As
      filed with the Securities and Exchange Commission on August 14,
      2006






**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549








**FORM
      10-QSB**


**(Mark
      One)**


**QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**


For
      the
      quarterly period ended June 30, 2006





**OR**





**TRANSITION
      REPORT UNDER 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 small business issuer as specified in its charter)





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





**70
      Lake Drive, Hightstown, NJ 08520**


(Address
      of Principal Executive Offices)





**(609)
      426-4666**


(Issuer’s
      Telephone Number)





**Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.**Yes x Noo





**Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).**Yes o Nox





The
      number of shares outstanding of each class of our common equity as of August
      1,
      2006, is as follows:




Class
                of Common Equity
            
            Number
                of SharesCommon
                Stock, par value $.01
            
            31,172,716




Transitional
      Small Business Disclosure Format:




Yes  o No x







**QSGI
                INC.**TABLE
                OF CONTENTSItem
            Description
            Page**PART
                I - FINANCIAL INFORMATION**1.
            Financial
                Statements*(all
                unaudited)*Condensed
                Consolidated Balance Sheets -
              June
                30, 2006 and December 31, 2005
            1Condensed
                Consolidated Statements of Operations
                -
              Three
                and Six Months Ended June 30, 2006 and 2005
            2Condensed
                Consolidated Statement of Stockholders’ Equity
                -
              Six
                Months Ended June 30, 2006
            3Condensed
                Consolidated Statements of Cash Flows -
              Six
                Months Ended June 30, 2006 and 2005
            4Notes
                to Condensed Consolidated Financial Statements
            52.
            Management’s
                Discussion and Analysis of Financial Condition
              and
                Results of Operations
            113.
            Controls
                and Procedures
            20**PART
                II - OTHER INFORMATION**1.
            Legal
                Proceedings
            212.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            223.
            Defaults
                Upon Senior Securities
            224.
            Submission
                of Matters to a Vote of Security
                Holders
            225.
            Other
                Information
            226.
            Exhibits
            22SIGNATURES
            23EXHIBITS
            24





**QSGI
        INC.**
 
 **CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(Unaudited)**


**June
                30,**
            
            December
                31,**2006**
            
            2005**Assets****Current
                Assets**Cash
                and cash equivalents
            
            **$**
            -
            
            $
            153,794Accounts
                receivable, net of reserve of $559,656 in 2006 and $80,000 in 2005
            
            
            **5,825,093**
            
            
            7,014,129Inventories
            
            
            **4,517,328**
            
            
            4,136,304Prepaid
                expenses, income taxes and other assets
            
            
            **304,794**
            
            
            227,352Deferred
                income taxes
            
            
            **72,095**
            
            
            155,668**Total
                Current Assets**
            
            
            **10,719,310**
            
            
            11,687,247**Property
                and Equipment, Net**
            
            
            **511,229**
            
            
            605,887**Goodwill**
            
            
            **6,644,403**
            
            
            3,212,314**Intangibles,
                Net**
            
            
            **2,713,912**
            
            
            2,872,240**Other
                Assets**
            
            
            **126,994**
            
            
            116,225**$**
            **20,715,848**
            
            $
            18,493,913**Liabilities
                And Stockholders’ Equity****Current
                Liabilities**Revolving
                line of credit
            
            **$**
            **738,322**
            
            $
            3,631,500Accounts
                payable
            
            
            **949,733**
            
            
            2,254,136Accrued
                expenses
            
            
            **377,557**
            
            
            279,090Deferred
                revenue
            
            
            **1,311,275**
            
            
            404,540Accrued
                payroll and other liabilities
            
            
            **258,273**
            
            
            293,500**Total
                Current Liabilities**
            
            
            **3,635,160**
            
            
            6,862,766**Deferred
                Income Taxes**
            
            
            **159,454**
            
            
            280,318**Total
                Liabilities**
            
            
            **3,794,614**
            
            
            7,143,084**Redeemable
                Convertible Preferred Stock**
            
            
            **4,211,922**
            
            
            1,967,220**Stockholders’
                Equity**Preferred
                shares: authorized 5,000,000 shares in 2006and
                2005, $0.01 par value, none issued
            
            
            -
            
            
            -Common
                shares: authorized 55,000,000 shares in 2006 and 2005,$0.01
                par value; 31,172,716 shares issued and outstanding in 2006and
                28,670,631 shares issued and outstanding in 2005
            
            
            **311,727**
            
            
            286,706Additional
                paid-in capital
            
            
            **14,520,731**
            
            
            11,093,881Retained
                earnings (deficit)
            
            
            **(2,123,146**
            **)**
            
            (1,996,978
            )**Total
                Stockholders’ Equity**
            
            
            **12,709,312**
            
            
            9,383,609**$**
            **20,715,848**
            
            $
            18,493,913





See
            the
            accompanying notes to condensed consolidated financial
            statements.
 1


**QSGI
        INC.**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF
          OPERATIONS**


**For
      The Three and Six Months Ended June 30, 2006 and 2005**


(Unaudited)




**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2006**
            
            2005
            
            **2006**
            
            2005**Product
                Revenue**
            
            **$**
            **13,915,641**
            
            $
            8,066,592
            
            **$**
            **22,037,867**
            
            $
            14,623,515**Service
                Revenue**
            
            
            **1,275,699**
            
            
            880,833
            
            
            **2,437,597**
            
            
            1,640,600**Total
                Revenue**
            
            
            **15,191,340**
            
            
            8,947,425
            
            
            **24,475,464**
            
            
            16,264,115**Cost
                Of Products Sold**
            
            
            **11,721,788**
            
            
            6,575,189
            
            
            **18,457,060**
            
            
            12,176,855**Cost
                Of Services Sold**
            
            
            **407,099**
            
            
            273,804
            
            
            **789,745**
            
            
            580,803**Total
                Cost Of Sales**
            
            
            **12,128,887**
            
            
            6,848,993
            
            
            **19,246,805**
            
            
            12,757,658**Gross
                Profit**
            
            
            **3,062,453**
            
            
            2,098,432
            
            
            **5,228,659**
            
            
            3,506,457**Selling,
                General And Administrative Expenses**
            
            
            **2,306,251**
            
            
            2,216,354
            
            
            **4,890,911**
            
            
            4,384,071**Depreciation
                And Amortization**
            
            
            **171,607**
            
            
            156,073
            
            
            **341,680**
            
            
            300,943**Interest
                Expense, net**
            
            
            **47,465**
            
            
            3,744
            
            
            **99,783**
            
            
            27,300**Income
                (Loss) Before Provision (Benefit) For Income
                Taxes**
            
            
            **537,130**
            
            
            (277,739
            )
            
            **(103,715**
            **)**
            
            (1,205,857
            )**Provision
                (Benefit) For Income Taxes**
            
            
            **232,545**
            
            
            (53,550
            )
            
            **22,453**
            
            
            (375,390
            )**Net
                Income (Loss)**
            
            
            **304,585**
            
            
            (224,189
            )
            
            **(126,168**
            **)**
            
            (830,467
            )**Preferred
                Stock Dividends**
            
            
            **65,162**
            
            
            -
            
            
            **127,036**
            
            
            -**Accretion
                To Redemption Value of Preferred Stock**
            
            
            **4,391**
            
            
            -
            
            
            **8,400**
            
            
            -**Net
                Income (Loss) Available to Common Stockholders**
            
            **$**
            **235,032**
            
            $
            (224,189
            )
            **$**
            **(261,604**
            **)**
            $
            (830,467
            )**Net
                Income (Loss) Per Common Share - Basic**
            
            $
            **0.01**
            
            $
            (**0.01**
            **)**
            $
            (**0.01**
            **)**
            $
            (0.03
            )**Net
                Income (Loss) Per Common Share - Diluted**
            
            $
            **0.01**
            
            $
            (**0.01**
            **)**
            $
            (**0.01**
            **)**
            $
            (0.03
            )**Weighted
                Average Number Of Common**
              **Shares Outstanding -Basic**
            
            
            **29,335,934**
            
            
            28,578,340
            
            
            **29,064,467**
            
            
            27,672,696**Weighted
                Average Number Of Common**
              **Shares Outstanding -Diluted**
            
            
            **30,440,652**
            
            
            28,578,340
            
            
            **29,064,467**
            
            
            27,672,696


See
              the
              accompanying notes to condensed consolidated financial
              statements.
 2


**QSGI
        INC.**
 **CONDENSED
          CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**


**For
      The Six Months Ended June 30, 2006**


(Unaudited)





**Additional**
            
            **Retained**
            
            **Total****Common
                Stock**
            
            **Paid-in**
            
            **Earnings**
            
            **Stockholders’****Number**
            
            **Amount**
            
            **Capital**
            
            **(Deficit)**
            
            **Equity****Balance
                (Deficit) - December 31, 2005**
            
            
            28,670,631
            
            $
            286,706
            
            $
            11,093,881
            
            $
            (1,996,978
            )
            $
            9,383,609**Options
                Exercised**
            
            
            350,000
            
            
            3,500
            
            
            5,600
            
            
            -
            
            
            9,100**Stock
                Option Compensation**
            
            
            -
            
            
            -
            
            
            9,930
            
            
            -
            
            
            9,930**Shares
                Issued For Services**
            
            
            88,540
            
            
            885
            
            
            160,802
            
            
            -
            
            
            161,687**Preferred
                Stock Dividends**
            
            
            -
            
            
            -
            
            
            (127,036
            )
            
            -
            
            
            (127,036
            )**Accretion
                To Redemption Value Of Preferred Stock**
            
            
            -
            
            
            -
            
            
            (8,400
            )
            
            -
            
            
            (8,400
            )**Common
                Shares Issued For****Qualtech
                Earn-out**
            
            
            2,063,545
            
            
            20,636
            
            
            3,385,954
            
            
            -
            
            
            3,406,590**Net
                Loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            (126,168
            )
            
            (126,168
            )**Balance
                (Deficit) - June 30, 2006**
            
            
            31,172,716
            
            $
            311,727
            
            $
            14,520,731
            
            $
            (2,123,146
            )
            $
            12,709,312




See
            the
            accompanying notes to condensed consolidated financial
            statements.
 3


**QSGI
        INC.**
 **CONDENSED
          CONSOLIDATED STATEMENTSOF CASH
          FLOWS**


**For
      The Six Months Ended June 30, 2006 and 2005**


(Unaudited)





**2006**
            
            2005**Cash
                Flows From Operating Activities**Net Loss
            
            **$**
            **(126,168**
            **)**
            $
            (830,467
            )Adjustments
                to reconcile net loss to net cash provided by (used in ) operating
                activities:Depreciation and amortization
            
            
            **341,680**
            
            
            300,943Stock option compensation expense
            
            
            **9,930**
            
            
            12,666Deferred income taxes
            
            
            **(37,292**
            **)**
            
            (431,290
            )Common shares issued for services
            
            
            **161,687**
            
            
            -Allowance for doubtful accounts
            
            
            **479,656**
            
            
            (38,670
            )Changes in assets and liabilities:Accounts
                receivable
            
            
            **709,380**
            
            
            (2,365,399
            )Inventories
            
            
            **(381,024**
            **)**
            
            (649,320
            )Prepaid
                expenses and other current assets
            
            
            **(101,942**
            **)**
            
            (17,079
            )Accounts
                payable and accrued expenses
            
            
            **(334,427**
            **)**
            
            1,612,108**Net
                Cash Provided by (Used In) Operating Activities**
            
            
            **721,480**
            
            
            (2,406,508
            )**Cash
                Used In Investing Activities**Payments for Qualtech acquisition, net of cash acquired
            
            
            **-**
            
            
            (86,520
            )Purchases of property and equipment
            
            
            **(74,962**
            **)**
            
            (241,263
            )**Net
                Cash Used In Investing Activities**
            
            
            **(74,962**
            **)**
            
            (327,783
            )**Cash
                Flows From Financing Activities**Proceeds from the issuance of redeemable preferred stock
            
            
            **2,236,301**
            
            
            -Proceeds from the exercise of options and warrants
            
            
            **9,100**
            
            
            2,597,809Other financing fees
            
            
            -
            
            
            (48,125
            )Stock issuance costs
            
            
            **(25,499**
            **)**
            
            -Preferred stock dividends
            
            
            **(127,036**
            **)**
            
            -Net amounts paid on notes payable
            
            
            **-**
            
            
            (856,666
            )Net amounts (paid) borrowed under revolving lines of
                credit
            
            
            **(2,893,178**
            **)**
            
            916,000**Net
                Cash Provided By (Used In) Financing Activities**
            
            
            **(800,312**
            **)**
            
            2,609,018**Net
                Decrease In Cash And Cash Equivalents**
            
            
            **(153,794**
            **)**
            
            (125,273
            )**Cash
                And Cash Equivalents - Beginning Of Period**
            
            
            **153,794**
            
            
            844,939**Cash
                And Cash Equivalents - End of Period**
            
            **$**
            **-**
            
            $
            719,666  See
              the
              accompanying notes to condensed consolidated financial statements.
 4
 **QSGI
              INC.**


**NOTES
      TO 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 June 30, 2006 and December 31, 2005 and for the
      three and six months ended June 30, 2006 and 2005 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-QSB and Item 310 of Regulation S-B 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 six months
      ended June 30, 2006 is not necessarily indicative of the results that may be
      expected for the entire year ending December 31, 2006. These statements should
      be read in conjunction with the financial statements and related notes thereto
      included in our Annual Report on Form 10-KSB and Form 10-KSB/A for the year
      ended December 31, 2005.




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




**Business
      Organization**




We
      are a
      technology services company. Our Data Security and Compliance services as well
      as our Data Center Hardware and Data Center Maintenance services are geared
      towards both the users of business-computing hardware (desktops, laptops,
      related peripherals and servers) as well as the users of enterprise-class
      hardware (mainframes, midrange processors, large storage, controllers, etc.).
      We
      use the trade name “QGSI” in order to build cohesion among the various
      technology services that we offer and build brand recognition and preference
      through strong cross-marketing opportunities. In October 2005, we changed our
      name to QSGI INC. from WindsorTech, Inc.




On
      May
      28, 2004, the Company purchased QualTech International Corporation and QualTech
      Services Group, Inc. QualTech International Corporation sells refurbished IBM
      mainframes and associated IBM peripherals to companies around the world.
      QualTech Services Group, Inc. provides hardware maintenance solutions and
      information systems consulting services to businesses in the United States.




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





**A.**
            **Data
                Security & 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, and servers) 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




5


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





These
      services can be custom tailored to meet our customer’s needs and implemented at
      one client location or at multiple locations, onsite, at QSGI facilities or
      through the use of our mobile audit and erasure truck.





**B.
      Data Center Hardware**





We
      are a
      leading reseller of refurbished IBM mainframe processors, IBM midrange
      processors and associated peripheral products including tape and disk products
      and connectivity products to companies around the world.





**C.
      Data Center Maintenance**





We
      provide hardware maintenance services for enterprise-class hardware and Data
      Center consulting to companies throughout the United States.





Across
      all three segments, we purchase excess, used, off-lease and refurbished hardware
      from a variety of sources including Fortune 1000 companies, as well as leasing
      and finance companies.




The
      Company has office and warehouse space in Hightstown, New Jersey, and Eagan,
      Minnesota, and satellite sales and business development offices in Colorado,
      Connecticut, Florida, Illinois, Maine, Michigan, New York, North Carolina,
      Nebraska, New Hampshire, Pennsylvania, South Carolina, Texas, Virginia,
      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.




**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 six months ended June 30, 2006 and 2005 are as
      follows:




Three
                Months Ended June 30,
            
            Six
                Months Ended June 30,2006
            
            2005
            
            2006
            
            2005Basic
            
            
            29,335,934
            
            
            28,578,340
            
            
            29,064,467
            
            
            27,672,696Stock
                options
            
            
            1,104,718
            
            
            -
            
            
            -
            
            
            -






6




Stock
                warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -Redeemable
                preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -Diluted
            
            
            30,440,652
            
            
            28,578,340
            
            
            29,064,467
            
            
            27,672,696




For
      the
      six months ended June 30, 2006 and 2005, the Company excluded weighted average
      common share equivalents related to stock options of 1,164,178 and 2,189,996,
      respectively, weighted average common share equivalents related to stock
      warrants of 0 and 1,121,331, respectively, and redeemable preferred stock of
      1,911,111 and 0, respectively, because their effect would be
      anti-dilutive.




For
      the
      three months ended June 30, 2006, the Company excluded weighted average common
      share equivalents related to redeemable preferred stock of
      1,911,111.




For
      the
      three months ended June 30, 2005, the Company excluded weighted average common
      share equivalents related to stock options 1,421,231 and weighted average common
      share equivalents related to stock warrants of 404,343 because their effect
      would be anti-dilutive.




**Stock-Based
      Compensation**




In
      December 2004, the FASB issued SFAS No. 123R, *Share-Based
      Payment.* SFAS No.
      123R requires measurement of all employee stock-based compensation awards using
      a fair value method and the recording of such expense in the consolidated
      financial statements. In addition, the adoption of SFAS No. 123R requires
      additional accounting related to the income tax effects and additional
      disclosure regarding the cash flow effects resulting from share-based payment
      arrangements. Effective January 1, 2006, we adopted SFAS No. 123R using the
      modified prospective method.




In
      2002,
      the Company’s stockholders approved our 2002 Flexible Stock Plan. Under the
      plan, options, stock appreciation rights or performance shares may be granted
      to
      certain directors, officers and employees. The stockholders approved 5,000,000
      shares, plus an annual increase equal to 10% of the number of outstanding shares
      outstanding as of the first day of each calendar year. Option awards are
      generally granted with an exercise price equal to the market price of the
      Company’s stock at the date of grant. Options granted between 2001 and 2005 vest
      upon issuance or up to five years from date of issuance and expire in either
      five years or ten years from date of vesting. No stock options were granted
      during the six months ended June 30, 2006. When stock options are granted,
      the
      fair value of options granted is estimated on the date of grant using the
      Black-Scholes option-pricing model. The expense is then recorded straight-line
      over the vesting period.




Our
      net
      income for the three and six months ended June 30, 2006 includes compensation
      costs of $2,950 and $9,930, respectively. As of June 30, 2006, there was
      approximately $52,000 of total unrecognized compensation costs related to stock
      options. These costs will be recognized over the next five years.






7




A
      summary
      of option activity for the six months ended June 30, 2006 is as
      follows:




Shares
              (in
                thousands)
            
            Weighted
                Average
              Exercise
                Price
            
            Weighted
                Average Remaining Contractual Term (years)
            
            Aggregate
              Intrinsic
                Value (in thousands)Balance,
                December 31, 2005
            
            
            12,567
            
            $
            1.92
            
            
            8.2
            
            $
            3,863Granted
            
            
            -
            
            
            -Exercised
            
            
            (350
            )
            
            .026Canceled
            
            
            -
            
            
            -Forfeited
            
            
            (25
            )
            
            1.54Balance,
                June 30, 2006
            
            
            12,192
            
            $
            1.97
            
            
            8.0
            
            $
            2,897




Substantially
      all of the Company’s outstanding stock options are currently
      exercisable.




During
      the six months ended June 30, 2006 and 2005, the following stock option activity
      occurred:




Six
                Months Ended
              June
                30,2006
            
            2005Total
                intrinsic value of stock options exercised
            
            $
            635,900
            
            $
            2,641,890




Cash
      received from stock
      option exercises for the six months ended June 30, 2006 and 2005 was $9,100
      and
      $1,247,810, respectively. As of June 30, 2006, an aggregate of 4,166,862 shares
      were authorized for future grants under our flexible stock plan. When options
      are exercised, new shares are issued. Option grants that expire or forfeited
      without exercise become available under the plan.




The
      following table illustrates the effect on net loss and loss per share if the
      Company had applied the fair value recognition provisions of SFAS No. 123,
      "Accounting for Stock-Based Compensation", to stock-based employee compensation
      for periods presented prior to the Company's adoption of Statement
      123R:




Six
                Months Ended June 30,2005Net
                loss, as reported
            
            $
            (830,467
            )Add:
                Stock-based employee compensation expense included in reported net
                loss,
                net of related tax effects
            
            
            7,726Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (6,900,090
            )Pro
                forma net loss
            
            $
            (7,722,831
            )Loss
                per share:Basic
                - as reported
            
            $
            (0.03
            )Diluted
                - as reported
            
            $
            (0.03
            )Basic
                - Pro forma
            
            $
            (0.28
            )Diluted
                - Pro forma
            
            $
            (0.28
            )







8




The
      weighted average per share fair value of the options granted was $2.05 for
      the
      six months ended June 30, 2005. The fair value of each option granted is
      estimated on the date of grant using the Black-Scholes option-pricing model
      with
      the following weighted-average assumptions:




2005Risk-free
                interest rate
            4.0%Expected
                option life
            5
                yearsExpected
                volatility
            92.2%Expected
                dividend yields
            0%




**3.** **INVENTORIES**




Inventories
      at June 30, 2006 and December 31, 2005 consist of:




2006
            
            2005Finished
                goods
            
            $
            3,646,841
            
            $
            3,144,515Inventory
                in transit
            
            
            917,487
            
            
            1,041,789Allowance
                for excess and obsolescence
            
            
            (47,000
            )
            
            (50,000
            )$
            4,517,328
            
            $
            4,136,304




**4.**  **FINANCING**




On
      May 3,
      2005, the Company entered into a revolving line of credit agreement that
      provides for borrowings limited to the lesser of $4,250,000 or the borrowing
      base of 80% of eligible accounts receivable plus 40% of inventories and in
      certain circumstances 60% of eligible inventories, with eligible inventories
      not
      to exceed $1,500,000. Availability on the line of credit at June 30, 2006 was
      $3,511,678. Interest on this loan is payable monthly at the prime rate plus
      one
      percent (7.0% at May 3, 2005 and 9.25% at June 30, 2006), with all principal
      and
      interest due April 1, 2007. In accordance with EITF Issue No. 95-22, the line
      of
      credit is classified as a current liability due to the agreement containing
      a
      subjective acceleration clause and a lock-box arrangement. All loans or lines
      of
      credit that the Company had prior to this date were paid and cancelled.




The
      revolving line of credit arrangement contains certain financial covenants,
      including maintaining a minimum tangible net worth, a minimum fixed charge
      coverage ratio, and limiting capital expenditures. At June 30, 2006, the Company
      was in compliance with all covenants.




**5.**  **TAXES**




In
      the
      second quarter of 2006, during preparation of the Company’s federal income tax
      return for the year ended December 31, 2005, it was discovered that certain
      compensation deductions related to the exercise of stock options, totaling
      approximately $2.3 million, were excluded from the Company’s tax provision
      prepared at December 31, 2005.






9






The
      impact of these additional deductions was to increase the deferred tax asset
      by
      approximately $870,000. The Company determined that, had these facts been known
      during the original preparation of the tax provision for the year ended December
      31, 2005, a valuation allowance would have been provided against these
      additional deferred tax assets. Because there was no net balance sheet or income
      statement impact, the Company recorded these adjustments to its deferred tax
      accounts at June 30, 2006, and prior periods were not adjusted. Should the
      Company determine in the future that the deferred tax asset valuation allowance
      should be reversed, it will result in an increase to additional paid-in capital,
      with no impact on the tax provision.




Based
      on
      the revised calculations, as of December 31, 2005, the Company has approximately
      $4.4 million of net operating loss carryforwards for federal income tax
      purposes.




**6.**  **ACQUISITIONS**




Under
      the
      terms of the acquisition agreement, as amended, with Qualtech International
      Corporation and its affiliate, Qualtech Services Group, Inc. that was completed
      on May 28, 2004, as of May 1, 2006, additional merger consideration was due
      to
      the selling shareholders. The selling shareholders were entitled to this
      additional merger consideration in the form of restricted shares of the Company
      representing at least fifty percent (50%) of the total consideration to be
      paid
      and cash of up to fifty percent (50%) of the additional consideration which
      was
      to be determined at the discretion of the Company. Any portion that was to
      be
      paid in cash was due within 30 days following the second anniversary of the
      effective date of the acquisition. Any portion that was to be paid in stock
      was
      due on February 15, 2007. The number of shares was to be determined by using
      the
      average trading price 15 days prior to February 14, 2007. The Company elected
      to
      pay the consideration early in restricted shares of the Company. To settle
      the
      earn-out, 2,063,545 shares were issued at a value of approximately $1.66 per
      share resulting in additional goodwill in the amount of $3,432,089.




**7.**  **SEGMENT
      INFORMATION**




The
      Company operates in three business segments: Data Security & Compliance,
      Data Center Hardware, and Data Center Maintenance. 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**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2006**
            
            2005
            
            **2006**
            
            2005**Revenues******Data
                Security and Compliance
            
            **$**
            **5,507,236**
            
            $
            3,129,209
            
            $
            10,271,966
            
            $
            5,427,905****Data
                Center Hardware
            
            
            **8,532,316**
            
            
            5,304,304
            
            
            12,479,366
            
            
            9,849,284****Data Center Maintenance
            
            
            **1,170,003**
            
            
            811,568
            
            
            2,165,022
            
            
            1,547,841****Intersegment Elimination
            
            
            **(18,215**
            **)**
            
            (297,656
            )
            
            (440,890
            )
            
            (560,915
            )**Consolidated
                Total**
            
            **$**
            **15,191,340**
            
            $
            8,947,425
            
            $
            24,475,464
            
            $
            16,264,115






10






**Income
                (loss) before Provision (Benefit) for Income
                Taxes******Data Security and Compliance
            
            **$**
            **(676,945**
            **)**
            $
            (841,332
            )
            $
            (1,428,817
            )
            $
            (1,974,193
            )****Data Center Hardware
            
            
            **928,824**
            
            
            381,403
            
            
            808,722
            
            
            379,966****Data Center Maintenance
            
            
            **285,251**
            
            
            182,190
            
            
            516,380
            
            
            388,370**Consolidated
                Total**
            
            **$**
            **537,130**
            
            $
            (277,739
            )
            $
            (103,715
            )
            $
            (1,205,857
            )




**Item
      2.**  **MANAGEMENT'SDISCUSSION 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-KSB and Form 10-KSB/A Amendment No 1 for the year
      ended
      December 31, 2005. 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.




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.






11




**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**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2006**
            
            2005
            
            **2006**
            
            2005**%**
            
            
            %
            
            
            **%**
            
            
            %**Product
                Revenue**
            
            
            **91.6**
            
            
            90.2
            
            
            **90.0**
            
            
            89.9**Service
                Revenue**
            
            
            **8.4**
            
            
            9.8
            
            
            **10.0**
            
            
            10.1**Total
                Revenue**
            
            
            **100.0**
            
            
            100.0
            
            
            **100.0**
            
            
            100.0**Cost
                Of Products Sold**
            
            
            **77.2**
            
            
            73.5
            
            
            **75.4**
            
            
            74.9**Cost
                Of Services Sold**
            
            
            **2.6**
            
            
            3.0
            
            
            **3.2**
            
            
            3.5**Cost
                Of Products and Services Sold**
            
            
            **79.8**
            
            
            76.5
            
            
            **78.6**
            
            
            78.4**Gross
                Profit**
            
            
            **20.2**
            
            
            23.5
            
            
            **21.4**
            
            
            21.6**Selling,
                General And Administrative**
              **Expenses**
            
            
            **15.2**
            
            
            24.8
            
            
            **20.0**
            
            
            27.0**Depreciation
                And Amortization**
            
            
            **1.2**
            
            
            1.7
            
            
            **1.4**
            
            
            1.8**Interest
                Expense, net**
            
            
            **0.3**
            
            
            0.1
            
            
            **0.4**
            
            
            0.2**Income
                (Loss) Before Provision (Benefit) For**
              **Income Taxes**
            
            
            **3.5**
            
            
            (3.1
            )
            
            **(0.4**
            **)**
            
            (7.4
            )**Provision
                (Benefit) For Income Taxes**
            
            
            **1.5**
            
            
            (0.6
            )
            
            **0.1**
            
            
            (2.3
            )**Net
                Income (Loss)**
            
            
            **2.0**
            
            
            (2.5
            )
            
            **(0.5**
            **)**
            
            (5.1
            )




***Quarter
      Ended June 30, 2006 Compared to Quarter Ended June 30,
      2005***




Revenue
      for the quarter ended June 30, 2006 was $15,191,340 compared to revenue of
      $8,947,425 for the quarter ended June 30, 2005, a $6,243,915 increase, or 69.8%.
      Revenue in our Data Security and Compliance segment for the quarter ended June
      30, 2006 increased to $5,507,236 from $3,129,209 for the quarter ended June
      30,
      2005, a $2,378,027 increase, or 76.0%. This was the result of new and existing
      corporate customers utilizing our full suite of services as well as a
      substantial increase in our wholesale remarketing revenues. Revenue in our
      Data
      Center Hardware Segment for the quarter ended June 30, 2006 increased to
      $8,532,316 from $5,304,304 for the quarter ended June 30, 2005, a $3,228,012
      increase, or 60.9%. This division’s revenue growth benefited from the strength
      of a few substantial hardware sales to existing data center hardware and data
      center maintenance clients. Revenue in our Data Center Maintenance Services
      segment increased to $1,170,003 for the quarter ended June 30, 2006 from
      $811,568 for the quarter ended June 30, 2005, a $358,435 increase, or 44.2%.
      This was the result of signing additional service contracts with new and
      existing customers this year as well as new contracts that were signed during
      last year. These contracts are generally one to three year terms.






12




Our
      revenues categorized by products and services are as follows:


Three
                Months Ended
            
            Three
                Months EndedJune
                30, 2006
            
            June
                30, 2005RevenueProducts
            
            $
            13,915,641
            
            $
            8,066,592Services
            
            
            1,275,699
            
            
            880,833Total
                Revenue
            
            $
            15,191,340
            
            $
            8,947,425




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 June 30, 2006 was $3,062,453 of revenue compared
      to
      a gross profit of $2,098,432 for the quarter ended June 30, 2005, a $964,021
      increase, or 45.9%. Gross profit in our Data Security and Compliance segment
      for
      the quarter ended June 30, 2006 increased to $617,477 from $315,578 for the
      quarter ended June 30, 2005, a $301,899 increase, or 95.7%. Gross profit in
      our
      Data Center Hardware segment for the quarter ended June 30, 2006 increased
      to
      $1,636,339 from $1,191,633 for the quarter ended June 30, 2005, a $444,706
      increase, or 37.3%. Gross profit in our Data Center Maintenance segment for
      the
      quarter ended June 30, 2006 increased to $808,637 from $591,221 for the quarter
      ended June 30, 2005, a $217,416 increase, or 36.8%.




Gross
      margin for the quarter ended June 30, 2006 was 20.2% compared to a gross margin
      of 23.5% for the quarter ended June 30, 2005. Gross margin in our Data Security
      and Compliance segment for the quarter ended June 30, 2006 was 11.2% compared
      to
      a gross margin of 10.1% for the quarter ended June 30, 2005. The improvement
      in
      our gross profit and gross margin reflects both an increase in our wholesale
      re-marketing business, while holding down our semi-fixed cost of goods sold,
      as
      well as the addition of corporate customers utilizing our full suite of
      higher-margin data security services. Gross margin in our Data Center Hardware
      segment for the quarter ended June 30, 2006 was 19.2% of revenue compared to
      22.5% of revenue for the quarter ended June 30, 2005. Gross profit increased
      but
      margins decreased slightly as the result of a few substantial sales where the
      margins realized were lower. Gross margin in our Data Center Maintenance segment
      for the quarter ended June 30, 2006 was 69.1% of revenue compared to a gross
      margin of 72.8% for the quarter ended June 30, 2005. Gross profit increased
      but
      margins decreased slightly as we opened up a number of new sales offices and
      added maintenance engineers to support the expanded customer base.




Selling,
      general and administrative expenses for the quarter ended June 30, 2006 were
      $2,306,251 compared to selling, general and administrative expenses of
      $2,216,354 for the quarter ended June 30, 2006, a $89,897 increase, or 4.1%.
      The
      minimal increase demonstrates the relatively fixed cost nature of our business
      as revenues continue to grow.




Depreciation
      and amortization for the quarter ended June 30, 2006 was $171,607 compared
      to
      depreciation and amortization of $156,073 for the quarter ended June 30, 2005,
      a
      $15,534 increase, or 10.0%. This increase was the result of depreciation on
      fixed assets purchased during 2005, and the first six months of 2006.






13




Interest
      expense for the quarter ended June 30, 2006 was $47,465 compared to interest
      expense of $3,744 for the quarter ended June 30, 2005, a $43,721 increase,
      commensurate with an increase in the level of the Company’s borrowings and an
      increase in the rate of interest.




The
      Company recorded a federal tax and state tax expense for the three months ended
      June 30, 2006. The Company recorded a federal tax benefit for the three months
      ended June 30, 2005. 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.




In
      the
      second quarter of 2006, during preparation of the Company’s federal income tax
      return for the year ended December 31, 2005, it was discovered that certain
      compensation deductions related to the exercise of stock options, totaling
      approximately $2.3 million, were excluded from the Company’s tax provision
      prepared at December 31, 2005.




The
      impact of these additional deductions was to increase the deferred tax asset
      by
      approximately $870,000. The Company determined that, had these facts been known
      during the original preparation of the tax provision for the year ended December
      31, 2005, a valuation allowance would have been provided against these
      additional deferred tax assets. Because there was no net balance sheet or income
      statement impact, the Company recorded these adjustments to its deferred tax
      accounts at June 30, 2006, and prior periods were not adjusted. Should the
      Company determine in the future that the deferred tax asset valuation allowance
      should be reversed, it will result in an increase to additional paid-in capital,
      with no impact on the tax provision.




Based
      on
      the revised calculations, as of December 31, 2005, the Company has approximately
      $4.4 million of net operating loss carryforwards for federal income tax
      purposes.




***Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005***




Revenue
      for the six months ended June 30, 2006 was $24,475,464 compared to revenue
      of
      $16,264,115 for the six months ended June 30, 2005, an $8,211,349 increase,
      or
      50.5%. Revenue in our Data Security and Compliance segment for the six months
      ended June 30, 2006 increased to $10,271,966 from $5,427,905 for the six months
      ended June 30, 2005, a $4,844,061 increase, or 89.2%. This was the result of
      new
      and existing corporate customers utilizing our full suite of services as well
      as
      a substantial increase in our wholesale remarketing revenues. Revenue in our
      Data Center Hardware Segment for the six months ended June 30, 2006 increased
      to
      $12,479,366 from $9,849,284 for the six months ended June 30, 2005, a $2,630,082
      increase, or 26.7%. This division’s revenue growth benefited from the strength
      of a few substantial hardware sales to existing data center hardware and data
      center maintenance clients. Revenue in our Data Center Maintenance Services
      segment increased to $2,165,022 for the six months ended June 30, 2006 from
      $1,547,841 for the six months ended June 30, 2005, a $617,181 increase, or
      39.9%. This was the result of signing additional service contracts with new
      and
      existing customers this year as well as new contracts that were signed during
      last year. These contracts are generally one to three year terms.




Our
      revenues categorized by products and services are as follows:




Six
                Months Ended
            
            Six
                Months EndedJune
                30, 2006
            
            June
                30, 2005RevenueProducts
            
            $
            22,037,867
            
            $
            14,623,515Services
            
            
            2,437,597
            
            
            1,640,600Total
                Revenue
            
            $
            24,475,464
            
            $
            16,264,115




Gross
      profit for the six months ended June 30, 2006 was $5,228,659 of revenue compared
      to a gross profit of $3,506,457 for the six months ended June 30, 2005, a
      $1,722,202 increase, or 49.1%. Gross profit in our Data Security and Compliance
      segment for the six months ended June 30, 2006 increased to $1,440,526 from
      $489,486 for the six months ended June 30, 2005, a $951,040 increase, or 194.3%.
      Gross profit in our Data Center Hardware segment for the six months ended June
      30, 2006 increased to $2,312,030 from $1,947,479 for the six months ended June
      30, 2005, a $364,551 increase, or 18.7%. Gross profit in our Data Center
      Maintenance segment for the six months ended June 30, 2006 increased to
      $1,476,103 from $1,069,493 for the six months ended June 30, 2005, a $406,610
      increase, or 38.0%.




Gross
      margin for the six months ended June 30, 2006 was 21.4% compared to a gross
      margin of 21.6% for the six months ended June 30, 2005. Gross margin in our
      Data
      Security and Compliance segment for the six months ended June 30, 2006 was
      14.0%
      compared to a gross margin of 9.0% for the six months ended June 30, 2005.
      The
      improvement in our gross profit and gross margin reflects both an increase
      in
      our wholesale re-marketing business, while holding down our semi-fixed cost
      of
      goods sold, as well as the addition of corporate customers utilizing our full
      suite of higher-margin data security services. Gross margin in our Data Center
      Hardware segment for the six months ended June 30, 2006 was 18.5% of revenue
      compared to 19.8% of revenue for the six months ended June 30, 2005. Gross
      profit increased but margins decreased slightly as the result of a few
      substantial sales where the margins realized were lower. Gross margin in our
      Data Center Maintenance segment for the six months ended June 30, 2006 was
      68.2%
      of revenue compared to a gross margin of 69.1% for the six months ended June
      30,
      2005. Gross profit increased but margins decreased slightly as we opened up
      a
      number of new sales offices and added maintenance engineers to support the
      expanded customer base.




Selling,
      general and administrative expenses for the six months ended June 30, 2006
      were
      $4,890,911 compared to selling, general and administrative expenses of
      $4,384,071 for the six months ended June 30, 2006, a $506,840 increase, or
      11.6%. The increase was mainly the result of a one time increase in our
      allowance for doubtful accounts in the first quarter of 2006 whereby we took
      a
      charge of $448,000 from a single customer and against whom QSGI is pursuing
      recourse. Excluding the charge, the minimal increase demonstrates the relatively
      fixed cost nature of our business as revenues continue to grow.




Depreciation
      and amortization for the six months ended June 30, 2006 was $341,680 compared
      to
      depreciation and amortization of $300,943 for the six months ended June 30,
      2005, a $40,737 increase, or 13.5%. This increase was the result of depreciation
      on fixed assets purchased during 2005, and the first six months of 2006.




Interest
      expense for the six months ended June 30, 2006 was $99,783 compared to interest
      expense of $27,300 for the six months ended June 30, 2005, a $72,483 increase,
      commensurate with an increase in the level of the Company’s borrowings and an
      increase in the rate of interest.




14




The
        Company recorded a federal tax benefit for the six months ended June 30,
        2006
        and 2005.




**Business
      Segments**




We
      operate in three segments that clearly focus our services into
      easy-to-understand categories for our target customers: Data Security and
      Compliance, Data Center Hardware and Data Center Maintenance. 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.





**Data
      Security & Compliance Segment**





**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2006**
            
            2005
            
            **2006**
            
            2005**Revenue**
            
            **$**
            **5,507,236**
            
            $
            3,129,209
            
            $
            10,271,966
            
            $
            5,427,905**Gross
                Profit**
            
            
            **617,477**
            
            
            315,578
            
            
            1,440,526
            
            
            489,486**Selling,
                General And Administrative**
              **Expenses**
            
            
            **1,189,684**
            
            
            1,108,916
            
            
            2,655,684
            
            
            2,365,683**Depreciation
                And Amortization**
            
            
            **56,826**
            
            
            44,250
            
            
            112,693
            
            
            79,137**Loss
                Before Benefit For Income Taxes**
            
            
            **(676,945**
            **)**
            
            (841,332
            )
            
            (1,428,817
            )
            
            (1,974,193
            )**Segment
                Assets**
            
            
            **8,463,911**
            
            
            6,416,350
            
            
            8,463,911
            
            
            6,416,350**Goodwill**
            
            
            **-**
            
            
            -
            
            
            
            
            
            -**Expenditures
                for Property and Equipment**
            
            
            **21,409**
            
            
            120,429
            
            
            54,572
            
            
            193,697




***Quarter
      Ended June 30, 2006 Compared to Quarter Ended June 30,
      2005***




Revenue
      in our Data Security and Compliance segment for the quarter ended June 30,
      2006
      increased to $5,507,236 from $3,129,209 for the quarter ended June 30, 2005,
      a
      $2,378,027 increase, or 76.0%. This was the result of new and existing corporate
      customers utilizing our full suite of services as well as a substantial increase
      in our wholesale remarketing revenues.




Gross
      profit in our Data Security and Compliance segment for the quarter ended June
      30, 2006 increased to $617,477 from $315,578 for the quarter ended June 30,
      2005, a $301,899 increase, or 95.7%. Gross margin in our Data Security and
      Compliance segment for the quarter ended June 30, 2006 was 11.2% compared to
      a
      gross margin of 10.1% for the quarter ended June 30, 2005. The improvement
      in
      our gross profit and gross margin reflects both an increase in our wholesale
      re-marketing business,






15




while
      holding down our semi-fixed cost of goods sold, as well as the addition of
      corporate customers utilizing our full suite of higher-margin data security
      services.




Selling,
      general and administrative expenses for the quarter ended June 30, 2006 were
      $1,189,684 compared to selling, general and administrative expenses of
      $1,108,916 for the quarter ended June 30, 2005, a $80,768 increase, or 7.3%.
      The
      minimal increase demonstrated the relatively fixed cost nature of our business
      as revenues continue to grow.




Depreciation
      and amortization for the quarter ended June 30, 2006 was $56,826 compared to
      depreciation and amortization of $44,250 for the quarter ended June 30, 2005,
      a
      $12,576 increase, or 28.4%. This increase was the result of depreciation on
      fixed assets purchased during 2005.




***Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005***




Revenue
      for the six months ended June 30, 2006 was $10,271,966 compared to revenue
      of
      $5,427,905 for the six months ended June 30, 2005, a $4,844,061 increase, or
      89.2%. This was the result of new and existing corporate customers utilizing our
      full suite of services as well as a substantial increase in our wholesale
      remarketing revenues.




Gross
      profit for the six months ended June 30, 2006 was $1,440,526 compared to gross
      profit of $489,486 for the six months ended June 30, 2005, a $951,040 increase,
      or 194.3%. Gross margin in our Data Security and Compliance segment for the
      six
      months ended June 30, 2006 was 14.0% compared to a gross margin of 9.0% for
      the
      six months ended June 30, 2005. The improvement in our gross profit and gross
      margin reflects both an increase in our wholesale re-marketing business, while
      holding down our semi-fixed cost of goods sold, as well as the addition of
      corporate customers utilizing our full suite of higher-margin data security
      services.




Selling,
      general and administrative expenses for the six months ended June 30, 2006
      was
      $2,655,684 as compared to selling, general and administrative expenses for
      the
      six months ended June 30, 2005 of $2,365,683, a $290,001 increase, or 12.3%.
      Selling, general and administrative expenses increased as a result of a one
      time
      increase in our allowance for doubtful accounts taken in the first quarter
      of
      2006 whereby we took a charge of $349,000 from a single customer and against
      whom QSGI is pursuing recourse. We have joined a group of other creditors
      alleging that we have been unwitting victims of fraudulent activities with
      respect to the sale of IT equipment and the related collection of receivables.




Depreciation
      and amortization for the six months ended June 30, 2006 was $112,693 compared
      to
      depreciation and amortization of $79,137 for the six months ended June 30,
      2005,
      a $33,556 increase, or 42.4%. This increase was the result of depreciation
      on
      fixed assets purchased during 2005 and the first six months of 2006.






16




**Data
      Center Hardware Segment**


**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2006**
            
            2005
            
            **2006**
            
            2005**Revenue**
            
            **$**
            **8,532,316**
            
            $
            5,304,304
            
            **$**
            **12,479,366**
            
            $
            9,849,284**Gross
                Profit**
            
            
            **1,636,339**
            
            
            1,191,633
            
            
            **2,312,030**
            
            
            1,947,479**Selling,
                General And Administrative Expenses**
            
            
            **608,943**
            
            
            713,518
            
            
            **1,306,940**
            
            
            1,367,488**Depreciation
                And Amortization**
            
            
            **99,017**
            
            
            96,712
            
            
            **197,689**
            
            
            191,584**Income
                Before Provision For Income Taxes**
            
            
            **928,824**
            
            
            381,403
            
            
            **808,722**
            
            
            379,966**Segment
                Assets**
            
            
            **10,794,950**
            
            
            9,001,893
            
            
            **10,794,950**
            
            
            9,001,893**Goodwill**
            
            
            **6,116,707**
            
            
            1,902,805
            
            
            **6,116,707**
            
            
            1,902,805**Expenditures
                for Property and Equipment**
            
            
            **12,407**
            
            
            20,207
            
            
            **14,254**
            
            
            44,889




***Quarter
      Ended June 30, 2006 Compared to Quarter Ended June 30,
      2005***




Revenue
      for the quarter ended June 30, 2006 was $8,532,316 compared to revenue of
      $5,304,304 for the quarter ended June 30, 2005, a $3,328,012 increase, or 62.7%.
      Since hardware equipment tends to be a bigger ticket item and may be subject
      to
      the uneven nature of the sales cycle, the timing of shipments can have an impact
      on a particular quarter. This segment’s revenue growth benefited from the
      strength of a few substantial hardware sales to existing data center hardware
      and data center maintenance clients.




Gross
      profit for the quarter ended June 30, 2006 was $1,636,339 compared to gross
      profit of $1,191,633 for the quarter ended June 30, 2005, a $444,706 increase,
      or 37.3%. Gross margin in our Data Center Hardware segment for the quarter
      ended
      June 30, 2006 was 19.2% of revenue compared to 22.5% of revenue for the quarter
      ended June 30, 2005. Gross profit increased but margins decreased slightly
      as
      the result of a few substantial sales where the margins realized were lower.




Selling,
      general and administrative expenses for the quarter ended June 30, 2006 were
      $608,943 compared to selling, general and administrative expenses of $713,518
      for the quarter ended June 30, 2005, a $104,575 decrease, or (14.7%). The
      decrease was the result of a strict cost containment policy instituted at the
      beginning of 2006.




Depreciation
      and amortization for the quarter ended June 30, 2006 was $99,017 compared to
      depreciation and amortization of $96,712 for the quarter ended June 30, 2005,
      a
      $2,305 increase, or 2.4%. This increase was the result of depreciation on fixed
      assets purchased during 2005.




***Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005***




Revenue
      for the six months ended June 30, 2006 was $12,479,366
      compared to revenue of $9,849,284 for the six months ended June 30, 2005, a
      $2,630,082 increase, or 26.7%. Hardware equipment tends to be a bigger ticket
      item and may be subject to the uneven nature of the sales cycle and the timing
      of shipments. This segment’s revenue growth has benefited from the strength of a
      few substantial hardware sales to existing data center hardware and data center
      maintenance clients.




Gross
      profit for the six months ended June 30, 2006 was $2,312,030 compared to gross
      profit of $1,947,479 for the six months ended June 30, 2005, a $364,551
      increase, or 18.7%. Gross margin in our Data Center Hardware segment for the
      six
      months ended June 30, 2006 was 18.5% of revenue compared to 19.8% of revenue
      for
      the six months ended June 30, 2005. Gross profit increased but margins decreased
      slightly as the result of a few substantial sales where the margins realized
      were lower.




Selling,
      general and administrative expenses for the six months ended June 30, 2006
      were






17




$1,306,940
      compared to selling, general and administrative expenses of $1,367,488 for
      the
      six months ended June 30, 2005, a $60,548 decrease, or (4.4%). The decrease
      was
      the result of a strict cost containment policy instituted at the beginning
      of
      2006.




Depreciation
      and amortization for the six months ended June 30, 2006 was $197,689 compared
      to
      depreciation and amortization of $191,584 for the six months ended June 30,
      2005, a $6,105 increase, or 3.2%. This increase was the result of depreciation
      on fixed assets purchased during 2005.




**Data
      Center Maintenance Segment**


**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2006**
            
            2005
            
            **2006**
            
            2005**Revenue**
            
            **$**
            **1,170,003**
            
            $
            811,568
            
            **$**
            **2,165,022**
            
            $
            1,547,841**Gross
                Profit**
            
            
            **808,637**
            
            
            591,221
            
            
            **1,476,103**
            
            
            1,069,492**Selling,
                General And Administrative Expenses**
            
            
            **507,623**
            
            
            393,920
            
            
            **928,287**
            
            
            650,900**Depreciation
                And Amortization**
            
            
            **15,764**
            
            
            15,111
            
            
            **31,298**
            
            
            30,222**Income
                Before Provision For Income Taxes**
            
            
            **285,251**
            
            
            182,190
            
            
            **516,380**
            
            
            388,370**Segment
                Assets**
            
            
            **1,456,988**
            
            
            948,719
            
            
            **1,456,988**
            
            
            948,719**Goodwill**
            
            
            **527,696**
            
            
            164,158
            
            
            **527,696**
            
            
            164,158**Expenditures
                for Property and Equipment**
            
            
            **2,350**
            
            
            0
            
            
            **6,137**
            
            
            2,677




***Quarter
      Ended June 30, 2006 Compared to Quarter Ended June 30,
      2005***




Revenue
      for the quarter ended June 30, 2006 was $1,170,003 compared to revenue of
      $811,568 for the quarter ended June 30, 2005, a $358,435 increase, or 44.2%.
      This was the result of signing additional service contracts with new and
      existing customers this quarter as well as new contracts that were signed during
      last year. These contracts are generally one to three year terms.




Gross
      profit for the quarter ended June 30, 2006 was $808,637 compared to gross profit
      of $591,221 for the quarter ended June 30, 2005, a $217,416 increase, or 36.8%.
      Gross margin for the quarter ended June 30, 2006 was 69.1% of revenue compared
      to a gross margin of 72.8% for the quarter ended June 30, 2005. Gross profit
      increased but margins decreased slightly as we opened up a number of new sales
      offices and added maintenance engineers to support the expanded customer base.




Selling,
      general and administrative expenses for the quarter ended June 30, 2006 were
      $507,623 compared to selling, general and administrative expenses of $393,919
      for the quarter ended June 30, 2005, a $113,704 increase, or 28.9%. The increase
      was mainly the result of additional personnel and compensation.




Depreciation
      and amortization for the quarter ended June 30, 2006 was $15,764 compared to
      depreciation and amortization of $15,111 for the quarter ended June 30, 2005,
      a
      $653 increase, or 4.3%. This increase was the result of depreciation on fixed
      assets purchased during 2005.




***Six
      Months Ended June 30, 2006 Compared to Six Months Ended June 30,
      2005***




Revenue
      for the six months ended June 30, 2006 was $2,165,022 compared to revenue of
      $1,547,841 for the six months ended June 30, 2005, a $617,181 increase, or
      39.9%. This was the result of signing additional service contracts with new
      and
      existing customers this year as well as new contracts that were signed during
      last year. These contracts are generally one to three year terms.






18




Gross
      profit for the six months ended June 30, 2006 was $1,476,103 compared to gross
      profit of $1,069,493 for the six months ended June 30, 2005, a $406,610
      increase, or 38.0%. Gross margin for the six months ended June 30, 2006 was
      68.2% of revenue compared to a gross margin of 69.1% for the six months ended
      June 30, 2005. Gross profit increased but margins decreased slightly as we
      opened up a number of new sales offices and added maintenance engineers to
      support the expanded customer base.




Selling,
      general and administrative expenses for the six months ended June 30, 2006
      were
      $928,287 compared to selling, general and administrative expenses of $650,900
      for the six months ended June 30, 2005, a $277,387 increase, or 42.6%. The
      increase was mainly the result of additional personnel and compensation.




Depreciation
      and amortization for the six months ended June 30, 2006 was $31,298 compared
      to
      depreciation and amortization of $30,222 for the six months ended June 30,
      2005,
      a $1,076 increase, or 3.6%. This increase was the result of depreciation on
      fixed assets purchased during 2005 and this year.




***Geographic
      Areas***




We
      operate primarily in the United States and have minimal 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, and we recorded no foreign currency transaction gains or losses during
      any period.




**Liquidity
      and Capital Resources** ******




Net
      cash
      provided by operating activities in the six months ended June 30, 2006 was
      $721,480. Net cash used in operating activities in the six months ended June
      30,
      2005 was $2,406,508. Net cash provided by operating activities during the six
      month period ended June 30, 2006 was primarily as a result of our net income
      and
      a decrease in accounts receivable, offset by a decrease in accounts payable
      and
      accrued expenses and an increase in inventories and prepaid expenses. The
      decrease in our receivables was mainly attributable to tighter credit controls
      established and better collections and an increase in our allowance for doubtful
      accounts. Net cash used in operating activities during the period ended June
      30,
      2005 was primarily as a result of a net loss, an increase in accounts
      receivable, an increase in inventories, an increase in prepaid expenses and
      other assets offset by an increase in accounts payable and accrued expenses.




Net
      cash
      used in investing activities for the six months ended June 30, 2006 and 2005
      was
      $74,962 and $327,783, respectively. Net cash used in investing activities in
      the
      six months ended June 30, 2006 was for the purchase of fixed assets. Net cash
      used in investing activities in the six months ended June 30, 2005 was for
      the
      purchase of fixed assets and for payments for the Qualtech
      acquisition.




Net
      cash
      used in financing activities for the six months ended June 30, 2006 was
      $800,312. Net cash provided by financing activities for the six months ended
      June 30, 2005 was $2,609,018. Net cash used in financing activities during
      the
      six month period ended June 30, 2006 was the result of payments made under
      our
      revolving line of credit, dividends on our preferred stock, and stock issuance
      costs offset by proceeds from the issuance of redeemable preferred stock and
      proceeds from the exercise of options. Net cash provided by financing activities
      in the six months ended June 30, 2005 was from the exercise of stock options
      and
      stock warrants and borrowings under our revolving line of credit reduced by
      net
      amounts paid notes payable and other financing fees.






19




We
      believe that the anticipated cash flow from operations and current financing
      arrangements with Fifth Third Bank, together with anticipated proceeds from
      the
      exercise of stock options and warrants, 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.




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.




Under
      the
      terms of the acquisition agreement, as amended, with Qualtech International
      Corporation and its affiliate, Qualtech Services Group, Inc. that was completed
      on May 28, 2004, as of May 1, 2006, additional merger consideration was due
      to
      the selling shareholders. The selling shareholders were entitled to this
      additional merger consideration in the form of restricted shares of the Company
      representing at least fifty percent (50%) of the total consideration to be
      paid
      and cash of up to fifty percent (50%) of the additional consideration which
      was
      to be determined at the discretion of the Company. Any portion that was to
      be
      paid in cash was due within 30 days following the second anniversary of the
      effective date of the acquisition. Any portion that was to be paid in stock
      was
      due on February 15, 2007. The number of shares was to be determined by using
      the
      average trading price 15 days prior to February 14, 2007. The Company elected
      to
      pay the consideration early in restricted shares of the Company. To settle
      the
      earn-out, 2,063,545 shares were issued at a value of approximately $1.66 per
      share resulting in additional goodwill in the amount of $3,432,089.




We
      did
      not have any significant elements of income or loss not arising from continuing
      operations in either of the periods ended June 30, 2006 and 2005 and do not
      expect any in the remainder of fiscal 2006. 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.




**Item
      3.  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, does not
      expect that our Disclosure Controls will prevent all error 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.






20




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-QSB. In this
      Form
      10-QSB for the quarter ended June 30, 2006, we are reporting a control weakness
      related to our corporate tax accounting function. This weakness relates
      specifically to the Company not maintaining sufficient resources in the
      corporate tax accounting function to accurately identify, evaluate and report,
      in a timely manner, non-routine and complex transactions. This deficiency
      resulted in errors in the Company’s accounting for deferred income taxes. These
      errors were not considered material enough to adjust prior period financial
      statements and were adjusted for this quarter. However, this control weakness,
      if gone uncorrected, could result in a material financial statement
      misstatement. Upon identification of this control weakness, immediate corrective
      action was undertaken. Remediation will include the following:




·
            Where
                necessary, we will retain outside experts to supplement our core
                knowledge
                of the complexities around both current and deferred income tax accounts.
                These resources, when combined with our existing resources, will
                enable us
                to comply with the technical complexities of accounting for income
                taxes.




·
            A
                formal policy governing all key aspects of accounting for income
                taxes
                will be developed and adopted.




·
            We
                will increase the training of our corporate accountants on accounting
                for
                income taxes and other complex accounting
                issues




As
      of June 30, 2006, 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
      the information discussed above, our CEO and CFO have concluded these controls
      are not effective. Other than the remediation plans discussed above, there
      have
      been no significant changes in internal controls, or in other factors, which
      would significantly affect these controls subsequent to the date of evaluation.
      Our efforts to strengthen financial and internal controls continue.




**Changes
      in internal control over financial reporting**




During
      the period covered by this report, there have been no changes 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.




**Part
      II - OTHER INFORMATION**




**Item
      1.  LEGAL PROCEEDINGS**




The
      Company also is party to legal proceedings, which arise from time to time 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. Such estimate of potential impact
      on
      the Company could change in the future depending upon matters in suit and the
      course of specific litigation.






21




**Item
      2.** **UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**




Under
      the
      terms of the acquisition agreement, as amended, with Qualtech International
      Corporation and its affiliate, Qualtech Services Group, Inc. that was completed
      on May 28, 2004, as of May 1, 2006, additional merger consideration was due
      to
      the selling shareholders. The selling shareholders were entitled to this
      additional merger consideration in the form of restricted shares of the Company
      representing at least fifty percent (50%) of the total consideration to be
      paid
      and cash of up to fifty percent (50%) of the additional consideration which
      was
      to be determined at the discretion of the Company. Any portion that was to
      be
      paid in cash was due within 30 days following the second anniversary of the
      effective date of the acquisition. Any portion that was to be paid in stock
      was
      due on February 15, 2007. The number of shares was to be determined by using
      the
      average trading price 15 days prior to February 14, 2007. The Company elected
      to
      pay the consideration early in restricted shares of the Company. To settle
      the
      earn-out, 2,063,545 shares were issued at a value of approximately $1.66 per
      share resulting in additional goodwill in the amount of $3,432,089.




**Item3.  
DEFAULTS
      UPON SENIOR
      SECURITIES**




Not
      applicable.




**Item
      4.** **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None




**Item
      5.** **OTHER
      INFORMATION**




None




**Item6.  
EXHIBITS**




ExhibitsSee
                List of Exhibits filed as part of this quarterly report on Form
                10-QSB.  22


**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.**  (Registrant)Dated:August
                14, 2006
            By:
            /s/
                Marc ShermanMarc
                ShermanChairman
                and Chief Executive OfficerDated:August
                14, 2006
            By:
            /s/
                Edward L. CummingsEdward
                L. CummingsChief
                Financial Officer and Treasurer





23


**List
      Of 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. Grossman**10.10**
            Credit
                Agreement by and among Windsortech, Inc., Qualtech International
                Corporation, Qualtech Services Corporation and Fifth Third
                Bank.






24


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-B.


25