As
filed with the Securities and Exchange Commission on November 14,
2008




UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q





[X]QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended September 30, 2008





OR





[   ]TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from ____________ to ________________





Commission
File No.: 001-32620





QSGI
INC.


(Exact
name of registrant as specified in its charter)





Delaware
              (State
      or other jurisdiction of
              incorporation)
            13-2599131
              (I.R.S.
      Employer
              Identification
      No.)





400
Royal Palm Way, Palm Beach, FL  33480


(Address
of Principal Executive Offices)





(561)
835-9757


(Registrants'
Telephone Number, including area code)





Indicate by check
mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding
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 [ 
]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (check one):





Large accelerated filer [ 
      ]
            Accelerated
      filer [  ]
            Non- accelerated filer [ 
      ]


Small Reporting
Company [x]





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





The
number of outstanding common shares, par value $.01, of the registrant as of
October 1, 2008 was 45,797,716.




QSGI
INC.


QSGI
      INC.TABLE
      OF CONTENTSItem
              Description
              PagePART
      I – FINANCIAL INFORMATION1.
              Financial
      Statements (all
      unaudited)Condensed
      Consolidated Balance Sheets –
                September
      30, 2008 and December 31, 2007
              1Condensed
      Consolidated Statements of Operations –
                Three
      and Nine Months Ended September 30, 2008 and 2007
              2Condensed
      Consolidated Statement of Stockholders’ Equity –
                Nine
      Months Ended September 30, 2008
              3Condensed
      Consolidated Statements of Cash Flows –
                Nine
      Months Ended September 30, 2008 and 2007
              4Notes
      to Condensed Consolidated Financial Statements
              52.
              Management’s
      Discussion and Analysis of Financial Condition
                and
      Results of Operations
              113.
              Quantitative
      and Qualitative Disclosures About Market Risk
              234.
              Controls
      and Procedures
              23PART
      II – OTHER INFORMATION1.
              Legal
      Proceedings
              241A.
              Risk
      Factors
              252.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              253.
              Defaults
      Upon Senior Securities
              254.
              Submission
      of Matters to a Vote of Security Holders
              255.
              Other
      Information
              256.
              Exhibits
              25SIGNATURES
              26EXHIBITS
              27






i
 QSGI
INC.





CONDENSEDCONSOLIDATED BALANCE SHEETS


(Unaudited)


September
      30,
            
            
            December
      31,2008
            
            
            2007AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            435,210
            
            
            $
            127,723Accounts
      receivable, net of reserve of $1,000,510 and $955,599 in 2008 and 2007,
      respectively
            
            
            3,391,883
            
            
            
            3,853,362Inventories
            
            
            5,333,508
            
            
            
            6,578,031Prepaid
      expenses and other assets
            
            
            260,356
            
            
            
            163,553Total Current
      Assets
            
            
            9,420,957
            
            
            
            10,722,669Property
      and Equipment, Net
            
            
            808,967
            
            
            
            286,766Goodwill
            
            
            7,934,627
            
            
            
            1,489,621Intangibles,
      Net
            
            
            6,138,895
            
            
            
            470,348Other
      Assets
            
            
            304,929
            
            
            
            448,066$
            24,608,375
            
            
            $
            13,417,470Liabilities
      And Stockholders’ Equity (Deficit)Current
      LiabilitiesRevolving
      line of credit, net of original issue discount
            
            $
            3,459,153
            
            
            $
            3,754,061Notes
      payable - current
            
            
            674,854
            
            
            
            –Accounts
      payable
            
            
            3,627,662
            
            
            
            1,109,940Accrued
      expenses
            
            
            1,353,055
            
            
            
            654,461Accrued
      payroll
            
            
            368,177
            
            
            
            88,818Deferred
      revenue
            
            
            609,938
            
            
            
            439,865Other
      liabilities
            
            
            352,520
            
            
            
            311,610Total Current
      Liabilities
            
            
            10,445,359
            
            
            
            6,358,755Notes
      Payable – Principal Stockholders
            
            
            10,000,000
            
            
            
            –Common
      Stock to be Issued
            
            
            73,950
            
            
            
            –Long-Term
      Deferred Revenue
            
            
            22,000
            
            
            
            142,772Deferred
      Income Taxes
            
            
            27,300
            
            
            
            27,300Total
    Liabilities
            
            
            20,568,609
            
            
            
            6,528,827Redeemable
      Convertible Preferred Stock
            
            
            4,252,995
            
            
            
            4,238,685Stockholders’
      Equity (Deficit)Preferred
      shares: Authorized 5,000,000 shares in 2008and
      2007, $0.01 par value, none issued
            
            
            –
            
            
            
            –Common
      shares: authorized 95,000,000 shares in 2008 and 2007, $0.01 par value;
      46,547,716 shares issued and outstanding in 2008, of which 10,000,000
      shares were contingent acquisition shares held in escrow; 31,172,716
      shares issued and outstanding in 2007
            
            
            365,477
            
            
            
            311,727Additional
      paid-in capital
            
            
            16,406,413
            
            
            
            14,134,298Retained
      earnings (deficit)
            
            
            (16,985,119
            )
            
            
            (11,796,067
            )Total Stockholders’ Equity
      (Deficit)
            
            
            (213,229
            )
            
            
            2,649,958$
            24,608,375
            
            
            $
            13,417,470




See
the accompanying notes to financial statements.


Page
1
 QSGI
INC.





CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS


For
The Three and Nine Months Ended September 30, 2008 and 2007


(Unaudited)





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Product
      Revenue
            
            $
            3,755,135
            
            
            $
            6,753,288
            
            
            $
            14,143,562
            
            
            $
            22,659,971Service
      Revenue
            
            
            4,874,182
            
            
            
            2,003,599
            
            
            
            8,788,569
            
            
            
            5,156,272Total
      Revenue
            
            
            8,629,317
            
            
            
            8,756,887
            
            
            
            22,932,131
            
            
            
            27,816,243Cost
      Of Products Sold
            
            
            4,073,829
            
            
            
            6,018,499
            
            
            
            14,384,068
            
            
            
            18,731,156Cost
      Of Services Sold
            
            
            2,864,291
            
            
            
            654,474
            
            
            
            4,226,144
            
            
            
            1,830,475Total
      Cost Of Sales
            
            
            6,938,120
            
            
            
            6,672,973
            
            
            
            18,610,212
            
            
            
            20,561,631Gross
      Profit
            
            
            1,691,197
            
            
            
            2,083,914
            
            
            
            4,321,919
            
            
            
            7,254,612Selling,
      General And Administrative Expenses
            
            
            3,482,461
            
            
            
            1,904,476
            
            
            
            8,241,341
            
            
            
            6,897,779Depreciation
      And Amortization
            
            
            201,187
            
            
            
            181,079
            
            
            
            516,907
            
            
            
            520,796Interest
      Expense, net
            
            
            465,251
            
            
            
            166,798
            
            
            
            721,693
            
            
            
            297,990Loss
      Before Provision (Benefit) For Income Taxes
            
            
            (2,457,702
            )
            
            
            (168,439
            )
            
            
            (5,158,022
            )
            
            
            (461,953
            )Provision
      (Benefit) For Income Taxes
            
            
            (3,737
            )
            
            
            (55,257
            )
            
            
            31,030
            
            
            
            (133,370
            )Net
      Loss
            
            
            (2,453,965
            )
            
            
            (113,182
            )
            
            
            (5,189,052
            )
            
            
            (328,583
            )Preferred
      Stock Dividends
            
            
            65,030
            
            
            
            65,031
            
            
            
            193,678
            
            
            
            192,970Accretion
      To Redemption Value of Preferred Stock
            
            
            4,842
            
            
            
            4,560
            
            
            
            14,310
            
            
            
            13,478Net
      Loss Available to Common Stockholders
            
            $
            (2,523,837
            )
            
            $
            (182,773
            )
            
            $
            (5,397,040
            )
            
            $
            (535,031
            )Net
      Loss Per Common Share – Basic
            
            $
            (0.07
            )
            
            $
            (0.01
            )
            
            $
            (0.16
            )
            
            $
            (0.02
            )Net
      Loss Per Common Share – Diluted
            
            $
            (0.07
            )
            
            $
            (
      0.01
            )
            
            $
            (0.16
            )
            
            $
            (0.02
            )Weighted
      Average Number Of Common Shares Outstanding –Basic
            
            
            36,506,955
            
            
            
            31,172,716
            
            
            
            33,292,242
            
            
            
            31,172,716Weighted
      Average Number Of Common Shares Outstanding –Diluted
            
            
            36,506,955
            
            
            
            31,172,716
            
            
            
            33,292,242
            
            
            
            31,172,716





See the accompanying notes
to financial statements.


Page
2
 QSGI
INC.





CONDENSEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(DEFICIT)


For
The Nine Months Ended September 30, 2008


(Unaudited)








Additional
            
            
            Retained
            
            
            TotalCommon
      Stock
            
            
            Paid-in
            
            
            Earnings
            
            
            Stockholders’Number
            
            
            Amount
            
            
            Capital
            
            
            (Deficit)
            
            
            Equity
      (Deficit)Balance
      (Deficit) - December 31, 2007
            
            
            31,172,716
            
            
            $
            311,727
            
            
            $
            14,134,298
            
            
            $
            (11,796,067
            )
            
            $
            2,649,958Stock
      Option Compensation
            
            
            –
            
            
            
            –
            
            
            
            142,225
            
            
            
            –
            
            
            
            142,225Stock
      Issued For Financing
            
            
            1,875,000
            
            
            
            18,750
            
            
            
            315,000
            
            
            
            –
            
            
            
            333,750Preferred
      Stock Dividends
            
            
            –
            
            
            
            –
            
            
            
            (193,678
            )
            
            
            –
            
            
            
            (193,678
            )Stock
      Issued For Acquisition
            
            
            3,500,000
            
            
            
            35,000
            
            
            
            735,000
            
            
            
            –
            
            
            
            770,000Warrants
      Issued For Acquisition Of CCSI
            
            
            –
            
            
            
            –
            
            
            
            1,287,878
            
            
            
            –
            
            
            
            1,287,878Accretion
      To Redemption Value Of Preferred Stock
            
            
            –
            
            
            
            –
            
            
            
            (14,310
            )
            
            
            –
            
            
            
            (14,310
            )Net
      Loss
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (5,189,052
            )
            
            
            (5,189,052
            )Balance
      (Deficit) – September 30, 2008
            
            
            36,547,716
            
            
            $
            365,477
            
            
            $
            16,406,413
            
            
            $
            (16,985,119
            )
            
            $
            (213,229
            )




See the accompanying notes
to financial statements.


Page
3
 QSGI
INC.





CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS


For
The Nine Months Ended September 30, 2008 and 2007


(Unaudited)





2008
            
            
            2007Cash
      Flows From Operating ActivitiesNet Loss
            
            $
            (5,189,052
            )
            
            $
            (215,401
            )Adjustments to reconcile net
      loss to net cash provided by operating activities:Depreciation
      and amortization
            
            
            516,907
            
            
            
            339,717Non-cash
      interest expense
            
            
            64,833
            
            
            
            –Stock
      option compensation expense
            
            
            142,225
            
            
            
            7,300Deferred
      income taxes
            
            
            –
            
            
            
            (99,170
            )Provision
      for doubtful accounts
            
            
            327,727
            
            
            
            (11,212
            )Changes
      in assets and liabilities, net of effects of acquisition:Accounts
    receivable
            
            
            1,066,773
            
            
            
            1,551,129Inventories
            
            
            1,733,648
            
            
            
            (2,509,350
            )Prepaid expenses and other
      assets
            
            
            323,377
            
            
            
            103,347Accounts payable and accrued
      expenses
            
            
            1,651,545
            
            
            
            (454,471
            )Net
      Cash Provided by (Used in) Operating Activities
            
            
            637,983
            
            
            
            (1,288,111
            )Cash
      Used In Investing ActivitiesPurchases
      of property and equipment
            
            
            (105,763
            )
            
            
            (85,649
            )Cash
      from business acquired
            
            
            255,714
            
            
            
            –Cost
      of acquisition
            
            
            (192,563
            )
            
            
            –Net
      Cash Used In Investing Activities
            
            
            (42,612
            )
            
            
            (85,649
            )Cash
      Flows From Financing ActivitiesPayment
      for financing costs
            
            
            (25,614
            )
            
            
            (142,827
            )Net
      amounts borrowed under current revolving lines of credit, net of
      OID
            
            
            3,262,273
            
            
            
            –Net
      amounts borrowed (paid) under previous revolving lines of
      credit
            
            
            (3,330,865
            )
            
            
            1,872,345Preferred stock
      dividends
            
            
            (193,678
            )
            
            
            (127,939
            )Net
      Cash Provided By (Used In) Financing Activities
            
            
            (287,884
            )
            
            
            1,601,579Net
      Increase In Cash And Cash Equivalents
            
            
            307,487
            
            
            
            227,819Cash
      And Cash Equivalents – Beginning Of Period
            
            
            127,723
            
            
            
            632,948Cash
      And Cash Equivalents – End of Period
            
            $
            435,210
            
            
            $
            860,767


Supplemental
schedule of non-cash financing and investing activities:


Stock
      issued for financing
            
            $
            333,750Stock
      issued for acquisition
            
            $
            770,000Warrants
      issued for acquisition
            
            
            1,287,878Note
      issued for acquisition
            
            
            10,000,000Accrued
      acquisition costs
            
            
            940,559$
            12,938,437Stock
      to be issued for financing
            
            $
            73,950




See the accompanying notes
to financial statements.


Page
4
 QSGI
INC.





NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(Unaudited)




1.
            Basis
      of Presentation




The
accompanying unaudited condensed consolidated financial statements of QSGI INC.
(“QSGI” or the “Company”) as of September 30, 2008 and December 31, 2007 and for
the three and nine months ended September 30, 2008 and 2007 have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X under the Securities Exchange Act of
1934.  Accordingly they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.  In the opinion
of the Company’s management, all adjustments (consisting of only normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations or cash flows have been made.  Certain
reclassifications have been made for consistent presentation.




The
condensed consolidated statement of operations for the three and nine months
ended September 30, 2008 is not necessarily indicative of the results that may
be expected for the entire year ending December 31, 2008.  These
statements should be read in conjunction with the financial statements and
related notes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2007.




These unaudited condensed consolidated
financial statements have been prepared assuming that the Company will continue
as a going concern and, accordingly, do not include any adjustments that might
result from the outcome of this uncertainty. The independent registered public
accounting firm’s report on the consolidated financial statements included in
the Company’s annual report on Form 10-K for the year ended December 31, 2007
contained an explanatory paragraph regarding the uncertainty of the Company’s
ability to continue as a going concern.




2.
            Summary
      of Significant Accounting Policies




Business
Organization




We are a
technology services and maintenance company.  Our Data Center
Maintenance and Hardware services as well as our Data Security and Compliance
services are geared towards both the users of enterprise-class hardware
(mainframes, midrange processors, large storage, controllers, etc.) as well as
the users of business-computing hardware (desktops, laptops, related peripherals
and servers).  Our network infrastructure design and support
services  provide our corporate, government and educational clients
with network services including network design, implementation and monthly
maintenance services as well as IT monitoring.  We use the trade name
“QSGI” in order to build cohesion among the various technology services that we
offer and build brand recognition and preference through strong cross-marketing
opportunities.





Segments





Our
company operates in four segments that clearly focus our services into
easy-to-understand categories for our target customers:





A.
            Data
      Center Maintenance





We
provide hardware maintenance services for enterprise-class hardware including
mainframes, mid-range processors, tape, disk and storage as well as associated
peripheral products and Data Center consulting to companies throughout the
United States.





5
 QSGI
INC.


B.
            Data
      Center Hardware





We are a
reseller of refurbished enterprise-class hardware including mainframe
processors, midrange processors and associated peripheral products and
replacement parts to companies.





C.
            Network
      Infrastructure Design and Support





Through
its Contemporary Computer Services, Inc. (CCSI) subsidiary, we provide our
corporate, government and educational clients with network infrastructure
services including network design, implementation and monthly maintenance
services on corporations' network hardware & related infrastructure as well
as 24/7 IT monitoring and diagnostics through its North American Network
Operating Center (NOC).





D.
            Data
      Security and Compliance





We
provide data security and regulatory compliance services for end-of-life
business-computing Information Technology (IT) assets.  We offer a
variety of solutions to companies whose business computing technologies
(desktops, laptops, printers, servers and enterprise storage systems) have come
to the end of their life cycle.  These services include:


- Data
erasure to Department of Defense standards for hard drives


- Asset
Auditing/Life Cycle Management, which allows customers to minimize their overall
IT expenditure and maximize their return on investment.


- IT
asset remarketing for IT assets with market value


-
Environmental compliance (proper recycling or safe disposal) for IT
assets





These
services can be custom tailored to meet our customers' needs and implemented at
QSGI facilities or at one client location or at multiple client-site locations,
through the use of one of our client-site solutions including our mobile audit
and erasure truck and our client suitcase server.




The
Company has office and warehouse space in Hightstown, New Jersey, Eagan,
Minnesota, Bohemia, New York and Lyndhurst, New Jersey and technical coverage
and sales offices in 20 other states including Arkansas, Colorado, Illinois,
Indiana, Kansas, Maine, Missouri, Michigan, Nebraska, New Jersey, New York,
North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Washington
DC, Wisconsin and Wyoming.




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 disclosure 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 those
estimates.




6
 QSGI
INC.


Earnings
(Loss) Per Share




Basic
earnings (loss) per share is computed on the basis of the weighted average
number of common shares outstanding.  Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of all dilutive potential common shares that were
outstanding during the period.  A reconciliation of shares used
calculating basic and diluted earnings per share for the three and nine months
ended September 30, 2008 and 2007 are as follows:




Three
      Months Ended Sept. 30,
            
            
            Nine
      Months Ended Sept. 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Basic
            
            
            36,506,955
            
            
            
            31,172,716
            
            
            
            33,292,242
            
            
            
            31,172,716Stock
      options
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Stock
      warrants
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Redeemable
      preferred stock
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Diluted
            
            
            36,506,955
            
            
            
            31,172,716
            
            
            
            33,292,242
            
            
            
            31,172,716




For the
three months ended September 30, 2008 and 2007, the Company excluded weighted
average common share equivalents related to stock options of 941,571 and
1,022,621, respectively and weighted average common share equivalents related to
redeemable preferred stock of 1,911,111 and 1,911,111, respectively because
their effect would be anti-dilutive.




For the
nine months ended September 30, 2008 and 2007, the Company excluded weighted
average common share equivalents related to stock options of 960,247 and
1,030,476, respectively and weighted average common share equivalents related to
redeemable preferred stock of 1,911,111 and 1,911,111, respectively because
their effect would be anti-dilutive.




At
September 30, 2008, there were also 10,000,000 contingent acquisition shares
outstanding.  These are being held in escrow to be released based on
Contemporary Computer Services achieving certain performance milestones or
returned to treasury if such milestones are not reached.




Impact
Of Recently Issued Accounting Standards




In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchyof Generally Accepted Accounting
Principles(“FAS 162"). This Standard identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. FAS 162
directs thehierarchy to the
entity, rather than the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in
conformity with generally accepted accounting principles. The Standard is
effective 60 days following SEC approval of the Public Company Accounting
Oversight Board amendments to remove the hierarchy of generally accepted
accounting principles from the auditing standards. FAS 162 is not expected to
have an impact on the financial statements.





In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible
Assets.This Staff Position is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is prohibited. Application of this FSP is not
expected to have a significant impact on the financial statements.





7
 QSGI
INC.


In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities.
This FSP provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The Company does not
currently have any share-based awards that would qualify as participating
securities. Therefore, application of this FSP is not expected to have an effect
on the Company's financial reporting.




3.
            Inventories




Inventories
at September 30, 2008 and December 31, 2007 consist of:




2008
            
            
            2007Finished
      goods
            
            $
            6,077,656
            
            
            $
            6,120,473Inventory
      in transit
            
            
            342,852
            
            
            
            708,558Allowance
      for excess and obsolescence
            
            
            (1,087,000
            )
            
            
            (251,000
            )$
            5,333,508
            
            
            $
            6,578,031




4.           Financing




On June
5, 2008, the Company entered into a Senior Security Purchase Agreement with
Victory Park Capital.  This agreement allows the Company to borrow up
to $10 million to finance both working capital needs and future
acquisitions.  The new facility replaced the Company's $7.5 million
asset based working capital facility with Wells Fargo Bank.  The new
revolving line of credit agreement provides for borrowings limited to the lesser
of $10,000,000 or the borrowing base of 80% of eligible accounts receivable plus
42.5% of eligible inventory plus 60% of eligible pre-billed service
receivables.  The interest rate per annum charged is the greater of
prime plus seven percent (7.00%) and twelve percent (12.00%).  As of
September 30, 2008, the Company had requested an over advance and as a result
was paying fifteen percent (15%) per annum.  Commencing October 31,
2008, there are certain monthly financial ratios that need to be
met.  The Company was in compliance with its loan agreement and had
borrowed the maximum amount under its borrowing base at September 30,
2008.




The
Company incurred $486,250 in origination fees paid to Victory Park Capital,
including the issuance of 1,125,000 shares of the Company’s common
stock.  These fees were recorded as a reduction of the loan
proceeds.  The original issue discount will be recognized as interest
expense on a straight-line basis over the thirty month term of the financing
agreement.  During the three months ended September 30, 2008, the
Company recognized $48,625 of interest expense related to the original issue
discount, and has $421,417 remaining to be recognized.  These costs
have the effect of making the interest rate approximately 4% higher than the
stated rate for thirty months based on anticipated future
borrowings.




8
 QSGI
INC.


The
Company also signed a Registration Rights Agreement with Victory Park Capital
where upon written request by Victory Park Capital to the Company, the Company
within 45 days shall file a registration statement.  This registration
statement must be declared effective 90 days from the filing
deadline.  The registration statement must remain effective until the
underlying securities are sold.  If the filing deadline, the
effectiveness deadline, or the continued effectiveness requirement is not met,
the Company shall pay Victory Park Capital, in cash, one and one half percent
(1.5%) of the aggregate outstanding principal amount of investor notes until
such filing failures are cured.  The Registration Rights Agreement
does not provide for any limitation as to the maximum potential consideration to
be paid.  At September 30, 2008, the Company has not recorded any
liability for the registration rights payment arrangement as this amount cannot
be determined and no demand by Victory Park Capital has been made.




As part
of the Amended and Restated Securities Purchase Agreement dated July 10, 2008,
750,000 additional shares were due to Victory Park Capital.  The value
of the shares issued was $120,000.  This amount was recorded as
additional debt issuance costs in July 2008 and will be recognized as interest
expense on a straight -line basis over the thirty month term of the financing
agreement.  Additionally upon the earlier of December 1, 2010 or the
date of the voluntary prepayment of all Notes due to Victory Park Capital, if
the Company has not issued a total of 2,600,000 shares of common stock to
Victory Park Capital, then the Company shall owe Victory Park Capital the result
of 2,600,000 shares of common stock minus the number of shares of common stock
issued to date multiplied by fifty percent (50%).  The Company has
accrued $73,850 as common stock to be issued as of September 30,
2008.




5.           SegmentInformation




The
Company operates in four business segments:  Data Security &
Compliance, Data Center Hardware, Data Center Maintenance and Network
Infrastructure Design and Support.  The segments are presented in a
manner consistent with how the chief operating decision maker and executive
management view the businesses, how the businesses are organized as to segment
management and the focus of the businesses with regards to the types of products
and services offered and the target market.  Each of our segments is
more fully described in Note 2 to our Condensed Consolidated Financial
Statements.




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007RevenuesData
      Security and Compliance
            
            $
            3,377,418
            
            
            $
            6,217,220
            
            
            $
            12,822,103
            
            
            $
            15,369,446Data
      Center Hardware
            
            
            241,820
            
            
            
            1,567,822
            
            
            
            1,284,618
            
            
            
            8,680,399Data
      Center Maintenance
            
            
            1,575,723
            
            
            
            1,677,058
            
            
            
            5,545,176
            
            
            
            4,519,140Network
      Infrastructure Design & Support
            
            
            3,447,830
            
            
            
            –
            
            
            
            3,447,830
            
            
            
            –Intersegment
      Elimination
            
            
            (13,474
            )
            
            
            (705,213
            )
            
            
            (167,596
            )
            
            
            (752,742
            )Consolidated
      Total
            
            $
            8,629,317
            
            
            $
            8,756,887
            
            
            $
            22,932,131
            
            
            $
            27,816,243Income
      (loss) before Provision (Benefit) for Income TaxesData
      Security and Compliance
            
            $
            (1,715,998
            )
            
            $
            (223,014
            )
            
            $
            (4,225,772
            )
            
            $
            (1,409,185
            )Data
      Center Hardware
            
            
            (535,734
            )
            
            
            (403,255
            )
            
            
            (1,407,763
            )
            
            
            (43,236
            )






9
 QSGI
INC.


Data
      Center Maintenance
            
            
            (73,216
            )
            
            
            457,830
            
            
            
            608,267
            
            
            
            990,468Network
      Infrastructure Design & Support
            
            
            (132,754
            )
            
            
            –
            
            
            
            (132,754
            )
            
            
            –Consolidated
      Total
            
            $
            (2,457,702
            )
            
            $
            (168,439
            )
            
            $
            (5,158,022
            )
            
            $
            (461,953
            )




6.           Business
Acquisition




In July,
the Company completed the purchase of all of the outstanding shares of
Contemporary Computer Service, Inc. (CCSI).  CCSI provides corporate,
government and educational clients with network infrastructure services
including network design, implementation and monthly maintenance services on
corporations' network hardware and related infrastructure as well as 24/7
monitoring and diagnostics through its North American Network Operating Center
(NOC).  The cost of the acquired entity was $13,191,080 plus an
additional stock earn out of up to an additional 10 million shares of common
stock based on achieving certain performance milestones. The $13,191,080
purchase price was financed through a combination of the issuance of 3,500,000
shares of common stock in the Company, valued at $770,000, based upon the
average market price for QSGI's common stock for two days before, the day of and
two days after May 7, 2008, the announcement date, senior bank and seller
financing in the amount of $10 million dollars, both secured by the assets of
the Company.  In connection with the seller financing, the Company
issued warrants to purchase 12,000,000 shares of Common Stock at a purchase
price of $0.30 per share valued at $1,287,878, based upon the closing price on
July 7, 2008, the date immediately prior to the announcement.  The
Company also incurred direct acquisition costs of $1,133,202.





Certain
cost of the acquisition was allocated to identifiable intangibles of $5,870,000
and goodwill of $6,445,006.





The
identifiable intangibles are comprised of the following:





Identifiable
      Intangible Asset
            
            Fair
      Value
            
            Remaining
      Useful LifeNon-Competition
      Agreement
            
            $
            80,000
            
            6
      yearsTrademark/Trade
      Name
            
            
            3,030,000
            
            IndefiniteList
      of Customers
            
            
            2,760,000
            
            9
      yearsTotal
            
            $
            5,870,000





The
amortizable expense related to the acquisition amounted to $80,664 for the three
months ended September 30, 2008.





The
goodwill and trademark recorded in connection with this acquisition will not be
amortized to expense, but will be subject to periodic testing for impairment in
accordance with SFAS No 142, Goodwill and Other Intangible
Assets.





10
 QSGI
INC.





The
following table summarizes the fair value of the CCSI assets acquired and
liabilities assumed as of July 1, 2008:


(Unaudited)Assets
      acquired:Current
      assets
            
            $
            1,776,826Property,
      plant and equipment
            
            
            588,573Intangible
      assets subject to amortization:Software
            
            
            2,958Other
      Assets
            
            
            62,622Total
      assets acquired
            
            $
            2,430,979Liabilities
      assumed:Accounts
      Payable and accrued expenses
            
            $
            1,382,714Deferred
      Revenue
            
            
            341,890Notes
      and loans payable
            
            
            22,801Total
      liabilities
            
            
            1,747,405Net
      assets acquired
            
            $
            683,574




In
considering the benefits of the CCSI acquisition, management recognized the
strategic complement of CCSI's trade name, services and customer
database.  This complement provides a strong platform for further
development of our management services.





The
results of CCSI have been included in the Condensed Consolidated Financial
Statements since July 1, 2008.  Un audited pro-forma results of
operations for the nine months ended September 30, 2008 are included
below.  Such pro-forma information assumes that the acquisition had
occurred as of January 1, 2008, and revenue is presented in accordance with our
accounting policies.  This summary is not necessarily indicative of
that our result of operations would have been had CCSI been a combined entity
during such periods, nor does it purport to represent results of operations for
any future periods.





Nine
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007Revenue
            
            $
            29,903,967
            
            
            $
            38,208,000Net
      Income
            
            $
            (5,232,225
            )
            
            $
            (5,512,000
            )Net
      Income Per Common Share - Basic
            
            $
            (0.16
            )
            
            $
            (0.15
            )Net
      Income Per Common Share - Diluted
            
            $
            (0.02
            )
            
            $
            (0.15
            )




Item2.                      Management’s
Discussion And Analysis Of Financial Condition And Results Of
Operations




This
following discussion should be read in conjunction with the accompanying
financial statements and related notes in Item 1 of this report as well as
Annual Report on Form 10-K for the year ended December 31,
2007.  Certain statements in this Report constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933,
Section 21E of the Securities Exchange Act of 1934 and the Private Securities
Litigation Reform Act of 1995.  We intend that such forward-looking
statements be subject to the safe harbors created thereby.




11
 QSGI
INC.





All such
forward-looking information involves risks and uncertainties and may be affected
by many factors, some of which are beyond our control.  These factors
include:




·
            Our
      growth strategies.




·
            Anticipated
      trends in our business and
demographics.




·
            Our
      ability to successfully integrate the business operations of recently
      acquired companies; and




·Regulatory,
competitive or other economic influences.




Forward-looking
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, performance or achievements expressed or
implied by such forward-looking statements.  Such factors include,
among others, the following:  our continued ability to sustain our
growth through continuing vendor relationships; the successful consummation and
integration of future acquisitions; the ability to hire and retain key
personnel; the continued development of our technical, manufacturing, sales,
marketing and management capabilities; relationships with and dependence on
third-party suppliers; anticipated competition; uncertainties relating to
economic conditions where we operate; uncertainties relating to government and
regulatory policies; uncertainties relating to customer plans and commitments;
rapid technological developments and obsolescence in the products we sell and
the industries in which we operate and compete; existing and potential
performance issues with suppliers and customers; governmental export and import
policies; global trade policies; worldwide political stability and economic
growth; the highly competitive environment in which we operate; potential entry
of new, well-capitalized competitors into our markets; and changes in our
capital structure and cost of capital.  The words “believe”, “expect”,
“anticipate”, “intend” and “plan” and similar expressions identify
forward-looking statements.  Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made.




Results
of Operations




The
following table sets forth our results of operations as a percentage of total
revenue for the periods indicated below and is derived from the unaudited
Condensed Consolidated Statement of Operations in Part 1, Item 1 of this
report.




Three
      Months Ended
              September
      30,
            Nine
      Months Ended
              September
      30,2008
            2007
            2008
            2007%
            %
            %
            %Product
      Revenue
            43.5
            77.1
            61.7
            81.5Service
      Revenue
            56.5
            22.9
            38.3
            18.5Total
      Revenue
            100.0
            100.0
            100.0
            100.0Cost
      Of Products Sold
            47.2
            68.7
            62.7
            67.3Cost
      Of Services Sold
            33.2
            7.5
            18.4
            6.6Cost
      Of Products and Services Sold
            80.4
            76.2
            81.1
            73.9Gross
      Profit
            19.6
            23.8
            18.9
            26.1Selling,
      General And Administrative Expenses
            40.4
            21.7
            35.9
            24.8Depreciation
      And Amortization
            2.3
            2.1
            2.3
            1.9Interest
      Expense, net
            5.4
            1.9
            3.1
            1.1Loss
      Before Benefit For Income Taxes
            (28.5)
            (1.9)
            (22.4)
            (1.7)Provision
      (Benefit) For Income Taxes
            (0.1)
            (0.6)
            0.1
            (0.5)Net
      Loss
            (28.4)
            (1.3)
            (22.5)
            (1.2)




12
 QSGI
INC.





Quarter
Ended September 30, 2008 Compared to Quarter Ended September 30,
2007




Revenue
for the quarter ended September 30, 2008 was $8,629,317 compared to revenue of
$8,756,887 for the quarter ended September 30, 2007, a $127,570 decrease, or
1.5%.   Revenue in our Data Security and Compliance segment
decreased to $3,377,418 from $6,217,220, a $2,839,802 decrease, or
45.7%.  This was primarily the result of a decrease in our wholesale
remarketing revenues caused by a decrease in the flow of wholesale OEM
remarketing product as the Company stopped speculating on inventory and instead,
only purchased product where we had a buyer in place.  We concentrated
on our fee based business where our customers use our full suite of services and
on developing our relationship with a company that sells product over the
internet, through direct mail and through direct emails.  Revenue in
our Data Center Maintenance segment decreased to $1,575,723 from $1,677,058, a
$101,335 decrease, or 6.0%.  The revenue for the quarter included
product revenue of $13,000 which we sold to support our maintenance
customers.  Excluding the product revenue, our service revenue
decreased due to the attrition of equipment under contract as a result of
several of our clients buying new equipment which carries a manufacturers'
warranty or our clients outsourcing all of their IT needs to
IBM.  This was offset by the addition of new clients selecting our
services.  Our service contracts are generally for a one
year  term.  Revenue in our Data Center Hardware segment
during the quarter decreased to $241,820 from $1,567,822, a $1,326,002 decrease,
or 84.6%.  This decrease was caused by the negative impact that IBM's
re-marketing restrictions, enacted in the 3rd quarter of 2007, had on our
revenues.  As a result of those restrictions, we are no longer
speculating on computer mainframe hardware.




Our
revenues categorized by products and services are as follows:




Three
      Months Ended
            
            
            Three
      Months EndedSeptember
      30, 2008
            
            
            September
      30, 2007RevenueProducts
            
            $
            3,755,135
            
            
            $
            6,753,288Services
            
            
            4,874,182
            
            
            
            2,003,599Total
      Revenue
            
            $
            8,629,317
            
            
            $
            8,756,887




In our
industry, the overall management of the computer equipment throughout its life
cycle represents a growing burden on companies.  The continual growth
of liability concerns associated with IT assets and the compliance with
relatively new government legislation is what is going to have the biggest
impact on the Company’s future revenues and profits.  Our business has
been built to keep companies in compliance with government legislation including
HIPAA, Sarbanes-Oxley, the FACT Act, Gramm-Leach-Bliley, the Patriot Act or
federal and state EPA regulations.  As increasing numbers of computers
are replaced or become obsolete, there is a greater source of computer equipment
that is available for resale and a potentially greater source of customers
needing our services.




Gross
profit for the quarter ended September 30, 2008 was $1,691,197 compared to a
gross profit of $2,083,914 for the quarter ended September 30, 2007, a $392,717
decrease, or 18.8%.  Gross profit for the quarter ended September 30,
2008 decreased over the quarter ended September 30, 2007 as a result of a
$419,379 decrease in gross profit in our Data Center Hardware segment as well as
a $933,000 decrease in gross profit in our Data Security and Compliance
segment.  Data Center Maintenance segment gross profit decreased by
$191,192.  This was offset by the addition of CCSI where margins were
33% of revenues or $1,150,854.  These margins are the result of their
consulting and service revenues where margins are higher.




13
 QSGI
INC.





Gross
profit in our Data Security and Compliance segment for the 3rd quarter decreased
to a loss of $20,443 from $912,557 in the 3rd quarter of 2007.  This
decrease was caused by inventory write-downs of $75,000 and lower revenues which
resulted in lower available gross profit dollars to cover our semi-fixed cost of
goods sold.




Gross
margins for the quarter ended September 30, 2008 were 19.6% compared to 23.8%
for the quarter ended September 30, 2007.  Gross margins decreased in
our Data Security and Compliance segment to (0.6%) for the quarter ended
September 30, 2008 from 14.7% for the quarter ended September 30,
2007.  Margins decreased due to inventory write-downs of $75,000 and
lower revenues which resulted in lower available gross profit dollars to cover
our semi-fixed cost of goods sold.  Gross margins decreased in our
Data Center Hardware segment for the quarter ended September 30, 2008 to (37.1%)
from 5.8% for the quarter ended September 30, 2007. The decrease was the result
of the onerous restrictions instituted during the 3rd quarter of 2007 by a major
OEM restricting our ability to reconfigure and remarket zSeries mainframe
computer equipment.  As a result, we were forced to sell product in
inventory at a loss to generate cash as well as a write-down in inventory of
$375,000 as a result of the restriction.  Gross margins in our Data
Center Maintenance segment decreased to 56.4% from 64.4%.  The Gross
Profit percentage decreased as we added additional technical personnel to handle
new customers and added additional maintenance work in pSeries, tape and disk
and storage units each of which carry a lower gross margin percentage than our
traditional zSeries mainframe work




Selling,
general and administrative expenses for the quarter ended September 30, 2008
were $3,482,461 compared to selling, general and administrative expenses of
$1,904,476 for the quarter ended September 30, 2007, a $1,577,985 increase, or
82.9%.  This increase was due to adding CCSI expenses of $895,659
during the quarter, an increase in professional fees and a recovery through the
settlement of litigation that occurred in the quarter ended September 30, 2007
that did not occur the quarter ended September 30, 2008.




Depreciation
and amortization for the quarter ended September 30, 2008 was $201,187 compared
to depreciation and amortization of $181,079 for the quarter ended September 30,
2007, a $20,108 increase.    This increase was the mainly
the result of depreciation from the acquisition of CCSI offset by a decrease
that was the result of the sale of Company assets during the fourth quarter of
2007 restructuring that occurred at our Hardware and Maintenance
Segments.




Interest
expense for the quarter ended September 30, 2008 was $465,251 compared to
interest expense of $166,798 for the quarter ended September 30, 2007, a
$298,453 increase, or 178.9%, commensurate with an increase in the rate of
interest charged on the Company’s borrowings and the interest expense incurred
due to the note issued for the purchase of CCSI.




The
Company did not record a federal tax benefit for the three months ended
September 30, 2008 as we recorded a change in the valuation allowance for an
amount equal to the tax benefit.  The Company recorded a state tax
benefit for the three months ended September 30, 2008.  The Company
recorded a federal tax benefit for the three months ended September 30,
2007.  This benefit was reduced by estimated state tax
obligations.  We incur state income taxes in jurisdictions where the
Company cannot file a consolidated income tax return.




14
 QSGI
INC.





Nine
Months Ended September 30, 2008 Compared to nine Months Ended September 30,
2007




Revenue
for the nine months ended September 30, 2008 was $22,932,131 compared to revenue
of $27,816,243 for the nine months ended September 30, 2007, a $4,884,112
decrease, or 17.6%.   Revenue in our Data Security and Compliance
segment decreased to $12,822,103 from $15,369,446, a $2,547,343 decrease, or
16.6%.  This was primarily the result of a decrease in our wholesale
remarketing revenues caused by a decrease in the flow of wholesale OEM
remarketing product as the Company stopped speculating on inventory and instead,
only purchased product where we had a buyer in place.  We concentrated
on our fee based business where our customers use our full suite of
services.  Revenue in our Data Center Maintenance segment increased to
$5,545,176 from $4,519,140, a $1,026,036 increase, or 22.7%.  The
revenue for the nine months included product revenue of $560,341 as we began to
sell product in the second quarter to support our maintenance
customers.  Excluding the product revenue, our service revenue
increased 10.6% to $4,981,934 from $4,505,039 as we signed additional service
contracts with new and existing customers.  Revenue in our Data Center
Hardware segment during the nine months decreased to $1,284,618 from $8,680,399,
a $7,395,781 decrease, or 85.2%.  Revenues decreased substantially due
to onerous restrictions instituted during the 3rd quarter of 2007 by a major OEM
restricting our ability to reconfigure and remarket zSeries mainframe computer
equipment.  These restrictions since their inception have had an
adverse financial impact on the Data Center Hardware segment, as well as the
Company.




Our
revenues categorized by products and services are as follows:




Nine
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30, 2008
            
            
            September
      30, 2007RevenueProducts
            
            $
            14,143,562
            
            
            $
            22,659,971Services
            
            
            8,788,569
            
            
            
            5,156,272Total
      Revenue
            
            $
            22,932,131
            
            
            $
            27,816,243




In our
industry, the overall management of the computer equipment throughout its life
cycle represents a growing burden on companies.  The continual growth
of liability concerns associated with IT assets and the compliance with
relatively new government legislation is what is going to have the biggest
impact on the Company’s future revenues and profits.  Our business has
been built to keep companies in compliance with government legislation including
HIPAA, Sarbanes-Oxley, the FACT Act, Gramm-Leach-Bliley, the Patriot Act or
federal and state EPA regulations.  As increasing numbers of computers
are replaced or become obsolete, there is a greater source of computer equipment
that is available for resale and a potentially greater source of customers
needing our services.




Gross
profit for the nine months ended September 30, 2008 was $4,321,919 compared to a
gross profit of $7,254,612 for the nine months ended September 30, 2007, a
$2,932,693 decrease, or 40.4%.  Gross profit for the nine months ended
September 30, 2008 decreased over the nine months ended September 30, 2007 as a
result of a $2,556,574 decrease in gross profit in our Data Center Hardware
segment as well as a $1,719,817 decrease in gross profit in our Data Security
and Compliance segment.  This was offset by a 6.7% increase in gross
profit at our Data Center Maintenance segment where gross profit increased to
$3,077,926 for the nine months ended September 30, 2008 from $2,885,081 for the
nine months ended September 30, 2007.




Gross
margins for the nine months ended September 30, 2008 were 18.9% compared to
26.1% for the nine months ended September 30, 2007.  Gross margins
decreased in our Data Security and Compliance segment to 5.5% for the nine
months ended September 30, 2008 from 15.8% for the nine months ended September
30, 2007.  This decrease was caused by an increase in inventory
reserves and lower revenues which resulted in lower available gross profit
dollars to cover our semi-fixed cost of goods sold.  Gross margins
decreased in our Data Center Hardware segment for the nine months ended
September 30, 2008 to (47.4%) from 22.4% for the nine months ended September 30,
2007. The decrease was the result of the onerous restrictions instituted during
the 3rd quarter of 2007 by a major OEM restricting our ability to reconfigure
and remarket zSeries mainframe computer equipment as we were forced to sell
product in inventory at a loss to generate cash as well as increasing in
inventory reserves over prior year by approximately $325,000.  As a
result, we have approximately $675,000 in inventory reserves at the end of the
third quarter.  Gross margins in our Data Center Maintenance segment
decreased to 55.5% from 63.8%.  During the quarter we increased our
inventory reserves by $30,000 and had an increase in wages as we added personnel
to support our customers.




15
 QSGI
INC.





Selling,
general and administrative expenses for the nine months ended September 30, 2008 were
$8,241,341 compared to selling, general and administrative expenses of
$6,897,779 for the nine months ended September 30, 2007, a $1,343,562
increase, or 19.5%.  This increase was in part due to the expenses
incurred by our acquisition of CCSI during the quarter of $895,659 and the
decrease of $161,024 due to the closing of our India operations.  This
was also the result of a decrease of $932,350 in expenses in our Data Center
Hardware segment, an increase of $798,739 in expenses in our Data Security and
Compliance segment and an increase of $581,513 in expenses in our Data Center
Maintenance segment.  During the quarter ended September 30, 2008, we
settled and incurred non-recurring expenses of approximately $215,000 relating
to the fees paid to our former lenders, and consultants and attorneys while in
default of the prior loan agreement.  During the quarter ended
September 30, 2007, we settled a bad debt claim for $320,000 which we did not
have during the third quarter of 2008.




Depreciation
and amortization for the nine months ended September 30, 2008 was $516,907
compared to depreciation and amortization of $520,796 for the nine months ended
September 30, 2007, a $3,889 decrease.




Interest
expense for the nine months ended September 30, 2008 was $721,693 compared to
interest expense of $297,990 for the nine months ended September 30, 2007, a
$423,703 increase, or 142.2%, commensurate with an increase in the rate of
interest charged on the Company’s borrowings and the addition of the note
payable due to the CCSI acquisition.




The
Company did not record a federal tax benefit for the nine months ended September
30, 2008 as we recorded a change in the valuation allowance for an amount equal
to the tax benefit.  The Company recorded a state tax expense for the
nine months ended September 30, 2008.  The Company recorded a federal
tax benefit for the nine months ended September30,
2007.  This benefit was reduced by estimated state tax
obligations.  We incur state income taxes in jurisdictions where the
Company cannot file a consolidated income tax return.




Business
Segments




We
operate in four segments that clearly focus our services into easy-to-understand
categories for our target customers: Data Security and Compliance, Data Center
Hardware, Data Center Maintenance and Network Infrastructure Design and
Support.  Our “eliminations” category includes all amounts recognized
upon consolidation of our subsidiaries such as the elimination of inter-segment
revenues, expenses, assets and liabilities.  Each of our segments is
more fully described in Note 2 to our Condensed Consolidated Financial
Statements.




16
 QSGI
INC.





Data
Security & Compliance Segment




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            3,377,417
            
            
            $
            6,217,220
            
            
            $
            12,822,103
            
            
            $
            15,369,446Gross
      Profit
            
            
            (20,443
            )
            
            
            912,557
            
            
            
            701,987
            
            
            
            2,421,804Selling,
      General And Administrative Expenses
            
            
            1,433,624
            
            
            
            880,521
            
            
            
            4,127,930
            
            
            
            3,329,191Depreciation
      And Amortization
            
            
            62,372
            
            
            
            88,252
            
            
            
            343,828
            
            
            
            203,793Loss
      Before Benefit For Income Taxes
            
            
            (1,715,998
            )
            
            
            (223,014
            )
            
            
            (4,225,772
            )
            
            
            (1,409,185
            )Segment
      Assets
            
            
            19,538,498
            
            
            
            10,162,306
            
            
            
            19,538,498
            
            
            
            10,162,306Goodwill
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Expenditures
      for Property and Equipment
            
            
            12,984
            
            
            
            3,662
            
            
            
            70,912
            
            
            
            76,104




Quarter
Ended September 30, 2008 Compared to Quarter Ended September 30,
2007




Revenue
for the quarter ended September 30, 2008 was $3,377,418 compared to revenue of
$6,217,220 for the quarter ended September 30, 2007, a $2,839,803 decrease, or
45.7%.  This was primarily the result of a decrease in our wholesale
remarketing revenues caused by a decrease in the flow of wholesale OEM
remarketing product as the Company stopped speculating on inventory and instead,
only purchased product where we had a buyer in place.  We concentrated
on our fee based business where our customers use our full suite of services and
on developing our relationship with a company that sells product over the
internet, through direct mail and through direct emails.




Gross
profit for the quarter ended September 30, 2008 was $(20,443) compared to gross
profit of $912,557 for the quarter ended September 30, 2007, a $933,000
decrease.  Gross margins for the quarter ended September 30, 2008 were
(0.6%) compared to gross margins of 14.7% for the quarter ended September 30,
2007.  These decreases were caused by inventory write-downs of $75,000
and lower revenues which resulted in lower available gross profit dollars to
cover our semi-fixed cost of goods sold.




Selling,
general and administrative expenses for the quarter ended September 30, 2008
were $1,433,624 compared to selling, general and administrative expenses of
$880,521 for the quarter ended September 30, 2007, a $553,103 increase, or
62.81%.  This was caused mainly by a recovery through the settlement
of litigation that occurred in the quarter ended September 30, 2007 that did not
occur in the quarter ended September 30, 2008.  There was also and
increase in our professional fees.  Excluding these expenses, our
total expenses remained relatively flat showing the relative fixed cost nature
of our business even though individual expense categories may vary period to
period.




Depreciation
and amortization for the quarter ended September 30, 2008 was $62,372 compared
to depreciation and amortization of $88,252 for the quarter ended September 30,
2007, a $25,880 decrease.  This decrease was the result of assets
becoming fully depreciated.




17
 QSGI
INC.





Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007




Revenue
for the nine months ended September 30, 2008 was $12,822,103 compared to revenue
of $15,369,446 for the nine months ended September 30, 2007, a $2,547,343
decrease, or 16.6%.  This was primarily the result of a decrease in
our wholesale remarketing revenues caused by a decrease in the flow of wholesale
OEM remarketing product as the Company stopped speculating on inventory and
instead, only purchased product where we had a buyer in place.  We
concentrated on our fee based business where our customers use our full suite of
services.




Gross
profit for the nine months ended September 30, 2008 was $701,987 compared to
gross profit of $2,421,804 for the nine months ended September 30, 2007, a
$1,719,817 decrease, or 71.0%.  Our gross profit decreased due to a
decrease in revenues and margins.  Gross margins for the nine months
ended September 30, 2008 were 5.5% compared to gross margins of 15.8% for the
nine months ended September 30, 2007.  This decrease was caused by an
increase in inventory reserves and lower revenues which resulted in lower
available gross profit dollars to cover our semi-fixed cost of goods
sold.




Selling,
general and administrative expenses for the nine months ended September 30, 2008
were $4,127,930 compared to selling, general and administrative expenses of
$3,329,191 for the nine months ended September 30, 2007, a $798,739 increase, or
24.0%.  During the nine months ended September 30, 2008, we incurred
non-recurring expenses of approximately $200,000 relating to the changing of our
bank line, a recovery through the settlement of litigation that occurred in the
quarter ended September 30, 2007 that did not occur in the quarter ended
September 30, 2008 and increased professional fees.  Excluding these
expenses, our total expenses remained relatively flat showing the relative fixed
cost nature of our business even though individual expense categories may vary
period to period.




Depreciation
and amortization for the nine months ended September 30, 2008 was $343,828
compared to depreciation and amortization of $203,793 for the nine months ended
September 30, 2007, a $140,035 increase.  This increase included the
write-off of deferred loan costs associated with changing lenders.




Data
Center Hardware Segment




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            241,820
            
            
            $
            1,567,822
            
            
            $
            1,284,618
            
            
            $
            8,680,399Gross
      Profit
            
            
            (327,692
            )
            
            
            91,687
            
            
            
            (608,847
            )
            
            
            1,947,727Selling,
      General And Administrative Expenses
            
            
            204,397
            
            
            
            416,929
            
            
            
            786,817
            
            
            
            1,719,167Depreciation
      And Amortization
            
            
            3,645
            
            
            
            78,013
            
            
            
            12,098
            
            
            
            271,811Income
      (Loss) Before Benefit For Income Taxes
            
            
            (535,734
            )
            
            
            (403,255
            )
            
            
            (1,407,763
            )
            
            
            (43,236
            )Segment
      Assets
            
            
            293,281
            
            
            
            9,090,256
            
            
            
            293,281
            
            
            
            9,090,256Goodwill
            
            
            –
            
            
            
            5,154,782
            
            
            
            –
            
            
            
            5,154,782Expenditures
      for Property and Equipment
            
            
            –
            
            
            
            –
            
            
            
            11,507
            
            
            
            13,207







18
 QSGI
INC.





Quarter
Ended September 30, 2008 Compared to Quarter Ended September 30,
2007




Revenue
for the quarter ended September 30, 2008 was $241,820 compared to revenue of
$1,567,822 for the quarter ended September 30, 2007, a $1,326,002 decrease, or
84.6%.  Revenues decreased substantially due to onerous restrictions
instituted during the 3rd quarter of 2007 by a major OEM restricting our ability
to reconfigure and remarket zSeries mainframe computer
equipment.  These restrictions since inception have had an adverse
financial impact on the Data Center Hardware segment, as well as the
Company.




Gross
profit for the quarter ended September 30, 2008 was $(327,692) compared to gross
profit of $91,687 for the quarter ended September 30, 2007, a $419,379 decrease,
or 457.0%.  The decrease was the result of the onerous restrictions
instituted during the 3rd quarter of 2007 by a major OEM restricting our ability
to reconfigure and remarket zSeries mainframe computer equipment.




Selling,
general and administrative expenses for the quarter ended September 30, 2008
were $204,397 compared to selling, general and administrative expenses of
$416,929 for the quarter ended September 30, 2007, a $212,532 decrease, or
51.0%.  The decrease was mainly the result of the restructuring that
took place during the fourth quarter of 2007 caused by the aforementioned OEM
policy change.




Depreciation
and amortization for the quarter ended September 30, 2008 was $3,645 compared to
depreciation and amortization of $78,013 for the quarter ended September 30,
2007, an $74,368 decrease, or 95.3%.  This decrease was the result of
the sale of Company assets during the fourth quarter 2007 restructuring and the
reduction in intangible assets that were impaired and written off at December
31, 2007.




Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007




Revenue
for the nine months ended September 30, 2008 was $1,284,618 compared to revenue
of $8,680,399 for the nine months ended September 30, 2007, a $7,395,781
decrease, or 85.2%.  Revenues decreased substantially due to onerous
restrictions instituted during the 3rd quarter of 2007 by a major OEM
restricting our ability to reconfigure and remarket zSeries mainframe computer
equipment.  These restrictions since their inception have had an
adverse financial impact on the Data Center Hardware segment, as well as the
Company.




Gross
profit for the nine months ended September 30, 2008 was $(608,847) compared to
gross profit of $1,947,727 for the nine months ended September 30, 2007, a
$2,556,574 decrease, or 131.3%.  The decrease was the result of the
onerous restrictions instituted during the 3rd quarter of 2007 by a major OEM
restricting our ability to reconfigure and remarket zSeries mainframe computer
equipment.




Selling,
general and administrative expenses for the nine months ended September 30, 2008
were $786,817 compared to selling, general and administrative expenses of
$1,719,167 for the nine months ended September 30, 2007, a $932,350 decrease, or
54.2%.  The decrease was mainly the result of the restructuring that
took place during the fourth quarter of 2007 caused by the aforementioned OEM
policy change.




Depreciation
and amortization for the nine months ended September 30, 2008 was $12,098
compared to depreciation and amortization of $271,811 for the nine months ended
September 30, 2007, an $259,713 decrease, or 95.5%.  This decrease was
the result of the sale of Company assets during the fourth quarter 2007
restructuring and the reduction in intangible assets that were impaired and
written off at December 31, 2007.




19
 QSGI
INC.





Data
Center Maintenance Segment




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            1,575,723
            
            
            $
            1,677,058
            
            
            $
            5,545,176
            
            
            $
            4,519,140Gross
      Profit
            
            
            888,478
            
            
            
            1,079,670
            
            
            
            3,077,926
            
            
            
            2,885,081Selling,
      General And Administrative Expenses
            
            
            948,781
            
            
            
            607,026
            
            
            
            2,430,934
            
            
            
            1,849,421Depreciation
      And Amortization
            
            
            12,913
            
            
            
            14,814
            
            
            
            38,724
            
            
            
            45,192Income
      Before Provision For Income Taxes
            
            
            (73,216
            )
            
            
            457,830
            
            
            
            608,267
            
            
            
            990,468Segment
      Assets
            
            
            2,809,572
            
            
            
            3,798,439
            
            
            
            2,809,571
            
            
            
            3,798,439Goodwill
            
            
            –
            
            
            
            1,489,621
            
            
            
            –
            
            
            
            1,489,621Expenditures
      for Property and Equipment
            
            
            –
            
            
            
            –
            
            
            
            1,675
            
            
            
            –




Quarter
Ended September 30, 2008 Compared to Quarter Ended September 30,
2007




Revenue
for the quarter ended September 30, 2008 was $1,575,723 compared to revenue of
$1,677,058 for the quarter ended September 30, 2007, a $101,335 decrease, or
6.0%.  This decrease was due to the attrition of equipment under
contract as a result of several of our clients buying new equipment which
carries a manufacturers' warranty or our clients outsourcing all of their IT
needs to IBM.  This was offset by the addition of new clients
selecting our services. These contracts are generally for a one year
term.




Gross
profit for the quarter ended September 30, 2008 was $888,478 compared to gross
profit of $1,079,670 for the quarter ended September 30, 2007, a $191,192
decrease, or 17.7%.  Gross margins decreased to 56.4% from
64.4%.  Our gross profit decreased as we added additional technical
personnel to handle new customers and additional maintenance work in pSeries,
tape and disk and storage units each of which carry a lower gross margin
percentage than our traditional zSeries mainframe work.




Selling,
general and administrative expenses for the quarter ended September 30, 2008
were $948,781 compared to selling, general and administrative expenses of
$607,026 for the quarter ended September 30, 2007, a $341,755 increase, or
56.3%.  This was the result of an increase in the allocation of the
corporate overhead charge and an increase in payroll and payroll related
expenses.




Depreciation
and amortization for the quarter ended September 30, 2008 was $12,913 compared
to depreciation and amortization of $14,814 for the quarter ended September 30,
2007, a $1,901 decrease.  This decrease was the result of a sale of
Company assets during the fourth quarter of 2007.




Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007




Revenue
for the nine months ended September 30, 2008 was $5,545,176 compared to revenue
of $4,519,140 for the nine months ended September 30, 2007, a $1,026,036
increase, or 22.7%.  The revenue for the nine months included product
revenue of $563,241 as we began to sell product in the second quarter to support
our maintenance customers.  Excluding the product revenue, our service
revenue increased 10.6% to $4,981,935 from $4,505,039 as we signed additional
service contracts with new and existing customers.  These contracts
are generally one to three year terms.




20
 QSGI
INC.





Gross
profit for the nine months ended September 30, 2008 was $3,077,926 compared to
gross profit of $2,885,081 for the nine months ended September 30, 2007, a
$192,845 increase, or 6.7%.  Our gross profit increased as a result of
the addition of new maintenance contracts.  Gross margins decreased to
55.5% for the nine months ended September 30, 2008 from 63.8% for the nine
months ended September 30, 2007.  Our gross profit decreased as we
added additional technical personnel to handle new customers and additional
maintenance work in pSeries, tape and disk and storage units each of which carry
a lower gross margin percentage than our traditional zSeries mainframe
work.  We also started in the second quarter to sell product to
support our maintenance customers.  Without the sale of product, the
gross profit percentage for the nine months ended September 30, 2008 was 61.8%
as compared to 64.1% for the nine months ended September 30, 2007.




Selling,
general and administrative expenses for the nine months ended September 30, 2008
were $2,430,934 compared to selling, general and administrative expenses of
$1,849,421 for the nine months ended September 30, 2007, a $581,513 increase, or
31.4%.  This was the result of an increase in the allocation of the
corporate overhead charge and an increase in payroll and payroll related
expenses.




Depreciation
and amortization for the nine months ended September 30, 2008 was $38,724
compared to depreciation and amortization of $45,192 for the nine months ended
September 30, 2007, a $6,468 decrease.  This decrease was the result
of a sale of Company assets during the fourth quarter of 2007.




Network
Infrastructure Design and Support




Three
      Months Ended
              September
      30,2008Revenue
            
            $
            3,447,830Gross
      Profit
            
            
            1,150,854Selling,
      General And Administrative Expenses
            
            
            895,659Depreciation
      And Amortization
            
            
            122,257Income
      Before Provision For Income Taxes
            
            
            (132,754
            )Segment
      Assets
            
            
            1,967,023Goodwill
            
            
            6,445,006Expenditures
      for Property and Equipment
            
            
            21,667




The
Network Infrastructure Design and Support segment became part of the Company on
June 1, 2008.




Geographic
Areas




We
operate primarily in the United States with no assets in foreign
countries.  However, we sell to and provide data security and
compliance services to customers operating in foreign
countries.  Additionally, we have established multiple foreign
partners for our Data Security and Compliance division which allow us to utilize
our software to service our client’s needs in more than 90 countries
worldwide.  All of our purchases and sales are denominated in US
dollars.  There were no foreign currency transaction gains or losses
during the nine months ended September 30, 2008 and minimal losses during the
nine months ended September 30, 2007.




21
 QSGI
INC.





Liquidity
and Capital Resources




Net cash
provided by operating activities in the nine months ended September 30, 2008 was
$637,983.  Net cash used in operating activities in the nine months
ended September 30, 2007 was $1,288,111.  Net cash provided by
operating activities during the nine months ended September 30, 2008 was
primarily a result of a decrease in accounts receivable, a decrease in
inventories, an increase in accounts payable and accrued expenses offset by an
increase in prepaid expenses and other assets and a net loss.  Net
cash used in operating activities during the nine month period ended September
30, 2007 was primarily as a result of a net loss, an increase in inventories, a
decrease in accounts payable and accrued expenses and a decrease in accounts
receivable.  The decrease in our receivables was mainly attributable
to the decrease in revenue in our Data Center Hardware segment and at our Data
Security and Compliance segment coupled with tighter credit controls resulting
in better collections.




Net cash
used in investing activities for the nine months ended September 30, 2008 and
2007 was $42,612 and $85,649, respectively.  Net cash used in
investing activities in the nine months ended September 30, 2008 was for the
purchase of fixed assets, costs related to the acquisition of CCSI offset by
cash acquired as part of the acquisition of CCSI.




Net cash
used in financing activities for the nine months ended September 30, 2008 was
$287,884.  Net cash provided by financing activities for the nine
months ended September 30, 2007 was $1,601,579.  Net cash used in
financing activities for the nine months ended September 30, 2008 was the result
of paying off our previous revolving line of credit, the payment of financing
costs and the payment of dividends offset by borrowing under our current
revolving line of credit.  Net cash provided by financing activities
for the nine months ended September 30, 2007 was from borrowings under our
revolving line of credit offset by dividends paid on our preferred stock and the
payments for financing costs for our new line of credit with Wells Fargo
Bank.




On June
5, 2008, the Company entered into a Senior Security Purchase Agreement with
Victory Park Capital.  This agreement allows the Company to borrow up
to $10 million to finance both working capital needs and future
acquisitions.  The new facility replaced the Company's $7.5 million
asset based working capital facility with Wells Fargo Bank.  The new
revolving line of credit agreement provides for borrowings limited to the lesser
of $10,000,000 or the borrowing base of 80% of eligible accounts receivable plus
42.5% of eligible inventory plus 60% of eligible pre-billed service
receivables.  The interest rate charged is the greater of prime plus
seven percent (7.00%) and twelve percent (12.00%).  Commencing October
31, 2008, there are certain monthly financial ratios that need to be
met.  As of September 30, 2008, the Company was paying fifteen percent
(15%).  At September 30, 2008, the Company was in compliance with its
loan agreement.




On July
7, 2008, the Company completed of the acquisition of Contemporary Computer
Service, Inc. for $13,191,080 plus an additional stock earn out of up to an
additional 10 million shares of common stock based on achieving certain
performance milestones. The $13,191,080 purchase price was financed through a
combination of the issuance of 3,500,000 shares of common stock in the Company,
valued at $770,000, based upon the average market price for QSGI's common stock
for two days before, the day of and two days after May 7, 2008, the announcement
date, senior bank and seller financing in the amount of $10 million dollars,
both secured by the assets of the Company.  In connection with the
seller financing, the Company issued warrants to purchase 12,000,000 shares of
Common Stock at a purchase price of $0.30 per share valued at $1,287,878, based
upon the closing price on July 6, 2008, the date immediately prior to the
closing date.  The Company also incurred direct acquisition costs of
$1,133,202.




22
 QSGI
INC.





At
September 30, 2008, we have no more borrowing capacity under our current line of
credit.  As a result of the acquisition, we have incurred additional
debt and will incur additional interest expense.  We believe that the
anticipated cash flow from the acquisition will be sufficient to pay for the
additional debt service.  We believe that any excess cash flow from
CCSI after paying for the debt service, cash flow from current operations and
current financing arrangements with Victory Park Capital, will be sufficient to
meet our cash requirements for at least the next 12 months. However, we may need
to raise additional funds to finance unanticipated working capital requirements
or to acquire complementary businesses.  If we cannot fund current
debt and expenses, we will have to cut expenses so that we can meet our
obligations.




We do not
have any material commitments for capital expenditures during the next twelve
months.  Any required expenditure will be completed through internally
generated funding.




We did
not have any significant elements of income or loss not arising from continuing
operations in either of the periods ended September 30, 2008 and 2007 and do not
expect any in the remainder of fiscal 2008.  While our business is
marginally seasonal, we do not expect this seasonality to have a material
adverse affect on our results of operations or cash flows.




Item3     Quantitative and Qualitative
Disclosures About Market Risk




The
Company does not engage in transactions in derivative financial instruments or
derivative commodity instruments.  As of September 30, the Company’s
financial instruments were not exposed to significant market risk due to
interest rate risk, foreign currency exchange risk, commodity price risk or
equity price risk.




Item4     Controls and
Procedures




Evaluation of
disclosure controls and procedures




It is the
Chief Executive Officer’s and the Chief Financial Officer’s responsibility to
ensure that we maintain disclosure controls and procedures designed to provide
reasonable assurance that material information, both financial and
non-financial, and other information required under the securities laws to be
disclosed is identified and communicated to senior management on a timely basis.
Our disclosure controls and procedures include mandatory communication of
material events, automated accounting processing and reporting, management
review of monthly results and an established system of internal
controls.




Our
Disclosure Controls were designed to provide reasonable assurance that the
controls and procedures would meet their objectives. Our management, including
the CEO and CFO, do not expect that our Disclosure Controls will prevent all
errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable assurance of achieving the designed
control objectives and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple errors or mistakes. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusions of two or more people, or by management override of the control.
Because of the inherent limitations in a cost-effective, maturing control
system, misstatements due to error or fraud may occur and not be
detected.




23
 QSGI
INC.





The
evaluation of our Disclosure Controls included a review of the controls’
objectives and design, our implementation of the controls and the effect of the
controls on the information generated for use in this Form 10-Q.




Our
efforts to strengthen financial and internal controls continue. At December 31,
2007, our Board of Directors were advised by our accountants that during their
performance of the audit for the year ended December 31, 2007, two material
weaknesses were identified in our internal control over financial
reporting.  One material weakness in the Company's internal controls
that existed was an ineffective control to ensure the accuracy and completeness
in the determination of the allowance for doubtful accounts.  To
remedy this situation, the Chief Executive Officer, the President and the Chief
Financial Officer reviewed and have signed off on the recommended allowance for
doubtful accounts as of September 30, 2008, and will continue this practice on a
quarterly basis.




The
second material weakness in the Company's internal controls that existed was an
ineffective control relating to goodwill and intangible impairment analysis and
the monitoring of the recording of appropriate reserves for income
taxes.  The Company uses an outside firm to calculate the value of
goodwill and intangible assets and an outside firm to calculate the appropriate
amount of income taxes for the year.  The Company used an outside firm
to calculate the value and life of the intangible assets acquired as part of the
acquisition.  During the fourth quarter of 2008, management intends to
remediate this weakness by establishing written procedures concerning complex
accounting issues, additional employee training and changing the process by
which these calculations are done.




As of
September 30, 2008, in light of the above, we evaluated the effectiveness of the
design and operation of our Disclosure Controls.  The controls
evaluation was done under the supervision and with the participation of
management, including our CEO and CFO.  Based on this evaluation, our
CEO and CFO have concluded these controls are not effective.




Changes
in internal control over financial reporting




During
the period covered by this report, there was a change in the Company's internal
control over financial reporting that have materially affected or are reasonably
likely to materially affect the Company's internal control over financial
reporting.  At December 31, 2007, our Board of Directors were advised
by our accountants that a material weakness in the Company's internal controls
exists in that there is not an effective control to ensure the accuracy and
completeness in the determination of the allowance for doubtful
accounts.  To remedy this situation, the Chief Executive Officer, the
President and the Chief Financial Officer have signed off on the recommended
allowance for doubtful accounts as of September 30, 2008, and will continue this
practice on a quarterly basis.




Part
II – OTHER INFORMATION




Item1.    Legal Proceedings




From time
to time, the Company may be party to legal proceedings which arise generally in
the ordinary course of business.  In the opinion of management, these
proceedings are not likely to have a material adverse affect on the financial
position, results of operations or cash flows of the Company.




The
Company may be involved in legal proceedings which may have a material adverse
affect on the financial position, results of operations or cash flows of the
Company. Therefore estimates of potential impact of legal proceedings on the
Company could change in the future depending upon matters in suit and the course
of specific litigation.  One such proceeding is currently pending in
the Supreme Court, State of New York.  In this action, Agile Equity,
LLC. Seeks approximately $500,000 from the Company in connection with investment
banking relating to the acquisition of CCSI.  The Company has asserted
multiple defenses and a counter-claim against Agile Equity, LLC. including
breach of duty, doctrine of first breach and breach of contract.  The
Company has not yet made of determination as to the amount, if any, it may be
required to pay Agile Equity, LLC. should the court determine the Company has
liability to Agile Equity, LLC.




24
 QSGI
INC.





Item1A.     Risk
Factors




Reference
is made to the factors set forth under the "Management Discussion and Analysis
of Financial Condition and Results of Operations" in Part I, Item 2 of
this Form 10-Q and other risk factors described in our Annual Report on Form
10-K for the year ended December 31, 2007, which are incorporated herein by
reference. There have not been any material changes to the risk factors
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2007.




Item2.      Unregistered sales
of equity securities and Use of Proceeds




None




Item3.      Defaults Upon Senior
Securities




Not
      applicable.




Item4.     Submission of Matters to a Vote
of Security Holders




None




Item5.     Other Information




None




Item6.     Exhibits




ExhibitsSee
      List of Exhibits filed as part of this quarterly
      report on Form 10-Q.




25
 QSGI
INC.





SIGNATURE




In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.




QSGI
      INC. Inc.
              (Registrant)Dated:                      November
      14, 2008
            By:
            /s/
      Marc ShermanMarc
      ShermanChairman
      of the Board and Chief Executive OfficerDated:                      November
      14, 2008
            By:
            /s/
      Edward L. CummingsEdward
      L. CummingsChief
      Financial Officer and Treasurer






26
 QSGI
INC.





ListOf Exhibits




Exhibit
      Number
            Description2.1
            Agreement
      and plan of Merger by and among Windsortech, Inc., Qualtech International
      Corporation and Qualtech Service Group, Inc. dated May 1,
      2004.3.1
            Certificate
      of Amendment of Certificate of Incorporation of WindsorTech, Inc.
      **3.2
            Amended
      and Restated ByLaws of WindsorTech, Inc. (Incorporated herein reference to
      Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-QSB filed with
      the Commission on August 19, 2002 (Commission file number
      000-07539)).3.3
            Action
      by Consent in Writing of a Majority of Stockholders dated May 19, 2004
      concerning Amended and Restated By Laws.3.4
            Action
      by Consent in Writing of a Majority of Stockholders dated September 17,
      2004 increasing the number of shares of the Corporation4.1
            Specimen
      Common Stock Certificate of WindsorTech, Inc. (Incorporated herein
      reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form
      10-QSB filed with the Commission on August 19, 2002 (Commission file
      number 000-07539)).4.2***
            Form
      of Stock Purchase Agreements with Barron Partners, L.P., Guerrilla
      Capital, and Odin Partners et al. dated May 26, 2004.4.3***
            Form
      of Registration Rights Agreements with Barron Partners, L.P., Guerrilla
      Capital, and Odin Partners et al. dated May 26, 2004.4.4***
            Form
      of Common Stock Purchase Warrant at $1.50 per share dated May 28,
      2004.4.5***
            Form
      of Common Stock Purchase Warrant at $3.60 per share dated May 28,
      20044.6
            Form
      of Registration Rights Agreement with Joel Owens and Jolene Owens dated
      May 1, 2004.10.1*
            Employment
      and Non-Compete Agreement – Edward L. Cummings **10.2*
            Employment
      and Non-Compete Agreement – David A. Loppert **10.3*
            Employment
      and Non-Compete Agreement – Carl C. Saracino **10.4*
            Employment
      and Non-Compete Agreement – Michael P. Sheerr **10.5*
            Employment
      and Non-Compete Agreement – Marc Sherman **10.6*
            2002
      Flexible Stock Plan (Incorporated herein reference to Exhibit 10.6 to the
      Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on
      April 16, 2002 (Commission file number 000-07539)).10.7
            Lease
      Agreement (Incorporated herein reference to Exhibit 10.9 to the
      Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on
      August 19, 2002 (Commission file number 000-07539)).10.8
            Employment
      and Non-Compete Agreement – Joel Owens10.9**
            Employment
      and Non-Compete Agreement – Seth A. Grossman10.10**
            Credit
      Agreement by and among Windsortech, Inc., Qualtech International
      Corporation, Qualtech Services Corporation and Fifth Third
      Bank.




27
 QSGI
INC.
 
 Exhibit
      Number
              Description


16.1
            Letter
      from Milton Reece, CPA (“Reece”) concurring with the statements made by
      the Registrant in the Current Report on Form 8-K reporting Reece’s
      resignation as the Registrant’s principal accountant (incorporated herein
      by reference to Exhibit 16 to the Registrant’s Current Report on Form 8-K
      filed with the Commission on February 13, 2002 (Commission file number
      000-07539)).31.1***
            Chief Executive Officer Certification Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2***
            Chief Financial Officer Certification Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1***
            Certification of Chief Executive Officer and Chief
      Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.*      Management
      contract or compensatory plan.**    Incorporated
      herein by reference to the same numbered exhibit in the Registrant’s
      Transition Report on Form 10-KSB filed with the Commission on April 1,
      2002 (Commission file number 000-07539).***  Attached
      hereto.There
      are no other documents required to be filed as an Exhibit as required by
      Item 601 of Regulation S-K.