Form
                  10KSB
                
                CAPITAL
                  GROWTH SYSTEMS INC /FL/ - CGSY
                
                Filed:
                  April 20, 2007 (period: December 31, 2006)
                
                Annual
                  report filed by small businesses
   
  Table
                  of Contents
  PART
                  IItem
                  1.
              Description
                  of Business.
              
              1Item
                  2.
              Description
                  of Property.
              
              14Item
                  3.
              Legal
                  Proceedings.
              
              14Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              
              14PART
                  IIItem
                  5.
              Market
                  for Common Equity and Related Stockholder Matters.
              
              15Item
                  6.
              Management's
                  Discussion and Analysis or Plan of Operation.
              
              16Item
                  7.
              Financial
                  Statements.
              
              26Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure.
              
              27Item
                  8A.
              Controls
                  and Procedures.
              
              28Item
                  8B.
              Other
                  Information
              
              28PART
                  IIIItem
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act.
              
              28Item
                  10.
              Executive
                  Compensation.
              
              29Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters.
              
              29Item
                  12.
              Certain
                  Relationships and Related Transactions.
              
              29Item
                  13.
              Exhibits.
              
              32Item
                  14.
              Principal
                  Accountant Fees and Services.
              
              35SIGNATURES
              
              36EXHIBIT
                  INDEX
              
              37EX-21
                  (Subsidiaries of the registrant)EX-31.1EX-31.2
                  (Certifications required under Section 302 of the Sarbanes-Oxley
                  Act of
                  2002)EX-32
                  (Certifications required under Section 906 of the Sarbanes-Oxley
                  Act of
                  2002)
  
  UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 WASHINGTON,
        D.C. 20549
  FORM
        10-KSB
 
 (Mark
        One)
 
 x
        ANNUAL REPORT UNDER
        SECTION 13 OR 15(d)
 OF
        THE
        SECURITIES EXCHANGE ACT OF 1934
 
 For
        the
        Fiscal Year ended December 31, 2006
 
 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)125
                  South Wacker Drive, Suite 300  Chicago, Illinois
                  60606(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: $14,820,000
 
 The aggregate
        market value of the registrant's common stock held by non-affiliates of the
        registrant as of April 9, 2007 was $14,506,372 based on the closing sale
        price
        for the registrant's common stock on that date as reported on the OTC Bulletin
        Board. For purposes of determing such aggregate market value, all officers
        and
        directors of the registrant are considered to be affiliates of the registrant.
        The registrant's preferred shares convertible to common shares were
        excluded for purposes of determing the aggregate value.
 
 As
        of
        April 9, 2007, the issuer had outstanding 21,710,880 shares of its $0.0001
        par
        value common stock, 20,634.53 (rounded) shares of Series AA
        convertible preferred stock (representing 45,854,057 shares of common stock
        on an as converted basis) and 2,516.10 (rounded) shares of Series B
        convertible preferred stock (representing 3,700,147 shares of common stock
        on an
        as converted basis).
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
  None
 Transitional
        Small Business Disclosure Format: Yes o No x
  ii
  **Table
        of Contents**
 
 **Page**Item
                  1.
              Description
                  of Business.
              
              1Item
                  2.
              Description
                  of Property.
              
              14Item
                  3.
              Legal
                  Proceedings.
              
              14Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              
              14Item
                  5.
              Market
                  for Common Equity and Related Stockholder Matters.
              
              15Item
                  6.
              Management's
                  Discussion and Analysis and Plan of Operation.
              
              16Item
                  7.
              Financial
                  Statements.
              
              26Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure.
              
              27Item
                  8A.
              Controls
                  and Procedures.
              
              28Item
                  8B.
              Other
                  Information.
              
              28Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of the Exchange Act.
              
              28Item
                  10.
              Executive
                  Compensation.
              
              29Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters.
              
              29Item
                  12.
              Certain
                  Relationships and Related Transactions.
              
              29Item
                  13.
              Exhibits.
              
              32Item
                  14.
              Principal
                  Accountant Fees and Services.
              
              35
  iii
  **CAUTIONARY
        NOTE REGARDING FORWARD LOOKING STATEMENTS**
  This
        report on Form 10-KSB contains forward-looking statements within the meaning
        of
        the Private Securities Litigation Reform Act of 1995. The forward-looking
        statements are contained principally in the sections entitled “Business” and
“Management's Discussion and Analysis and Plan of Operation.” These statements
        involve known and unknown risks, uncertainties and other factors which may
        cause
        our actual results, performance or achievements to be materially different
        from
        any future results, performances or achievements expressed or implied by
        the
        forward-looking statements.
  In
        some
        cases, you can identify forward-looking statements by terms such as “may,”
“should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “projects,” “predicts,” “potential” and similar expressions
        intended to identify forward-looking statements. These statements reflect
        our
        current views with respect to future events and are based on assumptions
        and
        subject to risks and uncertainties. Given these uncertainties, you should
        not
        place undue reliance on these forward-looking statements. We discuss many
        of
        these risks in this report in greater detail under the heading “Factors
        Affecting Future Performance.” These forward-looking statements represent our
        estimates and assumptions only as of the date of this report, and we do not
        assume any obligation to update any of these statements.
  iv
  **PART
        I**
 
 **Item
        1.**  **Description
        of Business.**
  **BACKGROUND**
  Capital
        Growth Systems, Inc. d/b/a Global Capacity ( ***“CGSY,”
        “CSI,” “we,” “us” or the “Company”*** ),
        is a
        publicly-traded corporation that delivers telecom integration services to
        a
        global client set consisting of systems integrators, telecommunications
        companies and enterprise customers. The Company has acquired unique technologies
        and software assets in the network integration space. Management believes
        that
        these assets enable the Company to more efficiently design, price, deliver
        and
        manage connectivity solutions on a global basis. Companies that deliver
        connectivity solutions are referred to as Network Operators and Logistics
        and
        Communications Systems Integrator. The Company is a Logistics and Communications
        Systems Integrator (Telecom Integrator), which delivers connectivity solutions
        to clients but does not own the underlying infrastructure. Therefore, Telecom
        Integrators are generally viewed as asset light and more solution oriented
        than
        traditional network operators that are mainly telephone companies, who, in
        the
        Company’s estimation, are more intent on offering as much of the solution as
        possible over their own networks. The Company intends to become a leading
        Telecom Integrator and capitalize on the over $100 billion global access
        market.
 
 Currently,
        CGSY consists of six operating subsidiaries: Global Capacity Group, Inc.,
        CentrePath, Inc., Magenta, Ltd.; 20/20 Technologies, Inc.; Frontrunner Network
        Systems Corporation; and Nexvu Technologies, Inc. CGSY’s core capability is
        represented by a database that fully automates the price and quoting of the
        Telecom Integrator. This system results in enhanced margins, reduced SG&A
        and delivery as well as creating pricing transparency in the telecommunications
        market. CGSY’s goal is to fill a growing need for value-added managed network
        services and to manage relationships across multiple customers, carriers
        and
        geographies. The Company’s technology effectively automates the supply chain for
        the provisioning of complex data circuits domestically and internationally,
        as
        compared to the current manual process used by large carriers and most of
        the
        Telecom Integrator’s. This competitive advantage translates into opportunities
        for increased margin and market share relative to the competition.
 
 **ACQUISITION
        AND HISTORY STRATEGY**
 
 Prior
        to
        2004, CGSY was a publicly reporting shell corporation with no active business.
        In January 2004, the Company acquired, by way of subsidiary merger, Nexvu
        Technologies, LLC (“Nexvu”), a development-stage company in the application
        performance management business. Nexvu has developed a series of proprietary
        software tools, including the Nexvu Analyzer, which enables it to connect
        to a
        customer’s computer network system and determine where the network is not
        running properly. This solution allows Nexvu customers to diagnose the root
        cause of a network problem, which could vary from difficulties with the software
        of a particular computer program, to inefficient allocation of computing
        time in
        a regional office, to improper allocation of bandwidth. The Nexvu technology
        also provides users with the ability to monitor the use of computer access
        and
        evaluate certain efficiency aspects of computer users on a real-time basis.
        Nexvu revenues are generated from both licensing of the software as well
        as from
        the Company’s use of the software in performing consulting projects for its
        customers. More than $10 million has been invested to develop the Nexvu
        solutions and to move the Nexvu business and product suite forward. The Company
        believes the Nexvu tools are robust and functional, with good customer
        acceptance. A lack of available funds has limited CGSY’s ability to aggressively
        market the Nexvu products. Also, the Company has determined that the Nexvu
        product is not core to the Telecom Integrator model and is exploring strategic
        alternatives.
 
 In
        September, 2004, CGSY acquired 100% of Frontrunner Network Systems Corporation
        via a subsidiary merger. Frontrunner is known as a “cross connect” company,
        which installs and services customer-premise voice, data and video networks.
        Frontrunner’s revenues are derived from the sale of telephone systems and fees
        associated with the installation, maintenance, upkeep, monitoring and upgrading
        of these systems. The market has been trending toward 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, and the Company believes Frontrunner
        is
        positioned to provide these services. However, the Company has determined
        Frontrunner is not core to the Telecom Integrator model and is exploring
        strategic alternatives.
 
 CGSY
        completed its third acquisition in September, 2006, when it acquired 20/20
        Technologies Inc., whose assets include UK-based Magenta, Ltd., a global
        leader
        in circuit pricing and network optimization. The Magenta technology and
        proprietary knowledge base is one of a very limited set of databases in the
        world and, to the best of the Company’s knowledge, the only one with competitive
        global access information coupled with automation tools for calculating,
        configuring and quoting enterprise connectivity solutions. Magenta
        revenue is derived from the licensing of its information database as well
        as
        consulting services associated with analyzing and optimizing data networks
        (to
        reduce cost and enhance reliability of the networks). Magenta’s clients include
        some of the largest telecommunication companies in the world.
 
 On
        November 30, 2006, the Company consummated its fourth acquisition of 100%
        of
        CentrePath, Inc. by way of subsidiary merger. CentrePath
        operates a “world class” network operations center (NOC) and provides
        professional services. CentrePath offers 24x7 management service with proactive
        notification and problem resolution of faults and performance issues for
        data
        replication and business continuity environments.
 
 The
        Company completed its fifth acquisition in December, 2006, when it acquired
        Global Capacity Group, Inc. Global Capacity Group provides network integration
        and wholesale network services to both carriers and large enterprise customers.
        The Company designs, builds and manages complex communications networks using
        best-in-class service providers and equipment manufacturers to deliver
        customized solutions.
  1
  CGSY
        and
        its management team have embarked upon an aggressive acquisition and integration
        strategy that will result in the offering of the following suite of products
        and
        services which management believes was never before available from a single
        source Telecom Integrator:
 
 ·
              Intelligence
 ·
              Proprietary
                  technology
 ·
              Automation
                  and efficiency data
 ·
              Software,
                  tools and applications
 ·
              Provisioning
                  Services
 ·
              Network
                  Operation Services
 ·
              Billing
                  Systems
 
 The
        successful execution of this strategy would satisfy the lingering challenge
        that
        has continued to frustrate corporations with complex and/or geographically
        dispersed data communications networks: accessing a single information source
        that will eliminate the current patchwork approach to achieving end-to-end
        data
        circuits.
 
 CGSY’s
        goal is to become a leading global intelligent Telecom Integrator providing
        high-speed connectivity solutions to enterprise, multinational corporations,
        telecommunications companies and systems integrators.
 
 **PRODUCTS
        AND SERVICES**
  ***20/20
        Technologies***
  20/20
        Technologies, Inc. (“20/20”) was founded in 2003 and acquired by us in
        September, 2006. Through its UK subsidiary, Magenta netLogic Limited
        (“ ***Magenta
        20/20*** ”),
        the
        company provides a global telecom procurement system that has the functionality
        to provide local pricing and delivery capability in more than 60 countries
        around the world. With this acquisition, the Company now has the database
        to
        find the rules, pricing, physical location data of competing networks and
        a
        proprietary algorithm that links the databases to efficiently receive firm
        and
        deliverable pricing. This efficiency should enable the Company to more quickly
        and accurately service its customers, thus creating the ability to generate
        higher margins than their competitors.
  By
        using
        its proprietary data base and software tools, Magenta has visibility to the
        physical connections and the real time pricing (both competitive market pricing
        and tariff rate pricing) for numerous network operators throughout the world,
        with particular emphasis on connections in Europe, North America and certain
        industrialized Asian nations. Magenta has the capability to generate automated
        quotations for complex end-to-end connectivity solutions on a global basis
        in
        minutes versus the industry norm that can take up to several weeks or longer
        to
        generate.
  Magenta
        has been in business since 1998 and emphasized research and development,
        more
        than commercial applications, for much of that period. When 20/20 acquired
        Magenta in 2004, the commercial application of the cumulative Magenta
        capabilities received more emphasis and new capital investment enabled a
        series
        of innovations and improvements. Today, Magenta operates a communications
        systems integration support structure that maintains a global focus on telecom
        access supply chain management and has the first global systems that automate
        the supply chain of “off-net” access. Its revenue is derived from the licensing
        of its information database as well as consulting services associated with
        analyzing and optimizing data networks (to reduce cost and enhance reliability
        of the networks). Magenta’s clients include the largest telecommunication
        companies in the world.
  Magenta
        has, to our knowledge, built the only global telecom procurement system that
        has
        the functionality to provide local pricing and delivery capability in more
        than
        60 countries around the world. The Magenta system delivers a demonstrated
        ability to reduce client network costs significantly.
  Magenta’s
        technologies enable the Company to be a Global Intelligent Telecom Integrator
        rather than a traditional regional-focused and manual-executed Telecom
        Integrator. Examples of the Magenta technologies include:
 
 ·
              Automated
                  supply chain knowledge database
                  model;
 ·
              Supply;
 ·
              Pricing;
 ·
              Fulfillment;
 ·
              Affordable
                  and timely iteration with WEB
                  portal;
 ·
              Deal
                  contracting; and
 ·
              Alternate
                  pathing and pricing scenarios, especially for backup and disaster
                  recovery
                  applications.
  2
  We
        believe, based on customer input, that the Magenta systems make it better,
        faster and less expensive for enterprises, multi-national corporations (MNCs),
        network operators and systems integrators to receive market competitive telecom
        connectivity quotes. Our customers use Magenta because our technologies enable
        Magenta to be more efficient in terms of margins, reduced SG&A, and delivery
        - as well as creating pricing transparency in the market. Magenta has three
        primary lines of business known to our customers as “netSource,” “netSystems,”
and “netSolutions.”
  *netSource* .
        netSource represents the current version of the Telecom Integrator component
        of
        the business. Magenta provides connectivity services for network integrators
        who
        bundle telecommunication solutions to enterprise customers. netSource is
        available to providers of storage area networks (SANs) pursuant to an agreement
        with McDATA Corporation (recently acquired by Brocade).
  *netSystems* .
        Through
        netSystems, Magenta provides global pricing and quotation software and
        management services for data communications. netSystems is embedded within
        the
        quotation process of several major global telecommunication carriers and
        is used
        by sales and support staff members worldwide to quote customers prices for
        national and international circuits. Magenta is paid an annual licensing
        fee for
        providing this software. netSystems offers an accurate, automated method
        of
        pricing network access in 60 countries. Contained within the data sets are
        more
        than 4,600 tariffs and over 8 million elements regarding location and supply.
        Additionally, a typical netSystems customer augments this tariff data with
        its
        own negotiated prices and uses the system to manage a single bundled offering
        that enables the customer to provide quotes to its end customer automatically.
        Lastly, netSystems incorporates market competitive pricing, as well as
        historical spot market pricing from hundreds of suppliers. This exchange-type
        function allows the customer to compare list, negotiated and market-based
        pricing to determine the best result to meet its demand.
  Beyond
        pricing data, the netSystems software enables its users to accurately calculate
        the appropriate distance of the circuit using state of the art satellite,
        mapping, and geo-spatial data sets. As the telecommunications industry prices
        connectivity based upon distance and location parameters, a one kilometer
        difference can cause a price to be inaccurate by more than 10%. netSystems
        is
        supplied as either a web interface, hosted environment, or regularly distributed
        CD-ROM-based service on the customer’s application requirements.
  *netSolutions* .
        Through
        netSolutions, Magenta assists customers to reduce connectivity costs and
        attain
        a better understanding and control of their deployed communications network.
        The
        netSolutions platform allows Magenta to review a customer’s circuit network,
        input the inventory into proprietary software tools, and proceed on a logical
        progression of re-pricing. First, the connectivity links are geo-coded and
        the
        distance is accurately calculated using the latest technology. Second, the
        amounts that the provider is charging are compared to the contract rate and
        distance to determine accuracy. The circuits are then compared to market
        rates.
        After this analysis, the netSolutions process enters the final phase,
        optimization, where the connections are re-priced using aggregation and grooming
        techniques to more efficiently streamline a customer’s access network.
        netSolutions is provided to customers on a contingency fee basis, a straight
        hourly fee arrangement, and/or a per circuit analysis charge. Within the
        cost-constrained environments of major corporations in a fiercely competitive
        global environment, such projects usually are deferred or lose budgetary
        allocations mid-way though the project. The Magenta technologies provide
        results
        on a time frame and cost basis that enables these hard cash savings to be
        achieved.
  ***CentrePath***
  In
        November 2006, we completed our acquisition of CentrePath, Inc., a network
        services company. CentrePath, Inc. operates a state of the art, “world class”
network operations center, managing the data replication and business continuity
        environments for an impressive list of multinational corporations and health
        care institutions. It provides an advanced management service providing an
        effective extension to its customers’ IT organizations, and in certain
        circumstances runs the transactions over dedicated fiber optic lines procured
        by
        it for its customers’ benefit. It is able to inform its customers within seconds
        of a network event of faults or performance issues and begin to promptly
        resolve
        the problem.
  Its
        service features include the following:
  ·
              24x7x365
                  remote monitoring and management service for data replication networks
                  encompassing the entire data path (Storage area network switches,
                  channel
                  extension equipment and DWDM and SONET
                  devices).
  ·
              Comprehensive
                  operations support system (“OSS”) supported by its software which provides
                  real-time fault correlation, root-case ID and application impact
                  analysis.
  ·
              Network
                  Control Center staffed by highly-qualified network engineers, with
                  carrier
                  operations infrastructure and
                  processes.
  ·
              Proactive
                  monitoring and resolution of network issues detected through constant
                  surveillance of data path elements.
  ·
              Single
                  point of contact for all technical and administrative network
                  issues.
  ·
              Web-based
                  customer portal with accurate, up-to-date visibility into network
                  assets
                  statistics, and account
                  information.
  3
  Its
        service benefits include the following:
  ·
              Reduces
                  downtime for mission-critical business
                  applications.
  ·
              Improves
                  operational efficiency for the management of critical
                  networks.
  ·
              Provides
                  accurate, up-to-date information of network assets and performance
                  statistics.
  ***Global
        Capacity Group.***
  We
        completed our acquisition on December 11, 2006 of Global Capacity Group,
        Inc., a Texas corporation based in Houston. Global Capacity began in 2001
        as a
        single point of contact to locate, procure, and manage off-net capacity for
        Tier
        1 carriers. The business was built by experts at bandwidth logistics in order
        to
        deliver innovative solutions. Its current line of business was founded in
        2004,
        and involves the sale of network solutions as a Telecom Integrator to major
        corporate customers and service providers. Global Capacity has invested in
        a
        provisioning system and a network operations center (NOC), both of which
        are
        essential to the deployment of its networks for its customers. Global Capacity’s
        core activities are to quote, source, provision, and maintain networks for
        clients. Global Capacity revenue is derived from the monthly recurring revenue
        of the underlying circuits it deploys. Today, Global Capacity provides
        customized service for enterprises unwilling to settle for off-the-shelf
        solutions. Global Capacity combines strategic thinking with the technical
        expertise to design and build comprehensive communications systems that
        seamlessly aggregate and integrate networks, vendors, and the latest
        technologies. It uses best-in-class providers to deliver business-specific
        solutions that enhance overall network performance while lowering the total
        cost
        of ownership.
 
 Global
        Capacity has the technology, relationships and experience to address the
        following areas:
  ·
              Enterprise
                  Solutions
 ·
              Carrier
                  Management
 ·
              LAN
                  Service
 ·
              Management
                  of Multiple IP Providers
 ·
              Managed
                  Network Services
 ·
              Network
                  Integration
 ·
              Private
                  Line Services
 ·
              Voice
                  over Internet Protocol (VoIP)
 ·
              Data
                  Transmission
 
 Global
        Capacity is a non-asset based licensed CLEC (competitive local exchange carrier)
        service provider. Global Capacity does not own a network. Its mission is
        to
        fully understand situational requirements then design an objective, unbiased
        solution using preferred carriers, service providers, and equipment makers.
        Global Capacity locates, negotiates, and procures connectivity, leveraging
        its
        wholesale relationship with presently more than 75 carriers. It is anticipated
        that the global relationships of Magenta and the Company’s management team will
        greatly expand this number. For example, Magenta interacts with more than
        400
        network providers globally.
  Quotes
        for the optimal solution, from the best providers, at the best price are
        delivered promptly. In addition, Global Capacity’s online password-enabled NOC
        provides a transparent, real-time communications platform that lets customers
        open, view and update trouble tickets online to help detect, diagnose and
        resolve network performance issues before they result in costly downtime.
        The
        online NOC and its information, reports and assistance is available to the
        customer on a 24 x 7 x 365 basis.
  We
        believe that Global Capacity is an expert at network integration, consolidation
        and optimization. It utilizes best-in-class network components, services,
        and
        equipment to design and deliver a business-specific solution that takes into
        account existing legacy systems and contracts, convergence strategies, multiple
        vendors, customer-owned equipment and any auxiliary needs like storage,
        security, or redundancy. Global Capacity provides a turnkey solution that
        intended to ensure a smooth transition and flawless implementation, while
        improving network performance and lowering the overall cost of
        ownership.
  We
        believe the completion of our acquisition of Global Capacity, a complementary
        Telecom Integrator, will enable us to accelerate and increase the scale of
        monetizing the value of the Magenta, software tools, and databases.
  ***Nexvu***
  Customers
        are increasingly demanding an end to end assessment capability- from end
        user to
        application performance, across a complex delivery infrastructure of servers,
        storage, networks, technologies and vendors. Nexvu is aimed directly at
        satisfying that need. Nexvu is complementary but not core to our Telecom
        Integrator strategy implemented through Magenta, CentrePath and Global
        Capacity.
  4
  Nexvu
        has
        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. The product was first released in the fourth
        quarter of 2004 for use by several very large early adopters. In August,
        2006 we
        made available release 3, a major enhancement in features and usability,
        based
        upon significant customer experience and feedback.
  Nexvu
        believes it has established a relatively low-cost means of significantly
        improving the ability to manage remote applications. Its 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 that 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: (i) the Nexvu Analyzer; and (ii)
        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.
  The
        Nexvu
        Analyzer is engineered for highly distributed environments (such as major
        banks
        or other major corporations where there are multiple users over a network
        with
        access to multiple software programs) 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, subject to availability of funds (not necessary for our core
        business), we would consider extension of 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.
        As with Nexvu, this business is complementary, but not core to our Telecom
        Integrator strategy implemented through Magenta, CentrePath and Global
        Capacity.
  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 NOC provides round-the-clock network fault management, service
        response and repair processes for Frontrunner’s entire customer base.
  Frontrunner
        has recently added advanced retail voice and data network applications
        including, virtual private networks, VoIP networks, and several versions
        of IP
        Telephony (or phone calls over the Internet) to its existing product set.
  5
  **MARKETS
        AND CUSTOMERS**
  The
        global market for telecom connectivity services is vast, estimated at over
        $100
        billion per year (according to the Atlantic ACM survey in 2000). Telecom
        Integrator’s leverage the infrastructure of multiple asset-based network
        operators to create highly customized, cost-efficient solutions for large
        enterprise, government and integrator customers whose complex communication
        requirements typically transcend the capabilities of any single network-based
        provider. The Telecom Integrator model is also typically attractive to customers
        with diverse or international connectivity requirements.
  Many
        network operators’ constraints result from the time and expense of managing the
        connectivity supply chain which includes designing, quoting, sourcing,
        delivering and managing connectivity services on other network operators’
infrastructure. These constraints impact the network operators’ ability to meet
        the demands of their enterprise, government and carrier customers.
  Traditionally,
        connectivity solutions have been delivered by incumbent asset-based network
        operators such as AT&T, BT, Verizon, NTT and France Telecom, who provide
        products and services emphasizing their own network. However, Management
        believes this market has a number of issues hindering the asset-based network
        operators, including:
  ·
              No
                  single network operator’s physical network is globally ubiquitous, and
                  increasingly clients are seeking greater levels of redundancy.
                  Therefore,
                  the requirement for being able to add “off -network” segments to create an
                  end to end connection is of critical
                  importance.
  ·
              Incumbent
                  providers are not effective or cost-efficient in combining the
                  on-net and
                  off-net components and the result is higher pricing to end-client
                  as well
                  as margin compression for the network
                  operators.
  ·
              Global
                  networks are particularly inefficient when delivered by a single
                  facility-based organization, as any such provider inevitably has
                  regional
                  deficiencies where its on-network capability is not
                  strong;
  ·
              Incumbent
                  based network operators (*i.e.,*the historically dominant telco in the region with origins as a
                  monopolistic utility) and network operators in general, do not,
                  in our
                  estimation, have good reputations regarding flexibility, customer
                  relations, service adaptability and
                  delivery;
  ·
              Network
                  operators have built their internal processes around the elements
                  they own
                  and control because this is where they gather most of their gross
                  profit
                  margins. However, we estimate this on-network component is generally
                  less
                  than 60%**]**of
                  the delivery requirements, and in most instances less than 50%
                  of the
                  delivery requirements, meaning the majority of the network delivery
                  is
                  generally off network and not under their control, which leads
                  to several
                  operational, service and financial
                  consequences:
  ·
              Long
                  lead time for quotes;
 ·
              Accuracy
                  of quotes;
 ·
              Long
                  lead times for delivery;
 ·
              Network
                  performance and maintenance issues;
 ·
              Lower
                  than expected margins; and
 ·
              Multiple
                  vendor/carrier management for end-user
                  customers.
 
 One
        of
        the fundamental challenges for corporations and other institutions with complex
        and/or geographically dispersed data communications networks is the number
        of
        service providers and pricing alternatives that must be pieced together in
        order
        to create an end-to-end data connectivity solution. Between any two locations
        there are a varying number of service alternatives and we do not believe
        there
        is one single information source that enables a buyer to figure out the most
        cost-effective and technically sound alternative. In addition, large
        multinational corporations are increasingly seeking to work with fewer vendors;
        a single network provider that they can look to for provisioning for enterprise
        data and voice, VoIP, storage networking and social networking
        applications.
 
 Furthermore,
        service providers, particularly in regions where facilities-based competition
        has been introduced, actively market their services with price as the primary
        differentiator and network reach being the primary limiting factor. This
        price-based competition has stressed already challenged gross margins and,
        as a
        result, service providers are actively seeking means to reduce the costs
        associated with network quotation management and off-network
        procurement.
 
 Beyond
        the telecommunication service providers, expanding enterprises, multi-national
        corporations (MNCs), information service providers and system integrators
        are
        deploying and managing private network-based solutions that provide seamless
        connections in support of the ever-increasing demand for business continuity,
        disaster recovery, regulatory compliance and collaboration capabilities.
        These
        private networks can rival the connections of network service providers.
        Procuring these networks is achieved utilizing negotiated pricing through
        a few
“trusted” providers or via an expensive and often deficient bidding solicitation
        process. Because telecommunications is not the primary line of business for
        these private network operators, but rather a facilitator to their end business
        goals, inefficiencies in the procurement process result in most companies
        paying
        more than they should for connectivity. In a competitive environment, such
        a
        drain on profitability can be significant.
  6
 
 This
        confusion is increased by global deregulation, physical fragmentation of
        the
        network layer - whether copper, fiber, coaxial cable or wireless spectrums
        - and
        geographic fragmentation. Due to financial and operational constraints, no
        one
        company can provide a ubiquitous global network. Competing entities therefore
        buy and sell from each other to extend their network reach and meet customer
        demands, which frequently extend globally outside their networks. Commonly,
        this
        buying and selling is done with little efficiency or transparency on an
        individual transaction basis or under the auspices of a supply agreement
        (Master
        Services Agreement) negotiated at arm’s length between the principal parties.
        The absence of a global benchmarking source for regional, market-based pricing
        further impairs the ability to manage costs.
 
 This
        market environment appears ideal for an information-driven model focused
        on
        minimizing the confusion and inefficiency that plagues the telecom market.
        The
        Company believes that it has such a business model and operating capability,
        as
        well as a management team experienced in executing such an information-leveraged
        and technology-leveraged approach.
  Telecom
        Integrators are facilities-free, technology-neutral telecommunications
        providers. Telecom Integrators leverage the infrastructure of multiple
        asset-based telecommunications carriers to create highly customized,
        cost-efficient solutions for large enterprise, government and carrier customers
        whose complex communications requirements typically transcend the capabilities
        of any single facilities-based provider. Telecom Integrators deliver network
        services to clients but do not own the underlying infrastructure. Telecom
        Integrators are therefore viewed as “asset light,” nimble and more price
        efficient than traditional telecom providers. Additionally, Telecom Integrators
        are generally viewed as more solutions-oriented, offering greater flexibility
        and merit-based neutrality of infrastructure selection to their customers.
  In
        contrast to Telecom Integrators, telecommunications companies must emphasize
        a
        return on their capital investment in proprietary assets and therefore offer
        as
        much of the solution as possible over their own networks. Telecom Integrators
        are also able to adopt new technologies with more flexibility because they
        do
        not have a legacy capital investment in deployed assets and technologies.
 
 Telecom
        Integrators first entered the market positioned to help solve the confusion
        for
        off-network pricing for large international telecom carriers and systems
        integration companies. Perhaps the most well known of these companies was
        Infonet which was owned by a consortium of international network operators
        and
        others. Its function was to deliver network services to international network
        operators relating to price quote, order and delivery. Due to the complexity
        of
        obtaining such information on a real time basis, Infonet (as well as the
        other
        Telecom Integrators in the industry) obtained this information through a
        manual
        basis of researching pricing and availability and confirming the data with
        the
        underlying network operators over the telephone. This manual process has
        caused
        the Telecom Integrators to struggle with scale, margins and overall
        profitability.
 
 By
        contrast, our Company has assembled a vast global database of critical
        information with respect to tariffs, competitive pricing, physical locations
        of
        buildings and carriers connected to such buildings and nearby points of
        presence. We also have combined this information with sophisticated software
        tools and algorithms to enable us to often obtain automated “best of breed”
connectivity solutions in seconds, rather than weeks or months. This ability
        to
        automate the “supply chain” of connectivity provides the Company with a
        competitive advantage. This process also requires continuous refreshing updating
        and validation of data and is therefore a continually evolving process to
        stay
        current with changing information and new information.
 
 In
        our
        opinion, despite operating in this space inefficiently and without automation
        systems, Telecom Integrators are capturing market share. Forrester Research
        conducted a survey of large enterprise customers and determined that 32%
        of
        those customers surveyed would buy connectivity services from a Telecom
        Integrator. As stated earlier, the market is measured in excess of $100 billion
        per annum, and some estimates indicate that Telecom Integrators presently
        account for 1% to 5% of the market. CGSY believes that its long investment
        in
        market intelligence and efficiency tools, combined with the acquired Telecom
        Integrator data platform, provides the Company with a unique, competitive
        advantage as a truly “global intelligent Telecom Integrator.”
  Telecom
        Integrators, even with the inefficiency of their manual processes, take the
        pain
        out of the integration and implementation of telecom services more efficiently
        than facilities-based providers. Telecom Integrators are often defined as
        being
        asset light, meaning that they are not facilities based. In practice, they
        should offer substantial benefits over traditional asset-centric network
        operator companies, including:
  ·
              Quotation
                  management;
 ·
              Procurement
                  management;
 ·
              Provisioning
                  capability;
 ·
              Network
                  monitoring capabilities; and
 ·
              Project
                  management skills and
                  processes.
  7
 
 Telecom
        Integrators, when packaged correctly, are ideally placed to capitalize upon
        the
        requirements of system integrators and multi-national corporations. Both
        markets
        have similar issues including network costs, network services packaged to
        meet
        their demands and timely service provisioning. The Telecom Integrator customer
        should receive a reduction in network costs, as the Telecom Integrator uses
        its
        best practices regarding costs and infrastructure to deliver connectivity
        solutions; the Telecom Integrators’ main “go to market” offering should be its
        network operations center, which is in place to manage multiple vendors;
        and by
        having to build processes and systems that are vendor agnostic, the Telecom
        Integrator should achieve improved provisioning capabilities over and above
        the
        traditional network operators. We believe these elements make the Telecom
        Integrator more customer focused, more flexible and give better value than
        traditional incumbent facility-based network operators.
  **The
        Company’s Unique Solution**
  A
        leading
        advantage of our intelligent Telecom Integrator is our proprietary knowledge
        database and technology organization, Magenta. To the best of our knowledge,
        Magenta holds what management believes to be the world’s most robust data sets
        regarding the global telecom landscape, including information from over 60
        countries. Included in the data sets are the rules, pricing, physical location
        data of competing networks and a proprietary algorithm that links the databases
        to quickly and efficiently access the information to receive firm and
        deliverable pricing. We believe that the closest competing data set belongs
        to a
        UK based company that owns a similar data base (acquired in May 2005) limited
        primarily to information in the United States.
  We
        believe Telecom Integrators must be global. The United States is the world’s
        largest single telecommunications market, and many networking companies are
        US-centric or even regional-centric within the United States. The experience
        of
        our management team is aggressively global, with heavy emphasis on the United
        States and the European Union. We have experienced personnel on site today
        in
        the United States, the United Kingdom and Portugal.
  We
        believe Telecom Integrators must be “intelligent”. We have a “knowledge
        management” culture (dedicated to the establishment of automated tools to enable
        companies to effectively access and use their data) and our management team
        has
        been innovative in this arena for decades. After twenty-five years at IBM,
        our
        CEO, Mr. Hudson spent three years at McGraw Hill (1993 to 1996), where he
        led
        the launch of the on-line versions of McGraw Hill’s paper publications. In 30
        months, McGraw Hill launched 30 “properties” and created a new software driven
        business without detracting from its revenues derived from use of traditional
        “paper” based offerings. Mr. Shutt co-founded Universal Access in 1997 and
        pioneered the creation of its “Universal Information Exchange,” the US-centric
        information system that enabled margins to increase substantially during
        his
        tenure as Chairman and CEO. The Company has a great emphasis on the
“Intelligent” aspects of our Global Intelligent Telecom Integrator because its
        automated software tools and data set enables the speedy delivery of quality
        service to its customers, as well as improved margins to the Company by
        eliminating headcount through technology.
  Through
        December 31, 2006, 20/20, CentrePath, Global Capacity, Frontrunner and Nexvu
        had
        approximately 650 customers. 20/20 has 11 customers as of December 31, 2006,
        which includes McData Corp, Colt, InfoNet, T-Systems and British Telecom
        and
        accounted for 32%, 15%, 15%, 15% and 10%, respectively, of 20/20’s total
        revenues during September to December 2006. CentrePath has 22 customers as
        of
        December 31, 2006, which includes Staten Island University Hospital, JPMorgan
        Chase and Time Warner Cable and accounted for approximately 19%, 10% and
        10%,
        respectively, of CentrePath’s total revenue during the month of December 2006. Global
        Capacity has approximately 100 customers as of December 31, 2006,
        including:
  GMAC
              Pyramid
                  Healthcare
              ACS
                  Government SolutionsVerizon
                  Wireless
              American
                  Healthcare Alliance
              XpediusFirst
                  National Bank
              Texas-New
                  Mexico Power Company
              Industry
                  State Bank
 
 One
        customer accounted for 10% of Global Capacity’s total revenue during the month
        of December 2006. Nexvu has a total of two customers, of which one customer
        accounted for approximately 80% of Nexvu’s total revenues during 2006. This
        customer is currently not expected to have additional purchases and will
        have a
        significant negative impact on Nexvu’s 2007 revenues. Frontrunner currently has
        over 500 customers. Two customers accounted for approximately 26% of the
        revenues of Frontrunner during 2006. Wegmans Supermarkets accounted for 16%
        and
        Hodgson Russ, LLP accounted for 10% of Frontrunner's business. 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. 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. .
 
 Wegmans
        Supermarkets accounted for 13% of our total consolidated revenues during
        the
        twelve months ended December 31, 2006.
  **SALES
        AND MARKETING**
 
 ***20/20***
 
 *Target
        Markets.* Magenta
        20/20’s software and solutions are targeted at the worldwide telecommunications
        market aimed specifically at solving the off-net access spend issue for
        carriers. The market is inefficient when it comes to properly evaluating
        the
        appropriate cost for going off-net to a customer and the Magenta pricing
        portal
        streamlines the effort to price this offering using our worldwide database
        of
        170 carriers in over 60 countries for access pricing.
  8
 
 
 *Sales
        Approach.* Magenta
        20/20 has an International sales team that focuses on working with the major
        carriers to offer a license to our pricing portal (netSystems) in addition
        to
        presenting our benchmarking services for cost reduction projects around access
        spend (netSolutions). For our netSystems product, we offer licenses for our
        pricing portal that allow a carrier to price their off-net access in over
        60
        countries around the world through an automated process that covers 8 million
        supply elements (POPs, Exchanges, on-net buildings, etc.). The netSolutions
        offering provides a benchmarking and cost reduction service to carriers with
        the
        goal of reducing off-net spend in a particular region by using the pricing
        portal to evaluate the current spend and points of connectivity against the
        respective tariffs and optimized points of connection.
  ***CentrePath***
 
 *Target
        Markets.* CentrePath
        offerings are aimed directly at large enterprise IT organizations struggling
        to
        implement Data Center Network initiatives, which includes the sheer complexity
        of both individually and combined end-to-end solution; lack of in-house skills
        and/or resources to design, deploy, and operate their Data Center Networking
        solutions; and finally, the limited manageability of many current Data Center
        Networking devices. **
 
 *Sales
        Approach.* CentrePath utilizes a channel sales team to drive sales of its solutions
        through
        strategic partners. CentrePath has established these partnerships to help
        develop, deliver, and support comprehensive Data Center Networking solutions
        for
        leading IT organizations. Partners such as Cisco Systems, AT&T, IBM, and HP
        are a key source of leads and revenue for CentrePath. These leading IT vendors
        understand the significance of the Data Center Networking market opportunity
        and
        recognize CentrePath’s proven ability to generate demand for, sell, and deliver
        the solutions that will drive large IT procurements in this area.
  ***Global
        Capacity Group***
 
 *Target
        Markets.* **** Global
        Capacity Group (GCG) operates as a Telecom Integrator leveraging the assets
        of
        more than 75 telecommunications service providers throughout the United
        States. The company targets two segments, enterprise customers and
        telecommunications carriers. For enterprises, GCG designs, builds and manages
        customized communications systems. The company specializes in innovative
        solutions for wide area networking and network integration by providing complete
        solutions that simplify the entire telecommunications supply chain. GCG’s
        customized network solutions that address a customer’s unique requirements
        include:
 
 ·
              Design
 ·
              Pricing
 ·
              Procurement
 ·
              Provisioning
 ·
              Network
                  Management
 ·
              Customer
                  Service
 ·
              Billing
 
 For
        telecommunications carriers, GCG fulfills off-net connectivity requirements
        ranging from private line connections to Layer 2 access solutions, including
        Ethernet private line, metro and long haul connectivity. GCG provides a turn-key
        service that includes monitoring and management. The company currently serves
        Fortune 2000 companies in financial services, health care, energy and the
        telecommunications industry.
 
 *Sales
        Approach.* GCG
        sales
        approach is segmented into two groups. The sales method of approach is both
        direct and indirect and can be allocated into 3 classes.
 
 **Direct
        enterprise Sales** -
        GCG has
        direct sales people who handle account acquisition and management. Targets
        are
        large fortune 5000 Enterprise customers and mid market enterprises.
 
 **Direct
        Wholesale Sales** -
        GCG has
        direct sales people who handle account acquisition and account management
        for
        our wholesale customer base.
 
 **Partner
        Sales Channel -** GCG
        contracts with partners which are aystems integrators, IT consulting firms
        and
        telecom sales distributors which are commonly referred to as telecom agents.
        GCG’s system integrator seek to fulfill a need for their clients in terms of
        network logistics and network solutions.
  9
  ***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;
        however budgetary limitations have historically restricted robust marketing
        in
        this area. Future product offerings, if implemented, would be designed 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 through a direct sales force effort and mid-sized enterprises
        through
        value-added resleers, or “VAR’s” will help allow us to penetrate our target
        market more effectively.
  Our
        revenues are generated from three major sources:
  ·
              Sales
                  of licenses for our software;
  ·
              Maintenance
                  contracts for our software licensing agreements;
                  and
  ·
              Professional
                  services for consulting on related information technology infrastructure
                  issues.
  ***Frontrunner***
  Frontrunner's
        distribution network is a direct sales force channel located in the Northeast
        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 INSTALLATIONS**
  ***20/20***
 
 *Suppliers.
        Magenta (20/20)* works
        closely with 170 carriers around the world and pulls publicly available tariff
        information to populate its pricing database along with other proprietary
        information.
 
 *Installation* .
        Magenta
        (20/20) will customize the pricing portal specific to a carrier’s need and then
        host the service for the specific carrier.
 
 ***CentrePath***
 
 *Suppliers* .
        CentrePath procures network connectivity from various carriers as well as
        customer premise hardware to facilitate connectivity from its Network Control
        Center to the networks it manages for its customers. This connectivity and
        hardware is procured only after securing a customer contract, and is a direct
        cost against that contract.
 
 
 *Installation.* CentrePath
        implements network hardware and related connectivity required to enable the
        delivery of its remote network management service. This implementation is
        part
        of a standard turn-up process associated with its service, and is included
        in
        the price of the service.
 
 ***Global
        Capacity Group***
 
 *Suppliers.* **** Global
        Capacity Group purchases bandwidth and other connectivity services from
        virtually all major U.S. telecom carriers. GCG’s model is to provide a solution
        for its end users which leverages commodity wholesale bandwidth from facility
        based US telecom carriers and bundles equipment, bandwidth, and monitoring
        services to provide our customers with a custom solution. The bandwidth and
        equipment that GCG buys is purchased after the sale of a customer solution
        which
        has been identified and priced prior to the sale. Once the sale of the solution
        has been contracted GCG then contracts for the needed bandwidth and equipment
        to
        fulfill the solution for the end user. GCG does not speculate on bandwidth
        or
        equipment by buying bandwidth or equipment prior to contracting with our
        customer. GCG aligns contracts with term and service level agreements on
        both
        the buy and sell side of the transaction.
  10
  *Installation:* Since
        GCG does not own any of the telecommunication infrastructure associated
        providing the connectivity services of provisioning bandwidth, there is no
        installation of software or hardware.
 
 ***N*** ***exvu***
  *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**
  ***20/20***
 
 Magenta
        20/20’s offering is such that competition comes from within the customer itself
        and the carrier’s existing pricing systems for off-net spend which tends to be a
        very manual process. To our knowledge there is no other worldwide pricing
        database like Magenta 20/20’s that would give it head-to-head competition. There
        are specific regional competitors that have culled pricing information and
        have
        incorporated some automation but not to the reach that Magenta 20/20 has
        for its
        customers.
 
 ***CentrePath***
 
 Competition
        for CentrePath professional services and management services
        includes:
 
 *Network
        service provider.* **** This
        category includes ILECs (e.g. Verizon, SBC), IXCs (e.g. AT&T, Qwest), and
        alternative carriers (e.g. MFN, XO, OnFiber). While CentrePath has established
        partnerships with several network service providers as suppliers of network
        connectivity, these firms may be competitive in the sense that they typically
        offer DWDM- or SONET-based metropolitan network services that can be used
        to
        connect enterprise data centers. These offerings usually compete with
        CentrePath’s network design, deployment, and ongoing monitoring & management
        services. CentrePath believes its competitive advantage over these firms
        is
        twofold. First, CentrePath’s IT solutions focus is designed to ensure that
        customers receive proven network solutions that will support their critical
        applications. Most network service providers lack the IT infrastructure and
        applications knowledge to design comprehensive Data Center Networking solutions
        and instead focus on promoting offerings that protect investments in their
        existing infrastructure. A second key competitive advantage is CentrePath’s
        network management capabilities. Since many network service providers have
        not
        integrated next-generation network devices into their operational support
        systems, CentrePath’s RMS platform is a key differentiator for firms considering
        Data Center Networking initiatives.
 
 *Equipment
        vendor professional services organizations.* This
        category includes data center equipment companies such as Nortel, Fujitsu
        and
        Brocade. CentrePath has focused primarily on partnering with these firms
        and
        supplementing their professional services offerings with unique CentrePath
        services such as network management services. In head-to-head competitive
        scenarios however, CentrePath’s key differentiators include the company’s
        vendor-neutral approach to designing customer solutions, as opposed to equipment
        vendors’ offerings, which are designed mainly to accelerate the adoption of
        their own specific technology. CentrePath’s other key strength lies in its
        comprehensive Data Center Networking perspective, which combines transport
        network, storage, server and data movement applications expertise, as opposed
        to
        having skills primarily in one area.
  11
  ***Global
        Capacity Group***
 
 Global
        Capacity Group’s (“GCG”) competition is vast and competitive. **** GCG
        competes directly with facility based carriers, Virtual Network Operators
        and
        Systems Integrators. Although, the competition is vast GCG does provide services
        to carriers and Virtual Network Operators. GCG at times will partner with
        our
        competition to provide a seamless solution for their end users.
 
 Some
        examples of competition from the 3 sectors are the following: (i) Facilities
        based carriers - ATT, Verizon, Sprint and Level 3; VNO’s - Vanco and Virtella;
        and system Integrators: EDS, IBM and Perot Systems.
 
 ***Nexvu***
  The
        market for Nexvu’s 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.
  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, including Network General, Netscout,
        Computer Associates, Agilent, Acterna, Wildpackets, Apogee Networks, Compuware,
        Niksun, Lucent and Network Instrument.
  Many
        of
        the application performance management products are developed, marketed and
        sold
        by the following organizations: Mercury Interactive (HP), Cisco, NetOOS,
        Netiq,
        Computer Associates and Compuware.
  ***Frontrunner***
  Business
        competition comes from numerous 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.
  **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**
 
 During
        the fiscal years ended December 31, 2006 and December 31, 2005, the Company
        spent $1.3 million and $1.4 million, respectively, on research and development
        activities, exclusively with respect to our Nexvu operations. 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, Magenta 20/20, CentrePath
        and Global Capacity did not incur any research and development costs during
        2006
        or 2005.
  **PATENTS
        AND PROPRIETARY TECHNOLOGY**
  ***20/20***
 
 Magenta
        20/20 does not currently hold any patents related to its Pricing Portal and
        Database and related proprietary software code, and relies on copyright laws
        for
        its protection.
 
 ***CentrePath***
 
 CentrePath
        currently does not hold any patents or proprietary technology related to
        its
        Data Networking Solution offerings.
  12
  ***Global
        Capacity Group***
 
 GCG
        has
        built and designed a proprietary software system called “ProVision”. GCG does
        not hold any Patents on this intellectual property. ProVision in its broadest
        sense is a circuit order management system which enables GCG to obtain telecom
        assets, providers, and pricing throughout the country. ProVision enables
        GCG to
        price, procure, provision, track, account for the buy and sell sides of
        transactions and holds accounting/dashboard functions for GCG’s management to
        determine status of services along the supply and fulfillment chain and into
        maintenance.
  ***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. 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. Through December 31, 2005 we had paid a total of $150,000 toward
        the
        royalty payments. During 2006 we did not make any payments associated with
        the
        minimum royalty payment requirement.  We are in the process of
        renegotiating the agreement.  Once this agreement is in place, we may have
        additional longer term royalty payments to make. 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 2007. There is
        no
        assurance that this patent will be approved. We also expect to apply for
        additional patents in 2007 for new technology that was developed during 2006
        as
        well as future 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.
  **EMPLOYEES**
  As
        of
        December 31, 2006, we had a total of 150 employees who are employed in the
        following areas: product development, quality assurance, product marketing
        and
        management, sales and sales support, installation technicians, IT support,
        customer support and finance and administration. Our future success will
        depend
        in part on our ability to attract, retain, integrate and motivate highly
        qualified sales, technical and management personnel, for whom competition
        is
        intense. We believe all relations with our employees are satisfactory. None
        of
        our employees are covered by a collective bargaining agreement.
  **GEOGRAPHIC
        INFORMATION**
  Financial
        information about geographic areas is incorporated by reference from Note
        15 to
        our Consolidated Financial Statements included elsewhere in this Annual Report
        Form 10-KSB.
  13
 
 **AVAILABLE
        INFORMATION**
  Our
        Web
        site is http://connectivitysi.net.com .
        We make
        available, free of charge, through our Web site, our annual report on Form
        10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and
        amendments to those reports, as soon as reasonably practicable after we
        electronically file such materials with, or furnish them to, the Securities
        and
        Exchange Commission. .
  **Item
        2.**  **Description
        of Property.**
  Our
        principal office was moved from 50 East Commerce Drive, Suite A,
        Schaumburg, Illinois 60173 to 125 South Wacker Drive, Suite 300 Chicago,
        Illinois 60606. Our Frontrunner and Nexvu office located in Schaumburg will
        relocate to a new location in the same area where we signed a new lease that
        expires in July 2012 at a cost of $50 thousand per year, with annual options
        to
        renew. We also entered into a two year office lease in Minnesota at a cost
        of
        $74 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 2011 with annual options
        to
        renew. Rent at this facility is approximately $130 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 .
        Three
        small satellite offices housing limited sales and operations are located
        in
        Buffalo, NY, Pittsford, NY, Syracuse and NY Highland, NY. These three satellite
        offices all have short-term leases that expire in 2007, each with options
        to
        renew. The combined annual rent obligation for all three satellite offices
        is
        currently $36 thousand per year. In
        connection with our acquisition of 20/20, we assumed four leases. One office
        lease is located in Chicago, Illinois and carries a renewalable six month
        term
        at a cost of $30 thousand per year. The remaining three offices are on
        month-to-month terms at a cost of $12 thousand per year. We also assumed
        a lease
        in connection with our acquisition of Global Capacity for a facility in Houston,
        Texas that expires in August 2011, with annual options to renew. The current
        rent at this location is $78 thousand per year. In addition, we also assumed
        a
        lease in connection with our acquisition of CentrePath for a facility in
        Waltham, Massachusetts that expires in August 2008, with annual options to
        renew. The current annual rent at this location is $738 thousand per year;
        however we are currently subleasing a portion of this facility through the
        remainder of the lease for a total amount of $234 thousand.
  Our
        management does not currently have policies regarding the acquisition or
        sale of
        real estate assets primarily for possible capital gain or primarily for income.
        We do not presently hold any investments or interests in real estate,
        investments in real estate mortgages or securities of or interests in persons
        primarily engaged in real estate activities.
  **Item
        3.**  **Legal
        Proceedings.**
  None.
 
 **Item
        4.**  **Submission
        of Matters to a Vote of Security Holders.**
  None.
  14
  **PART
        II**





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





O ur
      common
      stock, par value $0.01 per share, is traded on the OTC Bulletin Board under
      the
      symbol CGSY. At April 9, 2007, our common stock was held by approximately 205
      record holders .
      On
      April 9, 2007, the closing sale price of a share of our common stock was
      $0.80.





The
      high
      and low sale prices per share of our common stock from the three quarters during
      the year ended December 31, 2006 was as follows:




**High**
            
            **Low****Year
                ended December 31, 2006:**Second
                Quarter
            
            $
            1.00
            
            $
            .57Third
                Quarter
            
            
            .78
            
            
            .36Fourth
                Quarter
            
            
            1.25
            
            
            .44




**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**




All
      unregistered securities issued during 2006 have been disclosed in our previous
      10QSB or 8-K filings. 
 **Equity
        Compensation Plan Information**
  The
        following is summary of our equity compensation
        plans as of December 31, 2006:
 **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
              
              
              9,324,527*
              
              $
              0.81
              
              
              760,473*Total
              
              
              9,324,527
              
              $
              0.81
              
              
              760,473
  *Consists
        of 1,524,527 securities issuable under our 2003 Long-Term Incentive Plan
        for key
        employees, which was approved by our board of directors on December 16, 2003,
        4,800,000 time based and 3,000,000 performance based securities issued during
        2006 to three key executives.


15


**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**





Our
      net
      working capital deficiency, recurring losses and negative cash flows from
      operations raise substantial doubt about our ability to continue as a going
      concern. During 2006, we completed three acquisitions which significantly
      increased the amount of debt and overall losses for the year. On January 19,
      2007, we successfully completed the initial closing of new private offering
      of
      Units comprised of Series AA Preferred Convertible Stock with 100% warrants
      coverage and we concluded the offering on April 9, 2007, at which time an
      aggregate of approximately $21 million of equity was raised (from a combination
      of new cash infusion and conversions of debt to equity). In addition, at or
      about the time of the initial equity closing we raised an additional
      approximately $13.4 million of debt financing pursuant to a line of credit
      established with Hilco Financial, LLC. (initial draw of $7.0 million) and a
      secured subordinated term loan from a smaller number of individuals, bringing
      aggregate debt and equity funding to approximately $35 million. This capital
      raise allowed us to reduce the existing indebtedness and fund our current
      working capital needs. However, we continue to utilize cash to fund its current
      operations. Our cash balance as of April 9, 2007 and our ability to draw against
      our line of credit with Hilco Financial totaled $2.3 million. We currently
      believe this level of working capital will be sufficient to fund the operations
      until we start generating positive cash flow from operations in 2007.
      However, if our revenues do not materialize as anticipated, we may be forced
      to
      raise additional capital through issuance of new equity or increasing our debt
      load, or a combination of both. There can be no assurance that we will be
      successful in raising additional capital or issuing additional indebtedness
      if
      the need should arise, or that any such raise may not be dilutive to existing
      shareholders.





We
      presently have approximately 160 full time employees between all six entities
      (the Company and all five operating subsidiaries) as of April 9, 2007. We do
      not
      anticipate that this number will increase in the near future unless additional
      acquisitions occur or our revenue significantly increases. In addition, although
      we are in the process of integrating our operations, we are currently not
      anticipating any significant increases in our capital spending on software
      or
      equipment. We currently have a debt covenant with Hilco Financial which limits
      our capital expenditures to $500,000 per year.




**Results
      of Operations**




***2006
      vs 2005***




Revenues
      for the twelve month period ended December 31, 2006 and 2005 were heavily
      influenced by Frontrunner. The total revenues during 2006 and 2005 were $14.8
      million and $15.7 million, respectively, of which $12.0 million and $14.3
      million were derived by our Frontrunner segment, representing over 81% and
      92%,
      respectively, of our consolidated revenues . Frontrunner
      revenues were generated from installation of voice and data systems as well
      as
      through maintenance contracts on installed systems. Maintenance revenues for
      Frontrunner for the twelve month period ended December 31, 2006 and 2005,
      whether contractual or time and material based, represented $7.1 million and
      $7.9 million, or 60% and 55%, respectively, of Frontrunner’s total revenues. The
      reason for the decrease was due to $0.4 million of lower move/adds/change sales
      in 2006 when compared to 2005 and a decrease in the number of customers under
      maintenance contracts, resulting in a reduction in maintenance revenue of $0.4
      million. Customers under contract at December 31, 2006 and 2005 were 230 and
      279, respectively. Frontrunner was notified by one large customer its intent
      not
      to renew its annual maintenance agreement, which will negatively impact our
      maintenance revenue by $0.6 million in 2007. Installation revenue generated
      from
      Frontrunner during 2006 and 2005 totaled $4.9 million and $6.4 million,
      respectively, or 40% and 45%, respectively, of its total revenues. The reduction
      in Frontrunner’s installation revenue in 2006 from 2005 was the direct result of
      companies adopting newer telecommunication technology, which resulted in an
      overall increase in competition. Frontrunner’s ability to increase installation
      revenue will be highly dependent upon its ability to source this newer
      technology at a price point which allows them to be more competitive. Another
      factor includes Frontrunner’s ability to adequately train its employees and
      technicians on selling and supporting this newer technology. The
      Nexvu
      revenues for the twelve month period ended December 31, 2006 and 2005 were
      $1.3
      million of which $1.0 million was derived from consulting services in both
      periods with the remaining revenues related to software licensing sales and
      related maintenance fees. During 2006, one customer accounted for approximately
      80% of Nexvu’s overall revenue. We currently do not anticipate generating any
      revenue from this customer in 2007 which will have a significant negative impact
      on Nexvu’s business. Our acquisition of CentrePath which generates revenue by
      providing network control services, along with related consulting services
      contributed approximately $0.7 million of additional revenue during 2006.
      Revenues generated in 2006 from our acquisitions of 20/20 Technologies on
      September 6 th and
      Global Capacity Group on December 11 th through
      December 31, 2006 totaled $0.5 million and $0.4 million, respectively.





16




The
      gross
      margin rate was 49.3% for 2006 compared to 45.6% in 2005. Frontrunner’s overall
      gross margins, which accounted for 80.8% and 75.6% of the overall gross margin
      dollars generated during 2006 and 2005, were 49.2% and 45.5%, respectively.
      Frontrunner’s installation margins were 28% and 27%, while maintenance revenues
      gross margins were 54% and 52% during 2006 and 2005, respectively. Frontrunner’s
      maintenance gross margin improved slightly as a result of implementing several
      cost cutting measures during 2006 in response to an overall reduction in
      Frontrunner’s maintenance revenue from several customers not renewing their
      annual support agreements. Since a large percentage of our maintenance costs
      are
      fixed in nature, any significant reduction in maintenance revenue would have
      a
      deteriorating effect on the related gross margins. The Nexvu gross margin rate
      for 2006 was 51.8% and 46.8% for the years ended 2006 and 2005, respectively.
      The reason for the increase in the increase in gross margin percentage was
      due
      to an overall reduction in royalty costs incurred during the year. In 2005,
      we
      paid a company $150,000 in royalties versus $0 in 2006. We are in the process
      of
      renegotiating our license agreement with this company, which could result in
      higher royalty payments in the future. 20/20, CentrePath and Global Capacity
      Group had a combined gross margin of 48.3% and accounted for approximately
      10.3%
      of the overall gross margin dollars recognized in 2006.




Total
      operating expenses were as follows:





Twelve
                months endedDecember
                31, 2006
            
            December
                31, 2005Compensation
            
            $
            8,366,826
            
            $
            5,446,071Travel
                and entertainment
            
            
            373,657
            
            
            248,279Occupancy
            
            
            653,486
            
            
            490,099Professional
                services
            
            
            1,418,281
            
            
            639,965Insurance
            
            
            318,342
            
            
            319,533Depreciation
                and amortization
            
            
            1,199,828
            
            
            852,000Goodwill
              impairment
              charge
            
            
            1,400,000
            
            
            —Other
                operating expenses
            
            
            1,193,258
            
            
            1,023,619Total
                operating expenses
            
            $
            14,923,678
            
            $
            9,019,566





Frontrunner,
      along with the Company absorbs a majority of the selling, general and
      administrative expenses due to the relative size of the organization compared
      to
      the rest of the entities. Also, the total operating expenses only include 20/20,
      CentrePath and Global Capacity Group’s from their respective acquisition date
      through December 31, 2006. The majority of our operating expenses consist of
      compensation expenses and professional fees. Of the total $14.9 million and
      $9.0
      million of operating expenses recognized during 2006 and 2005, Frontrunner
      comprises $7.2 million and $6.4 million, respectively. When comparing
      Frontrunner’s operating expenses from 2006 to 2005, the increase of $0.8 million
      was primarily due to a goodwill impairment charge of $1.4 million, partially
      offset by $0.6 million of lower levels of compensation and travel and
      entertainments costs. The decrease in these costs was the result of an
      overall reduction in headcount as Frontrunner’s revenue had declined from $14.3
      million in 2005 to $12.0 million 2006. Operating expenses for Nexvu and the
      Company accounted for $5.8 million during 2006, up from $2.7 million for the
      year ended 2005. During 2006 we adopted FAS123(R), which resulted in the
      recognition of stock compensation expense of $1.8 million for stock options
      and
      warrants issued to employees, which was classified in compensation costs. The
      Company had expensed executive bonuses totaling $0.6 million and had an increase
      in compensation costs of $0.1 million during 2006. The Company also had an
      overall increase in professional fees and outside services of $0.7 million
      in 2006, when compared to the prior year of which approximately $0.4 million
      related to stock warrants issued and $0.1 million related to the issuance of
      common stock to a non-employee related to consulting services provided. These
      costs were partially offset by lower operating costs for Nexvu of $0.3 million,
      which were primarily compensation related as the result of an overall reduction
      in headcount. The remaining increase in operating costs in 2006 when compared
      to
      2005 was due to our acquisitions of 20/20 Technologies, CentrePath and Global
      Capacity, which totaled $1.5 million, $0.3 million and $0.1 million,
      respectively. The increase in depreciation and amortization was the result
      of
      the identified intangible assets and fixed assets associated with our
      acquisitions of 20/20, CentrePath and Global Capacity. The total amount of
      amortization and depreciation expense recognized during 2006 was $0.2 million,
      $0.2 million and $0.1 million, respectively.




Interest
      expense for 2006 was $3.9 million compared to $0.3 million during 2005. The
      increase in interest expense is the direct result of the additional indebtedness
      to facilitate our acquisitions of 20/20 Technologies, CentrePath and Global
      Capacity during 2006, along with our additional indebtedness. Of the increase
      in
      interest expense, approximately $2.8 million related to expense allocated to
      the
      stock warrants issued in connection with the debt.




***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.




17




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%.





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 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.




**Liquidity,
      Capital Resources and Going Concern**




Cash
      used
      in operating activities during the twelve months ended December 31, 2006 and
      2005 was $4.1 million and $1.8 million, respectively. The cash used in operating
      activities was principally due to the net loss for the year. There was a
      significant variance between operating loss and net cash used in operating
      activities due to stock option and warrant expense of $6,332,610 and a goodwill
      impairment charge of $1,400,000.




The
      cash
      used in investing activities was $10.4 million and $85 thousand for the twelve
      months ended December 31, 2006 and 2005, respectively. During 2006 the Company
      made three investments in acquisitions for 20/20, CentrePath and Global
      Capacity. The 20/20 acquisition which was completed through the issuance of
      our
      common stock and shares of Series B Convertible Preferred Stock (convertible
      into common stock) and the refinance of existing 20/20 debt resulting in an
      investment $3.5 million, which is disclosed as a non-cash item, resulted in
      net
      cash provided of $50 thousand. Our acquisition of CentrePath was facilitated
      through the issuance of a short-term bridge note resulting in an investment
      of
      $5.0 million, net of cash acquired. The acquisition of Global Capacity was
      primarily facilitated through the issuance of a short-term bridge note totaling
      $4.7 million. The investment in Global Capacity totaled $5.3 million, net of
      cash acquired. Our capital expenditures for the years ended 2006 and 2005
      totaled approximately $0.1 million in both periods. During 2006 our capital
      expenditures consisted primarily of computer related equipment and vehicles
      for
      our Frontrunner business. In 2005, the expenditures were primarily for computer
      equipment utilized in testing our Nexvu Application Performance Management
      product and other computer-related equipment at Nexvu. Although we currently
      do
      not anticipate any significant capital expenditures in the near future, we
      may
      have a need to make additional capital expenditures related to the integration
      of our operations. As part of our debt covenant with Hilco Financial, our
      capital expenditures are limited to $500,000 per year.




18




Cash
      provided by financing activities during the twelve months ended 2006 totaled
      approximately $15.3 million. This was the result of the additional indebtedness
      associated with the issuance of a mandatory convertible debt which totaled
      $1.3
      million and other short-term debt issued during 2006 to facilitate the
      acquisition of 20/20, CentrePath and Global Capacity, which totaled $2.5
      million, $7.9 million and $4.7 million, respectively. These amounts were
      partially offset by the repayment of debt totaling $1.1 million during 2006.
      Cash used in financing activities during the twelve months ended 2005 was due
      to
      the repayment of Frontrunner debt.




Historically
      our working capital requirements have been met through proceeds of common stock
      private equity offerings and debt issuances. As of December 31, 2006, we had
      $1.2 million of cash and cash equivalents. On January 19, 2007, we successfully
      completed a recapitalization of our bridge debt financing, through the initial
      closing of equity financing, which when coupled with additional issuances,
      totaled approximately $21 million. This sum, when combined with our new Hilco
      line of credit and an approximately $6.4 million term debt financing provides
      us
      with aggregate working cash capital of $2.3 million as of April 9, 2007. We
      currently believe this level of working capital will be sufficient to fund
      the
      operations until we start generating positive cash flow from operations in
      2007.
      However, if our revenues do not materialize as anticipated, we may be forced
      to
      raise additional capital through issuance of new equity or increasing our debt
      load, or a combination of both. There can be no assurance we will be able to
      raise additional capital or issuance additional indebtedness, or if we do so
      that it will not be dilutive of existing investors.




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.
      We also have entered into several purchase commitments with various
      telecommunication companies for the provisioning of bandwidth, which is resold
      by Global Capacity. The following table summarizes our future contractual
      obligations as of December 31, 2006:




Operating
                    Leases
            
            Capital
                    Leases
            
            Debt
                    Obligations
            
            Minimum
                  Royalty Payments2007
            
            $
            1,115,053
            
            $
            51,225
            
            $
            26,583,086
            
            $
            225,0002008
            
            
            769,378
            
            
            36,880
            
            
            909,763
            
            
            150,0002009
            
            
            237,463
            
            
            5,121
            
            
            382,255
            
            
            —2010
            
            
            221,864
            
            
            —
            
            
            50,793
            
            
            —2011
            
            
            97,009
            
            
            —
            
            
            32,820
            
            
            —Thereafter
            
            
            —
            
            
            —
            
            
            62,905
            
            
            —Total
                contractual obligations
            
            $
            2,440,767
            
            $
            93,226
            
            $
            28,021,622
            
            $
            375,000




The
      debt
      obligation related to Harris Bank as of December 31, 2006 was callable and
      not
      in compliance prior to January 19, 2007. However, the Company subsequently
      paid
      off most debt that was not in compliance as of January 19, 2007 (see Note
      16 - “Subsequent Events”). The above table does not include two $3.0 million
      dollar earn-out payments related to our acquisition of Global Capacity in
      December 2006. Both payments are based upon achieving certain revenue and gross
      margin targets over the next two years. The first $3.0 million payment is due
      in
      cash and payable in October 2008 and the second $3.0 million payment is payable
      either through the issuance of our common stock (based on the fair market value
      of our common stock as of the relevant pay out period) or in cash or a
      combination of the two at our discretion in October 2009. The Company will
      record any such payments as additional consideration as
      compensation in the period the revenue objectives have been
      met.




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.




19




**Recent
      Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48 “Accounting for Uncertainty in Income Taxes” an interpretation of FASB
      Statement No. 109 “Accounting for Income Taxes”. FASB Interpretation No. 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with FASB Statement No. 109. The
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. The Interpretation also provides guidance
      on de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The Interpretation is effective for fiscal
      years beginning after December 15, 2006. We do not expect the adoption of the
      interpretation to have a significant impact on our financial position and
      results of operations.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 157 “Fair Value Measurements”, which defines fair value, establishes
      a framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements. SFAS No. 157
      will
      apply whenever another standard requires (or permits) assets or liabilities
      to
      be measured at fair value. The standard does not expand the use of fair value
      to
      any new circumstances, and is effective beginning after December 31, 2007.
      We
      are currently evaluating the impact of adopting SFAS No. 157 on our financial
      position and results of operations.




**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.





**Revenue
      Recognition**




The
      Company ** generates
      revenue from selling and installing hardware, licensing its software and the
      provision of services. It also generates revenue from the provisioning and
      reselling of telecommunication circuits and from supporting and monitoring
      of
      its customers’ networks.




For
      revenue from product sales and services, the company recognizes revenue in
      accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB
      104”), 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. For revenue from the sale of software
      is
      recognized in accordance with SOP 97-2, *Software Revenue Recognition* , as
      amended by SOP 98-9, Modification of SOP 97-2, *Software Revenue Recognition with Respect to Certain
      Transactions*





Both
      SOP
      97-2 and 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)
      collectability 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 or software
      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. The allocation of license and maintenance is based on the
      residual method of accounting as prescribed in SOP97-2. Under this method the
      Company has established Vendor Specific Objective Evidence (VSOE) for the value
      of its post-contract support agreements at 20% of the license amount, which
      is
      based on the amount charged to its customer in the renewal year. Therefore,
      of
      the total amount received under the arrangement, the Company allocates 20%
      to
      maintenance and the remaining amount to software license.




20





The
      Company recognizes revenues and all related costs on consulting and 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 also earns sales revenue from providing its customers ongoing access
      to
      broadband data services and from the installation of those services. Ongoing
      services are billed in advance and the installation of those services are billed
      in arrears. The Company recognizes sales revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee
      is
      fixed or determinable, and collectibility is probable. Advance billings are
      recorded as deferred revenue in the month prior to delivery.





The
      Company defers maintenance and services revenue related to providing network
      monitoring and the ongoing access to broadband. This revenue is recognized
      ratably over the term of such contracts. The Company defers recognition of
      revenue on consulting and training billings until the related services are
      performed.





**Goodwill
      and Purchased Intangible Assets**




SFAS
      No.
      142, “Goodwill and Other Intangible Assets” requires goodwill to be tested for
      impairment on an annual basis and between annual tests in certain circumstances,
      and written down when impaired. 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, databases, developed technology, customer
      lists
      and trade names are amortized on a straight-line basis over periods ranging
      from
      3 to 11 years, representing the remaining life of the assets.




Based
      on
      the impairment test performed during 2006, the Company determined the
      goodwill for Frontrunner was impaired and recognized a charge in the amount
      of
      $1.4 million. No impairment of goodwill was recognized in 2005. There can
      be no assurance that future goodwill impairment tests will not result in a
      charge to earnings.




**Stock-Based
      Compensation**




At
      December 31, 2006, the Company has a stock option plan and separate employee
      related stock option agreements, which are described more fully in Note 4.
      Prior
      to January 1, 2006, the Company accounted for those plans and agreements under
      the recognition and measurement provisions of APB Opinion No. 25, *Accounting for Stock Issued to Employees* , and
      related Interpretations, as permitted by FASB Statement No. 123, *Accounting for Stock-Based Compensation* . No
      stock-based employee compensation cost was recognized in the Statement of
      Operations for twelve month period ended December 31, 2005, as all outstanding
      unvested options granted under those plans at that time had an exercise price
      equal to the market value of the underlying common stock on the date of grant
      and no restricted stock grants were outstanding during that period. Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      FASB Statement No. 123(R), *Share-Based Payment* , using
      the modified-prospective-transition method. Under this transition method,
      compensation cost recognized in fiscal 2006 includes: (a) compensation cost
      for
      all share-based payments granted prior to, but not yet vested as of January
      1,
      2006, based on the grant date fair value estimated in accordance with the
      original provisions of Statement 123, and (b) compensation cost for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of Statement
      123(R). Results for prior periods have not been restated.





**Off
      - Balance Sheet Arrangements**




The
      Company has no off-balance sheet arrangements in place as of December 31, 2006
      or 2005.




21


**Risk
          Factors**
  In
          evaluating us and our business, you should carefully consider the following
          risk. These risk factors contain, in addition to historical information,
          forward-looking statements that involve risks and uncertainties. Our actual
          results could differ significantly from the results discussed in the
          forward-looking statements. The order in which the following risks are
          presented
          is not intended to represent the magnitude of the risks described. Many
          of the
          risks set forth below are written as they apply to our business as presently
          constituted, but have similar if not identical application to the businesses
          of
          any companies we may acquire in the future.
  **Acquisition
          Risks**
  *We
          may choose to effect additional acquisition targets* .
          Should
          we choose to effect additional acquisitions, any such future acquisition
          shall
          be subject to all of the risks inherent in purchasing a new business.
          Shareholders must rely upon management’s estimates as to fair market value and
          future opportunities with respect to acquisitions of such companies. In
          addition, in order to attract and retain key personnel with respect to
          any
          acquisitions (including 20/20, CentrePath and Global Capacity) we may be
          obligated to increase substantially the benefits with respect to employment
          agreements and equity participation rights (through the issuance of stock,
          warrants, options, phantom stock rights or other assets with equity
          participation features) which could be substaintially dilutive of existing
          shareholders.
  *We 
          face operational challenges from acquisition targets and have a history of
          losses* .
          With
          the exception of Global Capacity, each of our operating subsidiaries has
          a
          history of losing money, and is presently losing money and there can be
          no
          assurances that they will be able to generate a profit following the integration
          of the recently acquired companies. A significant amount of the proceeds
          in our
          recently completed equity offering was applied to satisfy preexisting
          liabilities, as opposed to funding of growth.
  We
          have
          lost money over our entire operating history and there can be no assurances
          that
          either our historical business, or our business as centered around our
          new
          Telecom Integrator strategy will prove profitable. This risk is further
          heightened by the fact that the integration of an acquired business often
          results in the incurring of substantial costs and possible disruption of
          the
          business once acquired due to differences in the culture between the entities
          and the possibility that key employees may either elect not to continue
          with the
          integrated entity or work under a different motivation than prior to the
          acquisition. In addition, customers and suppliers may modify the way they
          do
          business due to their perception of the company post acquisition and/or
          due to
          certain preconceived issues that they may have with the acquiring
          company.
  *Our
          recently acquired Subsidiaries have not operated profitably in the
          past* . 
          Nexvu nor 20/20 has had any history of operating profitably.  Frontrunner
          has generated positive EBITDA, but is unable at the present time to generate
          sufficient cash to service in full both the cost of our operations as a
          public
          company and the secured and unsecured debt on its balance sheet. 
CentrePath has not generated funds sufficient to support the historical
          deficit
          cash flows and debt services obligations of its operations. Our business
          plan
          contemplates a rapid turn around in the fortunes of the consolidated enterprise,
          as a “smart Telecom Integrator” however should the anticipated future
          profitability not occur, or should it be delayed due to factors beyond
          our
          control (or due to delays in obtaining sufficient traction in the market
          to
          operate on a consolidated profitable basis), we may need additional capital
          beyond what was raised in our recent offering, both to satisfy accrued,
          unpaid
          liabilities presently existing, as well as to satisfy any future negative
          cash
          flow generated by us.  There can be no assurances that we will be able to
          source the additional funds, if any, necessary to ensure our survival due
          to
          adverse consequences from any of the above factors.
  22
  *We
          have incurred substantial debt in acquiring 20/20, CentrePath and Global
          Capacity.* As
          noted
          elsewhere in this Form 10-KSB, we are presently carrying substantial secured
          first lien debt with respect to our borrowing from Hilco Financial and
          second
          lien term debt in favor of the convertible debt holders with term debt
          maturing
          in January of 2009. This debt was used in large part to refinance the bidge
          loans that had been put in place to fund the acquisitions of 20/20, CentrePath
          and Global Capacity as well as to fund ongoing negative cash flows of the
          Company. This leverage will increase the risk of default due to the added
          debt
          service obligation. It may also bring with it certain restrictive covenants
          which could alter the way in which we do business in the future. In addition,
          the Hilco financing comes due 18 months from its initial closing and the
          terms
          debt comes due six months thereafter. There can be no assurances that the
          Company will be able to refinance or extend any of such debt.
  **Business
          Risks**
  *Our
            success is highly dependent on us taking principal positions in
            telecommunication circuit contracts, especially with
‘novations’.* The significant revenue growth in our business plan is predicated on
            our ability
            to successfully take principal positions in large telecommunication circuit
            contracts. A novation is the assumption of existing circuits business
            from a
            client and managing it to an improved cost basis with the same or better
            quality
            of services. Since these contracts tend to have a high dollar value,
            any delay
            in securing them will have a significant impact on our current year’s revenue
            and cash from operations.  Operationally, it leverages our automated
            logistics systems in pricing and remote support to do this. Customers
            and
            suppliers alike will demand credit worthiness as well. We have many such
            opportunities in the our sales pipeline and the market appears ready
            to accept
            our innovative approach to outsourcing of these functions. However, we
            have
            secured no novations contracts to date. In the event we do experience
            a delay or
            are ultimately unsuccessful in closing these orders, we may be forced
            to raise
            additional capital through issuance of new equity or increase our debt
            load, or
            a combination of both to fund our current operations.  However,
            t here
            can
            be no assurance we will be able to raise additional capital or issuance
            additional indebtedness, or if we do so that it will not be dilutive
            of existing
            investors. There is a risk that prospective customers may delay or not
            issue
            orders until our balance sheet is stronger and that potential suppliers
            of
            bandwith may cutback supply of bandwidth absent cash or cash
            collateral.
  *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, 2006, we have incurred cumulative
          losses of $22.6 million. Our loss in 2006 widened to $11.5 million from
          $2.3 in
          2005, 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 and in the past as have the auditors for 20/20 and CentrePath.
  As
          noted
          above, our business plan contemplates primary emphasis on the development
          of our
          Telecom Integrator model. It should be noted that while circumstances
          surrounding the start up and operations of Universal Access, Inc. (a Telecom
          Integrator founded by Mr. Shutt and of which he and Mr. King served as
          principals until late 2002) are entirely different than the current
          circumstances, Universal Access did file for bankruptcy in August 2004,
          almost
          two years after their departure, although such entity was ultimately sold
          for in
          excess of $22,000,000.
  *Bankruptcy
          of Universal Access Global Holdings, Inc and Class Action
          Settlement.* Patrick
          Shutt was a founder of Universal Access, as well as its CEO and a director
          through the date of his resignation from the company in late 2002. George
          King
          was one of its initial employees as well, and served as an executive officer
          through the date of his resignation from the company in late 2002. Universal
          Access filed for bankruptcy protection in August, 2004, almost two years
          after
          their departure, and was ultimately sold to Vanco for $22,000,000.
  During
          their tenure at Universal Access, two class action lawsuits were filed
          against
          Universal Access and certain named individual defendants, including in
          each
          instance, Mr. Shutt. Both of the lawsuits were settled, with no finding
          of
          liability against Mr. Shutt. A brief description of those lawsuits
          follows.
  In
          November 2001, a complaint captioned In re: Initial Public Offering Securities
          Litigation was filed in Federal District Court for the Southern District
          of New
          York on behalf of a purported class of persons who purchased Universal
          Access
          stock between March 16, 2000 and December 6, 2000. The complaint
          generally alleged that various underwriters engaged in improper and undisclosed
          activities related to the allocation of shares in its initial public offering
          of
          securities. The complaint brought claims for violation of several provisions
          of
          the federal securities laws against the underwriters of its IPO, and also
          against certain of its former directors and officers (including Mr. Shutt)
          under
          the Securities Act of 1933 and the Exchange Act of 1934. Similar lawsuits
          concerning more than 300 other companies’ initial public offerings were filed in
          2001, all of which were consolidated into a single coordinated proceeding
          in the
          Southern District of New York. The matter was settled with proceeds from
          its
          directors’ and officers’ liability insurance. The settlement provided for among
          other things, a release of Universal Access and of the individual defendants
          for
          the conduct alleged in the action to be wrongful in the complaint.
  Universal
          Access and certain of its former directors and officers (including Mr.
          Shutt)
          were defendants in an action brought in the United States District Court
          for the
          Eastern District of Texas, Frandsen v. Universal Access, Inc., et al.,
          No.
          9:02CV103 (E.D. Tex.). This case was also captioned as In re: Universal
          Access, Inc. Securities Litigation Civil Action No. 9:02CV103. The complaint
          alleged causes of action for securities fraud in connection with public
          disclosures made by its officers between 2000 and 2002. Universal Access
          and all
          the defendants denied any wrongdoing. The matter was subsequently settled
          for
          $11,000,000 with no finding of wrongdoing against any defendant.
  *We
          may need additional capital.* We may
          need to obtain additional financing over time to fund operations and/or
          to
          strengthen out balance sheet to attract customers and to ensure credit
          from
          suppliers, the amount and timing of which will depend on a number of
          factors including the pace of expansion of our markets and customer 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 shareholders’
proportionate equity interests in us. Failure to obtain financing could
          have a
          material adverse effect on our business.
  23
 *We
            are dependent upon key members of management.* Our
            success depends to a significant degree upon the continuing contributions
            of our
            key management: Thomas Hudson, our CEO, Patrick Shutt our COO, and George
            King
            our President of Global Operations and Development, Robert Pollan our
            Chief
            Information and Strategy Officer. These individuals have the most familiarity
            with the products we offer and the markets in which we offer them. Lee
            Wiskowski
            and Douglas Stukel, our former co-CEOs and Robert T. Geras, our Chairman
            have
            been and will continue to be integral to our fund raising efforts. The
            loss of
            any of these individuals could have a material adverse effect on our
            business
            and we do not maintain key man insurance on any of these
            individuals.
 *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 shareholders of the
          corporation which sold its assets to Telecom Midwest. 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 over one year ago, but no formal
          demand
          has been made. We believe the judgment creditors and any other former
          Frontrunner common shareholders are not entitled to compensation and 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 us to incur material costs
          in
          defending any such claims.
  *We
          face the risk of product obsolescence if we fail to develop new
          products.* We
          expect that the market for our products and services 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 our current and anticipated future markets is very intense, and it is
          expected that existing and new competitors will seek to replicate much
          of the
          functionality of our products and services. Additionally, there can be
          no
          assurances that we will be able to successfully develop the next generation
          of
          products and services 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 or service is developed,
          competition has the ability to lower its pricing significantly to gain
          market
          share, due to the minimal incremental cost to product production. Additionally,
          certain aspects of the market may be lost to the extent over time “free”
software is developed to address this functionality. These factors could
          have a
          material adverse effect on our business and financial condition.
  In
          the
          high technology business, one of the largest barriers to entry for small
          and
          start-up companies is the concern by enterprise customers and suppliers
          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, since we have not attained break-even
          profitability since our inception and we continue to maintain significant
          debt
          on our balance sheet. This resistance could have a material adverse effect
          on
          our results of operations and financial condition.
  *Risk
          of delayed development of application performance market for Nexvu. Nexvu’s
          a* bility
          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 Nexvu to recognize significant revenues. Nexvu
          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.
          The success of our Nexvu products is dependent upon our ability to continue
          to
          support our engineering staff, which works on an ongoing basis both in
          improvement of the technology as well as providing a customer support function
          both as to operations and troubleshooting. Should we fail to be able to
          provide
          this critical support function, it could impair our ability to realize
          value on
          a continual basis from such product or to realize meaningful proceeds from
          any
          future disposition efforts with respect to the product.
  24
 *We
        face various Internet, Software and Software License Issues.* 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.
  Defects
        in our software could reduce demand for our products and expose us to costly
        liability that would adversely affect the Nexvu’s 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.
  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 with respect to our Nexvu operations,
        and
        may apply for additional patents regarding the activities of Nexvu and our
        other
        subsidiaries, 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.
        For
        those technologies that are the subject of trade secrets, there is not patent
        protection, and our ability to protect such competitive advantages will be
        a
        function of many factors which are not fully within our control, including
        maintenance of confidentiality agreements and general efforts to keep trade
        secret information from coming into the public domain. Failure to protect
        our
        patents and our confidential information (as well as associated business
        techniques) could have a material adverse impact upon the away in which the
        Company does business.
  25


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




**index
      to Consolidated Financial Statements**




**Capital
                Growth Systems, Inc. Consolidated Financial
                Statements**
            
            **Page**Report
                of Independent Registered Public Accounting Firm
            
            
            F-1Consolidated
                Balance Sheet as of December 31, 2006 and 2005
            
            
            F-2Consolidated
                Statements of Operations for the two years ended December 31, 2006
                and 2005
            
            
            F-3Consolidated
                Statements of Shareholders' Equity for the years ended December 31,
                2006
            
            
            F-4Consolidated
                Statements of Cash Flows for the two years ended December 31, 2006,
                and 2005
            
            
            F-5
                - F-6Notes
                to Consolidated Financial Statements
            
            
            F-7
                - F-32





26




**CAPITAL
      GROWTH SYSTEMS, INC.**


**CONSOLIDATED
      FINANCIAL STATEMENTS**





**DECEMBER
      31, 2006 and 2005**










**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  
 To
        the
        Board of Directors and Shareholders of
 Capital
        Growth Systems, Inc. and Subsidiaries
 
 We
        have
        audited the accompanying balance sheets of Capital Growth Systems and
        Subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related
        consolidated statements of income and comprehensive income, changes in
        stockholders’ equity, and cash flows for each of the two years in the period
        ended December 31, 2006. 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 audits.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversights 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
        audits 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 and
        Subsidiaries as of December 31, 2006 and 2005, and the results of its operations
        and its cash flows for each of the two years in the period ended December
        31,
        2006 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
        regards 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.
  As
        discussed in note 2 to the financial statements, the
        Company adopted SFAS 123R, *Share-Based Payments*, effective
        January 1, 2006.
  
 /s/Plante
        & Moran, PLLC
 Elgin,
        IL
 April
        20,
        2007


F-1




**CAPITAL
                  GROWTH SYSTEMS, INC.****CONSOLIDATED
                  BALANCE SHEET****December
                  31,**
              
              **December
                  31,****2006**
              
              **2005****ASSETS****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              1,203,819
              
              $
              436,842Accounts
                  receivable, net
              
              
              2,786,749
              
              
              1,232,606Inventory,
                  net
              
              
              1,115,753
              
              
              1,537,908Prepaid
                  expenses
              
              
              549,715
              
              
              121,466Other
                  current assets
              
              
              86,162
              
              
              34,987Total
                  Current Assets
              
              
              5,742,198
              
              
              3,363,809**FIXED
                  ASSETS -**net of accumulated depreciation
              
              
              4,750,471
              
              
              947,203**OTHER
                  ASSETS**Software
                  licensing fee, net
              
              
              10,244
              
              
              26,778Intangible
                  assets, net
              
              
              11,748,506
              
              
              2,812,334Goodwill
              
              
              15,078,633
              
              
              3,965,543Other
                  Assets
              
              
              50,696
              
              
              18,543Total
                  Other Assets
              
              
              26,888,079
              
              
              6,823,198**TOTAL
                  ASSETS**
              
              $
              37,380,748
              
              $
              11,134,210**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Current
                  maturities of long-term debt
              
              $
              24,147,700
              
              $
              3,815,337Current
                  maturities of obligations under capital leases
              
              
              42,872
              
              
              —Accounts
                  payable
              
              
              2,674,317
              
              
              536,453Accrued
                  expenses
              
              
              4,671,745
              
              
              1,389,514Deferred
                  revenue, current portion
              
              
              2,002,834
              
              
              1,536,369Advance
                  billings
              
              
              321,045
              
              
              964,734Warranty
                  Reserve
              
              
              152,050
              
              
              191,624Total
                  Current Liabilities
              
              
              34,012,563
              
              
              8,434,031**LONG-TERM
                  LIABILITIES**Deferred
                  revenue, net of current portion
              
              
              112,222
              
              
              —Long
                  term portion of debt
              
              
              1,309,194
              
              
              851,379Long
                  term portion of obligations under capital leases
              
              
              38,653
              
              
              —Total
                  Liabilities
              
              
              35,472,632
              
              
              9,285,410**SHAREHOLDERS'
                  EQUITY**Preferred
                  Stock, $.0001 par value, 5,000,000 authorized; 2,516.10 Series
                  B
                  Convertibleissued
                  and outstanding as of December 31, 2006 and none outstanding as
                  of
                  December31,
                  2005.
              
              
              —
              
              
              —Common
                  stock,$.0001 par value, 25,000,000 authorized; 17,115,754 and 17,015,754
                  issued and outstanding common stock at December 31, 2006 and December
                  31,
                  2005, respectively, 3,899,315 shares were issuable at December
                  31,
                  2006.
              
              
              2,101
              
              
              1,701Additional
                  paid-in capital
              
              
              24,519,495
              
              
              12,831,414Accumulated
                  other comprehensive loss
              
              
              (48,904
              )
              
              —Accumulated
                  deficit
              
              
              (22,564,576
              )
              
              (10,984,315
              )**SHAREHOLDERS'
                  EQUITY**
              
              
              1,908,116
              
              
              1,848,800**TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY**
              
              $
              37,380,748
              
              $
              11,134,210




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





F-2




**CAPITAL
                GROWTH SYSTEMS, INC.****CONSOLIDATED
                STATEMENTS OF OPERATIONS****Twelve
                months ended, December 31,****2006**
            
            **2005****REVENUE**
            
            $
            14,820,913
            
            $
            15,656,226**COST
                OF GOODS SOLD**
            
            
            7,507,679
            
            
            8,520,909**GROSS
                MARGIN**
            
            
            7,313,234
            
            
            7,135,317**OPERATING
                EXPENSES**Compensation
            
            
            8,366,826
            
            
            5,446,071Travel
                and entertainment
            
            
            373,657
            
            
            248,279Occupancy
            
            
            653,486
            
            
            490,099Professional
                fees
            
            
            1,418,281
            
            
            639,965Insurance
            
            
            318,342
            
            
            319,533Depreciation
                and amortization
            
            
            1,199,828
            
            
            852,000Goodwill
              impairment
              charge
            
            
            1,400,000
            
            
            -Other
                operating expenses
            
            
            1,193,258
            
            
            1,023,619**TOTAL
                EXPENSES**
            
            
            14,923,678
            
            
            9,019,566**OPERATING
                LOSS**
            
            
            (7,610,444
            )
            
            (1,884,249
            )**INTEREST
                EXPENSE, NET**
            
            
            3,909,466
            
            
            347,191**NET
                LOSS BEFORE INCOME TAXES**
            
            
            (11,519,910
            )
            
            (2,231,440
            )**INCOME
                TAXES**
            
            
            60,351
            
            
            61,448**NET
                LOSS**
            
            $
            (11,580,261
            )
            $
            (2,292,888
            )**Basic
                and Diluted Loss per Share**
            
            $
            (0.63
            )
            $
            (0.13
            )**Average
                Shares Outstanding**
            
            
            18,316,358
            
            
            16,984,606




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




F-3




**CAPITAL
                GROWTH SYSTEMS, INC.****CONSOLIDATED
                STATEMENTS OF SHAREHOLDERS' EQUITY**




**Common
                Shares Outstanding**
            
            
            **Series
                B Convertible Preferred Stock**
            
            
            **Common
                Stock**
            
            
            **Additional
                Paid-in Capital**
            
            
            **Accumulated**
              **Deficit**
            
            
            **Foreign
                Translation Adjustment**
            
            
            **Total
                Equity**
            
            
            **Comprehensive
                Income (Loss)**Balance,
                January 1, 2005
            
            
            16,940,754
            
            
            -
            
            $
            1,694
            
            $
            12,730,171
            
            $
            (8,691,427
            )
            $
            -
            
            $
            4,040,438Net
                Loss - 2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,292,888
            )
            
            -
            
            
            (2,292,888
            )
            $
            (2,292,888
            )Stock
                issued for Frontrunner acquisition
            
            
            75,000
            
            
            -
            
            
            7
            
            
            101,243
            
            
            -
            
            
            -
            
            
            101,250Balance,
                December 31, 2005
            
            
            17,015,754
            
            
            -
            
            $
            1,701
            
            $
            12,831,414
            
            $
            (10,984,315
            )
            $
            -
            
            $
            1,848,800
            
            $
            (2,292,888
            )Stock
                issued for consulting services
            
            
            100,000
            
            
            -
            
            
            10
            
            
            134,990
            
            
            -
            
            
            -
            
            
            135,000
            
            
            -Stock
                issued for 20/20 acquisition
            
            
            3,899,315
            
            
            2,516.10
            
            
            390
            
            
            5,167,244
            
            
            -
            
            
            -
            
            
            5,167,634
            
            
            -Stock
                based compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            1,297,769
            
            
            -
            
            
            -
            
            
            1,297,769
            
            
            -Stock
                warrants issued to employees
            
            
            -
            
            
            -
            
            
            -
            
            
            502,591
            
            
            -
            
            
            -
            
            
            502,591
            
            
            -Stock
                warrants issued to consultants
            
            
            -
            
            
            -
            
            
            -
            
            
            388,366
            
            
            -
            
            
            -
            
            
            388,366
            
            
            -Stock
                warrants issued for debt issuance
            
            
            -
            
            
            -
            
            
            -
            
            
            4,197,121
            
            
            -
            
            
            -
            
            
            4,197,121
            
            
            -Foreign
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (48,904
            )
            
            (48,904
            )
            
            (48,904
            )Net
                Loss - 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (11,580,261
            )
            
            
            
            
            (11,580,261
            )
            
            (11,580,261
            )Balance,
                December 31, 2006
            
            
            21,015,069
            
            
            2,516.10
            
            $
            2,101
            
            $
            24,519,495
            
            $
            (22,564,576
            )
            $
            (48,904
            )
            $
            1,908,116
            
            $
            (11,629,165
            )




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




F-4





**CAPITAL
                GROWTH SYSTEMS, INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS**




**Twelve
                months ended December 31,****2006**
            
            **2005****CASH
                FLOW FROM OPERATING ACTIVITIES****Net
                Loss**
            
            $
            (11,580,261
            )
            $
            (2,292,888
            )Adjustments
                to reconcile net loss to net cashused
                in operating activities:Depreciation
                and amortization
            
            
            1,199,828
            
            
            852,000Consulting
                expenses paid in common stock
            
            
            135,000
            
            
            -Consulting
                expenses issued in warrants
            
            
            388,366
            
            
            -Stock
                warrant expense issued with debt
            
            
            2,809,057
            
            
            -Stock
                option and warrant compensation expense issued to
                employees
            
            
            1,800,359
            
            
            -Goodwill
              impairment
              charge
            
            
            1,400,000
            
            
            -Changes
                in working capital items, net of amounts acquired:Accounts
                receivable
            
            
            (182,939
            )
            
            221,973Inventory
            
            
            422,155
            
            
            444,194Prepaid
                expenses
            
            
            (126,877
            )
            
            (31,163
            )Other
                current assets
            
            
            (49,869
            )
            
            84,365Deposits
                and other assets
            
            
            (445
            )
            
            26,109Accounts
                payable
            
            
            301,687
            
            
            (871,046
            )Accrued
                expenses
            
            
            181,948
            
            
            (103,609
            )Deferred
                revenue
            
            
            (94,576
            )
            
            64,286Advance
                billings
            
            
            (643,689
            )
            
            (249,296
            )Warranty
                reserve
            
            
            (39,574
            )
            
            76,5947,500,431
            
            
            514,407Net
                cash used in operating activities
            
            
            (4,079,830
            )
            
            (1,778,481
            )**CASH
                FLOW FROM INVESTING ACTIVITIES**Acquisition
                of 20/20, cash acquired
            
            
            49,856
            
            
            -Acquisition
                of CentrePath, net of cash acquired
            
            
            (5,011,672
            )
            
            -Acquisition
                of Global Capacity Group, net of cash acquired
            
            
            (5,326,879
            )
            
            -Purchase
                of fixed assets
            
            
            (105,118
            )
            
            (84,177
            )Payments
                for software license
            
            
            (309
            )
            
            (400
            )Net
                cash used in investing activities
            
            
            (10,394,122
            )
            
            (84,577
            )**CASH
                FLOW FROM FINANCING ACTIVITIES**Repayments
                of debt
            
            
            (1,148,567
            )
            
            (1,360,994
            )Issuance
                of debt
            
            
            16,438,399
            
            
            -Net
                cash provided by (Used in) Financing Activities
            
            
            15,289,832
            
            
            (1,360,994
            )Effect
                of exchange rate changes on cash and equivalents
            
            
            (48,903
            )
            
            -Increase
                (Decrease) in Cash
            
            
            766,977
            
            
            (3,224,052
            )Cash
                and Cash Equivalents - Beginning of Period
            
            
            436,842
            
            
            3,660,894Cash
                and Cash Equivalents - End of period
            
            $
            1,203,819
            
            $
            436,842




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




F-5




**SUPPLEMENTAL
                CASH FLOW INFORMATION:**Cash
                paid for interest
            
            $
            403,701
            
            $
            400,746Cash
                paid for income taxes
            
            
            351
            
            
            16,448**NON-CASH
                INVESTING AND FINANCING ACTIVITIES:**Common
                stock issued for the acquisition of Frontrunner
            
            $
            -
            
            $
            101,250Common
                stock issued for the acquisition of 20/20
            
            
            5,167,634
            
            
            -Debt
              refinanced for the acquisition of
              20/20
            
            
            3,559,416
            
            
            -




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





F-6




**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”), Frontrunner Network Systems Corp. (“Frontrunner”),
      CentrePath, Inc. (“CentrePath”), Global Capacity Group, Inc. (“GCG”), 20/20
      Technologies, Inc. (“20/20”) and its wholly-owned subsidiary, Magenta net Logic
      (“Magenta”) . Except where necessary to distinguish the six entities, we
      will refer to all six as the “Company.” All intercompany accounts have been
      eliminated in consolidation.




**Acquisition
      of 20/20 Technologies**





On
      September 8, 2006, the Company entered into an Agreement and Plan of Merger
      (the
“20/20 Merger Agreement”) with 20/20 Technologies, Inc., a Delaware corporation
      (“20/20”). Pursuant
      to the terms of the 20/20 Merger Agreement, the Company agreed to acquire all
      of
      the capital stock of 20/20 in exchange for certain cash, stock consideration
      and
      the assumption of certain indebtedness. The Company and 20/20 effected the
      transaction through a reverse triangular merger whereby a subsidiary
      established for the purpose of merger was merged with 20/20, and 20/20 was
      the surviving corporation (the “Merger”).





The
      aggregate consideration paid to 20/20 in connection with the Merger was
      $8,727,050, comprised of debt refinanced in the amount of $3,559,416 and stock
      valued at $5,167,634. The stock consideration consisted of 3,899,315
      shares of the Company's common stock, par value of $0.0001 (“Common Stock”) and
      2,516.10 shares of the Company's Series B preferred stock, par value $.0001
      (the
“Series B Preferred Stock”, and collectively with the shares of Common Stock,
      the “Transaction Shares”). The
      value
      of the Transaction Shares was based on the average closing price of the
      Company's Common Stock for the ten trading days immediately preceding the
      Closing Date and was equal to $0.68 per share. The
      Series B Preferred Stock, by its terms will automatically convert into an
      additional 3,700,147 shares of common stock upon the filing of articles of
      amendment to the Company's articles of incorporation authorizing the issuance
      of
      not less than 50,000,000 shares of common stock, and it enjoys a liquidation
      preference prior to conversion equal to $0.68 per share .
      A
      portion of the Transaction Shares have been held back as security in connection
      with certain indemnification obligations of 20/20 and its stockholders.




The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of 20/20. Under the purchase method of accounting, the total
      estimated consideration as shown in the table below is allocated to 20/20’s
      tangible and intangible assets and liabilities based on their estimated fair
      values as of the Closing Date. The consideration is allocated as
      follows:





Debt
                refinanced
            
            
            
            
            $
            3,559,416Value
                of stock issued
            
            
            
            
            
            5,167,634Professional
                fees
            
            
            
            
            
            250,000Total
                purchase price
            
            
            
            
            $
            8,977,050Assets
                and liabilities acquired/assumedCash
            
            $
            49,856Accounts
                receivable
            
            
            66,115Other
                current assets
            
            
            14,140Property
                and equipment, net
            
            
            9,904Other
                assets
            
            
            4,675Accounts
                payable
            
            
            (639,589
            )Accrued
                expenses and other current liabilities
            
            
            (357,783
            )Deferred
                revenue
            
            
            (258,254
            )Notes
                payable
            
            
            (3,247,479
            )Net
                liabilities assumed
            
            
            
            
            
            (4,358,415
            )Identifiable
                intangible assets
            
            
            
            
            
            4,525,400Goodwill
            
            
            
            
            
            8,810,065Total
            
            
            
            
            $
            8,977,050





F-7





The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:


**Fair Value**
              
              
              **Useful Life**
              
              
              **Annual Amortization**Developed
                  technology
              
              $
              3,755,400
              
              
              11
                  years
              
              $
              341,400Trade
                  name
              
              
              50,000
              
              
              3
                  years
              
              
              16,667Customer
                  base
              
              
              720,000
              
              
              8
                  years
              
              
              90,000$
              4,525,400
              
              
              
              
              $
              448,067




The
      amount allocated to goodwill is not deductible for
      tax purposes.




**Acquisition
      of CentrePath**




On
        November 22, 2006, the Company entered into an Agreement and Plan of Merger
        (the
“Merger Agreement”) with CentrePath, Inc., a Delaware corporation (“CentrePath”)
        pursuant to which CentrePath merged with and into a subsidiary of the Company
        established for that purpose. The merger consideration to be paid to the
        CentrePath stockholders was a cash amount equal to $6,750,000, subject to
        a
        post-closing net working capital adjustment. On November 30, 2006, the Company
        consummated the acquisition of CentrePath. Pursuant to the Merger Agreement,
        an
        additional payment of $750,000 related to the post-closing net working capital
        adjustment was agreed to, bringing the total amount of the merger consideration
        to $7,500,000. The additional payment due is recorded in accrued liabilities
        at
        December 31, 2006.


The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of CentrePath. Under the purchase method of accounting, the total
      consideration as shown in the table below is allocated to CentrePath’s tangible
      and intangible assets and liabilities based on their fair values as of the
      date
      of completion of the CentrePath acquisition. The consideration is allocated
      as
      follows:








Cash
            
            
            
            
            $
            7,500,000Professional
                fees
            
            
            
            
            
            150,000Total
                consideration
            
            
            
            
            $
            7,650,000Assets
                and liabilities acquired/assumedCash
                and cash equivalents
            
            $
            2,488,328Accounts
                receivable
            
            
            889,608Prepaid
                expenses
            
            
            263,120Property
                and equipment, net
            
            
            3,910,000Accounts
                payable
            
            
            (282,012
            )Accrued
                expenses
            
            
            (2,438,583
            )Deferred
                revenue
            
            
            (415,009
            )Capital
                lease
            
            
            (59,272
            )Net
                assets acquired
            
            
            
            
            
            4,356,180Identifiable
                intangible assets
            
            
            
            
            
            1,540,000Goodwill
            
            
            
            
            
            1,753,820Total
            
            
            
            
            $
            7,650,000





The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:


**Fair Value**
              
              **Useful Life**
              
              **Annual Amortization**Developed
                  technology
              
              $
              970,000
              
              
              9
                  years
              
              $
              107,778Trade
                  name
              
              
              90,000
              
              
              3
                  years
              
              
              30,000Customer
                  base
              
              
              480,000
              
              
              6
                  years
              
              
              80,000$
              1,540,000
              
              
              
              
              $
              217,778




The
      amount allocated to goodwill is not deductible for
      tax purposes.




F-8




**Acquisition
      of Global Capacity**





Effective
        December 12, 2006, the Company consummated the acquisition of Global Capacity
        Group, Inc. (“GCG”) pursuant to which GCG became a wholly-owned subsidiary of
        the Company. The aggregate cash consideration paid at closing in connection
        with
        the merger was $5,300,000. The former Global Capacity Group, Inc. stockholders
        will also be entitled to additional contingent consideration after the second
        and third anniversary dates of the merger if certain revenue and profitability
        thresholds are reached by GCG after the merger . The parties agreed to various
        revenue and gross margin combinations that could result in additional
        consideration of an amount between $1,500,000 and $3,000,000 on each of the
        second and third anniversary dates. The Company requires the Executives to
        be
        employed in order to receive any such additional consideration payments.
        Therefore, any additional payments or stock issued related to the contingent
        consideration will be recorded as compensation in the Company’s Statement of
        Operations in the period that it is earned. The revenue thresholds range
        between
        $9 million and $13.4 million and the gross profit thresholds range between
        27.5%
        and 30% of revenue. Any additional consideration paid on the second anniversary
        date must be paid in cash. Contingent consideration on the third anniversary
        date may be paid in cash or Capital Growth common stock at the Company’s
        discretion.
 
 The
        Company issued a series of 60 day bridge notes to provide the cash necessary
        to
        fund the purchase of the Global Capacity Group, Inc. As more fully described
        in
        Note 6, each bridge note bore interest at 8% per annum. In addition, for
        each
        $1,000,000 of bridge notes funded the lenders received a detachable warrant
        to
        purchase up to 225.00225 shares of series AA convertible preferred stock
        of the
        Company, which by their terms will be convertible into 500,000 shares of
        common
        stock upon the authorization of the underlying common stock. The warrants
        are
        exercisable on or before December 31, 2009 at an as converted to common stock
        purchase price of $0.45 per share. On December 11, 2006, an aggregate of
        $4,700,000 of bridge notes were issued. The balance of the merger consideration
        was provided by available cash from the Company.




The
      Company established a tranche of up to $5,500,000 of 60 day bridge notes that
      it
      was issuing pursuant to a global bridge note purchase agreement dated as of
      December 11, 2007, by and among the Company and various lenders party thereto,
      to provide the cash necessary to fund the purchase of the Global Capacity Group,
      Inc. ($5,300,000) plus an additional amount up to $200,000 for general
      working capital purposes. Each bridge note bore interest at 8% per annum and
      was
      secured by a collateral pledge of the stock of Global Capacity Group, Inc.
      as
      well as a junior security interest in the assets of the Company. In addition,
      for each $1,000,000 of bridge notes funded the lenders received a detachable
      warrant to purchase up to 225.00225 shares of series AA convertible preferred
      stock of the Company, which by their terms will be convertible into 500,000
      shares of common stock upon the authorization of the underlying common stock,
      and with the warrants exercisable on or before December 31, 2009 at an as
      converted to common stock purchase price of $0.45 per share. The certificate
      of
      designations for the series AA convertible preferred stock provides that the
      series AA convertible preferred stock will automatically convert to common
      stock
      once the articles of incorporation for the Company are amended to authorize
      the
      issuance of not less than 200,000,000 shares of common stock.  On
      December 11, 2006, an aggregate of $4,700,000 of bridge notes were issued. 
The balance of the merger consideration was provided by available cash
      from the Company.





The
      Company hired a third-party independent valuation firm to assist in determining
      the fair value of the assets acquired and liabilities assumed, including
      identifying the value of intangible assets that existed at the date of the
      acquisition of Global Capacity Group, Inc. Under the purchase method of
      accounting, the total consideration as shown in the table below is allocated
      to
      Global Capacity, Inc’s tangible and intangible assets and liabilities based on
      their fair values as of the date of completion of the Global Capacity Group,
      Inc. acquisition. The consideration is allocated as follows:




Cash
              
              
              
              
              $
              5,300,000Professional
                  fees
              
              
              
              
              
              150,000Total
                  consideration
              
              
              
              
              $
              5,450,000Assets
                  and liabilities acquired/assumedAccounts
                  receivable
              
              
              415,481Prepaid
                  expenses & other assets
              
              
              52,451Property
                  and equipment, net
              
              
              192,002Cash
                  overdraft
              
              
              (26,879
              )Accounts
                  payable
              
              
              (364,575
              )Accrued
                  expenses
              
              
              (303,917
              )Notes
                  payable
              
              
              (75,398
              )Capital
                  lease
              
              
              (28,370
              )Net
                  liabilities assumed
              
              
              
              
              
              (139,205
              )Identifiable
                  intangible assets
              
              
              
              
              
              3,640,000Goodwill
              
              
              
              
              
              1,949,205Total
              
              
              
              
              $
              5,450,000




The
      Company valued the identifiable intangible assets acquired using an appraisal.
      Identifiable intangible assets consist of:


**Fair Value**
              
              **Useful Life**
              
              **Annual Amortization**Developed
                  technology
              
              $
              1,070,000
              
              
              5
                  years
              
              $
              214,000Trade
                  name
              
              
              210,000
              
              
              3
                  years
              
              
              70,000Retail
                  customer base
              
              
              2,210,000
              
              
              10
                  years
              
              
              221,000Wholesale
                  customer base
              
              
              150,000
              
              
              6
                  years
              
              
              25,000$
              3,640,000
              
              
              
              
              $
              530,000




The
      amount allocated to goodwill is not deductible for
      tax purposes.





F-9




**Unaudited
      Pro Forma Financial Information**





The
      following unaudited pro forma condensed consolidated results of operations
      have
      been prepared as if the acquisition of 20/20, CentrePath and Global Capacity
      had
      occurred as of January 1, 2005:


**Years Ended**
                **December 31,****2006******
              
              **2005******Net
                  revenues
              
              $
              30,998,218
              
              $
              29,820,317Net
                  loss
              
              $
              (21,664,840
              )
              $
              (17,622,967
              )Net
                  loss per share:Basic
                  and diluted
              
              $
              (0.98
              )
              $
              (0.84
              )Weighted
                  average shares outstanding:Basic
                  and diluted
              
              
              22,215,673
              
              
              20,883,921




The
      unaudited pro forma condensed consolidated results of operations are not
      necessarily indicative of results that would have occurred had the acquisitions
      occurred as of January 1, 2005, nor are they necessarily indicative of the
      results that may occur in the future.






**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.




**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 $179,848 and $ 83,148
      as
      of December 31, 2006 and 2005, respectively. 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.




F-10




**Revenue
      Recognition**




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




For
      revenue from product sales and services, the Company recognizes revenue in
      accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition”
(“SAB104”), 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. For revenue from the
      sale of software is recognized in accordance with SOP97-2, *Software Revenue
      Recognition*, as amended by SOP98-9, modification of SOP97-2, *Software
      Revenue Recognition with Respect to Certain Transactions*.




Both
      SOP97-2 and SAB104 require 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. The allocation of license and maintenance is based on the residual
      method of accounting as prescribed in SOP97-2. Under this method the Company
      has
      established Vendor Specific Objective Evidence (VSOE) for the value of its
      post-contract support agreements at 20% of the license amount, which is based
      on
      the amount charged to its customer in the renewal year. Therefore, of the total
      amount received under the arrangement, the Company allocates 20% to maintenance
      and the remaining amount to software license.




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 also earns sales revenue from providing its customers ongoing access
        to
        broadband data services and from the installation of those services. Ongoing
        services are billed in advance and the installation of those services are
        billed
        in arrears. The Company recognizes sales revenue when persuasive evidence of an arrangement exists, delivery has occurred, the
        fee is
        fixed or determinable, and collectibility is probable. Advance billings are
        recorded as deferred revenue in the month prior to delivery.
  The
          Company defers maintenance and services revenue related to providing network
          monitoring and the ongoing access to broadband. This revenue is recognized
          ratably over the term of such contracts. The Company defers recognition
          of
          revenue on consulting and training billings until the related services
          are
          performed.




**Concentrations
      of Credit Risk**




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




**Product
      Warranties**




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





**Research
      and Development**




The
      Company accounts for research and development costs in accordance with 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 2006 and 2005 were $1.3 million and $1.4
      million, respectively.




F-11




**Comprehensive
      loss**




SFAS
      No.
      130, “Reporting Comprehensive Income,” establishes standards for reporting and
      displaying of comprehensive income, its components and accumulated balances.
      Comprehensive income (loss) 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 (loss) be reported in a financial statement that is displayed with the
      same prominence as other financial statements. The following is the Company’s
      comprehensive loss for the year ended December 31, 2006 and
      2005:


**Years Ended****December 31,****2006******
              
              **2005******Net
                  loss as reported
              
              $
              (11,580,261
              )
              $
              (2,292,888
              )Exchange
                  translation loss
              
              
              (48,904
              )
              
              —Comprehensive
                  loss
              
              
              (11,629,165
              )
              
              (2,292,888
              )Basic
                  and diluted
              
              $
              (0.63
              )
              $
              (0.13
              )Weighted
                  average shares outstanding:Basic
                  and diluted
              
              
              18,316,358
              
              
              16,984,606




In
          the
          first quarter of 2006, the Company adopted Statement of Financial Accounting
          Standards No. 123R, “Share-Based Payment” (SFAS 123R), which revises SFAS 123,
“Accounting for Stock-Based Compensation” (SFAS 123) and supersedes Accounting
          Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB
          25). SFAS 123R requires that share-based payment transactions with employees
          be
          recognized in the financial statements based on their fair value and recognized
          as compensation expense over the vesting period. Prior to SFAS 123R, the
          Company
          disclosed the pro forma effects of SFAS 123 under the minimum value method.
          The
          Company adopted SFAS 123R effective January 1, 2006, prospectively for
          new
          equity awards issued subsequent to January 1, 2006. The adoption of SFAS
          123R
          for the year ended December 31,
          2006 resulted in the recognition of stock-based compensation expense of
          $1,800,359. No tax benefit has been recorded due to the full valuation
          allowance
          on deferred tax assets that the Company has recorded.
  Prior
        to January 1, 2006, the Company accounted for employee stock-based
        compensation in accordance with provisions of APB 25, and Financial
        Accounting Standards Board Interpretation No. 44, “Accounting for Certain
        Transactions Involving Stock Compensation — an Interpretation of APB
        No. 25”, and complied with the disclosure provisions of SFAS 123 and
        SFAS No. 148, “Accounting for Stock-Based Compensation —
Transaction and Disclosure” (SFAS 148). Under APB 25, compensation
        expense is based on the difference, if any, on the date of the grant, between
        the fair value of our stock and the exercise price of the option. The Company
        amortized deferred stock-based compensation using the straight-line method
        over
        the vesting period.
  SFAS No. 123,
        as amended by SFAS No. 148, “Accounting for Stock Based
        Compensation — Transition and Disclosure” (SFAS No. 148), defines
        a fair value method of accounting for issuance of stock options and other
        equity
        instruments. Under the fair value method, compensation cost is measured at
        the
        grant date based on the fair value of the award and is recognized over the
        service period, which is usually the vesting period. Pursuant to
        SFAS No. 123, companies were not required to adopt the fair value
        method of accounting for employee stock-based transactions. Companies were
        permitted to account for such transactions under APB 25, but were required
        to disclose in a note to the financial statements pro forma net loss and
        per
        share amounts as if a company had applied the fair methods prescribed by
        SFAS 123. The Company applied APB Opinion 25 and related interpretations in
        accounting for its stock awards granted to employees and directors and has
        complied with the disclosure requirements of SFAS 123 and
        SFAS 148.
  All
        stock awards granted by the Company have an exercise based on either the 10
        day trailing price or the closing market value on date of grant of the
        underlying common stock. Prior to the adoption for SFAS 123R, had
        compensation cost for the grants issued by the Company been determined based
        on
        the fair value at the grant dates for grants consistent with the fair value
        method of SFAS 123, the Company’s cash flows would have remained unchanged;
        however, net loss and loss per common share would have been increased for
        the
        year ended December 31, 2005 to the pro forma amounts indicated
        below:
  Net
                  loss:As
                  reported
              
              $
              (2,292,888
              )Add:
                  Employee compensation expense included in net loss
              
              
              —Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards
              
              
              (62,041
              )Pro
                  forma
              
              $
              (2,354,929
              )Loss
                  per common share:As
                  reported
              
              $
              (0.13
              )Pro
                  forma
              
              $
              (0.14
              )
 
 The
        fair value of each award is estimated on the date of the grant using the
        Black-Scholes option-pricing model (minimum value method), assuming no expected
        dividends and the following assumptions:
  **2006
                  Grants**
              
              **2005
                  Grants**Expected
                  volatility factors
              
              
              100
              %
              
              n/aApproximate
                  risk free interest rates
              
              
              5.17
              %
              
              3.85
              %Expected
                  lives
              
              
              5
                  Years
              
              
              5
                  Years
  The
        determination of the fair value of all awards is based on the above assumptions.
        See Note 5 for more information regarding the Company’s stock-based
        compensation plans.
  The
        Company accounts for equity instruments issued for services and goods to
        non-employees under SFAS 123; EITF 96-18, “Accounting for Equity
        Instruments that are Issued to Other Than Employees for Acquiring, or in
        Conjunction with Selling, Goods or Services”; and EITF 00-18, “Accounting
        Recognition for Certain Transactions Involving Equity Instruments Granted
        to
        Other Than Employees”. Generally, the equity instruments issued for services and
        goods are for shares of the Company’s common stock or warrants to purchase
        shares of the Company’s common stock. These shares or warrants generally are
        fully-vested, nonforfeitable and exercisable at the date of grant and require
        no
        future performance commitment by the recipient. The Company expenses the
        fair
        market value of these securities over the period in which the related services
        are received.


F-12





**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 potential
      common shares, 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,
      2006, there were 9,324,527 (Note 5) stock options and 15,600,641 (Note 9) stock
      warrants outstanding that could be converted into potential common shares.
      There
      are also 2,516.10 shares of Series B Convertible preferred stock that could
      potentially be converted into 3,700,147 shares of common stock that are
      outstanding at December 31, 2006. As of December 31, 2005, there
      were 1,524,527 stock options and 1,301,389 stock warrants outstanding that
      could be converted into common stock.





**Goodwill
      and Intangible Assets**





Goodwill
      is the excess of cost of an acquired entity over the amounts assigned to assets
      acquired and liabilities assumed in a business combination. Goodwill is not
      amortized. Goodwill is tested for impairment annually, and will be tested for
      impairment between annual tests if an event occurs or circumstances change
      that
      would indicate the carrying amount may be impaired. Impairment testing for
      goodwill is done at a reporting unit level. Reporting units are one level below
      the business segment level, but can be combined when reporting units within
      the
      same segment have similar economic characteristics. The Company has determined
      that there are five reporting units. In
      2006,
      the Company determined the carrying value of Frontrunner's goodwill exceeded
      the
      implied fair value of goodwill by $1.4 million and therefore recognized a charge
      of this amount in 2006. The Company determined the fair value was equal to
      what
      Frontrunner could be sold for in a current transaction between willing parties,
      since the decision was made in 2007 to dispose of this asset. Note that
      this is an estimate and has not been finalized.The Company
      also engaged a third-party valuation firm to assist in the purchase price
      allocation for its acquisition of 20/20, CentrePath and Global Capacity. As
      part
      of this process, the valuation firm assessed the carry value of the residual
      goodwill for each respective entity and determined no impairment existed as
      of
      the acquisition date. Also, there have been no events or circumstances
      subsequent to each of the acquisition dates that would indicate an impairment
      of
      goodwill exists. The changes in the carrying amount of goodwill for the years
      ended December 31, 2006 and 2005 was as follows:





**December 31,****2006**
            
            **2005**Beginning
                of the year
            
            $
            3,965,543
            
            $
            3,965,543Goodwill
              impairment
              charge for Frontrunner
            
            
            (1,400,000
            )
            
            —Acquisition
                of 20/20 Technologies, Inc.
            
            
            8,810,065
            
            
            —Acquisition
                of CentrePath, Inc.
            
            
            1,753,820
            
            
            —Acquisition
                of Global Capacity Group, Inc.
            
            
            1,949,205
            
            
            —End
                of the year
            
            $
            15,078,633
            
            $
            3,965,543




F-13




Intangible
      assets are assets acquired from an independent party. The assets have no
      significant residual values. There are no intangible assets which are not
      subject to amortization. The acquired intangible assets are tested for
      impairment whenever events or circumstances indicate that a carrying amount
      of
      an asset (asset group) may not be recoverable. The Company has determined that
      no material impairments existed as of December 31, 2006. An impairment loss
      is recognized when the carrying amount of an asset exceeds the estimated
      undiscounted cash flows used in determining the fair value of the asset. The
      amount of the impairment loss to be recorded is calculated by the excess of
      the
      asset’s carrying value over its fair value. Fair value is generally determined
      using a discounted cash flow analysis. The acquired intangible assets by major
      intangible asset class at December 31, 2006 were as
      follows:




**Acquired**
              **Value**
            
            
            **Amortization**
              **Period in Years**Developed
                technology
            
            $
            5,795,400
            
            
            5
                to 11Trade
                names
            
            
            350,000
            
            
            3Customer
                base
            
            
            7,175,358
            
            
            6
                to 10$
            13,320,758
            
            
            8.52
                weighted average
                years




Gross
      carrying amounts and accumulated amortization of the acquired other intangibles
      were as follows for each major intangible asset class:




**As of December 31, 2006****Gross Carrying**
              **Amount**
            
            
            **Accumulated**
              **Amortization**
            
            
            **Net Balances**Developed
                technology
            
            $
            5,795,400
            
            $
            (141,221
            )
            $
            5,654,179Trade
                names
            
            
            350,000
            
            
            (13,889
            )
            
            336,111Customer
                base
            
            
            7,175,358
            
            
            (1,417,142
            )
            
            5,758,216$
            13,320,758
            
            $
            (1,572,252
            )
            $
            11,748,506






**As of December 31, 2005****Gross Carrying**
              **Amount**
            
            
            **Accumulated**
              **Amortization**
            
            
            **Net Balances**Customer
                base
            
            $
            3,615,358
            
            $
            (803,024
            )
            $
            2,812,334




Amortization
      expense for the years ended December 31, 2006 and 2005 related to the
      acquired intangible assets was $769,229 and $598,288, respectively.





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




2007
            
            $
            1,725,0042008
            
            
            1,698,5482009
            
            
            1,659,5242010
            
            
            1,532,8662011
            
            
            1,353,550Thereafter
            
            
            3,779,014$
            11,748,506




F-14




**Impairment
      of Long-lived Assets**




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




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




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




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




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




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




· 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.




Excluding
      the goodwill impairment charge of $1.4 million recognized in 2006, no other
      impairment charges related to the Company's long-lived assets was recognized
      in
      2006 or 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, 2006, the Company's current liabilities exceeded its current assets
      by $28.3 million. Included in the current liabilities is approximately $24
      million of current maturies of long-term debt and capital leases payable. This
      debt reflects pre-existing balances assumed from the acquisition of Frontrunner
      during 2004, the debt refinanced and other assumption of debt from our
      acquisition of 20/20, the three short-bridge notes and the mandatory convertible
      notes issued in 2006. Cash on hand at December 31, 2006 was $1.2 million. The
      company has incurred operating losses of $11.6 million and $2.3 million for
      the
      two years ended December 31, 2006 and 2005 respectively. Additionally, cash
      used
      in operating activities were $4.1 million and $1.8 million for the two years
      ended December 31, 2006 and 2005 respectively.





The
      Company’s net working capital deficiency, recurring losses and negative cash
      flows from operations raise substantial doubt about its ability to continue
      as a
      going concern. During 2006, the Company completed three acquisitions which
      significantly increased the amount of debt and overall losses for the year.
      On
      January 19, 2007, the Company successfully completed the initial closing of
      new
      private offering of Units comprised of Series AA Preferred Convertible Stock
      with 100% warrants coverage and the Company concluded the offering on April
      9,
      2007, at which time an aggregate of approximately $21 million of equity was
      raised (from a combination of new cash infusion and conversions of debt to
      equity). In addition, at or about the time of the initial equity closing the
      Company raised approximately an additional $13.4 million of debt financing
      pursuant to a line of credit established with Hilco Financial, LLC. (initial
      draw of $7.0 million) and a secured subordinated term loan from a smaller number
      of individuals, bringing aggregate debt and equity funding to approximately
      $35
      million. This capital raise allowed the Company to reduce the existing
      indebtedness and fund our current working capital needs. However, the Company
      continues to utilize cash to fund its current operations. The Company’s cash
      balance as of April 9, 2007, combined with the ability to draw against
      a line of credit with Hilco Financial totaled $2.3 million. The Company
      currently believes this level of working capital will be sufficient to fund
      the
      operations until they start generating positive cash flow from operations in
      2007. However, if the Company revenues do not materialize as anticipated, it
      may
      be forced to raise additional capital through issuance of new equity or
      increasing its debt load, or a combination of both. There can be no assurance
      that we will be successful in raising additional capital or issuing additional
      indebtedness if the need should arise, or that any such raise may not be
      dilutive to existing shareholders.




F-15




**Reclassifications**




Certain
      amounts previously reported have been reclassified to conform to the current
      period presentation.




**Recent
      Accounting Pronouncements**




In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      No. 48 “Accounting for Uncertainty in Income Taxes” an interpretation of FASB
      Statement No. 109 “Accounting for Income Taxes”. FASB Interpretation No. 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with FASB Statement No. 109. The
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. The Interpretation also provides guidance
      on de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The Interpretation is effective for fiscal
      years beginning after December 15, 2006. We do not expect the adoption of the
      interpretation to have a significant impact on our financial position and
      results of operations.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      (SFAS) No. 157 “Fair Value Measurements”, which defines fair value, establishes
      a framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements. SFAS No. 157
      will
      apply whenever another standard requires (or permits) assets or liabilities
      to
      be measured at fair value. The standard does not expand the use of fair value
      to
      any new circumstances, and is effective beginning after December 31, 2007.
      We
      are currently evaluating the impact of adopting SFAS No. 157 on our financial
      position and results of operations.




**NOTE
      3 - Inventories**




Inventories
      as of December 31, 2006 and 2005 consist of the following:




**As
                of December 31,****2006**
            
            
            **2005**Equipment
            
            $
            1,311,148
            
            $
            1,459,357Work
                in process
            
            
            256,722
            
            
            718,512Gross
                inventory
            
            
            1,567,870
            
            
            2,177,869Inventory
                reserve
            
            
            (452,117
            )
            
            (639,961
            )Net
                inventories
            
            $
            1,115,753
            
            $
            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
      the
      other five companies have 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-16





**NOTE
      4 - Software License Agreement**





On
      August
      31, 2002, 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 initial software licensing
      fee
      was $300,000 with annual upgrade and maintenance charges of $15,000. The
      remaining unamortized balance of the initial $300,000 payment was $0 at December
      31, 2006 and 2005. In addition to this amount, the Company was required to
      make
      annual minimum royalty payments over a five year period which totals $500,000.
      During 2004, the Company recorded a full valuation for the remaining obligation
      under this agreement; therefore the unamortized balance of the $500,000
      obligation was $0 at December 31, 2006 and December 31, 2005. The Company has
      an
      outstanding obligation at the end December 31, 2006 of $375,000, of which
      $100,000 was due in 2006, $125,000 in 2007 and $150,000 in 2007. We are
      currently in the process of renegotiating the terms, which could result in
      us
      having to make additional longer term royalty payments then those stated
      above.


**Note
        5 - Stock Based Compensation**
 
 **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 2003 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, 2006, we have issued and outstanding 1,524,527 stock options
        under
        the plan, net of forfeitures.
  **Executive
        Stock Option Agreement**
  On
        June 29, 2006, pursuant to the terms of an Employee Option Agreement, as
        amended, the Company granted its new CEO, Mr.Thomas G. Hudson, an option
        to
        acquire 1,496,993 shares of common stock of the Company at a strike price
        equal
        to the closing price of the Company's common stock as of that date ($.70
        per
        share). On September 8, 2006, the Company amended this option agreement and
        increased the number of shares by 303,007 shares, also at an exercise price
        of
        $.70 per share. Additionally in conjunction with the acquisition of 20/20,
        two
        senior executives were each granted options to acquire 1,500,000 shares of
        common stock of the Company at $.70 per share. In accordance with the terms
        of
        each of these option agreements (i) 25% of such options vested upon execution
        of
        the Agreement, and (ii) 25% shall thereafter vest on the yearly anniversary
        of
        the Agreement over the next three (3) years. Accordingly, 1,200,000 of stock
        options are vested under these three agreements, as amended.
  **Performance
        Option Agreement**
  Under
        employment agreements with three newly hired senior executives of the Company,
        3,000,000 options to acquire common stock of the Company at $.70 were issued
        during 2006, subject to vesting restrictions. These performance option
        agreements are designed to deliver and attain certain revenue objectives
        and
        will vest on the following basis:  upon each realization by the Company of
        an incremental $20 million of third party service and/or maintenance revenue
        from new or existing customers, with gross margins in excess of 30%, pursuant
        to
        an agreement of one year or more, 50% of the options will vest; the remaining
        options vest upon realization by the Company of a second $20 million of third
        party service and/or maintenance revenue from new or existing customers,
        with
        gross margins in excess of 30%. As of December 31, 2006, no options have
        vested
        under this plan.
  Options
        issued to directors and employees during the years ended December 31, 2006
        were as follows:


F-17




The
        following table summarizes the activity under the 2003 stock option plan
        and
        other stock grants for January 1, 2005 to December 31, 2006:
  Options
                  Outstanding:
              
              
              **Number
                    of****Shares**
              
              
              **Price
                    per****Share**
              
              
              **Weighted****Average
                    Price****Per
                  Shares**January
                  1, 2005
              
              
              1,139,907
              
              $
              0.95
                  - 1.35
              
              
              1.34Granted
              
              
              400,000
              
              
              1.35
              
              
              1.35Terminated
              
              
              15,380
              
              
              0.95
                  - 1.35
              
              
              1.35January
                  1, 2006
              
              
              1,524,527
              
              
              0.95
                  - 1.35
              
              
              1.34Granted
              
              
              7,800,000
              
              
              0.70
              
              
              0.70December
                  31, 2006
              
              
              9,324,527
              
              $
              0.70
                  - 1.35
              
              
              0.81Vested
                  Shares:Vested,
                  December 31, 2006
              
              
              2,241,560
              
              $
              0.70
                  - 1.35
              
              
              1.00
 
 The
        aggregate intrinsic value for options vested and outstanding as of December
        31,
        2006 totaled $602,664 and the weighted average contractual life of those
        options
        was 6.18 years.
  As
        of December 31, 2006, $2,749,453 of compensation expense remained to be
        recognized on the stock options above including $1,365,576 related to options
        under Performance Agreements. The expense will be recognized ratably over
        3
        years. The Company has not recognized any deferred income tax benefit related
        to
        stock-based compensation due to our deferred tax asset being fully
        reserved.
 
 The
        weighted average fair value per stock option issued during the year ended
        December 31, 2006 and 2005 was $0.503 and $0.218,
        respectively.
  The
        following table shows the effects of adopting SFAS 123R on selected
        reported items (referred to in the table as “As Reported”) and what those items
        would have been under previous guidance under APB No. 25:
  **Year
                  Ended December 31, 2006****Pro
                  Forma****As**
              
              **Under****Reported**
              
              **APB
                  No. 25**
              
              **Difference**Net
                  Loss
              
              $
              (11,580,261
              )
              $
              (9,779,902
              )
              $
              (1,800,359
              )Cash
                  flows used in operating activities
              
              
              (4,079,830
              )
              
              (4,079,830
              )
              
              —Cash
                  flows from in financing activities
              
              
              15,289,832
              
              
              15,289,832
              
              
              —Basic
                  and diluted loss per common share
              
              $
              (0.63
              )
              $
              (0.53
              )
              $
              0.10
  A
        summary of compensation expense recognized for the issuance of stock options
        and
        warrants for the year ended December 31, 2006 follows:
  Stock-based
                  compensation costs included in:Compensation
              
              $
              1,800,359Total
                  stock-based compensation costs
              
              $
              1,800,359
  401(k)
        Plan


20/20
      sponsors a defined-contribution 401(k) plan without a matching provision for
      its
      U.S. employees. There have been no 20/20 contributions to the 401(k) plan from
      the acquisition date to December 31, 2006. Magenta
      20/20 administers a Group Personal Pension Plan which is compliant with UK
      Government “Stakeholder” provisions. Employees are free to contribute any
      percentage of their salary (minimum 3%), and Magenta makes a 2% lower
      contribution, with a minimum of 3% and a maximum of 5%. Magenta 20/20
      contributions from the acquisition date to December 31, 2006 totaled
      $3,613.





CentrePath
      and Global Capacity Group does not offer any type of retirement plan to its
      employees.





Nexvu
      also has a 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.





Frontrunner
      has a 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
      2006 and 2005 was $113,642 and $119,425, respectively.




F-18




**NOTE
      6 - Debt**





Debt
      as
      of December 31, 2006 and December 31, 2005 consist of the
      following:




December
                31, 2006
            
            December
                31, 2005Secured
                    short term notes payable to various parties, with a face amount
                    of
                    $5,987,367 bearing interest at 18%, secured by all of the assets
                    of 20/20
                    and Nexvu, due January 2007. The debt instrument also provided
                    for the
                    issuance of stock warrants allowing the holder to purchase 4,787,137
                    shares of common stock (or equivalent) of the Company at an exercise
                    price
                    between $.45 and $.70 per share. Using the Black Scholes Model,
                    the
                    Company estimated the fair value of the warrants to be $1,554,219
                    and
                    allocated that amount of the proceeds to the warrants resulting
                    in a
                    discount on the notes payable. As of December 31, 2006, the balance
                    of the
                    debt due was reported net of a $64,758
                    discount.
            
            $
            5,922,609
            
            $
            -Secured
                  short term notes payable to various parties, with a face amount
                  of
                  $7,950,000 bearing interest at 8%, secured by all of the assets
                  of
                  CentrePath, due January 2007. The debt instrument also provided
                  for the
                  issuance of stock warrants allowing the holder to purchase 4,925,000
                  shares of common stock (or equivalent) of the Company at an exercise
                  price
                  of $.45 per share. Using the Black Scholes Model, the Company estimated
                  the fair value of the warrants to be $1,349,181 and allocated that
                  amount
                  of the proceeds to the warrants resulting in a discount on the
                  notes
                  payable. As of December 31, 2006, the balance of the debt due was
                  reported
                  net of a $652,104 discount.
            
            
            7,197,896
            
            
            -Secured
                    short term notes payable to various parties, with a face amount
                    of
                    $4,700,000 bearing interest at 8%, secured by all of the assets
                    of Global
                    Capacity Group, due January 2007. The debt instrument also provided
                    for
                    the issuance of stock warrants allowing the holder to purchase
                    2,350,000
                    shares of common stock (or equivalent) of the Company at an exercise
                    price
                    of $.45 per share. Using the Black Scholes Model, the Company
                    estimated
                    the fair value of the warrants to be $810,077 and allocated that
                    amount of
                    the proceeds to the warrants resulting in a discount on the notes
                    payable.
                    As of December 31, 2006, the balance of the debt due was reported
                    net of a
                    $540,051 discount.
            
            
            4,159,949
            
            
            -Mandatory
                  convertible promissory notes to various parties, with a face amount
                  of
                  $1,275,000 bearing interest at 8% per annum and mandatorily convertible
                  into the securities issued by the Company on the terms of the offering
                  completed on January 19, 2007 (see Note 16 - “Subsequent Events”). The
                  debt instrument also provided for the issuance of stock warrants
                  allowing
                  the holder to purchase 255,000 shares of common stock (or equivalent)
                  of
                  the Company at an exercise price of $.45 per share. Using the Black
                  Scholes Model, the Company estimated the fair value of the warrants
                  to be
                  $149,887 and allocated that amount of the proceeds to the warrants
                  resulting in a discount on the notes payable. As of December 31,
                  2006, the
                  balance of the debt due was reported net of a $131,151
                  discount.
            
            
            1,143,849
            
            
            -Promissory
                notes to US Bank bearing interest at the rate of 6.75%, secured by
                vehicles of Global Capacity Group. One of the notes requires monthly
                payments in the amount of $1,027 and expires in September 2010 and
                the
                other note requires monthly payments in the amount of $873 and expires
                in
                October 2010.
            
            
            75,398
            
            
            -Promissory
                note payable to DTD Investments, LLC, secured by the Company’s accounts
                receivable from CNT Telecom Services, Inc., which has as its interest
                rate
                the right to participate in the proceeds the Company receives with
                respect
                to this contract (anticipated over the life to the contact to return
                the
                original principal and pay “participation interest” equal to approximately
                $470,000).
            
            
            406,187
            
            
            -




F-19




Demand
                note payable to Harris Bank, plus interest at 1.50% above prime rate;
                9.75% at December 31, 2006, until the loan is paid in full. 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).
            
            
            2,478,122
            
            
            3,155,000Unsecured
                note payable to various creditors of 20/20, past due, bearing interest
                rates between 8% and 16%. All notes are in default
            
            
            1,610,000
            
            
            -Unsecured
                note payable to various creditors with interest rates at HSBC plus
                4%,
                principal payments commencing in January 2007, maturing December
                2008.
            
            
            1,257,992
            
            
            -Promissory
                note payable to Nortel Networks, payable in monthly payments of $27,776
                through October 2009. Secured by certain assets of Frontrunner. Interest
                on the note is fixed at 7.25%.
            
            
            851,379
            
            
            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,
                2006,
                Frontrunner was in default under the terms of the
                agreement.
            
            
            103,505
            
            
            178,070Unsecured
                promissory note payable to Review Video, payable in monthly payments
                of
                $10,000 through September 2006. Interest on the note is fixed at
                7.25%
            
            
            -
            
            
            87,926





Unsecured
                note payable to related party creditor, unsecured, payable in monthly
                installments of $12,500, including interest at 8.25%, through December
                2005. The Company is in default under the terms of this
                note.
            
            
            85,143
            
            
            96,976Unsecured
                installment payment agreement to New York State Department of Taxation
                and
                Finance, payable in monthly payments of $5,455 through June 2006.
                Includes
                principal and imputed interest and penalties at 16.67%.
            
            
            -
            
            
            36,153Various
                unsecured loans from employees of Magenta netLogic, bearing interest
                at
                8.43%, due upon demand
            
            
            164,865
            
            
            -Total
                debt
            
            
            25,456,894
            
            
            4,666,716Less:
                current maturities
            
            
            24,147,700
            
            
            3,815,337Long
                term portion
            
            $
            1,309,194
            
            $
            851,379





As
      of
      December 31, 2006, the Company is in default on several of the loan agreements.
      The Company is in arrears on the total Global Crossing note, Harris note and
      the
      unsecured note payable to a related party creditor. There have been no adverse
      actions from these creditors concerning the arrearage amount. On January 19,
      2007, the Company successfully completed an equity funding, which allowed for
      most of the above debt to be either repaid, extended or converted into equity
      and is no longer in default. Refer to Note 16 “Subsequent Events” for a complete
      description of the recapitalization.




The
      weighted-average interest rate on the debt listed above is 9.87% as of December
      31, 2006.




The
      aggregate principal re-payments of long term debt for 2007 and annual thereafter
      are as follows (not including discount on notes payable):




2007
            
            $
            25,535,7642008
            
            
            837,6422009
            
            
            361,3672010
            
            
            40,6642011
            
            
            23,836Thereafter
            
            
            45,685Total
            
            
            26,844,958




F-20




**NOTE
      7 - Shareholders' Equity**




During
      the year ended December 31, 2005, the Company issued the remaining 75,000 shares
      related to the acquisition of Frontrunner, which had a per share value of $1.35.
      During the year ended December 31, 2006, the Company issued 3,899,315 shares
      of
      common stock and 2,516.10 of series B preferred stock or 3,700,147 on an as
      converted basis into common shares related to the acquisition of 20/20 (see
      Note
      1). The value of the shares was based on the average closing price of the
      Company's common stock for the ten trading days immediately preceding the
      closing date of the transaction and was equal to $0.68 per share or $5,167,634.




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




**NOTE
      8 - Supplemental Balance Sheet Information**




Property
      and equipment at December 31, 2006 and 2005 consists of the
      following:




2006
            
            2005Furniture
                & fixtures
            
            $
            922,719
            
            $
            165,702Computer
                equipment
            
            
            2,946,605
            
            
            921,611Leasehold
                improvements
            
            
            1,366,743
            
            
            88,154Machinery
                & equipment
            
            
            455,881
            
            
            285,9465,691,948
            
            
            1,461,413Accumulated
                depreciation
            
            
            (941,477
            )
            
            (514,210
            )Net
                property and equipment
            
            $
            4,750,471
            
            $
            947,203




Depreciation
      and amortization of property and equipment were $430,599 and $253,712 for the
      years ended December 31, 2006 and 2005, respectively.




Accrued
      expenses at December 31, 2006 and 2005 consists of the following:




2006
            
            2005Accrued
                compensation and payroll taxes
            
            $
            1,245,962
            
            $
            569,564Accrued
                interest expense on debt
            
            
            831,142
            
            
            25,780Accrual
                of additional consideration for CentrePath acquisition
            
            
            750,000
            
            
            —Accrued
                software royalties
            
            
            315,982
            
            
            363,482Accrued
                sales taxes
            
            
            379,659
            
            
            45,000Accrued
                professional fees
            
            
            276,979
            
            
            62,290Accrued
                other liabilities
            
            
            872,021
            
            
            323,398Total
                accrued expenses
            
            $
            4,671,745
            
            $
            1,389,514




**NOTE 9
        - 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**Advisory
                  services
              
              
              3/31/2004
              
              
              3/31/2007
              
              
              500,000
              
              
              1.35Preliminary
                  bridge notes
              
              
              9/8/2006
              
              
              12/31/2011
              
              
              678,766
              
              
              .50
                  - .70Secured
                  bridge notes
              
              
              9/8/2006
              
              
              9/8/2011
              
              
              2,250,000
              
              
              .45Inducement
                  agreements
              
              
              9/8/2006
              
              
              12/31/2011
              
              
              2,061,875
              
              
              .45Board
                  and executive warrants
              
              
              9/14/2008
              
              
              9/14/2011
              
              
              2,330,000
              
              
              .70Consulting
                  Services
              
              
              9/14/2006
              
              
              9/14/2011
              
              
              100,000
              
              
              .70CentrePath
                  bridge notes
              
              
              11/30/2006
              
              
              12/31/2009
              
              
              4,925,000
              
              
              .45Advisory
                  services
              
              
              11/30/2006
              
              
              12/31/2009
              
              
              100,000
              
              
              .45Global
                  Capacity bridge notes
              
              
              12/11/2006
              
              
              12/31/2009
              
              
              2,350,000
              
              
              .45Advisory
                  services
              
              
              12/11/2006
              
              
              12/31/2009
              
              
              50,000
              
              
              .45Mandatory
                  convertible notes
              
              
              12/31/2006
              
              
              12/31/2009
              
              
              255,000
              
              
              .45Total
                  stock warrants outstanding
              
              
              
              
              
              
              
              
              15,600,641
              
              $
              .53
 
 All
        of
        the stock warrants are exercisable and have a weighted average life of 3.8
        years. Certain of the stock warrants were issued as Series A Preferred Stock
        Warrants and Series AA Preferred Stock Warrants. These warrants shall be
        converted to warrants to acquire Common Stock of the Company, upon the
        authorization of additional shares of common stock. Non-employee warrant
        expense
        recognized in the Company's Statement of Operations for 2006 totaled $3,197,423
        of which $2,809,057 was included in interest Expense and $388,366 was included
        in professional fees.


**NOTE 10
      - Related Parties**




The
      Company currently has an $85,143 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 as of
      December 31, 2006.




F-21





During
      2006, the Company had a $100,000 unsecured note payable to Momentum Capital,
      LLC, whose principals are comprised of our prior co-CEO's, each of which were
      senior executives of the Company in 2006. One of these senior executives
      provided an additional $30,000 demand note to the Company on June 14, 2006.
      The
      Company issued a total of 40,700 stock warrants to these individuals during
      2006
      at an exercise price of.$.70 per share in conjunction with these loans. The
      notes payable was repaid as of December 31, 2006.




Additionally,
      one of our board members and prior co-CEO's provided numerous short term bridge
      notes during 2006. Each of these notes were repaid. The Company issued 150,000
      warrants to this individual during 2006 at an exercise price of $.50 per share
      in conjunction with these loans.




As
      part
      of the acquisition of 20/20, two members of our board, one of which is now
      acting as a senior executive of our Company, had preferred stock of 20/20
      converted into the equivalent of 2,087,556 shares of the Company's common
      stock.




Three
      board members, two of which are senior officers of the Company, have lent a
      total of $417,630, plus accrued interest, to the Company as part of the short
      term secured financings completed by the Company during 2006. These balances
      were transferred from secured debt of 20/20 at the time of acquisition to the
      secured short term note payables of the Company. The loans bear interest at
      a
      rate of 18% and mature on January 6, 2007. Additionally, as part of the secured
      loan agreement, these individuals were issued stock warrants to ultimately
      purchase 156,611 shares of common stock of the Company at an exercise price
      of
      $.50 per share. These warrants expire on August 24, 2009. Additionally, the
      Chairman of our board had a total of $468,000 of principal secured debt with
      20/20 prior to the acquisition. As part of the acquisition of 20/20 a portion
      of
      this secured debt was paid to this individual totaling $231,100 of principal
      balance and $28,888 of accrued interest.




One
      board
      member, who also serves as our Chief Executive Officer, has a $150,000 unsecured
      note payable with 20/20, bearing interest at a rate of 8%. This debt was assumed
      as part of the acquisition of 20/20.




During
      2006, the board issued a total of 2,330,000 of stock warrants at an exercise
      price of $.70 per share to board members and several members of the senior
      management in conjunction with past services to the Company. These warrants
      all
      have a five year life and expire on September 14, 2011.




In
      connection with the acquisition of 20/20, the Chairman of our board was issued
      warrants to purchase 89.9487 shares of Series A Preferred Stock (representing
      99,942 shares of common stock on an as converted basis) exercisable at $1,000
      per share ($0.90 per share on an as converted to common stock basis) in
      conjunction with inducements to convert portions of the 20/20 secured debt
      into
      secured debt of the Company. These warrants expire on August 24,
      2011.




As
      part
      of a short term bridge financing with the Company during 2006, the Company
      issued a total of 25,700 stock warrants to one board member. These stock
      warrants have an exercise price of $.70 per share and expire on December 31,
      2011. The short term bridge financing had been repaid by 2006.




In
        connection with the acquisition of CentrePath and Global Capacity, the Company
        issued two short-term bridge notes bearing interest at a rate of 8%. Of this
        amount, our Chief Executive Officer and Chairman of our board lent approximately
        $2.0 million each and in turn received stock warrants to purchase 1123.00112
        Series AA Preferred Shares (2,000,000 common shares on an as converted basis)
        and 464.62965 Series AA Preferred Stock (1,032,500 common shares on an as
        converted basis), respectively. Our Chief Executive Officer received an
        additional warrant to purchase 450.0045 AA Preferred Shares (1,000,000 common
        shares on an as converted basis) for putting $1.0 million at risk in connection
        with the completion of our acquisition of CentrePath at a time when the
        remaining financing for the acquisition of CentrePath had not been committed.
        Our Chief Executive Officer was not paid any cash compensation related to
        his
        investment in our Company. The above mentioned stock warrants have an exercise
        price of $1,000 per Series AA Preferred Shares ($0.45 per share of common
        stock
        on an as converted basis expiring on December 31, 2009. In addition, the
        Chairman of our board of directors was also paid $280,000 for providing personal
        guarantees and pledging his own collateral to secure bridge loans in the
        amount
        of $3.7 million. These loans were accomplished on very short notice, and
        therefore without the Chairman of our board of directors providing his personal
        guarantees and the pledge of his own assets, it is likely that both of the
        CentrePath and Global Capacity acquisitions would have been in
        jeopardy.




During
        2006, two of the Company’s board members, who also served as the former co-CEO’s
        up until the first half of 2006 and as executive officers through January
        2007 and/or Vice Presidents had each been paid annual salaries of $87,500
        during 2006. In addition, they each had earned total cash compensation of
        $211,500 during 2006 in connection with the arrangement of the bridge note
        financing and associated transactions. During
        2006 the board of directors agreed to pay each of these individuals $50,000
        upon
        their termination. Also, as part of securing the various short terms notes,
        we
        issued warrants to purchase 33.75034 shares of Series AA Preferred Stock
        (75,000
        shares of common stock on an as converted basis) each to both of these
        individuals. The stock warrants have an exercise price of $1,000 per Series
        AA
        Preferred Share ($0.45 per share of common stock on an as converted basis)
        expiring on December 31, 2009.





Three
      senior executives of the Company, Thomas G. Hudson, Patrick C. Shutt and George
      King, entered into employment agreements with the Company. The terms of each
      agreement are for two years and provide for base salaries of $240,000 to Mr.
      Hudson and $200,000 to each of Mr. Shutt and Mr. King. Additionally Mr. Hudson's
      contract provides for the opportunity to attain an annual performance bonus
      of
      up to 200% of Mr. Hudson's salary as determined by the Board. Mr. Hudson has
      been granted 1,800,000 executive stock options and 1,000,000 performance stock
      options under his employment contract and related option agreements, allowing
      him to purchase common stock of the Company at $.70 per share. The agreement
      provides for customary severance and an acceleration of unvested Executive
      and
      Performance options in the event that the Company terminates Mr. Hudson's
      employment without cause or if Mr. Hudson terminates for “good reason.” The
      contracts of Mr. Shutt and Mr. King are similar to Mr. Hudson's except that
      1,500,000 executive stock options were granted to each individual to purchase
      common stock of the Company at $.70 per share. Additionally each of the
      individuals will also have the possibility of an annual performance bonus as
      determined by the Board.




No
      cash compensation was paid to our Chief Executive
      Officer in connection with completing any of the transactions in
      2006.






F-22







**NOTE
      11 - Income Taxes**




As
      part
      of the 2006 acquisition of 20/20 Technologies, the Company acquired federal
      net
      operating loss (NOL) carryforwards of approximately $7,440,000 and other related
      deferred tax assets and liabilities established upon acquisition. The amounts
      allocated to goodwill and purchased intangibles are not deductible for tax
      purposes.





As
      part
      of the 2006 acquisition of CentrePath, the Company acquired federal net
      operating loss (NOL) carryforwards of approximately $145,895,000 and other
      related deferred tax assets and liabilities established upon acquisition. The
      amounts allocated to goodwill and purchased intangibles are not deductible
      for
      tax purposes. We estimate that approximately $7,500,000 of the acquired NOL
      will
      be available to be utilized due to section 382 limitations. We have reflected
      this estimated NOL reduction in our deferred tax assets shown in these
      footnotes.





As
      part
      of the 2006 acquisition of Global Capacity there were no acquired federal net
      operating loss (NOL) carryforwards as the entity was an S-Corporation prior
      to
      the acquisition. The amounts allocated to goodwill and purchased intangibles
      are
      not deductible for tax purposes.





The
      Company has recorded a full valuation allowance against the net deferred tax
      assets, acquired, or otherwise, due to the uncertainty of future taxable income,
      which is necessary to realize the benefits of the deferred tax assets. The
      acquired NOLs begin to expire in the year 2020 and are subject to annual
      utilization limits Under Internal Revenue Codes Section 382 due to prior
      ownership changes.





The
      Company will continue to assess and evaluate strategies that will enable the
      deferred tax asset, or portion thereof, to be utilized, and will reduce the
      valuation allowance appropriately at such time when it is determined that the
      more likely than not criteria is satisfied. Reversal of the valuation allowance
      for those acquired deferred tax assets will be first be applied to reduce to
      zero any goodwill and other non-current intangibles related to the acquisitions,
      prior to reducing income tax expense.





The
      provision for income taxes consists of the following:





Years
                Ended December 31,2006
            
            2005Current:U.S.
                and state
            
            $
            60,351
            
            $
            61,448ForeignTotal
                current tax expense (benefit)
            
            
            60,351
            
            
            61,448Deferred:U.S.
                and state
            
            $
            -
            
            $
            -Foreign
            
            
            -
            
            
            -Total
                deferred tax expense (benefit)
            
            
            -
            
            
            -Total
                income tax expense (benefit)
            
            $
            60,351
            
            $
            61,448




The
      Company's current provision is comprised of state
      tax for Frontrunner. All deferred taxes are not recognized as their benefit
      is
      100% provided for as an increase in the valuation allowance.


F-23





Deferred
      tax assets/(liabilities) are comprised of the following:





Years
                Ended December 31,2006
            
            2005Deferred
                tax liabilities:Amortization
                of purchased intangibles
            
            $
            (4,587,304
            )
            $
            -Other
                deferred liabilities
            
            
            (4,646
            )
            
            -Deferred
                tax assets:Accruals
            
            
            177,633
            
            
            176,888Allowance
                for bad debt
            
            
            61,693
            
            
            26,652Capitalized
                research and development costs
            
            
            2,918,605
            
            
            -Depreciation
            
            
            1,592,981
            
            
            1,008,627Deferred
                revenue
            
            
            131,145
            
            
            -Inventory
                reserve
            
            
            178,369
            
            
            156,917Stock
                compensation
            
            
            863,500
            
            
            -Other
                reserves
            
            
            72,072
            
            
            -Warranty
                reserve
            
            
            59,987
            
            
            -Net
                operating loss carryforwards
            
            
            28,964,536
            
            
            2,442,326Charitable
                contribution carryforwards
            
            
            6,092
            
            
            -Research
                and development credit carryforwards
            
            
            827,134
            
            
            -31,261,797
            
            
            3,811,410Valuation
                allowance
            
            
            (31,261,797
            )
            
            (3,811,410
            )Net
                deferred tax asset / (liability)
            
            $
            -
            
            $
            -




Deferred
      tax assets and liabilities reflect the net tax effects of temporary differences
      between the carrying amounts of assets and liabilities for financial reporting
      purposes and the amounts used for income tax purposes. The Company had net
      operating loss (NOL) carryforwards of approximately $73,921,000 in the United
      States (U.S.) and foreign NOL carryforwards of approximately $4,478,000 at
      December 31, 2006. The utilization of a portion of the Company's U.S. NOLs
      and
      carryforwards is subject to annual limitations under Internal Revenue Code
      Sections 382 and 383. Subsequent equity changes could further limit the
      utilization of these NOLs and credit carryforwards. If not used, the federal
      NOLs begin to expire in 2011.





For
                the year ending December 31,2007
            
            
            -2008
            
            
            -2009
            
            
            -2010
            
            
            -2011
            
            
            3,991,000Thereafter
            
            
            69,930,000$
            73,921,000





In
      addition, at December 31, 2006 the Company has general business tax credits
      for
      federal and state purposes of approximately $685,000 and $215,000, respectively,
      which are available to offset future federal and state regular income taxes,
      if
      any, and will begin to expire in 2016. The utilization of the Company's general
      business tax credits is subject to annual limitations under Internal Revenue
      Code Section 383. Subsequent equity changes could further limit the utilization
      of these credit carryforwards.





Realization
      of the NOL carryforwards, tax credits and other deferred tax temporary
      differences is contingent on future taxable earnings. The deferred tax asset
      was
      reviewed for expected utilization using "more likely than not" approach by
      assessing the available positive and negative evidence surrounding its
      recoverability. The Company has concluded that a full valuation allowance
      against the deferred tax assets is appropriate given the Company’s past losses
      and uncertainty of future taxable income.




F-24




**NOTE
      12 - Product Warranties**





The
      change in the aggregate product warranty liability which relates to Frontrunner
      for the year ended December 31, 2006 and 2005 is as follows:







2006
            
            2005Beginning
                balance
            
            $
            191,624
            
            $
            115,030Additional
                warranties issued
            
            
            304,659
            
            
            373,088Claims
                paid
            
            
            (282,848
            )
            
            (308,042
            )Revisions
                in estimates
            
            
            (61,385
            )
            
            11,548Balance,
                end of period
            
            $
            152,050
            
            $
            191,624




**NOTE
      13 - Business Concentration**




During
      the year ended December 31, 2006, approximately $4.1 million (27%) of total
      2006
      revenues were derived and $233 thousand (9%) of the total accounts receivable
      at
      December 31, 2006 were due from three customers. 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.





**NOTE
      14 - 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, 2006
      or
      December 31, 2005.




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.





*Operating
      and Capital Leases:* The Company has entered into or assumed certain non-cancelable operating and
      capital lease agreements related to office and warehouse space, equipment and
      vehicles. Total rent expense under operating leases net of sublease income,
      was
      $653,486 and $490,099 for the years ended December 31, 2006 and 2005,
      respectively. Total payments including interest made under capital leases for
      2006 was $3,586. The Company did not have any capital leases for the year ended
      December 31, 2005. At December 31, 2006, leased capital assets included in
      the Company’s fixed assets were as follows:


**December 31,****2006**Computer
                    equipment
                
                $
                66,279Machinery
                    & equipment
                
                
                31,090Less
                    accumulated depreciation
                
                
                (2,138
                )$
                95,231




F-25




Minimum
      remaining rental commitments under operating leases net of sublease and capital
      leases arrangements are as follows as of December 31,
      2006:




**Operating**
            
            **Capital**For
                the year ending December 31,2007
            
            $
            1,115,053
            
            $
            51,2252008
            
            
            769,378
            
            
            36,8802009
            
            
            237,463
            
            
            5,1212010
            
            
            221,864
            
            
            —2011
            
            
            97,009
            
            
            —Thereafter
            
            
            —
            
            
            —Total
            
            $
            2,440,767
            
            $
            93,226Less:
                Amounts representing interest
            
            
            
            
            
            (11,701
            )Present
                value of future minimum lease payments
            
            
            
            
            $
            81,525Less:
                Current portions of obligations under capital lease
            
            
            
            
            
            (42,872
            )Obligations
                under capital leases, net of current portions
            
            
            
            
            $
            38,653





F-26





**NOTE
      15 - Segment Reporting and Geographic Area Information**




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.





20/20’s revenues
      are generated from provisioning and reselling telecommunication bandwidth,
      from
      the licensing of its information database as well as consulting services
      associated with analyzing and optimizing data networks (to reduce cost and
      enhance reliability of the networks). Most of 20/20 revenue derived from
      provisioning and reselling bandwidth are located in the United States, while
      revenue generated from its information database and related consulting services
      are concentrated primarily in Europe. CentrePath operates a state of the art,
      “world class” network operations center, managing the data replication and
      business continuity environments for an impressive list of multinational
      corporations and health care institutions with are concentrated in the United
      States. Global Capacity generates its revenue through its core activities which
      includes quoting, sourcing, provisioning, and maintaining networks for clients.
      Global Capacity revenue is derived from the monthly recurring revenue of the
      underlying circuits it deploys for its customer which are all located in the
      United States. Nexvu
      licenses its proprietary application performance monitoring software along
      with
      related hardware. They also provide consulting services to their customers.
      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. For purposes of segment reporting, the Company considers 20/20,
      CentrePath, Global Capacity, Nexvu and Frontrunner as five separate identifiable
      businesses. These five segments have separate management teams and financial
      statements.




From
      the
      September 8, 2006 to December 31, 2006, approximately $435 thousand (87%) of
      20/20 segment revenues were derived and 219 thousand (93%) of the segment
      accounts receivable at December 31, 2006 were due from five customers. For
      the
      month of December approximately $261 thousand (39%) of CentrePath segment
      revenues were derived and $272 thousand (29%) of segment accounts receivable
      were due from three customers. From December 11, 2006 to December 31, 2006
      approximately $148 thousand (23%) of Global Capacity segment revenues were
      derived and $109 thousand (32%) of segment accounts receivable were due from
      three customers. For the year ended December 31, 2006, approximately $3.1
      million (25%) of Frontrunner segment revenues were derived and $233 thousand
      (24%) of the segment accounts receivable at December 31, 2006 were due from
      two
      customers. For Nexvu, approximately $1.1 million (88%) of segment revenues
      were
      derived and $0 of segment accounts receivable were due from two
      customers.





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.




**Results
      of Operation:**




**Twelve
      months ended December 31, 2006**




20/20
            
            CentrePath
            
            GlobalCapacity
            
            Frontrunner
            
            Nexvu
            
            Corp/elim
            
            TotalRevenues
            
            $
            499,794
            
            $
            661,156
            
            $
            396,301
            
            $
            12,003,946
            
            $
            1,259,716
            
            $
            -
            
            $
            14,820,913Gross
                margin
            
            
            499,794
            
            
            169,829
            
            
            82,961
            
            
            5,908,466
            
            
            652,184
            
            
            -
            
            
            7,313,234Expenses
            
            
            1,293,434
            
            
            455,880
            
            
            129,127
            
            
            7,221,594
            
            
            1,629,194
            
            
            4,194,449
            
            
            14,923,678Operating
                income (loss)
            
            
            (793,640
            )
            
            (286,051
            )
            
            (46,166
            )
            
            (1,313,128
            )
            
            (977,010
            )
            
            (4,194,449
            )
            
            (
                7,610,444
            )Interest
                expense (income)
            
            
            88,372
            
            
            (777
            )
            
            295
            
            
            397,681
            
            
            (13,206
            )
            
            3,437,101
            
            
            3,909,466Loss
                before taxes
            
            
            (882,012
            )
            
            (285,274
            )
            
            (46,461
            )
            
            (1,710,809
            )
            
            (963,804
            )
            
            (7,631,550
            )
            
            (11,519,910
            )Depreciation/amortization
            
            
            153,246
            
            
            208,946
            
            
            44,250
            
            
            713,795
            
            
            79,591
            
            
            -
            
            
            1,199,828Income
              taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            60,351
            
            
            -
            
            
            -
            
            
            60,351Consulting
              expenses
              paid in common stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            135,000
            
            
            135,000Consulting
              expenses
              issued in warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            388,386
            
            
            388,386Stock warrant
              expense issued with debt
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,809,057
            
            
            2,809,057Stock
                option and warrant compensation expense issued to
                employees
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,800,359
            
            
            1,800,359Goodwill
              impairment
              charge
            
            
            -
            
            
            -
            
            
            -
            
            
            1,400,000
            
            
            -
            
            
            -
            
            
            1,400,000Capital
                expenditures
            
            
            -
            
            
            -
            
            
            -
            
            
            43,924
            
            
            61,194
            
            
            -
            
            
            105,118





F-27




**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
            
            
            -
            
            
            852,000Income
              taxes
            
            
            61,448
            
            
            -
            
            
            -
            
            
            61,448Capital
                expenditures
            
            
            44,819
            
            
            39,358
            
            
            -
            
            
            84,177




**Segment
        assets as of December 31, 2006**




20/20
            
            CentrePath
            
            Global
                Capacity
            
            Frontrunner
            
            Nexvu
            
            Corp/elim
            
            TotalTangible
                assets
            
            $
            277,014
            
            $
            5,194,641
            
            $
            611,610
            
            $
            3,103,037
            
            $
            844,831
            
            $
            522,476
            
            $
            10,553,609Intangibles
                & Goodwill
            
            
            13,185,503
            
            
            3,275,811
            
            
            5,544,955
            
            
            4,820,870
            
            
            -
            
            
            -
            
            
            26,827,139Total
                assets
            
            $
            13,462,517
            
            $
            8,470,452
            
            $
            6,156,565
            
            $
            7,923,907
            
            $
            844,831
            
            $
            522,476
            
            $
            37,380,748




**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
            
            $
            9,704,724
            
            $
            2,693,263
            
            $
            (1,263,777
            )
            $
            11,134,210




Revenues
      generated outside the United States during 2006 and 2005 totaled $341,387 and
      $0, respectively. All of the Company’s 2006 international revenue was generated
      in Europe. As of December 31, 2006 and 2005, the Company’s identifiable assets
      outside the United States totaled $165,107 and $0, respectively. All of the
      Company’s international identifiable assets were located in the United Kingdom.




F-28




**NOTE
      16 - Subsequent Events**





On
      January 19, 2007, the Company closed on an equity funding of $15,869,429 toward
      the issuance of Units comprised of 15,869.4 (rounded) shares of Series AA
      Preferred Stock (convertible into Common Stock at $0.45 per Share) and warrants
      to purchase an additional 15,869.4 (rounded) shares of Series AA Preferred
      Stock. Each Unit was priced at $1,000 comprised of: (i) one share of Series
      AA
      Preferred Stock; (ii) one warrant to purchase one half share of Series AA
      Preferred Stock at $1,000 per share expiring December 31, 2008 (“Two Year
      Warrant); and (ii) one warrant to purchase one half share of Series AA Preferred
      Stock at $1,444.43 per share, expiring December 31, 2009 (Three Year Warrant).
      Since January 20, 2007 through April 9, 2007, the Company has closed on equity
      funding of an additional $5,044,340, representing an additional 5,044.4(rounded)
      shares of Series AA Preferred Stock constituting 11,209,626 shares of
      Common Stock on an as converted basis and warrants to purchase an additional
      like amount of Series AA Preferred Stock, with one-half or 2,522.2 Series
      AA Preferred Shares (5,604,827 shares of Common Stock as converted) exercisable
      at $1,000 per share on or before December 31, 2008 ($0.45 per share on an as
      converted to Common Stock basis); and the other one-half or 2,522.2 Series
      A Preferred Shares (5,604,799 shares of Common Stock as converted) exercisable
      at $1,444.43 per share (or $0.65 per share on an as converted to Common Stock
      basis). This financing brings aggregate issued and outstanding Series AA
      Preferred Stock to 20,634.5 (rounded) shares representing 46,549,894
      shares of Common Stock on an as converted basis, assuming the anti-dilution
      protection described in below. The Series AA Preferred Stock also contains
      certain full ratchet anti-dilution rights in the event that there are any
      issuances of capital stock or rights to acquire capital stock (other than
      certain exempted transactions) at a price of below $0.45 per share (on an as
      converted to Common Stock basis in the event the issuance is of a security
      other
      than Common Stock). The Company filed a Certificate of Designations and
      Preferences authorizing the issuance of up to 120,000 shares of Series AA
      Preferred Stock (convertible into up to 266,664,000 shares of Common Stock,
      subject to adjustment as noted above) on December 29, 2006 with the Florida
      Secretary of State.




On
      an
      as-converted basis, the Two Year Warrants issued as part of the Units may be
      exercised to purchase an aggregate of 23,237,501 shares of Common Stock
      exercisable at $0.45 per share, and the Three Year Warrants may be exercised
      to
      purchase an aggregate of 23,237,344 shares of Common Stock exercisable at
      $0.65 per share, assuming the anti-dilution protection described above is not
      triggered.




In
      addition, the placement agent and designees in connection with the Units
      financing received warrants to purchase 928.37 (rounded) shares of Series AA
      Preferred Stock (2,063,030 shares of Common Stock on an as converted basis),
      with one half of the warrants expiring December 31, 2008 and exercisable at
      $0.45 per share (on an as converted to Common Stock basis) and one half expiring
      December 31, 2009 and exercisable at $0.65 per share (on an as converted to
      Common Stock basis) in connection with the initial equity closing on January
      19,
      2007. The placement agent was awarded from January 20, 2007 to April 9, 2007
      warrants to purchase an additional 65.000 (rounded) shares of Series AA
      Preferred Stock (144,443 shares of Common Stock on an as converted basis),
      with
      one half of the warrants expiring December 31, 2008 and exercisable at $0.45
      per
      share (on an as converted to Common Stock basis) and one half expiring December
      31, 2009 and exercisable at $0.65 per shares (on an as converted to Common
      Stock
      basis).




The
      Company also entered into a Registration Rights Agreement with the Units
      purchasers which obligates the Company to file a registration statement to
      register the shares of Common Stock underlying the Units within 90 days
      following the termination of the Units offering and to cause the registration
      statement to be declared effective no later than 180 days following the date
      of
      termination of the offering. There is a penalty of 1% of the purchase price
      of
      the Units per month for each month that the Company is late in the initial
      filing or the declaration of effectiveness of the registration statement,
      subject to a cap of 12% in the aggregate of the original Units' purchase price,
      and with the penalty to be payable in Common Stock issuable based upon the
      10
      days' average trading value of the Company’s shares of Common Stock for the
      applicable period. The Two Year Warrants and Three Year Warrants are exercisable
      only by payment of cash, however, in the event of delays in the registration
      of
      the shares of Common Stock underlying the Warrants, the Warrants require the
      Company to modify the terms of the warrants to either: (i) extend the outside
      date for the warrants to a year following the date of declaration of
      effectiveness of a registration statement with respect to the shares underlying
      the warrants, or (ii) modify the exercise rights under the warrants to be
      cashless.




On
      January 19, 2007, the Company closed the initial funding of $7,020,632 of
      borrowings on an 18 month $12,000,000 Senior Secured Facility issued to the
      Company by Hilco Financial, LLC. The Credit Agreement for the facility names
      the
      Company and its Magenta netLogic, Limited subsidiary as guarantors of the
      facility, and the Company’s remaining active subsidiaries, namely 20/20
      Technologies, Inc., 20/20 Technologies I, LLC, Nexvu Technologies, LLC,
      Frontrunner Network Systems Corporation, Centrepath, Inc. and Global Capacity
      Group, Inc., as co-borrowers. The Credit Agreement provides for a term loan
      of
      $6,500,000 plus up to $5,500,000 of borrowing availability based upon an advance
      rate of 85% against eligible accounts receivable. It requires the payment of
      interest on a monthly basis at the greater of 15% per annum or prime plus 7%,
      and has a $250,000 prepayment penalty until the last 30 days of the facility.
      There is a $3,000 per month collateral management fee, a 0.5% per month unused
      line fee and an obligation to reimburse the lender for costs incurred by it
      in
      connection with the original issuance and ongoing administration of the
      facility. Further, the Company agreed to pay Hilco a fee of 5% of the maximum
      amount of the facility, with one half funded on the closing date and the second
      half due six months following the closing. The Company also paid a fee of
      $250,000 to a placement agent in connection with the placement of the facility.





F-29




The
      Senior Secured Facility is secured by a blanket lien on all of the Company’s
      assets and all of the assets of the Company’s subsidiaries. Additionally, the
      Company pledged all of the capital stock or limited liability company interests
      of each of the Company’s subsidiaries as additional collateral. The Credit
      Agreement prohibits junior encumbrances on the Company’s assets with the
      exception of the Junior Secured Facility (discussed herein) and certain
      permitted purchase money security interests. The Credit Agreement includes
      a
      covenant limiting the Company’s capital expenditures and the parties have agreed
      to establish additional loan covenants post closing. The Credit Agreement
      contains numerous affirmative and negative covenants customary for facilities
      of
      this nature, as well as certain post closing obligations. The
      Company has agreed to EBITDA covenants (earnings before interest taxes,
      depreciation and amortization) with Hilco as follows (at least 75% of the amount
      must be achieved on a cumulative basis: Q1 2007 ($2,400,000); Q2 2007
      ($2,600,000); Q3 2007 ($600,000); and Q4 2007 $3,100,000. Hilco and the Company
      also agreed to a covenant capping capital expenditures at $500,000 for 2007.
      Note, this corrects an error to the cumulative Q4 2007 amount filed on Form
      8-K/A dated March 30, 2007.




In
      connection with the Senior Secured Facility, on January 19, 2007, the Company
      issued to Hilco two warrants to purchase an aggregate of 1,125.0 shares of
      Series AA Preferred Stock (2,500,000 shares of Common Stock on an as converted
      to Common Stock basis). Warrants with respect to one half of the shares are
      exercisable on or before December 31, 2008 at an exercise price equal to $0.45
      per share of Common Stock on an as-converted basis and warrants with respect
      to
      the one half of the shares are exercisable on or before December 31, 2009 at
      an
      exercise price equal to $0.65 per share of Common Stock on an as-converted
      basis. The warrants issued as part of the Senior Secured Facility are subject
      to
      similar extension and registration rights as those granted to the purchasers
      in
      the Units offering described above.




On
      January 19, 2007 the Company entered into an agreement with a number of
      individuals and entities for the establishment of a Junior Secured Facility
      which permits the funding of up to $10,000,000 of original principal amount
      of
      advances. At
      the
      closing, an initial $5,888,438 of funds was provided pursuant to the facility
      (as adjusted to reflect an additional $1,230 of accrued interest converted
      to
      principal from the amount previously reported) and on January 22, 2007 an
      additional $500,000 was added to the facility, bringing the aggregate principal
      amount of the facility to $6,388,438. All
      but
      $1,000,000 of the funding of the facility to date was provided by the exchange
      of existing bridge loans for the issuance of new notes with respect to the
      facility (valued dollar for dollar against outstanding principal plus accrued
      interest of the bridge loans; this included a bridge loan of $500,000 plus
      accrued interest funded to the Company by its chief executive officer). The
      facility has a two year term accruing simple interest at 12% per annum, with
      all
      principal and interest due on maturity. No points or fees were payable by the
      Company in connection with the issuance of the facility.




The
      original principal amount of each note issued pursuant to the Junior Secured
      Facility is convertible at the holder's option into Series AA Preferred Stock
      (or following its conversion to Common Stock, then the conversion feature
      relates to Common Stock) at a price per share equal to a 20% discount to the
      average ten day trading average for the Company’s Common Stock as of the day
      immediately preceding the date of conversion, subject to a floor of $0.65 per
      share and a ceiling of $1.25 per share (subject to adjustment to account for
      stock splits and certain other extraordinary corporate circumstances). Based
      upon the foregoing range and assuming no more advances on the facility than
      those presently in effect, this equates to a minimum of 5,109,766 shares of
      Common Stock (on an as converted basis) in the event the Company’s stock value
      as computed per the above formula is at or above the $1.25 per share ceiling
      price, and a maximum of 9,826,473 shares of Common Stock (on an as converted
      basis) issuable in the event the Company’s stock value as computed per the above
      formula is at or below the $0.65 floor price.




In
      connection with the funding of Junior Secured Facility, each lender under that
      facility was issued a warrant to purchase up to 67.5 shares of Series AA
      Preferred Stock for each $100,000 of monies advanced, which represents 150,000
      shares of Common Stock on an as converted basis, exercisable at $0.45 per share
      and expiring December 31, 2009. To date, we have issued an aggregate of
      4,312.24 (rounded) shares of Series AA Preferred Stock warrants
      (representing 9,582,658 shares of Common Stock on an as converted basis). Shares
      of Common Stock on an as converted basis are issuable in connection with the
      warrants so issued. The warrants issued as part of the Junior Secured Facility
      are subject to similar extension and registration rights as those granted to
      the
      purchasers in the Units offering described above.




The
      Junior Secured Facility is secured by a junior lien on the Company's assets
      and
      the assets of its subsidiaries, which is expressly contractually subordinated
      to
      the Senior Secured Facility and any refinancing of that facility.





F-30




The
      Company has engaged a number of consultants and has agreed to compensate them
      for financial consulting services with warrants issued as of the dates set
      forth
      below, in each instance with: (i) one half of the warrants set for the below
      exercisable at $1000 per share of Series AA Preferred Stock (convertible into
      2222.2 shares of Common Stock at $0.45 per share) expiring December 31, 2007;
      and (ii) one half exercisable at $1444.44 per share of Series AA Preferred
      Stock
      (convertible into 2222.2 shares of Common Stock at $0.65 per share). The agreed
      upon issuances were as follows:




Date
            
            Number
                of Series AA Preferred Shares Purchasable(1)1.
            
            March
                22, 2007
            
            374.45594(2)
            (832,117
                Common as converted)2.
            
            March
                22, 2007
            
            374.45639(2)
            (832,117
                Common as converted)3.
            
            March
                22, 2007
            
            109.9208
            (244,266
                Common as converted)4.
            
            March
                22, 2007
            
            14.16569
            (31,749
                Common as converted)5.
            
            March
                22,2007
            
            45.28665
            (100,636
                Common as converted)6.
            
            March
                22, 2007
            
            31.29061
            (69,534
                Common as converted)





(1)
            
            Allocated
                one-half to $0.45 warrants and one half to $0.65 warrants as outlined
                above.(2)
            
            An
              additional 4.75025 Series AA Preferred Warrants (1,555 Common as
              converted) was issuable as of termination of the
              offering.





The
      Company had previously entered into a series of bridge loans as summarized
      in
      Note 6 - Debt, all of which were either paid off, extended or converted under
      the terms of the Unit offering described above. These bridge loans included
      the
      following (all of the warrants issued in connection with these loans have
      registration rights comparable to those with respect to the Units
      offering):




*20/20
      Bridge Loan* .
      The
      Company had borrowed $5,987,367 in original principal amount of monies
      simultaneous with or shortly following its purchase of 20/20 Technologies,
      Inc.,
      which loans had been secured by a blanket lien on the assets of 20/20. The
      principal and accrued interest with respect to these loans was either paid
      off
      or rolled into the purchase of Units per the Units offering on January 19,
      2007.
      The holders of these notes were issued warrants to purchase Series A Preferred
      Stock which are convertible into Common Stock at the rate of 37,500 shares
      for each $100,000 of funds advanced (2,245,263 shares of Common Stock on an
      as
      converted basis), exercisable on or before December 31, 2011, at $1,000 per
      share ($0.45 per share on an as converted to Common Stock basis), subject to
      a
      call in favor of the Company in the event that the closing price of the
      Company’s Stock exceeds $4.00 per share for 30 consecutive days following the
      effectiveness of a registration statement registering the Common Stock
      underlying the warrants.




*Centrepath
      Bridge Loan* .
      The
      Company had borrowed $7,850,000 in original principal amount in November, 2007
      with $6,750,000 of the proceeds used toward the purchase of Centrepath, and
      the
      balance of the proceeds used for working capital, which loans were secured
      by
      the stock and assets of CentrePath. The principal and accrued interest with
      respect to these loans was either paid off or rolled into the purchase of Units
      per the Units offering on January 19, 2007. In connection with the funding
      of
      this loan the Company issued warrants to purchase 1,766.2676 shares of Series
      AA
      Preferred Stock (representing 3,925,000 shares of Common Stock on an as
      converted to Common Stock basis), exercisable on or before December 31, 2009,
      at
      $1000 per share ($0.45 per share on an as converted to Common Stock basis).




*Global
      Bridge Loan* .
      The
      Company had borrowed $4,700,000 in original principal amount in December, 2007,
      which proceeds were (together with an additional $500,000 provided from working
      capital) used toward the purchase of Global Capacity. The principal and accrued
      interest with respect to these loans was secured by the stock of Global
      Capacity. The principal and accrued interest with respect to these loans was
      either paid off or rolled into the purchase of Units per the Units offering
      on
      January 19, 2007. In connection with the funding of this loan the Company issued
      warrants to purchase 1,057.5105 shares of Series AA Preferred Stock
      (representing 2,350,000 shares of Common Stock on an as converted to Common
      Stock basis), exercisable on or before December 31, 2009, at $1,000 per share
      ($0.45 per share on an as converted to Common Stock basis).




*Mandatory
      Notes*. The Company issued an aggregate of $3,684,342 of Mandatory Notes
      through January 19, 2007, which by their terms were automatically converted
      to
      Units on the initial closing of the Units offering. In addition, each Mandatory
      Note holder was issued a warrant which is exercisable for 331.60 (rounded)
      shares of Series AA Preferred Stock, representing 20,000 shares of Common Stock
      (on an as converted to Common Stock basis) or 736,868 shares of Common Stock
      in
      the aggregate. The warrants associated with this issuance are exercisable at
      $0.45 per share on an as converted to Common Stock basis, expire on December
      31,
      2009 and are callable by the Company. From January 22, 2007 through
      March 25, 2007, an aggregate of $4,290,840 of additional Mandatory Notes
      were issued (increased by another $103,500 thereafter through April 9, 2007),
      which were converted into Units of Series AA Preferred Stock and Warrants on
      the
      terms as described in Section above. In consideration for the funding of the
      Mandatory Notes, in addition to the conversion of the Mandatory Notes into
      Units
      (comprising a portion of the Units discussed in “Units Offering” above),
      Warrants to purchase an additional 327.15327 shares of Series AA Preferred
      Stock
      (convertible into 727,000 shares of Common Stock) were issued to the Mandatory
      Note lenders for the funding through January 19, 2007, which was increased
      by
      the subsequent Mandatory Note issuances through March 25, 2007 to warrants
      for
      an additional 386.17946 shares of Series AA Preferred Stock (convertible into
      858,168 shares of Common Stock) and again increased by the subsequent Mandatory
      Note issuances through April 9, 2007 to warrants for an additional 9.31514
      shares of Series AA Preferred Stock (convertible into 20,700 shares of Common
      Stock). The warrants associated with this issuance are exercisable at $0.45
      per
      share on an as converted to Common Stock basis, expire on December 31, 2011
      and
      are callable by the Company.




In
        connection with completing all the transactions in 2007 and 2006, the
        Company paid two of the directors of the Company, Lee Wiskowski and Douglas
        Stukel (and principals of Momentum Capital, a financial advisory firm), each
        in
        the amount of $580,441 plus warrants to purchase 374.5 shares of Series AA
        Preferred Stock. The Company also paid $280,000 to Robert Geras in 2007, a
        director of the Company and principal of Lasalle Investments, Inc. an investment
        and advisory firm) in consideration for
        providing personal guarantees and pledging his own collateral to secure bridge
        loans in the amount of $3.7 million. These loans were accomplished on very
        short
        notice, and therefore without him providing his personal guarantees and the
        pledge of his own assets, it is likely that both of the CentrePath and Global
        Capacity acquisitions would have been in jeopardy.
  No
        cash
        compensation was paid to our Chief Executive Officer in connection with
        completing any of the transactions in 2006 or 2007.




F-31




*DTD
      Investments, LLC* .
      In
      November, 2006 the Company borrowed $450,000 from DTD Investments, LLC and
      secured the loan with a collateral pledge of the Company’s contract with CNT
      Telecom Services, Inc. The loan called for no base interest, but did call for
      the payment of participation interest anticipated to total $470,000, based
      upon
      anticipated collections under the contract over the period from the funding
      of
      the loan through December 31, 2007. On January 19, 2007 the Company paid off
      this loan in full by payment of the balance of the original principal amount
      owing plus an additional $150,000 and delivery of a warrant to purchase
      135.00135 shares of Series AA Preferred Stock at $1,000 per share (i.e., 300,000
      shares of Common Stock on an as converted basis, exercisable at $0.45 per share)
      and expiring December 31, 2008.




*Unsecured
      Loans* . In
      connection with the Company's acquisition of 20/20 Technologies, Inc., there
      remained unsecured loans with an original principal amount of $1,610,000
      outstanding. In connection with the funding of the Senior Secured Facility,
      the
      Company paid off all but one of these loans ($60,000 original principal amount),
      to the extent the holders of the loans did not elect to convert the principal
      and accrued interest thereon to equity. The Company subsequently paid off the
      $60,000 loan.




*Creditor
      Waiver Agreements* . In
      connection with the Company's purchase of 20/20 Technologies, Inc. there were
      two outstanding agreements with creditors of 20/20 Technologies and its
      subsidiaries, calling for the accrual of these liabilities at 8% simple interest
      and the payoff of the principal in eight quarterly installments, plus a
      prepayment of 10% of the original principal amount of the obligations upon
      the
      Company raising $10,000,000 of equity and a second comparable prepayment upon
      the Company raising an additional $10,000,000. There is a remaining principal
      balance of $967,080 with respect to these loans. The required second 10% payment
      has not yet been made.  With respect to a third similar creditor agreement,
      election was made to convert the $45,780 obligation to common stock, which
      conversion was effected in exchange for 75,049 shares of common
      stock.




As
      a
      result of all issuances of capital stock of the Company to date, the outstanding
      capital stock of the Company on an as converted to Common Stock basis as of
      April 9, 2007 represents 71,265,110 shares of Common Stock (on an as
      converted basis), with cumulative stock options to purchase 18,624,557
      (rounded and including options for approximately 1,700,000 shares authorized
      but
      not yet issued) shares of Common Stock (on an as converted basis and subject
      to
      certain vesting and/or performance criteria) and cumulative warrants to purchase
      79,697,340 (rounded) shares of Common Stock (on an as converted basis),
      representing cumulative fully diluted capitalization of 169,587,007
      (rounded) shares of Common Stock on an as converted basis.




In
      2007 the Company identified Frontrunner and other
      assets of the business as non-core to the Telecom Integrator model. As a result,
      the Company will account for these segments as discontinued operations starting
      in the first quarter of 2007.




F-32


**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, 2005, 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."




27




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




As
        required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation,
        under the supervision and with the participation of our management, including
        our chief executive officer and our chief financial officer, of the
        effectiveness and the design and operation of our disclosure controls and
        procedures as of December 31, 2006, the end of the period covered by this
        report. Based upon that evaluation, our chief executive officer and our chief
        financial officer concluded that our disclosure controls and procedures are
        effective to ensure that information required to be disclosed in the reports
        that we file or submit under the Exchange Act is recorded, processed, summarized
        and reported within the time periods specified in the Securities and Exchange
        Commission’s rules and forms and includes controls and procedures designed to
        ensure that information required to be disclosed in these reports is accumulated
        and communicated to our management, including our chief executive officer
        and
        our chief financial officer, as appropriate to allow timely decisions regarding
        the required disclosure. As described below, there were changes in our internal
        control over financial reporting that occurred during the fiscal quarter
        ended
        December 31, 2006 that have materially affected, or are reasonably likely
        to materially affect, our internal control over financial
        reporting.
 
 During
        the third and fourth quarter of 2006, we completed our acquisitions of 20/20
        Technologies,  CentrePath and Global Capacity Group.  Since these
        entities have limited resources for processing accounting information and
        financial reporting, we concluded a material weakness exists related to proper
        segregation of duties at these locations.  We have begun a process to
        improve upon our internal controls in an effort to remediate these
        deficiencies.  This process will include a thorough review of our internal
        control structure to ensure we have proper segregation of duties being performed
        by our accounting staff, consolidation of existing accounting systems and
        the
        implementation of defining our accounting policies and procedures.  Upon
        completion, we will be able to provide reasonable assurance that no acts
        of
        fraud are being committed.
 
 The
        certifications of our chief executive officer and chief financial officer
        attached as Exhibits 31.1 and 31.2 to this annual report on Form 10-KSB include,
        in paragraph 4 of each certification, information concerning our disclosure
        controls and procedures and internal control over financial reporting. These
        certifications should be read in conjunction with the information contained
        in
        this Item 8A for a more complete understanding of the matters covered by
        the
        certifications.





**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.****




The
      information concerning our officers required by this Item is incorporated by
      reference to the information included herein under Item 4A. The information
      concerning our directors and other matters required by this Item is incorporated
      by reference to our definitive proxy statement to our 2006 Annual Meeting of
      Stockholders under the caption “Election of Directors”.




The
      information concerning compliance with Section 16(a) of the Exchange
      Act required by this Item is incorporated by reference to our definitive proxy
      statement to our 2006 Annual Meeting of Stockholders under the caption
“Section 16(a) Beneficial Ownership Reporting
      Compliance”.





**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.




28




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





The
      information that is required by this Item is incorporated by reference to our
      definitive proxy statement to our 2006 Annual Meeting of Stockholders under
      the
      caption “Executive Compensation”.




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





The
      information about security ownership of certain beneficial owners and management
      required by this Item is incorporated by reference to our definitive proxy
      statement to our 2006 Annual Meeting of Stockholders under the captions
“Security Ownership of Certain Beneficial Owners and Management”.




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




As
      of
      December 31, 2006, we were in default on an unsecured note payable totaling
      $85,143 to Jel-Ken, LLC. Mr. Phil Kenny, who is on our board of directors,
      is a
      principal of this entity. We continue to be in default of this loan
      agreement.




During
      2006, we had a $100,000 unsecured notes payable to Momentum Capital, LLC, whose
      principals include Mr. Lee Wiskowski and Mr. Douglas Stukel. Both Messers.
      Wiskowski and Stukel, were our co-CEO’s up through the first six months of
      2006 and senior executive officers of our Company through January 2007. Mr.
      Stukel provided an additional $30,000 demand note to us on June 14, 2006. As
      part of the terms of the notes payable, we issued a total of 15,000 warrants
      to
      Momentum Capital and 25,700 stock warrants to Mr. Stukel during 2006 at an
      exercise price of $0.70 per share in conjunction with these loans. We had repaid
      the notes payable as of December 31, 2006.





Additionally,
      Mr. Douglas Stukel provided numerous short term bridge notes during 2006 to
      our
      Company. Each of these notes were repaid as of December 31, 2006. As part of
      the
      terms of the notes, we issued Mr. Stukel a total of 150,000 warrants during
      2006
      at an exercise price of $0.50 per share.




As
      part of our acquisition of 20/20, Mr. Bob Geras, the
      Chairman of our board of directors and Mr. Patrick Shutt, an executive officer
      and member of our board of directors, had preferred stock of 20/20 converted
      into the equivalent of 2,019,335 and 68,221, respectively, of our Common
      Stock.




Mr.
      Bob
      Geras, Mr. Thomas Hudson and Mr. Patrick Shutt, all board members of our Company
      and Mr. Hudson and Mr. Shutt, who are also senior officers of the Company,
      have
      lent a total of $417,630, plus accrued interest to our Company as part of the
      short term secured financing completed by us during 2006. These balances were
      transferred from secured debt of 20/20 at the time of acquisition to the secured
      short term note payables of our Company. The loans bear interest at a rate
      of
      18% and mature on January 6, 2007. Additionally, as part of the secured loan
      agreement, these individuals were issued stock warrants to ultimately purchase
      156,611 shares of our common stock at an exercise price of $0.50 per share.
      These warrants expire on August 24, 2009. Additionally, Mr. Bob Geras, who
      is
      chairman of our board of directors, had a total of $468,000 of principal secured
      debt with 20/20 prior to the acquisition. As part of the acquisition of 20/20
      a
      portion of this secured debt was paid to him totaling $231,100 of principal
      balance and $28,888 of accrued interest. On January 19, 2007, Messers. Geras,
      Hudson and Shutt (to his designee) were all repaid the principal and interest
      amounts owed totaling $283,993, $106,722 and $54,307.





Mr.
      Tom
      Hudson, who is on our board of directors and is Chief Executive Officer of
      our
      Company, had a $150,000 unsecured note payable with 20/20, bearing interest
      at a
      rate of 8%. This debt was assumed as part of the acquisition of 20/20 and was
      subsequently repaid with accrued interest totaling $15,682 in 2007.





29




During
        2006, the board issued a total of 2,330,000 of stock warrants at an exercise
        price of $0.70 per share to board members and several members of the senior
        management in conjunction with past services to our Company. These warrants
        all
        have a five year life and expire on September 14, 2011. The following is
        a list
        of those warrants issued and the services they relate to:
  Name
              
              Role
              
              Description
                  of service
                performed
                  (1)
              
              Total
                  # of
                Warrants
                  IssuedMr.
                  Bob Geras
              
              Chairman
                  of our board of directors
              
              Three
                  years of serving on our board of directors and 3 years on a
                  Committee
              
              450,000Mr.
                  Phil Kenny
              
              Member
                  of our board of directors
              
              Two
                  years of serving on our board of directors
              
              150,000Mr.
                  David Beamish
              
              Member
                  of our board of directors
              
              Two
                  years of serving on our board of directors
              
              150,000Mr.
                  Lee Wiskowski
              
              Member
                  of our board of directors and former Co-CEO
              
              Two
                  years as co-CEO and three years of serving on our board of
                  directors
              
              475,000Mr.
                  Douglas Stukel
              
              Member
                  of our board of directors and former Co-CEO
              
              Two
                  years as co-CEO and three years of serving on our board of
                  directors
              
              475,000Mr.
                  Lee Wiskowski
              
              Member
                  of our board of directors and former Co-CEO
              
              For
                  securing a convertible short-term notes payable
              
              240,000Mr.
                  Douglas Stukel
              
              Member
                  of our board of directors and former Co-CEO
              
              For
                  securing a convertible short-term notes payable
              
              240,000Mr.
                  Derry Behm
              
              Chief
                  Financial and Principal Accounting Officer
              
              For
                  serving as the Company's Chief Financial Officer
              
              150,000Total
                  Warrants Issued
              
              2,330,000
  (1)
              Our
                  board of directors authorized 75,000 warrants for each year of
                  service on
                  our board and 25,000 for serving as a committee member. The board
                  authorized 125,000 for each year of service as co-CEO of our company.
  In
        connection with our acquisition of 20/20, Mr. Bob Geras was issued warrants
        to
        purchase 89.9487 shares of Series A Preferred Stock (representing 99,942
        shares
        of common stock on an as converted basis) exercisable at $1,000 per share
        ($0.90
        per share on an as converted to Common Stock basis) in conjunction with
        inducements to convert portions of the 20/20 secured debt into secured debt
        of
        our Company. These warrants expire on August 24, 2011.
 
 As
        part
        of a short term bridge financing during 2006, Mr. David Beamish, who is a
        member
        of our board of directors, was issued 25,700 stock warrants with an exercise
        price of $0.70 per share and expire on December 31, 2011. The note payable
        was
        repaid as of December 31, 2006.




30




In
        connection with the acquisition of CentrePath and Global Capacity, we issued
        two
        short term bridge notes which totaled $12.6 million bearing interest at a
        rate
        of 8%. Of this amount, our Chief Executive Officer, Mr. Thomas Hudson and
        our
        chairman of our board of directors, Mr. Bob Geras lent $2.0 million and $1.8
        million, respectively. As part of the terms of the notes payable, Mr. Hudson
        and
        Mr. Geras received stock warrants to purchase 1125.00112 Series AA Preferred
        Shares (2,000,000 common shares on an as converted basis) and 464.62965 Series
        AA Preferred Shares (1,032,500 common shares on an as converted
        basis)respectively. Mr. Hudson received an additional warrant to purchase
        450.0045 Series AA Preferred Shares (1,000,000 common shares on an as converted
        basis) for putting his $1.0 million at risk in connection with the completion
        of
        our acquisition of CentrePath at a time when the remaining financing for
        the
        acquisition of CentrePath had not been committed. Mr. Hudson was not paid
        any
        cash compensation related to his investment into our Company. The above
        mentioned stock warrants have an exercise price of $1,000 per Series AA
        Preferred Share ($0.45 per share of common stock on an as converted basis)
        expiring on December 31, 2009. In addition, Mr. Geras was also paid $280,000
        for
        providing personal guarantees and pledging his own collateral to secure bridge
        loans in the amount of $3.7 million. These loans were accomplished on very
        short
        notice, and therefore without Mr. Geras providing his personal guarantees
        and
        the pledge of his own assets, it is likely that both of the CentrePath and
        Global Capacity acquisitions would have been in jeopardy. On January 19,
        2007,
        Mr. Hudson converted approximately $1.0 million of the notes payable under
        the
        equity funding terms described in Note 16 - Subsequent Events. Mr. Hudson
        was
        repaid approximately $0.5 million on this date and elected to place the
        remaining $0.5 million into the Junior Secured Facility also described in
        Note
        16 - Subsequent Events. Mr. Geras was repaid the entire principal and interest
        totaling $1.9 million upon the completion of our initial equity funding on
        January 19, 2007.
 
 In
        securing various short term bridge financing during 2006, Mr. Lee Wiskowski
        and
        Mr. Douglas Stukel each received cash compensation totaling $211,500 during
        2006. In addition to these fees, Messers. Wiskowski and Stukel were paid
        annual
        salaries of $87,500 for serving as our co-CEOs and/or Vice-Presidents in
        2006.
        During 2006 we entered into a severance agreement with Messers. Wiskowski
        and
        Stukel. As part of this agreement, our board of directors agreed to pay each
        of
        them cash compensation of $50,000 upon their termination as executive officers,
        which we accrued in 2006 and paid in 2007.
  Three
        senior executives, Thomas G. Hudson, Patrick C. Shutt and George King, entered
        into employment agreements with us. The terms of each agreement are for two
        years and provide for base salaries of $240,000 to Mr. Hudson and $200,000
        to
        each of Mr. Shutt and Mr. King. Additionally Mr. Hudson's contract provides
        for
        the opportunity to attain an annual performance bonus of up to 200% of Mr.
        Hudson's salary as determined by the Board. Mr. Hudson has been granted
        1,800,000 executive stock options and 1,000,000 performance stock options
        under
        his employment contract and related option agreements, allowing him to purchase
        our common stock of the Company at $.70 per share. The agreement provides
        for customary severance and an acceleration of unvested Executive and
        Performance options in the event that we terminate Mr. Hudson's employment
        without cause or if Mr. Hudson terminates for “good reason.” The contracts of
        Mr. Shutt and Mr. King are similar to Mr. Hudson's except that 1,500,000
        executive stock options were granted to each individual to purchase
        our common stock at $.70 per share. Additionally each of the individuals
        will also have the possibility of an annual performance bonus as determined
        by
        the Board.
  In
        2007,
        Mr. Lee Wiskowski and Mr. Douglas Stukel each received cash payments totaling
        $319,000 in connection with all the transactions completed by the Company
        in
        2006 and 2007. In addition, Messers. Wiskowski and Stukel were each issued
        warrants to purchase stock warrants to purchase 374.53110 shares of Series
        AA
        Preferred Stock (representing in the aggregate 832,117 shares of common stock
        on
        an as converted basis) , with one half at an exercise price of $1,000 per
        share
        ($0.45 per share on an as converted to common stock basis) expiring on December
        31, 2008 and the other half at an exercise price of $1,444.44 per share ($0.65
        per share on an as converted to common stock basis) expiring on December
        31,
        2009. Also, as part of securing the various short terms notes, we issued
        warrants to purchase 33.75034 shares of Series AA Preferred Stock (75,000
        shares
        of common stock on an as converted basis) each to both Mr. Lee Wiskowski
        and Mr.
        Douglas Stukel. The stock warrants have an exercise price of $1,000 per Series
        AA Preferred Share ($0.45 per share of common stock on an as converted basis)
        expiring on December 31, 2009.
  No
        cash compensation was paid to Mr. Thomas Hudson in
        connection with completing any of the transactions in 2006 or
        2007.





31


**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 by and among the Company, 20/20 Merger Sub,
                  Inc. and
                  20/20 Technologies, Inc., dated September 8, 2006.(1)2.2
              
              Agreement
                  and Plan of Merger with CGSI MergerCo, Inc., a Delaware corporation
                  and
                  CentrePath, Inc., a Delaware corporation pursuant to which
                  MergerCo. merged with and into the CentrePath, and
                  CentrePath would be the surviving corporation in the
                  merger.(2)2.3
              
              Agreement
                  and Plan of Merger (the “Merger Agreement”) by and among Global Capacity
                  Merger Sub, Inc., a Texas corporation and a wholly-owned subsidiary
                  of the
                  Company, Global Capacity Group, Inc., a Texas corporation (“GCG”), John
                  Abraham and David P. Walsh.(3)2.4
              
              Amendment
                  to Agreement and Plan of Merger (the “Amendment”) by and among Global
                  Capacity Merger Sub, Inc., Global Capacity Group, Inc., John Abraham
                  and
                  David P. Walsh.(4)3.1
              
              Articles
                  of Incorporation of Capital Growth Systems, Inc.(5)3.2
              
              Amendment
                  to Articles of Incorporation of Capital Growth Systems, Inc.(6)3.3
              
              By-laws
                  of Capital Growth Systems, Inc.(5)10.1
              
              Purchase
                  Agreement by and among the Company, Augustine Fund, L.P., Michael
                  Balkin
                  and David Lies, dated July 28, 2006.(7)10.2
              
              Warrant
                  issued by Company to Augustine Capital Management, LLC, dated July
                  28,
                  2006.(7)10.3
              
              Agreement
                  by and among the Company, Michael Balkin and David Lies, dated
                  July 28,
                  2006.(7)10.4
              
              Common
                  Stock Warrant issued by the Company to Michael Balkin, dated July
                  28, 2006
                  together with a schedule of substantially identical documents omitted
                  from
                  filing pursuant to Rule 12b-31 promulgated under the Exchange
                  Act.(7)10.5
              
              Bridge
                  Note Purchase Agreement by and among the Company and a limited
                  number of
                  accredited investors, dated August 23, 2006, together with a schedule
                  of
                  substantially identical documents omitted from filing pursuant
                  to Rule
                  12b-31 promulgated under the Exchange Act.(7)10.6
              
              First
                  Amendment to Bridge Note Purchase Agreement by and among the Company
                  and a
                  limited number of accredited investors, dated August 24, 2006,
                  together
                  with a schedule of substantially identical documents omitted from
                  filing
                  pursuant to Rule 12b-31 promulgated under the Exchange Act.(7)10.7
              
              Agreement
                  by and between Capital Growth Systems, Inc. and Mellon Enterprises,
                  LLC,
                  dated August 24, 2006.(7)10.8
              
              Common
                  Stock Warrant issued by the Company to Mellon Enterprises, LLC,
                  dated
                  August 24, 2006.(7)10.9
              
              Purchase
                  Agreement by and between Capital Growth Systems, Inc. and LaSalle
                  20/20
                  Lender, LLC and certain other lenders, dated August 24, 2006.(7)10.10
              
              Common
                  Stock Warrant issued by the Company to LaSalle 20/20 Lender, dated
                  August
                  24, 2006.(7)




32




Exhibit
                  Number
              
              Description
                  of Document10.11
              
              Convertible
                  Promissory Note issued by the Company to Michael Balkin, dated
                  September 8, 2006, together with a schedule of substantially identical
                  documents omitted from filing pursuant to Rule 12b-31 promulgated
                  under
                  the Exchange Act.(7)10.12
              
              Series
                  A Convertible Preferred Stock Purchase Warrant issued by the Company
                  to
                  Michael Balkin, dated September 8, 2006, together with a schedule
                  of
                  substantially identical documents omitted from filing pursuant
                  to Rule
                  12b-31 promulgated under the Exchange Act.(7)10.13
              
              Common
                  Stock Warrant issued by the Company to David Beamish, dated September
                  8,
                  2006, together with a schedule of substantially identical documents
                  omitted from filing pursuant to Rule 12b-31 promulgated under the
                  Exchange
                  Act.(7)10.14
              
              Mellon
                  Inducement Agreement by and between Mellon Enterprises, Limited
                  Partnership and the Company dated September 8, 2006.(7)10.15
              
              Series
                  A Convertible Preferred Stock Warrant issued by the Company to
                  Mellon
                  Enterprises, Limited Partnership, dated September 8, 2006.(7)10.16
              
              Inducement
                  Agreement by and between Venture Equities Management, Inc., Mellon
                  Enterprises, Limited Partnership, dated September 8, 2006.(7)10.17
              
              Series
                  A Convertible Preferred Stock Warrant issued by the Company to
                  Venture
                  Equities Management, Inc., dated September 8, 2006.(7)10.18
              
              Employment
                  Agreement by and between Patrick C. Shutt and the Company, dated
                  September
                  8, 2006.(7)10.19
              
              Stock
                  Option Agreement by and between Patrick C. Shutt and the Company,
                  dated September 8, 2006.(7)10.20
              
              Performance
                  Option Agreement by and between Patrick C. Shutt and the Company,
                  dated
                  September 8, 2006.(7)10.21
              
              Employment
                  Agreement by and between George A. King and the Company, dated
                  September 8, 2006.(7)10.22
              
              Stock
                  Option Agreement by and between George A. King and the Company,
                  dated
                  September 8, 2006.(7)10.23
              
              Performance
                  Option Agreement by and between George A. King and the Company,
                  dated
                  September 8, 2006.(7)


33




Exhibit
                    Number
              
              Description
                  of Document10.24
              
              Amendment
                  No. 1 to Employment Agreement by and between Thomas G. Hudson and
                  the
                  Company, dated September 8, 2006.(7)10.25
              
              Amendment
                  No. 1 to Stock Option Agreement by and between Thomas G. Hudson
                  and the
                  Company, dated September 8, 2006.(7)10.26
              
              Performance
                  Option Agreement by and between Thomas G. Hudson and the Company,
                  dated
                  September 8, 2006.(7)10.27
              
              Common
                  Stock Warrant issued by the Company to Robert Geras, dated September
                  14,
                  2006, together with a schedule of substantially identical documents
                  omitted from filing pursuant to Rule 12b-31 promulgated under the
                  Exchange
                  Act.(7)10.28
              
              Separation
                  Agreement by and between Rory Herriman and the Company, dated September
                  30, 2006.(7)10.29
              
              Consulting
                  Agreement by and between Rory Herriman and the Company, dated September
                  30, 2006.(7)10.30
              
              Stock
                  Option Agreement by and between Thomas G. Hudson and the Company,
                  dated
                  September 8, 2006.(7)10.31
              
              Centrepath
                Bridge Note Purchase Agreement by and among the Company and a limited
                number of accredited investors dated as of November 30, 2006.
                (8)10.32
              
              Global
                Bridge Note Purchase Agreement by and among the Company and a limited
                number of accredited inestors dated as of December 11, 2006.(9)10.33
              
              Placement
                Agency
                Agreement between Capital Growth Systems, Inc. and National Securities
                Corporation dated November 14, 2006.10.34
              
              First
                Amendment
                dated December 28, 2007 to Placement Agency Agreement between Capital
                Growth Systems, Inc. and National Securities Corporation.10.35
              
              Lease
                between FSP
                505 Waterford Corp. and Capital Growth Systems, Inc. dated April
                15,
                2007.10.36
              
              Amendment of
                  office service agreement between Wacker Drive Executive Suites, LLC
                  and 20/20 Technologies, Inc. dated March 1, 2007.10.37
              
              Office
                  service agreement between Wacker Drive Executive Suites, LLC and
                  20/20
                  Technologies, Inc. dated March 1, 2006.31.1
              
              Certification
                  of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.31.2
              
              Certification
                  of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.
  
 (1)
              
              Incorporated
                  by reference to Form 8-K filed with the Commission on September
                  14, 2006
                  (SEC File No. 0-30831).(2)
              
              Incorporated
                  by reference to Form 8-K filed with the Commission on December
                  11, 2006
                  (SEC File No. 0-30831).(3)
              
              Incorporated
                  herein by reference to the Form 8-K filed with the Commission on
                  October
                  6, 2006 (File No. 0-30831).(4)
              
              Incorporated
                  herein by reference to the Form 8-K filed with the Commission on
                  December
                  15, 2006 (File No. 0-30831).(5)
              
              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).(6)
              
              Incorporated
                  by reference to Form 8-K filed with the Commission on September
                  14, 2006
                  (SEC File No. 0-30831).(7)
              
              Incorporated
                  by reference to Form 10QSB for the quarter ended September 30,
                  3006 filed
                  with the Commission on November 20, 2006 (SEC File No.
                  0-30831)(8)
              
              Incorporated
                by reference to Form 8-K filed December 6, 2006 (file
                No.0-30831)(9)
              
              Incorporated
                by reference to Form 8-K filed December 15, 2006 (file No.
                0-30831)
  34


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





The
      information that is required by this Item is incorporated by reference to our
      definitive proxy statement for our 2006 Annual Meeting of Stockholders under
      the
      caption “Ratification of Independent Auditors”.





35





**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/ Thomas
                G. HudsonThomas
                G. Hudson, Chief Executive Officer


/s/ Derry
                L. BehmDerry
                L. Behm, Chief Financial and Accounting
                Officer


**Dated:
        April 20, 2007**




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




**SIGNATURE**
            
            **TITLE**
            
            **DATE**/s/
                Douglas Stukel
            
            Director
            
            April
                20, 2007Douglas
                Stukel/s/
                Lee Wiskowski
            
            Director
            
            April
                  20, 2007Lee
                Wiskowski/s/
                David A. Beamish
            
            Director
            
            April
                  20, 2007David
                A. Beamish/s/
                Philip B. Kenny
            
            Director
            
            April
                  20, 2007Philip
                B. Kenny/s/
                Patrick C. Shutt
            
            Director
            
            April
                  20, 2007Patrick
                C. Shutt/s/
                Robert T. Geras
            
            Chairman
                of the Board
            
            April
                  20, 2007Robert
                T. Geras/s/
                Thomas G. Hudson
            
            Chief
                Executive Officer
            
            April
                  20, 2007Thomas
                G. Hudson/s/
                Derry L. Behm
            
            Chief
                Financial and Accounting Officer
            
            April
                  20, 2007Derry
                L. Behm





36





EXHIBIT
      INDEX




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




37