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

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.

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 employs 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 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 demand among its clients for its novel products. The successful delivery on major contracts signed in the last year is anticipated to put the Company into a sustained period of growth of profitability. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

Cash on hand at September 30, 2008 was $2.4 million (including $0.2 million restricted for outstanding letters of credit). The Company has incurred net losses from continuing operations of $11.1 million and $3.9 million for the nine-month periods ended September 30, 2008 and 2007, respectively. Results for 2008 to date include $6.8 million in non-cash expenses relating to the accounting treatment for stock-based compensation as well as professional services purchased with warrants. Cash used in operating activities from continuing operations was $9.5 million and $7.2 million for the nine-month periods ended September 30, 2008 and 2007, respectively. The Company's recurring losses and negative cash flows from operations raise substantial 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, as evidenced by the $19.0 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 is being used for operations and to support the Company's successful new business development efforts.

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 actively marketed the two companies. 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 for the three-month period ended September 30, 2008 compared to 2007

Continuing Operations

Total revenues for the three-month period ended September 30, 2008 were $5.8 million compared to $4.4 million for the same period in 2007, representing a 32% increase. This increase is primarily due to a significant new contract in our Connectivity Solutions line of business.

Revenues generated from Optimization Solutions totaled $2.2 million for the three-month period ended September 30, 2008 compared to $1.9 million for the same period in 2007, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $3.6 million for the three-month period ended September 30, 2008 compared to $2.5 million for the same period in 2007, which is from the delivery of turn-key global networks and system management services. The increase was driven by a large novation customer that was initiated in the fourth quarter of 2007.

The consolidated gross margin rate was 31% for the three-month period ended September 30, 2008 compared to 27% for the same period in 2007. This increase was driven primarily by the delivery of higher margin connectivity consulting services to the new customer mentioned above. Optimization Solutions' gross margin totaled $1.0 million or 45% for the three-month period ended September 30, 2008 as compared to $0.8 million or 43% for the same period in 2007. Connectivity Solutions' margin totaled $0.8 million or 23% compared to $0.4 million or 16% for the same period in 2007.

Operating expenses for the third quarters of 2008 and 2007 consists of the following:

                                                 Three Months Ended
                                                    September 30,
                                                               2007
                                               2008        (As Restated)
                                                   (in thousands)
            Compensation                    $    3,319    $         3,499
            Professional services                2,218                468
            Depreciation and amortization          446                879
            All other operating expenses           943                996

            Total operating expenses        $    6,926    $         5,842

Compensation expense was down slightly at $3.3 million for the three-month period ended September 30, 2008 as compared to 2007. Included in compensation expense for 2008 are non-cash charges of $1.3 million related to the accounting treatment (pursuant to SFAS 123R) of certain stock option grants as compared to $1.0 million for the same period in 2007. Other compensation expense is lower in 2008 by $0.5 million due in part to lower operations staffing levels in several locations.

Professional services increased $1.7 million for the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007, due in part to additional advisory expenses and utilization of outside contractors in lieu of full-time staff for certain projects.

Depreciation and amortization expense relates primarily to the Network Operating Center in the suburbs of Boston and the fair value assigned to the Company's intellectual property. Depreciation and amortization decreased by $0.4 million for the three-month period ended September 30, 2008 as compared to the three-month period ended September 30, 2007. This decrease was due primarily to lower depreciation resulting from the sale of certain fixed assets during 2007 and certain assets becoming fully depreciated during the same time frame.

Other operating expenses were down slightly for the three-month period ended September 30, 2008 as compared to the same period for 2007. 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 three-month period ended September 30, 2008 reflect interest of $1.9 million, a decrease of $1.5 million from the three-month period ended September 30, 2007. Interest expense for the three-month periods ended September 30, 2008 and 2007 includes $1.4 million and $1.3 million, respectively, related to the amortization of the fair value assigned to the warrants and embedded derivatives issued with debt. The weighted average interest rate was 8.0% and 12.5% for the three-month periods ended September 30, 2008 and 2007, respectively.

Results for the three-month period ended September 30, 2008 reflect a gain on warrants and derivatives of $1.7 million compared to a gain of $15.3 million for the comparable period in 2007. The current and prior year's gain was driven mainly by the decrease in the Company's stock price while 2008 included the effects of a modest amount of cashless exercises. 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 statement of operations.

Discontinued Operations

Total revenues for the three-month period ended September 30, 2008 were $8,000 compared to $2.4 million for the same period in 2007. The loss from discontinued operations for the three-month period ended September 30, 2008 was $18,000 compared to a $4.7 million loss for the same period in 2007. The decreases in revenue and loss from discontinued operations were due to the sale of Frontrunner and Nexvu.

Results for the nine-month period ended September 30, 2008 compared to 2007

Continuing Operations

Total revenues for the nine-month period ended September 30, 2008 were $24.0 million compared to $12.6 million for the same period in 2007, representing a 90% increase. This increase is primarily due to the recognition of revenue in 2008 in connection with significant new contracts in both the Optimization Solutions and Connectivity Solutions lines of business.

Revenues generated from Optimization Solutions totaled $13.7 million for the nine-month period ended September 30, 2008 compared to $5.7 million for the same period in 2007, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $10.3 million for the nine-month period ended September 30, 2008 compared to $6.9 million for the same period in 2007, which is from the delivery of turn-key global networks and system management services. The increase was driven by a large novation customer that was initiated in the fourth quarter of 2007.

The consolidated gross margin rate was 47% for the nine-month period ended September 30, 2008 compared to 31% for the same period in 2007. This increase was driven primarily by the delivery of higher margin optimization services to the new customer mentioned above. Optimization Solutions' gross margin totaled 10.0 million or 74% for the nine-month period ended September 30, 2008 as compared to $2.6 million or 46% for the same period in 2007. Connectivity Solutions' margin totaled $1.3 million or 12% - which is net of the upfront cost of a novation for a large customer - compared to $1.3 million or 18% for the same period in 2007.

Operating expenses for the nine-month periods ended September 30, 2008 and 2007 consists of the following:

                                                  Nine Months Ended
                                                    September 30,
                                                               2007
                                                2008       (As Restated)
                                                    (in thousands)
             Compensation                    $   12,410   $        11,536
             Professional services                5,765             1,595
             Depreciation and amortization        1,411             2,594
             All other operating expenses         2,777             2,608

             Total operating expenses        $   22,363   $        18,333

Included in compensation expense for 2008 are non-cash charges of $5.6 million related to the accounting treatment (pursuant to SFAS 123R) of certain stock option grants as compared to $5.1 million for the same period in 2007. Other compensation expense increased $0.4 million for the nine-month period ended September 30, 2008 as compared to the nine-month period ended September 30, 2007, due in part to higher commission expense, which is consistent with the increase in revenue.

Professional services expense increased $4.2 million for the nine-month period ended September 30, 2008 as compared to the nine-month period ended September 30, 2007, due mainly to additional advisory services needed to support financing activities. Non-cash charges from the amortization of warrants issued to service providers included in the above totaled $1.2 million. In addition, we utilized outside contractors in lieu of full-time staff for certain projects.

Depreciation and amortization expense relates primarily to the Network Operating Center in the suburbs of Boston and the fair value assigned to the Company's intellectual property. Depreciation and amortization decreased by $1.2 million for the nine-month period ended September 30, 2008 as compared to the nine-month period ended September 30, 2007. This decrease was due primarily to lower depreciation resulting from the sale of certain fixed assets during 2007 and certain assets becoming fully depreciated during the same period.

Other operating expenses increased $0.2 million for the nine-month period ended September 30, 2008 as compared to the same period for 2007. Increased travel related to new European Union-based customers drove this change.

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 nine-month period ended September 30, 2008 reflect interest of $15.0 million, a decrease of $20.8 million from the nine-month period ended September 30, 2007. Interest expense for the nine-month periods ended September 30, 2008 and 2007 includes $ 12.2 million and $27.8 million, respectively, related to the amortization of the fair value assigned to the warrants and embedded derivatives issued with debt. The weighted average interest rate was 9.4% and 12.5% for the nine-month periods ended September 30, 2008 and 2007, respectively.

Results for the nine-month period ended September 30, 2008 reflect a gain on warrants and derivatives of $17.1 million compared to a gain of $44.8 million for the comparable period in 2007. The prior year gain was driven mainly by the decrease in the Company's stock price while 2008 to date benefitted from the payoff of the Senior and Junior Secured Facilities in the first quarter. 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 statement of operations.

Discontinued Operations

Total revenues for the nine-month period ended September 30, 2008 were $1.0 million compared to $7.3 million for the same period in 2007. The loss from discontinued operations for the nine-month period ended September 30, 2008 was $0.1 million compared to $5.5 million for the same period in 2007. The decreases in revenue and loss from discontinued operations were due to the sale of Frontrunner and Nexvu.

In February 2008, we 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 $0.9 million and the Buyer assumed Frontrunner's indebtedness to a material supplier that had a remaining principal amount of $0.6 million. Approximately $0.1 million 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. In August 2008, we entered into an Asset Purchase Agreement with an unaffiliated party pursuant to which Nexvu sold substantially all of its assets. The purchase price was $0.25 million. Half was paid at closing and the balance, represented by a promissory note, is due in early 2009. The gain on sale of discontinued operations for the nine-month period ended September 30, 2008 was $0.7 million.

Liquidity and Capital Resources

Cash used in operating activities from continuing operations for the nine-month period ended September 30, 2008 was principally due to the net loss from continuing operations of $11.1 million. The primary variance between operating loss and net cash used in operating activities from continuing operations for the nine-month period ended September 30, 2008 was due to non-cash charges of $12.2 million for the amortization of debt discount, $5.6 million for stock-based compensation expense, $1.4 million of depreciation and amortization, and the $2.5 million of accrued registration rights penalty. This was offset by the $17.5 million increase in the fair value of the embedded derivates and warrants, and an increase in accounts receivable of $6.6 million primarily related to a significant new contract in our Optimization Solutions line of business. The variance between the operating loss and net cash used in operating activities from continuing operations during the nine-month period ended September 30, 2007 was primarily due to the non-cash charges of $27.8 million for stock warrant expense related to debt financing and a non-cash credit of $44.7 million on the increase in the fair value of embedded derivates and warrants.

The cash used in investing activities from continuing operations during the nine-month periods ended September 30, 2008 and 2007 was $57,000 and $0.5 million, respectively. Our capital expenditures in both 2008 and 2007 consisted primarily of computer-related equipment. Although we currently do not anticipate any significant capital expenditures in the near future, we may have a need to make similar additional capital expenditures related to the integration of our operations.

Net cash provided by financing activities from continuing operations during the nine-month period ended September 30, 2008 and 2007 was $10.6 million and $8.8 million, respectively. The cash provided from financing activities during the nine-month period ended September 30, 2008 resulted from the sale of the secured convertible debentures of $19.0 million completed on March 11, 2008. These proceeds were partially offset by the repayment of the Senior Secured and Junior Secured facilities and financing payments on the secured convertible debentures. The remaining proceeds were retained for working capital purposes. The cash provided from financing activities during the nine-month period ended September 30, 2007 was the result of the debt and equity offerings funded primarily during the three-month period ended June 30, 2007. We also generated cash from the issuance of the Senior Secured and Junior Secured credit . . .