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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-KSB/A





(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, 2007



| ̈ | 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)

500 W. Madison Street, Suite 2060, Chicago, Illinois 60661

(Address of principal executive offices)

(312) 673-2400

(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.   ̈

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



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

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

State issuers revenues for its most recent fiscal year: $17,228,050

The aggregate market value of the registrants common stock held by non-affiliates of the registrant as of December 31, 2007 was $74,641,773 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 determining 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 included for purposes of determining the aggregate value.

As of March 17, 2008, the issuer had
outstanding 146,795,709 shares of its $0.0001 par value common stock.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Transitional Small Business Disclosure
Format:    Yes   ̈    No  x









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Explanatory Note:

This Amendment No. 2 (this Amendment) on Form 10-KSB/A to the Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 and filed with the Securities and Exchange
Commission on August 14, 2008 amends and restates the Companys consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders equity and the consolidated statements of cash flow. In
addition, this Amendment amends and restates the following notes: Summary of Significant Accounting Policies; Debt; Warrants; Shareholders Equity; Related Parties; Income Taxes and Liability for Warrants and Embedded Derivatives to the
Companys consolidated financial statements and certain other disclosures in response to comments raised by the Securities and Exchange Commission. This Amendment has been made to reflect adjustments to the Companys accounting for the
embedded derivatives related to the various debt issuances and the Companys outstanding warrants.

The information contained in this
Amendment, including the financial statements and notes thereto, amends or restates the following only:



| |  |  | Part II, Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Part II, Item 6. Managements Discussion and Analysis and Plan of Operation.
| | - |  | ----------------------------------------------------------------------------



| |  |  | Part II, Item 7. Financial Statements.
| | - |  | --------------------------------------



| |  |  | Certifications from our Chief Executive Officer and Chief Financial Officer as required by Rules 13a-15(e) and 15d-15(e), included as exhibits.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Signatures
| | - |  | ----------

Restatement

As of September 8, 2006, the shares of common stock required to settle the convertible bridge loan issued in connection with the Companys
acquisition of 20/20 Technologies, Inc., the convertible preferred stock outstanding, the stock options outstanding, and the warrants outstanding were in excess of the Companys authorized but unissued shares of common stock. This condition,
which continues through the current balance sheet date required evaluation in accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and Emerging
Issues Task Force 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys own Stock (EITF 00-19); however, such evaluation was not considered during the preparation of the
September 30, 2006 Form 10-QSB.

Pursuant to SFAS 133 and EITF 00-19, the conversion features of the bridge loans and the preferred
stock are considered embedded derivatives requiring bifurcation from the debt host and recording as a liability at fair value on the consolidated balance sheet. In accordance with the same guidance, the Companys outstanding warrants also meet
the definition of a liability to be recorded at fair value on the consolidated balance sheet. These liabilities are revalued at each balance sheet date and mark to fair value with the corresponding adjustment recognized as a gain or loss on
warrants and derivatives in the consolidated statements of operations. Note 18 of the Notes to the Consolidated Financial Statements contained in this Amendment No. 2 to our Annual Report on Form 10-KSB/A sets forth the effects of the
restatement to the Companys previously reported consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders equity and the consolidated statements of cash flow.

This restatement requires a balance sheet reclassification of warrants and preferred stock from the consolidated statement of shareholders equity
to a liability account. In addition, it requires a non-cash charge to mark the liabilities to fair value at each balance sheet date. As a result, this restatement had no impact on operating income or loss or cash flows from operating, investing and
financing activities, as previously reported.



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Table of Contents



|              |  |                                                                                                                         |  |   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --
|PART II       |  |                                                                                                                        
|              |  |                                                                                                                        
|Item 5.       |  | Market for Registrants Common Equity and Related Stockholder Matters.                                                  |  | 1 
|Item 6.       |  | Managements Discussion and Analysis and Plan of Operation.                                                             |  | 2 
|Item 7.       |  | Financial Statements.                                                                                                   |  | 13
|Item 8A.      |  | Controls and Procedures.                                                                                                |  | 67
|              | 
|PART III      |  |                                                                                                                        
|Item 13.      |  | Exhibits.                                                                                                               |  | 69
|              | 
|SIGNATURES    |  | 70                                                                                                                     
|              | 
|EXHIBIT INDEX |  | 71                                                                                                                     
|              | 
|EXHIBIT 31.1. |  | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                        
|              | 
|EXHIBIT 31.2. |  | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                        
|              | 
|EXHIBIT 32.   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report on Form 10-KSB/A contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are contained principally in the sections entitled Business and Managements Discussion and Analysis and Plan of Operation. These statements involve known and unknown risks, uncertainties, and
other factors, which may cause our actual results, performance, or achievements to be materially different from any future results, performances, or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as may, should, could, would,
expects, plans, anticipates, believes, estimates, projects, predicts, potential, and similar expressions intended to identify forward-looking statements.
These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this report in greater detail under the heading Factors Affecting Future Performance. These forward-looking statements represent our estimates and assumptions only as of the date of this report and we do
not assume any obligation to update any of these statements.



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PART II



|Item 5. | Market for Registrants Common Equity and Related Stockholder Matters.
|------- | ----------------------------------------------------------------------

Our common stock, par value $0.0001 per share, is traded on the OTC Bulletin Board under the symbol CGSY. At March 17, 2008, our common stock was held by approximately 550 holders of record. On March 17,
2008, the closing sale price of a share of our common stock was $0.57.

The high and low sale prices per share of our common stock from the
four quarters during the year ended December 31, 2007 and from the three quarters during the year ended December 31, 2006 were as follows (the quotations reflect inter-dealer price, without retail mark-up, mark-down or commission and may
not represent actual transactions):



|               |  |      |      |      |   |      |  |     |      |  |   |     
|-------------- |  | ---- | ---- | ---- | - | ---- |  | --- | ---- |  | - | ----
|               |  | 2007 |      | 2006
|               |  | High |      | Low  |   | High |  | Low
|First Quarter  |  | $    | 1.21 |      | $ | 0.62 |  |     | NA   |  |   | NA  
|Second Quarter |  | $    | 0.90 |      | $ | 0.46 |  | $   | 1.00 |  | $ | 0.57
|Third Quarter  |  | $    | 0.95 |      | $ | 0.25 |  | $   | 0.78 |  | $ | 0.36
|Fourth Quarter |  | $    | 0.70 |      | $ | 0.20 |  | $   | 1.25 |  | $ | 0.44

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 2007 have been disclosed in our previous 10-QSB or 8-K filings.

Equity Compensation Plan Information

The following
is summary of our equity compensation plans as of December 31, 2007:



|                                                           |  |                                                                                      |  |                                                                       |       |                                                                                                                                 |        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number ofSecurities tobe IssuedUponExercise ofOutstandingOptions,Warrants,and Rights |  | WeightedAverageExercisePrice ofOutstandingOptions,Warrants,and Rights |       | Number ofSecuritiesRemainingAvailable forFutureIssuanceUnder
EquityCompensationPlans(ExcludingSecuritiesReflected inColumn (a))
|Equity Compensation Plans Approved by Security Holders     |  |                                                                                     |  |                                                                       |      |                                                                                                                                 |       
|Equity Compensation Plans Not Approved by Security Holders |  | 60,708,027                                                                           |  | $                                                                     | 0.383 |                                                                                                                                 | 860,443
|                                                           |  |                                                                                      |  |                                                                       |       |                                                                                                                                 |        
|Total                                                      |  | 60,708,027                                                                           |  | $                                                                     | 0.383 |                                                                                                                                 | 860,443
|                                                           |  |                                                                                      |  |                                                                       |       |                                                                                                                                 |        

Additional information about compensation plans is incorporated by reference from Note 8 to our
Consolidated Financial Statements included elsewhere in this Form 10-KSB.



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|Item 6. | Managements Discussion and Analysis and Plan of Operation.
|------- | -----------------------------------------------------------

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

Overview (As Restated)

There are several economic
or industry-wide factors relevant to Capital Growth Systems, Inc. (CGSI or Company). The global market for access networks is measured at over $100 billion and the present state of the global capital markets underlines efforts to cut costs in
SG&A  including networks. The market continues to grow, as technology advancements and dependency on electronic mediums are increasing the need for faster, more efficient, and more cost effective access network solutions.

It is generally understood that the access network market is complex and inefficient. There are over 900 primary suppliers offering services to clients
around the world and no single provider has a ubiquitous network footprint. In the global marketplace for our services, fragmentation of infrastructure and technology exists within and between geographies. In addition, pricing, tariffs, business
rules, and methods of doing business vary widely by geography and the lack of accurate supply and pricing data leads to inefficient procurement practices. Margin stacking thus becomes a normal condition.

This market inefficiency creates opportunity and there is significant excess margin available in the system for those who can provide: price
transparency, physical network transparency, and operational transparency.



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

CGSI has created a fully-integrated supply chain management system that streamlines and accelerates the process of designing, pricing, building, and managing customized communications networks. As such, we analyze complex networks and
identify opportunities for improvement by using highly-automated systems, processes, and industry expertise to design, price, and implement optimized network solutions. Then, we function as a single source of accountability for the entire network
solution.

The Company generates revenue by providing a wide variety of custom combinations of the following services, mainly to global
suppliers of connectivity.

Optimization Solutions focus on identifying and implementing improved network efficiencies and reduced network
costs for complex customer networks globally. The primary offering of the business unit is a network optimization consulting practice that follows a very structured process of customer and market data collection, data cleansing, data implementation,
and data analysis by leveraging powerful tools and a proprietary pricing engine to yield a complete, automated network optimization analysis. Results provide both financial and physical network optimization recommendations. In order to help
customers implement the identified savings and efficiencies, the Optimization Solutions business offers a suite of professional services and remote network management services. The Optimization Solutions business also offers telecommunications and
systems integrator customers the ability to use automated pricing software to provide fast, accurate, automated price quotes for off-net access requirements globally.

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

Automated pricing software exploits the
Companys unique knowledgebase of telecom market pricing and supply data to provide telecommunications companies and systems integrators the ability to quickly and accurately obtain an automated price for access circuits globally. This
automated pricing process replaces the largely manual process most companies continue to rely on and dramatically reduces the amount of time it takes to generate an accurate quote, while increasing the accuracy of the quote. This results in a
competitive sales advantage for our customers, while also reducing their operating costs. Automated pricing software is sold as an annual software license.

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

The Company also provides network design, engineering, implementation, and project management services under the heading of Professional Services. These services leverage the well-developed processes, repeatable methodologies, and deep
expertise of the Company to deliver targeted engagements that help customers design, engineer, build, test, and turn-up complex networks. These engagements are delivered as non-recurring revenue on a statement of work (SOW) basis.

For customers seeking to simplify the sourcing and management of their complex networks, the Companys Connectivity Solutions business provides
turn-key network solutions, from design and pricing through network provisioning, testing, and on-going management. By leveraging unique market knowledge and powerful tools that automate the entire



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telecom supply chain, the Company designs and delivers network solutions that combine the best underlying network assets at the optimal market price,
overlaid with the Companys world-class customer service and network management. The result is a single point of accountability to design, price, deliver, and manage the best network at the lowest cost  resulting in improved network
efficiency and simplified operations.

For customers wishing to simplify their procurement process for complex global networks, we will
deploy our breadth of logistics expertise and solutions to deliver a turn-key network solution. Using the Companys pricing systems, we generate an automated, accurate price quote. We then manage that quote from initial pricing through
ordering, procurement, provisioning, test and turn up, and operations hand-off, utilizing the Companys proprietary Circuit Lifecycle Manager (CLM) system, which manages the entire circuit lifecycle. Networks are then monitored and managed by
our 7X24 Network Operations Center (NOC). By leveraging automated systems across the entire telecom supply chain, the Company is able to accelerate the delivery of an optimal network solution.

The Company operates as an asset light service provider, taking advantage of the underlying network assets of other suppliers, while
strategically deploying network infrastructure to insure maximum network efficiency and operational capability. This model enables the Company to avoid the requirement that many facilities-based providers have of pushing customers toward solutions
that maximize use of their own network, regardless of the fit to the customers requirements. We utilize our logistics systems and capabilities to identify the best network solution based on the customers requirements, and then apply our
model to deliver that network as a turn-key solution to the customer  regardless of who the underlying suppliers are. This model insures that the customer receives the best solution, in the shortest time, at the best price, while insuring the
Company maintains margin by maximizing the efficiency of our pricing and logistics systems.

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

The Company is (and has been since its 2006 reorganization) investing its time, team resources and capital in the scaling of its systems and personnel in order to meet the recent remarkable demand among its clients for its novel products.
The successful delivery on major contracts signed in the last three quarters is anticipated to put the Company into a sustained period of rapid growth of profitability. At the same time, expenses are managed closely and lower-cost outsource
opportunities are given case-by-case consideration.

As of December 31, 2007, the Companys current liabilities exceeded its
current assets by $7.8 million. Included in the current liabilities is $5.1 million of current maturities of long-term debt, net of $1.2 million of debt discount associated with the initial fair value of related warrants. This debt reflects
indebtedness to its senior secured lender and the balance of its short-term bridge facilities. Cash on hand at December 31, 2007 was $0.6 million (not including $0.2 million restricted for outstanding letters of credit) and the Companys
borrowing capacity under the asset-based loan agreement with its senior lender totaled $0.5 million. The Company incurred net losses from continuing operations of $56.4 million and $35.7 million for the years ended December 31, 2007 and 2006,
respectively. The results for 2007 include $20.6 million in non-cash expenses relating to the accounting treatment for stock and options and $38.6 million related to the amortization of debt discount. The results for 2006 include $2.3 million in
non-cash expenses relating to the accounting treatment for stock and options and $11.4 million related to the amortization of debt discount. Cash used in operating activities from continuing operations was $9.7 million and $3.9 million for the years
ended December 31, 2007 and 2006, 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. However, the
successful delivery on major contracts signed in the last three quarters is anticipated to move the Company into profitability. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case
consideration.

The Companys net working capital deficiency, recurring losses, and negative cash flows from operations raise doubt
about its ability to continue as a going concern. Notwithstanding the above, the Company continues to find support amongst its shareholders and other investors.

There was significant capital activity during 2007 and in the ensuing months as well. The major components are summarized below:



| |  |  | On January 19, 2007, the Company closed on an equity funding of $14.1 million, net of fees of $1.5 million, toward the issuance of Units comprised of 15,590.1
shares of Series AA preferred stock with 100% warrant coverage. Between January 20, 2007 and April 9, 2007, the Company closed on equity funding of and additional $5.0 million, represent and additional 5,044.4 shares of Series AA preferred
stock with 100% warrant coverage. This financing brought aggregate issued Series AA preferred stock to 20,634.5 shares.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | In the same timeframe of the initial equity closing, the Company raised an additional $12.4 million of debt financing pursuant to a senior secured credit agreement
with Hilco Financial (initial draw of $7.0 million), a subordinated term loan from a small number of individuals, and a short-term bridge financing.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During the fourth quarter of 2007, $3.8 million was raised from the exercise of warrants at a price of $0.15 per share along with an additional $2.2 million from
the private placement of securities at $0.15 per share.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Additional short-term funding of $2.0 million was raised in December 2007 under the subordinated debt facility and those proceeds were used as part of the reduction
of the senior secured facility by $2.5 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These capital raises allowed the Company to re-finance existing
indebtedness and fund its operations. On March 11, 2008, the Company closed on $19.0 million of senior secured convertible debentures. Approximately $8.9 million of the proceeds from the sale of the Debentures was used to pay off almost all
previously outstanding indebtedness and $1.7 million was used to pay advisory fees to Capstone Investments and Aequitas Capital Management. The remaining proceeds will be used for working capital purposes and to support the Companys new
business development.

On September 8, 2006, the Company entered into an Agreement and Plan of Merger with 20/20 and its wholly-owned
UK subsidiary, Magenta. Pursuant to the terms of the 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.

On November 22, 2006, the Company entered into an Agreement and Plan of Merger with CentrePath, Inc. pursuant to which CentrePath merged with and
into a subsidiary of the Company established for that purpose. The merger consideration paid to the CentrePath stockholders was a cash amount equal to $6.8 million, subject to a post-closing net working capital adjustment. On November 30, 2006,
the Company consummated the acquisition. Pursuant to the Agreement, an additional payment of $0.75 million related to the post-closing net working capital adjustment was established, bringing the total amount of the merger consideration to $7.5
million. The additional payment due was recorded in accrued expenses at December 31, 2006 and paid in 2007.

Effective
December 12, 2006, the Company consummated the acquisition of GCG. The aggregate cash consideration paid at closing was $5.3 million. GCGs former stockholders were entitled to additional contingent consideration after the second and third
anniversary dates of the merger if certain revenue and profitability thresholds were reached by GCG after the merger. The parties agreed to various revenue and gross margin combinations that could have resulted in additional consideration between
$1.5 million and $3.0 million on each of the second and third anniversary dates. The Company required the former shareholders to be employed by GCG in order to receive any such additional consideration payments. The agreed upon revenue thresholds
ranged between $9.0 million and $13.4 million and the gross profit thresholds ranged between 27.5% and 30% of revenue. Any additional consideration to be paid on the second anniversary date was to have been paid in cash. Contingent consideration on
the third anniversary date may have been paid in cash or CGSI common stock at the Companys discretion. Ultimately, on October 31, 2007, separation agreements were reached with the former owners and all claims to potential earn-out
payments were released in exchange for a lump sum payment of $350,000. This amount was paid in 2007 and is included as compensation expense.

See accompanying notes to the consolidated financial statements incorporated by reference herein for information on the allocation of the purchase price for each of the acquisitions.

During the first quarter of 2007, the Company determined the operations of Frontrunner and Nexvu were not core to the Companys overall telecom
logistics integrator strategy and therefore made the decision to dispose of these two entities. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets (SFAS 144), the financial results of these two entities are presented as discontinued operations. See accompanying notes to the consolidated financial statements incorporated by reference herein for further discussion.

Results of Continuing Operations

2007 vs. 2006

Total revenues for 2007 were $17.2 million compared to $1.6 million in 2006. Although not truly comparable, had there been a full year of activity
reported for 2006 by the entities acquired late in the year, there would be a 3% year over year decrease in the top line. A component of that change can be traced to a shift in product development and delivery at Magenta, where management
prioritized the proprietary pricing tools that have now been placed in service.



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Revenues generated from Optimization Solutions totaled $7.5 million, which represents professional
services, remote network management services, and the use of our automated pricing software. The Connectivity Solutions business recorded $9.7 million from the design, delivery, and management of networks.

The gross margin rate was 29% for 2007 compared to 48% in 2006. Gross margin for Optimization Solutions totaled $3.5 million or 47% for 2007 as compared
to $0.7 million or 58% in 2006. Connectivity Solutions margin totaled $1.5 million or 16% for 2007 compared to $0.1 million or 21% in 2006. These amounts and percentages are not truly comparable as each of the entities reported in continuing
operations was acquired at a different point within the last four months of 2006.

Greater growth (on an estimated annualized basis) was
seen in the Optimization Solutions business than Connectivity Solutions in 2007; however, additional staff (at a cost of approximately $0.4 million) was assigned into client-facing roles to support the delivery activity than in the past. The product
mix actually shifted towards the Optimization Solutions business line but this is not obvious due to the short period of 2006 operations.

In addition, as the software license business is entirely proprietary, gross margins on that particular line are quite high; however, a decision was made to re-tool those offerings in the short-term to better deliver the integrated product
suite.

The operating expenses are as follows:



|                              |  |                  |            |                  |   |          
|----------------------------- |  | ---------------- | ---------- | ---------------- | - | ---------
|                              |  | Year Ended      
|                              |  | December 31,2007 |            | December 31,2006
|Compensation                  |  | $                | 21,370,425 |                  | $ | 3,770,237
|Professional services         |  |                  | 6,595,209  |                  |   | 1,153,177
|Depreciation and amortization |  |                  | 3,497,262  |                  |   | 406,442  
|All other operating expenses  |  |                  | 4,201,245  |                  |   | 743,034  
|                              |  |                  |            |                  |   |          
|Total operating expenses      |  | $                | 35,664,141 |                  | $ | 6,072,890
|                              |  |                  |            |                  |   |          

Operating expenses increased $29.6 million for the year ended December 31, 2007 as compared
to December 31, 2006. The primary reason for this increase is due to the acquisitions of 20/20, Magenta, CentrePath, and GCG during the second half of 2006. As a result, the year ended December 31, 2007 includes a full year of operating
expenses related to these activities compared to less than four months of operating expenses during the year ended December 31, 2006. The majority of operating expenses consist of compensation, professional fees, and depreciation and
amortization. Included in compensation expense for 2007 are non-cash charges of $13.8 million related to the accounting treatment of certain stock option grants as compared to $1.8 million for 2006. This is driven by the application of SFAS
No. 123R,Share-Based Payment (SFAS 123R) to the executive compensation packages approved at the end of the year as well as the severance provision for the former CEO. Professional services also include similar non-cash charges of $4.3
million for 2007 as compared to $0.5 million for 2006. Depreciation and amortization expense relates primarily to the Network Operating Center (NOC) in suburbs of Boston and the fair value assigned to the Companys intellectual
property.

The remaining compensation, professional fees, and other operating costs relate to the continuing efforts in building and
supporting current operations to integrate several disparate entities into a world-class telecommunications logistics provider. In the second half of 2007, management increased its efforts to contain costs and reduce expenses. Occupancy commitments
were addressed  specifically including the location in the suburbs of Boston  and shell space in the NOC was reduced by two thirds.

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

Results for the year ended December 31, 2007 reflect interest of $39.0 million on
the various debt facilities opened throughout the year, including related warrant coverage and embedded derivatives. This interest includes $38.6 million related to the amortization of the fair value assigned to the warrants issued with the debt.
The debt had a weighted average interest rate of 12.8%.

Results for the year ended December 31, 2007 reflect a gain on warrants and
derivatives of $14.5 million. In accordance with SFAS 133 AND EITF 00-19, the warrant and embedded derivatives liabilities are revalued at each balance



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sheet date and marked-to-fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the consolidated statement of
operations. As of December 31, 2007, the fair value of the warrant liability and the embedded conversion feature liability was $35.9 million and $9.2 million, respectively.

The Company previously entered into a series of bridge loans, all of which were either paid off with the proceeds from the Junior Secured Facility, the
senior secured facility, or the unit offering. The Company determined that the transaction should be treated as an extinguishment of debt and recorded a gain on extinguishment of $1.6 million.

On January 19, 2007, we closed on an equity funding of $15.9 million toward the issuance of Units comprised of 15,590.1 shares of Series AA
preferred stock (convertible into common stock at $0.45 per Share) and warrants to purchase an additional 15,869.4 shares of Series AA preferred stock. We also entered into a Registration Rights Agreement with the Units purchasers which obligates us
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 we are 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 ten-days average trailing value of our shares of common stock for the applicable
period. As of December 31, 2007, we had not filed a registration statement and therefore were obligated to issue 4,784,623 shares of common representing a non-cash registration rights penalty of $2.5 million. Holders of the affected shares
include certain members of our Board of Directors.

Results of Discontinued Operations

2007 vs. 2006

Total revenues for 2007 were $9.3 million compared to $13.3 million in 2006. This
decrease in revenue is attributable to the shut down of Nexvus operations. Development activity at Nexvu was ended on September 30, 2007.

Loss from discontinued operations for the years ended December 31, 2007 and 2006 were $5.0 million and $2.7 million, respectively. In connection with tentative offers for Frontrunner, we reassessed the carrying
amount of that units goodwill and wrote-off the balance of $2.6 million during 2007. In addition, during 2007, shut down costs of $160,000 were accrued at Nexvu to cover any residual costs including severance and liquidation of fixed assets.

Results of Continuing Operations:

2006 vs. 2005

Total revenues from continuing operations for 2006 were $1.6 million compared to none in 2005, as there were no continuing operations.
Revenues in 2006 were the result of operations for entities acquired late in 2006, including: 20/20 and Magenta (in September) $0.5 million, CentrePath (in November) $0.7mm and GCG (in December) $0.4 million.

The gross margin rate was 48% for 2006 compared to none in 2005, as there were no continuing operations.

Total operating expenses were as follows:



|                              |  |                  |           |                  |   |        
|----------------------------- |  | ---------------- | --------- | ---------------- | - | -------
|                              |  | Year Ended      
|                              |  | December 31,2006 |           | December 31,2005
|Compensation                  |  | $                | 3,770,237 |                  | $ | 373,177
|Professional services         |  |                  | 1,153,177 |                  |   | 313,395
|Depreciation and amortization |  |                  | 406,442   |                  |   |       
|All other operating expenses  |  |                  | 743,034   |                  |   | 146,040
|                              |  |                  |           |                  |   |        
|Total operating expenses      |  | $                | 6,072,890 |                  | $ | 832,612
|                              |  |                  |           |                  |   |        

The total operating expenses include 20/20, Magenta, CentrePath, and GCG from their respective
acquisition dates through December 31, 2006 and CGSI for the full year. Operating expenses for 2005 are only those of CGSI. The majority



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of our operating expenses consist of compensation expense and professional fees. 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. The Company expensed executive bonuses totaling $0.6 million and had an equivalent full year increase in
compensation costs of $0.1 million during 2006. The Company also had an overall increase in professional fees and outside services of $0.8 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. The remaining increase in operating costs, including depreciation and amortization, in 2006 when compared to 2005 was due to
our acquisitions of 20/20 (and Magenta), CentrePath and GCG.

Interest expense for 2006 was $12.2 million compared to $0.3 million during
2005. The increase in interest expense is the direct result of the additional indebtedness incurred to facilitate our acquisitions of 20/20 (and Magenta), CentrePath and GCG during 2006. Of the increase in interest expense, approximately $11.4
million related to the amortization of fair value assigned to stock warrants and embedded derivatives issued in connection with the debt issuances.

Results for the year ended December 31, 2006 reflect a loss on warrants and derivatives of $18.2 million. In accordance with SFAS 133 and EITF 00-19, the warrant and embedded derivatives liabilities are revalued at each balance sheet
date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the consolidated statements of operations. As of December 31, 2006, the fair value of the warrant liability and the
embedded conversion feature liability was $15.0 million and $18.7 million respectively.

Results of Discontinued Operations:

2006 vs. 2005

Total revenues from discontinued
operations during 2006 and 2005 were $13.3 million and $15.7 million, respectively, of which $12.0 million and $14.3 million were generated by Frontrunner. Frontrunner revenues resulted from installation of voice and data systems and from
maintenance contracts on installed systems. Maintenance revenues for Frontrunner for 2006 and 2005 represented $7.1 million and $7.9 million, respectively, or 60% and 55% of Frontrunners total revenues. Installation revenue generated from
Frontrunner during 2006 and 2005 totaled $4.9 million and $6.4 million, respectively, or 40% and 45% 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. The Nexvu revenues for 2006 and 2005 were $1.3 million and $1.4 million, respectively, of which $1.0 million was derived from consulting services in both years with
the remaining revenues related to software licensing sales and related maintenance fees.

During 2006, management determined the carrying
value of Frontrunners goodwill exceeded its estimated fair value and charged the difference of $1.4 million to goodwill impairment.

The loss from discontinued operations for 2006 was $2.7 million compared to $1.5 million for 2005. This overall increase in pre-tax loss from discontinued operations of $1.2 million was comprised primarily of a $2.4 million reduction in
revenues with a corresponding decrease in gross margin of $0.6 million and a goodwill impairment charge of $1.4 million partially offset by a reduction in headcount at Frontrunner with related savings of $0.6 million.

Liquidity and Capital Resources (As Restated)

Cash
used in operating activities from continuing operation during the years ended December 31, 2007 and 2006 was $9.7 million and $3.9 million, respectively. The cash used in operating activities from continuing operations during the year ended
December 31, 2007 was principally due to the net loss from continuing operations for the year of $56.4 million. There was a significant variance between operating loss from continuing operations and net cash used in operating activities from
continuing operations during the year due to non-cash stock compensation of $13.8 million, amortization of debt discount of $38.6 million, consulting expenses paid in stock and warrants of $4.3 million, registration rights penalty of $2.5 million,
non-cash change in fair value of embedded derivatives and warrants of $14.5 million, and non-cash depreciation and amortization expense of $3.5 million. Stock compensation expense for the year ended December 31, 2007 increased $12.0 million as
compared to the year ended December 31, 2006. This is a result of an increase in the number of stock-based options issued during the year ended December 31, 2007.



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The cash used in operating activities from continuing operations during the year ended December 31,
2006 was principally due to the net loss from continuing operations for the year of $35.7 million. There was a significant variance between operating loss and net cash used in operation activities from continuing operations during the year due to
non-cash stock compensation of $1.8 million and amortization of debt discount of $11.4 million, and non-cash change in fair value of embedded derivatives and warrants of $18.2.

The cash used in investing activities from continuing operations was $0.4 million and $10.3 million for the years ended December 31, 2007 and 2006,
respectively. During 2006, the Company made three investments in acquisitions for 20/20 (including Magenta), CentrePath, and GCG. We did not make any acquisitions during 2007.

Net cash provided by financing activities from continuing operations during the period ended December 31, 2007 and 2006 was $14.4 million and $16.4
million, respectively. The cash provided from financing activities during the period ended December 31, 2007 was due to the issuance of common stock offset by payments made on debt. The cash provided from financing activities during the period
ended December 31, 2006 was the result of the additional indebtedness from the issuance of a mandatory convertible debt, which totaled $1.3 million and other short-term debt to acquire 20/20 (including Magenta), CentrePath, and GCG, which
totaled $2.5 million, $7.9 million, and $4.7 million, respectively.

Historically our working capital requirements have been met through
proceeds of private equity offerings and debt issuances. On March 11, 2008, we completed a private placement of $19.0 million of securities with a number of investors. The proceeds, net of $1.7 million of advisory fees, were used to extinguish
the Senior Secured debt as well as all remaining subordinated debt that had not been converted to equity previously. The outstanding balances of the Senior Secured and the subordinated debt were $6.6 million and $2.0 million, respectively. The
remaining proceeds were retained for working capital purposes. We currently believe our working capital will be sufficient to fund the business until we start generating positive cash flow from operations which we expect will occur starting in the
second quarter of 2008. 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.

The following table summarizes our future contractual obligations as of December 31, 2007:



|                              |  |                 |           |                 |   |           
|----------------------------- |  | --------------- | --------- | --------------- | - | ----------
|                              |  | OperatingLeases |           | DebtObligations
|2008                          |  | $               | 594,893   |                 | $ | 6,090,787 
|2009                          |  |                 | 375,298   |                 |   | 9,539,274 
|2010                          |  |                 | 345,527   |                 |   | 23,836    
|2011                          |  |                 | 245,171   |                 |   | 23,836    
|2012                          |  |                 | 134,109   |                 |   | 23,836    
|Thereafter                    |  |                 |          |                 |   | 42,856    
|                              |  |                 |           |                 |   |           
|Total contractual obligations |  | $               | 1,694,998 |                 | $ | 15,744,425
|                              |  |                 |           |                 |   |           

From time to time, we may evaluate potential acquisitions of businesses, products, or
technologies. A portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use third party technologies. In addition, in making such acquisitions or investments, we may assume obligations
or liabilities that may require us to make payments or otherwise use additional cash in the future.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (SFAS 157), 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.

On December 4, 2007, the FASB issued SFAS 141(R), Business Combinations (SFAS 141R). SFAS 141R replaces SFAS
141, Business Combinations and applies to all transactions or other events in which an entity obtains control of one or more businesses. SFAS 141R requires the acquiring entity in a business combination to recognize the acquisition-date fair
value of all assets acquired and liabilities assumed including contingent consideration and those relating to minority interests. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs to be expensed as incurred
rather than capitalized as a component of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and may not be applied before that date. The provisions of SFAS 141R will impact the Company if it is
party to a business combination after the pronouncement has been adopted.



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On December 4, 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements(SFAS 160). SFAS 160 establishes accounting and reporting standards for the non-controlling interest (previously referred to as minority interests) in a subsidiary and for the deconsolidation of a subsidiary by requiring all
non-controlling interests in subsidiaries be reported in the same way, as equity in the consolidated financial statements and eliminates the diversity in accounting for transactions between an entity and non-controlling interests by requiring they
be treated as equity transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and may not be applied before that date. The Company does not currently expect the adoption of SFAS 160 to have a material effect on its
consolidated results of operations and financial condition.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions
we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial
statements, we believe the following critical accounting policies involve the most complex, difficult, and subjective estimates and judgments.

Revenue
Recognition

The Company generates revenue from selling and installing hardware, licensing its software, and the rendering 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.

Both SOP 97-2 and SAB 104 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) 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 collectability 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 under the residual method of accounting as prescribed in SOP 97-2.

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 is 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 collectability 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 Intangible Assets

SFAS No. 142, Goodwill and Other Intangible Assets(SFAS
142) 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



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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 three to eleven years, representing the remaining life
of the assets.

Based on the impairment test performed at 2007, the Company determined no impairment of goodwill or intangibles should be
recognized. There can be no assurance that future goodwill or impairment tests will not result in a charge to earnings.

Stock-Based Compensation

In the first quarter of 2006, the Company adopted SFAS No. 123R,Share-Based Payment, (SFAS 123R), which revises SFAS
No. 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 resulted in the recognition of stock-based compensation
expense during ended December 31, 2007 of $13.8 million compared to $1.8 million in the prior year. No tax benefit has been recorded due to the full valuation allowance on deferred tax assets that the Company has recorded.

The Company accounts for equity instruments issued for services and goods to non-employees under SFAS 123; Emerging Issues Task Force Issue
No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services(EITF 96-18); and Emerging Issues Task Force Issue No. 00-18,Accounting Recognition
for Certain Transactions Involving Equity Instruments Granted to Other Than Employees(EITF 00-18). 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. These shares or warrants generally are fully vested, non-forfeitable, 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.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements in place as of December 31, 2007 or 2006.

Factors Affecting Future Performance

In evaluating
us and our business, you should carefully consider the following risks. These risk factors contain, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly
from the results discussed in the forward-looking statements. The order in which the following risks are presented is not intended to represent the magnitude of the risks described. Many of the risks set forth below are written as they apply to our
business as presently constituted, but have similar if not identical application to the businesses of any companies us may acquire in the future.

Acquisition Risks

We may choose to effect additional acquisitions. 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, Magenta, CentrePath, and GCG), we may be obligated to increase substantially the benefits with respect to
employment agreements and equity participation rights (through the issuance of stock, warrants, options, phantom stock rights, or other assets with equity participation features) which could be substantially dilutive of existing shareholders.

We face operational challenges and have a history of losses. With the exception of GCG, each of our operating subsidiaries has a
history of losing money and is presently losing money and despite the foreseen nature of those losses, there can be no assurances that the integrated Company will be able to generate profits. We have lost money over our operating history and there
can be no assurances that either our historical business or our business as centered on our new Telecom Logistics Integrator strategy will prove profitable. This risk is further heightened by the fact that the integration of an acquired business
often results in the incurring of substantial costs and possible disruption of the business once acquired due to differences in the culture between the entities and the possibility that key employees may either elect not to continue with the
integrated entity or work under a different motivation than prior to the acquisition. In addition, customers and suppliers may modify the way they do business due to their perception of the company post-acquisition and/or due to certain preconceived
issues that they may have with the acquiring company.



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We have incurred substantial debt in developing the business and in acquiring our subsidiaries,
although a significant part of this has now converted to equity.There can however be no assurances that the Company will be able to refinance or extend any existing debt. At December 31, 2007, we had incurred substantial debt with our
primary secured lender and with the providers of subordinated secured debt and short-term bridge debt. All of such debt was refinanced in March 2008 with a portion of the proceeds of $19 million of five-year senior secured convertible notes (the
Convertible Notes) issued to a small group of institutional lenders, together with detached warrant coverage and subject to a registration rights agreement obligating us to register the shares of common stock underlying the Convertible
Notes and the warrants. There is a risk that the Company will be unable to meet all of the covenants contained in the Convertible Notes or other associated loan documents, including the obligation to pay interest on a regular basis and the
obligation to timely register the shares of common stock underlying the Convertible Notes and warrants, which could result in acceleration of the indebtedness and/or the incurring of penalty interest and significant penalties associated with failure
to timely register the shares of common stock. There is also a risk that on maturity of the Convertible Notes we will lack the funds to repay the same. Conversely, the Convertible Notes are convertible into common stock at 50 cents per share,
subject to a reset in the conversion price in the future, and with full ratchet anti-dilution protection. Conversion of the Convertible Notes and exercise of the warrants could be substantially dilutive to existing shareholders.

Business Risks (As Restated)

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. Customers and suppliers alike will demand credit worthiness as well. We have many such opportunities in
our sales pipeline and the market appears ready to accept our innovative approach to outsourcing of these functions. In the event we do experience a delay or are ultimately unsuccessful in closing these orders, we may be forced to raise additional
capital through issuance of new equity or increased debt load, or a combination of both to fund our current operations. However, there can be no assurance we will be able to raise additional capital or issue additional indebtedness, or if we do so
that it will not be dilutive of existing investors. There is a risk that prospective customers may delay or not issue orders until our balance sheet is stronger and that potential suppliers of bandwidth may 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, 2007, we have incurred cumulative losses of $110.7 million compared to a cumulative loss of $49.4 million through December 31, 2006. To succeed, we must continue to
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.

We may need additional capital.We may need to
obtain additional financing over time to fund operations and/or to strengthen our balance sheet to attract customers and to ensure credit from suppliers, the amount and timing of which will depend on a number of factors including the pace of
expansion of our markets and customer base, development efforts and the cash flow generated by our operations. We cannot predict the extent to which we will require additional financing, and cannot assure you that additional financing will be
available on favorable terms or at all times. The rights of the holders of any debt or equity we may issue in the future could be senior to the rights of shareholders, and any future issuance of equity could result in the dilution of our
shareholders proportionate equity interests in us (including due to the full ratchet anti-dilution rights in favor of the holders of our senior debt and financing on unattractive terms). Failure to obtain financing or obtaining of financing on
unattractive terms could have a material adverse effect on our business.

We are dependent upon key members of management.Our
success depends to a significant degree upon the continuing contributions of our key management. These individuals have the most familiarity with the products we offer and the markets in which we offer them. The loss of any of these individuals
could have a material adverse effect on our business and we do not maintain key man insurance on any of these individuals.

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,



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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 production. Additionally, certain aspects of the market may
be lost to the extent that free software is developed to address this functionality. These factors could have a material adverse effect on our business and financial condition.

In the high technology business, one of the largest barriers to entry for small and start-up companies is the concern by enterprise customers and
suppliers as to the viability of the Company. Even if we are profitable, we may experience significant resistance from prospective customers due to our relatively small size. This could be exacerbated as we have not attained profitability since our
inception and we continue to maintain significant debt on our balance sheet. This resistance could have a material adverse effect on our results of operations and financial condition.

We face various Software, and Software License Issues. Defects in our software could reduce demand for our products and expose us to costly
liability that would adversely affect the Companys operating results. Our technology solutions are internally complex. Complex software may contain errors or defects, particularly when first introduced or when new versions or enhancements are
released. Although we conduct extensive testing, we may not discover software defects that affect our current or new 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 affect on our results of operations and financial condition.

We face uncertainties regarding protection of our proprietary technology.We may lack the resources to enforce any patents or other intellectual property rights we may have or a court may subsequently determine
that the scope of our intellectual property protection is not as broad as presently envisioned. In any event, proprietary rights litigation can be extremely protracted and expensive and we may lack the resources to enforce our intellectual property
rights. There is not patent protection for those technologies that are the subject of trade secrets, and our ability to protect such competitive advantages will be a function of many factors that are not fully within our control, including
maintenance of confidentiality agreements and general efforts to keep trade secret information from coming into the public domain. Failure to protect our patents and our confidential information (as well as associated business techniques) could have
a material adverse impact upon the way in which the Company does business.



|Item 7. | Financial Statements.
|------- | ---------------------

Index to Consolidated
Financial Statements



|                                                                                               |  |     
|---------------------------------------------------------------------------------------------- |  | ----
|Capital Growth Systems, Inc. and Subsidiaries Consolidated Financial Statements                |  | Page
|Report of Independent Registered Public Accounting Firm                                        |  | 14  
|                                                                                               | 
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                   |  | 15  
|                                                                                               | 
|Consolidated Statements of Operations for the years ended December 31, 2007 and 2006           |  | 16  
|                                                                                               | 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2007 and
2006 |  | 17  
|                                                                                               | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006           |  | 19  



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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 consolidated balance sheets of Capital Growth Systems, Inc. and Subsidiaries (the Company)
as of December 31, 2007 and 2006, and the related consolidated statements of operations, statement of shareholders equity, and cash flows for each of the two years in the period ended December 31, 2007. 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 Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion,
the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Growth Systems, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 15 of 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 15.
The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

As discussed in Note 18 to
the financial statements, the 2007 and 2006 financial statements have been restated to correct a misstatement.

Plante & Moran, PLLC

Elgin, IL

August 14, 2008



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------ | - | ------------- | - | ----------- | -
|                                                                                                                                                                                                                  |  | December 31   |             
|                                                                                                                                                                                                                  |  | 2007          |              |   | 2006          |  
|                                                                                                                                                                                                                  |  | (As Restated) |              |   | (As Restated) |  
|ASSETS                                                                                                                                                                                                            |  |               |              |   |               |   |             |  
|CURRENT ASSETS                                                                                                                                                                                                    |  |               |              |   |               |   |             |  
|Cash and cash equivalents                                                                                                                                                                                         |  | $             | 859,410      |   |               | $ | 1,203,819   |  
|Accounts receivable, net                                                                                                                                                                                          |  |               | 1,781,944    |   |               |   | 1,592,110   |  
|Prepaid expenses and other current assets                                                                                                                                                                         |  |               | 1,645,797    |   |               |   | 516,592     |  
|Current assets of discontinued operations                                                                                                                                                                         |  |               | 2,386,392    |   |               |   | 2,429,677   |  
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|Total Current Assets                                                                                                                                                                                              |  |               | 6,673,543    |   |               |   | 5,742,198   |  
|Property and equipment, net                                                                                                                                                                                       |  |               | 1,418,432    |   |               |   | 3,915,820   |  
|Intangible assets, net                                                                                                                                                                                            |  |               | 8,307,802    |   |               |   | 9,493,179   |  
|Goodwill                                                                                                                                                                                                          |  |               | 12,513,090   |   |               |   | 12,513,090  |  
|Other assets                                                                                                                                                                                                      |  |               | 477,597      |   |               |   | 38,508      |  
|Long-term assets of discontinued operations                                                                                                                                                                       |  |               | 1,031,490    |   |               |   | 5,677,953   |  
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|TOTAL ASSETS                                                                                                                                                                                                      |  | $             | 30,421,954   |   |               | $ | 37,380,748  |  
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                                                                             |  |               |              |   |               |   |             |  
|CURRENT LIABILITIES                                                                                                                                                                                               |  |               |              |   |               |   |             |  
|Current maturities of long-term debt                                                                                                                                                                              |  | $             | 5,084,114    |   |               | $ | 19,460,510  |  
|Accounts payable                                                                                                                                                                                                  |  |               | 2,750,186    |   |               |   | 1,429,882   |  
|Accrued expenses                                                                                                                                                                                                  |  |               | 3,231,261    |   |               |   | 3,352,806   |  
|Deferred revenue                                                                                                                                                                                                  |  |               | 536,599      |   |               |   | 608,461     |  
|Current liabilities of discontinued operations                                                                                                                                                                    |  |               | 2,827,272    |   |               |   | 7,378,404   |  
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|Total Current Liabilities                                                                                                                                                                                         |  |               | 14,429,432   |   |               |   | 32,230,063  |  
|Liabilities for warrants to purchase common stock                                                                                                                                                                 |  |               | 35,882,879   |   |               |   | 15,024,383  |  
|Embedded derivatives of convertible debt instruments and preferred stock                                                                                                                                          |  |               | 9,198,576    |   |               |   | 18,742,378  |  
|Long-term portion of debt                                                                                                                                                                                         |  |               | 3,489,734    |   |               |   | 828,908     |  
|Deferred revenue                                                                                                                                                                                                  |  |               | 76,270       |   |               |   | 112,222     |  
|Long-term liabilities of discontinued operations                                                                                                                                                                  |  |               | 727,276      |   |               |   | 570,587     |  
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|Total Liabilities                                                                                                                                                                                                 |  |               | 63,804,167   |   |               |   | 67,508,541  |  
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|SHAREHOLDERS DEFICIT                                                                                                                                                                                             |  |               |              |   |               |   |             |  
|Preferred stock, $.0001 par value; 5,000,000 authorized, none issued or outstanding as of December 31, 2007 and 5,000,000 authorized,
2,516.1 Series B Convertible issued and outstanding as of December 31, 2006 |  |               |             |   |               |   |            |  
|Common stock, $.0001 par value; 350,000,000 authorized, 123,752,039 issued and outstanding at December 31, 2007 and 25,000,000
authorized, 21,015,069 issued and outstanding at December 31, 2006                 |  |               | 12,374       |   |               |   | 2,101       |  
|Additional paid-in capital                                                                                                                                                                                        |  |               | 77,461,987   |   |               |   | 19,296,655  |  
|Foreign currency translation adjustment                                                                                                                                                                           |  |               | (89,533      | ) |               |   | (48,904     | )
|Accumulated deficit                                                                                                                                                                                               |  |               | (110,767,041 | ) |               |   | (49,377,645 | )
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|Total Shareholders Deficit                                                                                                                                                                                       |  |               | (33,382,213  | ) |               |   | (30,127,793 | )
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                                                                       |  | $             | 30,421,954   |   |               | $ | 37,380,748  |  
|                                                                                                                                                                                                                  |  |               |              |   |               |   |             |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                              |  |                         |             |   |               |   |             |  
|--------------------------------------------- |  | ----------------------- | ----------- | - | ------------- | - | ----------- | -
|                                              |  | Year ended December 31, |            
|                                              |  | 2007                    |             |   | 2006          |  
|                                              |  | (As Restated)           |             |   | (As Restated) |  
|REVENUE                                       |  | $                       | 17,228,050  |   |               | $ | 1,557,251   |  
|COST SALES                                    |  |                         | 12,175,462  |   |               |   | 804,667     |  
|                                              |  |                         |             |   |               |   |             |  
|GROSS MARGIN                                  |  |                         | 5,052,588   |   |               |   | 752,584     |  
|                                              |  |                         |             |   |               |   |             |  
|OPERATING EXPENSES                            |  |                         |             |   |               |   |             |  
|Compensation                                  |  |                         | 21,370,425  |   |               |   | 3,770,237   |  
|Travel and entertainment                      |  |                         | 1,369,711   |   |               |   | 216,730     |  
|Occupancy                                     |  |                         | 1,776,331   |   |               |   | 133,703     |  
|Professional services                         |  |                         | 6,595,209   |   |               |   | 1,153,177   |  
|Insurance                                     |  |                         | 316,766     |   |               |   | 130,224     |  
|Depreciation and amortization                 |  |                         | 3,497,262   |   |               |   | 406,442     |  
|Other operating expenses                      |  |                         | 738,437     |   |               |   | 262,377     |  
|                                              |  |                         |             |   |               |   |             |  
|TOTAL OPERATING EXPENSES                      |  |                         | 35,664,141  |   |               |   | 6,072,890   |  
|                                              |  |                         |             |   |               |   |             |  
|OPERATING LOSS                                |  |                         | (30,611,553 | ) |               |   | (5,320,306  | )
|Loss on disposal of assets                    |  |                         | 500,914     |   |               |   |            |  
|Registration rights penalty                   |  |                         | 2,531,428   |   |               |   |            |  
|(Gain) or loss on warrants and derivatives.   |  |                         | (14,538,890 | ) |               |   | 18,180,881  |  
|Interest expense                              |  |                         | 38,969,104  |   |               |   | 12,157,179  |  
|Gain on extinguishment of debt                |  |                         | (1,645,366  | ) |               |   |            |  
|                                              |  |                         |             |   |               |   |             |  
|Loss from continuing operations               |  |                         | (56,428,743 | ) |               |   | (35,658,366 | )
|Loss from discontinued operations, net of tax |  |                         | (4,960,653  | ) |               |   | (2,734,964  | )
|                                              |  |                         |             |   |               |   |             |  
|NET LOSS                                      |  | $                       | (61,389,396 | ) |               | $ | (38,393,330 | )
|                                              |  |                         |             |   |               |   |             |  
|LOSS PER SHARE OF COMMON STOCK                |  |                         |             |   |               |   |             |  
|Loss from continuing operations               |  | $                       | (1.04       | ) |               | $ | (1.95       | )
|Loss from discontinued operations             |  |                         | (0.10       | ) |               |   | (0.15       | )
|                                              |  |                         |             |   |               |   |             |  
|Net loss per share of common stock            |  | $                       | (1.14       | ) |               | $ | (2.10       | )
|                                              |  |                         |             |   |               |   |             |  
|Weighted average common shares outstanding    |  |                         | 53,801,855  |   |               |   | 18,316,358  |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT) (As Restated)



|                                          |  |              |  |                         |  |             |       |                          |   |            |                    |  |   |                                      |   |  |                                    |         |   |                   |   |             |   |  |   |             |  
|----------------------------------------- |  | ------------ |  | ----------------------- |  | ----------- | ----- | ------------------------ | - | ---------- | ------------------ |  | - | ------------------------------------ | - |  | ---------------------------------- | ------- | - | ----------------- | - | ----------- | - |  | - | ----------- | -
|                                          |  | CommonShares |  | Series BPreferredShares |  | CommonStock |       | AdditionalPaid-inCapital |   |            | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | TotalShareholdersEquity (Deficit) |         |   | ComprehensiveLoss |  
|Balance, January 1, 2006                  |  | 17,015,754   |  |                        |  | $           | 1,701 |                          | $ | 12,831,414 |                    |  | $ | (10,984,315                          | ) |  | $                                  |        |   |                   | $ | 1,848,800   |   |  | $ |            |  
|Stock issued for 20/20 acquisition        |  | 3,899,315    |  | 2,516                   |  |             | 390   |                          |   | 5,167,244  |                    |  |   |                                     |   |  |                                    |        |   |                   |   | 5,167,634   |   |  |   |            |  
|Stock-based compensation expense          |  |             |  |                        |  |             |      |                          |   | 1,243,864  |                    |  |   |                                     |   |  |                                    |        |   |                   |   | 1,243,864   |   |  |   |            |  
|Stock issued for consulting services      |  | 100,000      |  |                        |  |             | 10    |                          |   | 134,990    |                    |  |   |                                     |   |  |                                    |        |   |                   |   | 135,000     |   |  |   |            |  
|Reclassification of warrants to liability |  |             |  |                        |  |             |      |                          |   | (80,857    | )                  |  |   |                                     |   |  |                                    |        |   |                   |   | (80,857     | ) |  |   |            |  
|Foreign currency translation adjustment   |  |             |  |                        |  |             |      |                          |   |           |                    |  |   |                                     |   |  |                                    | (48,904 | ) |                   |   | (48,904     | ) |  |   | (48,904     | )
|Net loss for 2006                         |  |             |  |                        |  |             |      |                          |   |           |                    |  |   | (38,393,330                          | ) |  |                                    |        |   |                   |   | (38,393,330 | ) |  |   | (38,393,330 | )
|                                          |  |              |  |                         |  |             |       |                          |   |            |                    |  |   |                                      |   |  |                                    |         |   |                   |   |             |   |  |   |             |  
|Balance, December 31, 2006                |  | 21,015,069   |  | 2,516                   |  | $           | 2,101 |                          | $ | 19,296,655 |                    |  | $ | (49,377,645                          | ) |  | $                                  | (48,904 | ) |                   | $ | (30,127,793 | ) |  | $ | (38,442,234 | )
|                                          |  |              |  |                         |  |             |       |                          |   |            |                    |  |   |                                      |   |  |                                    |         |   |                   |   |             |   |  |   |             |  

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



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT (As Restated)



|                                                        |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                           |   |         |                   |  |   |             |   |  |   |             |  
|------------------------------------------------------- |  | ------------ |  | ------------------------ | - |  | ----------------------- | - |  | ----------- | ------ | -------------- | - | -- | ------------------------ |  | - | ------------------ | - |  | ------------------------------------ | ------------ | - | ------------------------- | - | ------- | ----------------- |  | - | ----------- | - |  | - | ----------- | -
|                                                        |  | CommonShares |  | Series AAPreferredShares |   |  | Series BPreferredShares |   |  | CommonStock |        | PreferredStock |   |    | AdditionalPaid-inCapital |  |   | AccumulatedDeficit |   |  | ForeignCurrencyTranslationAdjustment |              |   | TotalShareholdersDeficit |   |         | ComprehensiveLoss | 
|Balance, January 1, 2007                                |  | 21,015,069   |  |                         |   |  | 2,516                   |   |  | $           | 2,101  |                | $ |   |                          |  | $ | 19,296,655         |   |  | $                                    | (49,377,645  | ) |                           | $ | (48,904 | )                 |  | $ | (30,127,793 | ) |  | $ |            |  
|Issuance of Series AA preferred stock warrants          |  |             |  | 20,635                   |   |  |                        |   |  |             |       |                |   | 2  |                          |  |   |                   |   |  |                                      |             |   |                           |   |        |                   |  |   | 2           |   |  |   |            |  
|Conversion of Series AA preferred stock to common stock |  | 45,854,513   |  | (20,635                  | ) |  |                         |   |  |             | 4,585  |                |   | (2 | )                        |  |   | 25,219,983         |   |  |                                      |             |   |                           |   |        |                   |  |   | 25,224,566  |   |  |   |            |  
|Conversion of Series B preferred stock to common stock  |  | 3,700,147    |  |                         |   |  | (2,516                  | ) |  |             | 370    |                |   |   |                          |  |   | (485,969           | ) |  |                                      |             |   |                           |   |        |                   |  |   | (485,599    | ) |  |   |            |  
|Warrant conversion                                      |  | 25,277,556   |  |                         |   |  |                        |   |  |             | 2,528  |                |   |   |                          |  |   | 12,484,016         |   |  |                                      |             |   |                           |   |        |                   |  |   | 12,486,544  |   |  |   |            |  
|Registration rights penalty                             |  | 4,784,623    |  |                         |   |  |                        |   |  |             | 478    |                |   |   |                          |  |   | 2,530,950          |   |  |                                      |             |   |                           |   |        |                   |  |   | 2,531,428   |   |  |   |            |  
|Stock issued for services                               |  | 5,000,000    |  |                         |   |  |                        |   |  |             | 500    |                |   |   |                          |  |   | 1,999,500          |   |  |                                      |             |   |                           |   |        |                   |  |   | 2,000,000   |   |  |   |            |  
|Stock-based compensation expense                        |  |             |  |                         |   |  |                        |   |  |             |        |                |   |   |                          |  |   | 13,791,601         |   |  |                                      |             |   |                           |   |        |                   |  |   | 13,791,601  |   |  |   |            |  
|Issuance of common stock                                |  | 18,120,131   |  |                         |   |  |                        |   |  |             | 1,812  |                |   |   |                          |  |   | 2,625,251          |   |  |                                      |             |   |                           |   |        |                   |  |   | 2,627,063   |   |  |   |            |  
|Foreign currency translation adjustment                 |  |             |  |                         |   |  |                        |   |  |             |       |                |   |   |                          |  |   |                   |   |  |                                      |             |   |                           |   | (40,629 | )                 |  |   | (40,629     | ) |  |   | (40,629     | )
|Net loss for 2007                                       |  |             |  |                         |   |  |                        |   |  |             |       |                |   |   |                          |  |   |                   |   |  |                                      | (61,389,396  | ) |                           |   |        |                   |  |   | (61,389,396 | ) |  |   | (61,389,396 | )
|                                                        |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                           |   |         |                   |  |   |             |   |  |   |             |  
|Balance, December 31, 2007                              |  | 123,752,039  |  |                         |   |  |                        |   |  | $           | 12,374 |                | $ |   |                          |  | $ | 77,461,987         |   |  | $                                    | (110,767,041 | ) |                           | $ | (89,533 | )                 |  | $ | (33,382,213 | ) |  | $ | (61,430,025 | )
|                                                        |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                           |   |         |                   |  |   |             |   |  |   |             |  

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



18



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW



|                                                                            |  |                         |             |   |               |   |             |  
|--------------------------------------------------------------------------- |  | ----------------------- | ----------- | - | ------------- | - | ----------- | -
|                                                                            |  | Year ended December 31, |            
|                                                                            |  | 2007                    |             |   | 2006          |  
|                                                                            |  | (As Restated)           |             |   | (As Restated) |  
|CASH FLOW FROM OPERATING ACTIVITIES                                         |  |                         |             |   |               |   |             |  
|Net loss                                                                    |  | $                       | (61,389,396 | ) |               | $ | (38,393,330 | )
|Net loss from discontinued operations                                       |  |                         | 4,960,653   |   |               |   | 2,734,964   |  
|                                                                            |  |                         |             |   |               |   |             |  
|Net loss from continuing operations                                         |  |                         | (56,428,743 | ) |               |   | (35,658,366 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                         |             |   |               |   |             |  
|Depreciation and amortization                                               |  |                         | 3,497,262   |   |               |   | 406,442     |  
|Loss on disposal of assets                                                  |  |                         | 500,914     |   |               |   |            |  
|Consulting expenses paid in common stock and warrants                       |  |                         | 4,318,858   |   |               |   | 523,366     |  
|Amortization of debt discount                                               |  |                         | 38,555,665  |   |               |   | 11,441,245  |  
|Registration rights penalty                                                 |  |                         | 2,531,428   |   |               |   |            |  
|Stock-based compensation                                                    |  |                         | 13,791,601  |   |               |   | 1,800,359   |  
|Gain on extinguishment of debt                                              |  |                         | (1,645,366  | ) |               |   |            |  
|Change in fair value of embedded derivatives and warrants                   |  |                         | (14,538,890 | ) |               |   | 18,180,881  |  
|Changes in working capital items, net of amounts acquired:                  |  |                         |             |   |               |   |             |  
|Accounts receivable                                                         |  |                         | (189,834    | ) |               |   | (220,906    | )
|Prepaid expenses and other current assets                                   |  |                         | (1,129,205  | ) |               |   | (200,478    | )
|Deposits and other assets                                                   |  |                         | (63,340     | ) |               |   |            |  
|Accounts payable                                                            |  |                         | 1,320,304   |   |               |   | (406,295    | )
|Accrued expenses                                                            |  |                         | (121,545    | ) |               |   | 141,583     |  
|Deferred revenue                                                            |  |                         | (107,814    | ) |               |   | 47,420      |  
|                                                                            |  |                         |             |   |               |   |             |  
|Total adjustments                                                           |  |                         | 46,720,038  |   |               |   | 31,713,617  |  
|                                                                            |  |                         |             |   |               |   |             |  
|Net cash used in continuing operations                                      |  |                         | (9,708,705  | ) |               |   | (3,944,749  | )
|Net cash used in discontinued operations                                    |  |                         | (2,187,226  | ) |               |   | (1,389,074  | )
|                                                                            |  |                         |             |   |               |   |             |  
|Net cash used in operating activities                                       |  |                         | (11,895,931 | ) |               |   | (5,333,823  | )
|                                                                            |  |                         |             |   |               |   |             |  
|CASH FLOW FROM INVESTING ACTIVITIES                                         |  |                         |             |   |               |   |             |  
|Acquisition of 20/20, net of cash acquired                                  |  |                         |            |   |               |   | 49,856      |  
|Acquisition of CentrePath, net of cash acquired                             |  |                         |            |   |               |   | (5,011,672  | )
|Acquisition of Global Capacity Group, net of cash overdraft                 |  |                         |            |   |               |   | (5,326,879  | )
|Purchase of property and equipment                                          |  |                         | (365,232    | ) |               |   |            |  
|                                                                            |  |                         |             |   |               |   |             |  
|Net cash used in investing activities from continuing operations            |  |                         | (365,232    | ) |               |   | (10,288,695 | )
|                                                                            |  |                         |             |   |               |   |             |  
|CASH FLOW FROM FINANCING ACTIVITIES                                         |  |                         |             |   |               |   |             |  
|Proceeds from the issuance of long-term debt                                |  |                         | 11,621,259  |   |               |   | 16,438,399  |  
|Repayment of long-term debt                                                 |  |                         | (29,997,758 | ) |               |   |            |  
|Net proceed from line of credit                                             |  |                         | 7,954,058   |   |               |   |            |  
|Proceeds from issuance of stock and units offering                          |  |                         | 25,233,695  |   |               |   |            |  
|Payment of financing costs                                                  |  |                         | (375,749    | ) |               |   |            |  
|                                                                            |  |                         |             |   |               |   |             |  
|Net cash provided by financing activities from continuing operations        |  |                         | 14,435,505  |   |               |   | 16,438,399  |  
|Net cash used in financing activities from discontinued operations          |  |                         | (2,478,122  | ) |               |   |            |  
|                                                                            |  |                         |             |   |               |   |             |  
|Net cash provided by financing activities                                   |  |                         | 11,957,383  |   |               |   | 16,438,399  |  
|                                                                            |  |                         |             |   |               |   |             |  
|Effect of exchange rate on cash and equivalents                             |  |                         | (40,629     | ) |               |   | (48,904     | )
|                                                                            |  |                         |             |   |               |   |             |  
|Increase (decrease) in cash and cash equivalents                            |  |                         | (344,409    | ) |               |   | 766,977     |  
|Cash and cash equivalents  beginning of period                             |  |                         | 1,203,819   |   |               |   | 436,842     |  
|                                                                            |  |                         |             |   |               |   |             |  
|Cash and cash equivalents  end of period                                   |  | $                       | 859,410     |   |               | $ | 1,203,819   |  
|                                                                            |  |                         |             |   |               |   |             |  



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|                                                                                                                  |  |                         |            |      |   |          
|----------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------
|                                                                                                                  |  | Year ended December 31,
|                                                                                                                  |  | 2007                    |            | 2006
|SUPPLEMENTAL CASH FLOW INFORMATION                                                                                |  |                         |            |      |   |          
|Cash paid for interest for continuing operations                                                                  |  | $                       | 1,761,919  |      | $ | 403,701  
|Cash paid for interest for discontinued operations                                                                |  |                         | 86,581     |      |   |         
|NON-CASH INVESTING AND FINANCING ACTIVITIES                                                                       |  |                         |            |      |   |          
|Conversion of short-term bridge notes to junior secured facility                                                  |  | $                       | 5,388,438  |      | $ |         
|Issuance of common stock                                                                                          |  |                         | 313,457    |      |   |         
|Conversion of warrants to common stock                                                                            |  |                         | 8,692,091  |      |   |         
|Conversion of preferred stock to common stock                                                                     |  |                         | 24,738,967 |      |   |         
|Common stock issued for the acquisition of 20/20                                                                  |  |                         |           |      |   | 5,167,634
|Debt refinanced for the acquisition of 20/20                                                                      |  |                         |           |      |   | 3,559,416
|Reclassification of warrants from additional paid-in capital to liabilities for warrants to purchase common stock |  |                         |           |      |   | 80,857   

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



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

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, 20/20 Technologies, Inc. (20/20), Magenta netLogic Ltd. (Magenta), CentrePath, Inc. (CentrePath), and Global Capacity Group, Inc.
(GCG). Except where necessary to distinguish the entities, together they are referred to as the Company. All intercompany accounts have been eliminated in consolidation.

Prior to 2004, Capital Growth Systems, Inc. (CGSI) 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 network performance management business. During 2007, the Company hibernated Nexvus operations (eliminating all
operating expense associated with the business) while it evaluated alternatives for the core Nexvu intellectual property (IP), which management believes to have value in the market.

In September 2004, CGSI acquired Frontrunner Network Systems (Frontrunner) via a subsidiary merger. Frontrunner is known as an
interconnect company, which installs and services customer-premise voice, data, and video networks. In 2007, the Company agreed to sell Frontrunner. The sale was completed on February 19, 2008 and is discussed in the
Subsequent Events note.

During the first quarter of 2007, the Company determined both Nexvu and Frontrunner were not core to
its telecom logistics model and met the definition of discontinued operations as prescribed in Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144)
the financial results of these two entities are presented as discontinued operations. See the Discontinued Operations note for further discussion.

Acquisition of 20/20

On September 8, 2006, the Company entered into an Agreement and Plan of Merger with 20/20 and its
wholly-owned UK subsidiary, Magenta. Pursuant to the terms of the 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 aggregate consideration paid to 20/20 in connection with the merger was $8.7 million, comprised of debt refinanced in the amount of $3.5 million and
stock valued at $5.2 million. 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, converted into an additional 3,700,147 shares of common stock upon June 25, 2007, common shareholder
approval of increasing the number of authorized shares of common stock from 25,000,000 to 350,000,000. All of the Transaction Shares have been released to the former shareholders of 20/20.

Acquisition of CentrePath

On November 22, 2006,
the Company entered into an Agreement and Plan of Merger with CentrePath, Inc. pursuant to which CentrePath merged with and into a subsidiary of the Company established for that purpose. The merger consideration paid to the CentrePath stockholders
was a cash amount equal to $6.8 million, subject to a post-closing net working capital adjustment. On November 30, 2006, the Company consummated the acquisition. Pursuant to the Agreement, an additional payment of $0.75 million related to the
post-closing net working capital adjustment was established, bringing the total amount of the merger consideration to $7.5 million. The additional payment due was recorded in accrued expenses at December 31, 2006 and paid in 2007.

As part of this Merger, the Company borrowed $7.9 million in November 2006 with $6.8 million of the proceeds used toward the purchase of CentrePath
and the balance of the proceeds used for working capital. The financing was 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
pursuant to the Units offering on January 19, 2007 as discussed in the Shareholders Equity note. In connection with the funding of this loan, the Company issued warrants to purchase 2,261.3 shares of Series AA preferred stock
(representing 3,925,000 shares of common stock, on an as-converted 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). Due to the June 2007 amendment to the
Companys Articles of Incorporation to increase its authorized common stock, the warrants issued in connection with the loans became exercisable to purchase common stock.



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Acquisition of GCG

Effective December 12, 2006, the Company consummated the acquisition of GCG. The aggregate cash consideration paid at closing was $5.3 million. GCGs former stockholders were entitled to additional
contingent consideration after the second and third anniversary dates of the merger if certain revenue and profitability thresholds were reached by GCG after the merger. The parties agreed to various revenue and gross margin combinations that could
have resulted in additional consideration between $1.5 million and $3.0 million on each of the second and third anniversary dates. The Company required the former shareholders to be employed by GCG in order to receive any such additional
consideration payments. The agreed upon revenue thresholds ranged between $9.0 million and $13.4 million and the gross profit thresholds ranged between 27.5% and 30% of revenue. Any additional consideration to be paid on the second anniversary date
was to have been paid in cash. Contingent consideration on the third anniversary date may have been paid in cash or CGSI common stock at the Companys discretion. Ultimately, on October 31, 2007, separation agreements were reached with the
former owners and all claims to potential earn-out payments were released in exchange for a lump sum payment of $350,000. This amount was paid in 2007 and is included as compensation expense.

The Company authorized a tranche of up to $5.5 million of 60-day bridge notes pursuant to a Global Bridge Note Purchase Agreement dated as of
December 11, 2006, by and among the Company and various lenders party thereto, to provide the cash necessary to fund the purchase of Global Capacity Group, Inc. plus an additional amount of 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 GCG as well as a junior security interest in the assets of the Company. In addition, for each $1.0 million of bridge notes funded, the lenders
received a detachable warrant to purchase up to 225.00225 shares of Series AA Convertible Preferred Stock, which by its terms was convertible into 500,000 shares of common stock upon the authorization of the underlying common stock. The warrants
were exercisable on or before December 31, 2009 at an as-converted to common stock purchase price of $0.45 per share. The Series AA Convertible Preferred Stock provided for the automatic conversion to common stock once the Articles of
Incorporation for the Company were amended to authorize the issuance of not less than 200,000,000 shares of common stock. The Articles were amended in June 2007. On December 11, 2006, $4.7 million of bridge notes were issued. The balance of the
merger consideration was provided by available cash from the Company. In the first quarter of 2007, $2.9 million of the principal and accrued interest related to the bridge notes was extended and became part of the Companys new junior secured
facility and the remaining balance of $1.8 million was repaid. See the Debt note for further discussion. There was no further obligation related to the bridge notes outstanding as of December 31, 2007.

The Company determined the fair value of the assets acquired and liabilities assumed, including identifying the value of intangible assets that existed
at the dates of the acquisitions. Under the purchase method of accounting, the total consideration as shown in the table below is allocated to tangible and intangible assets and liabilities based on their fair values as of the date of completion of
the acquisitions. The consideration was allocated as follows:



|                                               |  |       |            |   |            |   |            |     |  |   |           |  
|---------------------------------------------- |  | ----- | ---------- | - | ---------- | - | ---------- | --- |  | - | --------- | -
|                                               |  | 20/20 |            |   | CentrePath |   |            | GCG | 
|Cash                                           |  | $     |           |   |            | $ | 7,500,000  |     |  | $ | 5,300,000 |  
|Debt refinanced                                |  |       | 3,559,416  |   |            |   |           |     |  |   |          |  
|Stock issued                                   |  |       | 5,167,634  |   |            |   |           |     |  |   |          |  
|Professional fees                              |  |       | 250,000    |   |            |   | 150,000    |     |  |   | 150,000   |  
|                                               |  |       |            |   |            |   |            |     |  |   |           |  
|Total consideration                            |  | $     | 8,977,050  |   |            | $ | 7,650,000  |     |  | $ | 5,450,000 |  
|                                               |  |       |            |   |            |   |            |     |  |   |           |  
|Assets and liabilities acquired/assumed        |  |       |            |   |            |   |            |     |  |   |           |  
|Cash                                           |  | $     | 49,856     |   |            | $ | 2,488,328  |     |  | $ |          |  
|Accounts receivable, net                       |  |       | 66,115     |   |            |   | 889,608    |     |  |   | 415,481   |  
|Prepaid expenses and other assets              |  |       | 18,815     |   |            |   | 263,120    |     |  |   | 52,451    |  
|Property and equipment, net                    |  |       | 9,904      |   |            |   | 3,910,000  |     |  |   | 192,002   |  
|Accounts payable                               |  |       | (639,589   | ) |            |   | (282,012   | )   |  |   | (364,575  | )
|Accrued expenses and other current liabilities |  |       | (357,783   | ) |            |   | (2,438,583 | )   |  |   | (303,917  | )
|Cash overdraft                                 |  |       |           |   |            |   |           |     |  |   | (26,879   | )
|Deferred revenue                               |  |       | (258,254   | ) |            |   | (415,009   | )   |  |   |          |  
|Capital lease obligations                      |  |       |           |   |            |   | (59,272    | )   |  |   | (28,370   | )
|Notes payable                                  |  |       | (3,247,479 | ) |            |   |           |     |  |   | (75,398   | )
|Net assets acquired (liabilities assumed)      |  |       | (4,358,415 | ) |            |   | 4,356,180  |     |  |   | (139,205  | )
|Identifiable intangible assets                 |  |       | 4,525,400  |   |            |   | 1,540,000  |     |  |   | 3,640,000 |  
|Goodwill                                       |  |       | 8,810,065  |   |            |   | 1,753,820  |     |  |   | 1,949,205 |  
|                                               |  |       |            |   |            |   |            |     |  |   |           |  
|Total                                          |  | $     | 8,977,050  |   |            | $ | 7,650,000  |     |  | $ | 5,450,000 |  
|                                               |  |       |            |   |            |   |            |     |  |   |           |  



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The Company valued the identifiable intangible assets acquired using an appraisal. The identifiable
intangible assets, estimated useful lives, and expected annual amortizations are as follows:



|                        |  |            |           |             |          |                    |   |        
|----------------------- |  | ---------- | --------- | ----------- | -------- | ------------------ | - | -------
|20/20                   |  | Fair Value |           | Useful Life |          | AnnualAmortization
|Developed technology    |  | $          | 3,755,400 |             | 11 years |                    | $ | 341,400
|Trade name              |  |            | 50,000    |             | 3 years  |                    |   | 16,667 
|Customer base           |  |            | 720,000   |             | 8 years  |                    |   | 90,000 
|                        |  |            |           |             |          |                    |   |        
|                        |  | $          | 4,525,400 |             |          |                    | $ | 448,067
|                        |  |            |           |             |          |                    |   |        
|                        |  |            |          
|CentrePath              |  | Fair Value |           | Useful Life |          | AnnualAmortization
|Developed technology    |  | $          | 970,000   |             | 9 years  |                    | $ | 107,778
|Trade name              |  |            | 90,000    |             | 3 years  |                    |   | 30,000 
|Customer base           |  |            | 480,000   |             | 6 years  |                    |   | 80,000 
|                        |  |            |           |             |          |                    |   |        
|                        |  | $          | 1,540,000 |             |          |                    | $ | 217,778
|                        |  |            |           |             |          |                    |   |        
|                        |  |            |          
|GCG                     |  | Fair Value |           | Useful Life |          | AnnualAmortization
|Developed technology    |  | $          | 1,070,000 |             | 5 years  |                    | $ | 214,000
|Trade name              |  |            | 210,000   |             | 3 years  |                    |   | 70,000 
|Retail customer base    |  |            | 2,210,000 |             | 10 years |                    |   | 221,000
|Wholesale customer base |  |            | 150,000   |             | 6 years  |                    |   | 25,000 
|                        |  |            |           |             |          |                    |   |        
|                        |  | $          | 3,640,000 |             |          |                    | $ | 530,000
|                        |  |            |           |             |          |                    |   |        

The amounts allocated to goodwill are not deductible for tax purposes.

Unaudited Pro Forma Financial Information (As Restated)

The following unaudited pro forma condensed consolidated results of operations have been prepared as if the acquisitions of 20/20 (including Magenta), CentrePath, and GCG had occurred as of January 1, 2006:



|                                     |  |                  |             |  
|------------------------------------ |  | ---------------- | ----------- | -
|                                     |  | December 31,2006 |            
|Net revenue                          |  | $                | 17,734,556  |  
|Net loss                             |  | $                | (45,742,945 | )
|Net loss per share:                  |  |                  |             |  
|Basic and diluted                    |  | $                | (2.06       | )
|Weighted average shares outstanding: |  |                  |             |  
|Basic and diluted                    |  |                  | 22,215,673  |  

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, 2006, 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. As of
December 31, 2007, the Company had $0.2 million of restricted cash for outstanding letters of credit.



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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 rates on the promissory notes approximating current rates.

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.

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 $99,000 and $64,000 as of December 31, 2007 and 2006, 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 three to fifteen 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.

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 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. There have been no current events or circumstances that would indicate an impairment of goodwill exists and there
were no changes in the carrying amount of goodwill for the year ended December 31, 2007 in the continuing operations.

The value at
acquisition and current carrying cost for each acquired company are as follows:



|                          |  |                    |            |               |   |           
|------------------------- |  | ------------------ | ---------- | ------------- | - | ----------
|                          |  | GrossCarrying Cost |            | AcquiredValue
|                          |  | December 31,      
|                          |  | 2007               |            | 2006         
|Acquisition of 20/20      |  | $                  | 8,810,065  |               | $ | 8,810,065 
|Acquisition of CentrePath |  |                    | 1,753,820  |               |   | 1,753,820 
|Acquisition of GCG        |  |                    | 1,949,205  |               |   | 1,949,205 
|                          |  |                    |            |               |   |           
|End of the year           |  | $                  | 12,513,090 |               | $ | 12,513,090
|                          |  |                    |            |               |   |           

Intangible assets are assets acquired from an independent party. The assets have no significant
residual values. There are no intangible assets that 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 or asset group may not be
recoverable. The Company has determined that no impairments existed as of December 31, 2007. 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 represents the excess of the assets carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis.

Gross carrying amounts, accumulated amortization, and estimated amortization period for each major intangible asset class are as follows:



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|                     |  |                             |  |                         |           |                         |   |            |     |  |   |          
|-------------------- |  | --------------------------- |  | ----------------------- | --------- | ----------------------- | - | ---------- | --- |  | - | ---------
|                     |  |                             |  | As of December 31, 2007
|                     |  | AmortizationPeriod in Years |  | GrossCarryingAmount     |           | AccumulatedAmortization |   |            | Net
|Developed technology |  | 5 to 11                     |  | $                       | 5,805,400 |                         | $ | (809,788   | )   |  | $ | 4,995,612
|Trade names          |  | 3                           |  |                         | 350,000   |                         |   | (129,246   | )   |  |   | 220,754  
|Customer base        |  | 6 to 10                     |  |                         | 3,560,000 |                         |   | (468,564   | )   |  |   | 3,091,436
|                     |  |                             |  |                         |           |                         |   |            |     |  |   |          
|Total                |  | 8.52 weighted average years |  | $                       | 9,715,400 |                         | $ | (1,407,598 | )   |  | $ | 8,307,802
|                     |  |                             |  |                         |           |                         |   |            |     |  |   |          



|                     |  |                         |           |                         |   |          |     |  |   |          
|-------------------- |  | ----------------------- | --------- | ----------------------- | - | -------- | --- |  | - | ---------
|                     |  | As of December 31, 2006
|                     |  | GrossCarryingAmount     |           | AccumulatedAmortization |   |          | Net
|Developed technology |  | $                       | 5,795,400 |                         | $ | (141,220 | )   |  | $ | 5,654,180
|Trade names          |  |                         | 350,000   |                         |   | (13,890  | )   |  |   | 336,110  
|Customer base        |  |                         | 3,560,000 |                         |   | (57,111  | )   |  |   | 3,502,889
|                     |  |                         |           |                         |   |          |     |  |   |          
|Total                |  | $                       | 9,705,400 |                         | $ | (212,221 | )   |  | $ | 9,493,179
|                     |  |                         |           |                         |   |          |     |  |   |          

Amortization expense for the years ended December 31, 2007 and 2006 related to the intangible
assets was $1.2 million and $0.2 million, respectively.

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



|           |  |   |          
|---------- |  | - | ---------
|2008       |  | $ | 1,195,844
|2009       |  |   | 1,183,265
|2010       |  |   | 1,079,178
|2011       |  |   | 1,065,349
|2012       |  |   | 856,895  
|Thereafter |  |   | 2,927,271
|           |  |   |          
|           |  | $ | 8,307,802
|           |  |   |          

Impairment of Long-lived Assets

The Company assesses the recoverability of long-lived assets in accordance with SFAS 144. 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 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.

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important, which could trigger an impairment review, include the following:



| |  |  | a significant decrease in the market price of a long-lived asset or asset group;
| | - |  | --------------------------------------------------------------------------------



| |  |  | a significant adverse change in the extent or manner in which a long-lived asset or 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 or 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 or 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 or asset group; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

There were no impairment charges recognized related to the long-lived assets of the
continuing operations for the years ended December 31, 2007 and 2006.

Accounting for Convertible Debentures, Warrants and Derivative Instruments
(As Restated)

The Company does not enter into derivative contracts for purposes of risk management or speculation. However, from time
to time, the Company enters into contracts that are not considered derivative financial instruments in their entirety but that include embedded derivative features.

The Company accounts for its embedded conversion features and freestanding warrants pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Companys Own Stock (EITF 00-19) which requires freestanding contracts that are settled in a companys own stock to be designated as an equity
instrument, asset, or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a companys balance sheet, with any changes in fair value recorded in results of
operations.

In accordance with EITF 00-19, certain warrants to purchase common stock and embedded conversion options are accounted for as
liabilities at fair value and the unrealized changes in the values of these derivatives are recorded in the statement of operations as gain or loss on warrants and derivatives. Contingent conversion features that reduce the conversion
price of warrants and conversion features are included in the valuation of the warrants and the conversion features. The recognition of the fair value of derivative liabilities (i.e., warrants and embedded conversion options) at the date of issuance
is applied first to the proceeds. The excess fair value, if any, over the proceeds from units-type offerings (i.e., preferred stock with freestanding warrants) or from a debt instrument, is recognized immediately in the statement of operations as
gain or loss on warrants and derivatives or interest expense, respectively. The value of warrants or derivatives associated with a debt instrument is recognized at inception as a discount to the debt instrument. This discount
is amortized over the life of the debt instrument using the effective interest method. The value of the warrants and derivatives associated with the units-type offerings is credited to additional paid-in-capital upon conversion to common stock.

A determination is made upon settlement, exchange, or modification of the debt instruments to determine if a gain or loss on the
extinguishment has been incurred based on the terms of the settlement, exchange, or modification and on the value allocated to the debt instrument at such date.

The Company uses the Black-Scholes pricing model to determine fair values of its derivatives. Valuations derived from this model are subject to ongoing internal verification and review. The model uses market-sourced
inputs such as interest rates, exchange rates, and option volatilities. Selection of these inputs involves managements judgment and may impact net income. The fair value of the derivative liabilities are subject to the changes in the trading
value of the Companys common stock. As a result, the Companys financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of the Companys stock at the balance sheet date, the amount of shares
converted by note holders and/or exercised by warrant holders, and changes in the determination of market-sourced inputs. Consequently, the Companys financial position and results of operations may vary materially from quarter-to-quarter based
on conditions other than its operating revenues and expenses.

Accounting for Debt Issued with Stock Purchase Warrants

The Company accounts for debt issued with stock purchase warrants in accordance with Accounting Principles Board (APB) Opinion No. 14, Accounting
for Convertible Debts and Debts issued with Stock Purchase Warrants (APB 14), if such warrants merit equity classification. The proceeds of the debt are allocated between the debt and the detachable warrants based on the relative fair values of
the debt security without the warrants and the warrant themselves, if the warrants are equity instruments. The Company does not currently have any warrants that merit equity classification.

Revenue Recognition (As Restated)

The Company
generates revenue from two business units: Optimization Solutions and Connectivity Solutions. The revenue products of the Optimization Business include Optimization Consulting, Automated Pricing Software, Remote Management Services and Professional
Services, while products of the Connectivity Business include delivering turn-key global networks and system management services.



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The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue
Recognition (SAB 104) which incorporates Emerging Issues Task Force Issues No. 00-21, Multiple-Deliverable Revenue Arrangements (EITF 00-21) and in accordance with AICPA Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended
by AICPA Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions (SOP 98-9). In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an
arrangement exists, the service is performed and collectability of the resulting receivable is reasonable assured.

While customers may
purchase services separately, sales often include multiple products that cross business units. At the inception of such arrangements, the deliverables are evaluated to determine whether they represent separate units of accounting under EITF Issue
No. 00-21. The Companys policy regarding this determination of separate units is based on all of the following criteria being met: the delivered item has value to the customer on a standalone basis; there is objective and reliable evidence of
the fair value of the items(s); and delivery or performance of the item(s) is considered probable and substantially in the Companys control. Revenue is allocated to each unit of accounting in a transaction based on its fair value as determined
by vendor objective evidence. Vendor objective evidence of fair value for all elements of an arrangement is based upon the normal pricing and discounting practices when sold to other customers. If vendor objective evidence of fair value is has not
been established for all items under the arrangement, no allocation can be made, and revenue is recognized on all items over the term of the arrangement.

As part of the revenue recognition process, the Company records provisions for estimated product returns and allowances as determined by historical sales returns, reviewing economic trends and changes to
customers demands. Cancellation charges which are included in Company contracts are booked upon managements determination that the customer has violated the terms of the contract.

Optimization Consulting.The Company contracts these services on a contingent basis, where the Company is paid a non-recurring fee based on
a percentage of the savings achieved from the engagement. Savings in off-net access can be identified through the novation of existing circuits, least-cost carrier upgrades, point-of-presence re-homing, and aggregation of circuits into higher
bandwidth facilities. Revenues related to optimization recommendations that require additional action before acceptance or implementation are deferred until such contingency is resolved.

Automated Pricing Software. The Company allocates revenue to software license and to the related maintenance based on the residual method
of accounting as prescribed in SOP 97-2 whereby the software revenue is recognized upon product acceptance by the customer and the maintenance allocation is recognized over the annual life of the license. The Company has established Vendor Specific
Objective Evidence (VSOE) for the value of its post-contract maintenance support agreement at 20% of the license amount, which is based on the amount charged to its customers in the renewal year. Therefore, the Company allocates 20% of the revenue
of the arrangement to maintenance and the remaining amount to the software license.

Remote Management Services. The Company
recognizes revenue from the installation and servicing of the arrangement ratably over the term of the contract with no allocation to either installation or monthly monitoring since, as prescribed in EITF 00-21, the installation has no value to the
customer on a standalone basis.

Professional Services. The Company recognizes revenue over the duration of the contract on a
percentage of completion method from the go-live date through the contract life.

Turn-key Global Networks. The Company
generally bills its customers for ongoing services on a monthly basis. Invoices include charges for the current months connectivity access and for the prior months excess usage-based revenue. Revenue is recognized in the month earned.
Installation charges are recognized upon acceptance by the customer.



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Cost of Sales

The cost of sales for the Optimization solutions products include the cost of accessing circuits and fiber networks, the direct costs for labor, travel and materials to install and maintain customer sites, along with the occupancy and labor
costs of operating a network operations center.

Cost of sales for the connectivity solutions products includes the cost of accessing
circuits and bandwidth need for communication networks, and fees paid to third party sales agents.

Accounting for Stock-Based Compensation

In the first quarter of 2006, the Company adopted SFAS No. 123R,Share-Based Payments (SFAS 123R), which revises SFAS
No. 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 resulted in the recognition of stock-based compensation
expense for the years ended December 31, 2007 and 2006 of $13.8 million and $1.8 million, respectively. No tax benefit has been recorded due to the full valuation allowance on deferred tax assets that the Company has recorded.

The Company accounts for equity instruments issued for services and goods to non-employees under SFAS 123; Emerging Issues Task Force Issue
No. 96-18,Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18); and Emerging Issues Task Force Issue No. 00-18, Accounting Recognition
for Certain Transactions Involving Equity Instruments Granted to Other Than Employees (EITF 00-18). Generally, the equity instruments issued for services and goods are for shares of the Companys common stock or warrants to purchase shares.
These shares or warrants generally are fully vested, non-forfeitable, 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.

Income Taxes

The Company adopted the provisions of FASB Interpretation No 48,Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109,Accounting for Income Taxes (SFAS 109), and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on recognition, classification, interest, and penalties, accounting in interim
periods, disclosure, and transition.

The Company and its subsidiaries, file income tax returns in the U.S. federal jurisdiction, and
various state as well as local and foreign jurisdictions. Based on its evaluation, the Company has concluded that there are no significant unrecognized tax benefits. The Companys evaluation was performed for the tax years ended
December 31, 2003, 2004, 2005, and 2006, the tax years that remain subject to examination by major tax jurisdictions as of December 31, 2007. The Company does not believe there will be any material changes in its unrecognized tax positions
over the next twelve months.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any
such assessments historically have been minimal and immaterial to its financial results. In accordance with FIN 48, paragraph 19, the Company has decided to classify interest and penalties as a component of income tax expense.

Comprehensive Loss (As Restated)

SFAS
No. 130,Reporting Comprehensive Income (SFAS 130), 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. The following is the Companys comprehensive loss for the years ended December 31, 2007 and 2006:



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|                                        |  |                          |             |   |               |   |             |  
|--------------------------------------- |  | ------------------------ | ----------- | - | ------------- | - | ----------- | -
|                                        |  | Years Ended December 31, |            
|                                        |  | 2007                     |             |   | 2006          |  
|                                        |  | (As Restated)            |             |   | (As Restated) |  
|Net loss                                |  | $                        | (61,389,396 | ) |               | $ | (38,393,330 | )
|Foreign currency translation adjustment |  |                          | (40,629     | ) |               |   | (48,904     | )
|                                        |  |                          |             |   |               |   |             |  
|Comprehensive loss                      |  | $                        | (61,430,025 | ) |               | $ | (38,442,234 | )
|                                        |  |                          |             |   |               |   |             |  

Loss per Share (As Restated)

Basic and diluted net loss per share information is presented under the requirements of SFAS No. 128,Earnings per Share (SFAS 128). Basic net loss per share is computed by dividing the net loss applicable
to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects potential dilution of securities by adding other potential common shares, including stock options and
warrants, to 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, 2007, there were 60,708,027 stock options and 67,107,343 stock warrants outstanding that potentially could be converted into common shares. The Company also has outstanding a junior secured facility which contains a
conversion feature into shares of common stock. Based on the Companys ten-day trailing average of its closing market price, these notes had the potential to convert into 16,767,904 of additional common shares as of December 31, 2007. On
June 25, 2007, the Companys shareholders approved an increase in the number of authorized common shares from 25,000,000 to 350,000,000, resulting in the conversion of all series of preferred stock into common stock. At that date, the
Company had a total of 2,516.1 and 20,634.5 shares of Series B and Series AA Convertible preferred stock that converted into 3,700,147 and 45,852,567 shares of common stock, respectively.

As of December 31, 2006, there were 9,324,527 stock options and 15,595,903 stock warrants outstanding that could generally be converted into common
shares. There were 2,516.1 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.

Segment Information

SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information (SFAS 131) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which
separate, discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and assess performance. The information disclosed herein materially
represents all of the financial information related to the Companys principal operating segments. During the first quarter of 2007, the Company completed the process of identifying which of the entities operations were core to its
overall Telecom Logistics Integrator business model. As a result, the Company determined that all operations were core to this business model, with the exception of Nexvu and Frontrunner and therefore made a decision to divest from these businesses.
See the Discontinued Operations note for further discussion. The Companys management team views the remaining combined operations of 20/20, Magenta, CentrePath, GCG, and CGSI as one operating segment, for which it prepares discrete
financial statement information and is the basis for making decisions on how to allocate resources and assess performance.

Recent Accounting
Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurement(SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 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. The Company is currently evaluating the impact of
adopting SFAS 157 on its financial position and results of operations.

On December 4, 2007, the FASB issued SFAS 141(R), Business
Combinations (SFAS 141R). SFAS 141R replaces SFAS 141, Business Combinations and applies to all transactions or other events in which an entity obtains control of one or more businesses. SFAS 141R requires the acquiring entity in a
business combination to recognize the acquisition-date fair value of all assets acquired and liabilities assumed including contingent consideration and those relating to minority interests. SFAS 141R also requires acquisition-related transaction
expenses and restructuring costs to be expensed as incurred, rather than capitalized as a component of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and may not be applied before that date.
The provisions of SFAS 141R will impact the Company if it is party to a business combination after the pronouncement has been adopted.



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On December 4, 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements(SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51) to establish accounting and reporting standards for the non-controlling interest (previously referred to
as minority interests) in a subsidiary and for the deconsolidation of a subsidiary by requiring all non-controlling interests in subsidiaries be reported in the same way, (i.e., as equity in the consolidated financial statements) and eliminates the
diversity in accounting for transactions between an entity and non-controlling interests by requiring they be treated as equity transactions. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and may not be applied before
that date. The Company does not currently expect the adoption of SFAS 160 to have a material effect on its consolidated results of operations and financial condition.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Reclassifications

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

Note 3. Discontinued Operations.

During the first quarter of 2007, the Company determined the operations of Frontrunner and Nexvu were not core to the Companys overall Telecom Logistics Integrator strategy and therefore made the decision to dispose of these two
entities. Since early 2007, the Company has been actively marketing the two companies and was in final negotiations for the sale of Nexvu at December 31, 2007. Development activity at Nexvu was ended effective September 30, 2007 and shut
down costs of $160,000 were accrued at that date to cover any residual costs, including severance and liquidation of fixed assets. In accordance with SFAS 144, the Company has classified both of these entities as discontinued operations for the
financial statements presented herein. Revenues for the years ended December 31, 2007 and 2006 were $9.3 million and $13.3 million, respectively. The loss from discontinued operations for the years ended December 31, 2007 and 2006 were
$5.0 million and $2.7 million, respectively.

In 2006, the Company determined the carrying value of Frontrunners goodwill exceeded
its fair value by $1.4 million and therefore recognized a charge of this amount in 2006. In connection with tentative offers for Frontrunner, the Company reassessed the carrying amount of that units goodwill and wrote-off the balance of $2.6
million during 2007.

On February 19, 2008, the Company entered into an Asset Purchase Agreement with an unaffiliated party
(Buyer) pursuant to which Frontrunner sold substantially all of its assets to the Buyer. The purchase price for the assets was $850,000 and the Buyer assumed Frontrunners indebtedness to a material supplier that had a remaining
principal amount of $590,000. Approximately $140,000 of the cash purchase price was placed in escrow to be disbursed based on the collections of certain accounts receivable of Frontrunner that were purchased by the Buyer. The Company used the cash
proceeds (net of the escrow amount) to pay down amounts outstanding under the Senior Secured Credit Agreement. In connection with the sale of assets, the Company agreed to not compete with the Buyer for a period of five years. Based on final sale
negotiations, the Company recorded an additional gain on sale of $1.0 million during the first quarter of 2008.

In 2002, 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. The Company was required to make annual
minimum royalty payments over a five-year period that totaled $500,000. During 2007, the Company and the third party agreed that, in connection with the close of operations of Nexvu and the removal of the third partys software from the Nexvu
product, that the agreement would be terminated in exchange for a payment of $25,000, which was made.

The discontinued operations assets
and liabilities were as follows:



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|                                                     |  |                  |           |                  |   |          
|---------------------------------------------------- |  | ---------------- | --------- | ---------------- | - | ---------
|                                                     |  | December 31,2007 |           | December 31,2006
|Current assets of discontinued operations            |  |                  |           |                  |   |          
|Accounts receivable, net                             |  | $                | 1,298,009 |                  | $ | 1,194,639
|Inventory                                            |  |                  | 863,259   |                  |   | 1,115,753
|Prepaid expenses and other current assets            |  |                  | 58,175    |                  |   | 74,934   
|Other current assets                                 |  |                  | 166,949   |                  |   | 44,351   
|                                                     |  |                  |           |                  |   |          
|Total current assets of discontinued operations      |  |                  | 2,386,392 |                  |   | 2,429,677
|                                                     |  |                  |           |                  |   |          
|                                                     |  |                 
|Long-term assets of discontinued operations          |  |                  |           |                  |   |          
|Property and equipment, net                          |  |                  | 505,323   |                  |   | 834,651  
|Intangible assets, net                               |  |                  | 526,167   |                  |   | 2,255,327
|Goodwill                                             |  |                  |          |                  |   | 2,565,543
|Other assets                                         |  |                  |          |                  |   | 22,432   
|                                                     |  |                  |           |                  |   |          
|Long-term assets of discontinued operations          |  |                  | 1,031,490 |                  |   | 5,677,953
|                                                     |  |                  |           |                  |   |          
|Total assets from discontinued operations            |  | $                | 3,417,882 |                  | $ | 8,107,630
|                                                     |  |                  |           |                  |   |          
|                                                     |  |                 
|Current liabilities of discontinued operations       |  |                  |           |                  |   |          
|Current maturities of long-term notes                |  | $                |          |                  | $ | 2,947,562
|Accounts payable                                     |  |                  | 325,852   |                  |   | 1,244,435
|Accrued expenses                                     |  |                  | 643,896   |                  |   | 1,318,939
|Advance billing                                      |  |                  | 390,350   |                  |   | 321,045  
|Warranty reserve                                     |  |                  | 98,763    |                  |   | 152,050  
|Deferred revenue, current portion                    |  |                  | 1,368,411 |                  |   | 1,394,373
|                                                     |  |                  |           |                  |   |          
|Total current liabilities of discontinued operations |  |                  | 2,827,272 |                  |   | 7,378,404
|                                                     |  |                  |           |                  |   |          
|                                                     |  |                 
|Long-term liabilities of discontinued operations     |  |                  |           |                  |   |          
|Long-term portion of notes                           |  |                  | 727,276   |                  |   | 570,587  
|                                                     |  |                  |           |                  |   |          
|Total liabilities from discontinued operations       |  | $                | 3,554,548 |                  | $ | 7,948,991
|                                                     |  |                  |           |                  |   |          

Note 4. Property and Equipment.

Property and equipment at December 31, 2007 and 2006 consists of the following:



|                           |  |      |            |   |      |   |           |  
|-------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                           |  | 2007 |            |   | 2006 |  
|Furniture and fixtures     |  | $    | 341,429    |   |      | $ | 755,770   |  
|Computer equipment         |  |      | 834,712    |   |      |   | 866,388   |  
|Leasehold improvements     |  |      | 111,263    |   |      |   | 1,236,250 |  
|Machinery and equipment    |  |      | 1,472,167  |   |      |   | 1,251,634 |  
|                           |  |      |            |   |      |   |           |  
|                           |  |      | 2,759,571  |   |      |   | 4,110,042 |  
|Accumulated depreciation   |  |      | (1,341,139 | ) |      |   | (194,222  | )
|                           |  |      |            |   |      |   |           |  
|Net property and equipment |  | $    | 1,418,432  |   |      | $ | 3,915,820 |  
|                           |  |      |            |   |      |   |           |  

Depreciation of property and equipment was $2,301,885 and $194,221 for the years ended
December 31, 2007 and 2006, respectively.

Note 5. Accrued Expenses.

Accrued expenses at December 31, 2007 and 2006 consist of the following:



|                                       |  |      |         |      |   |        
|-------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                       |  | 2007 |         | 2006
|Accrued compensation and payroll taxes |  | $    | 453,252 |      | $ | 760,875
|Accrued interest expense               |  |      | 884,114 |      |   | 824,703



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|                              |  |      |           |      |   |          
|----------------------------- |  | ---- | --------- | ---- | - | ---------
|                              |  | 2007 |           | 2006
|Accrued software royalties    |  |      | 100,000   |      |   |         
|Accrued sales taxes           |  |      | 277,139   |      |   | 276,954  
|Accrued professional services |  |      | 441,090   |      |   | 265,379  
|Other accrued expenses        |  |      | 1,075,666 |      |   | 1,224,895
|                              |  |      |           |      |   |          
|Total accrued expenses        |  | $    | 3,231,261 |      | $ | 3,352,806
|                              |  |      |           |      |   |          

6. Debt (As Restated).

Debt as of December 31, 2007 and 2006 consists of the following:



|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                  |           |                  |   |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | ---------------- | - | ---------
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  | December 31,2007 |           | December 31,2006
|Senior secured line of credit, with an outstanding balance of $5,454,057, bearing interest at 15%, due July 2008. Debt discount at issuance of
$2,361,546. As of December 31, 2007, the balance of the debt was reported net of $1,077,234, which represents the unamortized value of the debt discount.                                                                                                                      |  | $                | 4,376,823 |                  | $ |         
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Junior secured facility, with a face amount of $9,313,438, bearing simple interest at 12%, due January 2009. Debt discount at issuance of
$18,278,835. As of December 31, 2007, the balance of the debt was reported net of $5,939,634, which represents the unamortized value of the debt discount.                                                                                                                          |  |                  | 3,373,804 |                  |   |         
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|A Short-term bridge facility, with an outstanding balance of $202,000, bearing interest at 12%, due September 30, 2007, which was
subsequently extended. Debt discount at issuance of $205,211. As of December 31, 2007, the balance of the debt was reported net of $153,709, which represents the unamortized value of the debt discount                                                                                    |  |                  | 48,291    |                  |   |          
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Secured short-term notes payable (20/20 bridge loan), with a face amount of $5,987,367 bearing interest at 18%, due January 2007. Debt
discount at issuance of $7,718,673. As of December 31, 2006, the balance of the debt due was reported net of $299,368, which represents the unamortized value of the debt discount.                                                                                                    |  |                  |          |                  |   | 5,687,999
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Secured short-term notes payable (CentrePath Bridge Loan), with a face amount of $7,850,000 bearing interest at 8%, due January 2007. Debt
discount at issuance of $2,065,247. As of December 31, 2006, the balance of the debt due was reported net of $961,407, which represents the unamortized value of the debt discount.                                                                                                |  |                  |          |                  |   | 6,888,593
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Secured short-term notes payable (GCG Bridge Loan), with a face amount of $4,700,000 bearing interest at 8%, due January 2007. Debt discount
at issuance of $983,124. As of December 31, 2006, the balance of the debt due was reported net of $639,031, which represents the unamortized value of the debt discount.                                                                                                         |  |                  |          |                  |   | 4,060,969
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Mandatory convertible promissory notes to, 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. Debt discount of $2,200,114. As of December 31, 2006, the balance of the debt due was reported net of $1,219,100, which represents the
unamortized value of the debt discount. |  |                  |          |                  |   | 55,890   
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Promissory notes bearing interest at the rate of 6.75%, secured by vehicles. The obligation to make payments on these notes and the related
vehicles were transferred to certain former employees of GCG effective October 31, 2007.                                                                                                                                                                                          |  |                  |          |                  |   | 75,398   
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Promissory note evidencing the advanced funding of certain of the Companys accounts receivable, which has, in lieu of interest, a right
to participate in the proceeds the Company receives with respect to the underlying contract.                                                                                                                                                                                         |  |                  |          |                  |   | 406,187  
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Unsecured note payable to various creditors of 20/20, bearing interest rates between 8% and 16%.                                                                                                                                                                                                                                                                                                                              |  |                  |          |                  |   | 1,610,000
|                                                                                                                                                                                                                                                                                                                                                                                                                              |  |                 
|Unsecured notes payable to creditors with an interest rate of 8%, principal payments commencing in January 2007, maturing December
2008.                                                                                                                                                                                                                                                                                      |  |                  | 601,268   |                  |   | 1,257,992



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|                                                                                      |  |                  |           |                  |   |           
|------------------------------------------------------------------------------------- |  | ---------------- | --------- | ---------------- | - | ----------
|                                                                                      |  | December 31,2007 |           | December 31,2006
|Unsecured loans from employees of Magenta, bearing interest at 8.43%, due upon demand |  |                  | 138,200   |                  |   | 164,865   
|Capital lease obligations                                                             |  |                  | 35,462    |                  |   | 81,525    
|                                                                                      |  |                  |           |                  |   |           
|Total                                                                                 |  |                  | 8,573,848 |                  |   | 20,289,418
|Less: current maturities                                                              |  |                  | 5,084,114 |                  |   | 19,460,510
|                                                                                      |  |                  |           |                  |   |           
|Long-term portion                                                                     |  | $                | 3,489,734 |                  | $ | 828,908   
|                                                                                      |  |                  |           |                  |   |           

Senior Secured Facility. On January 19, 2007, the Company closed the initial
funding of $7.0 million of borrowings on an 18-month $12 million Senior Secured Facility issued to the Company by Hilco Financial, LLC (Senior Lender). The Credit Agreement for the facility names the Company and its remaining active
subsidiaries as co-borrowers. The Credit Agreement provides for a term loan of $6.5 million plus up to $5.5 million 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 thirty 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 the Senior Lender 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 facility. As of December 31, 2007, the
Companys borrowing capacity was $0.5 million.

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 contains numerous affirmative and
negative covenants customary for facilities of this nature. The Company had agreed to EBITDA covenants (earnings before interest taxes, depreciation and amortization and before non-cash stock compensation and warrant expense) as follows (at least
75% of the amount must be achieved on a ,P-cumulative basis: Q1 2007 ($2.4) million; Q2 2007 ($2.6) million; Q3 2007 ($600,000); and Q4 2007 $3.1 million. The Company also agreed to a covenant capping capital expenditures at $500,000 for 2007. The
Senior Lender agreed to waive the Companys non-compliance related to the EBITDA covenant during 2007.

In connection with the Senior
Secured Facility, on January 19, 2007, the Company issued to the Senior Lender 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 basis). Warrants with respect
to one half of the shares were 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 were 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 In connection with the October 31, 2007 Waiver and Amendment to the Agreement, a new five-year warrant to purchase up to
3,500,000 shares of common stock at $0.15 was issued and the previously issued warrants were cancelled. The new warrant provides for, among other things, cashless exercise, anti-dilution, and registration rights. The Senior Lender subsequently
agreed to waive the requirements that the shares underlying its warrant be registered.

Using the Black-Scholes pricing model, the Company
allocated the debt proceeds to the warrants as follows:



|                                                                        |  |                   |          
|----------------------------------------------------------------------- |  | ----------------- | ---------
|                                                                        |  | Initial FairValue
|Warrants issued on January 19, 2007                                     |  | $                 | 1,827,966
|Fair value increase for replacement warrants issued on October 31, 2007 |  |                   | 533,580  
|                                                                        |  |                   |          
|Total debt discount                                                     |  | $                 | 2,361,546
|                                                                        |  |                   |          

During the first quarter of 2008, this debt was paid in full. See the Subsequent
Events note for further discussion.

Junior Secured Facility. 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 that permits the funding of up to $10.0 million of original principal amount of advances. At the closing, $6.3 million was provided pursuant to
the facility. During the year, another $3.4 million was funded, bringing the aggregate principal amount of the facility to $9.3 million. The facility has a two-year term accruing simple interest at 12% per annum, with all principal and interest
due on maturity. 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.



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The original principal amount of each note issued pursuant to the junior secured facility was 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 trailing ten-day average for the
Companys common stock as of the day immediately preceding the date of conversion, (subject to adjustment to account for stock splits and certain other extraordinary corporate circumstances). In connection with the funding of the 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 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. The loan agreement establishing the facility was amended effective June 15, 2007 to: (i) eliminate the ceiling (originally applicable to the facility based on a floor of $0.65 and a ceiling of
$1.25 per share) and floor for the conversion of loan amounts to equity in the Company; (ii) permit the cashless exercise of warrants under the facility in lieu of an obligation to register the shares of capital stock underlying the warrants;
and (iii) provide that with respect to advances under the facility after June 15, 2007, the warrant coverage was increased to 90.0009 shares of Series AA preferred stock (200,000 shares of common stock, on an as-converted basis, at an
effective price of $0.45 per share) for each $100,000 of principal amount advanced; those lenders funding the facility on or before January 22, 2007 received a warrant to purchase up to 67.500675 shares of Series AA preferred stock for each
$100,000 of monies advanced (150,000 shares of common stock, on an as-converted basis, at an effective price of $0.45 per share) for each $100,000 of principal amount advanced. In connection with the June 15, 2007 amendment, additional funding
of $3.0 million was received and the company issued 5,850,000 warrants. The Company has issued warrants to purchase an aggregate of 15,432,658 shares of its common stock under the junior secured facility. 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 in the Shareholders Equity note. All of the warrants under the facility expire
December 31, 2009.

Using the Black-Scholes pricing model, the Company allocated the debt proceeds to the warrants and the embedded
derivatives as follows:



|                                             |  |                    |           
|-------------------------------------------- |  | ------------------ | ----------
|                                             |  | Initial Fair Value
|Warrants issued on January 19, 2007          |  | $                  | 7,569,592 
|Warrants issued with June 15, 2007 amendment |  |                    | 3,340,299 
|Embedded derivatives                         |  |                    | 7,368,944 
|                                             |  |                    |           
|Total debt discount                          |  | $                  | 18,278,835
|                                             |  |                    |           

The initial fair value of the warrants and embedded derivatives exceeded the proceeds from the
Junior Secured Facility by $9.0 million, which was recognized immediately as interest expense.

In August 2007, the Company established a
short-term bridge facility authorizing the issuance of up to $1,000,000 of Units comprised of short-term promissory notes bearing interest at 12% per annum and maturing September 30, 2007, coupled with a warrant to purchase up to 125,000
shares of common stock for each $100,000 of notes funded. Each warrant is exercisable at $0.55 per share and expires December 31, 2010. At that time, two of the Companys Directors purchased Units for a total of $150,000. In addition, two
officers of the Company each purchased $50,000 of the Units and two investors purchased a total of $100,000 of Units. Collectively, the purchases of these Units resulted in the issuance of short-term notes in the principal amount of $350,000, plus
warrants to purchase an aggregate of up to 437,500 shares of common stock. The purchasers of these units agreed to extend the maturity date until completion of the contemplated financing. The short-term bridge facility is unsecured. During the first
quarter of 2008, each note was converted to common stock or paid in full. See the Subsequent Events note.

Using the
Black-Scholes pricing model, the Company allocated the debt proceeds to the warrants as follows:



|                    |  |                    |        
|------------------- |  | ------------------ | -------
|                    |  | Initial Fair Value
|Warrants            |  | $                  | 205,211
|                    |  |                    |        
|Total debt discount |  | $                  | 205,211
|                    |  |                    |        



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The Company previously entered into a series of bridge loans as summarized herein, all of which were
either paid off with the proceeds from the Junior Secured Facility, the Senior Secured Facility or the Unit offering or were converted into Units or the Junior Secured Facility. The Company determined that the transaction should be treated as an
extinguishment of debt and recorded a gain on debt extinguishment of $1.6 million.

Such 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 borrowed $6.0 million simultaneously with or shortly following its purchase of 20/20, 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 thirty consecutive days following the effectiveness of a registration statement registering
the common stock underlying the warrants.

Using the Black-Scholes pricing model, the Company allocated the debt proceeds to the warrants
and the embedded derivatives as follows:



|                     |  |                    |          
|-------------------- |  | ------------------ | ---------
|                     |  | Initial Fair Value
|Warrants             |  | $                  | 1,114,461
|Embedded derivatives |  |                    | 6,604,212
|                     |  |                    |          
|Total debt discount  |  | $                  | 7,718,673
|                     |  |                    |          

The initial fair value of the warrants and embedded derivatives exceeded the proceeds from the
20/20 Bridge Loan by $1.7 million, which was recognized immediately as interest expense.

CentrePath Bridge Loan. The Company
had borrowed $7.9 million in original principal amount in November 2006 with $6.8 million of the proceeds used toward the purchase of CentrePath, and the balance of the proceeds used for working capital. The 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 2,276.2 shares of Series AA preferred stock (representing 4,925,000 shares of common stock, on an as-converted 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).

Using the Black-Scholes pricing model, the Company allocated the debt proceeds to the warrants as
follows:



|                    |  |                    |          
|------------------- |  | ------------------ | ---------
|                    |  | Initial Fair Value
|Warrants            |  | $                  | 2,065,247
|                    |  |                    |          
|Total debt discount |  | $                  | 2,065,247
|                    |  |                    |          

GCG Bridge Loan. The Company borrowed $4.7 million in original principal amount in
December 2006, which proceeds were (together with an additional $500,000 provided from working capital) used toward the purchase of GCG. The principal and accrued interest with respect to these loans was secured by the stock of GCG. 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 1,057.5
shares of Series AA preferred stock (representing 2,350,000 shares of common stock, on an as-converted 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).

Using the Black-Scholes pricing model, the Company allocated the debt proceeds to the warrants as follows:



|                    |  |                    |        
|------------------- |  | ------------------ | -------
|                    |  | Initial Fair Value
|Warrants            |  | $                  | 983,124
|                    |  |                    |        
|Total debt discount |  | $                  | 983,124
|                    |  |                    |        

Mandatory Notes. The Company issued an aggregate of $3.7 million 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, for every



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##### Table of Contents

$100,000 of notes purchased, each note holder was issued a warrant that was exercisable at $0.45 and expires December 31, 2009 for 50.0 shares of Series
AA preferred stock, representing 111,111 shares of common stock (on an as-converted basis) and a warrant that is exercisable at $0.65 and expires December 31, 2009 for 50.0 shares of Series AA Preferred Stock, representing 111,111 shares of
common stock (on an as-converted basis). The Company also issued the note holders a warrant for 4.5 shares of Series AA Preferred Stock, representing 10,000 shares of common stock (on an as-converted basis) exercisable at $0.45 and expiring on
December 31, 2011, with a callable right by the Company. From January 22, 2007 through April 10, 2007, an aggregate of $4.4 million of additional Mandatory Notes were issued, with warrants. Total warrants were issued on a combined (as
converted) basis for 1,605,868 shares.

Using the Black-Scholes pricing model, the Company allocated the debt proceeds to the warrants and
the embedded derivatives as follows:



|                     |  |                    |           
|-------------------- |  | ------------------ | ----------
|                     |  | Initial Fair Value
|Warrants             |  | $                  | 1,354,961 
|Embedded derivatives |  |                    | 15,055,126
|                     |  |                    |           
|Total debt discount  |  | $                  | 16,410,087
|                     |  |                    |           

Total proceeds received in connection with the Mandatory Notes were $8.1 million. The initial fair
value of the warrants and embedded derivatives exceeded the proceeds from the Mandatory Notes by $8.3 million, which was recognized immediately as interest expense.

During 2007, the Company failed to meet certain covenants required under various borrowing agreements. The Company sought and obtained waivers from its lenders, as necessary. No acceleration of the indebtedness
evidenced by these notes had been declared as of December 31, 2007 by any of its creditors.

The weighted-average interest rate on the
debt listed above excluding the affect of the amortization of the fair value of the related warrants is 12.8% and 10.8% as of December 31, 2007 and 2006, respectively.

The aggregate scheduled principal re-payments of long-term debt for the next five years are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2008       |  | $ | 6,090,787 
|2009       |  |   | 9,539,274 
|2010       |  |   | 23,836    
|2011       |  |   | 23,836    
|2012       |  |   | 23,836    
|Thereafter |  |   | 42,856    
|           |  |   |           
|Total      |  | $ | 15,744,425
|           |  |   |           

Note 7. Warrants (As Restated).

At December 31, 2007 and 2006, the Company had 67,107,343 and 15,600,641 warrants outstanding, respectively, to purchase common stock. Certain
warrants were originally issued as Series A preferred stock warrants, Series B preferred stock warrants, and Series AA preferred stock warrants. Under the terms of the warrant agreement, these preferred warrants automatically converted to warrants
to purchase common stock of the Company (which became effective June 25, 2007) upon the approval of an amendment to the Companys articles of incorporation authorizing 350,000,000 shares of common stock. These warrants were granted in
connection with debt and equity offerings and in lieu of cash payments for services provided and are exercisable when issued. The warrants expire two to five years from date of issuance. In accordance with the terms of a registration penalty clause
in the warrant agreement, the expiration date on 16,471,638 outstanding warrants was extended from December 31, 2008 to February 5, 2009. In addition, the exercise price of certain warrants was reduced as called for by anti-dilution
provisions contained in the warrant agreement. The increase in fair value as a result of the modification in exercise prices was $2.0 million.

The table below summarizes the warrant expiration dates as of December, 31, 2007:



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##### Table of Contents

|                                |  |                          |  |                    |  |                
|------------------------------- |  | ------------------------ |  | ------------------ |  | ---------------
|Weighted Average Exercise Price |  | Range of Exercise Prices |  | Number of Warrants |  | Expiration Date
|$0.331                          |  | $0.30-$0.39              |  | 45,548,240         |  | 2009           
|$0.356                          |  | $0.35-$0.36              |  | 675,000            |  | 2010           
|$0.576                          |  | $0.45-$0.70              |  | 7,884,103          |  | 2011           
|$0.263                          |  | $0.15-$0.50              |  | 13,000,000         |  | 2012           
|                                |  |                          |  |                    |  |                
|Total warrants outstanding      |  | 67,107,343               |  |                   
|                                |  |                          |  |                    |  |                

Warrant activity from December 31, 2005 through December 31, 2007 is as follows:



|                                                          |  |               |   |  |                              |       |                                                 |     |                                |   |       
|--------------------------------------------------------- |  | ------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ------------------------------ | - | ------
|                                                          |  | Warrants(000) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue ($000)
|Summary of warrant activity                               |  |               |   |  |                              |       |                                                 |     |                                |   |       
|Outstanding at December 31, 2005                          |  | 1,301         |   |  | $                            | 1.350 |                                                 | 1.1 |                                |   |       
|Warrants granted in connection with debt financing        |  | 13,000        |   |  |                              | 0.478 |                                                 |     |                                |   |       
|Warrants granted for services received                    |  | 2,100         |   |  |                              | 0.682 |                                                 |     |                                |   |       
|Exercised                                                 |  |              |   |  |                              |      |                                                 |     |                                |   |       
|Forfeited/canceled                                        |  | (801          | ) |  |                              | 1.350 |                                                 |     |                                |   |       
|                                                          |  |               |   |  |                              |       |                                                 |     |                                |   |       
|Outstanding at December 31, 2006                          |  | 15,600        |   |  |                              | 0.527 |                                                 | 4.0 |                                |   |       
|Warrants granted in connection with debt financing        |  | 23,799        |   |  |                              | 0.419 |                                                 |     |                                |   |       
|Warrants granted in connection with equity financing      |  | 50,806        |   |  |                              | 0.550 |                                                 |     |                                |   |       
|Warrants granted for services received                    |  | 5,800         |   |  |                              | 0.311 |                                                 |     |                                |   |       
|Exercised                                                 |  | (25,280       | ) |  |                              | 0.532 |                                                 |     |                                |   |       
|Anti-dilution modification of warrant exercise price, old |  | (49,923       | ) |  |                              | 0.513 |                                                 |     |                                |   |       
|Anti-dilution modification of warrant exercise price, new |  | 49,923        |   |  |                              | 0.329 |                                                 |     |                                |   |       
|Forfeited/canceled                                        |  | (3,618        | ) |  |                              | 0.615 |                                                 |     |                                |   |       
|                                                          |  |               |   |  |                              |       |                                                 |     |                                |   |       
|Outstanding at December 31, 2007                          |  | 67,107        |   |  | $                            | 0.347 |                                                 | 2.6 |                                | $ | 20,539
|                                                          |  |               |   |  |                              |       |                                                 |     |                                |   |       

The weighted average fair value of warrants issued is as follows:



|                                                    |  |      |       |      |   |      
|--------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                    |  | 2007 |       | 2006
|Warrants issued in connection with debt financing   |  | $    | 0.625 |      | $ | 0.457
|Warrants issued in connection with equity financing |  |      | 0.671 |      |   |     
|Warrants issued for services received               |  |      | 0.491 |      |   | 0.481
|                                                    |  |      |       |      |   |      
|Warrants issued for all grants                      |  | $    | 0.644 |      | $ | 0.461

The fair value of warrants issued is calculated using the Black Scholes pricing model generally
using the Company stock price on the date of the warrant grant as the warrant exercise price, the Companys expected volatility and the risk free interest rate matched to the warrants expected life. The company does not anticipate paying
dividends during the term of the warrants. The Company uses historical data to estimate volatility assumptions used in the valuation model. The expected term of warrants granted is derived from an analysis that represents the period of time that
warrants granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the time of grant.



|                                         |  |      |       |   |      |   |        |  
|---------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|                                         |  | 2007 |       |   | 2006 |  
|Weighted-average exercise price          |  | $    | 0.523 |   |      | $ | 0.449  |  
|Weighted-average volatility              |  |      | 100.2 | % |      |   | 100.23 | %
|Expected dividends                       |  |      |      |   |      |   |       |  
|Expected term (in years)                 |  |      | 2.5   |   |      |   | 4.2    |  
|Weighted-average risk-free interest rate |  |      | 4.55  | % |      |   | 4.70   | %



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##### Table of Contents

The total fair value of warrants issued and immediately exercisable in 2007 and 2006 was $51.7 million
and $7.0 million, respectively. There were no warrants issued in 2005. Warrants expire on various dates through December, 2012.

During
2007 and 2006, the Company issued warrants in conjunction with debt issuances, for advisory services and as part of the preferred stock units offering. The total initial fair value of the warrants issued was as follows: debt issuances  $14.9
million and $5.9 million; advisory services  $2.8 million and $1.0 million; and preferred stock units offering  $34.0 million and zero, for the years ended December 31, 2007 and 2006, respectively. At December 31, 2007,
warrants issued for advisory fees during the year of $1.0 million, are reported in pre-paid expenses on the consolidated balances and will be expensed during 2008.

In 2007, 25,279,502 warrants were exercised in conjunction with the Companys offer disclosed in 8K filings in October and November to reduce the exercise price to $0.15 per common share (compared with the
weighted average exercise price of $0.532 per common share before the offer). The intrinsic value of warrants exercised was $4.6 million. Cash received from the exercise of warrants in 2007 was $3.8 million. In connection with this modification, the
Company incurred a fair market value adjustment charge of $2.1 million, which is included in the gain or loss on warrants and derivatives in the consolidated statements of operations. There were no warrants exercised in 2006 or 2005. No
tax liability or benefit has been recorded in connection with the warrant expenses due to the net loss carryforward position of the company.

Note 8.
Liability for Warrants and Embedded Derivatives (As Restated).

The Company has entered into derivative financial instruments which
required evaluation in accordance with SFAS 133 and EITF 00-19:



| |  |  | As of September 8, 2006, the shares of common stock required to settle the convertible bridge loan issued in connection with the Companys acquisition of
20/20, convertible preferred stock, stock options, and warrants outstanding were in excess of the Companys authorized but unissued shares of common stock, on an as converted basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On June 15, 2007, the Company amended the terms of the Junior Secured Facility to eliminate the floor for the conversion of loan amounts to equity in the
Company. Because of this provision, the Company did not have sufficient shares of common stock outstanding to settle the outstanding debt, warrants and options if converted.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On June 25, 2007, the common shareholders approved increasing the number of authorized shares of common stock from 25,000,000 to 350,000,000. However, due to
the amendment to the Junior Secured Facility, the Company did not have sufficient shares of common stock outstanding to settle the outstanding debt, warrants, and options if converted.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to SFAS 133 and EITF 00-19, the conversion features of the debt are considered embedded derivatives requiring bifurcation from the debt host and
they are included on the consolidated balance sheet as a liability (see embedded derivates of convertible debt and preferred stock) at fair value. The embedded derivative is revalued at each balance sheet date and marked to fair value
with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the consolidated statements of operations.

The Companys outstanding warrants also meet the definition of a liability based on the assessment above. The warrants are recorded at fair value and classified as a liability in the consolidated balance sheet (see liabilities
for warrants to purchase common stock). The warrant liability is revalued at each balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the consolidated
statements of operations. As of December 31, 2007, and 2006, the fair value of the warrants was $35.9 million and $15.0 million, respectively.

The embedded derivatives and the warrants are initially measured at fair value generally using the Black-Scholes option valuation technique. In selecting the appropriate fair value technique, the Company considers the nature of the
instrument, the market risks that it embodies and the expected means of settlement.

The embedded derivative liability is revalued at each
balance sheet date and marked to fair value with the corresponding adjustment recognized as gain or loss on warrants and derivatives in the consolidated statement of operations. As of December 31, 2007, and 2006, the fair value of
the derivatives embedded in preferred stock and convertible debt was $9.2 million and $18.7 million, respectively.



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##### Table of Contents

Note 9. Share-based Compensation (As Restated).

Employee Stock Option Agreements

The
Company adopted a Long-Term Incentive Plan for key employees and other persons providing assets or services. The plan provides for the issuance of stock-based awards to key employees as part of their overall compensation. Under the plan, 7,505,000
shares of common stock, stock options, or other equity-based compensation units have been authorized to be issued. During 2007, 5,220,000 shares were issued at a strike price between $0.85 and $0.98. Of the 5,220,000 shares, 750,000 provided for
immediate vesting, while all the remaining grants had vesting terms whereby 25% of such options vest upon execution of the Agreement and 25% shall vest on the yearly anniversary of the Agreement over the next three years. As of December 31,
2007, the Company has issued and outstanding 6,644,557 stock options under the plan, net of forfeitures.

Under the terms of the stock
option agreements approved by the Board on March 5, 2007, 3,000,000 options were granted to certain employees to acquire common stock of the Company at a price of $0.92. All options are subject to vesting requirements. The vesting requirements
are conditional upon these employees achieving specific key objectives as outlined in their respective performance option agreements. The vesting requirements include delivering new revenue, creating value within their organization, and/or achieving
executive performance targets. As of December 31, 2007, none of the options has vested under these agreements.

2007 Long-Term
Incentive Plan

On December 31, 2007, the Company adopted a long-term incentive plan (Plan) for providing stock
options, stock awards and other equity-based compensation awards to its employees and other persons assisting the Company. Up to 5,000,000 shares of common stock are issuable under the Plan. As of December 31, 2007, no awards of common stock
have been made under the Plan. Awards can have a term of up to ten years from the date of grant.

Executive Stock Option Agreements

On June 29, 2006, pursuant to the terms of an Employee Option Agreement, as amended, the Company granted its former CEO 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 grant by 303,007 shares, also at an exercise price of $.70 per share. Additionally, in conjunction with the acquisition of 20/20, the Companys Chief Executive Officer and the Companys President were each granted options to
acquire 1,500,000 shares of common stock of the Company at $.70 per share. In the first quarter of 2007, the Company granted options to acquire 500,000 and 300,000 shares of common stock to its Chief Operating Officer and its Chief Financial Officer
at a price of $.98 and $.92, respectively. In December 2007, the Company granted 17,965,000 and 2,450,000 options to acquire common stock to four of its executives and five of its board members, respectively, at a price of $0.185. In accordance with
the terms of each of these option agreements, 25% of such options vested upon execution of the Agreement and 25% vests on the yearly anniversary of the Agreement over the next three years. In accordance with the terms of the former CEOs
employment agreement, 1,350,000 shares immediately vested on his separation date of May 18, 2007. In total, 3,500,000 of stock options are vested under these agreements, as amended.

Under employment agreements with the four current officers and one former senior executive of the Company, there are 26,300,000 options to acquire common
stock of the Company at a price ranging between $.185 and $.98. Approximately 3,000,000 options were issued during 2006 and 23,300,000 were issued during 2007. All options are subject to vesting restrictions. These performance option agreements are
designed to incent the attainment of certain revenue objectives and 3,300,000 will vest on the following basis: (i) 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; and (ii) 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%. Approximately 1,000,000 performance options shall vest upon the realization by the Company of achieving agreed targets. In accordance with the
terms of the former CEOs employment agreement, 1,066,000 shares immediately vested on his separation date of May 18, 2007. No other stock options have vested under these agreements.



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The following table summarizes the activity under the stock option plan and other stock grants for the
years ended December 31, 2007 and December 31, 2006:



|                                 |  |             |   |  |                              |       |                                                 |     |                                |   |       
|-------------------------------- |  | ----------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ------------------------------ | - | ------
|Summary of option activity       |  | Shares(000) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualLife (Years) |     | AggregateIntrinsicValue ($000)
|Outstanding at December 31, 2005 |  | 1,525       |   |  | $                            | 1.340 |                                                 |     |                                |   |       
|Granted                          |  | 7,800       |   |  |                              | 0.700 |                                                 |     |                                |   |       
|Exercised                        |  |            |   |  |                              |      |                                                 |     |                                |   |       
|Forfeited or expired             |  |            |   |  |                              |      |                                                 |     |                                |   |       
|                                 |  |             |   |  |                              |       |                                                 |     |                                |   |       
|Outstanding at December 31, 2006 |  | 9,325       |   |  | $                            | 0.810 |                                                 |     |                                |   |       
|Granted                          |  | 52,813      |   |  |                              | 0.310 |                                                 |     |                                |   |       
|Exercised                        |  |            |   |  |                              |      |                                                 |     |                                |   |       
|Forfeited/canceled               |  | (1,430      | ) |  |                              | 0.930 |                                                 |     |                                |   |       
|                                 |  |             |   |  |                              |       |                                                 |     |                                |   |       
|Outstanding at December 31, 2007 |  | 60,708      |   |  | $                            | 0.383 |                                                 | 9.6 |                                | $ | 19,723
|                                 |  |             |   |  |                              |       |                                                 |     |                                |   |       
|Exercisable at December 31, 2007 |  | 27,598      |   |  | $                            | 0.357 |                                                 | 9.6 |                                | $ | 9,493 
|                                 |  |             |   |  |                              |       |                                                 |     |                                |   |       

The weighted average grant-date fair value of options granted during the years ended
December 31, 2007 and December 31, 2006 was $0.557 and $0.500, respectively. The company estimates the fair value of stock option grants using the Black Scholes pricing model. The company used the following factors to calculate the fair
value of stock option grants issued:



|                                     |  |            |   |  |       |  
|------------------------------------ |  | ---------- | - |  | ----- | -
|                                     |  | 2007       |   |  | 2006  |  
|Expected Volatility                  |  | 90 - 143.0 | % |  | 100.0 | %
|Expected Life (in years)             |  | 5.0        |   |  | 5.0   |  
|Risk free interest rate              |  | 3.8 - 4.5  | % |  | 3.8   | %
|No dividend payments are anticipated |  |            |   |  |       |  

There were no options exercised during the years ended December 31, 2007 and 2006.

For the years ended December 31, 2007 and 2006, the company recognized compensation expense for stock option awards totaling $13.8
million and $1.8 million, respectively. No tax benefit has been recorded related to stock based compensation expense. At December 31, 2007, unrecognized compensation expense related to stock options totaled $17.8 million with a remaining
weighted average amortization period of 2.7 years.

Note 10. Shareholders Deficit (As Restated).

The Company has 5.0 million preferred shares authorized of which 100,000 shares are reserved for issuance as Series A; 100,000 shares are reserved
for issuance as Series B; and 120,000 shares are reserved for issuance as Series AA; all of which have a par value of $0.0001 per share. The preferred stock previously issued was automatically converted to Company common stock upon ratification of
an amendment to the Companys Articles of Incorporation on June 25, 2007, which increased the authorized common shares to 350.0 million. The Series A and Series B shares enjoy liquidation privileges of $1.00 per share until converted to
common stock and do not have dividend privileges. The Series AA shares enjoy liquidation privileges of $1,000 per share until converted to common stock. Series A, B and AA shares have voting rights on an as converted basis.

On January 19, 2007, the Company closed on an equity funding of $14.1 million, net of fees of $1.5 million, toward the issuance of Units comprised
of 15,590.1 shares of Series AA preferred stock (convertible into common stock at $0.45 per Share) and warrants to purchase an additional 15,590.1 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). Between January 20, 2007 and April 9, 2007, the Company closed on equity funding of an additional $5.0 million, representing an additional
5,044.4 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



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share, on an as-converted to common stock basis); and the other one-half or 2,522.2 Series AA preferred shares (5,604,799 shares of common stock, as
converted) exercisable at $1,000 per share (or $0.65 per share, on an as-converted to common stock basis). This financing brought aggregate issued Series AA preferred stock to 20,634.5 shares representing 45,854,513 shares of common stock, on an
as-converted basis, which conversion was effective in June 2007 upon the filing of articles of amendment to the Companys Articles of Incorporation.

On an as-converted basis, the Two-Year Warrants issued as part of the Units are exercisable to purchase an aggregate of 22,927,268 shares of common stock exercisable at $0.45 per share and the Three-Year Warrants are
exercisable to purchase an aggregate of 22,927,245 shares of common stock exercisable at $0.65 per share.

The placement agent and
designees in connection with the Units financing received warrants, with a fair value of $2.9 million, to purchase 1995.4 shares of Series AA preferred stock (4,434,186 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 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 ten-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. As of December 31, 2007, the Company had not filed a registration statement and therefore was obligated to issue 4,784,623 shares of
common stock representing a non-cash registration rights penalty of $2.5 million. Holders of the affected shares include certain members of the Companys Board of Directors.

In connection with the Senior Secured Facility, on January 19, 2007, the Company issued to its Senior Lender warrants, with a fair value of $1.8
million, 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 basis). Warrants with respect to one half of the shares were 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 were 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. In connection with the October 31, 2007 Waiver and Amendment to the Agreement, a new five-year warrant to purchase up to 3.5 million shares of common stock at $0.15 was issued and the previously issued
warrants above were cancelled. The new warrant provides for, among other things, cashless exercise, anti-dilution, and registration rights. Using the Black-Scholes model, this modification resulted in a $0.5 million increase to the fair value of the
warrants.

The original principal amount of each note issued pursuant to the junior secured facility is convertible at the holders
option into common stock at a price per share equal to a 20% discount to the average ten-day trailing average for the Companys common stock as of the day immediately preceding the date of conversion (subject to adjustment to account for stock
splits and certain other extraordinary corporate circumstances). The loan agreement establishing the facility was amended effective June 15, 2007 to: (i) eliminate the ceiling and floor for the conversion of loan amount (which had
originally been at $0.65 per share floor and $1.25 per share ceiling) to equity in the Company; (ii) permit the cashless exercise of warrants under the facility in lieu of an obligation to register the shares of capital stock underlying the
warrants; and (iii) provide that with respect to advances under the facility after June 15, 2007, the warrant coverage was increased to 200,000 shares of common stock at an effective price of $0.45 per share for each $100,000 of principal
amount advanced; those lenders funding the facility on or before January 22, 2007 received a warrant to purchase up to 67.5 shares of Series AA preferred stock for each $100,000 of monies advanced (150,000 shares of common stock, on an
as-converted basis, at an effective price of $0.45 per share) for each $100,000 of principal amount advanced. All of the warrants under the facility expire December 31, 2009. As of December 31, 2007, the Company has issued an aggregate of
15,432,658 shares of common stock warrants in connection with the junior secured facility. Shares of common stock 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.



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Pursuant to SFAS 133 and EITF 00-19, the Series AA preferred stock, the embedded conversion features
related to the Series AA preferred stock and the junior secured facility, and the freestanding warrants to purchase common stock are accounted for as liabilities at fair value. The Company allocated the proceeds from the Series AA financing between
the Series AA preferred stock, the embedded conversion feature and the warrants based upon their estimated fair values as of the closing date using a Black-Scholes model.

Note 11. Related Parties (As Restated).

During 2006, the Company had a $100,000 unsecured note
payable to Momentum Capital, LLC, whose principals were Board members and 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 and fair value of $20,016 in conjunction with these loans. The notes payable was repaid as of December 31, 2006.

Additionally, a Board member who was a former senior executive provided numerous short-term bridge notes during 2006. Each of these notes was repaid. The
Company issued 150,000 warrants to this individual during 2006 at an exercise price of $.50 per share and fair value of $73,425 in conjunction with these loans.

As part of a short-term bridge financing with the Company during 2006, the Company issued a total of 25,700 stock warrants to a Board member at an exercise price $.70 per share and fair value of $12,639 which expire
on December 31, 2011. The short term bridge financing were repaid in 2006.

Two current members and one former member of the
Companys Board of Directors lent a total of $418,000, plus accrued interest, to the Company as part of the short-term secured financing completed by the Company during 2006. These balances were transferred from secured debt of 20/20 at the
time of acquisition to secured short-term note payables of the Company. The loans bore interest at a rate of 18% and matured 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 at an exercise price of $0.50 per share. These warrants had a fair value of $76,661 and expire on August 24, 2009. Additionally, the Companys former chairman of the 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 including $231,000 of principal and $29,000 of accrued interest. On
January 19, 2007, the two current and one former member of the Companys Board of Directors were all repaid the principal and interest amounts owed totaling $445,000.

As part of the acquisition of 20/20, two members of the Board had preferred stock of 20/20 converted into the equivalent of 2,087,556 shares of the
Companys common stock valued at $1,419,538.

One Board member, who also served as Chief Executive Officer, 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. This note was repaid January 19, 2007.

In connection with the acquisition of 20/20, the former Chairman of the Board was issued warrants to purchase 89.9 shares of Series A preferred stock (representing 99,942 shares of common stock on an as-converted
basis) exercisable at $1,000 per share ($0.45 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 had a fair value of
$49,611 and expire on August 24, 2011.

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, the Companys then Chief Executive Officer and its now former Chairman of the Board lent $2.0 million each and in turn received stock warrants to purchase 1,123.0 Series
AA preferred shares (2,000,000 common shares, on an as-converted basis) and 464.6 Series AA preferred stock (1,032,500 common shares, on an as-converted basis), respectively. The Companys then Chief Executive Officer received an additional
warrant to purchase 450.0 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 the acquisition of CentrePath at a time when the remaining financing for the
acquisition of CentrePath had not been committed. The Companys then Chief Executive Officer was not paid any cash compensation related to his investment in the 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), had a fair value of $1,690,827 and expiring on December 31, 2009. In addition, the former Chairman of the 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.



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During 2006, the Board issued a total of 2,330,000 of stock warrants at an exercise price of $.70 per
share and had a fair value of $1,145,894 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.

During 2006, two of the Companys Board members, who also served as executive officers were each paid annual salaries of $87,500. The Board of
Directors also agreed to pay each of these individuals $50,000 upon their termination. 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, two of the Companys Board members, who also served as executive officers, were issued warrants to
purchase 33.8 shares of Series AA preferred stock (75,000 shares of common stock on an as-converted basis) each as part of securing the various short terms notes. 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), had a fair value of $31,448 and expire on December 31, 2009.

In
connection with the financing services performed for the second quarter of 2007, the Company agreed to compensate two current Board members each a sum of $17,000 plus warrants to purchase 20,555 shares of common stock, with one half at an exercise
price of $0.45 per share expiring on December 31, 2008 and the other half at an exercise price of $0.65 per share. The warrants had a fair value of $21,165. In connection with financing services performed in the third quarter of 2007, the
Company agreed to compensate the same Directors $8,500 each.

In August 2007, the Company established a short-term bridge facility
authorizing the issuance of up to $1,000,000 of Units comprised of short-term promissory notes bearing interest at 12% per annum and maturing September 30, 2007, coupled with a warrant to purchase up to 125,000 shares of common stock for
each $100,000 of notes funded; the warrants are exercisable at $0.55 per share and expire December 31, 2010. During the month, two of the Companys Directors purchased Units for a total of $150,000. In addition, two officers of the Company
each purchased $50,000 of the Units and two investors purchased a total of $100,000 of Units. Collectively, the purchases of these Units resulted in the issuance of short-term notes in the principal amount of $350,000 in the aggregate, and warrants
with a fair value of $205,211 to purchase an aggregate of up to 437,500 shares of common stock. The purchasers of these units agreed to extend the maturity date until the next financing was completed. The short-term bridge facility is unsecured.

In September 2007, the Company entered into an advisory agreement with Aequitas Capital Management, Inc., (Aequitas), an investor. In
connection with this advisory agreement, Aequitas was issued a warrant to purchase 3,000,000 shares of common stock at $0.15 per share with a fair value of $1,698,174. In October 2007, Aequitas exercised 2,030,890 of its warrants related to previous
financing. On December 19, 2007, two affiliates of Aequitas funded $2.0 million under the junior secured facility and were issued warrants to purchase 4,000,000 shares of common stock at $0.30 per share with a fair value of $2,351,682. In
addition, an affiliate of Aequitas purchased $4,000,000 shares of common stock issued by the Company at $0.15 per share. In connection with the funding, Aequitas was paid a transaction fee of $0.1 million. In addition, the Company paid Aequitas $0.3
million for advisory services related to the Companys equity offering and warrant exercise program, inter alia. During the first quarter of 2008, pursuant to the completed private placement of $19.0 million of securities, the Company paid
Aequitas an advisory fee of $0.4 million.

In November 2007, the Company entered into an advisory agreement with Capstone Investments Inc.,
(Capstone), an investor. In connection with this advisory agreement, Capstone was issued warrants to purchase 2,500,000 shares of common stock at $0.50 per share with a fair value of $1,023,910. During the first quarter of 2008, pursuant
to the completed private placement of $19.0 million of securities, the Company paid Capstone an advisory fee of $1.3 million and issued warrants to purchase 2,660,000 shares of common stock at $0.73 per share with a fair value of $1,476,085
exercisable for five years.

Effective November 30, 2007, the Company entered into a final severance and release agreement with its
former CEO. This agreement includes a mutual release that provides for the abandonment of all unpaid severance with respect to the former CEOs employment agreement in consideration for the issuance of 2,000,000 shares of common stock on
January 15, 2008. the fair value of the shares issued to the former CEO was $300,000 which was charged to compensation expense for the year ended 2007. In addition, warrants to purchase 1,000,000 shares of the Companys common stock that
had been issued as part of the former CEOs investment in the Companys Units offering that was consummated on January 19, 2007 were extinguished. Also, warrants to purchase 1,500,000 shares of the Companys common stock issued
as part of the CentrePath bridge loan were exchanged for substantially identical warrants except that 1,000,000 of the 1,500,000 shares purchasable under the new warrants will have cashless exercise rights.



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Note 12. Income Taxes (As Restated).

As part of the 2006 acquisition of CentrePath, the Company acquired federal net operating loss (NOL) carryforwards of $145.9 million and other related deferred tax assets and liabilities established upon acquisition.
The Company estimates a maximum of $6.7 million of the acquired NOL will ever be available to be utilized due to Section 382 limitations. This estimated NOL reduction has been reflected in deferred tax assets. Federal general business credits
of $0.7 million were also acquired in the CentrePath acquisition. However, due to Section 382 and 383 limitations, these credits will not be available to be utilized and have been eliminated from the 2007 deferred tax asset components
enumerated below.

As part of the 2006 acquisition of 20/20, the Company acquired federal net operating loss (NOL) carryforwards of $7.4
million and other related deferred tax assets and liabilities established upon acquisition. There were no acquired federal net operating loss (NOL) carryforwards acquired in connection with GCG, as the entity was an S-Corporation prior to the
acquisition in late 2006.

The amounts allocated to goodwill and purchased intangibles with respect to each of the acquisitions are not
deductible for tax purposes.

The Company has recorded a full valuation allowance against the net deferred tax assets (whether acquired or
otherwise generated) due to the uncertainty of future taxable income, which is necessary to realize the benefits of the deferred tax assets. 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 portions 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,
|                                     |  | 2007                     |   | 2006
|Current:                             |  |                          |   |      |   |       
|U.S. and state                       |  | $                        |  |      | $ | 60,351
|Foreign                              |  |                          |  |      |   |      
|                                     |  |                          |   |      |   |       
|Total current tax expense (benefit)  |  |                          |  |      |   | 60,351
|Deferred:                            |  |                          |   |      |   |       
|U.S. and state                       |  |                          |  |      |   |      
|Foreign                              |  |                          |  |      |   |      
|                                     |  |                          |   |      |   |       
|Total deferred tax expense (benefit) |  |                          |  |      |   |      
|                                     |  |                          |   |      |   |       
|Total income tax expense (benefit)   |  | $                        |  |      | $ | 60,351
|                                     |  |                          |   |      |   |       

Due to estimated tax losses in 2007 on a consolidated as well as separate company basis, there is
no income tax provision. The Companys current provision for 2006 related to state tax associated with certain discontinued operations that were profitable on a separate company basis. The provision for income taxes did not change as a result
of the restatement. No deferred taxes are recognized as their benefit is 100% provided for as an increase in the valuation allowance.

Net
deferred tax assets (liabilities) are comprised of the following:



|                                              |  |                          |            |   |               |   |            |  
|--------------------------------------------- |  | ------------------------ | ---------- | - | ------------- | - | ---------- | -
|                                              |  | Years Ended December 31, |           
|                                              |  | 2007                     |            |   | 2006          |  
|                                              |  | (As Restated)            |            |   | (As Restated) |  
|Deferred tax liabilities:                     |  |                          |            |   |               |   |            |  
|Amortization of purchased intangibles         |  | $                        | (3,245,910 | ) |               | $ | (4,587,304 | )
|Depreciation                                  |  |                          | (31,729    | ) |               |   |           |  
|Other deferred liabilities                    |  |                          |           |   |               |   | (4,646     | )
|Deferred tax assets:                          |  |                          |            |   |               |   |            |  
|Net operating loss carryforwards              |  |                          | 20,061,680 |   |               |   | 28,964,536 |  
|Research and development credit carryforwards |  |                          |           |   |               |   | 827,134    |  



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|                                              |  |                          |             |   |      |   |             |  
|--------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                              |  | Years Ended December 31, |            
|                                              |  | 2007                     |             |   | 2006 |  
|Other carryforwards                           |  |                          | 11,559      |   |      |   | 6,092       |  
|Stock compensation and warrants for services  |  |                          | 6,436,627   |   |      |   | 863,500     |  
|Capitalized research and development          |  |                          | 2,944,122   |   |      |   | 2,918,605   |  
|Depreciation                                  |  |                          |            |   |      |   | 1,592,981   |  
|Other reserves                                |  |                          | 536,291     |   |      |   | 310,428     |  
|Accruals                                      |  |                          | 148,868     |   |      |   | 177,633     |  
|Allowance for bad debt                        |  |                          | 55,193      |   |      |   | 61,693      |  
|Deferred revenue                              |  |                          | 28,024      |   |      |   | 131,145     |  
|Liabilities related to convertible securities |  |                          | 13,548,752  |   |      |   | 12,091,242  |  
|                                              |  |                          |             |   |      |   |             |  
|                                              |  |                          | 40,493,477  |   |      |   | 43,353,039  |  
|Valuation allowance                           |  |                          | (40,493,477 | ) |      |   | (43,353,039 | )
|                                              |  |                          |             |   |      |   |             |  
|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. Due to the restatement, a deferred tax asset is reflected above relating to book treatment of warrants to purchase
securities and embedded derivatives included in preferred stock and debt. All other liabilities referenced above and deferred tax assets were not affected as a result of the restatement. The Company has Federal net operating loss (NOL) carryforwards
of $54.1 million in the United States (U.S.) and foreign (U.K.) NOL carryforwards of $5.8 million at December 31, 2007. The federal NOL carryforwards have been reduced to reflect approximate annual limitations under Internal Revenue Code
Sections 382 and 383. Subsequent equity changes could further limit the utilization of these NOLs and credit carryforwards. A formal analysis of Internal Revenue Code Section 382 impact on NOL utilization, as well as UK NOL utilization rules,
will be required when the Company begins to utilize the NOLs. If not used, the federal the NOLs begin to expire in 2011.

The carryover of
the Companys general business tax credits acquired in the CentrePath acquisition were eliminated from the 2007 deferred tax assets as their utilization is unavailable due to the annual limitations under Internal Revenue Code Sections 382 and
383.

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 a 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.

Effective January 1, 2007, the Company adopted FIN 48, which prescribes a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 did not have a material impact on the financial statements. Additionally, the adoption of FIN
48 had no impact on retained earnings or the gross liability for uncertain tax positions as the Company had no uncertain tax positions as of December 31, 2007 and 2006.

The Company did not have any material unrecognized tax benefits as of the date of the adoption. The Company recognizes potential accrued interest and
penalties related to unrecognized tax benefits as a component of income tax expense. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the
overall income tax provision. The Company recorded no interest and penalties during the year ended December 31, 2007 and had no accrued interest and penalties as of December 31, 2007. The Company is no longer subject to U.S. federal tax
examinations by tax authorities for tax years before 2003. The Company is open to state tax audits until the applicable statutes of limitations expire.

Note 13. Commitments and Contingencies.

Operating and Capital Leases: The Company has entered into or assumed
certain non-cancelable operating and capital lease agreements related to office and warehouse space, equipment, and vehicles. Total rent expense under operating leases, net of sublease income, was $1,288,983 and $133,703 for the years ended
December 31, 2007 and 2006, respectively. Total payments, including interest, made under capital leases for the years ended December 31, 2007 and 2006 were $58,397 and $3,586, respectively.



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Minimum remaining rental commitments under operating leases (net of subleases) and capital lease
arrangements are as follows as of December 31, 2007:



|                                                          |  |           |           |         |   |         |  
|--------------------------------------------------------- |  | --------- | --------- | ------- | - | ------- | -
|                                                          |  | Operating |           | Capital |  
|For the year ending December 31,                          |  |           |           |         |   |         |  
|2008                                                      |  | $         | 594,893   |         | $ | 38,415  |  
|2009                                                      |  |           | 375,298   |         |   |        |  
|2010                                                      |  |           | 345,527   |         |   |        |  
|2011                                                      |  |           | 245,171   |         |   |        |  
|2012                                                      |  |           | 134,109   |         |   |        |  
|Thereafter                                                |  |           |          |         |   |        |  
|                                                          |  |           |           |         |   |         |  
|Total                                                     |  | $         | 1,694,998 |         |   | 38,415  |  
|                                                          |  |           |           |         |   |         |  
|Less: Amounts representing interest                       |  |           |           |         |   | (3,152  | )
|                                                          |  |           |           |         |   |         |  
|Present value of future minimum lease payments            |  |           |           |         |   | 35,263  |  
|Less: Current portions of obligations under capital lease |  |           |           |         |   | (35,263 | )
|                                                          |  |           |           |         |   |         |  
|Obligations under capital leases, net of current portions |  |           |           |         | $ |        |  
|                                                          |  |           |           |         |   |         |  

Note 14. Business Concentration.

A major customer represented $2.8 million (16%) of total 2007 revenues and $0.1 million (7%) of total accounts receivable at December 31,
2007. Another major customer represented $0.2 million (10%) of total 2006 revenues and $0.9 million (5%) of total accounts receivable at December 31, 2006.

Note 15. Segment Reporting and Geographic Area Information.

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 deciding how to allocate resources and assess performance. During the first quarter of 2007, the
Company completed the process of identifying which of the entities operations were core to its overall Telecom Logistics Integrator business model. The Company determined that all operations were core to this business model, with the exception
of Nexvu and Frontrunner and therefore made a decision to divest from these business activities. See the Discontinued Operations note for further discussion. The Companys management team views the remaining combined operations of
20/20, Magenta, CentrePath, GCG, and CGSI. as one operating segment, for which it prepares discrete financial statement information and is the basis for making decisions on how to allocate resources and assess performance.

Within the companys one operating segment, revenues generated from Optimization Solutions totaled $7.5 million and $1.2 million for the years ended
December 31, 2007 and 2006 respectively, which represents professional services, remote network management services, and the use of automated pricing software, while Connectivity Solutions revenues totaled $9.7 million and $0.4 million for the
years ended December 31, 2007 and 2006 respectively from the design, delivery, and management of networks.

Revenues generated outside
the United States during 2007 and 2006 totaled $0.9 million and $0.3 million, respectively. All of the Companys international revenue was generated in Europe. As of December 31, 2007 and 2006, the Companys identifiable assets
outside the United States totaled $0.04 million and $0.2 million, respectively. All of the Companys international identifiable assets were located in the United Kingdom.

Note 16. Going Concern (As Restated).

As of December 31, 2007, the Companys current
liabilities exceeded its current assets by $7.8 million. Included in the current liabilities is $5.1 million of current maturities of long-term debt, net of $1.2 million of debt discount associated with the initial fair value of related warrants.
This debt reflects indebtedness to its senior secured lender and the balance of its short-term bridge facilities. Cash on hand at December 31, 2007 was $0.6 million (not including $0.2 million restricted for outstanding letters of credit) and
the Companys borrowing capacity under the asset-based loan agreement with its senior lender totaled $0.5 million. The Company incurred net losses from continuing operations of $56.4 million and $35.7 million for the years ended
December 31, 2007 and 2006, respectively. The results for 2007 include $20.6 million in non-cash expenses relating to the accounting treatment for stock and options and $38.6 million related to the amortization of debt discount. The results for
2006 include $2.3 million in non-cash expenses relating to the accounting treatment for stock and options and $11.4 million related to the amortization of debt discount. Cash used in operating activities from continuing



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operations was $9.7 million and $3.9 million for the years ended December 31, 2007 and 2006, 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. However, the successful delivery on major contracts signed in the last three quarters is anticipated to
move the Company into profitability. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

Notwithstanding the above, the Company continues to find support amongst its shareholders and other investors, as evidenced by the $19 million financing completed in the first quarter of 2008. This capital was
used to pay off essentially all of the Companys outstanding debt. The balance of the funds will be used for operations and to support the Companys successful new business development efforts.

Note 17. Subsequent Events.

Sale of
Frontrunner. On February 19, 2008, the Company entered into an Asset Purchase Agreement with an unaffiliated party (Buyer) for the sale of substantially all of Frontrunners assets. The purchase price for the assets was
$850,000 and the Buyer assumed Frontrunners indebtedness to a material supplier that had a remaining principal amount of $590,000. The Company retained certain non-trade liabilities of Frontrunner and is subject to other terms and conditions.

Securities Purchase Agreement. On March 11, 2008, the Company completed a private placement of $19 million of
securities (Purchase Agreement) with a number of investors (Purchasers). The securities comprise (i) variable rate senior secured convertible debentures (Debentures) in an aggregate principal amount of $19
million, convertible into common stock of the Company at $0.50 per share (the Conversion Price; representing 38 million shares of common stock on an as-converted basis; and (ii) one warrant per Debenture, providing a right to
purchase 50% of the number of shares of common stock purchasable with the original principal amount of the Debentures, at a price of $0.73 per share having a term ending five years from the closing date.

Proceeds pursuant to the Agreement, net of $1.7 million of advisory fees paid to Capstone Investments and Aequitas Capital Management, were used to
extinguish the Senior Secured debt as well as all remaining subordinated debt that had not been converted to equity prior to the execution of the Purchase Agreement. These outstanding balances were $6.6 million and $2.0 million, respectively, at the
closing date. The remaining proceeds were retained for working capital purposes. In addition to the cash paid fees, the Company issued to Capstone a warrant to purchase 2,660,000 shares of common stock. Such warrant contains substantially similar
terms and conditions (including exercise price and expiration date) to the Warrants issued to the Purchasers and described below, but does not carry registration rights.

The Debentures mature five years from the closing date. Each Debenture contains a 5% coupon for the first two years and a 10% coupon for the last three years. The coupon shall be paid quarterly in arrears and may, at
the Companys option, be paid in cash or in shares of common stock pursuant to certain prescribed calculations to determine value. A late fee of 16% per annum is payable with respect to any late payments.

During the first year, the Company will have the right to call up to 25% of the Debentures outstanding at 105% of their stated value (plus all interest
that would have accrued on the prepaid amount were the Debentures held to maturity). In the second year, the Company may call up to 100% of the Debentures upon tender of the full amount owing with respect to the Debentures (plus all interest that
would have accrued on the prepaid amount were the Debentures held to maturity), provided the Company is in compliance with all of its obligations under the Debentures. The Debentures are subject to a number of other restrictions, conditions,
sanctions, and negative covenants. The Debentures are convertible from time to time at the option of their holders at the Conversion Price. The Conversion Price is $0.50 per share, subject to certain adjustments.

The Purchase Agreement calls for the issuance of Warrants comprising the right to purchase up to 50% of the shares issuable per the Debentures (19
million shares of common stock in the aggregate for all of the Warrants) at an exercise price of $0.73 per share (subject to adjustment as discussed below). The Warrants expire five years from the closing date. The Warrants may be exercised for cash
or on a cashless basis and are subject to certain other conditions.

The Company has entered into a Registration Rights
Agreement, pursuant to which it is obligated to file a registration statement to register all or the maximum amount permitted by the SEC (collectively the Maximum Amount) of the common stock of the Company underlying the Debentures
and Warrants (subject to the obligation to file one or more subsequent registration statements as necessary to register the remaining unregistered shares until all of the underlying securities are eligible for resale under Rule 144 without volume
limitation), which contains certain liquidated damages if not timely filed. The Company has agreed that it shall file to register all of the shares of common stock underlying the Debentures and Warrants (Registerable Securities) promptly
following the closing of the offering pursuant to the Purchase Agreement (Closing Date), subject to cutback of the amount to be registered if required by the SEC pursuant to Rule 415 (subject to the obligation in such event to
subsequently register the unregistered securities by September 30, 2008). It is



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obligated to, among other things, file a registration statement pursuant to the Securities Act of 1933 on the earlier of the fifteenth calendar day following
the date if files its annual report on Form 10-KSB or May 1, 2008 and cause the registration statement to be declared effective no later than sixty days following the filing date (or ninety days following the filing date if the registration
statement undergoes a full review by the Securities and Exchange Commission). Failure to meet any of these obligations constitutes an Event, which subjects the Company to liquidated damages of 2% for each month in which it
occurs and on each monthly anniversary thereof, of a liquidated damages obligation equal to 2% of the original principal amount of the Debenture of the holder, subject to an aggregate cap of 12% of the original principal amount of the Debenture,
payable in cash unless otherwise agreeable to the Company and the Debenture holder (and interest accrues on unpaid liquidated damages at 18% per annum).

The Company and all of its subsidiaries (each, a Debtor) entered into a Security Agreement pursuant to which they granted to the Purchasers a security interest in all of the assets of the Debtors (the
Collateral), including a pledge by the Company of all of the capital stock of each of its subsidiaries. Upon an Event of Default, the Agent may exercise all rights available to any of the Purchasers, including to take possession of the
Collateral and to operate the business of each Debtor.

On May 1, 2008, the Company adopted a 2008 Long Term Incentive Plan
(Plan) for providing stock options and other equity-based compensation awards to its employees and other persons assisting the Company. Initially, up to 22,000,000 shares of common stock are issuable under the Plan; however, the Plan
contains an evergreen provision such that each year the number of shares of common stock issuable under the Plan shall automatically increase, so that the amount of shares issuable under the Plan is equal to fifteen percent (15%) of
the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year. In no event shall the number of shares of common stock issuable under the Plan exceed 30,000,000 shares. At the
date of adoption of the Plan, options to purchase 1,875,000 shares of common stock were issued under the plan.

NOTE 18: Restatement of Consolidated
Financial Statements.

As of September 8, 2006, the shares of common stock required to settle the convertible bridge loan issued in
connection with the Companys acquisition of 20/20, the convertible preferred stock outstanding, the stock options outstanding, and the warrants outstanding were in excess of the Companys authorized but unissued shares of common stock, on
an as converted basis, and required evaluation in accordance with SFAS 133 and EITF 00-19.

Pursuant to SFAS 133 and EITF 00-19, the
conversion features of the bridge loans and the preferred stock are considered embedded derivatives requiring bifurcation from the debt host and recording as a liability at fair value on the consolidated balance sheet. In accordance with the same
guidance, the Companys outstanding warrants also meet the definition of a liability to be recorded at fair value on the consolidated balance sheet. These liabilities are revalued at each balance sheet date and mark to fair value with the
corresponding adjustment recognized as a gain or loss on warrants and derivatives in the consolidated statements of operations.

This restatement requires a balance sheet reclassification of warrants and preferred stock from the consolidated statement of shareholders equity to a liability account. In addition, it requires a non-cash charge to mark the
liabilities to fair value at each balance sheet date. In accordance with SFAS No. 154, Accounting Changes and Error Corrections, the Company has restated its previously issued financial statements, as described below.

The following table sets forth effects of the restatement on the Companys previously reported consolidated balance sheets,
consolidated statements of operations, consolidated statements of shareholders equity and the consolidated statements of cash flow for the year ended December 31, 2006.



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|------------------------------------------------- |  | ----------------------- | ----------- | - | ----------- | - | ----------- | - |  | ----------- |  | - | ----------- | -
|                                                  |  | As of December 31, 2006 |            
|                                                  |  | As PreviouslyReported   |             |   | Adjustments |   |             |   |  | As Restated | 
|ASSETS                                            |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|CURRENT ASSETS                                    |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|Cash and cash equivalents                         |  | $                       | 1,203,819   |   |             | $ |            |   |  |             |  | $ | 1,203,819   |  
|Accounts receivable, net                          |  |                         | 1,592,110   |   |             |   |            |   |  |             |  |   | 1,592,110   |  
|Prepaid expenses and other current assets         |  |                         | 516,592     |   |             |   |            |   |  |             |  |   | 516,592     |  
|Current assets of discontinued operations         |  |                         | 2,429,677   |   |             |   |            |   |  |             |  |   | 2,429,677   |  
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|Total Current Assets                              |  |                         | 5,742,198   |   |             |   |            |   |  |             |  |   | 5,742,198   |  
|Property and equipment, net                       |  |                         | 3,915,820   |   |             |   |            |   |  |             |  |   | 3,915,820   |  
|Intangibles, net                                  |  |                         | 9,493,179   |   |             |   |            |   |  |             |  |   | 9,493,179   |  
|Goodwill                                          |  |                         | 12,513,090  |   |             |   |            |   |  |             |  |   | 12,513,090  |  
|Other assets                                      |  |                         | 38,508      |   |             |   |            |   |  |             |  |   | 38,508      |  
|Long-term assets of discontinued operations       |  |                         | 5,677,953   |   |             |   |            |   |  |             |  |   | 5,677,953   |  
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|TOTAL ASSETS                                      |  | $                       | 37,380,748  |   |             | $ |            |   |  |             |  | $ | 37,380,748  |  
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|LIABILITIES AND SHAREHOLDERS DEFICIT             |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|CURRENT LIABILITIES                               |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|Current maturities of long-term debt              |  | $                       | 21,243,010  |   |             | $ | (1,782,500  | ) |  | A           |  | $ | 19,460,510  |  
|Accounts payable                                  |  |                         | 1,429,882   |   |             |   |            |   |  |             |  |   | 1,429,882   |  
|Accrued expenses                                  |  |                         | 3,352,806   |   |             |   |            |   |  |             |  |   | 3,352,806   |  
|Deferred revenue                                  |  |                         | 608,461     |   |             |   |            |   |  |             |  |   | 608,461     |  
|Current liabilities of discontinued operations    |  |                         | 7,378,404   |   |             |   |            |   |  |             |  |   | 7,378,404   |  
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|Total Current Liabilities                         |  |                         | 34,012,563  |   |             |   | (1,782,500  | ) |  |             |  |   | 32,230,063  |  
|Liabilities for warrants to purchase common stock |  |                         |            |   |             |   | 15,024,383  |   |  | B           |  |   | 15,024,383  |  
|Embedded derivatives of convertible debt          |  |                         |            |   |             |   | 18,742,378  |   |  | C           |  |   | 18,742,378  |  
|Long-term portion of debt                         |  |                         | 777,260     |   |             |   | 51,648      |   |  | A           |  |   | 828,908     |  
|Deferred revenue                                  |  |                         | 112,222     |   |             |   |            |   |  |             |  |   | 112,222     |  
|Long-term liabilities of discontinued operations  |  |                         | 570,587     |   |             |   |            |   |  |             |  |   | 570,587     |  
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|Total Liabilities                                 |  |                         | 35,472,632  |   |             |   | 32,035,909  |   |  |             |  |   | 67,508,541  |  
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|SHAREHOLDERS DEFICIT                             |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|Preferred stock                                   |  |                         |            |   |             |   |            |   |  |             |  |   |            |  
|Common stock                                      |  |                         | 2,101       |   |             |   |            |   |  |             |  |   | 2,101       |  
|Additional paid-in capital                        |  |                         | 24,519,495  |   |             |   | (5,222,840  | ) |  | D           |  |   | 19,296,655  |  
|Foreign currency translation adjustment           |  |                         | (48,904     | ) |             |   |            |   |  |             |  |   | (48,904     | )
|Accumulated deficit                               |  |                         | (22,564,576 | ) |             |   | (26,813,069 | ) |  | E           |  |   | (49,377,645 | )
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|Total Shareholders Deficit                       |  |                         | 1,908,116   |   |             |   | (32,035,909 | ) |  |             |  |   | (30,127,793 | )
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT       |  | $                       | 37,380,748  |   |             | $ |            |   |  |             |  | $ | 37,380,748  |  
|                                                  |  |                         |             |   |             |   |             |   |  |             |  |   |             |  



|A | Adjust long-term debt and current maturities as a result of embedded derivatives valuation.
|- | -------------------------------------------------------------------------------------------

|B | Record fair value of outstanding warrants to purchase common stock
|- | ------------------------------------------------------------------

|C | Record fair value of embedded derivative.
|- | -----------------------------------------

|D | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|E | Restatement adjustments to income statement for the year ended December 31, 2006.
|- | ---------------------------------------------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|---------------------------------------------- |  | ---------------------------- | ----------- | - | ----------- | - | ----------- | - |  | ----------- |  | - | ----------- | -
|                                               |  | Year Ended December 31, 2006 |            
|                                               |  | As PreviouslyReported        |             |   | Adjustments |   |             |   |  | As Restated | 
|REVENUE                                        |  | $                            | 1,557,251   |   |             | $ |            |   |  |             |  | $ | 1,557,251   |  
|COST OF SALES                                  |  |                              | 804,667     |   |             |   |            |   |  |             |  |   | 804,667     |  
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|GROSS MARGIN                                   |  |                              | 752,584     |   |             |   |            |   |  |             |  |   | 752,584     |  
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|OPERATING EXPENSES:                            |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|Compensation                                   |  |                              | 3,770,237   |   |             |   |            |   |  |             |  |   | 3,770,237   |  
|Travel and entertainment                       |  |                              | 216,730     |   |             |   |            |   |  |             |  |   | 216,730     |  
|Occupancy                                      |  |                              | 133,703     |   |             |   |            |   |  |             |  |   | 133,703     |  
|Professional services                          |  |                              | 1,153,177   |   |             |   |            |   |  |             |  |   | 1,153,177   |  
|Insurance                                      |  |                              | 130,224     |   |             |   |            |   |  |             |  |   | 130,224     |  
|Depreciation and amortization                  |  |                              | 406,442     |   |             |   |            |   |  |             |  |   | 406,442     |  
|Other operating expenses                       |  |                              | 262,377     |   |             |   |            |   |  |             |  |   | 262,377     |  
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|TOTAL OPERATING EXPENSES                       |  |                              | 6,072,890   |   |             |   |            |   |  |             |  |   | 6,072,890   |  
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|OPERATING LOSS                                 |  |                              | (5,320,306  | ) |             |   |            |   |  |             |  |   | (5,320,306  | )
|(Gain) loss on warrants and derivatives        |  |                              |            |   |             |   | 18,180,881  |   |  | A           |  |   | 18,180,881  |  
|Interest expense                               |  |                              | 3,524,991   |   |             |   | 8,632,188   |   |  | B           |  |   | 12,157,179  |  
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|Loss from continuing operations                |  |                              | (8,845,297  | ) |             |   | (26,813,069 | ) |  |             |  |   | (35,658,366 | )
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|Loss from discontinued operations, net of tax  |  |                              | (2,734,964  | ) |             |   |            |   |  |             |  |   | (2,734,964  | )
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|NET LOSS                                       |  | $                            | (11,580,261 | ) |             | $ | (26,813,069 | ) |  |             |  | $ | (38,393,330 | )
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|LOSS PER SHARE OF COMMON STOCK                 |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|Loss from continuing operations                |  |                              | (0.48       | ) |             |   | (1.46       | ) |  |             |  |   | (1.95       | )
|Loss from discontinued operations              |  |                              | (0.15       | ) |             |   | 0.00        |   |  |             |  |   | (0.15       | )
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|Net loss per common share                      |  |                              | (0.63       | ) |             |   | (1.46       | ) |  |             |  |   | (2.10       | )
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  
|Weighted average shares outstanding - Restated |  |                              | 18,316,358  |   |             |   | 18,316,358  |   |  |             |  |   | 18,316,358  |  
|                                               |  |                              |             |   |             |   |             |   |  |             |  |   |             |  



|A | Record (gain) loss on fair value of stock warrants issued and beneficial conversion feature of convertible debt and preferred stock issued.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|B | Adjust for amortization of fair value of convertible debt warrants and beneficial conversion feature recorded as debt discount.
|- | -------------------------------------------------------------------------------------------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

As Previously Reported



|                                        |  |              |  |                         |  |             |       |                            |   |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|--------------------------------------- |  | ------------ |  | ----------------------- |  | ----------- | ----- | -------------------------- | - | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | ------- | - | ----------------- | - | ----------- | - |  | - | ----------- | -
|                                        |  | CommonShares |  | Series BPreferredShares |  | CommonStock |       | Additional Paid-in Capital |   | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |         |   | ComprehensiveLoss |  
|Balance, January 1, 2006                |  | 17,015,754   |  |                        |  | $           | 1,701 |                            | $ | 12,831,414         |  | $ | (10,984,315                          | ) |  | $                     |        |   |                   | $ | 1,848,800   |   |  | $ |            |  
|Stock issued for acquisition of 20/20   |  | 3,899,315    |  | 2,516                   |  |             | 390   |                            |   | 5,167,244          |  |   |                                     |   |  |                       |        |   |                   |   | 5,167,634   |   |  |   |            |  
|Stock-based compensation expense        |  |              |  |                         |  |             |      |                            |   | 1,297,769          |  |   |                                      |   |  |                       |         |   |                   |   | 1,297,769   |   |  |   |             |  
|Stock issued for consulting services    |  | 100,000      |  |                        |  |             | 10    |                            |   | 134,990            |  |   |                                     |   |  |                       |        |   |                   |   | 135,000     |   |  |   |            |  
|Warrants issued to employees            |  |             |  |                        |  |             |      |                            |   | 502,591            |  |   |                                     |   |  |                       |        |   |                   |   | 502,591     |   |  |   |            |  
|Warrants issued to consultants          |  |             |  |                        |  |             |      |                            |   | 388,366            |  |   |                                     |   |  |                       |        |   |                   |   | 388,366     |   |  |   |            |  
|Warrants issued with debt financing     |  |             |  |                        |  |             |      |                            |   | 4,197,121          |  |   |                                     |   |  |                       |        |   |                   |   | 4,197,121   |   |  |   |            |  
|Foreign currency translation adjustment |  |             |  |                        |  |             |      |                            |   |                   |  |   |                                     |   |  |                       | (48,904 | ) |                   |   | (48,904     | ) |  |   | (48,904     | )
|Net loss for 2006                       |  |              |  |                         |  |             |       |                            |   |                    |  |   | (11,580,261                          | ) |  |                       |         |   |                   |   | (11,580,261 | ) |  |   | (11,580,261 | )
|                                        |  |              |  |                         |  |             |       |                            |   |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|Balance, December 31, 2006              |  | 21,015,069   |  | 2,516                   |  | $           | 2,101 |                            | $ | 24,519,495         |  | $ | (22,564,576                          | ) |  | $                     | (48,904 | ) |                   | $ | 1,908,116   |   |  | $ | (11,629,165 | )
|                                        |  |              |  |                         |  |             |       |                            |   |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  



51



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

As Restated



|                                        |  |              |  |                         |  |             |       |                            |   |            |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|--------------------------------------- |  | ------------ |  | ----------------------- |  | ----------- | ----- | -------------------------- | - | ---------- | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | ------- | - | ----------------- | - | ----------- | - |  | - | ----------- | -
|                                        |  | CommonShares |  | Series BPreferredShares |  | CommonStock |       | Additional Paid-in Capital |   |            | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |         |   | ComprehensiveLoss |  
|Balance, January 1, 2006                |  | 17,015,754   |  |                        |  | $           | 1,701 |                            | $ | 12,831,414 |                    |  | $ | (10,984,315                          | ) |  | $                     |        |   |                   | $ | 1,848,800   |   |  | $ |            |  
|Stock issued for acquisition of 20/20   |  | 3,899,315    |  | 2,516                   |  |             | 390   |                            |   | 5,167,244  |                    |  |   |                                     |   |  |                       |        |   |                   |   | 5,167,634   |   |  |   |            |  
|Stock-based compensation expense        |  |              |  |                         |  |             |      |                            |   | 1,243,864  |                    |  |   |                                     |   |  |                       |        |   |                   |   | 1,243,864   |   |  |   |            |  
|Stock issued for consulting services    |  | 100,000      |  |                         |  |             | 10    |                            |   | 134,990    |                    |  |   |                                     |   |  |                       |        |   |                   |   | 135,000     |   |  |   |            |  
|Reclass of warrants to liability        |  |              |  |                         |  |             |      |                            |   | (80,857    | )                  |  |   |                                     |   |  |                       |        |   |                   |   | (80,857     | ) |  |   |            |  
|Foreign currency translation adjustment |  |              |  |                         |  |             |       |                            |   |            |                    |  |   |                                      |   |  |                       | (48,904 | ) |                   |   | (48,904     | ) |  |   | (48,904     | )
|Net loss for 2006                       |  |              |  |                         |  |             |      |                            |   |           |                    |  |   | (38,393,330                          | ) |  |                       |        |   |                   |   | (38,393,330 | ) |  |   | (38,393,330 | )
|                                        |  |              |  |                         |  |             |       |                            |   |            |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|Balance, December 31, 2006              |  | 21,015,069   |  | 2,516                   |  | $           | 2,101 |                            | $ | 19,296,655 |                    |  | $ | (49,377,645                          | ) |  | $                     | (48,904 | ) |                   | $ | (30,127,793 | ) |  | $ | (38,442,234 | )
|                                        |  |              |  |                         |  |             |       |                            |   |            |                    |  |   |                                      |   |  |                       |         |   |                   |   |             |   |  |   |             |  
|                                        |  |              |  |                         |  |             |       |                            |   | A          |                    |  |   | B                                    |   |  |                       |         |   |                   |   |             |   |  |   |             |  



|A | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|B | Restatement adjustments to income statement.
|- | --------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                  |  |                           |             |   |                |   |             |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | -------------- | - | ----------- | -
|                                                                                                                  |  | Year Ended December 31    |            
|                                                                                                                  |  | 2006As PreviouslyReported |             |   | 2006AsRestated |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                                              |  |                           |             |   |                |   |             |  
|Net loss from continuing operations                                                                               |  | $                         | (8,845,297  | ) |                | $ | (35,658,366 | )
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Adjustments to reconcile note loss to net cash provided by (used in) operating activities:                        |  |                           |             |   |                |   |             |  
|Depreciation and amortization                                                                                     |  |                           | 406,442     |   |                |   | 406,442     |  
|Consulting expenses paid in common stock and warrants                                                             |  |                           | 523,366     |   |                |   | 523,366     |  
|Amortization of debt discount                                                                                     |  |                           | 2,809,057   |   |                |   | 11,441,245  |  
|Stock-based compensation                                                                                          |  |                           | 1,800,359   |   |                |   | 1,800,359   |  
|Change in fair value of embedded derivatives and warrants                                                         |  |                           |            |   |                |   | 18,180,881  |  
|Changes in working capital items, net of amounts acquired:                                                        |  |                           |             |   |                |   |             |  
|Accounts receivable                                                                                               |  |                           | (220,906    | ) |                |   | (220,906    | )
|Prepaid expenses and other current assets                                                                         |  |                           | (200,478    | ) |                |   | (200,478    | )
|Accounts payable                                                                                                  |  |                           | (406,295    | ) |                |   | (406,295    | )
|Accrued expenses                                                                                                  |  |                           | 141,583     |   |                |   | 141,583     |  
|Deferred revenue                                                                                                  |  |                           | 47,420      |   |                |   | 47,420      |  
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Total Adjustments                                                                                                 |  |                           | 4,900,548   |   |                |   | 31,713,617  |  
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Net cash used in continuing operations                                                                            |  |                           | (3,944,749  | ) |                |   | (3,944,749  | )
|Net cash used in discontinued operations                                                                          |  |                           | (1,389,074  | ) |                |   | (1,389,074  | )
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Net cash used in operating activities                                                                             |  |                           | (5,333,823  | ) |                |   | (5,333,823  | )
|                                                                                                                  |  |                           |             |   |                |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                                              |  |                           |             |   |                |   |             |  
|Acquisition of 20/20, net of cash acquired                                                                        |  |                           | 49,856      |   |                |   | 49,856      |  
|Acquisition of CentrePath, net of cash acquired                                                                   |  |                           | (5,011,672  | ) |                |   | (5,011,672  | )
|Acquisition of Global Capacity Group, net of cash overdraft                                                       |  |                           | (5,326,879  | ) |                |   | (5,326,879  | )
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Net cash used in investing activities                                                                             |  |                           | (10,288,695 | ) |                |   | (10,288,695 | )
|                                                                                                                  |  |                           |             |   |                |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                                              |  |                           |             |   |                |   |             |  
|Proceeds from debt                                                                                                |  |                           | 16,438,399  |   |                |   | 16,438,399  |  
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Net cash provided by financing activities                                                                         |  |                           | 16,438,399  |   |                |   | 16,438,399  |  
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Effect of exchange rates on cash and cash equivalents                                                             |  |                           | (48,904     | ) |                |   | (48,904     | )
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Increase (decrease) in cash and cash equivalents                                                                  |  |                           | 766,977     |   |                |   | 766,977     |  
|Cash and cash equivalents, beginning                                                                              |  |                           | 436,842     |   |                |   | 436,842     |  
|                                                                                                                  |  |                           |             |   |                |   |             |  
|Cash and cash equivalents, ending                                                                                 |  | $                         | 1,203,819   |   |                | $ | 1,203,819   |  
|                                                                                                                  |  |                           |             |   |                |   |             |  
|                                                                                                                  | 
|                                                                                                                  |  | Year Ended December 31    |            
|                                                                                                                  |  | 2006As PreviouslyReported |             |   | 2006AsRestated |  
|SUPPLEMENTAL CASH FLOWS INFORMATION                                                                               |  |                           |             |   |                |   |             |  
|Cash paid for interest for continuing operations                                                                  |  |                           | 403,701     |   |                |   | 403,701     |  
|                                                                                                                  |  |                          
|NON-CASH INVESTING AND FINANCING ACTIVITIES                                                                       |  |                           |             |   |                |   |             |  
|Common stock issued for the acquisition of 20/20                                                                  |  |                           | 5,167,634   |   |                |   | 5,167,634   |  
|Debt refinanced for the acquisition of 20/20                                                                      |  |                           | 3,559,416   |   |                |   | 3,559,416   |  
|Reclassification of warrants from additional paid-in-capital to liabilities for warrants to purchase common stock |  |                           |            |   |                |   | 80,857      |  



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The following table sets forth effects of the restatement on the Companys previously reported
consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders equity and the consolidated statements of cash flow for the year ended December 31, 2007 and the effect of the restatement on the
previously reported consolidated statements of operations for the three months ended March 31, 2007, June 30, 2007 and September 30, 2007.

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|------------------------------------------------- |  | ----------------------- | ----------- | - | ----------- | - | ----------- | - |  | ---------- |  | - | ------------ | -
|                                                  |  | As of December 31, 2007 |            
|                                                  |  | As PreviouslyReported   |             |   | Adjustments |   |             |   |  | AsRestated | 
|ASSETS                                            |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|CURRENT ASSETS                                    |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|Cash and cash equivalents                         |  | $                       | 859,410     |   |             | $ |            |   |  |            |  | $ | 859,410      |  
|Accounts receivable, net                          |  |                         | 1,781,944   |   |             |   |            |   |  |            |  |   | 1,781,944    |  
|Prepaid expenses and other current assets         |  |                         | 1,645,797   |   |             |   |            |   |  |            |  |   | 1,645,797    |  
|Current assets of discontinued operations         |  |                         | 2,386,392   |   |             |   |            |   |  |            |  |   | 2,386,392    |  
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|Total Current Assets                              |  |                         | 6,673,543   |   |             |   |            |   |  |            |  |   | 6,673,543    |  
|Property and equipment, net                       |  |                         | 1,418,432   |   |             |   |            |   |  |            |  |   | 1,418,432    |  
|Intangibles, net                                  |  |                         | 8,307,802   |   |             |   |            |   |  |            |  |   | 8,307,802    |  
|Goodwill                                          |  |                         | 12,513,090  |   |             |   |            |   |  |            |  |   | 12,513,090   |  
|Other assets                                      |  |                         | 477,597     |   |             |   |            |   |  |            |  |   | 477,597      |  
|Long-term assets of discontinued operations       |  |                         | 1,031,490   |   |             |   |            |   |  |            |  |   | 1,031,490    |  
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|TOTAL ASSETS                                      |  | $                       | 30,421,954  |   |             | $ |            |   |  |            |  | $ | 30,421,954   |  
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|LIABILITIES AND SHAREHOLDERS DEFICIT             |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|CURRENT LIABILITIES                               |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|Current maturities of long-term debt              |  | $                       | 5,182,023   |   |             | $ | (97,909     | ) |  | A          |  | $ | 5,084,114    |  
|Accounts payable                                  |  |                         | 2,750,186   |   |             |   |            |   |  |            |  |   | 2,750,186    |  
|Accrued expenses                                  |  |                         | 3,231,261   |   |             |   |            |   |  |            |  |   | 3,231,261    |  
|Deferred revenue                                  |  |                         | 536,599     |   |             |   |            |   |  |            |  |   | 536,599      |  
|Current liabilities of discontinued operations    |  |                         | 2,827,272   |   |             |   |            |   |  |            |  |   | 2,827,272    |  
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|Total Current Liabilities                         |  |                         | 14,527,341  |   |             |   | (97,909     | ) |  |            |  |   | 14,429,432   |  
|Liabilities for warrants to purchase common stock |  |                         |            |   |             |   | 35,882,879  |   |  | B          |  |   | 35,882,879   |  
|Embedded derivatives of convertible debt          |  |                         |            |   |             |   | 9,198,576   |   |  | C          |  |   | 9,198,576    |  
|Long-term portion of debt                         |  |                         | 6,365,985   |   |             |   | (2,876,251  | ) |  | A          |  |   | 3,489,734    |  
|Deferred revenue                                  |  |                         | 76,270      |   |             |   |            |   |  |            |  |   | 76,270       |  
|Long-term liabilities of discontinued operations  |  |                         | 727,276     |   |             |   |            |   |  |            |  |   | 727,276      |  
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|Total Liabilities                                 |  |                         | 21,696,872  |   |             |   | 42,107,295  |   |  |            |  |   | 63,804,167   |  
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|SHAREHOLDERS DEFICIT                             |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|Preferred stock                                   |  |                         |            |   |             |   |            |   |  |            |  |   |             |  
|Common stock                                      |  |                         | 12,374      |   |             |   |            |   |  |            |  |   | 12,374       |  
|Additional paid-in capital                        |  |                         | 81,849,171  |   |             |   | (4,387,184  | ) |  | D          |  |   | 77,461,987   |  
|Foreign currency translation adjustment           |  |                         | (89,533     | ) |             |   |            |   |  |            |  |   | (89,533      | )
|Accumulated deficit                               |  |                         | (73,046,930 | ) |             |   | (37,720,111 | ) |  | E          |  |   | (110,767,041 | )
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|Total Shareholders Deficit                       |  |                         | 8,725,082   |   |             |   | (42,107,295 | ) |  |            |  |   | (33,382,213  | )
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT       |  | $                       | 30,421,954  |   |             | $ |            |   |  |            |  | $ | 30,421,954   |  
|                                                  |  |                         |             |   |             |   |             |   |  |            |  |   |              |  



|A | Adjust long-term debt and current maturities as a result of embedded derivatives valuation.
|- | -------------------------------------------------------------------------------------------

|B | Record fair value of outstanding warrants to purchase common stock
|- | ------------------------------------------------------------------

|C | Record fair value of embedded derivative.
|- | -----------------------------------------

|D | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|E | Restatement adjustments to income statement for the year ended December 31, 2007.
|- | ---------------------------------------------------------------------------------



54



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|-------------------------------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ----------- | - | ----------- | - |  | ---------- |  | - | ----------- | -
|                                                                                             |  | Year Ended December 31, 2007 |            
|                                                                                             |  | As PreviouslyReported        |             |   | Adjustments |   |             |   |  | AsRestated | 
|REVENUE                                                                                      |  | $                            | 17,228,050  |   |             | $ |            |   |  |            |  | $ | 17,228,050  |  
|COST OF SALES                                                                                |  |                              | 12,175,462  |   |             |   |            |   |  |            |  |   | 12,175,462  |  
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|GROSS MARGIN                                                                                 |  |                              | 5,052,588   |   |             |   |            |   |  |            |  |   | 5,052,588   |  
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|OPERATING EXPENSES:                                                                          |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|Compensation                                                                                 |  |                              | 21,370,425  |   |             |   |            |   |  |            |  |   | 21,370,425  |  
|Travel and entertainment                                                                     |  |                              | 1,369,711   |   |             |   |            |   |  |            |  |   | 1,369,711   |  
|Occupancy                                                                                    |  |                              | 1,776,331   |   |             |   |            |   |  |            |  |   | 1,776,331   |  
|Professional services                                                                        |  |                              | 6,595,209   |   |             |   |            |   |  |            |  |   | 6,595,209   |  
|Insurance                                                                                    |  |                              | 316,766     |   |             |   |            |   |  |            |  |   | 316,766     |  
|Depreciation and amortization                                                                |  |                              | 3,497,262   |   |             |   |            |   |  |            |  |   | 3,497,262   |  
|Other operating expenses                                                                     |  |                              | 738,437     |   |             |   |            |   |  |            |  |   | 738,437     |  
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|TOTAL OPERATING EXPENSES                                                                     |  |                              | 35,664,141  |   |             |   |            |   |  |            |  |   | 35,664,141  |  
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|OPERATING LOSS                                                                               |  |                              | (30,611,553 | ) |             |   |            |   |  |            |  |   | (30,611,553 | )
|Loss on disposal of assets                                                                   |  |                              | 500,914     |   |             |   |            |   |  |            |  |   | 500,914     |  
|Registration rights penalty                                                                  |  |                              | 2,531,428   |   |             |   |            |   |  |            |  |   | 2,531,428   |  
|(Gain) loss on warrants and derivatives                                                      |  |                              |            |   |             |   | (14,538,890 | ) |  | A          |  |   | (14,538,890 | )
|Interest expense                                                                             |  |                              | 11,877,806  |   |             |   | 27,091,298  |   |  | B          |  |   | 38,969,104  |  
|Extinguishment of debt                                                                       |  |                              |            |   |             |   | (1,645,366  | ) |  | C          |  |   | (1,645,366  | )
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|Loss from continuing operations                                                              |  |                              | (45,521,701 | ) |             |   | (10,907,042 | ) |  |            |  |   | (56,428,743 | )
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|Loss from discontinued operations, net of tax                                                |  |                              | (4,960,653  | ) |             |   |            |   |  |            |  |   | (4,960,653  | )
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|NET LOSS                                                                                     |  |                              | (50,482,354 | ) |             |   | (10,907,042 | ) |  |            |  |   | (61,389,396 | )
|Deemed dividend warrants and beneficial conversion features issued to preferred shareholders |  |                              | (20,424,432 | ) |             |   | 20,424,432  |   |  | D          |  |   |            |  
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|Net income (loss) applicable to common shareholders                                          |  | $                            | (70,906,786 | ) |             | $ | 9,517,390   |   |  |            |  | $ | (61,389,396 | )
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|LOSS PER SHARE OF COMMON STOCK                                                               |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|Income (loss) from continuing operations                                                     |  |                              | (1.22       | ) |             |   | 0.18        |   |  |            |  |   | (1.04       | )
|Loss from discontinued operations                                                            |  |                              | (0.10       | ) |             |   | (0.00       | ) |  |            |  |   | (0.10       | )
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|Net income (loss) applicable to common shareholders                                          |  |                              | (1.32       | ) |             |   | 0.18        |   |  |            |  |   | (1.14       | )
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  
|Weighted average shares outstanding - Restated                                               |  |                              | 53,801,855  |   |             |   | 53,801,855  |   |  |            |  |   | 53,801,855  |  
|                                                                                             |  |                              |             |   |             |   |             |   |  |            |  |   |             |  



|A | Record (gain) loss on fair value of stock warrants issued and beneficial conversion feature of convertible debt and preferred stock issued.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|B | Adjust for amortization of fair value of convertible debt warrants and beneficial conversion feature recorded as debt discount.
|- | -------------------------------------------------------------------------------------------------------------------------------

|C | Payoff of bridge loans not previously reported as extinguishment of debt.
|- | -------------------------------------------------------------------------

|D | Reverse deemed dividend recorded as issuance of preferred stock as a result of EITF 00-19 liability change.
|- | -----------------------------------------------------------------------------------------------------------



55



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

As Previously Reported



|                                                                                   |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |             |   |                       |   |         |                   |  |   |             |   |  |   |             |  
|---------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | - |  | ----------------------- | - |  | ----------- | ------ | -------------- | - | -- | ------------------------ |  | - | ------------------ | - |  | ------------------------------------ | ----------- | - | --------------------- | - | ------- | ----------------- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                   |  | CommonShares |  | Series AAPreferredShares |   |  | Series BPreferredShares |   |  | CommonStock |        | PreferredStock |   |    | AdditionalPaid-inCapital |  |   | AccumulatedDeficit |   |  | ForeignCurrencyTranslationAdjustment |             |   | Total Equity(Deficit) |   |         | ComprehensiveLoss | 
|Balance, January 1, 2007                                                           |  | 21,015,069   |  |                         |   |  | 2,516                   |   |  | $           | 2,101  |                | $ |   |                          |  | $ | 24,519,495         |   |  | $                                    | (22,564,576 | ) |                       | $ | (48,904 | )                 |  | $ | 1,908,116   |   |  | $ |            |  
|Issuance of Series AA preferred stock warrants                                     |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 9,182,990          |   |  |                                      |            |   |                       |   |        |                   |  |   | 9,182,990   |   |  |   |            |  
|Beneficial conversion feature of Series AA preferred stock                         |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 11,241,442         |   |  |                                      |            |   |                       |   |        |                   |  |   | 11,241,442  |   |  |   |            |  
|Deemed dividend related to conversion of Series AA preferred stock to common stock |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | (20,424,432        | ) |  |                                      |            |   |                       |   |        |                   |  |   | (20,424,432 | ) |  |   |            |  
|Issuance of Series AA preferred stock                                              |  |             |  | 20,635                   |   |  |                        |   |  |             |       |                |   | 2  |                          |  |   | 17,930,608         |   |  |                                      |            |   |                       |   |        |                   |  |   | 17,930,610  |   |  |   |            |  
|Conversion of preferred stock to common stock                                      |  | 49,552,714   |  | (20,635                  | ) |  | (2,516                  | ) |  |             | 4,955  |                |   | (2 | )                        |  |   | (4,953             | ) |  |                                      |            |   |                       |   |        |                   |  |   |            |   |  |   |            |  
|Beneficial conversion feature of junior credit facility                            |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 3,010,451          |   |  |                                      |            |   |                       |   |        |                   |  |   | 3,010,451   |   |  |   |            |  
|Stock warrants issued with debt financing                                          |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 8,453,916          |   |  |                                      |            |   |                       |   |        |                   |  |   | 8,453,916   |   |  |   |            |  
|Stock and warrants issued for services                                             |  | 5,000,000    |  |                         |   |  |                        |   |  |             | 500    |                |   |   |                          |  |   | 5,202,455          |   |  |                                      |            |   |                       |   |        |                   |  |   | 5,202,955   |   |  |   |            |  
|Warrant conversion                                                                 |  | 25,279,502   |  |                         |   |  |                        |   |  |             | 2,528  |                |   |   |                          |  |   | 3,789,397          |   |  |                                      |            |   |                       |   |        |                   |  |   | 3,791,925   |   |  |   |            |  
|Registration rights penalty                                                        |  | 4,784,623    |  |                         |   |  |                        |   |  |             | 478    |                |   |   |                          |  |   | 2,530,950          |   |  |                                      |            |   |                       |   |        |                   |  |   | 2,531,428   |   |  |   |            |  
|Debt to equity conversion                                                          |  | 1,019,723    |  |                         |   |  |                        |   |  |             | 102    |                |   |   |                          |  |   | 152,814            |   |  |                                      |            |   |                       |   |        |                   |  |   | 152,916     |   |  |   |            |  
|Stock-based compensation expense                                                   |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   | 13,791,601         |   |  |                                      |            |   |                       |   |        |                   |  |   | 13,791,601  |   |  |   |            |  
|Issuance of common stock                                                           |  | 17,100,408   |  |                         |   |  |                        |   |  |             | 1,710  |                |   |   |                          |  |   | 2,472,437          |   |  |                                      |            |   |                       |   |        |                   |  |   | 2,474,147   |   |  |   |            |  
|Foreign currency translation adjustment                                            |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   |                   |   |  |                                      |            |   |                       |   | (40,629 | )                 |  |   | (40,629     | ) |  |   | (40,629     | )
|Net loss for 2007                                                                  |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   |                   |   |  |                                      | (50,482,354 | ) |                       |   |        |                   |  |   | (50,482,354 | ) |  |   | (50,482,354 | )
|                                                                                   |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |             |   |                       |   |         |                   |  |   |             |   |  |   |             |  
|Balance, December 31, 2007                                                         |  | 123,752,039  |  |                         |   |  |                        |   |  | $           | 12,374 |                | $ |   |                          |  | $ | 81,849,171         |   |  | $                                    | (73,046,930 | ) |                       | $ | (89,533 | )                 |  | $ | 8,725,082   |   |  | $ | (50,522,983 | )
|                                                                                   |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |             |   |                       |   |         |                   |  |   |             |   |  |   |             |  



56



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

As Restated



|                                                                  |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                       |   |         |                   |  |   |             |   |  |   |             |  
|----------------------------------------------------------------- |  | ------------ |  | ------------------------ | - |  | ----------------------- | - |  | ----------- | ------ | -------------- | - | -- | ------------------------ |  | - | ------------------ | - |  | ------------------------------------ | ------------ | - | --------------------- | - | ------- | ----------------- |  | - | ----------- | - |  | - | ----------- | -
|                                                                  |  | CommonShares |  | Series AAPreferredShares |   |  | Series BPreferredShares |   |  | CommonStock |        | PreferredStock |   |    | AdditionalPaid-inCapital |  |   | AccumulatedDeficit |   |  | ForeignCurrencyTranslationAdjustment |              |   | Total Equity(Deficit) |   |         | ComprehensiveLoss | 
|Balance, January 1, 2007                                          |  | 21,015,069   |  |                         |   |  | 2,516                   |   |  | $           | 2,101  |                | $ |   |                          |  | $ | 19,296,655         |   |  | $                                    | (49,377,645  | ) |                       | $ | (48,904 | )                 |  | $ | (30,127,793 | ) |  | $ |            |  
|Issuance of Series AA preferred stock                             |  |             |  | 20,635                   |   |  |                        |   |  |             |       |                |   | 2  |                          |  |   |                   |   |  |                                      |             |   |                       |   |        |                   |  |   | 2           |   |  |   |            |  
|Conversion of Series AA preferred stock liability to common stock |  | 45,854,513   |  | (20,635                  | ) |  |                        |   |  |             | 4,585  |                |   | (2 | )                        |  |   | 25,219,983         |   |  |                                      |             |   |                       |   |        |                   |  |   | 25,224,566  |   |  |   |            |  
|Conversion of Series B preferred stock to common stock            |  | 3,700,147    |  |                         |   |  | (2,516                  | ) |  |             | 370    |                |   |   |                          |  |   | (485,969           | ) |  |                                      |             |   |                       |   |        |                   |  |   | (485,599    | ) |  |   |            |  
|Warrant conversion                                                |  | 25,277,556   |  |                         |   |  |                        |   |  |             | 2,528  |                |   |   |                          |  |   | 12,484,016         |   |  |                                      |             |   |                       |   |        |                   |  |   | 12,486,544  |   |  |   |            |  
|Registration rights penalty                                       |  | 4,784,623    |  |                         |   |  |                        |   |  |             | 478    |                |   |   |                          |  |   | 2,530,950          |   |  |                                      |             |   |                       |   |        |                   |  |   | 2,531,428   |   |  |   |            |  
|Stock issued for services                                         |  | 5,000,000    |  |                         |   |  |                        |   |  |             | 500    |                |   |   |                          |  |   | 1,999,500          |   |  |                                      |             |   |                       |   |        |                   |  |   | 2,000,000   |   |  |   |            |  
|Stock-based compensation expense                                  |  |             |  |                         |   |  |                        |   |  |             |       |                |   |   |                          |  |   | 13,791,601         |   |  |                                      |             |   |                       |   |        |                   |  |   | 13,791,601  |   |  |   |            |  
|Issuance of common stock                                          |  | 18,120,131   |  |                         |   |  |                        |   |  |             | 1,812  |                |   |   |                          |  |   | 2,625,251          |   |  |                                      |             |   |                       |   |        |                   |  |   | 2,627,063   |   |  |   |            |  
|Foreign currency translation adjustment                           |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                       |   | (40,629 | )                 |  |   | (40,629     | ) |  |   | (40,629     | )
|Net loss for 2007                                                 |  |              |  |                          |   |  |                         |   |  |             |       |                |   |   |                          |  |   |                   |   |  |                                      | (61,389,396  | ) |                       |   |        |                   |  |   | (61,389,396 | ) |  |   | (61,389,396 | )
|                                                                  |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                       |   |         |                   |  |   |             |   |  |   |             |  
|Balance, December 31, 2007                                        |  | 123,752,039  |  |                         |   |  |                        |   |  | $           | 12,374 |                | $ |   |                          |  | $ | 77,461,987         |   |  | $                                    | (110,767,041 | ) |                       | $ | (89,533 | )                 |  | $ | (33,382,213 | ) |  | $ | (61,430,025 | )
|                                                                  |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   |                    |   |  |                                      |              |   |                       |   |         |                   |  |   |             |   |  |   |             |  
|                                                                  |  |              |  |                          |   |  |                         |   |  |             |        |                |   |    |                          |  |   | A                  |   |  |                                      | B            |   |                       |   |         |                   |  |   |             |   |  |   |             |  



|A | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|B | Restatement adjustments to income statement.
|- | --------------------------------------------



57



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                            |  |                           |             |   |                 |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | --------------- | - | ----------- | -
|                                                                            |  | Year Ended December 31    |            
|                                                                            |  | 2007As PreviouslyReported |             |   | 2007As Restated |  
|CASH FLOW FROM OPERATING ACTIVITIES                                         |  |                           |             |   |                 |   |             |  
|Net loss from continuing operations                                         |  | $                         | (45,521,701 | ) |                 | $ | (56,428,743 | )
|                                                                            |  |                           |             |   |                 |   |             |  
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |             |   |                 |   |             |  
|Depreciation and amortization                                               |  |                           | 3,497,262   |   |                 |   | 3,497,262   |  
|Loss on disposal of assets                                                  |  |                           | 500,914     |   |                 |   | 500,914     |  
|Consulting expenses paid in common stock and warrants                       |  |                           | 4,318,858   |   |                 |   | 4,318,858   |  
|Amortization of debt discount                                               |  |                           | 11,464,367  |   |                 |   | 38,555,665  |  
|Registration rights penalty                                                 |  |                           | 2,531,428   |   |                 |   | 2,531,428   |  
|Stock-based compensation                                                    |  |                           | 13,791,601  |   |                 |   | 13,791,601  |  
|Extinguishment of debt                                                      |  |                           |            |   |                 |   | (1,645,366  | )
|Change in fair value of embedded derivatives and warrants                   |  |                           |            |   |                 |   | (14,538,890 | )
|Changes in working capital items, net of amounts acquired:                  |  |                           |             |   |                 |   |             |  
|Accounts receivable                                                         |  |                           | (189,834    | ) |                 |   | (189,834    | )
|Prepaid expenses and other current assets                                   |  |                           | (1,129,205  | ) |                 |   | (1,129,205  | )
|Deposits and other assets                                                   |  |                           | (63,340     | ) |                 |   | (63,340     | )
|Accounts payable                                                            |  |                           | 1,320,304   |   |                 |   | 1,320,304   |  
|Accrued expenses                                                            |  |                           | (121,545    | ) |                 |   | (121,545    | )
|Deferred revenue                                                            |  |                           | (107,814    | ) |                 |   | (107,814    | )
|                                                                            |  |                           |             |   |                 |   |             |  
|Total Adjustments                                                           |  |                           | 35,812,996  |   |                 |   | 46,720,038  |  
|                                                                            |  |                           |             |   |                 |   |             |  
|Net cash used in continuing operations                                      |  |                           | (9,708,705  | ) |                 |   | (9,708,705  | )
|Net cash used in discontinued operations                                    |  |                           | (2,187,226  | ) |                 |   | (2,187,226  | )
|                                                                            |  |                           |             |   |                 |   |             |  
|Net cash used in operating activities                                       |  |                           | (11,895,931 | ) |                 |   | (11,895,931 | )
|                                                                            |  |                           |             |   |                 |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                        |  |                           |             |   |                 |   |             |  
|Purchase of property and equipment                                          |  |                           | (365,232    | ) |                 |   | (365,232    | )
|                                                                            |  |                           |             |   |                 |   |             |  
|Net cash used in investing activities                                       |  |                           | (365,232    | ) |                 |   | (365,232    | )
|                                                                            |  |                           |             |   |                 |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                        |  |                           |             |   |                 |   |             |  
|Increase (decrease) in debt, net                                            |  |                           | (10,422,441 | ) |                 |   |            |  
|Proceeds from the issuance of long-term debt                                |  |                           |            |   |                 |   | 11,621,259  |  
|Repayment of long-term debt                                                 |  |                           |            |   |                 |   | (29,997,758 | )
|Net proceeds from line of credit                                            |  |                           |            |   |                 |   | 7,954,058   |  
|Issuance of stock                                                           |  |                           | 25,233,695  |   |                 |   | 25,233,695  |  
|Payment of financing costs                                                  |  |                           | (375,749    | ) |                 |   | (375,749    | )
|                                                                            |  |                           |             |   |                 |   |             |  
|Net cash provided by financing activities from continuing operations        |  |                           | 14,435,505  |   |                 |   | 14,435,505  |  
|Net cash used in financing activities from discontinued operations          |  |                           | (2,478,122  | ) |                 |   | (2,478,122  | )
|                                                                            |  |                           |             |   |                 |   |             |  
|Net cash provided by financing activities                                   |  |                           | 11,957,383  |   |                 |   | 11,957,383  |  
|                                                                            |  |                           |             |   |                 |   |             |  
|Effect of exchange rates on cash and cash equivalents                       |  |                           | (40,629     | ) |                 |   | (40,629     | )
|                                                                            |  |                           |             |   |                 |   |             |  
|Increase (decrease) in cash and cash equivalents                            |  |                           | (344,409    | ) |                 |   | (344,409    | )
|Cash and cash equivalents, beginning of period                              |  |                           | 1,203,819   |   |                 |   | 1,203,819   |  
|                                                                            |  |                           |             |   |                 |   |             |  
|Cash and cash equivalents, end of period                                    |  | $                         | 859,410     |   |                 | $ | 859,410     |  
|                                                                            |  |                           |             |   |                 |   |             |  
|                                                                            |  |                          
|                                                                            |  | 2007As PreviouslyReported |             |   | 2007AsRestated  |  
|SUPPLEMENTAL CASH FLOWS INFORMATION                                         |  |                           |             |   |                 |   |             |  
|Cash paid for interest for continuing operations                            |  | $                         | 1,761,919   |   |                 | $ | 1,761,919   |  
|Cash paid for interest for discontinued operations                          |  |                           | 86,581      |   |                 |   | 86,581      |  
|                                                                            |  |                          
|NON-CASH INVESTING AND FINANCING ACTIVITIES                                 |  |                           |            |   |                 |   |            |  
|Conversion of short-term bridge and convertible notes into preferred stock  |  |                           | 4,585,795   |   |                 |   |            |  
|Conversion of short-term bridge notes to junior secured facility            |  |                           | 5,388,438   |   |                 |   | 5,388,438   |  
|Issuance of common stock                                                    |  |                           | 313,457     |   |                 |   | 313,457     |  
|Conversion of warrants to common stock                                      |  |                           |            |   |                 |   | 8,694,911   |  
|Conversion of preferred stock to common stock                               |  |                           |            |   |                 |   | 24,738,967  |  



58



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CAPTIAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

As Restated



|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|------------------------------------------------------ |  | --------------------------------------------------------------- | ----------- | - | ------------- | - | ----------- | ------------ |  | - | ------------- | - |  | -------- | ----------- | - |  | - | ----------- | -
|                                                       |  | Four Quarters (Unaudited) and Full Year Ended December 31, 2007 |            
|                                                       |  | FirstQuarter                                                    |             |   | SecondQuarter |   |             | ThirdQuarter |  |   | FourthQuarter |   |  | FullYear |            
|REVENUE                                                |  | $                                                               | 3,999,593   |   |               | $ | 4,227,063   |              |  | $ | 4,369,632     |   |  | $        | 4,631,762   |   |  | $ | 17,228,050  |  
|COST OF SALES                                          |  |                                                                 | 2,734,430   |   |               |   | 2,843,213   |              |  |   | 3,176,152     |   |  |          | 3,421,667   |   |  |   | 12,175,462  |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|GROSS MARGIN                                           |  |                                                                 | 1,265,163   |   |               |   | 1,383,850   |              |  |   | 1,193,480     |   |  |          | 1,210,095   |   |  |   | 5,052,588   |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|OPERATING EXPENSES:                                    |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Compensation                                           |  |                                                                 | 3,250,429   |   |               |   | 4,787,808   |              |  |   | 3,498,617     |   |  |          | 9,833,571   |   |  |   | 21,370,425  |  
|Depreciation and amortization                          |  |                                                                 | 938,016     |   |               |   | 776,737     |              |  |   | 879,379       |   |  |          | 903,130     |   |  |   | 3,497,262   |  
|Other operating expenses                               |  |                                                                 | 1,169,789   |   |               |   | 1,568,134   |              |  |   | 1,464,701     |   |  |          | 6,593,830   |   |  |   | 10,796,454  |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|TOTAL OPERATING EXPENSES                               |  |                                                                 | 5,358,234   |   |               |   | 7,132,679   |              |  |   | 5,842,697     |   |  |          | 17,330,531  |   |  |   | 35,664,141  |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|OPERATING LOSS                                         |  |                                                                 | (4,093,071  | ) |               |   | (5,748,829  | )            |  |   | (4,649,217    | ) |  |          | (16,120,436 | ) |  |   | (30,611,553 | )
|                                                       |  |                                                                 |             |   |              
|Loss on disposal of assets                             |  |                                                                 |            |   |               |   |            |              |  |   |              |   |  |          | 500,914     |   |  |   | 500,914     |  
|Registration rights penalty                            |  |                                                                 |            |   |               |   |            |              |  |   |              |   |  |          | 2,531,428   |   |  |   | 2,531,428   |  
|(Gain) loss on warrants and derivatives                |  |                                                                 | 9,198,834   |   |               |   | (38,663,122 | )            |  |   | (15,262,707   | ) |  |          | 30,188,105  |   |  |   | (14,538,890 | )
|Interest expense                                       |  |                                                                 | 29,567,929  |   |               |   | 2,796,384   |              |  |   | 3,408,744     |   |  |          | 3,196,047   |   |  |   | 38,969,104  |  
|Extinguishment of debt                                 |  |                                                                 | (1,645,366  | ) |               |   |            |              |  |   |              |   |  |          |            |   |  |   | (1,645,366  | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Income (loss) from continuing operations               |  |                                                                 | (41,214,468 | ) |               |   | 30,117,909  |              |  |   | 7,204,746     |   |  |          | (52,536,930 | ) |  |   | (56,428,743 | )
|Income (loss) from discontinued operations, net of tax |  |                                                                 | (492,565    | ) |               |   | (341,953    | )            |  |   | (4,649,075    | ) |  |          | 522,940     |   |  |   | (4,960,653  | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Net income (loss)                                      |  | $                                                               | (41,707,033 | ) |               | $ | 29,775,956  |              |  | $ | 2,555,671     |   |  | $        | (52,013,990 | ) |  | $ | (61,389,396 | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK        |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|                                                       |  |                                                                 |             |   |              
|Income (loss) from continuing operations               |  |                                                                 | (1.92       | ) |               |   | 1.23        |              |  |   | 0.10          |   |  |          | (0.54       | ) |  |   | (1.04       | )
|Loss from discontinued operations                      |  |                                                                 | (0.02       | ) |               |   | (0.01       | )            |  |   | (0.06         | ) |  |          | 0.00        |   |  |   | (0.10       | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Net income (loss)                                      |  |                                                                 | (1.94       | ) |               |   | 1.22        |              |  |   | 0.04          |   |  |          | (0.54       | ) |  |   | (1.14       | )
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Weighted average shares outstanding - Restated         |  |                                                                 | 21,491,069  |   |               |   | 24,433,557  |              |  |   | 71,829,042    |   |  |          | 96,353,226  |   |  |   | 53,801,855  |  
|DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK      |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|                                                       |  |                                                                 |             |   |              
|Loss from continuing operations                        |  |                                                                 |            |   |               |   | 0.54        |              |  |   | 0.08          |   |  |          |            |   |  |   |            |  
|Loss from discontinued operations                      |  |                                                                 |            |   |               |   | (0.01       | )            |  |   | (0.05         | ) |  |          |            |   |  |   |            |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Net income (loss)                                      |  |                                                                 |            |   |               |   | 0.53        |              |  |   | 0.03          |   |  |          |            |   |  |   |            |  
|                                                       |  |                                                                 |             |   |               |   |             |              |  |   |               |   |  |          |             |   |  |   |             |  
|Weighted average shares outstanding - Restated         |  |                                                                 | 21,491,069  |   |               |   | 55,726,807  |              |  |   | 97,688,710    |   |  |          | 96,353,226  |   |  |   | 53,801,855  |  



59



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##### Table of Contents

The following table sets forth effects of the restatement on the Companys previously reported
consolidated condensed balance sheets, for the period ended March 31, 2008 and the consolidated condensed statements of operations and the consolidated condensed statements of shareholders equity for the three months ended March 31, 2008 and
March 31, 2007. There was no impact to cash flows from operating activities, investing activities or financing activities for the three months ended March 31, 2008 or March 31, 2007.

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS

(in thousands, except share amounts)



|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|-------------------------------------------------- | -------------------- | -------------------- | ------- | ----------- | --------------------------- | - | ------- | - | ----------- | ----------- |  | - | --------- | - |  | - | -------- | -
|                                                   |                      | As of March 31, 2008 |         |             | December 31,2007 AsRestated |  
|                                                   | AsPreviouslyReported |                      |         | Adjustments |                             |   |         |   | As Restated |             | 
|                                                   |                      | (Unaudited)          |         |             |                             |   |         |   |             | (Unaudited) |  |   | (Audited) |  
|ASSETS                                             |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|CURRENT ASSETS                                     |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|Cash and cash equivalents                          |                      | $                    | 6,930   |             |                             | $ |        |   |             |             |  | $ | 6,930     |   |  | $ | 859      |  
|Accounts receivable, net of allowances             |                      |                      | 6,634   |             |                             |   |        |   |             |             |  |   | 6,634     |   |  |   | 1,782    |  
|Prepaid expenses and other current assets          |                      |                      | 1,400   |             |                             |   |        |   |             |             |  |   | 1,400     |   |  |   | 1,646    |  
|Current assets of discontinued operations          |                      |                      | 3       |             |                             |   |        |   |             |             |  |   | 3         |   |  |   | 2,387    |  
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|Total Current Assets                               |                      |                      | 14,967  |             |                             |   |        |   |             |             |  |   | 14,967    |   |  |   | 6,674    |  
|                                                   |                      |                      |         |             |                            
|Property and equipment, net                        |                      |                      | 1,193   |             |                             |   |        |   |             |             |  |   | 1,193     |   |  |   | 1,418    |  
|Intangible assets, net                             |                      |                      | 8,008   |             |                             |   |        |   |             |             |  |   | 8,008     |   |  |   | 8,308    |  
|Goodwill                                           |                      |                      | 12,513  |             |                             |   |        |   |             |             |  |   | 12,513    |   |  |   | 12,513   |  
|Other assets                                       |                      |                      | 1,916   |             |                             |   |        |   |             |             |  |   | 1,916     |   |  |   | 478      |  
|Non-current assets of discontinued operations      |                      |                      | 10      |             |                             |   |        |   |             |             |  |   | 10        |   |  |   | 1,031    |  
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|TOTAL ASSETS                                       |                      | $                    | 38,607  |             |                             | $ |        |   |             |             |  | $ | 38,607    |   |  | $ | 30,422   |  
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT              |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|CURRENT LIABILITIES                                |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|Current maturities of long-term debt               |                      | $                    | 36      |             |                             | $ |        |   |             | A           |  | $ | 36        |   |  | $ | 5,084    |  
|Accounts payable                                   |                      |                      | 1,940   |             |                             |   |        |   |             |             |  |   | 1,940     |   |  |   | 2,750    |  
|Accrued expenses                                   |                      |                      | 4,465   |             |                             |   |        |   |             |             |  |   | 4,465     |   |  |   | 3,231    |  
|Deferred revenue                                   |                      |                      | 560     |             |                             |   |        |   |             |             |  |   | 560       |   |  |   | 537      |  
|Current liabilities of discontinued operations     |                      |                      | 30      |             |                             |   |        |   |             |             |  |   | 30        |   |  |   | 2,827    |  
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|Total Current Liabilities                          |                      |                      | 7,031   |             |                             |   |        |   |             |             |  |   | 7,031     |   |  |   | 14,429   |  
|                                                   |                      |                      |         |             |                            
|Liabilities for warrants to purchase common stock  |                      |                      | 32,086  |             |                             |   | 5,184   |   |             | B           |  |   | 37,270    |   |  |   | 35,883   |  
|Embedded derivatives of convertible debt           |                      |                      | 1,513   |             |                             |   | 9,904   |   |             | C           |  |   | 11,417    |   |  |   | 9,199    |  
|Long-term portion of debt                          |                      |                      | 9,752   |             |                             |   | (9,438  | ) |             | A           |  |   | 314       |   |  |   | 3,490    |  
|Deferred revenue                                   |                      |                      | 63      |             |                             |   |        |   |             |             |  |   | 63        |   |  |   | 76       |  
|Non-current liabilities of discontinued operations |                      |                      |        |             |                             |   |        |   |             |             |  |   |          |   |  |   | 727      |  
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|Total Liabilities                                  |                      |                      | 50,445  |             |                             |   | 5,650   |   |             |             |  |   | 56,095    |   |  |   | 63,804   |  
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|SHAREHOLDERS DEFICIT                              |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|Preferred stock                                    |                      |                      |        |             |                             |   |        |   |             |             |  |   |          |   |  |   |         |  
|Common stock                                       |                      |                      | 14      |             |                             |   |        |   |             |             |  |   | 14        |   |  |   | 12       |  
|Additional paid-in capital                         |                      |                      | 64,635  |             |                             |   | 25,837  |   |             | D           |  |   | 90,472    |   |  |   | 77,462   |  
|Foreign currency translation adjustment            |                      |                      | (95     | )           |                             |   |        |   |             |             |  |   | (95       | ) |  |   | (89      | )
|Accumulated deficit                                |                      |                      | (76,392 | )           |                             |   | (31,487 | ) |             | E           |  |   | (107,879  | ) |  |   | (110,767 | )
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|Total Shareholders Deficit                        |                      |                      | (11,838 | )           |                             |   | (5,650  | ) |             |             |  |   | (17,488   | ) |  |   | (33,382  | )
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT        |                      | $                    | 38,607  |             |                             | $ |        |   |             |             |  | $ | 38,607    |   |  | $ | 30,422   |  
|                                                   |                      |                      |         |             |                             |   |         |   |             |             |  |   |           |   |  |   |          |  



|A | Adjust long-term debt and current maturities as a result of embedded derivatives valuation.
|- | -------------------------------------------------------------------------------------------

|B | Record fair value of outstanding warrants to purchase common stock
|- | ------------------------------------------------------------------

|C | Record fair value of embedded derivative.
|- | -----------------------------------------

|D | EITF 00-19 liability accounting adopted on January 1, 2008, with restatement, prior year impact is now recorded in proper period.
|- | ---------------------------------------------------------------------------------------------------------------------------------

|E | Restatement adjustments to income statement for the three months ended March 31, 2008.
|- | --------------------------------------------------------------------------------------



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##### Table of Contents

CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)



|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|--------------------------------------------------- | --------------------- | --------------------------------- | ----------- | ----------- |  | - | ----------- | - | ----------- | - |  | - | ----------- | -
|                                                    |                       | Three Months Ended March 31, 2008 |            
|                                                    | As PreviouslyReported |                                   |             | Adjustments |  |   |             |   | As Restated |  
|REVENUE                                             |                       | $                                 | 9,523       |             |  | $ |            |   |             |   |  | $ | 9,523       |  
|COST OF SALES                                       |                       |                                   | 4,418       |             |  |   |            |   |             |   |  |   | 4,418       |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|GROSS MARGIN                                        |                       |                                   | 5,105       |             |  |   |            |   |             |   |  |   | 5,105       |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Operating Expenses:                                 |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Compensation                                        |                       |                                   | 4,289       |             |  |   |            |   |             |   |  |   | 4,289       |  
|Depreciation and amortization                       |                       |                                   | 536         |             |  |   |            |   |             |   |  |   | 536         |  
|Other operating expenses                            |                       |                                   | 2,857       |             |  |   |            |   |             |   |  |   | 2,857       |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Total Operating Expenses                            |                       |                                   | 7,682       |             |  |   |            |   |             |   |  |   | 7,682       |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Operating Loss                                      |                       |                                   | (2,577      | )           |  |   |            |   |             |   |  |   | (2,577      | )
|Interest expense                                    |                       |                                   | 5,845       |             |  |   | 5,761       |   |             | B |  |   | 11,606      |  
|Gain on warrants and derivatives                    |                       |                                   | (4,769      | )           |  |   | (11,994     | ) |             | A |  |   | (16,763     | )
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Income (loss) from continuing operations            |                       |                                   | (3,653      | )           |  |   | 6,233       |   |             |   |  |   | 2,580       |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Discontinued Operations:                            |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Loss from discontinued operations, net of tax       |                       |                                   | (91         | )           |  |   |            |   |             |   |  |   | (91         | )
|Gain on sale of discontinued operations, net of tax |                       |                                   | 399         |             |  |   |            |   |             |   |  |   | 399         |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Income from discontinued operations, net of tax     |                       |                                   | 308         |             |  |   |            |   |             |   |  |   | 308         |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Net income (loss) applicable to common shareholders |                       | $                                 | (3,345      | )           |  | $ | 6,233       |   |             |   |  | $ | 2,888       |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|BASIC EARNINGS PER SHARE OF COMMON STOCK            |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Income (loss) from continuing operations            |                       |                                   | (0.03       | )           |  |   | 0.05        |   |             |   |  |   | 0.02        |  
|Loss from discontinued operations                   |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Net income (loss) applicable to common shareholders |                       |                                   | (0.03       | )           |  |   | 0.05        |   |             |   |  |   | 0.02        |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Weighted average shares outstanding - Restated      |                       |                                   | 135,303,454 |             |  |   | 135,303,454 |   |             |   |  |   | 135,303,454 |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|DILUTED EARNINGS PER SHARE OF COMMON STOCK          |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Loss from continuing operations                     |                       |                                   |            |             |  |   |            |   |             |   |  |   | 0.01        |  
|Loss from discontinued operations                   |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Net income (loss) applicable to common shareholders |                       |                                   |            |             |  |   |            |   |             |   |  |   | 0.01        |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  
|Weighted average shares outstanding - Restated      |                       |                                   |            |             |  |   |             |   |             |   |  |   | 192,922,548 |  
|                                                    |                       |                                   |             |             |  |   |             |   |             |   |  |   |             |  



|A | Record (gain) loss on fair value of stock warrants issued and beneficial conversion feature of convertible debt and preferred stock issued.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|B | Adjust for amortization of fair value of convertible debt warrants and beneficial conversion feature recorded as debt discount.
|- | -------------------------------------------------------------------------------------------------------------------------------



61



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)



|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|-------------------------------------------------------------------------------------------- | --------------------- | --------------------------------- | ---------- | ----------- |  | - | ---------- | - | ----------- | - |  | - | ---------- | -
|                                                                                             |                       | Three Months Ended March 31, 2007 |           
|                                                                                             | As PreviouslyReported |                                   |            | Adjustments |  |   |            |   | As Restated |  
|REVENUE                                                                                      |                       | $                                 | 4,000      |             |  | $ |           |   |             |   |  | $ | 4,000      |  
|COST OF SALES                                                                                |                       |                                   | 2,260      |             |  |   | 475        |   |             | A |  |   | 2,735      |  
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|GROSS MARGIN                                                                                 |                       |                                   | 1,740      |             |  |   | (475       | ) |             | A |  |   | 1,265      |  
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Operating Expenses                                                                           |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Compensation                                                                                 |                       |                                   | 3,502      |             |  |   | (252       | ) |             | A |  |   | 3,250      |  
|Depreciation and amortization                                                                |                       |                                   | 938        |             |  |   |           |   |             |   |  |   | 938        |  
|Other operating expenses                                                                     |                       |                                   | 1,393      |             |  |   | (223       | ) |             | A |  |   | 1,170      |  
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Total Operating Expenses                                                                     |                       |                                   | 5,833      |             |  |   | (475       | ) |             | A |  |   | 5,358      |  
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Operating Loss                                                                               |                       |                                   | (4,093     | )           |  |   |           |   |             |   |  |   | (4,093     | )
|Interest expense                                                                             |                       |                                   | 2,872      |             |  |   | 26,696     |   |             | B |  |   | 29,568     |  
|Loss on warrants and derivatives                                                             |                       |                                   |           |             |  |   | 9,199      |   |             | C |  |   | 9,199      |  
|Gain on extinguishment of debt                                                               |                       |                                   |           |             |  |   | (1,645     | ) |             | D |  |   | (1,645     | )
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Loss from continuing operations                                                              |                       |                                   | (6,965     | )           |  |   | (34,250    | ) |             |   |  |   | (41,215    | )
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Loss from discontinued operations, net of tax                                                |                       |                                   | (492       | )           |  |   |           |   |             |   |  |   | (492       | )
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Net income (loss)                                                                            |                       |                                   | (7,457     | )           |  |   | (34,250    | ) |             |   |  |   | (41,707    | )
|Deemed dividend warrants and beneficial conversion features issued to preferred shareholders |                       |                                   | (9,183     | )           |  |   | 9,183      |   |             | E |  |   |           |  
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Net income (loss) applicable to common shareholders                                          |                       | $                                 | (16,640    | )           |  | $ | (25,067    | ) |             |   |  | $ | (41,707    | )
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|LOSS PER SHARE OF COMMON STOCK                                                               |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Income (loss) from continuing operations                                                     |                       |                                   | (0.75      | )           |  |   | (1.17      | ) |             |   |  |   | (1.92      | )
|Loss from discontinued operations                                                            |                       |                                   | (0.02      | )           |  |   |           |   |             |   |  |   | (0.02      | )
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Net income (loss) applicable to common shareholders                                          |                       |                                   | (0.77      | )           |  |   | (1.17      | ) |             |   |  |   | (1.94      | )
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  
|Weighted average shares outstanding - Restated                                               |                       |                                   | 21,491,069 |             |  |   | 21,491,069 |   |             |   |  |   | 21,491,069 |  
|                                                                                             |                       |                                   |            |             |  |   |            |   |             |   |  |   |            |  



|A | Reclassification between operating expenses and cost of goods sold to conform with current period presentation
|- | --------------------------------------------------------------------------------------------------------------

|B | Record (gain) loss on fair value of stock warrants issued and beneficial conversion feature of convertible debt and preferred stock issued.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|C | Adjust for amortization of fair value of convertible debt warrants and beneficial conversion feature recorded as debt discount.
|- | -------------------------------------------------------------------------------------------------------------------------------

|D | Payoff of bridge loans not previously reported as extinguishment of debt.
|- | -------------------------------------------------------------------------

|E | Reverse deemed dividend recorded as issuance of preferred stock as a result of EITF 00-19 liability change.
|- | -----------------------------------------------------------------------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

In thousands, except share data

(Unaudited)

As Previously Reported



|                                                                                       |  |              |  |                          |  |                         |  |             |   |                          |   |        |                    |  |   |                                      |   |  |                       |     |   |                   |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ |  | ----------------------- |  | ----------- | - | ------------------------ | - | ------ | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | --- | - | ----------------- | - | ------ | - |  | - | ------ | -
|                                                                                       |  | CommonShares |  | Series AAPreferredShares |  | Series BPreferredShares |  | CommonStock |   | AdditionalPaid-inCapital |   |        | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |     |   | ComprehensiveLoss |  
|Balance, January 1, 2007                                                               |  | 21,015,069   |  |                         |  | 2,516                   |  | $           | 2 |                          | $ | 24,520 |                    |  | $ | (22,565                              | ) |  | $                     | (49 | ) |                   | $ | 1,908  |   |  | $ |       |  
|Issuance of Series AA preferred stock                                                  |  |             |  | 19,984                   |  |                        |  |             |  |                          |   | 17,554 |                    |  |   |                                     |   |  |                       |    |   |                   |   | 17,554 |   |  |   |       |  
|Deemed dividend related to the conversion of Series AA preferred stock to common stock |  |             |  |                         |  |                        |  |             |  |                          |   | (9,183 | )                  |  |   |                                     |   |  |                       |    |   |                   |   | (9,183 | ) |  |   |       |  
|Issuance of Series AA preferred stock warrants                                         |  |             |  |                         |  |                        |  |             |  |                          |   | 9,183  |                    |  |   |                                     |   |  |                       |    |   |                   |   | 9,183  |   |  |   |       |  
|Stock warrants issued with debt financing                                              |  |             |  |                         |  |                        |  |             |  |                          |   | 5,184  |                    |  |   |                                     |   |  |                       |    |   |                   |   | 5,184  |   |  |   |       |  
|Stock-based compensation expense                                                       |  |             |  |                         |  |                        |  |             |  |                          |   | 1,432  |                    |  |   |                                     |   |  |                       |    |   |                   |   | 1,432  |   |  |   |       |  
|Issuance of common stock                                                               |  | 695,811      |  |                         |  |                        |  |             |  |                          |   | 326    |                    |  |   |                                     |   |  |                       |    |   |                   |   | 326    |   |  |   |       |  
|Foreign currency translation adjustment                                                |  |              |  |                          |  |                         |  |             |   |                          |   |        |                    |  |   |                                      |   |  |                       | (1  | ) |                   |   | (1     | ) |  |   | (1     | )
|Net loss for the three months ended March 31, 2007                                     |  |             |  |                         |  |                        |  |             |  |                          |   |       |                    |  |   | (7,457                               | ) |  |                       |    |   |                   |   | (7,457 | ) |  |   | (7,457 | )
|                                                                                       |  |              |  |                          |  |                         |  |             |   |                          |   |        |                    |  |   |                                      |   |  |                       |     |   |                   |   |        |   |  |   |        |  
|Balance, March 31, 2007                                                                |  | 21,710,880   |  | 19,984                   |  | 2,516                   |  | $           | 2 |                          | $ | 49,016 |                    |  | $ | (30,022                              | ) |  | $                     | (50 | ) |                   | $ | 18,946 |   |  | $ | (7,458 | )
|                                                                                       |  |              |  |                          |  |                         |  |             |   |                          |   |        |                    |  |   |                                      |   |  |                       |     |   |                   |   |        |   |  |   |        |  



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

In thousands, except share data

(Unaudited)

As Restated



|                                                   |  |              |  |                          |  |                         |  |             |   |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |         |  
|-------------------------------------------------- |  | ------------ |  | ------------------------ |  | ----------------------- |  | ----------- | - | ------------------------ | - | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | --- | - | ----------------- | - | ------- | - |  | - | ------- | -
|                                                   |  | CommonShares |  | Series AAPreferredShares |  | Series BPreferredShares |  | CommonStock |   | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |     |   | ComprehensiveLoss |  
|Balance, January 1, 2007                           |  | 21,015,069   |  |                         |  | 2,516                   |  | $           | 2 |                          | $ | 19,297             |  | $ | (49,378                              | ) |  | $                     | (49 | ) |                   | $ | (30,128 | ) |  | $ |        |  
|Issuance of Series AA preferred stock              |  |             |  | 19,984                   |  |                        |  |             |  |                          |   |                   |  |   |                                     |   |  |                       |    |   |                   |   |        |   |  |   |        |  
|Stock-based compensation expense                   |  |             |  |                         |  |                        |  |             |  |                          |   | 1,432              |  |   |                                     |   |  |                       |    |   |                   |   | 1,432   |   |  |   |        |  
|Issuance of common stock                           |  | 695,811      |  |                         |  |                        |  |             |  |                          |   | 327                |  |   |                                     |   |  |                       |    |   |                   |   | 327     |   |  |   |        |  
|Foreign currency translation adjustment            |  |              |  |                          |  |                         |  |             |   |                          |   |                    |  |   |                                      |   |  |                       | (1  | ) |                   |   | (1      | ) |  |   | (1      | )
|Net loss for the three months ended March 31, 2007 |  |             |  |                         |  |                        |  |             |  |                          |   |                   |  |   | (41,707                              | ) |  |                       |    |   |                   |   | (41,707 | ) |  |   | (41,707 | )
|                                                   |  |              |  |                          |  |                         |  |             |   |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |         |  
|Balance, March 31, 2007                            |  | 21,710,880   |  | 19,984                   |  | 2,516                   |  | $           | 2 |                          | $ | 21,056             |  | $ | (91,085                              | ) |  | $                     | (50 | ) |                   | $ | (70,077 | ) |  | $ | (41,708 | )
|                                                   |  |              |  |                          |  |                         |  |             |   |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |         |  
|                                                   |  |              |  |                          |  |                         |  |             |   |                          |   | A                  |  |   | B                                    |   |  |                       |     |   |                   |   |         |   |  |   |         |  



|A | Reverse fair value of detachable warrants as originally recorded.
|- | -----------------------------------------------------------------

|B | Restatement adjustments to income statement.
|- | --------------------------------------------



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

In thousands, except share data

(Unaudited)

As Previously Reported



|                                                   |  |              |  |             |    |                          |   |         |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |        |  
|-------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------- | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | --- | - | ----------------- | - | ------- | - |  | - | ------ | -
|                                                   |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   |         | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |     |   | ComprehensiveLoss |  
|Balance, January 1, 2008                           |  | 123,752,039  |  | $           | 12 |                          | $ | 81,849  |                    |  | $ | (73,047                              | ) |  | $                     | (89 | ) |                   | $ | 8,725   |   |  | $ |       |  
|Stock warrants issued with debt financing          |  |             |  |             |   |                          |   | 1,083   |                    |  |   |                                     |   |  |                       |    |   |                   |   | 1,083   |   |  |   |       |  
|Reclassification of warrants to liability          |  |             |  |             |   |                          |   | (28,908 | )                  |  |   |                                     |   |  |                       |    |   |                   |   | (28,908 | ) |  |   |       |  
|Cashless warrant conversion                        |  | 2,358,506    |  |             |   |                          |   |        |                    |  |   |                                     |   |  |                       |    |   |                   |   |        |   |  |   |       |  
|Cashless exercise of stock options                 |  | 804,626      |  |             |   |                          |   |        |                    |  |   |                                     |   |  |                       |    |   |                   |   |        |   |  |   |       |  
|Registration rights penalty                        |  | 477,185      |  |             |   |                          |   | 241     |                    |  |   |                                     |   |  |                       |    |   |                   |   | 241     |   |  |   |       |  
|Debt to equity conversion                          |  | 19,591,890   |  |             | 2  |                          |   | 8,406   |                    |  |   |                                     |   |  |                       |    |   |                   |   | 8,408   |   |  |   |       |  
|Stock-based compensation expense                   |  |              |  |             |   |                          |   | 1,964   |                    |  |   |                                     |   |  |                       |    |   |                   |   | 1,964   |   |  |   |       |  
|Foreign currency translation adjustment            |  |              |  |             |   |                          |   |        |                    |  |   |                                     |   |  |                       | (6  | ) |                   |   | (6      | ) |  |   | (6     | )
|Net loss for the three months ended March 31, 2008 |  |              |  |             |   |                          |   |        |                    |  |   | (3,345                               | ) |  |                       |    |   |                   |   | (3,345  | ) |  |   | (3,345 | )
|                                                   |  |              |  |             |    |                          |   |         |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |        |  
|March 31, 2008                                     |  | 146,984,246  |  | $           | 14 |                          | $ | 64,635  |                    |  | $ | (76,392                              | ) |  | $                     | (95 | ) |                   | $ | (11,838 | ) |  | $ | (3,351 | )
|                                                   |  |              |  |             |    |                          |   |         |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |        |  



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CAPITAL GROWTH SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

In thousands, except share data

(Unaudited)

As Restated



|                                                     |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |       |  
|---------------------------------------------------- |  | ------------ |  | ----------- | -- | ------------------------ | - | ------------------ |  | - | ------------------------------------ | - |  | --------------------- | --- | - | ----------------- | - | ------- | - |  | - | ----- | -
|                                                     |  | CommonShares |  | CommonStock |    | AdditionalPaid-inCapital |   | AccumulatedDeficit |  |   | ForeignCurrencyTranslationAdjustment |   |  | Total Equity(Deficit) |     |   | ComprehensiveLoss |  
|Balance, January 1, 2008                             |  | 123,752,039  |  | $           | 12 |                          | $ | 77,462             |  | $ | (110,767                             | ) |  | $                     | (89 | ) |                   | $ | (33,382 | ) |  | $ |      |  
|Cashless warrant conversion                          |  | 2,358,506    |  |             |   |                          |   | 2,399              |  |   |                                     |   |  |                       |    |   |                   |   | 2,399   |   |  |   |      |  
|Cashless exercise of stock options                   |  | 804,626      |  |             |   |                          |   |                   |  |   |                                     |   |  |                       |    |   |                   |   |        |   |  |   |      |  
|Registration rights penalty                          |  | 477,185      |  |             |   |                          |   | 241                |  |   |                                     |   |  |                       |    |   |                   |   | 241     |   |  |   |      |  
|Debt to equity conversion                            |  | 19,591,890   |  |             | 2  |                          |   | 8,406              |  |   |                                     |   |  |                       |    |   |                   |   | 8,408   |   |  |   |      |  
|Stock-based compensation                             |  |              |  |             |   |                          |   | 1,964              |  |   |                                     |   |  |                       |    |   |                   |   | 1,964   |   |  |   |      |  
|Foreign currency translation adjustment              |  |              |  |             |   |                          |   |                   |  |   |                                     |   |  |                       | (6  | ) |                   |   | (6      | ) |  |   | (6    | )
|Net income for the three months ended March 31, 2008 |  |             |  |             |   |                          |   |                   |  |   | 2,888                                |   |  |                       |    |   |                   |   | 2,888   |   |  |   | 2,888 |  
|                                                     |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |       |  
|Balance, March 31, 2008                              |  | 146,984,246  |  | $           | 14 |                          | $ | 90,472             |  | $ | (107,879                             | ) |  | $                     | (95 | ) |                   | $ | (17,488 | ) |  | $ | 2,882 |  
|                                                     |  |              |  |             |    |                          |   |                    |  |   |                                      |   |  |                       |     |   |                   |   |         |   |  |   |       |  
|                                                     |  |              |  |             |    |                          |   | A                  |  |   | B                                    |   |  |                       |     |   |                   |   |         |   |  |   |       |  



|A | EITF 00-19 liability accounting adopted on January 1, 2008, with restatement, prior year impact is now recorded in proper period.
|- | ---------------------------------------------------------------------------------------------------------------------------------

|B | Restatement adjustments to income statement.
|- | --------------------------------------------



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|Item 8A(T). | Controls and Procedures.
|----------- | ------------------------

Managements Report on Internal
Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by
our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations, including the possibility of the circumvention or
overriding of controls. Therefore, even a system determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, internal control
effectiveness may vary over time.

Management has conducted an assessment of our internal control over financial reporting as of
December 31, 2007. Such assessment is required under Section 404 of the Sarbanes-Oxley Act of 2002 and was conducted using the criteria in Internal Control over Financial ReportingGuidance for Smaller Public Companies issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

As a result of that assessment, we identified
three material weaknesses with respect to our internal control over financial reporting:



| |  |  | We did not maintain a majority of independent directors and no financial expert on our Board has been designated;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | we have not yet deployed our staff and systems in a manner that allows for the desired level of segregation of duties to operate and be documented in a manner
sufficient to meet Sarbanes-Oxley standards that will need to be evidenced in the near term and;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | we did not adequately analyze the contingent terms of previous financing transactions in light of the volume of increasingly complex accounting and reporting
standards issued by various promulgating bodies.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Corporations annual or interim financial statements will not be prevented or detected on a timely basis.

In order to determine whether a control deficiency, or combination of control deficiencies, is a material weakness, management considers all relevant
information and evaluates the severity of each control deficiency that comes to its attention. Management also evaluates the effect of its compensating controls, which serve to accomplish the objective of another control that did not function
properly, helping to reduce risk to an acceptable level. To have a mitigating effect, the compensating control should operate at a level of precision that would prevent or detect a misstatement that could be material.

Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not
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 includes controls and procedures designed to ensure that information required to be disclosed in these reports is accumulated and communicated to our management, as appropriate to allow timely decisions regarding the
required disclosure.

Management is committed to continuing efforts aimed at improving the design adequacy and operational effectiveness of
its system of internal control. During 2008, the Company will implement the following remediation activities to improve the Companys internal control over financial reporting:



| |  |  | Continuation of our search for an independent director to fill the remaining vacancy on our seven-member Board of Directors. We are also considering whether to add
two independent directors or to replace an inside director with an independent director, in both cases, in order to have a majority of our Board of Directors become independent. We will determine whether any of its current directors is a financial
expert and, if not, will ensure that one of the new directors is a financial expert. (See the Subsequent Events footnote to the financial statements for further information.) In addition, we will adopt audit committee best practices as
recommended by the Treadway Commission and the major stock exchanges;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | utilization of external consultants to assist in the implementation and design of policies and procedures to meet the required documentation and effectiveness
requirements for internal control over financial reporting under the Sarbanes-Oxley Act and to adequately address the lack of segregation of duties within the financial reporting process and;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | utilization of external consultants to assist in the planning for, and in advance of the execution of, the accounting treatment of complex transactions and
financings given the unforeseen effects driven by complex accounting standards.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Even with these changes, due to the
increasing number and complexity of pronouncements, emerging issues and releases, and reporting requirements and regulations, we expect there will continue to be some risk related to financial disclosures. The process of identifying risk areas and
implementing the many facets of internal control over financial reporting as required under the Sarbanes-Oxley Act continues to be complex and subject to significant judgment and may result in the identification in the future of areas where we may
need additional resources.

As described below, there were changes in our internal control over financial reporting that occurred during
the fiscal quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Late in 2006, we completed our acquisitions of 20/20, Magenta, CentrePath, and GCG. Since these entities had limited resources for processing accounting
information and financial reporting, we concluded a material weakness existed at that time related to proper segregation of duties at those locations. In the fourth quarter of 2007, we continued our integration of existing accounting systems and
processes by means of centralization and additional staffing. We also initiated new risk assessment and documentation standards.



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This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only managements report in this annual report.

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(T) for a
more complete understanding of the matters covered by the certifications.

PART III



|Item 13. | Exhibits.
|-------- | ---------

The Financial Statements and Financial
Statement Schedules filed as part of this Report are set forth in Item 7. The Statement regarding the computation of share earnings filed as part of this report is set forth in the accompanying notes to the financial statements. The Statement
regarding the Code of Ethics filed as part of this Report is set forth in Item 9. The annual report to the Security holders filed as part of this report is set forth in Items 3, 5 through 12, and 14.

See Exhibit Index below for a description of the documents that are filed as Exhibits to this report on Form 10-KSB or incorporated by reference herein.
We will furnish a copy of any Exhibit to a security holder upon request.



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SIGNATURES

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



CAPITAL GROWTH SYSTEMS, INC.By:

/s/ Patrick C. ShuttPatrick C. Shutt, Chief Executive Officer/s/ Jim McDevittJim McDevitt, Chief Financial and Accounting Officer


Dated: August 14, 2008



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EXHIBIT INDEX



|              |  |                                                                                                                         
|------------- |  | ------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                 
|31.1          |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                        
|              | 
|31.2          |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*                                        
|              | 
|32            |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

References



|* | Filed herewith.
|- | ---------------



71