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, and Houston, 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, including 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 customer contracts entered into since mid-2008 and continued success in closing these types of contracts will move the Company into profitability. In addition to those new contracts, Management believes that the inclusion of VDUL's business and cash flows will have a positive impact on future results. At the same time, expenses are managed closely and lower-cost outsource opportunities are given case-by-case consideration.

As of September 30, 2009, the Company's current liabilities exceeded its current assets by $22.6 million. Included in the current liabilities is $12.0 million of current maturities of long-term debt, net of $32.1 million of debt discount associated with the year-to-date fair value of related warrants and embedded derivatives and $23.1 million associated with original issue discount and imputed interest. Cash on hand at September 30, 2009 was $2.2 million (not including $0.6 million restricted for outstanding letters of credit). The Company reported a net loss from continuing operations of $33.2 million and $15.4 million for the nine-month periods ended September 30, 2009 and 2008, respectively. The results for 2009 include non-cash expenses of $1.5 million relating to the accounting treatment for stock and options. The current period includes non-cash charges of $12.3 million from the change in fair value of embedded derivatives and warrants, and $8.9 million of non-cash charges from the change in debt discounts. The results for the nine-month period ended September 30, 2008 include $5.6 million in non-cash expenses relating to the accounting treatment for stock and options, $11.9 million related to the amortization of debt discount, and non cash gain on warrants and derivatives of $10.2 million.

Cash used in operating activities from continuing operations was $7.7 million and $9.5 million for the nine-month period ended September 30, 2009 and 2008, respectively. The Company's net working capital deficiency, recurring operating 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 customer contracts entered into since mid-2008 and continued success in closing these types of contracts are expected to move the Company into profitability. In addition to those new contracts, Management believes that the inclusion of VDUL's business and cash flows will have a positive impact on future results. 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 2008 and 2009. The major components are summarized below:

• On March 11, 2008, the Company closed on $19.0 million of Senior Secured Convertible debentures. Approximately $8.8 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. The remaining proceeds were used for working capital purposes and to support the Company's successful new business development efforts.

• The Variable Rate Senior Secured Convertible Debentures issued on March 11, 2008 included a provision that, on the 210th calendar day after issuance, the conversion price for the debentures would be reduced to 90% of the volume weighted average price for the five trading days immediately prior to that date. The contemplated 210-day period ended on October 7, 2008 and the new conversion price was determined to be $0.24 per share. This value was used in determining the liability for warrants to purchase common stock and the embedded derivatives of convertible debt instruments.

• On November 20, 2008, the Company entered into an Interest and Loan Purchase Agreement (the "ILPA") with Vanco plc, a U.K. corporation in administration ("Seller") to purchase all of the outstanding membership interests (the "Interests") of Vanco Direct USA, LLC ("VDUL"). In order to finance the purchase of the Interests, the Company entered into the following additional agreements, inter alia, to be effective as of the funding of the transaction: (i) a Term Loan and Security Agreement ("Term Loan") pursuant to which the Company agreed to borrow $8.5 million from the senior lender(s); (ii) a Consent, Waiver, Amendment, and Exchange Agreement with holders of its outstanding Senior Secured Convertible Debentures issued on March 11, 2008, pursuant to which the holders waived and amended certain conditions and enabled the Company to enter into the Term Loan Agreement and issue the November Debentures (defined below) and the other transactions referenced below; (iii) a new Securities Purchase Agreement (the "November SPA") pursuant to which the Company agreed to issue to certain holders of the March Debentures and to certain additional designated purchasers (including Aequitas Catalyst Fund, LLC, which agreed to convert its September 30, 2008, $500,000 loan to the Company into a November Debenture) an additional $9.0 million of purchase price amount of junior original issue discount secured convertible debentures (the "November Debentures"), convertible at $0.24 per share, subject to anti-dilution adjustment coupled with warrants exercisable at $0.24 per share, subject to anti-dilution adjustment; and (iv) an unsecured $3.0 million convertible debenture to be issued to the Seller; and (v) certain intercreditor agreements among the parties.

• Effective July 31, 2009 and August 24, 2009, the Company issued two tranches that totaled $10.5 million of principal amount of original issue discount convertible senior secured debentures (July Debentures), representing the funding of $6.0 million of subscription amount (inclusive of $0.4 million of subscriptions credited against liabilities of the Company to the respective holders) and $4.5 million of original issue discount added to principal, coupled with warrants to purchase up to 18.7 million shares of Common Stock, all exercisable or convertible at $0.24 per share (the July Warrants and coupled with the July Debentures, the Units). The transaction resulted in proceeds to the Company of $5.6 million, before $0.2 million of financing fees.

• The Company has established a vendor payment plan designed to reduce past due obligations to certain of its vendors over time. In conjunction with the Second Amendment to the Loan Agreement, the Company issued $1.2 million subscription value, equal to the amount of vendor obligations, with a 65% original issue discount (OID) factor as Vendor Payment Plan Debentures, due November 2011, convertible at $0.24 per share into 8.3 million shares of common stock, along with 3.4 million detachable warrants expiring five years from the date of the authorized share increase. The VPP Security Agreement is substantially a similar form of security agreement (the "VPP Security Agreement") as applicable to the July Security Agreement, with Aequitas to serve as the Collateral Agent.

Results for the three-month period ended September 30, 2009 compared to 2008

Continuing Operations

Total revenues for the three-month period ended September 30, 2009 were $16.5 million compared to $5.8 million for the same period in 2008, representing a 184% increase. This increase is primarily due to the acquisition of VDUL.

Revenues generated from Optimization Solutions totaled $2.5 million for the three-month period ended September 30, 2009 compared to $2.2 million for the same period in 2008, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $14.0 million for the three-month period ended September 30, 2009 compared to $3.6 million for the same period in 2008, which is from the delivery of turn-key global networks and system management services.

The consolidated gross margin rate was 24% for the three-month period ended September 30, 2009 compared to 31% for the same period in 2008. This decrease was driven primarily by the decrease in margins associated with Connectivity revenues. Optimization Solutions' gross margin totaled $1.4 million or 57% for the three-month period ended September 30, 2009 as compared to $1.0 million or 45% for the same period in 2008. Connectivity Solutions' margin totaled $2.5 million or 18% compared to $0.8 million or 23% for the same period in 2008.

Operating expenses for the three-month periods ended September 30, 2009 and 2008 consist of the following:

                                              Three-month periods ended
                                                    September 30,
                                                2009             2008
            Compensation                    $       2,747    $       3,319
            Professional services                   1,658            2,218
            Depreciation and amortization           1,139              446
            Other operating expenses                1,168              943

            Total operating expenses        $       6,712    $       6,926

Compensation expense decreased $0.6 million for the three-month period ended September 30, 2009 as compared to 2008. Included in compensation expense for 2009 are non-cash charges of $0.5 million related to the accounting treatment of certain stock option grants as compared to $1.3 million for the same period in 2008.

Professional services decreased $0.6 million for the three-month period ended September 30, 2009 as compared to the three-month period ended September 30, 2008, due to the decrease in advisory fees.

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 increased by $0.7 million for the three-month period ended September 30, 2009 as compared to September 30, 2008. This increase was due primarily to the acquisition of $19.4 million of intangible assets in November 2008 with the acquisition of VDUL.

Other operating expenses increased $0.2 million for the three-month period ended September 30, 2009 as compared to the same period for 2008. 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, 2009 reflect interest of $4.3 million, an increase of $2.4 million from the three-month period ended September 30, 2008. Interest expense for the three-month periods ended September 30, 2009 and 2008 includes $3.9 million and $0.9 million, respectively, related to the amortization of the fair value assigned to the warrants and embedded derivatives issued with debt.

Results for the three-month period ended September 30, 2009 reflect a gain on warrants and derivatives of $7.6 million compared to a loss of $0.8 million for the comparable period in 2008. The current quarter's gain was driven mainly by the $0.03 decrease of the September 30, 2009 closing price of $0.15 versus the June 30, 2009 closing price of $.18, issuance of an additional 22.5 million warrants, and embedded derivatives with debentures convertible into 52.0 million shares of common stock in connection with the July Debentures and the VPP Debentures, while 2008 included the effects of a modest amount of cashless exercises. The Company has revalued the warrant and embedded derivative liabilities 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

The gain from discontinued operations for the three-month periods ended September 30, 2009 and September 30, 2008 was de minimis. 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, 2009 compared to 2008

Continuing Operations

Total revenues for the nine-month period ended September 30, 2009 were $48.6 million compared to $24.0 million for the same period in 2008, representing a 103% increase. This increase is primarily due to the acquisition of VDUL.

Revenues generated from Optimization Solutions totaled $7.1 million for the nine-month period ended September 30, 2009 compared to $13.7 million for the same period in 2008, which represents optimization consulting, automated pricing software, remote management services, and professional services. The Connectivity Solutions business recorded $41.5 million for the nine-month period ended September 30, 2009 compared to $10.3 million for the same period in 2008, which is from the delivery of turn-key global networks and system management services.

The consolidated gross margin rate was 23% for the nine-month period ended September 30, 2009 compared to 47% for the same period in 2008. This decrease was driven primarily by the decrease in higher margin revenue from Optimization Solutions. Optimization Solutions' gross margin totaled $3.5 million or 49% for the nine-month period ended September 30, 2009 as compared to $10.0 million or 74% for the same period in 2008. Connectivity Solutions' margin totaled $7.7 million or 18% compared to $1.3 million or 12% for the same period in 2008.

Operating expenses for the first nine-months of 2009 and 2008 consist of the following:

                                               Nine-month periods ended
                                                    September 30,
                                                2009             2008
            Compensation                    $       9,459    $      12,410
            Professional services                   5,001            5,765
            Depreciation and amortization           3,415            1,411
            Other operating expenses                3,543            2,776

            Total operating expenses        $      21,418    $      22,362

Compensation expense decreased $3.0 million for the nine-month period ended September 30, 2009 as compared to 2008. Included in compensation expense for 2009 are non-cash charges of $1.5 million related to the accounting treatment of certain stock option grants as compared to $5.6 million for the same period in 2008.

Professional services decreased $0.8 million for the nine-month period ended September 30, 2009 as compared to the nine-month period ended September 30, 2008, due to fewer advisory fees incurred.

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 increased by $2.0 million for the nine-month period ended September 30, 2009 as compared to September 30, 2008. This increase was due primarily to the acquisition of $19.4 million of intangible assets in November 2008 with the acquisition of VDUL.

Other operating expenses increased $0.8 million for the nine-month period ended September 30, 2009 as compared to the same period for 2008. 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, 2009 reflect interest of $10.5 million, an increase of $3.4 million from the nine-month period ended September 30, 2008. Interest expense for the nine-month periods ended September 30, 2009 and 2008 includes $8.9 million and $12.2 million, respectively, related to the amortization of the fair value assigned to the warrants and embedded derivatives issued with debt.

Results for the nine-month period ended September 30, 2009 reflect a loss on warrants and derivatives of $12.3 million compared to a gain of $10.2 million for the comparable period in 2008. The current year's loss was driven mainly by the $0.04 increase of the $0.11 closing share price of December 31, 2008 versus the September 30, 2009 closing price of $0.15, issuance of an additional 22.5 million warrants, and embedded derivatives with debentures convertible into 52.0 million shares of common stock in connection with the July Debentures and the VPP Debentures, while 2008 included the effects of a modest amount of cashless exercises. In accordance with ASC 815-10, 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

The gain from discontinued operations for the nine-month periods ended September 30, 2009 and September 30, 2008 was de minimis. The decreases in revenue and gain from discontinued operations were due to the sale of Frontrunner and Nexvu.

Liquidity and Capital Resources

Cash used in operating activities from continuing operations for the nine-month . . .