As filed
with the Securities and Exchange Commission on May 14, 2009









UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended March 31, 2009





OR





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


THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from ____________ to ________________





Commission
File No.: 001-32620





QSGI
INC.


(Exact
name of registrant as specified in its charter)





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





400
Royal Palm Way, Palm Beach, FL  33480


(Address
of Principal Executive Offices)





(561)
835-9757


(Issuer’s
Telephone Number)





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting
company.  See definition of "large accelerated filer," "accelerated
filer," and "small reporting company" in Rule 12b-2 of the Exchange Act (check
one):
 
 Large
      accelerated filer [  ]
              Accelerated
      filer [  ]
              Non-accelerated filer [ 
      ]
              Smaller
      reporting company [x]
 
 Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).YesNo
 
 The
number of outstanding common shares, par value $.01, of the registrant as of May
1, 2009 was 48,797,716.





QSGI
      INC.TABLE
      OF CONTENTSItem
              Description
              PagePART
      I – FINANCIAL INFORMATION1.
              Financial
      Statements (all
      unaudited)Condensed
      Consolidated Balance Sheets –
                March
      31, 2009 and December 31, 2008
              1Condensed
      Consolidated Statements of Operations –
                Three
      Months Ended March 31, 2009 and 2008
              2Condensed
      Consolidated Statement of Stockholders’ Deficit –
                Three
      Months Ended March 31, 2009
              3Condensed
      Consolidated Statements of Cash Flows –
                Three
      Months Ended March 31, 2009 and 2008
              4Notes
      to Condensed Consolidated Financial Statements
              52.
              Management’s
      Discussion and Analysis of Financial Condition
                and
      Results of Operations
              123.
              Quantitative
      and Qualitative Disclosures About Market Risk
              194.
              Controls
      and Procedures
              19PART
      II – OTHER INFORMATION1.
              Legal
      Proceedings
              201A.
              Risk
      Factors
              212.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              213.
              Defaults
      Upon Senior Securities
              214.
              Submission
      of Matters to a Vote of Security Holders
              215.
              Other
      Information
              216.
              Exhibits
              21SIGNATURES
              22EXHIBITS
              23




PART
I    FINANCIAL INFORMATION
 Item
1.    Financial Statements
 
 QSGIINC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)


March
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008AssetsCurrent
      AssetsCash
      and cash equivalents
                          
                          $
                          440,183
                          
                          
                          $
                          274,150Accounts
      receivable, net of reserve of $619,683 and $1,026,824 in 2009 and 2008,
      respectively
                          
                          
                          3,779,730
                          
                          
                          
                          4,689,376Inventories,
      net of allowance
                          
                          
                          4,807,404
                          
                          
                          
                          5,144,010Prepaid
      expenses and other assets
                          
                          
                          122,497
                          
                          
                          
                          242,659Total Current
      Assets
                          
                          
                          9,149,813
                          
                          
                          
                          10,350,195Property
      and Equipment, Net
                          
                          
                          642,897
                          
                          
                          
                          727,454Goodwill
                          
                          
                          7,934,627
                          
                          
                          
                          7,934,627Intangibles,
      Net
                          
                          
                          5,897,041
                          
                          
                          
                          6,017,968Other
      Assets
                          
                          
                          346,888
                          
                          
                          
                          285,198$
                          23,971,267
                          
                          
                          $
                          25,315,442Liabilities
      And Stockholders’ DeficitCurrent
      LiabilitiesRevolving
      line of credit
                          
                          $
                          5,753,013
                          
                          
                          $
                          5,351,130Accounts
      payable
                          
                          
                          4,646,547
                          
                          
                          
                          4,128,170Accrued
      expenses
                          
                          
                          1,332,921
                          
                          
                          
                          1,048,652Accrued
      payroll
                          
                          
                          194,010
                          
                          
                          
                          164,311Deferred
      revenue
                          
                          
                          431,520
                          
                          
                          
                          385,805Other
      current liabilities
                          
                          
                          299,462
                          
                          
                          
                          288,360Total Current
      Liabilities
                          
                          
                          12,657,473
                          
                          
                          
                          11,366,428Long-Term
      Deferred Revenue
                          
                          
                          19,000
                          
                          
                          
                          19,000Notes
      Payable – Principal Stockholder
                          
                          
                          10,000,000
                          
                          
                          
                          10,000,000Deferred
      Income Taxes
                          
                          
                          27,300
                          
                          
                          
                          27,300Total
    Liabilities
                          
                          
                          22,703,773
                          
                          
                          
                          21,412,728Redeemable
      Convertible Preferred Stock
                          
                          
                          4,262,899
                          
                          
                          
                          4,257,910Stockholders’
      DeficitPreferred
      shares: Authorized 5,000,000 shares in 2009and
      2008, $0.01 par value, none issued
                          
                          
                          –
                          
                          
                          
                          –Common
      shares: authorized 95,000,000 shares in 2009 and 2008, $0.01 par
      value;  48,797,716 shares issued and outstanding in 2009, of
      which 10,000,000 shares were contingent acquisition shares held in escrow;
      and 48,547,716 shares issued and outstanding in 2008
                          
                          
                          387,977
                          
                          
                          
                          385,477Additional
      paid-in capital
                          
                          
                          16,674,875
                          
                          
                          
                          16,723,724Accumulated
      deficit
                          
                          
                          (20,058,257
                          )
                          
                          
                          (17,464,397
                          )Total Stockholders’
      Deficit
                          
                          
                          (2,995,405
                          )
                          
                          
                          (355,196
                          )$
                          23,971,267
                          
                          
                          $
                          25,315,442




See the
accompanying notes to condensed consolidated financial
statements.


Page
1


QSGIINC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


For
The Three Months Ended March 31, 2009 and 2008


(Unaudited)


Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Product
      Revenue
                  
                  $
                  3,654,961
                  
                  
                  $
                  6,272,283Service
      Revenue
                  
                  
                  3,540,744
                  
                  
                  
                  1,933,293Total
      Revenue
                  
                  
                  7,195,705
                  
                  
                  
                  8,205,576Cost
      Of Products Sold
                  
                  
                  3,976,838
                  
                  
                  
                  5,963,828Cost
      Of Services Sold
                  
                  
                  1,956,335
                  
                  
                  
                  670,074Total
      Cost Of Sales
                  
                  
                  5,933,173
                  
                  
                  
                  6,633,902Gross
      Profit
                  
                  
                  1,262,532
                  
                  
                  
                  1,571,674Selling,
      General And Administrative Expenses
                  
                  
                  2,757,624
                  
                  
                  
                  2,272,068Depreciation
      And Amortization
                  
                  
                  216,886
                  
                  
                  
                  107,387Interest
      Expense, net
                  
                  
                  880,344
                  
                  
                  
                  56,649Loss
      Before Provision For Income Taxes
                  
                  
                  (2,592,322
                  )
                  
                  
                  (864,430
                  )Provision
      For Income Taxes
                  
                  
                  1,538
                  
                  
                  
                  26,256Net
      Loss
                  
                  
                  (2,593,860
                  )
                  
                  
                  (890,686
                  )Preferred
      Stock Dividends
                  
                  
                  (63,617
                  )
                  
                  
                  (64,324
                  )Accretion
      To Redemption Value of Preferred Stock
                  
                  
                  (4,989
                  )
                  
                  
                  (4,699
                  )Net
      Loss Available to Common Stockholders
                  
                  $
                  (2,662,466
                  )
                  
                  $
                  (959,709
                  )Net
      Loss Per Common Share – Basic
                  
                  $
                  (0.07
                  )
                  
                  $
                  (0.03
                  )Net
      Loss Per Common Share – Diluted
                  
                  $
                  (0.07
                  )
                  
                  $
                  (0.03
                  )Weighted
      Average Number Of Common Shares Outstanding –Basic
                  
                  
                  38,644,938
                  
                  
                  
                  31,172,716Weighted
      Average Number Of Common Shares Outstanding –Diluted
                  
                  
                  38,644,938
                  
                  
                  
                  31,172,716




See the
accompanying notes to condensed consolidated financial
statements.


Page
2


QSGIINC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT


For
The Three Months Ended March 31, 2009


(Unaudited)










Additional
                
                
                
                
                
                TotalCommon
      Stock
                
                
                Paid-in
                
                
                Accumulated
                
                
                Stockholders’Number
                
                
                Amount
                
                
                Capital
                
                
                Deficit
                
                
                DeficitBalance
      (Deficit) - December 31, 2008
                
                
                38,547,716
                
                
                $
                385,477
                
                
                $
                16,723,724
                
                
                $
                (17,464,397
                )
                
                $
                (355,196
                )Stock
      Issue For Financing
                
                
                250,000
                
                
                
                2,500
                
                
                
                12,500
                
                
                
                –
                
                
                
                15,000Stock
      Option Compensation
                
                
                –
                
                
                
                –
                
                
                
                7,256
                
                
                
                –
                
                
                
                7,256Preferred
      Stock Dividends
                
                
                –
                
                
                
                –
                
                
                
                (63,617
                )
                
                
                –
                
                
                
                (63,617
                )Accretion
      To Redemption Value Of Preferred Stock
                
                
                –
                
                
                
                –
                
                
                
                (4,988
                )
                
                
                –
                
                
                
                (4,988
                )Net
      Loss
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (2,593,860
                )
                
                
                (2,593,860
                )Balance
      (Deficit) – March 31, 2009
                
                
                38,797,716
                
                
                $
                387,977
                
                
                $
                16,674,875
                
                
                $
                (20,058,257
                )
                
                $
                (2,995,405
                )




See the
accompanying notes to condensed consolidated financial
statements.


Page
3


QSGIINC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


For
The Three Months Ended March 31, 2009 and 2008


(Unaudited)





2009
                      
                      
                      2008Cash
      Flows From Operating ActivitiesNet Loss
                      
                      $
                      (2,593,860
                      )
                      
                      $
                      (890,686
                      )Adjustments to reconcile net
      loss to net cash provided by operating activities:Gain
      on disposition of equipment
                      
                      
                      (11,000
                      )
                      
                      
                      –Depreciation
      and amortization
                      
                      
                      216,886
                      
                      
                      
                      107,387Stock
      option compensation expense
                      
                      
                      7,256
                      
                      
                      
                      2,719Inventory
      allowance
                      
                      
                      55,000
                      
                      
                      
                      110,000Amortization
      of Original Issue Discount
                      
                      
                      301,754
                      
                      
                      
                      –Provision
      for doubtful accounts
                      
                      
                      (455,788
                      )
                      
                      
                      90,512Changes in assets and
      liabilities:Accounts
    receivable
                      
                      
                      1,365,435
                      
                      
                      
                      244,750Inventories
                      
                      
                      281,606
                      
                      
                      
                      436,443Prepaid expenses and other
      assets
                      
                      
                      78,287
                      
                      
                      
                      (104,444
                      )Accounts payable and accrued
      expenses
                      
                      
                      889,163
                      
                      
                      
                      561,804Net
      Cash Provided by Operating Activities
                      
                      
                      134,739
                      
                      
                      
                      558,485Cash
      Used In Investing ActivitiesPurchases
      of property and equipment
                      
                      
                      (5,604
                      )
                      
                      
                      (26,279
                      )Proceeds
      from sale of equipment
                      
                      
                      11,000
                      
                      
                      
                      –Net
      Cash Provided By (Used In)Investing
      Activities
                      
                      
                      5,396
                      
                      
                      
                      (26,279
                      )Cash
      Flows From Financing ActivitiesPayment
      for financing costs
                      
                      
                      (25,614
                      )
                      
                      
                      –Net
      amounts borrowed (paid) under revolving lines of credit
                      
                      
                      115,129
                      
                      
                      
                      (178,764
                      )Preferred stock
      dividends
                      
                      
                      (63,617
                      )
                      
                      
                      (64,324
                      )Net
      Cash Provided By (Used In) Financing Activities
                      
                      
                      25,898
                      
                      
                      
                      (243,088
                      )Net
      Increase In Cash And Cash Equivalents
                      
                      
                      166,033
                      
                      
                      
                      289,118Cash
      And Cash Equivalents – Beginning Of Period
                      
                      
                      274,150
                      
                      
                      
                      127,723Cash
      And Cash Equivalents – End of Period
                      
                      $
                      440,183
                      
                      
                      $
                      416,841Supplemental
      Schedule of Non-Cash FinancingStock
      issued for debt issuance costs
                      
                      
                      15,000
                      
                      
                      
                      –





See the
accompanying notes to condensed consolidated financial
statements.





Page
4


QSGIINC.


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 March 31, 2009 and for the three months ended
March 31, 2009 and 2008 have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X under the Securities Exchange Act of 1934.  Accordingly
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.  In the opinion of the Company’s management, all
adjustments (consisting of only normal recurring adjustments) considered
necessary to present fairly the financial position, results of operations or
cash flows have been made.  Certain reclassifications have been made
for consistent presentation.




The
condensed consolidated statement of operations for the three months ended March
31, 2009 is not necessarily indicative of the results that may be expected for
the entire year ending December 31, 2009.  These statements should be
read in conjunction with the financial statements and related notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2008.




These
unaudited condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and, accordingly, do
not include any adjustments that might result from the outcome of this
uncertainty. The independent registered public accounting firm’s report on the
consolidated financial statements included in the Company’s annual report on
Form 10-K for the year ended December 31, 2008 contained an explanatory
paragraph regarding the uncertainty of the Company’s ability to continue as a
going concern.




2.
            Summary
      of Significant Accounting Policies




Business
Organization




The
Company is a technology services and maintenance company.  The
Company's Data Center Maintenance services as well as our Data Security and
Compliance services are geared towards both the users of enterprise-class
hardware (mainframes, midrange processors, large storage, controllers, etc.) as
well as the users of business-computing hardware (desktops, laptops, related
peripherals and servers).  The Company uses the trade name “QSGI” in
order to build cohesion among the various technology services that they offer
and build brand recognition and preference through strong cross-marketing
opportunities.




Principles
Of Consolidation




The
financial statements include the accounts of the Company and its wholly owned
subsidiaries.  All significant inter-company accounts and transactions
have been eliminated in consolidation.




Page
5


Segments




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





A.
            Data
      Center Maintenance Services





The
Company provides hardware maintenance services for enterprise-class hardware and
associated peripheral products and Data Center consulting to companies
throughout the United States.  The Company supports its clients' IT
hardware needs through the selling of refurbished enterprise-class hardware
including mainframe processors, midrange processors and associated peripheral
products and replacement parts.




B.
            Data
      Security and Compliance





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


- Data
erasure to Department of Defense standards for hard drives


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


- IT
asset remarketing for IT assets with market value


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





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





C.
            Network Infrastructure Design
      and Support





The
Company provides service for a full spectrum of technologies from mainframes to
PCs, including network infrastructure, managed services, IP security, IP
telephony and storage solutions.  The Company provides its corporate,
government and educational clients with these services which include design,
implementation and monthly maintenance services on corporations' net work
hardware and related infrastructure as well as 24/7 monitoring and diagnostics
through its North American Network Operating Center (NOC).  The
Company as part of its hardware maintenance offerings includes 24/7
repair/replacement of desktops, printers and LAN components and provide
full-service LAN/WAN design and support services.





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





6




The
Company has office and warehouse space in Hightstown, New Jersey, Eagan,
Minnesota, and Bohemia, NY and technical coverage in 17 other states including
Arkansas, Colorado, Connecticut, Georgia, Illinois, Indiana, Kansas, Michigan,
Missouri, Nebraska, New Jersey, New York, Ohio, Pennsylvania, South Carolina,
Texas, 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 months ended
March 31, 2009 and 2008 are as follows:




Three
      Months Ended March 31,2009
                        
                        
                        2008Basic
                        
                        
                        38,797,716
                        
                        
                        
                        31,172,716Stock
      options
                        
                        
                        –
                        
                        
                        
                        –Stock
      warrants
                        
                        
                        –
                        
                        
                        
                        –Redeemable
      preferred stock
                        
                        
                        –
                        
                        
                        
                        –Diluted
                        
                        
                        38,797,716
                        
                        
                        
                        31,172,716




For the
three months ended March 31, 2009 and 2008, the Company excluded weighted
average common share equivalents related to stock options of 821,199 and
970,740, respectively and weighted average common share equivalents related to
redeemable preferred stock of 1,911,111 and 1,911,111, respectively because
their effect would be anti-dilutive.




Recently Adopted Accounting
Pronouncements





In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which clarifies the accounting for convertible debt
instruments that may be settled in cash upon conversion, including partial cash
settlement. FSP APB 14-1 specifies that an issuer of such instruments should
separately account for the liability and equity components of the instruments in
a manner that reflects the issuer’s non-convertible debt borrowing rate when
interest costs are recognized in subsequent periods. FSP APB 14-1 is effective
for the Company’s fiscal year beginning January 1, 2009, and retrospective
application is required for all periods presented. FSP APB 14-1 is currently not
applicable to the Company.








7


In June
2008, the FASB issued EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock(“EITF Issue
No. 07-5”), which is effective for financial statements for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The Issue addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock, which is the first part
of the scope exception in Paragraph 11(a) of SFAS No. 133 for the purpose of
determining whether the instrument is classified as an equity instrument or
accounted for as a derivative instrument which would be recognized either as an
asset or liability and measured at fair value. The Company adopted EITF 07-5 as
of January 1, 2009.  Any debt discount that was recognized when the
conversion option was initially bifurcated from the convertible debt instrument
shall continue to be amortized. The cumulative effect of the change in
accounting principles shall be recognized as an adjustment to the opening
balance of retained earnings. The adoption of EITF Issue No. 07-05 did not have
a material impact on the Company’s financial statements.








In June
2008, the FASB issued FASB Staff Position (FSP) Emerging Issues Task Force
(EITF) 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. FSP EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method as described in SFAS No.
128, Earnings Per
Share. Under the guidance of FSP EITF 03-6-1, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and must be
included in the computation of earnings per share pursuant to the two-class
method. All prior period earnings per share information must be adjusted
retrospectively. The Company adopted FSP EITF 03-6-1 as of January 1, 2009. The
Company does not currently have any share-based awards that would qualify as
participating securities.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FSP No. SFAS No. 157-2,
Effective Date of FASB
Statement No. 157, which provides a one-year deferral of the effective
date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed in the financial statements at
fair value at least annually. The Company adopted this statement for financial
assets and financial liabilities and nonfinancial assets and nonfinancial
liabilities disclosed or recognized at fair value on a recurring basis (at least
annually) as of January 1, 2008. The Company adopted the statement for
nonfinancial assets and nonfinancial liabilities on January 1, 2009. The
adoption of this statement in each period did not have a material impact on its
financial statements.








Recently Issued Accounting
Pronouncements Not Yet Adopted





In April
2009, the FASB issued FASB Staff Position No. 107-1 (“FSP FAS 107-1”) and APB
28-1 (“APB 28-1”), which amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments and APB Opinion No. 28, Interim Financial Reporting,
to require disclosures about the fair value of financial instruments for interim
reporting periods. FSP FAS 107-1 and APB 28-1 will be effective for interim
reporting periods ending after June 15, 2009. The adoption of this staff
position will not have a material impact on the Company’s financial
statements.





In April
2009, the FASB issued FASB Staff Position No. 157-4 (“FSP FAS 157-4”), which
provides additional guidance in accordance with FASB No. 157, Fair Value Measurements, when
the volume and level of activity for the asset or liability has significantly
decreased. FSP FAS 157-4 shall be effective for interim and annual reporting
periods ending after June 15, 2009. The Company is currently evaluating the
potential impact the adoption of this staff position will have on its financial
statements.





8


In April
2009, the FASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and FASB
Staff Position No. 124-2 (“FSP FAS 124-2”), which amends the
other-than-temporary impairment guidance for debt and equity securities. FSP FAS
115-2 and FSP FAS 124-2 shall be effective for interim and annual reporting
periods ending after June 15, 2009. The Company is currently evaluating the
potential impact the adoption of this staff position will have on its financial
statements.







3.
            Inventories






Inventories
at March 31, 2009 and December 31, 2008 consist of:




2009
                
                
                2008Finished
      goods
                
                $
                5,943,308
                
                
                $
                6,206,761Inventory
      in transit
                
                
                18,096
                
                
                
                36,249Allowance
      for excess and obsolescence
                
                
                (1,154,000
                )
                
                
                (1,099,000
                )$
                4,807,404
                
                
                $
                5,144,010




4.           Financing




On
February 24, 2009, the Company signed a Second Amendment to the Amended and
Restated Securities Purchase Agreement with Victory Park Credit Opportunities
Master Fund, LTD and Victory Park Management, LLC. (collectively “Victory”)
which waived a December 31, 2008 covenant violation and amended the financial
covenants.  The amended financial covenants will take effect
commencing June 30, 2009.  The new financial covenants that need to be
met are as follows:




Maximum
      Senior Leverage
            4.0
      to 1.0Maximum
      Senior Leverage
            10.0
      to 1.0Interest
      Coverage
            1.5
      to 1.0Fixed
      Charge Coverage
            1.25
      to 1.0Capital
      Expenditures not in excess of $200,000 for any calendar
    year




In
connection with the Second Amendment to the Amended and Restated Securities
Purchase Agreement, the Company incurred $10,000 in amendment fees and 250,000
shares of Company common stock.  The fair value of the shares was
$15,000.  This amount was recorded as additional debt issuance costs
and will be recognized as interest expense on a straight-line basis over the
remaining twenty one months of the financing agreement.




On March
31, 2009, the Company signed a forbearance agreement and Third Amendment to the
Amended and Restated Securities Purchase Agreement with Victory whereby the
lender agreed to forbear from exercising certain of their rights and remedies
and advanced $850,000 in additional funds and changed the advance rate on
Accounts Receivable to a range of 85% to 90% and eligible inventory to
60%.  The Company incurred $10,000 in amendment fees and $100,000 in a
forbearance fee to be paid in four equal monthly installments beginning October
31, 2009.  The $100,000 forbearance fee was recorded as prepaid
expense and will be amortized over the two month period of the forbearance
agreement.




9


In
accordance with Emerging Issues task Force (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.




5.          SegmentInformation




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




Three
      Months Ended
                                                March
      31,2009
                                              
                                              
                                              2008RevenuesData
      Security and Compliance
                                              
                                              $
                                              3,119,919
                                              
                                              
                                              $
                                              5,643,836Data
      Center Maintenance
                                              
                                              
                                              1,658,395
                                              
                                              
                                              
                                              2,565,115Network
      Infrastructure Design & Support
                                              
                                              
                                              2,598,817
                                              
                                              
                                              
                                              –Intersegment
      Elimination
                                              
                                              
                                              (181,426
                                              )
                                              
                                              
                                              (3,375
                                              )Consolidated
      Total
                                              
                                              $
                                              7,195,705
                                              
                                              
                                              $
                                              8,205,576Income
      (loss) before Provision (Benefit) for Income TaxesData
      Security and Compliance
                                              
                                              $
                                              (1,528,566
                                              )
                                              
                                              $
                                              (1,048,421
                                              )Data
      Center Maintenance
                                              
                                              
                                              (295,926
                                              )
                                              
                                              
                                              183,991Network
      Infrastructure Design & Support
                                              
                                              
                                              (767,830
                                              )
                                              
                                              
                                              –Consolidated
      Total
                                              
                                              $
                                              (2,592,322
                                              )
                                              
                                              $
                                              (864,430
                                              )







10


6.          Business
Acquisition




In July
2008, the Company completed the purchase of all of the outstanding shares of
Contemporary Computer Service, Inc. (CCSI).  CCSI provides corporate,
government and educational clients with network infrastructure services
including network design, implementation and monthly maintenance services on
corporations' network hardware and related infrastructure as well as 24/7
monitoring and diagnostics through its North American Network Operating Center
(NOC).




The
results of CCSI have been included in the Condensed Consolidated Financial
Statements under the Network Infrastructure Design and Support segment since
July 1, 2008.  Unaudited pro-forma results of operations for the three
months ended March 31, 2008 are included below.  Such pro-forma
information assumes that the acquisition had occurred as of January 1, 2008, and
revenue is presented in accordance with our accounting policies.  This
summary is not necessarily indicative of that our result of operations would
have been had CCSI been a combined entity during such periods, nor does it
purport to represent results of operations for any future periods.





Three
      Months Ended
                  March
      312008Revenue
                
                $
                11,191,000Net
      Income
                
                $
                (981,000
                )Net
      Income Per Common Share - Basic
                
                $
                (0.04
                )Net
      Income Per Common Share - Diluted
                
                $
                (0.04
                )






7.          Stock
Options and Warrants




There
were no stock options or warrants issued in the first quarter of 2009 and no
options or warrants expired in the first quarter of 2009.




8.          Income
Taxes




There is
no income tax benefit for the losses for the three months ended March 31, 2009
and 2008 since management has determined that the realization of the net
deferred tax asset is not assured and has created a valuation allowance for the
entire amount of such benefit.




The
Company's policy is to record interest and penalties associated with
unrecognized tax benefits as additional income taxes in the statement of
operations.  As of January 1, 2009, the Company had no unrecognized
tax benefits, or any tax related interest of penalties.  There were no
changes in the Company's unrecognized tax benefits during the period ended March
31, 2009.  The Company did not recognize any interest or penalties
during 2009 related to unrecognized tax benefits.  Tax years from 2005
through 2008 remain subject to examination by major tax
jurisdictions.




9.          Concentrations
Customers




Major
Customers




The
Company had sales to one customer that accounted for approximately 25% of
revenues during the first quarter of 2009 and approximately 36% of accounts
receivable balance at March 31, 2009.




11


Major
Suppliers




The
Company had purchases from one vendor that accounted for approximately 13% of
purchases during the first quarter of 2009 and approximately 10% of accounts
payable at March 31, 2009.




10.        Related
Party




The
Company had sales to one customer related to one stockholder and officer of the
Company.  Sales for the three months ended March 31, 2009 amount to
approximately $96,000.  Accounts receivable from this customer
amounted to $96,000 at March 31, 2009.




The
Company makes monthly payments to Varilease Technology Finance Group owned by
one of the Board of Directors for the purchase of an asset.  At March
31, 2009, $4,172.00 was payable to this company.




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




This
following discussion should be read in conjunction with the accompanying
financial statements and related notes in Item 1 of this report as well as
Annual Report on Form 10-K for the year ended December 31,
2008.  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.




12


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
                March
      31,2009
              2008%
              %Product
      Revenue
              50.8
              76.4Service
      Revenue
              49.2
              23.6Total
      Revenue
              100.0
              100.0Cost
      Of Products Sold
              55.3
              72.6Cost
      Of Services Sold
              27.2
              8.2Cost
      Of Products and Services Sold
              82.5
              80.8Gross
      Profit
              17.5
              19.2Selling,
      General And Administrative Expenses
              38.3
              27.7Depreciation
      And Amortization
              3.0
              1.3Interest
      Expense, net
              12.2
              0.7Loss
      Before Benefit For Income Taxes
              (36.0)
              (10.5)Provision
      (Benefit) For Income Taxes
              0.0
              0.3Net
      Loss
              (36.0)
              (10.8)




Quarter
Ended March 31, 2009 Compared to Quarter Ended March 31, 2008




Revenue
for the quarter ended March 31, 2009 was $7,195,705 compared to revenue of
$8,205,576 for the quarter ended March 31, 2008, a $1,009,871 decrease, or
12.3%.   Revenue in our Data Security and Compliance segment
decreased to $3,119,919 from $5,643,836, a $2,523,917 decrease, or
44.7%.  This was primarily the result of a decrease in our wholesale
remarketing revenues as the amount of available product we were able to purchase
from our suppliers decreased due to tight availability of capital.  We
also had a decrease in our Data Security and Compliance services revenue as some
of our clients delayed their projects due to economic conditions.  We
anticipate that future quarters' service revenue should increase as we continue
to develop new relationships and provide our services to new clients as well as
existing clients.  Revenue in our Data Center Maintenance segment
decreased to $1,658,395 from $2,565,115, a $906,720 decrease, or
35.3%.  At the beginning of the first quarter of 2009, we combined the
Data Center Maintenance and Data Center Hardware segments to better service our
customers' needs.  The decrease was the result of a decrease in
hardware sales and a decrease in maintenance services due to hardware upgrades
that carry factory warranties by a few of our customers.  We
anticipate that future quarters' maintenance revenue should increase as we
provide maintenance services to current and new clients.  Revenue in
our Network Infrastructure Design and Support segment, which we acquired in the
third quarter of 2008, was $2,598,817 of which $469,297 was related to product
revenue.




13




Our
revenues categorized by products and services are as follows:




Three
      Months Ended
                            
                            
                            Three
      Months EndedMarch
      31, 2009
                            
                            
                            March
      31, 2008RevenueProducts
                            
                            $
                            3,654,961
                            
                            
                            $
                            6,272,283Services
                            
                            
                            3,540,744
                            
                            
                            
                            1,933,293Total
      Revenue
                            
                            $
                            7,195,705
                            
                            
                            $
                            8,205,576




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 March 31, 2009 was $1,262,532 compared to a gross
profit of $1,571,674 for the quarter ended March 31, 2008, a $309,142 decrease,
or 19.7%.  Gross profit for the quarter ended March 31, 2009 decreased
over the quarter ended March 31, 2008 as a result of a $463,314 decrease in
gross profit in our Data Security and Compliance segment as well as a $529,420
decrease in gross profit in our Data Center Maintenance segment.  This
was offset by the gross profit of $683,594 generated in our Network
Infrastructure Design and Support segment which was acquired in the third
quarter of 2008.




Gross
margins for the quarter ended March 31, 2009 were 17.5% compared to 19.2% for
the quarter ended March 31, 2008.  Gross margins decreased in our Data
Security and Compliance segment to 0% for the quarter ended March 31, 2009 from
8.1% for the quarter ended March 31, 2008.  Margins decreased as
revenues declined generating fewer dollars to cover our semi fixed cost of
goods.  We also reduced some of our slower moving inventory at a
loss.  Gross margins in our Data Center Maintenance segment decreased
as our revenue decreased.  This caused the expenses related to
providing maintenance to be spread over a lower revenue base.  Gross
margins in our Network Infrastructure Design and Support segment were 26.3%
which was acquired in the third quarter of 2008.




Selling,
general and administrative expenses for the quarter ended March 31, 2009 were
$2,757,624 compared to selling, general and administrative expenses of
$2,272,068 for the quarter ended March 31, 2008, a $485,556 increase, or
21.4%.  This was the result of the addition of the Network
Infrastructure Design and Support segment where selling, general and
administrative expenses were $1,120,304.  Included in these expenses
was an allocation of corporate expenses of $225,000.  This was offset
by a decrease of $598,362 in expenses in our Data Security and Compliance
segment and a decrease of $36,386 in expenses in our Data Center Maintenance
segment as we continued our commitment to reduce Company expenses.




14


Depreciation
and amortization for the quarter ended March 31, 2009 was $216,886 compared to
depreciation and amortization of $107,387 for the quarter ended March 31, 2008,
a $109,499 increase.    This increase was the mainly the
result of an increase in intangible asset amortization as a result of the
acquisition and additional asset depreciation from the Network Infrastructure
Design and Support segment.




Interest
expense for the quarter ended March 31, 2009 was $880,344 compared to interest
expense of $56,649 for the quarter ended March 31, 2008, an $823,695 increase,
or 1,454%, commensurate with an increase in the level of the Company’s
borrowings and the interest rates.




The
Company did not record a federal tax benefit for the three months ended March
31, 2009 and 2008, as we recorded a change in the valuation allowance for an
amount equal to the tax benefit.  The Company recorded state tax
expense for the three months ended March 31, 2009 and 2008.  We incur
state income taxes in jurisdictions where the Company cannot file a consolidated
income tax return.




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 Maintenance and Network Infrastructure Design and
Support.  Our “eliminations” category includes all amounts recognized
upon consolidation of our subsidiaries such as the elimination of inter-segment
revenues, expenses, assets and liabilities.  Each of our segments is
more fully described in Note 2 to our Condensed Consolidated Financial
Statements.




Data
Security & Compliance Segment




Three
      Months Ended
                          March
      31,2009
                        
                        
                        2008Revenue
                        
                        $
                        3,119,919
                        
                        
                        $
                        5,643,836Gross
      Profit
                        
                        
                        (7,675
                        )
                        
                        
                        455,640Selling,
      General And Administrative Expenses
                        
                        
                        758,899
                        
                        
                        
                        1,357,261Depreciation
      And Amortization
                        
                        
                        86,201
                        
                        
                        
                        90,151Loss
      Before Benefit For Income Taxes
                        
                        
                        (1,435,971
                        )
                        
                        
                        (1,048,421
                        )Segment
      Assets
                        
                        
                        6,356,757
                        
                        
                        
                        8,353,345Goodwill
                        
                        
                        –
                        
                        
                        
                        –Expenditures
      for Property and Equipment
                        
                        
                        3,882
                        
                        
                        
                        15,317




Quarter
Ended March 31, 2009 Compared to Quarter Ended March 31, 2008




Revenue
for the quarter ended March 31, 2009 was $3,119,919 compared to revenue of
$5,643,836 for the quarter ended March 31, 2008, a $2,523,917 decrease, or
44.7%.  This was primarily the result of a decrease in our wholesale
remarketing revenues as the amount of available product we were able to purchase
from our supplier's decreased and due to tight availability of
capital.  We also had a decrease in our Data Security and Compliance
services revenue as some of our clients delayed their projects due to economic
conditions.  We anticipate that future quarter's service revenue
should increase as we continue to develop new relationships and provide our
services to new as well as existing clients.




15


Gross
profit for the quarter ended March 31, 2009 was $(7,675) compared to gross
profit of $455,640 for the quarter ended March 31, 2008, a $463,315 decrease, or
101.7%.  Our gross profit decreased due to the realization of lower
margins on our mix of products sold.  Gross margins for the quarter
ended March 31, 2009 were 0% compared to gross margins of 8.1% for the quarter
ended March 31, 2008.  Margins decreased as revenues declined
generating fewer dollars to cover our semi fixed cost of goods.  We
also liquidated some of our slower moving inventory.




Selling,
general and administrative expenses for the quarter ended March 31, 2009 were
$758,899 compared to selling, general and administrative expenses of $1,357,261
for the quarter ended March 31, 2008, a $598,362 decrease, or
44.1%.  Expenses decreased as a result of cost reductions that were
initiated toward the end of 2008 and continued into the first
quarter.  Additional expense reductions were completed towards the end
of the first quarter of 2008 that should start to be realized during the second
quarter of 2009.




Depreciation
and amortization for the quarter ended March 31, 2009 was $86,201 compared to
depreciation and amortization of $90,151 for the quarter ended March 31, 2008, a
$3,950 decrease.  This increase was the result of assets becoming
fully depreciated.




Data
Center Maintenance Segment




Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Revenue
                  
                  $
                  1,658,395
                  
                  
                  $
                  2,565,115Gross
      Profit
                  
                  
                  586,614
                  
                  
                  
                  1,116,034Selling,
      General And Administrative Expenses
                  
                  
                  878,422
                  
                  
                  
                  914,807Depreciation
      And Amortization
                  
                  
                  15,653
                  
                  
                  
                  17,236Income
      Before Provision For Income Taxes
                  
                  
                  (307,857
                  )
                  
                  
                  183,991Segment
      Assets
                  
                  
                  3,057,751
                  
                  
                  
                  3,099,074Goodwill
                  
                  
                  1,489,621
                  
                  
                  
                  1,489,621Expenditures
      for Property and Equipment
                  
                  
                  –
                  
                  
                  
                  –




Quarter
Ended March 31, 2009 Compared to Quarter Ended March 31, 2008




Revenue
for the quarter ended March 31, 2009 was $1,658,395 compared to revenue of
$2,565,115 for the quarter ended March 31, 2008, a $906,720 decrease, or
35.3%.  At the beginning of the first quarter of 2009, we combined the
Data Center Maintenance and Data Center Hardware segments to better service our
customers' needs.  The decrease was the result of a decrease in
hardware sales and a decrease in maintenance services due to hardware upgrades
that initially carry factory warranties by a few of our customers.  We
anticipate that future quarters' maintenance revenue should increase as we
provide maintenance services to current and new clients.




16


Gross
profit for the quarter ended March 31, 2009 was $586,614 compared to gross
profit of $1,116,034 for the quarter ended March 31, 2008, a $529,420 decrease,
or 47.4%.  Our gross profit decreased as a result of the decrease in
gross profit caused by a decrease in our service revenue during the
quarter.  Our gross margin percentage decreased to 35.4% for the
period ended March 31, 2009 from 43.5% for the quarter ended March 31,
2008.  This was caused by the decrease in maintenance services due to
a few of our customer hardware upgrades that initially carry factory
warranties.  We anticipate that future quarters' gross profit will
increase along with the anticipated maintenance revenue increases.




Selling,
general and administrative expenses for the quarter ended March 31, 2009 were
$878,422 compared to selling, general and administrative expenses of $914,807
for the quarter ended March 31, 2008, a $36,385 decrease, or
4.0%.  This was the result of careful review of all expenses as we
continue our commitment to reduce expenses.




Depreciation
and amortization for the quarter ended March 31, 2009 was $15,653 compared to
depreciation and amortization of $17,236 for the quarter ended March 31, 2008, a
$1,583 decrease.  This was the result of assets becoming fully
depreciated.




Network
Infrastructure Design and Support




Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Revenue
                  
                  $
                  2,598,817
                  
                  
                  
                  –Gross
      Profit
                  
                  
                  683,593
                  
                  
                  
                  –Selling,
      General And Administrative Expenses
                  
                  
                  1,120,303
                  
                  
                  
                  –Depreciation
      And Amortization
                  
                  
                  115,032
                  
                  
                  
                  –Income
      Before Provision For Income Taxes
                  
                  
                  (848,494
                  )
                  
                  
                  –Segment
      Assets
                  
                  
                  14,556,759
                  
                  
                  
                  –Goodwill
                  
                  
                  7,321,080
                  
                  
                  
                  –Expenditures
      for Property and Equipment
                  
                  
                  1,723
                  
                  
                  
                  –




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




Geographic
Areas




We
operate in the United States with no assets in foreign
countries.  However, we sell to and provide data security and
compliance services to customers operating in foreign
countries.  Additionally, we have established multiple foreign
partners for our Data Security and Compliance division which allow us to utilize
our software to service our client’s needs in more than 90 countries
worldwide.  All of our purchases and sales are denominated in US
dollars.    There were no foreign currency transaction gains
or losses during the three months ended March 31, 2009 and March 31,
2008.


17


Liquidity
and Capital Resources




Net cash
provided by operating activities in the three months ended March 31, 2009 was
$134,739.  Net cash provided by operating activities in the three
months ended March 31, 2008 was $558,485.  Net cash provided by
operating activities in the three months ended March 31, 2009 was primarily as a
result of a decrease in accounts receivable, a decrease in inventories, and an
increase in accounts payable and accrued expenses, an increase in prepaid
expenses, offset by a gain on the disposition of equipment and the net
loss.  Net cash provided by operating activities during the three
months ended March 31, 2008 was primarily a result of a decrease in accounts
receivable, a decrease in inventories, an increase in accounts payable and
accrued expenses offset by a decrease in prepaid expenses and other
assets.  The decrease in our receivables was mainly attributable to
better collections and a decrease in revenues.


Net cash
provided by investing activities for the three months ended March 31, 2009 was
$5,396.  This was the result of a sale of equipment off set by purchases of
property and equipment.  Net cash used in investing activities in the three
months ended March 31, 2008 was for the purchase of property and
equipment.
  Net cash
provided by financing activities for the three months ended March 31, 2009 was
$25,898.  Net cash used in financing activities for the three months
ended March 31, 2008 was $243,088.  Net cash provided by financing
activities for the three months ended March 31, 2009 was the result net amounts
borrowed under our revolving lines of credit, the payment for financing costs
and the payment of dividends.  Net cash used in financing activities
for the three months ended March 31, 2008 was the result of payments on our
revolving line of credit and the payment of dividends.
  On March
31, 2009, the Company signed a forbearance agreement and Third Amendment to the
Amended and Restated Securities Purchase Agreement with Victory Park Credit
Opportunities Master Fund, LTD and Victory Park Management, LLC. (collectively
"Victory") whereby Victory agreed to forbear from exercising certain of their
rights and remedies and advanced $850,000 in additional funds and changed the
advance rate on Accounts Receivable to a range of 85% to 90% and eligible
inventory to 60%.  The Company incurred $10,000 in amendment fees and
250,000 shares of Company common stock.  The value of the shares
issued was $15,000.  This amount was recorded as additional debt
issuance costs in February 2009 and will be recognized as interest expense on a
straight -line basis over the remaining twenty one months of the financing
agreement.  The Company was in compliance with its loan agreement and
had borrowed the maximum amount under its borrowing base at March 31, 2009
exclusive of the $850,000.
  On
January 30, 2009, the Company signed a Second Amendment to the Amended and
Restated Securities Purchase Agreement with Victory which waived a December 31,
2008 covenant violation and amended the financial covenants.  The
amended financial covenants will take effect commencing June 30,
2009.  The new financial covenants that need to be met are as
follows:
  Maximum
      Senior Leverage
              4.0
      to 1.0Maximum
      Senior Leverage
              10.0
      to 1.0Interest
      Coverage
              1.5
      to 1.0Fixed
      Charge Coverage
              1.25
      to 1.0Capital
      Expenditures not in excess of $200,000 for any calendar
    year
 18
 In
connection with the Second Amendment to the Amended and Restated Securities
Purchase Agreement, the Company incurred $10,000 in amendment fees and 250,000
shares of Company common stock.  The fair value of the shares was
$15,000.  This amount was recorded as additional debt issuance costs
and will be recognized as interest expense on a straight-line basis over the
remaining twenty one months of the financing agreement.
 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.


We do not
have any material commitments for capital expenditures during the next twelve
months.  Any required expenditure will be completed through internally
generated funding.
  We did
not have any significant elements of income or loss not arising from continuing
operations in either of the periods ended March 31, 2009 and 2008 and do not
expect any in the remainder of fiscal 2009.


Item3                                Quantitative
and Qualitative Disclosures About Market Risk




The
Company does not engage in transactions in derivative financial instruments or
derivative commodity instruments.  As of March 31, 2009, the
Company’s financial instruments were not exposed to significant market risk due
to interest rate risk, foreign currency exchange risk, commodity price risk or
equity price risk.




Item4                                Controls
and Procedures




Evaluation of
disclosure controls and procedures




It is the
Chief Executive Officer’s and the Vice President of Finance’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.




19


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




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




Our
efforts to strengthen financial and internal controls continue.  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.




As of
March 31, 2009, 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 VP -
Finance.  Based on this evaluation, our CEO and VP - Finance have
concluded these controls are effective.




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




Item1.                                Legal
Proceedings




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




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




20


Item1A.                      Risk
Factors




Reference
is made to the factors set forth under the "Management Discussion and Analysis
of Financial Condition and Results of Operations" in Part I, Item 2 of
this Form 10-Q and other risk factors described in our Annual Report on Form
10-K for the year ended December 31, 2008, which are incorporated herein by
reference. There have not been any material changes to the risk factors
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2008.




Item2.                                Unregistered
sales of equity securities and Use of Proceeds




None




Item3.                                Defaults
Upon Senior Securities




Not
      applicable.




Item4.                                Submission
of Matters to a Vote of Security Holders




None




Item5.                                Other
Information






None




Item6.                                Exhibits




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




21


SIGNATURE




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




QSGI
      INC. Inc.
              (Registrant)Dated:                      May
      14, 2009
            By:
            /s/
      Marc ShermanMarc
      ShermanChairman
      of the Board and Chief Executive OfficerDated:                      May
      14, 2009
            By:
            /s/
      Edward L. CummingsEdward
      L. CummingsVice
      President of Finance






22


ListOf Exhibits




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






23




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***
              Vice President of Finance Certification Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1***
              Certification of Chief Executive Officer and Vice
      President of Finance Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.*      Management
      contract or compensatory plan.**    Incorporated
      herein by reference to the same numbered exhibit in the Registrant’s
      Transition Report on Form 10-KSB filed with the Commission on April 1,
      2002 (Commission file number 000-07539).***  Attached
      hereto.There
      are no other documents required to be filed as an Exhibit as required by
      Item 601 of Regulation S-K.