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







UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934


For the
quarterly period ended June 30, 2008





OR





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


THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from ____________ to ________________





Commission
File No.: 001-32620





QSGI
INC.


(Exact
name of registrant as specified in its charter)





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





400
Royal Palm Way, Palm Beach, FL  33480


(Address
of Principal Executive Offices)





(561)
835-9757


(Registrants'
Telephone Number, including area code)





Indicate by check
mark whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.Yes
[X]No [
]





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





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


Small Reporting
Company [X]





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





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











QSGI
      INC.TABLE
      OF CONTENTSItem
            Description
            PagePART
      I – FINANCIAL INFORMATION1.
            Financial
      Statements (all
      unaudited)Condensed
      Consolidated Balance Sheets –
              June
      30, 2008 and December 31, 2007
            1Condensed
      Consolidated Statements of Operations –
              Three
      and Six Months Ended June 30, 2008 and 2007
            2Condensed
      Consolidated Statement of Stockholders’ Equity –
              Six
      Months Ended June 30, 2008
            3Condensed
      Consolidated Statements of Cash Flows –
              Six
      Months Ended June 30, 2008 and 2007
            4Notes
      to Condensed Consolidated Financial Statements
            52.
            Management’s
      Discussion and Analysis of Financial Condition
              and
      Results of Operations
            93.
            Quantitative
      and Qualitative Disclosures About Market Risk
            204.
            Controls
      and Procedures
            20PART
      II – OTHER INFORMATION1.
            Legal
      Proceedings
            221A.
            Risk
      Factors
            222.
            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






i


PART
I             FINANCIAL
INFORMATION
 Item
1.                      Financial
Statements
 
 QSGI
INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)


June
      30,
            
            
            December
      31,2008
            
            
            2007AssetsCurrent
      AssetsCash and cash
      equivalents
            
            $
            141,682
            
            
            $
            127,723Accounts receivable, net of
      reserve of $1,070,280 and $955,599 in 2008 and 2007,
      respectively
            
            
            2,028,068
            
            
            
            3,853,362Inventories
            
            
            5,604,347
            
            
            
            6,578,031Prepaid
      expenses and other assets
            
            
            134,213
            
            
            
            163,553Total Current
      Assets
            
            
            7,908,310
            
            
            
            10,722,669Property
      and Equipment, Net
            
            
            260,575
            
            
            
            286,766Goodwill
            
            
            1,489,621
            
            
            
            1,489,621Intangibles,
      Net
            
            
            389,822
            
            
            
            470,348Other
      Assets
            
            
            549,113
            
            
            
            448,066$
            10,597,441
            
            
            $
            13,417,470Liabilities
      And Stockholders’ Equity (Deficit)Current
      LiabilitiesRevolving
      line of credit, net of original issue discount
            
            $
            3,142,273
            
            
            $
            3,754,061Accounts
payable
            
            
            1,934,054
            
            
            
            1,109,940Accrued
expenses
            
            
            614,922
            
            
            
            654,461Accrued payroll
            
            
            78,564
            
            
            
            88,818Deferred
      revenue
            
            
            269,352
            
            
            
            439,865Other
      liabilities
            
            
            259,229
            
            
            
            311,610Total Current
      Liabilities
            
            
            6,298,394
            
            
            
            6,358,755Long-Term
      Deferred Revenue
            
            
            27,650
            
            
            
            142,772Deferred
      Income Taxes
            
            
            27,300
            
            
            
            27,300Total
    Liabilities
            
            
            6,353,344
            
            
            
            6,528,827Redeemable
      Convertible Preferred Stock
            
            
            4,248,154
            
            
            
            4,238,685Stockholders’
      Equity (Deficit)Preferred
      shares: Authorized 5,000,000 shares in 2008and
      2007, $0.01 par value, none issued
            
            
            –
            
            
            
            –Common
      shares: authorized 95,000,000 shares in 2008 and 2007, $0.01 par value;
      45,797,716 shares issued and outstanding in 2008, of which 13,500,000
      shares were contingent acquisition shares held in escrow; 31,172,716
      shares issued and outstanding in 2007
            
            
            322,977
            
            
            
            311,727Additional
      paid-in capital
            
            
            14,204,120
            
            
            
            14,134,298Retained earnings
      (deficit)
            
            
            (14,531,154
            )
            
            
            (11,796,067
            )Total Stockholders’ Equity
      (Deficit)
            
            
            (4,057
            )
            
            
            2,649,958$
            10,597,441
            
            
            $
            13,417,470




See
the accompanying notes to condensed consolidated financial
statements.


Page
1


QSGI
INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


For
The Three and Six Months Ended June 30, 2008 and 2007


(Unaudited)





Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Product
      Revenue
            
            $
            4,113,245
            
            
            $
            7,951,514
            
            
            $
            10,388,427
            
            
            $
            15,906,683Service
      Revenue
            
            
            1,983,994
            
            
            
            1,713,675
            
            
            
            3,914,387
            
            
            
            3,152,673Total
      Revenue
            
            
            6,097,239
            
            
            
            9,665,189
            
            
            
            14,302,814
            
            
            
            19,059,356Cost
      Of Products Sold
            
            
            4,354,773
            
            
            
            6,538,501
            
            
            
            10,310,239
            
            
            
            12,712,657Cost
      Of Services Sold
            
            
            683,417
            
            
            
            633,072
            
            
            
            1,361,853
            
            
            
            1,176,001Total
      Cost Of Sales
            
            
            5,038,190
            
            
            
            7,171,573
            
            
            
            11,672,092
            
            
            
            13,888,658Gross
      Profit
            
            
            1,059,049
            
            
            
            2,493,616
            
            
            
            2,630,722
            
            
            
            5,170,698Selling,
      General And Administrative Expenses
            
            
            2,486,812
            
            
            
            2,378,407
            
            
            
            4,758,880
            
            
            
            4,993,303Depreciation
      And Amortization
            
            
            208,334
            
            
            
            167,709
            
            
            
            315,720
            
            
            
            339,717Interest
      Expense, net
            
            
            199,792
            
            
            
            43,353
            
            
            
            256,442
            
            
            
            131,192Loss
      Before Provision (Benefit) For Income Taxes
            
            
            (1,835,889
            )
            
            
            (95,853
            )
            
            
            (2,700,320
            )
            
            
            (293,514
            )Provision
      (Benefit) For Income Taxes
            
            
            8,511
            
            
            
            (19,294
            )
            
            
            34,767
            
            
            
            (78,113
            )Net
      Loss
            
            
            (1,844,400
            )
            
            
            (76,559
            )
            
            
            (2,735,087
            )
            
            
            (215,401
            )Preferred
      Stock Dividends
            
            
            64,323
            
            
            
            64,323
            
            
            
            128,648
            
            
            
            127,939Accretion
      To Redemption Value of Preferred Stock
            
            
            4,769
            
            
            
            4,493
            
            
            
            9,468
            
            
            
            8,918Net
      Loss Available to Common Stockholders
            
            $
            (1,913,492
            )
            
            $
            (145,375
            )
            
            $
            (2,873,203
            )
            
            $
            (352,258
            )Net
      Loss Per Common Share – Basic
            
            $
            (0.06
            )
            
            $
            0.00
            
            
            $
            (0.09
            )
            
            $
            (0.01
            )Net
      Loss Per Common Share – Diluted
            
            $
            (0.06
            )
            
            $
            0.00
            
            
            $
            (0.09
            )
            
            $
            (0.01
            )Weighted
      Average Number Of Common Shares Outstanding –Basic
            
            
            31,469,419
            
            
            
            31,172,716
            
            
            
            31,321,068
            
            
            
            31,172,716Weighted
      Average Number Of Common Shares Outstanding –Diluted
            
            
            31,469,419
            
            
            
            31,172,716
            
            
            
            31,321,068
            
            
            
            31,172,716




See
the accompanying notes to condensed consolidated financial
statements.




Page
2





QSGI
INC.


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)


For
The Six Months Ended June 30, 2008


(Unaudited)





Additional
            
            
            Retained
            
            
            TotalCommon
      Stock
            
            
            Paid-in
            
            
            Earnings
            
            
            Stockholders’Number
            
            
            Amount
            
            
            Capital
            
            
            (Deficit)
            
            
            Equity
      (Deficit)Balance
      (Deficit) - December 31, 2007
            
            
            31,172,716
            
            
            $
            311,727
            
            
            $
            14,134,298
            
            
            $
            (11,796,067
            )
            
            $
            2,649,958Stock
      Option Compensation
            
            
            –
            
            
            
            –
            
            
            
            5,438
            
            
            
            –
            
            
            
            5,438Stock
      issued for Financing
            
            
            1,125,000
            
            
            
            11,250
            
            
            
            202,500
            
            
            
            
            
            
            
            213,750Preferred
      Stock Dividends
            
            
            –
            
            
            
            –
            
            
            
            (128,648
            )
            
            
            –
            
            
            
            (128,648
            )Accretion
      To Redemption Value Of Preferred Stock
            
            
            –
            
            
            
            –
            
            
            
            (9,468
            )
            
            
            –
            
            
            
            (9,468
            )Net
      Loss
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (2,735,087
            )
            
            
            (2,735,087
            )Balance
      (Deficit) – June 30, 2008
            
            
            32,297,716
            
            
            $
            322,977
            
            
            $
            14,204,120
            
            
            $
            (14,531,154
            )
            
            $
            (4,057
            )







See
the accompanying notes to condensed consolidated financial
statements.


Page
3




QSGI
INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


For
The Six Months Ended June 30, 2008 and 2007


(Unaudited)





2008
            
            
            2007Cash
      Flows From Operating ActivitiesNet Loss
            
            $
            (2,735,087
            )
            
            $
            (215,401
            )Adjustments to reconcile net
      loss to net cash provided by operating activities:Depreciation and
      amortization
            
            
            315,720
            
            
            
            339,717Non-cash
      interest expense
            
            
            16,208Stock
      option compensation expense
            
            
            5,438
            
            
            
            7,300Deferred
      income taxes
            
            
            –
            
            
            
            (99,170
            )Provision
      for doubtful accounts
            
            
            194,176
            
            
            
            (11,212
            )Changes in assets and
      liabilities:Accounts
    receivable
            
            
            1,631,119
            
            
            
            1,551,129Inventories
            
            
            973,684
            
            
            
            (2,509,350
            )Prepaid expenses and other
      assets
            
            
            (183,988
            )
            
            
            103,347Accounts payable and accrued
      expenses
            
            
            436,304
            
            
            
            (454,471
            )Net
      Cash Provided by (Used in) Operating Activities
            
            
            653,574
            
            
            
            (1,288,111
            )Cash
      Used In Investing ActivitiesPurchases
      of property and equipment
            
            
            (71,107
            )
            
            
            (85,649
            )Net
      Cash Used In Investing Activities
            
            
            (71,107
            )
            
            
            (85,649
            )Cash
      Flows From Financing ActivitiesPayment
      for financing costs
            
            
            (25,614
            )
            
            
            (142,827
            )Net
      amounts borrowed under current revolving lines of credit, net of
      OID
            
            
            3,339,815
            
            
            
            –Net
      amounts borrowed (paid) under previous revolving lines of
      credit
            
            
            (3,754,061
            )
            
            
            1,872,345Preferred stock
      dividends
            
            
            (128,648
            )
            
            
            (127,939
            )Net
      Cash Provided By (Used In) Financing Activities
            
            
            (568,508
            )
            
            
            1,601,579Net
      Increase In Cash And Cash Equivalents
            
            
            13,959
            
            
            
            227,819Cash
      And Cash Equivalents – Beginning Of Period
            
            
            127,723
            
            
            
            632,948Cash
      And Cash Equivalents – End of Period
            
            $
            141,682
            
            
            $
            860,767











See
the accompanying notes to condensed consolidated financial
statements.





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




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




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




2.
            Summary
      of Significant Accounting Policies




Business
Organization




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





Segments





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





A.
            Data
      Center Maintenance





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






5





B.
            Data
      Center Hardware





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





C.
            Data
      Security and Compliance





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




-
      Data erasure to Department of Defense standards for hard
  drives-
      Asset Auditing/Life Cycle Management, which allows customers to minimize
      their overall IT expenditure and maximize their return on
      investment.-
      IT asset remarketing for IT assets with market
value


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





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





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 technical coverage and sales offices in 20 other states including
Arkansas, Colorado, Illinois, Indiana, Kansas, Maine, Missouri, Michigan,
Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South
Carolina, Tennessee, Texas, Washington DC, Wisconsin and Wyoming.




Estimates




The
preparation of financial statements, in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.




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, 2008 and 2007 are as follows:






6







Three
      Months Ended June 30,
            Six
      Months Ended June 30,2008
            2007
            2008
            2007Basic
            31,469,419
            31,172,716
            31,321,068
            31,172,716Stock
      options
            –
            –
            –
            –Stock
      warrants
            –
            –
            –
            –Redeemable
      preferred stock
            –
            –
            –
            –Diluted
            31,469,419
            31,172,716
            31,321,068
            31,172,716




For the
three months ended June 30, 2008 and 2007, the Company excluded weighted average
common share equivalents related to stock options of 1,898,479 and 1,027,505,
respectively and weighted average common share equivalents related to redeemable
preferred stock of 1,911,111 and 1,911,111, respectively because their effect
would be anti-dilutive.




For the
six months ended June 30, 2008 and 2007, the Company excluded weighted average
common share equivalents related to stock options of 1,922,259 and 1,033,319,
respectively and weighted average common share equivalents related to redeemable
preferred stock of 1,911,111 and 1,911,111, respectively because their effect
would be anti-dilutive.




At June
30, 2008, there were also 13,500,000 contingent acquisition shares
outstanding.  Of this amount 3,500,000 were issued in July 2008 as
part of the acquisition of Contemporary Computer Services and 10,000,000 are
being held in escrow to be released based on Contemporary Computer Services
achieving certain performance milestones or returned to treasury if such
milestones are not reached.




3.
            Inventories




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




2008
            
            
            2007Finished
      goods
            
            $
            6,168,596
            
            
            $
            6,120,473Inventory
      in transit
            
            
            27,751
            
            
            
            708,558Allowance
      for excess and obsolescence
            
            
            (592,000
            )
            
            
            (251,000
            )$
            5,604,347
            
            
            $
            6,578,031




4.           Financing




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






7




The
Company incurred $486,250 in origination fees paid to Victory Park Capital,
including the issuance of 1,125,000 shares of the Company’s common
stock.  These fees were recorded as a reduction of the loan
proceeds.  The original issue discount will be recognized as interest
expense on a straight-line basis over the thirty month term of the financing
agreement.  During the three months ended June 30, 2008, the Company
recognized $16,208 of interest expense related to the original issue discount,
and has $470,042 remaining to be recognized.  These costs have the
effect of making the interest rate approximately 4% higher than the stated rate
for thirty months based on anticipated future borrowings.




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




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




5.          SegmentInformation




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.






8




Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007RevenuesData
      Security and Compliance
            
            $
            3,800,850
            
            
            $
            4,885,902
            
            
            $
            9,444,686
            
            
            $
            9,152,226Data
      Center Hardware
            
            
            158,864
            
            
            
            3,304,785
            
            
            
            1,042,797
            
            
            
            7,112,577Data
      Center Maintenance
            
            
            2,288,272
            
            
            
            1,493,901
            
            
            
            3,969,453
            
            
            
            2,842,082Intersegment
      Elimination
            
            
            (150,747
            )
            
            
            (19,399
            )
            
            
            (154,122
            )
            
            
            (47,529
            )Consolidated
      Total
            
            $
            6,097,239
            
            
            $
            9,665,189
            
            
            $
            14,302,814
            
            
            $
            19,059,356Income
      (loss) before Provision (Benefit) for Income TaxesData
      Security and Compliance
            
            $
            (1,461,353
            )
            
            $
            (459,303
            )
            
            $
            (2,509,776
            )
            
            $
            (1,186,171
            )Data
      Center Hardware
            
            
            (511,031
            )
            
            
            95,087
            
            
            
            (872,028
            )
            
            
            360,019Data
      Center Maintenance
            
            
            136,495
            
            
            
            268,363
            
            
            
            681,484
            
            
            
            532,638Consolidated
      Total
            
            $
            (1,835,889
            )
            
            $
            (95,853
            )
            
            $
            (2,700,320
            )
            
            $
            (293,514
            )




6.          Business
Acquisition




On July
8, 2008, the Company completed of the acquisition of Contemporary Computer
Service, Inc. for $10.6 million plus an additional stock earn out of up to an
additional 10 million shares of common stock based on achieving certain
performance milestones. The $10.6 million purchase price was financed through a
combination of the issuance of 3,500,000 shares of common stock in the Company,
valued at $595,000, based upon the market price for QSGI's common stock as of
July 6, 2008, the date immediately prior to the closing date, senior bank and
seller financing in the amount of $10 million dollars, both secured by the
assets of the Company.  In connection with the seller financing, the
Company issued warrants to purchase 12,000,000 shares of Common Stock at a
purchase price of $0.30 per share.




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




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




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.






9




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




Results
of Operations




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




Three
      Months Ended
              June
      30,
            Six
      Months Ended
              June
      30,2008
            2007
            2008
            2007%
            %
            %
            %Product
      Revenue
            67.5
            82.3
            72.6
            83.5Service
      Revenue
            32.5
            17.7
            27.4
            16.5Total
      Revenue
            100.0
            100.0
            100.0
            100.0Cost
      Of Products Sold
            71.4
            67.7
            72.1
            66.7Cost
      Of Services Sold
            11.2
            6.5
            9.5
            6.2Cost
      Of Products and Services Sold
            82.6
            74.2
            81.6
            72.9Gross
      Profit
            17.4
            25.8
            18.4
            27.1Selling,
      General And Administrative Expenses
            40.8
            24.6
            33.3
            26.2Depreciation
      And Amortization
            3.4
            1.7
            2.2
            1.8Interest
      Expense, net
            3.3
            0.4
            1.8
            0.6Loss
      Before Benefit For Income Taxes
            (30.1)
            (2.1)
            (18.9)
            (1.5)Provision
      (Benefit) For Income Taxes
            0.1
            (0.1)
            0.2
            (0.4)Net
      Loss
            (30.2)
            (0.8)
            (19.1)
            (1.1)




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




Revenue
for the quarter ended June 30, 2008 was $6,097,239 compared to revenue of
$9,665,189 for the quarter ended June 30, 2007, a $3,567,950 decrease, or
36.9%.   Revenue in our Data Security and Compliance segment
decreased to $3,800,850 from $4,885,902, a $1,085,052 decrease, or
22.2%.  This was primarily the result of a decrease in our wholesale
remarketing revenues as the amount of product available for purchase from our
suppliers decreased.  This was balanced by a steady flow from
additional corporate customers utilizing our full suite of services where fee
based revenues increased 7% to $243,000 from $227,000 in 2007.  We
anticipate that future quarter's service revenue should continue to increase as
a result of the client relationships we continue to build.  Revenue in
our Data Center Maintenance segment increased to $2,288,272 from $1,493,901, a
$794,371 increase, or 53.2%.  The revenue for the quarter included
product revenue of $547,341 as we began to sell product to support our
maintenance customers.  Excluding the product revenue, our service
revenue increased 16.5% to $1,740,931 from $1,493,902 as we signed additional
service contracts with new and existing customers.  These contracts
are generally one to three year terms.  Revenue in our Data Center
Hardware segment during the quarter decreased to $158,864 from $3,304,785, a
$3,145,921 decrease, or 95.1%.  Revenues decreased substantially due
to onerous restrictions instituted during the 3rd quarter of 2007 by a major OEM
restricting our ability to reconfigure and remarket zSeries mainframe computer
equipment.  These restrictions since their inception have had an
adverse financial impact on the Data Center Hardware segment, as well as the
Company.






10


Our
revenues categorized by products and services are as follows:




Three
      Months Ended
            Three
      Months EndedJune
      30, 2008
            June
      30, 2007RevenueProducts
            $
      4,113,245
            $
      7,951,514Services
            1,983,994
            1,713,675Total
      Revenue
            $
      6,097,239
            $
      9,665,189




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, 2008 was $1,059,049 compared to a gross
profit of $2,493,616 for the quarter ended June 30, 2007, a $1,434,567 decrease,
or 57.5%.  Gross profit for the quarter ended June 30, 2008 decreased
over the quarter ended June 30, 2007 as a result of a $1,004,514 decrease in
gross profit in our Data Center Hardware segment as well as a $436,949 decrease
in gross profit in our Data Security and Compliance segment.  This was
offset by a 14.4% increase in gross profit at our Data Center Maintenance
segment where gross profit increased to $1,071,027 for the quarter ended June
30, 2008 from $935,965 for the quarter ended June 30, 2007.




Gross
margins for the quarter ended June 30, 2008 were 17.4% compared to 25.8% for the
quarter ended June 30, 2007.  Gross margins decreased in our Data
Security and Compliance segment to 7.0% for the quarter ended June 30, 2008 from
14.4% for the quarter ended June 30, 2007.  Margins decreased as
semi-fixed cost of goods sold expenses increased due to the costs incurred in
the operation of our internet business coupled with lower revenues which
resulted in lower available gross profit dollars.  Gross margins
decreased in our Data Center Hardware segment for the quarter ended June 30,
2008 to (175.5%) from 25.8% for the quarter ended June 30, 2007. The decrease
was the result of the onerous restrictions instituted during the 3rd quarter of
2007 by a major OEM restricting our ability to reconfigure and remarket zSeries
mainframe computer equipment.  As a result, we have increased the
inventory reserve by $155,000.  We were also forced to sell some
product at a loss.  This along with the increased reserve resulted in
the negative gross margin. Gross margins in our Data Center Maintenance segment
decreased to 46.8% from 62.7%.  The gross profit percentage decreased
as a result of our beginning to sell product out of this segment to support our
maintenance customers.  Without the sale of product sale, the gross
profit percentage was 61.3% for the quarter ended June 30, 2008 as compared to
62.7% for the quarter ended June 30, 2007 as we added additional technical
personnel to handle new customers.






11




Selling,
general and administrative expenses for the quarter ended June 30, 2008 were
$2,486,812 compared to selling, general and administrative expenses of
$2,378,407 for the quarter ended June 30, 2007, a $108,405 increase, or
4.6%.  This was the result of a decrease of $437,294 in expenses in
our Data Center Hardware segment, an increase of $276,507 in expenses in our
Data Security and Compliance segment and an increase of $269,191 in expenses in
our Data Center Maintenance segment.  During the quarter, we incurred
non-recurring expenses of approximately $215,000 relating to the fees paid to
our former lenders, and consultants and attorneys while in default of the prior
loan agreement.




Depreciation
and amortization for the quarter ended June 30, 2008 was $208,334 compared to
depreciation and amortization of $167,709 for the quarter ended June 30, 2007, a
$40,625 increase.    This increase was the mainly the result
of the write-off of deferred loan costs associated with changing lenders offset
by less intangible asset amortization during the current
quarter.  Intangible assets in our Data Center Hardware segment were
impaired and written off at December 31, 2007.




Interest
expense for the quarter ended June 30, 2008 was $199,792 compared to interest
expense of $43,353 for the quarter ended June 30, 2007, a $140,231 increase, or
360.8%, commensurate with an increase in the rate of interest charged on the
Company’s borrowings and the amortization of $16,208 in original issue discount
on the new loan agreement.




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




Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007




Revenue
for the six months ended June 30, 2008 was $14,302,814 compared to revenue of
$19,059,356 for the six months ended June 30, 2007, a $4,756,542 decrease, or
25.0%.   Revenue in our Data Security and Compliance segment
increased to $9,444,686 from $9,152,226, a $292,460 increase, or
3.2%.  This was primarily the result of a 56% increase in our year to
date service revenue, which increased from $319,000 to $497,000 and an increase
in our remarketing revenue.  The increase in service revenue was the
result of additional corporate customers utilizing our full suite of
services.  We anticipate that future quarter's service revenue should
continue to increase as a result of the client relationships we continue to
build.  Revenue in our Data Center Maintenance segment increased to
$3,969,453 from $2,842,082, a $1,127,371 increase, or 39.7%.  The
revenue for the six months included product revenue of $547,341 as we began to
sell product in the second quarter to support our maintenance
customers.  Excluding the product revenue, our service revenue
increased 20.4% to $3,422,112 from $2,842,082 as we signed additional service
contracts with new and existing customers.  Revenue in our Data Center
Hardware segment during the six months decreased to $1,042,798 from $7,112,577,
a $6,069,779 decrease, or 85.3%.  Revenues decreased substantially due
to onerous restrictions instituted during the 3rd quarter of 2007 by a major OEM
restricting our ability to reconfigure and remarket zSeries mainframe computer
equipment.  These restrictions since their inception have had an
adverse financial impact on the Data Center Hardware segment, as well as the
Company.






12




Our
revenues categorized by products and services are as follows:




Six
      Months Ended
            Six
      Months EndedJune
      30, 2008
            June
      30, 2007RevenueProducts
            $
      10,388,427
            $
      15,906,683Services
            3,914,387
            3,152,673Total
      Revenue
            $
      14,302,814
            $
      19,059,356




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 six months ended June 30, 2008 was $2,630,722 compared to a gross
profit of $5,170,698 for the six months ended June 30, 2007, a $2,539,976
decrease, or 49.1%.  Gross profit for the six months ended June 30,
2008 decreased over the six months ended June 30, 2007 as a result of a
$2,137,195 decrease in gross profit in our Data Center Hardware segment as well
as a $786,818 decrease in gross profit in our Data Security and Compliance
segment.  This was offset by a 21.3% increase in gross profit at our
Data Center Maintenance segment where gross profit increased to $2,198,448 for
the six months ended June 30, 2008 from $1,805,411 for the six months ended June
30, 2007.




Gross
margins for the six months ended June 30, 2008 were 18.4% compared to 27.1% for
the six months ended June 30, 2007.  Gross margins decreased in our
Data Security and Compliance segment to 7.7% for the six months ended June 30,
2008 from 16.5% for the six months ended June 30, 2007.  Margins
decreased as semi-fixed cost of goods sold expenses increased due to the costs
incurred in the operation of our internet business.  Gross margins
decreased in our Data Center Hardware segment for the six months ended June 30,
2008 to (27.0%) from 26.1% for the six months ended June 30, 2007. The decrease
was the result of the onerous restrictions instituted during the 3rd quarter of
2007 by a major OEM restricting our ability to reconfigure and remarket zSeries
mainframe computer equipment.  As a result, we have increased the
inventory reserve by $191,000.  We were also forced to sell some
product at a loss.  This along with the increased reserve resulted in
the negative gross margin.  Gross margins in our Data Center
Maintenance segment decreased to 55.2% from 63.5%.  This decrease was
the result of our beginning to sell product during the second quarter of 2008 to
support our maintenance customers.  Without the sale of product, the
gross profit percentage for the six months ended June 30, 2008 was 63.8% as
compared to 63.5% for the six months ended June 30, 2007.






13




Selling,
general and administrative expenses for the six months ended June 30, 2008 were
$4,758,880 compared to selling, general and administrative expenses of
$4,993,303 for the six months ended June 30, 2007, a $234,423 decrease, or
4.7%.  This was the result of a decrease of $437,294 in expenses in
our Data Center Hardware segment, an increase of $276,507 in expenses in our
Data Security and Compliance segment and an increase of $269,191 in expenses in
our Data Center Maintenance segment.  During the quarter ended June
30, 2008, we incurred non-recurring expenses of approximately $215,000 relating
to the fees paid to our former lenders, and consultants and attorneys while in
default of the prior loan agreement and incurred additional employee related
expenses and more customer contact and visits in our Data Center Maintenance
segment.




Depreciation
and amortization for the six months ended June 30, 2008 was $315,720 compared to
depreciation and amortization of $339,717 for the six months ended June 30,
2007, a $23,997 decrease.    This decrease included the
write-off of deferred loan costs associated with changing lenders offset by less
intangible asset amortization.  Intangible assets in our Data Center
Hardware segment were impaired and written off at December 31,
2007.




Interest
expense for the six months ended June 30, 2008 was $256,442 compared to interest
expense of $131,192 for the six months ended June 30, 2007, a $125,250 increase,
or 95.5%, commensurate with an increase in the rate of interest charged on the
Company’s borrowings and the amortization of $16,208 in original issue discount
on the new loan agreement.




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




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.






14


Data
Security & Compliance Segment




Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            3,800,850
            
            
            $
            4,885,902
            
            
            $
            9,444,686
            
            
            $
            9,152,226Gross
      Profit
            
            
            266,789
            
            
            
            703,738
            
            
            
            722,429
            
            
            
            1,509,247Selling,
      General And Administrative Expenses
            
            
            1,337,045
            
            
            
            1,060,538
            
            
            
            2,694,307
            
            
            
            2,448,670Depreciation
      And Amortization
            
            
            191,305
            
            
            
            59,150
            
            
            
            281,456
            
            
            
            115,541Loss
      Before Benefit For Income Taxes
            
            
            (1,461,353
            )
            
            
            (459,303
            )
            
            
            (2,509,776
            )
            
            
            (1,186,171
            )Segment
      Assets
            
            
            6,882,579
            
            
            
            10,141,098
            
            
            
            6,882,579
            
            
            
            10,141,098Goodwill
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –Expenditures
      for Property and Equipment
            
            
            42,611
            
            
            
            45,196
            
            
            
            57,928
            
            
            
            72,442







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




Revenue
for the quarter ended June 30, 2008 was $3,800,850 compared to revenue of
$4,885,902 for the quarter ended June 30, 2007, a $1,085,052 decrease, or
22.2%.  This was primarily the result of a decrease in our wholesale
remarketing revenues as the amount of product available for purchase from our
suppliers decreased.  This was balanced by a steady flow from
additional corporate customers utilizing our full suite of services where fee
based revenues increased 7% to $243,000 from $227,000 in 2007.  We
anticipate that future quarter's service revenue should continue to increase as
a result of the client relationships we continue to build.




Gross
profit for the quarter ended June 30, 2008 was $266,789 compared to gross profit
of $703,738 for the quarter ended June 30, 2007, a $436,949 decrease, or
62.1%.  Our gross profit decreased due to the decrease in
revenues.  Gross margins for the quarter ended June 30, 2008 were 7.0%
compared to gross margins of 14.4% for the quarter ended June 30,
2007.  Margins decreased as semi-fixed cost of goods sold expenses
increased due to the costs incurred in the operation of our internet business
and a non-cash increase in our inventory reserve of $60,000 coupled with lower
available gross profit dollars to offset these increases.  Margins
within the service portion of this segment increased to 57% for the quarter
ended June 30, 2008 from 29% for the quarter ended June 30, 2007 as we had an
increase in our higher margin end-user, data auditing, erasure and re-marketing
work.




Selling,
general and administrative expenses for the quarter ended June 30, 2008 were
$1,337,045 compared to selling, general and administrative expenses of
$1,060,538 for the quarter ended June 30, 2007, a $276,507 increase, or
26.1%.  During the quarter ended June 30, 2008, we incurred
non-recurring expenses of approximately $215,000 relating to the changing of our
bank line.  Excluding these expenses, our total expenses remained
relatively flat showing the relative fixed cost nature of our business even
though individual expense categories may vary period to period.




Depreciation
and amortization for the quarter ended June 30, 2008 was $191,305 compared to
depreciation and amortization of $59,150 for the quarter ended June 30, 2007, a
$132,155 increase.  This increase included the write-off of deferred
loan costs associated with changing lenders.




Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007




Revenue
for the six months ended June 30, 2008 was $9,444,686 compared to revenue of
$9,152,226 for the six months ended June 30, 2007, a $292,460 increase, or
3.2%.  This was primarily the result of a 56% increase in our year to
date service revenue, which increased from $319,000 to $497,000 and an increase
in our remarketing revenue.  The increase in service revenue was the
result of additional corporate customers utilizing our full suite of
services.  We anticipate that future quarter's service revenue should
continue to increase as a result of the client relationships we continue to
build.






15




Gross
profit for the six months ended June 30, 2008 was $722,429 compared to gross
profit of $1,509,247 for the six months ended June 30, 2007, a $786,818
decrease, or 52.1%.  Our gross profit decreased due to a decrease in
margins.  Gross margins for the six months ended June 30, 2008 were
7.6% compared to gross margins of 16.5% for the six months ended June 30,
2007.  Margins decreased as semi-fixed cost of goods sold expenses
increased due to the costs incurred in the operation of our internet business
and a non-cash increase in our inventory reserves of
$120,000.  Margins within the service portion of this segment
increased to 75% for the six months ended June 30, 2008 from 54% for the six
months ended June 30, 2007 as we had an increase in our higher margin end-user,
data auditing, erasure and re-marketing work.




Selling,
general and administrative expenses for the six months ended June 30, 2008 were
$2,694,307 compared to selling, general and administrative expenses of
$2,448,670 for the six months ended June 30, 2007, a $245,637 increase, or
10.0%.  During the six months ended June 30, 2008, we incurred
non-recurring expenses of approximately $215,000 relating to the changing of our
bank line.  Excluding these expenses, our total expenses remained
relatively flat showing the relative fixed cost nature of our business even
though individual expense categories may vary period to period.




Depreciation
and amortization for the six months ended June 30, 2008 was $281,456 compared to
depreciation and amortization of $115,541 for the six months ended June 30,
2007, a $165,915 increase.  This increase included the write-off of
deferred loan costs associated with changing lenders.




Data
Center Hardware Segment




Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            158,864
            
            
            $
            3,304,785
            
            
            $
            1,042,798
            
            
            $
            7,112,577Gross
      Profit
            
            
            (278,768
            )
            
            
            853,917
            
            
            
            (281,155
            )
            
            
            1,856,040Selling,
      General And Administrative Expenses
            
            
            228,157
            
            
            
            665,451
            
            
            
            582,420
            
            
            
            1,302,238Depreciation
      And Amortization
            
            
            4,106
            
            
            
            93,376
            
            
            
            8,453
            
            
            
            193,798Income
      (Loss) Before Benefit For Income Taxes
            
            
            (511,031
            )
            
            
            264,932
            
            
            
            (872,028
            )
            
            
            360,019Segment
      Assets
            
            
            929,946
            
            
            
            11,384,809
            
            
            
            929,946
            
            
            
            12,057,077Goodwill
            
            
            –
            
            
            
            5,154,782
            
            
            
            –
            
            
            
            5,154,782Expenditures
      for Property and Equipment
            
            
            543
            
            
            
            7,480
            
            
            
            11,507
            
            
            
            13,207




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




Revenue
for the quarter ended June 30, 2008 was $158,864 compared to revenue of
$3,304,785 for the quarter ended June 30, 2007, a $3,145,921 decrease, or
95.2%.  Revenues decreased substantially due to onerous restrictions
instituted during the 3rd quarter of 2007 by a major OEM restricting our ability
to reconfigure and remarket zSeries mainframe computer
equipment.  These restrictions have had an adverse financial impact on
the Data Center Hardware segment, as well as the Company.




Gross
profit for the quarter ended June 30, 2008 was $(278,768) compared to gross
profit of $853,917 for the quarter ended June 30, 2007, a $1,132,685 decrease,
or 132.7%.  The decrease was the result of the onerous restrictions
instituted during the 3rd quarter of 2007 by a major OEM restricting our ability
to reconfigure and remarket zSeries mainframe computer equipment.






16




Selling,
general and administrative expenses for the quarter ended June 30, 2008 were
$228,157 compared to selling, general and administrative expenses of $665,451
for the quarter ended June 30, 2007, a $437,294 decrease, or
65.7%.  The decrease was mainly the result of the restructuring that
took place during the fourth quarter of 2007 caused by the aforementioned OEM
policy change.




Depreciation
and amortization for the quarter ended June 30, 2008 was $4,106 compared to
depreciation and amortization of $93,376 for the quarter ended June 30, 2007, an
$89,270 decrease, or 95.6%.  This decrease was the result of the sale
of Company assets during the fourth quarter 2007 restructuring and the reduction
in intangible assets that were impaired and written off at December 31,
2007.




Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007




Revenue
for the six months ended June 30, 2008 was $1,042,798 compared to revenue of
$7,112,577 for the six months ended June 30, 2007, a $6,069,779 decrease, or
85.3%.  Revenues decreased substantially due to onerous restrictions
instituted during the 3rd quarter of 2007 by a major OEM restricting our ability
to reconfigure and remarket zSeries mainframe computer
equipment.  These restrictions have had an adverse financial impact on
the Data Center Hardware segment, as well as the Company.




Gross
profit for the six months ended June 30, 2008 was $(281,155) compared to gross
profit of $1,856,040 for the six months ended June 30, 2007, a $2,137,195
decrease, or 115.1%.  The decrease was the result of the onerous
restrictions instituted during the 3rd quarter of 2007 by a major OEM
restricting our ability to reconfigure and remarket zSeries mainframe computer
equipment.




Selling,
general and administrative expenses for the six months ended June 30, 2008 were
$582,420 compared to selling, general and administrative expenses of $1,302,238
for the six months ended June 30, 2007, a $719,818 decrease, or
55.3%.  The decrease was mainly the result of the restructuring that
took place during the fourth quarter of 2007 caused by the aforementioned OEM
policy change.




Depreciation
and amortization for the six months ended June 30, 2008 was $8,453 compared to
depreciation and amortization of $193,798 for the six months ended June 30,
2007, an $185,345 decrease, or 95.6%.  This decrease was the result of
the sale of Company assets during the fourth quarter 2007 restructuring and the
reduction in intangible assets that were impaired and written off at December
31, 2007.




Data
Center Maintenance Segment




Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
            
            $
            2,288,272
            
            
            $
            1,493,901
            
            
            $
            3,969,453
            
            
            $
            2,842,082Gross
      Profit
            
            
            1,071,027
            
            
            
            935,965
            
            
            
            2,189,448
            
            
            
            1,805,411Selling,
      General And Administrative Expenses
            
            
            921,609
            
            
            
            652,418
            
            
            
            1,482,153
            
            
            
            1,242,395Depreciation
      And Amortization
            
            
            12,922
            
            
            
            15,183
            
            
            
            25,811
            
            
            
            30,378Income
      Before Provision For Income Taxes
            
            
            136,496
            
            
            
            268,363
            
            
            
            681,484
            
            
            
            532,638Segment
      Assets
            
            
            2,784,916
            
            
            
            2,963,312
            
            
            
            2,784,916
            
            
            
            2,963,312Goodwill
            
            
            1,489,621
            
            
            
            1,489,621
            
            
            
            1,489,621
            
            
            
            1,489,621Expenditures
      for Property and Equipment
            
            
            1,675
            
            
            
            –
            
            
            
            1,675
            
            
            
            –







17




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




Revenue
for the quarter ended June 30, 2008 was $2,288,272 compared to revenue of
$1,493,901 for the quarter ended June 30, 2007, a $794,371 increase, or
53.2%.  The revenue for the quarter included product revenue of
$547,341 as we increased our selling of product to support our maintenance
customers and had several intercompany sales.  Excluding the product
revenue, our service revenue increased 16.5% to $1,740,931 from $1,493,901 as we
signed additional service contracts with new and existing
customers.  These contracts are generally one to three year
terms.




Gross
profit for the quarter ended June 30, 2008 was $1,071,027 compared to gross
profit of $935,965 for the quarter ended June 30, 2007, a $135,062 increase, or
14.4%.  Our gross profit increased as a result of the addition of new
maintenance contracts.  Gross margins decreased to 46.8% from
62.7%.  Gross margins decreased as a result of our beginning to sell
product out of this segment to support our maintenance
customers.  Without the sale of product sale, the gross profit
percentage was 61.3% for the quarter ended June 30, 2008 as compared to 62.7%
for the quarter ended June 30, 2007 as we added additional technical personnel
to handle new customers.




Selling,
general and administrative expenses for the quarter ended June 30, 2008 were
$921,609 compared to selling, general and administrative expenses of $652,418
for the quarter ended June 30, 2007, a $269,191 increase, or
41.3%.  This was the result of an increase in the allocation of the
corporate overhead charge and an increase in payroll and payroll related
expenses.




Depreciation
and amortization for the quarter ended June 30, 2008 was $12,922 compared to
depreciation and amortization of $15,183 for the quarter ended June 30, 2007, a
$2,261 decrease.  This was the result of a sale of Company assets
during the fourth quarter of 2007.




Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007




Revenue
for the six months ended June 30, 2008 was $3,969,453 compared to revenue of
$2,842,082 for the six months ended June 30, 2007, a $1,127,371 increase, or
39.7%.  The revenue for the six months included product revenue of
$550,241 as we increased our selling of product to support our maintenance
customers and had several intercompany sales.  Excluding the product
revenue, our service revenue increased 20.3% to $3,419,212 from $2,842,082 as we
signed additional service contracts with new and existing
customers.  These contracts are generally one to three year
terms.




Gross
profit for the six months ended June 30, 2008 was $2,189,448 compared to gross
profit of $1,805,411 for the six months ended June 30, 2007, a $384,037
increase, or 21.3%.  Our gross profit increased as a result of the
addition of new maintenance contracts.  Gross margins decreased to
55.2% for the six months ended June 30, 2008 from 63.5% for the six months ended
June 30, 2007.  This decrease was the result of our beginning to sell
product to support our maintenance customers.  Without the sale of
product, the gross profit percentage for the six months ended June 30, 2008 was
63.8% as compared to 63.5% for the six months ended June 30, 2007.




Selling,
general and administrative expenses for the six months ended June 30, 2008 were
$1,482,153 compared to selling, general and administrative expenses of
$1,242,395 for the six months ended June 30, 2007, a $239,758 increase, or
19.3%.  This was the result of an increase in the allocation of the
corporate overhead charge and an increase in payroll and payroll related
expenses.






18




Depreciation
and amortization for the six months ended June 30, 2008 was $25,811 compared to
depreciation and amortization of $30,378 for the six months ended June 30, 2007,
a $4,567 decrease.  This was the result of a sale of Company assets
during the fourth quarter of 2007.




Geographic
Areas




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




Liquidity
and Capital Resources




Net cash
provided by operating activities in the six months ended June 30, 2008 was
$653,574.  Net cash used in operating activities in the six months
ended June 30, 2007 was $1,288,111.  Net cash provided by operating
activities during the six months ended June 30, 2008 was primarily a result of a
decrease in accounts receivable, a decrease in inventories, an increase in
accounts payable and accrued expenses offset by a decrease in prepaid expenses
and other assets and a net loss.  Net cash used in operating
activities during the six month period ended June 30, 2007 was primarily as a
result of a net loss, an increase in inventories, a decrease in accounts payable
and accrued expenses and a decrease in accounts receivable.  The
decrease in our receivables was mainly attributable to the decrease in revenue
in our Data Center Hardware segment and at our Data Security and Compliance
segment coupled with tighter credit controls resulting in better
collections.




Net cash
used in investing activities for the six months ended June 30, 2008 and 2007 was
$71,107 and $85,649, respectively.  Net cash used in investing
activities in the six months ended June 30, 2008 and 2007 was for the purchase
of fixed assets.




Net cash
used in financing activities for the six months ended June 30, 2008 was
$568,508.  Net cash provided by financing activities for the six
months ended June 30, 2007 was $1,601,579.  Net cash used in financing
activities for the six months ended June 30, 2008 was the result of paying off
our previous revolving line of credit, the payment of financing costs and the
payment of dividends offset by borrowing under our current revolving line of
credit.  Net cash provided by financing activities for the six months
ended June 30, 2007 was from borrowings under our revolving line of credit
offset by dividends paid on our preferred stock and the payments for financing
costs for our new line of credit with Wells Fargo Bank.




On June
5, 2008, the Company entered into a Senior Security Purchase Agreement with
Victory Park Capital.  This agreement allows the Company to borrow up
to $10 million to finance both working capital needs and future
acquisitions.  The new facility replaced the Company's $7.5 million
asset based working capital facility with Wells Fargo Bank.  The new
revolving line of credit agreement provides for borrowings limited to the lesser
of $10,000,000 or the borrowing base of 80% of eligible accounts receivable plus
42.5% of eligible inventory plus 60% of eligible pre-billed service
receivables.  The interest rate charged is the greater of prime plus
seven percent (7.00%) and twelve percent (12.00%).  There was certain
supporting documentation that was to be available at closing, which was
not.  Additionally, the CCSI acquisition was to be completed within 10
days of the closing.  Until the satisfaction of these conditions, the
interest rate charged was fifteen percent (15%).  Commencing October
31, 2008, there are certain monthly financial ratios that need to be
met.  As of June 30, 2008, the Company was paying fifteen percent
(15%).  At June 30, 2008, the Company was in compliance with its loan
agreement.






19




On July
8, 2008, the Company completed of the acquisition of Contemporary Computer
Service, Inc. for $10.6 million plus an additional stock earn out of up to an
additional 10 million shares of common stock based on achieving certain
performance milestones. The $10.6 million purchase price was financed through a
combination of the issuance of 3,500,000 shares of common stock in the Company,
valued at $595,000, based upon the market price for QSGI's common stock as of
July 6, 2008, the date immediately prior to the closing date, senior bank and
seller financing in the amount of $10 million dollars, both secured by the
assets of the Company.  In connection with the seller financing, the
Company issued warrants to purchase 12,000,000 shares of Common Stock at a
purchase price of $0.30 per share.




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




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




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




Item
3                                Quantitative
and Qualitative Disclosures About Market Risk




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




Item
4                                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.






20




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




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




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




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




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




Changes
in internal control over financial reporting




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






21




Part
II – OTHER INFORMATION




Item
1.                          Legal
Proceedings




Currently
the Company is not party to legal proceedings; however, 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.




From time
to time 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.




Item
1A.                      Risk
Factors




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




Item
2.                         Unregistered
sales of equity securities and Use of Proceeds




None




Item
3.                         Defaults
Upon Senior Securities




Not
      applicable.




Item
4.                         Submission
of Matters to a Vote of Security Holders




None




Item5.                         Other
Information




None




Item
6.                         Exhibits




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






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






23




List
Of Exhibits




Exhibit
      Number
            Description




2.1
            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.






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-K.


























25