maintenance revenues
      having a 60% gross margin. The Nexvu gross margin rate for 2005 was 46.8%.
      The
      overall 2004 gross margin rate of 41.7% was negatively impacted by an
      acceleration of expenses for minimum royalty payments in the amount of $435
      thousand. Without this acceleration of expense, the gross margin rate would
      have
      been 51.8%.




24


Total
      operating expenses were as follows:




Twelve
                months ended,December
                31, 2005
            
            December
                31, 2004Compensation
            
            $
            5,446,071
            
            $
            3,696,802Travel
                and entertainment
            
            
            248,279
            
            
            274,197Occupancy
            
            
            490,099
            
            
            321,510Professional
                services
            
            
            639,965
            
            
            1,037,273Insurance
            
            
            319,533
            
            
            134,604Depreciation
                and amortization
            
            
            852,000
            
            
            659,548Other
                operating expenses
            
            
            1,023,619
            
            
            529,877Total
                operating expenses
            
            $
            9,019,566
            
            $
            6,653,811





Frontrunner
      absorbs a majority of the selling, general and administrative expenses due
      to
      the relative size of the organization compared to Nexvu. The 2004 expenses
      represent the Frontrunner expenses from the time of acquisition (September
      2004)
      to the end of the year. Accordingly, prior year amounts are not necessarily
      comparable to 2005 expenses. The majority of our operating expenses consist
      of
      compensation expenses and professional fees. Of the total $9.0 million of
      selling, general and administrative expenses, Frontrunner comprises $6.8 million
      with Nexvu and the holding company representing the remaining amount. During
      2004, we took steps to reduce the overall number of Nexvu employees by over
      50%.
      Annual savings from this reduction are over $2.0 million due to decreased
      compensation, travel and other incidental expenses. The professional fees are
      primarily related to legal fees related to securities work related to filings
      with the Securities and Exchange Commission and the NASD as well as other
      general counsel expenses. The reduction from the prior year represents an
      overall lower level of securities work being performed during 2005. Our travel
      and entertainment expenses relate primarily to costs associated with our sales
      force. The 2005 reduction reflects our efforts to trim the Nexvu employees
      and
      related expenses associated with such staff. 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, 2004, we made the decision to move our corporate offices to another
      location in Schaumburg, IL, sharing space with the Frontrunner division. The
      increase in the occupancy costs is the direct result of having Frontrunner
      for
      full year. Partially offsetting the Frontrunner increase is the impact of the
      decision made during 2004 to consolidate the corporate and Nexvu offices with
      existing Frontrunner office space in the Chicago area. During 2004, in addition
      to the above minimum royalty 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.




Interest
      expense for 2005 was $347.2 thousand compared to $43.4 thousand during 2004.
      The
      increase in interest expense is the direct result of having Frontrunner included
      in our operations for a full year during 2005, compared to only a partial year
      during 2004.




25


***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 (the acquisition
      date) 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:





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





26


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.




**Liquidity,
      Capital Resources and Going Concern**




Cash
      used
      in operating activities during the twelve months ended December 31, 2005 and
      2004 was $1.8 million and $3.3 million, respectively. The cash used in operating
      activities was principally due to the net loss for the year.




The
      cash
      used in investing activities was $85 thousand and $105 thousand for the twelve
      months ended December 31, 2005 and 2004, respectively. 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.




Cash
      used
      in financing activities was $1.4 million during the twelve months ended December
      31, 2005 and was due to the repayment of Frontrunner debt. Cash provided by
      financing activites was $6.4 million for the twelve months ended December 31,
      2004. This source of cash was attributable to the net cash proceeds of $6.7
      million from the issuance of common stock during 2004.




Historically
      our working capital requirements have been met through proceeds of common stock
      private equity offerings and debt issuances. As of December 31, 2005, we held
      $436.8 thousand of cash and cash equivalents. During 2004 we generated $6.7
      million from a private placement of our common stock. This capital had been
      sufficient to fund the Nexvu and Frontrunner operations through the end of
      2005.
      However, at December 31, 2005, we do not have sufficient working capital funds
      to operate without additional bridge loans or capital funding.




27


In
      2004,
      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.
      Frontrunner’s largest debtholder Harris Bank, N.A. has informed us that they
      intend on calling the current $3.2 million in debt (the “Harris Debt”) during
      2006. Frontrunner is currently negotiating with Harris Bank to extend this
      facility through December 31, 2006.




As
      of
      December 31, 2005, the Company’s current liabilities exceeded its current assets
      by $5.1 million. Included in the current liabilities is $3.8 million of current
      maturies of long-term debt, including a $3.2 million demand note payable to
      Harris Bank.




The
      Company’s net working capital deficiency, recurring losses and negative cash
      flows from operations raise substantial doubt about the Company’s ability to
      continue as a going concern. During 2005, the Company improved its revenue
      and
      reduced its operating losses and still had sufficient cash from the $6.6 million
      net equity raise that was completed in January 2004. However, the Company has
      continued to utilize cash in operations during 2006. During 2006 Nexvu will
      continue to strive to increase sales of its software products and professional
      services in order decrease the operating losses experienced previously.
      Frontrunner plans on increasing sales levels in order to provide additional
      operating capital. Both companies will continue to be vigilant on operating
      expenses. Through April 14, 2006, the Company has raised $200 thousand in bridge
      loans and intends to raise additional funds through this method in order to
      fund
      current working capital needs. $100 thousand of these loans was made by Momentum
      Capital, LLC, an entity co-owned by our co-CEO's. Additionally, the Company
      plans to raise additional capital which may involve the issuance of common
      stock
      in order to fund working capital needs, reduce debt and provide for additional
      funding. However, no assurance can be made that the additional bridge loans
      and
      an adequate capital raise can be completed.




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, 2005:




28


Operating
              Leases
            
            Debt
              Obligations
            
            Minimum
                Royalty Payments2006
            
            $
            299,622
            
            $
            3,815,337
            
            $
            100,0002007
            
            
            128,592
            
            
            280,792
            
            
            125,0002008
            
            
            64,289
            
            
            301,840
            
            
            150,0002009
            
            
            18,365
            
            
            268,746
            
            
            -Total
                contractual obligations
            
            $
            510,868
            
            $
            4,666,715
            
            $
            375,000


All
      debt
      that is callable or not in compliance is reflected in the 2005 obligations.
      However, we do not have reason to believe that these obligations, other than
      the
      Harris Debt, 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.







**Recent
      Accounting Pronouncements**




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.
      The new standard provides for a modified prospective application. Under this
      method, we will begin recognizing compensation cost for equity based
      compensation for all new or modified grants after the date of adoption. Based
      on
      existing options outstanding at December 31, 2005, we expect stock-based
      compensation expense to be 29,340 for the year ending December 31, 2006.
      However, the expense may be higher if additional options are issued to
      employees.




29


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 for 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.




In
      March
      2005, the FASB issued Interpretation (FIN) No. 47, "Accounting for Conditional
      Asset Retirement Obligations" an interpretation of SFAS 143. FIN 47 clarifies
      the manner in which uncertainties concerning the timing and the method of
      settlement of an asset retirement obligation should be accounted for. In
      addition, the Interpretation clarifies the circumstances under which fair value
      of an asset retirement obligation is considered subject to reasonable
      estimation. The Interpretation is effective no later than the end


of
      fiscal
      years ending after December 15, 2005. We do not anticipate that the
      implementation of this interpretation will have a material impact on our
      financial position, results of operations or cash flows.





In
      May 2005, the Financial Accounting Standards Board (“FASB’’) issued SFAS
      No. 154, “Accounting Changes and Error Corrections—a replacement of APB
      Opinion No. 20 and SFAS No. 3.’’ The pronouncement requires that all
      voluntary changes in accounting principle be reported by retrospectively
      applying the principle to all prior periods that are presented in the financial
      statements. The statement is effective for fiscal years beginning after
      December 15, 2005. The Company’s financial position, results of operations
      or cash flows will only be impacted by SFAS No. 154 if it implements
      changes in accounting principles that are addressed by the standard or corrects
      accounting errors in future periods.




**Critical
      Accounting Policy**




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.




30


**Revenue
      Recognition**




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




For
      revenue from product sales and services, the company recognizes revenue in
      accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB
      104”), which superseded Staff Accounting Bulletin No. 101, “Revenue Recognition
      in Financial Statements” (“SAB 101”).





SAB
      101
      requires that four basic criteria must be met before revenue can be recognized:
      (1) persuasive evidence of an arrangement exists; (2) delivery has occurred;
      (3)
      the selling price is fixed and determinable; and (4) collectibility is
      reasonably assured. Determination of criteria (3) and (4) are based on
      management’s judgments regarding the fixed nature of the selling prices of the
      products delivered and the collectibility of those amounts. Provisions for
      discounts and rebates to the 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.




The
      company defers maintenance revenue and recognizes it ratably over the
      maintenance term. The company defers consulting and training billings and
      recognizes them as those services are performed.




31


**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 from 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 2005 or 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, 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. FASB 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.”




32


**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 1,000,000 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.




The
      following creditors entered into creditor waiver agreements with Frontrunner
      and
      we, in turn, issued a total of 1,000,000 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, John Jellinek and James
      Cuppini. 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.




**Off
      - Balance Sheet Arrangements**




The
      Company has no off-balance sheet arrangements in
      place.




33


**Item
      7.**  **Financial
      Statements** **.**




**ndex
      to Consolidated Financial Statements**


**Capital
                  Growth Systems, Inc. Consolidated Financial
                  Statements**
              
              **Page**Report
                  ofIndependentRegistered
                  Public Accounting Firm
              
              F-2Report
                  of Prior Independent Registered Public Accounting Firm
              
              F-3Consolidated
                  Balance Sheet as of December 31, 2005
              
              F-4Consolidated
                  Statements of Operations for the two years ended December 31, 2005
                  and 2004
              
              F-5Consolidated
                  Statements of Shareholders’ Equity for the years ended December 31,
                  2005
              
              F-6Consolidated
                  Statements of Cash Flows for the two years ended December 31, 2005,
                  and 2004
              
              F-7
                  - F-8Notes
                  to Consolidated Financial Statements
              
              F-9
                  - F-30
 
 34
 
  **CAPITAL
        GROWTH SYSTEMS, INC.**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2005**
 
 F-1
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To
        the
        Board of Directors and Shareholders of
 Capital
        Growth Systems, Inc.
 
 
 We
        have
        audited the accompanying consolidated balance sheet of Capital Growth Systems,
        Inc. (the "Company") as of December 31, 2005 and the related consolidated
        statement of operations, shareholders' equity and cash flows for the year
        ended.
        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 the standards of the Public Company
        Accounting Oversight Board (United States). 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 provide 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, 2005 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.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 2 to the
        consolidated financial statements, the Company's recurring losses, negative
        cash
        flows from operations, and its net working capital deficiency raise substantial
        doubt about its ability to continue as a going concern. Management's plans
        in
        regard to these matters are also described in Note 2. The consolidated financial
        statements do not include any adjustments that might result from the outcome
        of
        these uncertainties.
 
  Plante
        & Moran, PLLC
 Elgin,
        IL
 March
        7,
        2006
 
 F-2
 REPORT
        OF
        PRIOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Directors
        and Stockholders
 Capital
        Growth Systems, Inc.
 
 We
        have
        audited the accompanying consolidated statements of operations, stockholders'
        equity and cash flows for the year ending December 31, 2004 of Capital Growth
        Systems, Inc. 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
        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 also 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 results of operations and cash flows
        of
        Capital Growth Systems, Inc. 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,
        New York
 
 F-3
   **CAPITAL
                  GROWTH SYSTEMS, INC.****CONSOLIDATED
                  BALANCE SHEET****December
                  31,****2005****ASSETS****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              436,842Accounts
                  receivable, net
              
              
              1,232,606Inventory,
                  net
              
              
              1,537,908Prepaid
                  expenses
              
              
              121,466Other
                  current assets
              
              
              34,987Total
                  Current Assets
              
              
              3,363,809**FIXED
                  ASSETS -**net
                  of accumulated depreciation
              
              
              947,203**OTHER
                  ASSETS**Software
                  licensing fee, net
              
              
              26,778Customer
                  list acquired, net
              
              
              2,812,334Goodwill
              
              
              3,965,543Other
                  Assets
              
              
              18,543Total
                  Other Assets
              
              
              6,823,198**TOTAL
                  ASSETS**
              
              $
              11,134,210**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Current
                  maturities of long-term debt
              
              $
              3,815,337Accounts
                  payable
              
              
              536,453Accrued
                  expenses
              
              
              1,389,514Deferred
                  revenue
              
              
              1,536,369Advance
                  billings
              
              
              964,734Warranty
                  Reserve
              
              
              191,624Total
                  Current Liabilities
              
              
              8,434,031**LONG-TERM
                  LIABILITIES**Long
                  term portion of debt
              
              
              851,379Total
                  Liabilities
              
              
              9,285,410**SHAREHOLDERS'
                  EQUITY**Common
                  Stock, $.0001 par value, 25,000,000 shares authorized;17,015,754
                  and 16,940,754 issued and outstanding at December 31, 2005 and
                  December
                  31, 2004, respectively
              
              
              1,701Additional
                  paid-in capital
              
              
              12,831,414Accumulated
                  deficit
              
              
              (10,984,315
              )**SHAREHOLDERS'
                  EQUITY**
              
              
              1,848,800**TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY**
              
              $
              11,134,210
 
  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,****2005**
              
              **2004****REVENUE**
              
              $
              15,656,226
              
              $
              4,296,800**COST
                  OF GOODS SOLD**
              
              
              8,520,909
              
              
              2,506,813**GROSS
                  MARGIN**
              
              
              7,135,317
              
              
              1,789,987**OPERATING
                  EXPENSES**Compensation
              
              
              5,446,071
              
              
              3,696,802Travel
                  and entertainment
              
              
              248,279
              
              
              274,197Occupancy
              
              
              490,099
              
              
              321,510Professional
                  fees
              
              
              639,965
              
              
              1,037,273Insurance
              
              
              319,533
              
              
              134,604Depreciation
                  and amortization
              
              
              852,000
              
              
              659,548Other
                  operating expenses
              
              
              1,023,619
              
              
              529,877**TOTAL
                  EXPENSES**
              
              
              9,019,566
              
              
              6,653,811**OPERATING
                  LOSS**
              
              
              (1,884,249
              )
              
              (4,863,824
              )**INTEREST
                  EXPENSE**
              
              
              347,191
              
              
              43,447**NET
                  LOSS BEFORE INCOME TAXES**
              
              
              (2,231,440
              )
              
              (4,907,271
              )**INCOME
                  TAXES**
              
              
              61,448
              
              
              19,606**NET
                  LOSS**
              
              $
              (2,292,888
              )
              $
              (4,926,877
              )**Loss
                  per Share**
              
              $
              (0.13
              )
              $
              (0.31
              )**Average
                  Shares Outstanding**
              
              
              16,984,606
              
              
              15,824,494
 
 
 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,
                  January 1, 2004
              
              
              -
              
              
              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
              
              $
              4,040,438Net
                  Loss - 2005
              
              
              
              
              
              
              
              
              (2,292,888
              )
              
              
              
              
              
              
              
              (2,292,888
              )Issuance
                  of Stock for Frontrunner Acquisition
              
              
              75,000
              
              
              
              
              
              
              
              
              7
              
              
              101,243
              
              
              101,250Balance,
                  December 31, 2005
              
              
              17,015,754
              
              $
              -
              
              $
              (10,984,315
              )
              $
              1,701
              
              $
              12,831,414
              
              $
              1,848,800
 
 
 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,****2005**
              
              **2004****CASH
                  FLOW FROM OPERATING ACTIVITIES****Net
                  Loss**
              
              $
              (2,292,888
              )
              $
              (4,926,877
              )Adjustments
                  to reconcile net loss to net cashUsed
                  in operating activitiesDepreciation
                  and amortization
              
              
              852,000
              
              
              659,548Write-off
                  organizational costs
              
              
              -
              
              
              19,795Consulting
                  expenses paid in common stock
              
              
              -
              
              
              67,500Stock
                  warrant expense
              
              
              -
              
              
              135,222Changes
                  in working capital items:Accounts
                  receivable
              
              
              221,973
              
              
              218,379Inventory
              
              
              444,194
              
              
              (833,202
              )Prepaid
                  expenses
              
              
              (31,163
              )
              
              2,796Other
                  current assets
              
              
              84,365
              
              
              (76,597
              )Deposits
                  and other assets:
              
              
              26,109
              
              
              (34,652
              )Accounts
                  payable
              
              
              (871,046
              )
              
              306,449Accrued
                  expenses
              
              
              (103,609
              )
              
              617,068Deferred
                  revenue
              
              
              64,286
              
              
              (53,779
              )Advance
                  billings
              
              
              (249,296
              )
              
              613,197Warranty
                  reserve
              
              
              76,594
              
              
              13,326514,407
              
              
              1,655,050Net
                  Cash Used in Operating Activities
              
              
              (1,778,481
              )
              
              (3,271,827
              )**CASH
                  FLOW FROM INVESTING ACTIVITIES**Acquisition
                  of Frontrunner cash
              
              
              -
              
              
              126,346Purchase
                  of fixed assets
              
              
              (84,177
              )
              
              (191,549
              )Payments
                  for software license
              
              
              (400
              )
              
              (40,000
              )Net
                  Cash Used In Investing Activities
              
              
              (84,577
              )
              
              (105,203
              )**CASH
                  FLOW FROM FINANCING ACTIVITIES**Repayments
                  of debt
              
              
              (1,360,994
              )
              
              (254,647
              )Issuance
                  of Common Stock
              
              
              -
              
              
              6,675,691Net
                  Cash Provided By (Used in) Financing Activities
              
              
              (1,360,994
              )
              
              6,421,044Increase
                  (Decrease) in Cash
              
              
              (3,224,052
              )
              
              3,044,014Cash
                  and Cash Equivalents - Beginning of Period
              
              
              3,660,894
              
              
              616,880Cash
                  and Cash Equivalents - End of period
              
              $
              436,842
              
              $
              3,660,894
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
  F-7
  
 **SUPPLEMENTAL
                  CASH FLOW INFORMATION:**Cash
                  paid for interest
              
              $
              400,746
              
              $
              143,148Cash
                  paid for income taxes
              
              
              16,448
              
              
              19,606**NONCASH
                  INVESTING AND FINANCING ACTIVITIES:**Contributions
                  by members through conversions of loans
              
              $
              -
              
              $
              550,000Warrants
                  issued in exchange for services
              
              
              -
              
              
              135,222Common
                  stock issued in exchange for services
              
              
              -
              
              
              67,500Acquisition
                  of Frontrunner for common stock:Total
                  assets acquired, excluding cash
              
              
              101,250
              
              
              11,514,294Total
                  liabilities assumed
              
              
              -
              
              
              10,391,890Common
                  stock issued
              
              
              101,250
              
              
              1,248,750Conversion
                  of accounts payable to notes payable
              
              
              -
              
              
              1,666,620
 
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-8
 **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, 2005 and December 31, 2004, and the related results
        of operations for the twelve months ended December 31, 2005 and 2004 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.
  F-9
 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
        issued
        during 2005 once the final creditor waiver was received. This 2005 transaction
        resulted in an additional $101,250 of goodwill being recorded in this
        transaction. Additionally, during 2005, the Company became aware of additional
        contingent liabilities for Frontrunner that related to periods prior to the
        acquisition date. The majority of these contingent liabilities were associated
        with potential prevailing wage laws for state work in the state of New York
        resulting in an additional $411,924 in goodwill being recorded.
  The
        following table summarizes the estimated fair values of the assets acquired
        and
        liabilities assumed at the date of acquisition, as adjusted for the remaining
        75,000 shares that were issued during 2005 as well as the adjustment for
        the
        contingent liabilities discussed above and in the Contingent Liabilities
        footnote. 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.
  
 Opening
                BalanceCurrent
                  assets
              
              $
              3,220,951Property
                  & equipment
              
              
              930,038Other
                  asset
              
              
              10,000Customer
                  list acquired
              
              
              3,615,358Goodwill
              
              
              3,965,543Total
                  assets acquired
              
              
              11,741,890Liabilities,
                  excluding debt
              
              
              5,711,153Debt
              
              
              4,680,737Total
                  liabilities assumed
              
              
              10,391,890Net
                  assets acquired
              
              $
              1,350,000
 
 F-10
  **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.
  **Accounts
        Receivable**
  Accounts
        receivable represent amounts owed from billings to customers and are recorded
        at
        gross amounts owed less an allowance for uncollectible accounts. The Company
        provides an allowance for uncollectible accounts receivable based upon prior
        experience and management’s assessment of the collectibility of existing
        specific accounts. Total reserve for uncollectible accounts was $83,148 as
        of
        December 31, 2005. The company’s policy is to write off accounts receivable
        balances once management has deemed them to be uncollectible.
  **Property
        and Equipment**
  Property
        and equipment are stated at cost less accumulated depreciation. Provision
        for
        depreciation is made generally at rates designed to allocate the cost of
        the
        property and equipment over their estimated useful lives of 3 - 15 years.
        Depreciation is calculated using the straight-line method. The cost of ordinary
        maintenance and repairs is charged to operations while renewals and replacements
        are capitalized.
  **Software
        Licensing Fee**
  The
        Company accounts for its software licenses in accordance with SFAS No. 142,
        “Goodwill and Other Intangible Assets.” 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 4 th quarter
        of 2004. This loss is reflected in additional amortization expense in the
        statement of operations for 2004. No impairment loss was recognized in any
        other
        periods presented.
  **Revenue
        Recognition**
  The
        Company ** generates
        revenue from selling and installing hardware, licensing its software and
        the
        provision of services.
  F-11
 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”).
  SAB101
        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 judgments regarding the fixed nature of the selling prices of the
        products delivered and the collectibility of those amounts. Provisions for
        discounts and rebates to customers, estimated returns and allowances, and
        other
        adjustments are provided for in the same period the related sales are recorded.
        The Company defers any revenue for which the product has not been delivered
        or
        is subject to refund until such time that the Company and the customer jointly
        determine that the product has been delivered or no refund will be
        required.
  SAB
        104
        incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”),
“Multiple-Deliverable Revenue Arrangements.” EITF 00-21 addresses accounting for
        arrangements that may involve the delivery or performance of multiple products,
        services and/or rights to use assets. The effect of implementing EITF 00-21
        on
        the Company’s consolidated financial position and results of operations was not
        significant.
  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.
  **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.
  F-12
 **Research
        and Development**
  The
        Company accounts for research and development costs in accordance with 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 2005 and 2004 were $1.4 million and
        $1.7
        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 from 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 2005 or 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 and interim disclosure provisions of SFAS No. 148 in its financial
        reports for the years ended December 31, 2005 and 2004.
  F-13
 **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.
  **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.
  **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. As of December 31, 2005, there
        were 658,613 stock options and 1,301,389 stock warrants outstanding that
        could
        be converted into common stock.
 F-14
  **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 $598,288 and $204,736 in 2005 and 2004 respectively. Future
        amortization of the customer list is expected to be as follows:
  2006
              
              $
              557,0082007
              
              
              529,1602008
              
              
              502,7042009
              
              
              477,5682010
              
              
              453,6882011
              
              
              292,206
 
  Total
        cost and accumulated amortization for the customer list is as
        follows:
  **12/31/2005**Customer
                  list costs
              
              $
              3,615,358Accumulated
                  amortization
              
              
              (803,024
              )Customer
                  list, net
              
              $
              2,812,334
 
  **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);
  F-15
 ·  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);
  ·  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 during 2005.
  **Fair
        Value of Financial Instruments**
  The
        carrying amount of cash, accounts receivable, prepaid expenses, current
        maturities of long-term debt and accounts payable are considered representative
        of their respective fair values because of the short-term nature of these
        financial instruments. Long-term debt approximates fair value due to the
        interest rate on the promissory note approximating current rates.
  **Use
        of Estimates**
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and the disclosures of contingent assets and liabilities at the
        date
        of the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from these
        estimates.
  **Going
        Concern**
  As
        of
        December 31, 2005, the Company’s current liabilities exceeded its current assets
        by $5.1 million. Included in the current liabilities is $3.8 million of current
        maturies of long-term debt, including a $3.2 million demand note payable
        to
        Harris Bank. This debt reflects pre-existing balances assumed from the
        acquisition of Frontrunner during 2004. Cash on hand at December 31, 2005
        was
        $437 thousand. The company has incurred operating losses of $2.3 million
        and
        $4.9 million for the two years ended December 31, 2005 and 2004 respectively.
        Additionally, cash used in operating activities were $1.8 million and $3.3
        million for the two years ended December 31, 2005 and 2004
        respectively.
  F-16
 The
        Company’s net working capital deficiency, recurring losses and negative cash
        flows from operations raise substantial doubt about the Company’s ability to
        continue as a going concern. During 2005, the Company improved its revenue
        and
        reduced its operating losses and still had sufficient cash from the $6.6
        million
        net equity raise that was completed in January 2004. However, the Company
        has
        continued to utilize cash in operations during 2006. During 2006 Nexvu will
        continue to strive to increase sales of its software products and professional
        services in order decrease the operating losses experienced previously.
        Frontrunner plans on increasing sales levels in order to provide additional
        operating capital. Both companies will continue to be vigilant on operating
        expenses. Through April 14, 2006, the Company has raised $200 thousand in
        bridge
        loans and is expected to raise additional funds through this method in order
        to
        fund current working capital needs. Additionally, the Company hopes to raise
        additional capital which may involve the issuance of common stock in order
        to
        fund working capital needs, reduce debt and provide additional funding. However,
        no assurance can be made that the additional bridge loans and an adequate
        capital raise can be completed.
  **Reclassifications**
  Certain
        amounts previously reported have been reclassified to conform to the current
        period presentation.
  **Recent
        Accounting Pronouncements**
  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.
        The new standard provides for a modified prospective application. Under this
        method, we will begin recognizing compensation cost for equity based
        compensation for all new or modified grants after the date of adoption. Based
        on
        existing options outstanding at December 31, 2005, we expect stock-based
        compensation expense to be $29,340 for the year ending December 31, 2006.
        However the expense may be higher if additional options are issued to
        employees.
  F-17
 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 for 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.
  In
        March
        2005, the FASB issued Interpretation (FIN) No. 47, "Accounting for Conditional
        Asset Retirement Obligations" an interpretation of SFAS 143. FIN 47 clarifies
        the manner in which uncertainties concerning the timing and the method of
        settlement of an asset retirement obligation should be accounted for. In
        addition, the Interpretation clarifies the circumstances under which fair
        value
        of an asset retirement obligation is considered subject to reasonable
        estimation. The Interpretation is effective no later than the end
 of
        fiscal
        years ending after December 15, 2005. We do not anticipate that the
        implementation of this interpretation will have a material impact on our
        financial position, results of operations or cash flows.
 
 In
        May 2005, the Financial Accounting Standards Board (“FASB’’) issued SFAS
        No. 154, “Accounting Changes and Error Corrections—a replacement of APB
        Opinion No. 20 and SFAS No. 3.’’ The pronouncement requires that all
        voluntary changes in accounting principle be reported by retrospectively
        applying the principle to all prior periods that are presented in the financial
        statements. The statement is effective for fiscal years beginning after
        December 15, 2005. The Company’s financial position, results of operations
        or cash flows will only be impacted by SFAS No. 154 if it implements
        changes in accounting principles that are addressed by the standard or corrects
        accounting errors in future periods.
  **NOTE
        3 - Inventories**
  Inventories
        as of December 31, 2005 consist of the following:
  **12/31/2005**Equipment
              
              $
              1,459,357Work
                  in process
              
              
              718,512Gross
                  inventory
              
              
              2,177,869Inventory
                  reserve
              
              
              (639,961
              )Net
                  inventories
              
              $
              1,537,908
 
  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
        Nexvu has no inventory. 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.
  F-18
 **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 three
        year period following customer shipment, payable quarterly as
        follows:
  2006   100,000
 2007   125,000
 2008   150,000
 
 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.
  
 F-19
  **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, 2005, we have issued and outstanding 1,524,557 restricted shares
        under the plan, net of forfeitures.
  The
        following table summarizes the activity under the stock option plan from
        inception to December 31, 2005:
  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
              
              $
              1.34Granted
              
              
              400,000
              
              
              1.35
              
              $
              1.35Terminated
              
              
              15,350
              
              
              .0.95
                  - 1.35
              
              
              1.35Outstanding
                  at December 31, 2005
              
              
              1,524,557
              
              $
              0.95
                  - 1.35
              
              $
              1.34Vested,
                  December 31, 2005
              
              
              658,613
              
              $
              0.95
                  - 1.35
              
              $
              1.32
 
 Of
        the
        outstanding options as of December 31, 2005, 1,513,900 have an option price
        of
        $1.35 per share and 10,657 have an option price of $.95 per share. Of the
        vested
        shares as of December 31, 2005, 647,956 have an option price of $1.35 per
        share
        and 10,657 have an option price of $.95 per share. The weighted average option
        contractual lives for total and vested stock options is 8.5 years as of December
        31, 2005.
  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.
  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:
  2005
                
                
                2004Estimated
                    life (in years)
                
                
                5.0
                
                
                5.0Risk-free
                    interest rate
                
                
                3.85
                %
                
                3.5
                %
 
 F-20
  Had
        compensation costs for the Company’s stock options been determined based on the
        fair market 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 31,2005
              
              2004Reported
                  net loss
              
              $
              (2,292,888
              )
              $
              (4,926,877
              )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)
              
              
              (62,041
              )
              
              (66,481
              )Pro
                  forma net loss
              
              $
              (2,354,929
              )
              $
              4,993,358
              )Earnings
                  Per ShareAs
                  reported
              
              $
              (0.13
              )
              $
              (0.31
              )Pro
                  forma
              
              $
              (0.14
              )
              $
              (0.32
              )
  **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 2005 fiscal year was $119,425 and the period from acquisition to
        December 31, 2004 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.
  F-21
  **NOTE
        6 - Debt**
  Debt
        as
        of December 31, 2005 consist of the following:
  2005Demand
                  note payable to Harris Bank, plus interest payable at 1.50% above
                  the
                  prime rate; 7.25% at December 31, 2005, until the loan is paid
                  in full or
                  demand is made by the bank. Secured by substantially all of the
                  assets of
                  Frontrunner and personal guarantee by a separate related party
                  entity and
                  three individuals (one of which is a related party).
              
              $
              3,155,000Promissory
                  note payable to Nortel Networks, payable in monthly payments of
                  $27,776
                  through October 2009. Secured by certain assets. Interest on the
                  note is
                  7.25%.
              
              
              1,112,591Unsecured
                  note 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,
                  2005,
                  Frontrunner was in default under the terms of the
                  agreement.
              
              
              178,070Unsecured
                  promissory note payable to Review Video, payable in monthly payments
                  of
                  $10,000 through September 2006. Interest on the note is
                  7.25%.
              
              
              87,926Unsecured
                  note payable to related party creditor, payable in monthly installments
                  of
                  $12,500, including interest at 8.25%. The Company is in default
                  under the
                  terms of this note.
              
              
              96,976Installment
                  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%.
              
              
              36,153Total
                  debt
              
              
              4,666,716Less:
                  Current maturities
              
              
              3,815,337Long
                  term portion
              
              $
              851,379
   As
        of
        December 31, 2005 the Company is in default on two of the loan agreements.
        The
        Company is in arrears by $59,887 for the Global Crossing note and the entire
        balance on the unsecured note payable to a related party creditor is in arrears.
        There have been no adverse actions from these creditors concerning the arrearage
        amount.
  F-22
  The
        aggregate principal payments of long term debt are as follows:
  2006
                
                $
                3,815,3372007
                
                
                280,7922008
                
                
                301,8402009
                
                
                268,747
 
 The
        weighted average interest rate on the debt above is 8.4% for 2005.
 
 **NOTE
        7 - Operating Leases**
  The
        Company leases buildings and machinery and equipment from several unrelated
        companies. Total rent expense included in the statement of operations was
        $424,106 and $306,568 in 2005 and 2004 respectively and includes the rent
        expense for Frontrunner, since the acquisition in September 2004.
  At
        December 31, 2005, minimum annual lease payments under operating leases are
        as
        follows:
  2006
                
                $
                299,6222007
                
                
                128,5922008
                
                
                64,2892009
                
                
                18,365
  **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.
  During
        the period June 2003 through September 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 interests in Nexvu. In December, 2003 Nexvu converted $1,175,000
        of
        these notes into 3,617,954 Class B membership interests, 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
        interests.
  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.
  F-23
 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, and agreement with CGSI, these members’ interests were converted
        to Company common stock as follows:
  Member
                  Interest
              
              Common
                  StockClass
                  A membership interest
              
              
              2,837,950
              
              
              991,145Class
                  B membership interest
              
              
              9,237,329
              
              
              6,432,437Managing
                  member’s 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 1,000,000 shares of common stock in connection with its
        acquisition of Frontrunner (See Note 1). Of the 1,000,000 shares issued,
        925,000
        were issued during 2004 and 75,000 were issued in 2005. The Company also
        issued
        50,000 shares of common stock for consulting services related to this
        acquisition. These shares were valued at $1.35 per share with the corresponding
        charge of $67,500 reflected in the results from operation in 2004.
  Share
        amount presented in the consolidated balance sheets and consolidated statements
        of stockholders’ equity reflect the actual share amounts
        outstanding.
  F-24
 **NOTE
        9 - Property and Equipment**
  Property
        and equipment at December 31, 2005 consists of the following:
  2005Furniture
                  & fixtures
              
              $
              165,702Computer
                  equipment
              
              
              921,611Leasehold
                  improvements
              
              
              88,154Machinery
                  & equipment
              
              
              285,9461,461,413Accumulated
                  depreciation
              
              
              (514,210
              )Net
                  property and equipment
              
              $
              947,203
  Depreciation
        and amortization of property and equipment were $236,779 and $158,023 for
        the
        years ended December 31, 2005 and 2004 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.
  The
        Company currently has a $96,976 unsecured note payable to an entity that
        includes one of our board members. Although the Company is in default under
        this
        agreement, no demands have been made by this creditor to pay the
        loan.
  F-25
  **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 1.3
        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 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:
  2005
                
                
                2004Estimated
                    life (in years)
                
                
                1.3
                
                
                2.3Risk-free
                    interest rate
                
                
                3.5
                %
                
                3.5
                %
 
 **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, 2005Deferred
                  taxes
              
              $
              1,369,084Net
                  operating loss carry forward
              
              
              2,442,326Valuation
                  allowance
              
              
              (3,811,410
              )Net
                  deferred taxes
              
              $
              -
 
 As
        of
        December 31, 2005, the company had available for federal income tax purposes
        net
        operating loss carryforwards of approximately $7.0 million, which expire
        in 2019
        and 2020, subject to limitations of Section 382 of the Internal Revenue Code,
        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 and intangible assets. For the year ended December 31,
        2005,
        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.
  F-26
 The
        Company’s current tax provision is comprised of state taxes for Frontrunner
        since acquisition. All deferred taxes are not recognized as their benefit
        is
        100% provided for as an increase in the valuation allowance. On consolidated
        basis, the company is not benefiting the losses.
  **NOTE
        13 - Product Warranties**
  The
        change in the aggregate product warranty liability which relates to Frontrunner
        for the year ended December 31, 2005 is as follows:
  12/31/2005Beginning
                  balance
              
              
              115,030Additional
                  warranties issued
              
              
              373,088Claims
                  paid
              
              
              (308,042
              )Revisions
                  in estimates
              
              
              11,548Balance,
                  end of period
              
              
              191,624
  **NOTE
        14 - Business Concentration**
  During
        the year ended December 31, 2005, approximately $3.6 million (23%) of total
        2005
        revenues were derived and $313 thousand (25%) of the total accounts receivable
        at December 31, 2005 were due from two customers. 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 receivable at December 31,
        2004
        were due from two customers.
  **NOTE
        15 - Commitments and Contingencies**
  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, 2005
        or
        December 31, 2004.
  During
        2005 the Company became aware of additional contingent liabilities for
        Frontrunner that related to periods prior to the acquisition date. The majority
        of these contingent liabilities were associated with potential prevailing
        wage
        laws for state work in the state of New York. The total amount of this potential
        liability is approximately $405 thousand of which approximately $317 thousand
        related to periods prior to the acquisition of Frontrunner. The amount of
        the
        liability related to pre acquisition periods was recorded as an adjustment
        to
        goodwill with the difference recorded in earnings prospectively. An additional
        $95 thousand of contingent liabilities were identified that related to prior
        periods. The majority of these liabilities were for costs to remove fiber
        optic
        cable from rented utility poles in New York. These liabilities also related
        to
        periods prior to the acquisition date of Frontrunner and were recorded as
        an
        adjustment to goodwill.
  F-27
 **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.
        These
        two segments have separate management teams and financial statements. During
        2004, the Company also started splitting out its corporate costs from the
        Nexvu
        financial statements. Accordingly, the segment results reflect this change
        from
        August, 2004 through the end of the year.
  During
        the year ended December 31, 2005, approximately $3.6 million (25%) of
        Frontrunner segment revenues were derived and $313 thousand (31%) of the
        segment
        accounts receivable at December 31, 2005 were due from two customers. For
        Nexvu,
        approximately $465 thousand (35.3%) of segment revenues were derived and
        $235
        thousand (95%) of segment accounts receivable were due from two
        customers.
  F-28
 **Results
        of Operation:**
  **Twelve
        months ended December 31, 2005**
  Frontrunner
              
              Nexvu
              
              Corp/elim
              
              TotalRevenues
              
              $
              14,339,131
              
              $
              1,317,095
              
              $
              -
              
              $
              15,656,226Gross
                  margin
              
              
              6,519,111
              
              
              616,206
              
              
              -
              
              
              7,135,317Expenses
              
              
              6,365,762
              
              
              1,821,192
              
              
              832,612
              
              
              9,019,566Operating
                  income
              
              
              153,349
              
              
              (1,204,986
              )
              
              (832,612
              )
              
              (
                  1,884,249
              )Interest
                  expense (income)
              
              
              380,585
              
              
              (33,394
              )
              
              -
              
              
              347,191Loss
                  before taxes
              
              
              (227,236
              )
              
              (1,171,592
              )
              
              (832,612
              )
              
              (2,231,440
              )Depreciation/amortization
              
              
              768,973
              
              
              83,027
              
              
              -
              
              
              852,000Capital
                  expenditures
              
              
              44,819
              
              
              39,358
              
              
              -
              
              
              84,177
 **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
              )Interest
                  expense (income)
              
              
              104,042
              
              
              (60,595
              )
              
              -
              
              
              43,447Income
                  (loss) before taxes
              
              
              68,661
              
              
              (4,231,105
              )
              
              (744,827
              )
              
              (4,907,271
              )Depreciation/amortization
              
              
              256,749
              
              
              402,799
              
              
              -
              
              
              659,548Capital
                  expenditures
              
              
              9,421
              
              
              182,028
              
              
              -
              
              
              191,449
 **Segment
        assets as of December 31, 2005**
  Frontrunner
              
              Nexvu
              
              Corp/elim
              
              TotalTangible
                  assets
              
              $
              2,926,847
              
              $
              2,693,263
              
              $
              (1,263,777
              )
              $
              4,356,333Intangibles
                  & Goodwill
              
              
              6,777,877
              
              
              -
              
              
              -
              
              
              6,777,877Total
                  assets
              
              $
              9,704,7242
              
              $
              2,693,263
              
              $
              (1,263,777
              )
              $
              11,134,210
  F-29
  **NOTE
        16 - Subsequent Event**
 
 Subsequent
        to December 31, 2005, the Company obtained two bridge loans of $100,000 each.
        The first loan was entered into on March 7, 2006 in the amount of $100,000.
        This
        note bears interest at a rate of 14% and is payable along with accrued interest
        by June 30, 2006. Additionally, the holder of this note will be issued 15,000
        stock warrants to purchase common stock of our Company at $1.35 per share.
        The
        second loan entered into on February 27, 2006 in the amount of $100,000 and
        bears interest at a rate of 7.25%. This loan was received by Momentum Capital,
        LLC, which was co-founded by our two Co-CEO’s. This loan is payable along with
        accrued interest by June 30, 2006.




F-30




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




***Previous
      independent registered public accounting firm***





On
      January 3, 2006, the Company dismissed its independent auditor, Russell Bedford
      Stefanou Mirchandani LLP, Certified Public Accountants ("Russell Bedford").
      The
      decision to dismiss Russell Bedford as the Company’s independent registered
      public accounting firm was approved by the Company’s Board of Directors on
      January 3, 2006.





The
      report of Russell Bedford on the Company’s consolidated financial statements for
      the year ended December 31, 2004 did not contain an adverse opinion or
      disclaimer of opinion and was not qualified or modified as to uncertainty,
      audit
      scope or accounting principle.





During
      the year ended December 31, 2004, and through January 3, 2006, the Company
      has
      not had any disagreements with Russell Bedford on any matter of accounting
      principles or practices, financial statement disclosure, or auditing scope
      or
      procedure, which disagreements, if not resolved to the satisfaction of Russell
      Bedford, would have caused them to make reference thereto in their report on
      the
      Registrant’s consolidated financial statements for such year.





We
      provided Russell Bedford with a copy of this disclosure on January 4, 2006.
      Russell and Bedford provided us and the Securities and Exchange Commission
      with
      a letter, which stated that Russell and Bedford agreed with these
      disclosures.




***New
      independent registered public accounting firm***





On
      January 3, 2006, CGSI engaged Plante & Moran, PLLC as the Registrant's
      independent accountants to report on the Registrant's consolidated balance
      sheet
      as of December 31, 2005, and the related consolidated statements of income,
      stockholders' equity and cash flows for the year then ended. The decision to
      appoint Plante & Moran, PLLC was approved by the Registrant's Board of
      Directors on January 3, 2006.





During
      the Registrant's two most recent fiscal years and any subsequent interim period
      prior to the engagement of Plante & Moran, PLLC, neither the Registrant nor
      anyone on the Registrant's behalf consulted with Plante & Moran, PLLC
      regarding either (i) the application of accounting principles to a specified
      transaction, either contemplated or proposed, or the type of audit opinion
      that
      might be rendered on the Registrant's financial statements, or (ii) any matter
      that was either the subject of a "disagreement" or a "reportable
      event."






35


**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, 2005, and have concluded
      that, as of December 31, 2005, these controls and procedures have been
      effectively designed to ensure that information required to be disclosed in
      reports that we file with or submit to the 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.




**Item
      8B.**  **Other
      Information**




None.




**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
            
            67
            
            Chairman
                of the Board of Directors, Assistant Secretary and Assistant
                TreasurerPhil
                Kenny
            
            52
            
            DirectorDavid
                A. Beamish
            
            42
            
            DirectorDouglas
                Stukel
            
            36
            
            Director
                and Assistant Secretary, Co-Chief Executive OfficerLee
                Wiskowski
            
            39
            
            Director,
                Co-Chief Executive OfficerDerry
                L Behm
            
            46
            
            Chief
                Financial Officer




36


*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, and has been
      for over the last five years, 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.




*David
      A. Beamish* .
      Mr.
      Beamish has served as a director of ours since August 2004. He has been in
      sales
      and marketing for over 19 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.




37


*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. Mr. Stukel also serves as an officer and
      director of Health Partnership, Inc. and Mountains West Exploration,
      Inc.




*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 and early in 1999 was a co-founder of Advanced Equities, 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.
      Mr.
      Wiskowski also serves as an officer and director of Health Partnership, Inc.
      and
      Mountains West Exploration, Inc.




*Derry
      L 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.




All
      directors hold office until their successors have been elected and qualified
      or
      until their earlier resignation or removal. Directors are elected annually.
      None
      of the directors are involved in certain legal proceedings are covered under
      Item 401(d) of Regulation S-B. 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 35 years old.




38


*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, in Milwaukee, WI. He served as a partner at Ernst & Young
      LLP from October 1993 through March 2000. Mr. Hauschild is 50 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 hereto.




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. 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 that Mr. Wiskowski failed to timely file two reports regarding two
      transactions in 2005. The foregoing late filings were inadvertent and corrected
      after discovery of the reporting obligations.




39


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




***Employment
      Agreements***




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.




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.




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.




40







**Summary
                Compensation Table****Annual**
              **Compensation**
            **Long-Term
                Compensation****Name
                and Principal Position**
            
            **Year**
            **Salary**
            **Bonus**
            **Restricted
                Stock**
              **Awards**
            **Securities**
              **Underlying**
              **Options**
            **All
                Other**
              **Compensation**Douglas
                Stukel(1)
              Co-Chief
                Executive Officer
            
            2005
              2004
            $87,500
              $29,200
            -
              -
            -
              250,000
            -
              -
            -
              -Lee
                Wiskowski(1)
              Co-Chief
                Executive Officer
            
            2005
              2004
            $87,500
              $29,200
            -
              -
            -
              250,000
            -
              -
            -
              -D.
                Skip Behm
              Chief
                Financial Officer
            
            2005
              2004
            $160,000
              $108,300
            -
              -
            -
              -
            -
              200,000
            -
              -Rory
                Herriman
              President,
                Chief Technology Officer, Nexvu
            
            2005
              2004
              2003
            $175,000
              $175,000
              $150,000
            -
              $35,000
              -
            -
              -
              901,953(2)
            -
              430,000
              -
            -
              -
              -Don
                Hauschild
              President,
                Frontrunner
            
            2005
            $154,375
            -
            -
            400,000
            -





(1)
      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 continue to be employed
      by us
      on a part-time basis.


(2)
      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 Technologies which occurred on January 28, 2004.




**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. The 2003 Plan provides
      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. The board of directors has
      adopted the 2005 Plan which mirrors the 2003 Plan. The 2005 Plan has not been
      ratified by our shareholders. However, in the event of such ratification, such
      plan will replace and supersede the 2003 Plan and the 2003 Plan will have no
      further force or effect.




41


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




**Beneficial
      Ownership**




The
      following table sets forth, as of April 14, 2006, the names, addresses, amount
      and nature of beneficial ownership and percent of such ownership
      of:




·
            each
                person known to be the beneficial owner of more than five percent
                (5%) of
                our common stock;




·
            each
                director and executive officer; 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 17,015,754 shares outstanding
      as of April 14, 2006. All share references are to shares of our common stock,
      $.0001 par value.




**Name
                and Address of Beneficial Owner**
            **Amount
                and Nature of Beneficial Ownership****(1)**
            **Percent
                of Class**Robert
                T. Geras
            2,257,837(2)
            13.2%Carl
                C. Greer Trust
            2,266,281(3)
            13.1%Craig
                Siegler
            1,401,091(4)
            8.2%David
                Lies
            1,304,375(5)
            7.6%Balkin
                Family Limited Partnership
            1,093,186(6)
            6.4%Philip
                B. Kenny(7)
            75,000
            .4%David
                A. Beamish(8)
            435,667
            2.6%Derry
                L. Behm(9)
            100,000(9)
            .6%Douglas
                Stukel(10)
            434,482(11)
            2.5%Lee
                Wiskowski(10)
            327,407(12)
            1.9%Don
                Hauschild(13)
            100,000(13)
            .6%Rory
                Herriman(14)
            403,871(14)
            2.3%All
                Current Directors and Executive Officers as a Group (8
                persons)
            4,134,764
            22.9%




42


(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 shares issuable upon the exercise of 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 127thStreet, 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 shares issuable upon the exercise of 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)
            Mr.
                Behm is the chief financial and accounting officer. Mr. Behm holds
                options
                to purchase 200,000 shares of common stock, which vest over a period
                of
                four years. Of the options granted, 100,000 have vested.The
                business address of Mr. Behm is 50 E. Commerce Drive, Suite A, Schaumberg,
                IL 60173.




(10)
            Messrs.
                Wiskowski and Stukel currently serve as co-chief executive officers
                and
                directors of the company. The business address of Mr. Wiskowski is
                3111 N. Seminary, Suite 1N Chicago Illinois 60657. The business address
                of
                 Mr. Stukel is 24750 Manor Drive, Shorewood, IL
                60431.




(11)
            Includes
                250,000 shares issuable upon the exercise of a warrant held by
                Mr. Stukel.




(12)
            Includes
                59,407 owned by Grander, L.L.C. of which Mr. Wiskowski is the sole
                member,
                15,000 owned by Mr. Wiskowski’s spouse, and 250,000 shares issuable upon
                the exercise of a warrant held by
                Mr. Wiskowski.




(13)
            Mr.
                Hauschild is the President of Frontrunner. Mr. Hauschild holds options
                to
                purchase 400,000 shares of common stock, which vest over a period
                of four
                years. Of the options granted, 200,000 have
                vested.




(14)
            Mr.
                Herriman is our chief technology officer and President of Nexvu.
                Includes
                430,000 shares issuable upon the exercise of options held by Mr.
                Herriman.
                Of the options granted, 215,000 have vested. His business address
                is 50 E.
                Commerce Drive, Suite A, Schaumburg, IL
                60173.




43





**Equity
      Compensation Plan Information**




**Plan
                Category**
            
            **Number
                of Securities to be Issued Upon Exercise of Outstanding
                Options,**
              **Warrants
                and Rights**
            
            **Weighted
                Average Exercise Price of Outstanding Options,**
              **Warrants
                and Rights**
            
            **Number
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation Plans (Excluding Securities Reflected
                in**
              **Column
                (a))**Equity
                Compensation Plans Approved by Security Holders
            
            --
            
            --
            
            --Equity
                Compensation Plans Not Approved by Security Holders
            
            1,524,557*
            
            $1.34
            
            760,443*Total
            
            1,524,557
            
            $1.34
            
            760,443




*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.




44


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, 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.




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 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 customers for a period of two
      years.




45


**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 Technologies 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.




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:




46


Date
            
            Holder
            
            Amount
            
            Class
                B Interests
              underlying
                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.




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 and expire on
      December 31, 2006.




47


**Frontrunner**




The
      form
      of the business combination with Frontrunner was a reverse triangular merger
      in
      which we issued 1,000,000 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.




The
      following creditors entered into creditor waiver agreements with Frontrunner
      and
      we, in turn, issued a total of 1,000,000 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, John Jellinek and James
      Cuppini. The shares issued to John Jellinek were issued in May 2005 after the
      credit waiver was executed. All other shares were issued on September 14, 2004.
      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.




48


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




A
      list of
      the Financial Statements and Financial Statement Schedules filed
      as
      part of this Report is set forth in Item 7, which list is incorporated herein
      by
      reference.




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.(4)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
            
            Second
                Amended and Restated Operating Agreement of Nexvu Technologies,
                LLC.(2)10.3
            
            Advisory
                Services Agreement dated March 31, 2004 by and between Capital Growth
                Systems, Inc. and Lee Wiskowski.(2)




49
 
 Exhibit
                  Number
              
              Description
                  of Document


10.4
            
            Advisory
                Services Agreement dated March 31, 2004 by and between Capital Growth
                Systems, Inc. and Douglas Stukel.(2)10.5
            
            Employment
                Agreement dated April 26, 2004 by and between Capital Growth Systems,
                Inc.
                and Rory Herriman.(2)10.6
            
            Software
                License Agreement dated as of August 31, 2002 by and between Hifn,
                Inc.
                and Siegler Technology & Development, L.L.C. for MeterFlow Software.(6)10.7
            
            Form
                of Agreement between Capital Growth Systems, Inc. and Value-Added
                Resellers.(6)10.8
            
            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, John Jellinek and James Cuppini.(5)14
            
            Code
                of Ethics.(2)16.1
            
            Letter
                from Russell Bedford Stefanou Mirchandani LLP, P.A. regarding Change
                in
                Auditors.(3)21
            
            List
                of Subsidiaries.31.1(a)
            
            Certification
                of Co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.1(b)
            
            Certification
                of Co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            
            Certification
                of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.(1)
            
            Incorporated
                herein by reference to the Form 8-K filed with the Commission on
                February
                11, 2004 (File No. 0-30831).(2)
            
            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).(3)
            
            Incorporated
                herein by reference to the Form 8-K filed with the Commission on
                January
                6, 2006 (File No. 0-30831).(4)
            
            Incorporated
                herein by reference to the Form 10-KSB/A for fiscal year ended December
                31, 2004, filed with the Commission on May 4, 2005 (File No.
                0-30831).(5)
            
            Incorporated
                herein by reference to the Form 8-K filed with the Commission on
                September
                20, 2004 (File No. 0-30831).(6)
            
            Incorporated
                herein by reference to the Form 10-KSB/A for fiscal year ended December
                31, 2003, filed with the Commission on August 26, 2004 (File No.
                0-30831).






50


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




(a)
            Audit
                Fees




The
      aggregate fees billed by Russell Bedford Stefanou Mirchandani LLP , our previous
      auditors for the 2004 audit, were $66,625 and $30,407 for the 2005 audit. Plante
      Moran did not bill any fees during 2005.


(b)
              Audit-Related
                  Fees




Fees
      associated with reviewing our Form SB-2 registration filing in 2004 were $3,150
      by Russell Bedford Mirchandani LLP.




(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.




(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.




51


**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


/s/ Douglas
              StukelDouglas
              Stukel, Co-Chief Executive
              Officer


/s/ Derry
              L.
              BehmDerry
              L. Behm, Chief Financial and Accounting
              Officer**Dated: April 14,
              2006**




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
              Douglas
                Stukel
            Director
                and Co-Chief Executive Officer
            April
                14, 2006/s/
                Lee Wiskowski
              Lee
                Wiskowski
            Director
                and Co-Chief Executive Officer
            April
                14, 2006/s/
                Robert T. Geras
              Robert
                T. Geras
            Director
            April
                14, 2006/s/
                Derry L. Behm
              Derry
                L. Behm
            Chief
                Financial and Accounting Officer
            April
                14, 2006





52


EXHIBIT
      INDEX




Exhibit
                Number
            
            Description
                of Document21
            
            List
                of Subsidiaries.31.1(a)
            
            Certification
                of Co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.1(b)
            
            Certification
                of Co-CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            
            Certification
                of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.**_______________________**





53