**As
      filed with the Securities and Exchange Commission on March 30, 2006**





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549









**FORM
      10-KSB**





**[X]
      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**


For
      the
      fiscal year ended December 31, 2005





**[
      ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**


For
      the
      transition period from ________ to ________







**Commission
      File No.: 000-07539**





**QSGI
      INC.**


**(Formerly
      WindsorTech, Inc.)**


(Exact
      name of small business issuer as specified in its charter)





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





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


(Address
      of Principal Executive Offices) (Zip Code)





**(609)
      426-4666**


(Issuer’s
      Telephone Number)




**Securities
      registered under Section 12(b) of the Exchange Act: None**




**Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par
      value**






Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act [ ]




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosures will be contained,
      to
      the best of Registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. [ ]




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




Issuer’s
      revenues for its most recent fiscal year: $36,386,138




The
      aggregate market value of the voting stock, $.01 par value, held by
      non-affiliates of the Registrant, based upon the closing price of Common Stock
      on March 1, 2006, as reported on the ArcaEx (“PCX”) under the symbol “QGI,” was
      approximately $56,196,330 (28,818,631 shares x $1.95 per share). There is no
      officer who owns more than 10% of the shares of Common Stock.











As
      filed with the Securities and Exchange
      Commission on March 30, 2006




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




Class
                of Common Equity
            
            Number
                of SharesCommon
                Stock, par value $.01
            
            28,818,631




A
      description of “Documents Incorporated by Reference” is contained in Item 13
      Exhibits and Financials Statements.




Transitional
      Small Business Disclosure Format (check one): Yes [ ] No [X]







**TABLE
                OF CONTENTS****ITEM**
            **DESCRIPTION**
            **PAGE****PART I**1.
            Description
                of Business
            12.
            Description
                of Property
            83.
            Legal
                Proceedings
            84.
            Submissions
                of Matters to a Vote of Security
                Holders
            9**PART II**5
            Market
                for Common Equity and Related Stockholder
                Matters
            106
            Management’s
                Discussion And Analysis of Financial Condition
                and Results of Operations
            147.
            Financial
                Statements
            288.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            298A.
            Controls
                and Procedures
            29**PART III**9.
            Directors,
                Executive Officers, Promoters and Control
                Persons; Compliance With Section 16(a) of the Exchange
                Act
            2910.
            Executive
                Compensation
            3211.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            3612.
            Certain
                Relationships and Related Transactions
            3713.
            Exhibits
            4014.
            Principal
                Accountant Fees and Services
            40Signatures
            41Financial
                Statements and Exhibits
            45














**PART
      I**






**ITEM 1.**   **DESCRIPTION
      OF BUSINESS**






**FORWARD-LOOKING
      STATEMENTS AND ASSOCIATED RISK**




The
      following discussion should be read in conjunction with our audited Financial
      Statements and Notes thereto included herein.




Certain
      statements in this Report, constitute “forward-looking statements” within the
      meaning of Section 27A of the Securities Act of 1933, Section 21E of the
      Securities Exchange Act of 1934 and the Private Securities Litigation Reform
      Act
      of 1995. We intend that such forward-looking statements be subject to the safe
      harbors created thereby.




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


·
            Our
                growth strategies.


·
            Anticipated
                trends in our business and
                demographics.


·
            Our
                ability to successfully integrate the business operations of recently
                acquired companies; and ·
            Regulatory, competitive or other economic
              influences.





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




**REFERENCES**




References
      in this form 10-KSB to “we”, “us,” “our,” “the Company,” “WindsorTech,” and
“QSGI” mean QSGI INC. and our subsidiaries, unless the context otherwise
      requires.




1




**WHAT
      WE DO**





We
      are a
      technology services company. Our Data Security and Compliance services as well
      as our Data Center Hardware and Data Center Maintenance services are geared
      towards both the users of business-computing hardware (desktops, laptops,
      related peripherals and servers) as well as the users of enterprise-class
      hardware (mainframes, midrange processors, large storage, controllers, etc.).
      We
      use the trade name “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. In October 2005, we changed our
      name to QSGI INC. from WindsorTech, Inc.





**SEGMENTS**





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





**A.**
            **Data
                Security & Compliance**





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


-
      Data
      erasure to Department Of Defense standards for hard drives


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


-
      IT
      asset remarketing for IT assets with market value


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





**B.**
            **Data
                Center Hardware**





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





**C.**
            **Data
                Center Maintenance**





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





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





**Data
      Security & Compliance Segment:**





We
      are a
“best practice” provider of data security and regulatory compliance services for
      end-of-life business-computing IT assets. We offer a variety of services on
      a
      global basis to help companies with these assets to ensure compliance with
      federal and state mandates regulating the donation or disposal of such assets.






2





The
      primary services that we offer are:





Data
      Erasure (Data security and regulatory compliance):


§
            Automated
                process that generates a self validated digital certificate of
                erasure


§
            Department
                of Defense standard 3x hard drive data erasure with no human
                intervention


§
            Online
                reporting and asset tracking


§
            Remarketing
                services to reduce or eliminate fees associated with hard drive data
                erasure and auditing


Reverse
      Logistics:


§
            Pack
                and ship service


§
            Full
                logistics management


Mobile
      Erasure Unit (expected to be placed into service in the second quarter of
      2006):


§
            54’
                truck with full service mobile data erasure unit to service large
                sites


§
            Preserves
                chain of custody - assets never leave
                building


§
            Data
                erasure performed on site


§
            Reports
                uploaded with digital Certificates of Erasure to
                extranet


§
            Assets
                can be removed for remarketing, or left to be processed for lease
                return


Downloadable
      Erasure Software:


§
            Single
                units can use our websiteto
                erase the hard drive


§
            Easy
                to use for small locations or remote sales
                force


§
            Downloadable
                from the internet or network and does not require floppy disk or
                CD
                Rom.


§
            Generates
                digital certificate of erasure


Environmental
      Compliance


§
            Generates
                digital certificate of erasure


§
            Help
                protect corporations from environmental liability issues for IT assets
                with no market value by finding opportunities for re-use, or recycling





Our
      data
      security and destruction services help companies achieve regulatory compliance
      with federal legislation including:





-
            **Gramm-Leach-Bliley
                Act**-
                Requires companies which engage in financial activities such as insurance
                companies, banks, brokerage firms, etc. to ensure the security and
                confidentiality of customer information and protect against anticipated
                threats or hazards to information.





-
            **Health
                Insurers Portability & Accounting Act of 1996 (HIPAA)**-
                Requires healthcare companies to ensure the confidentially of all
                protected health information and protect against anticipated threats
                or
                hazards to information.





-
            **Sarbanes-Oxley
                Act**-
                Requires all publicly traded companies to protect investors by improving
                the accuracy and reliability of corporate disclosures. Requires companies
                to track the complete life cycle of all IT assets for seven
                years.





-
            **FTC
                FACT Act**-
                Requires companies to protect consumers against unauthorized access
                to
                credit report information “in connection with the disposal” of computer
                and other records by erasure of hard
                drives.






3





-
            **Environmental
                Compliance -**requires
                that the recycling of computers and related products be managed in
                a
                manner that is protective of human health and the
                environment.





In
      summary, our services are designed to help our clients to:


-
            reduce
                the burdens of liability associated with regulatory compliance of
                IT
                assets.


-
            reduce
                the overall expense of achieving regulatory
                compliance.


-
            reduce
                the total cost of ownership for IT
                hardware.


-
            permit
                IT professionals to focus on rapid changes in technology, service
                their
                internal clients and make sure their IT infrastructure is proactively
                helping their company maintain a competitive edge in the
                marketplace.





The
      market is highly fragmented with critical legislation driving the demand. There
      is no other technology services company offering similar IT “life cycle”
services ranging from PCs to Mainframes.





On
      October 27, 2003 we filed U.S. Patent Application titled “System and Method of
      Erasing a Hard Drive via a Computer Network.” Our product is called,
“EraseYourHardDrive.com.” As described above, this product and the method of
      erasing a hard drive either over the internet or via a computer network provides
      an easy, fast and effective way for erasing hard drives, which meets US
      Department of Defense standards for hard drive sanitation.





In
      addition, the Data Security and Compliance segment re-sells a wide range of
      used
      and refurbished computer products, including servers, laptop and desktop
      computers, monitors, PC processors, CD/DVD disk drives, modems, printers and
      memory.





Our
      Data
      Security & Compliance group has technical facilities in New Jersey, a sales
      and marketing office in Minnesota and wholesale sales offices in New York,
      New
      Hampshire and Florida.





**Data
      Center Hardware Segment:**





We
      are a
      reseller of refurbished enterprise-class hardware and associated peripheral
      products to companies around the world. Our strength comes from a significant
      presence in worldwide markets as the leading provider of refurbished mainframes
      and associated peripherals. More importantly, in this hardware niche, there
      are
      no other significant competitors.





The
      enterprise-class products that we market include:


-
            IBM
                mainframe products


-
            IBM
                midrange products (AS/400 and
                RS/6000)


-
            IBM/OEM
                tape storage


-
            IBM/OEM
                disk storage


-
            Hitachi
                Data Systems (HDS) products


-
            EMC
                products


-
            Connectivity
                products, controllers and mainframe
                printers





Very
      few
      resellers of enterprise-class hardware are able to offer data center managers
      refurbished mainframe products as well as technical expertise across all
      hardware categories found in the typical data center.





Because
      enterprise-class hardware is designed and manufactured to be reliable spanning
      several years, an alternative - such as QSGI - to choosing “new” hardware offers
      significant savings to our target audience.





Businesses
      that have already made purchasing decisions and saved money in the secondary
      market understand that there is often a fine line between “latest” technology
      and “current” technology. IBM, for example, recently introduced both the z990
      and z890 mainframe. This new hardware is able to perform a variety of functions
      that make it unique and attractive for “early adopters” and those that believe
      that having the “latest” is best. Others understand, however, that technology
      that is only one year old can easily meet their data center requirements -
      that
      year-old technology is still “current” for their purposes. Yet, the key
      difference is that those who choose “current” technology (as opposed to
“latest”) do not absorb the initial depreciation and may pay only a fraction of
      the price of “new” technology.





Currently,
      IBM is the only manufacturer of mainframes in the world marketplace. This gives
      IBM the luxury of having no competition for new mainframes. The lack of
      competition for new mainframes creates a unique opportunity for us to sell
      used
      mainframes to customers needing to control capital budgets for IT
      hardware.





Technology
      that is introduced by IBM is often available in the used marketplace as early
      as
      9-12 months after being introduced as a result of companies merging data
      centers, filing bankruptcy, upgrading to the latest technology, or when hardware
      goes off lease. In many instances, the hardware is shipped to our offices in
      Eagan, Minnesota, where it is tested, refurbished and typically upgraded.





The
      key
      to our success is rooted in the information we glean through our retail efforts
      and our wholesale efforts. QSGI is typically involved in greater than 80 percent
      of all refurbished mainframe bids in the United States. To source
      enterprise-class hardware, our wholesale efforts are aware of nearly all
      mainframes that are - or about to become - available in the world. Access to
      this database of clients allows us to cross-market our other services that
      we
      offer.





Our
      Data
      Center Hardware group has its technical facilities in Minnesota along with
      sales
      and marketing. In addition, it has technical and sales offices in Connecticut,
      Florida, Illinois and California.





**Data
      Center Maintenance Segment:**





We
      provide hardware maintenance services on enterprise-class hardware and
      associated peripheral products to companies around the United States. Either
      as
      a separate service from the hardware sale or sold as a service along with a
      sale
      of hardware, our maintenance programs are a source of significant savings and
      reliability for clients.





Products
      we maintain include:


-
            IBM
                mainframe products


-
            IBM
                midrange products


-
            IBM/OEM
                tape storage


-
            IBM/OEM
                disk storage


-
            Hitachi
                Data Systems (HDS) products


-
            EMC
                products


-
            Connectivity
                products and controllers





Our
      competitive advantages that make our services valuable for our corporate
      end-users as well as leasing companies needing to manage “off-lease”
enterprise-class hardware include:


-
            our
                technical expertise.








4






-
            our
                ready access to a strategic inventory of critical back-up
                parts.


-
            our
                reduced pricing as compared to our
                competitors.


-
            our
                greater expertise on multiple platforms including the heart of the
                data
                center, “the Mainframe.”





All
      training and back-up parts management for Data Center Maintenance is located
      in
      Minnesota; however, we have technical coverage and offices in 18 states and
      one
      country including Arkansas, Colorado, District of Columbia, Illinois, Indiana,
      Iowa, Kansas, Michigan, Missouri, New Jersey, New York, Pennsylvania, Tennessee,
      Texas, Wisconsin and Wyoming.




**DEPENDENCE
      ON MAJOR CUSTOMERS**





With
      the
      exception of our hardware maintenance contracts which can be up to three years
      in length, we do not have any exclusive long-term arrangements with our
      customers for the continued sales of our product. At present, we operate
      primarily in the United States and have minimal assets in foreign countries.







We
      sell
      and deliver our technology services to customers throughout the United States
      and on 6 continents worldwide. For the years ended December 31, 2005 and 2004,
      sales to our top ten customers comprised 37% and 39% of our revenue,
      respectively. In each of the periods referred to, Keystone Memory Group, a
      “related party” for accounting purposes, was one of our top ten
      customers.






A
      portion
      of our revenues is also derived from export sales. For the years ended December
      31, 2005, and 2004, export sales comprised 7% and 18% of revenue,
      respectively.




**Backlog**





Customers
      typically do not place recurring "long-term" orders with us, resulting in a
      limited order backlog at any point in time. Our failure to receive orders from
      customers on a continuous basis could have a material adverse effect on our
      financial condition, results of operations and cash flows given our lack of
      recurring orders.




**Employees**





As
      of
      March 1, 2006, we employed 61 full-time and 12 part-time employees. None of
      our
      employees are represented by a collective bargaining agreement, nor have we
      experienced any work stoppages. We consider our relations with our employees
      to
      be good. We depend on the continued service of our key technical, sales and
      senior management personnel, and our ability to attract and retain additional
      qualified personnel. If we are unable to hire and retain qualified personnel,
      our business will be seriously harmed.








**Available
      Information**





Our
      Internet website address is http://www.qsgi.com .
      We make
      available free of charge through our Internet website our annual report on
      Form
      10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K and
      amendments to those reports filed as soon as reasonably practicable after we
      electronically file such material with, or furnish it to, the Securities and
      Exchange Commission.






5








**COMPLIANCE
      WITH ENVIRONMENTAL REGULATIONS**





Federal,
      state, and local laws or regulations which have been enacted or adopted
      regulating the discharge of materials into the environment have not had, and
      under present conditions we do not foresee that they will have, a material
      adverse effect on our capital expenditures, earnings, cash flows or our
      competitive position. We will continue to monitor our operations with respect
      to
      potential environmental issues and costs, including changes in legally mandated
      standards.





We
      recycle used equipment that may contain hazardous materials through Waste
      Management’s Recycle America - Asset Recovery Group (“ARG”) division. ARG, for a
      fee, manages commodities and materials for recycling in accordance with
      applicable local, state and federal laws, rules and regulations. Upon receipt
      of
      materials for recycling, ARG provides us with a Certification of Destruction
      that, in part, certifies that the materials were accepted for the purpose of
      recycling and/or destruction in accordance with all applicable standards
      including federal, state and local requirements.






**RECENT
      DEVELOPMENTS**




**Change
      in Authorized Share Capital**




On
      September 17, 2004, in an Action by Consent in Writing of a Majority of
      Shareholders, the Company’s majority shareholders voted to amend the Company’s
      Amended and Restated Certificate of Incorporation to increase the total number
      of authorized shares of common stock of the Company. The majority shareholders
      approved an increase in the number of common shares which the Corporation is
      authorized to issue from Thirty-five Million (35,000,000) shares of Common
      Stock, par value $.01 per share, to Fifty-five Million (55,000,000) shares
      of
      Common Stock, par value $.01 per share. No change was made to the Five Million
      (5,000,000) shares of Preferred Stock, par value $.01 per share that the Company
      is authorized to issue. On October 19, 2004, the Company filed an appropriate
      amendment to its Amended and Restated Certificate of Incorporation with the
      Secretary of State of the State of Delaware.






**Other
      Information**




On
      May
      26, 2004, in a Confidential Private Placement to certain investors, we completed
      the sale of 6,000,000 shares of our Common Stock at $.60 per share and 6,000,000
      warrants. 3,000,000 of the warrants are exercisable for a period of five years
      at a price of $1.50 per share and 3,000,000 of the warrants are exercisable
      for
      a period of five years at a price of $3.60 per share. In October 2004, the
      Company issued warrants with an exercise price of $2.00 to certain of the $1.50
      warrant holders in exchange for their exercise of 500,000 warrants for which
      the
      Company received $750,000.




On
      May
      28, 2004, the Company completed the purchase of all of the outstanding shares
      of
      Qualtech International Corporation and its affiliate, Qualtech Services Group,
      Inc. Under the terms of the agreement, Qualtech’s shareholders received a
      combination of 1,957,831 shares of WindsorTech common stock and cash totaling
      $6.6 million of which $3.25 million was in cash, $3.25 million was in the
      Company’s common stock and $100,000 was in direct acquisition costs, primarily
      legal fees.




On
      July
      27, 2004, the Company received notice from the Securities and Exchange
      Commission that its registration statement on Form SB-2 for the registration
      of
      28,876,839 shares of stock became effective.




On
      October 20, 2004, the Company filed a registration statement on Form S-8 to
      register the issuance of up to 9,238,292 shares of common stock including common
      stock pursuant to the WindsorTech, Inc. 2002 Flexible Stock Plan.






6




As
      of
      February 14, 2005, Joel L. Owens resigned as Chief Operating Officer. He continues
      his employment as Executive Vice-President of the Company’s Data Center Hardware
      and Data Center Services groups.




On
      March
      14, 2005, Seth A. Grossman, a member of the Company’s Board of Directors, was
      appointed President and Chief Operating Officer. He continues as a member of
      the
      Board of Directors.




On
      May 3,
      2005, the Company entered into a revolving line of credit agreement that
      provides for borrowings limited to the lesser of $4,250,000 or the borrowing
      base of 80% of eligible accounts receivable plus 40% of inventories and in
      certain circumstances 60% of eligible inventories, with eligible inventories
      not
      to exceed $1,500,000. Interest on this loan is payable monthly at the prime
      rate
      plus one percent (8.25% at December 31, 2005), with all principal and interest
      due April 1, 2007.




On
      September 7, 2005, John F. Cunningham was appointed as a member of our board
      of
      directors to fill a vacancy, as the company expanded the board to seven members.
      On September 12, 2005, Geoffrey A. Smith was appointed a member of our board
      to
      fill a vacancy, as the Company expanded the board to seven members.




On
      September 13, 2005, the Company was confirmed on the Archipelago
      Exchange SM **** (ArcaEx®),
      and began trading on September 15, 2005, under the symbol “QGI.” The Company had
      previously been listed on the OTC Bulletin Board under the symbol
“WSRT.OB.”




On
      October 17, 2005, the Company held its annual shareholders meeting in Palm
      Beach, Florida and elected seven members to the Company’s Board of Directors to
      hold office until the Company’s Annual Meeting of Stockholders in 2006 or until
      their successors are duly elected and qualified; ratified the appointment of
      RubinBrown LLP as the Company’s independent certified public accountant for the
      fiscal year ending December 31, 2005; and ratified a change of name of the
      Company from WindsorTech, Inc. to QSGI INC.




On
      November 14, 2005, the Company filed Amendment No. 1 on Form 10-KSB/A
      to the Company’s Annual Report filed on Form 10-KSB for the year ended
      December 31, 2004, initially filed with the Securities and Exchange Commission
      on March 29, 2005, reflecting a restatement of the Consolidated Financial
      Statements of WindsorTech, Inc. and Subsidiaries for the year ended December
      31,
      2004. At the same time, the Company also filed Amendment No. 1 on
      Form 10-QSB/A (“Form 10-QSB/A”) to the Company’s Quarterly Report on
      Form 10-QSB for the quarterly period ended June 30, 2005, initially filed
      with the Securities and Exchange Commission (the “SEC”) on August 12, 2005,
      (“Original Filing”) reflecting a restatement of the Condensed Consolidated
      Financial Statements of WindsorTech, Inc. and Subsidiaries (the “Company”) for
      the three months and six months ended June 30, 2005 and 2004. The determination
      to restate these Financial Statements and other financial information was made
      as a result of management’s determination that the initial accounting for
      deferred income taxes related to the acquisition of Qualtech International
      Corporation and Qualtech Services Group, Inc. needed correction. The audited
      consolidated financial statements as of December 31, 2004 and for the year
      then
      ended were restated to reflect the proper accounting treatment.




On
      December 20, 2005, the Company completed a private placement with a group of
      investors for net proceeds of approximately $4.2 million. The Company received
      the proceeds in two payments. The first payment, net of offering costs, of
      $1,967,220 was received at the time of signing and approximately $2,200,000
      was
      received at the beginning of January 2006. The preferred securities issued
      in
      the private placement consist of 143,333 shares of 6% Series A Preferred Stock
      with a face value of $30.00 per share. The 6% dividend is payable quarterly
      in
      cash or additional preferred securities at the Company’s option. Each Series A
      Preferred Share is convertible into approximately 13.33 shares of our common
      stock. The Company can require the holders to convert if the Company’s common
      stock price maintains $2.75 for twenty consecutive business days. The Company
      can redeem the preferred






7




securities
      at any time after December 10, 2007. Additionally, the holder may demand
      redemption in cash, for the original $30 per share, at any time after December
      10, 2010. Because these preferred securities are conditionally redeemable,
      they
      are classified as temporary equity in the balance sheet.




On
      December 21, 2005, the Company completed the repurchase and retirement of
      4,283,334 outstanding warrants, including 1,866,667 warrants exercisable at
      $1.50 per share and 2,416,667 warrants exercisable at $3.60 per share. The
      total
      purchase price for the warrants, including transaction costs, was $1,256,210
      in
      cash. These warrants, previously held by an institutional investor, were issued
      as part of the private placement that was completed in May 2004.






**ITEM
      2. DESCRIPTION OF
      PROPERTY**






Our
      Data
      Security and Compliance segment leases approximately 38,000 square feet of
      general warehouse and office space in Hightstown, New Jersey pursuant to a
      five-year lease at a current annual rental of approximately $159,000, escalating
      each year. In addition to fixed rentals, the real property lease requires the
      Company to pay all maintenance, real estate taxes and insurance. This facility,
      with approximately 34,000 feet of warehouse space, is in good condition and
      ideally suited to our business. This lease expires in August 2006. In addition,
      in August 2005, the company leased additional warehouse space pursuant to a
      one-year lease at an annual rental of approximately $122,000. This lease expires
      in August 2006. These warehouses have sufficient capacity for our current and
      estimated future business needs.






This
      segment also leases the following space:






1.
            In
                Portsmouth, New Hampshire approximately 1,400 square feet of office
                space
                pursuant to a three-year lease at a current annual rental of approximately
                $30,000, escalating each year. This lease expires in October
                2007.






2.
            In
                New York, New York approximately 250 square feet of office space
                pursuant
                to a one-year lease at a current annual rental of approximately $47,000.
                This lease expires in August 2006.






3.
            In
                Palm Beach, Florida approximately 1,600 square feet of office space
                pursuant to a 27 month lease at a current annual rental of approximately
                $54,000, escalating each year. This lease expires in March,
                2007.






Our
      Data
      Center Hardware and Data Center Maintenance segments lease approximately 30,000
      square feet of general warehouse and office space in Eagan, Minnesota pursuant
      to a five-year lease at a current rental of approximately $13,000, escalating
      in
      August 2006 to approximately $15,000 per month. This facility is in good
      condition and ideally suited to our existing business and has adequate and
      sufficient capacity for our current and estimated future business needs. This
      lease expires in October 2009.






**ITEM
      3.**   **LEGAL
      PROCEEDINGS**




On
      April
      19, 2004, David A. Loppert filed a Complaint against the Company in the Chancery
      Court of New Castle County, Delaware, Case No. 394-N, in which he asserted
      he
      remained a director and officer of the Company notwithstanding the Company’s
      position that he no longer held those positions. Settlement discussions were
      held and a dispute arose as to whether agreement had been reached.








8





On
      May
      14, 2004, Mr. Loppert filed a second lawsuit in the Chancery Court, Case No.
      441-N, in which he asserted that a settlement had been reached and that he
      would
      acknowledge that he was no longer an officer or director provided the Company
      delivered to him options to purchase 1.1 million shares of the Company’s common
      stock at $1.10 per share. The Company defended and asserted that final agreement
      had never been reached. However, on June 25, 2004, the Delaware Chancery Court
      ruled that an enforceable agreement had been reached and further ruled that
      the
      Company was required to pay Mr. Loppert’s legal fees related to this matter.
      Based upon the Court’s decision in this matter, Mr. Loppert continued as an
      employee of the Company through September 30, 2004. On July 27, 2004, the
      Company determined to appeal the Court’s ruling to the Delaware Supreme Court.




On
      November 18, 2004, the Company filed a Complaint against Mr. Loppert in the
      Circuit Court for Palm Beach County, Florida, Case No. 502004CA010870XXXXMB,
      in
      which the Company asserted that, if any settlement agreement had been reached
      between the Company and Mr. Loppert, such agreement had been induced by improper
      conduct and was thereby voidable.





On
      January 7, 2005, Mr. Loppert brought an action in the Superior Court of New
      Jersey, Case No. L000020-05, against two officers of the Company, Marc Sherman
      and Edward Cummings, and two former officers, Carl Saracino and Michael Sheerr,
      alleging that each owed Mr. Loppert approximately $110,000.00 in connection
      with
      loans made to each of them which were then loaned to the Company.





On
      January 31, 2005, the Delaware Supreme Court affirmed the Chancery Court’s June
      25, 2004 decision.





On
      March
      15, 2005, all claims and litigation between Mr. Loppert and the Company and
      Messrs. Sherman, Cummings, Saracino and Sheerr were resolved pursuant to
      agreement. The Company, Mr. Loppert and each party released all opposing parties
      for all claims existing as of the date of settlement.







The
      Company is party to various legal proceedings arising in the ordinary course
      of
      business. In the opinion of management, these proceedings are not likely to
      have
      a material adverse affect on the financial position, results of operations
      or
      cash flows of the Company. The estimate of potential impact on the Company
      could
      change in the future.






**PART
      II**






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




On
      February 19, 2004, by Action of Consent of Majority Shareholders. David A.
      Loppert was removed from the Board of Directors. Thereafter, the Board of
      Directors removed Mr. Loppert as an officer of the Company.




On
      September 17, 2004, in an Action by Consent in Writing of a Majority of
      Shareholders, the Company’s majority shareholders voted to amend the Company’s
      Amended and Restated Certificate of Incorporation to increase the total number
      of authorized shares of common stock of the Company. The majority shareholders
      approved an increase in the number of common shares which the Corporation is
      authorized to issue from Thirty-five Million (35,000,000) shares of Common
      Stock, par value $.01 per share, to Fifty-five Million (55,000,000) shares
      of
      Common Stock, par value $.01 per share. No change








9




was
      made
      to the Five Million (5,000,000) shares of Preferred Stock, par value $.01 per
      share that the Company is authorized to issue. On October 19, 2004, the Company
      filed an appropriate amendment to its Amended and Restated Certificate of
      Incorporation with the Secretary of State of the State of Delaware.




On
      October 17, 2005, an annual meeting of our stockholders was held for the
      following purposes:




(1)
      To
      elect seven members to the Company’s Board of Directors to hold office until the
      Company’s Annual Meeting of Stockholders in 2006 or until their successors are
      duly elected and qualified. The results of the vote to elect the seven directors
      were as follows:






**Name
                of Director**
            For
            WithheldMarc
                Sherman
            
            20,828,069
            1,814,820Seth
                A. Grossman
            
            20,628,109
            2,014,780Edward
                L. Cummings
            
            20,828,099
            1,814,790R.
                Keith Elliott
            
            22,388,619
            254,270Robert
                W. VanHellemont
            
            22,388,639
            254,250Geoffrey
                A. Smith
            
            22,388,619
            254,270John
                F. Cunningham
            
            22,388,639
            254,250







(2)
      To
      ratify the appointment of RubinBrown LLP as the Company’s independent certified
      public accountant for the fiscal year ending December 31, 2005. The proposal
      received 22,389,529 votes for, 253,000 votes against, and 360
      abstentions;




(3)
      To
      ratify a change of name of the Company from WindsorTech, Inc. to QSGI INC.
      The
      proposal received 19,697,204 votes for, 263,020 votes against, and 200
      abstentions.




All
      of
      the proposals were approved.







**ITEM
      5.** **** **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**






***Market
      Information***




The
      Company’s Common Stock is listed on the ArcaEx exchange under the symbol “QGI.”
Our Common Stock became listed on this exchange on September 15, 2005. Prior
      to
      that date, our stock was listed on the OTC Bulletin Board under the symbol
      “WSRT.OB.”





The
      following table sets forth, for the calendar periods indicated, the high and
      low
      sales prices per share for the Company’s Common Stock as reported on the ArcaEx
      exchange:







**Years
                Ended December 31, 2005**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            4.40
            
            $
            2.50Second
                Quarter
            
            
            2.80
            
            
            1.37Third
                Quarter
            
            
            2.31
            
            
            1.47Fourth
                Quarter
            
            
            1.75
            
            
            1.00






10




**Years
                Ended December 31, 2004**First
                Quarter
            
            $
            4.40
            
            $
            2.00Second
                Quarter
            
            
            2.30
            
            
            1.05Third
                Quarter
            
            
            2.25
            
            
            1.19Fourth
                Quarter
            
            
            3.57
            
            
            1.65




***Holders***




As
      of
      March 1, 2006, there were approximately 3,300 holders of record of the Company’s
      Common Stock and the closing price was $1.95. Because many of the outstanding
      shares of the Company’s Common Stock are held by brokers and other institutions
      on behalf of shareholders, the Company is not able to estimate the total number
      of beneficial shareholders represented by these record holders.






***Dividends***




The
      Company has paid no cash or stock dividends on its Common Stock to date and
      does
      not anticipate paying any dividends on its Common Stock in the foreseeable
      future. The Company intends to use any earnings, which may be generated, to
      finance the growth of the businesses. The Board of Directors has the right
      to
      authorize the issuance of preferred stock, without further shareholder approval,
      the holders of which may have preferences over the holders of the Common Stock
      as to payment of dividends.






***Securities
      authorized for issuance under equity compensation plans***






Set
      forth
      in the table below is information, as of December 31, 2005, regarding securities
      authorized for issuance under equity compensation plans:




**Plan
                Category**
            **Number
                of Securities to be**
              **issued
                upon exercise of**
              **outstanding
                options,**
              **warrants
                and rights**
              **(a)**
            **Weighted-average
                exercise**
              **price
                of outstanding options,**
              **warrants
                and rights**
              **(b)**
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance under equity**
              **compensation
                plans**
              **(excluding
                securities**
              **reflected
                in column (a))**
              **(c)**Equity
                compensation plans approved by security holders
            8,516,834
            $1.858
            1,274,799Equity
                compensation plans not approved by security holders
            4,050,000
            $2.044
            -Total
            12,566,834
            $1.918
            1,274,799






***Equity
      Compensation Plan not Approved by Security Holders***




The
      material features of the plan are:




*Option
      Grant.* In
      October 2001, in connection with their initial employment, WindsorTech, Inc.
      (New Jersey corporation) granted to Messrs. Cummings, Loppert, Saracino, Sherman
      and Sheerr and two other employees options to purchase an aggregate of 1,350,000
      shares of its common stock at $0.026 per share, exercisable at any time after
      October 1, 2001 and on or before December 31, 2010. The options granted were
      Non-Qualified Options and immediately vested.






11




*Death.* If the
      option recipient dies, his personal representative and/or beneficiary will
      have
      the right (which must be exercised not later than the option expiration date)
      to
      exercise the options to the extent they were not exercised at the time of the
      recipient’s death.




*Non-Transferability
      of Rights; Designation of Beneficiaries.* Except
      as provided below, the options cannot not be transferred by the recipient other
      than by will or the laws of descent and distribution, and, during the lifetime
      of the recipient, the options can be exercised only by the recipient, except
      that, during his lifetime, the recipient may transfer the options for no
      consideration to members of his immediate family or a trust for the benefit
      of
      himself and/or members of his immediate family subject to all of the provisions
      applicable to the options prior to the transfer.




*Withholding.*   The
      Company or any affiliate that employs the recipient has the right to deduct
      any
      sums that federal, state or local tax law requires to be withheld with respect
      to the exercise of the options or as otherwise may be required by such laws.
      The
      Company or any such affiliate may require, as a condition to issuing stock
      upon
      the exercise of the options, that the recipient or other person exercising
      the
      options pay a sum to cover any such taxes. In the alternative, the recipient
      or
      other person exercising the options may elect to pay such sums to the Company
      or
      the affiliate by delivering written notice of that election to the Company's
      corporate headquarters prior to or concurrently with exercise. There is no
      obligation that the recipient be advised of the existence of the tax or the
      amount that may be withheld.




*Changes
      in Capital Structure.* If there
      is any change in the capital structure of the Company, or if there is be any
      dividend upon the stock of the Company payable in stock or any other dividend
      payable in stock, or of there is a stock split, spin-off, split-up, spin-out,
      recapitalization, merger, consolidation, reorganization, combination or exchange
      of shares, the maximum aggregate number of shares with respect to which the
      options may be exercised and the number and the option price of the shares
      of
      stock with respect to which the options were granted, will be proportionately
      adjusted by the Company if, and to the extent, necessary to prevent dilution
      or
      enlargement of the rights of the recipient.




***Recent
      Sales of Unregistered Securities***




The
      following table lists all unregistered securities sold/issued by us in the
      last
      three years pursuant to Item 701 of Regulation S-B.




These
      shares were issued to the persons listed below in connection with (1)(2)(3)
      Private Placement Shares, (4) the acquisition, (5) the exercise of stock
      options, (6) the exercise of stock warrants, or (7) services rendered.




**Name/Entity/Nature**
            **Date
                Issued**
            **Note**
            **Number
                of****Persons**
            **Issued
                For**
            **Number
                of**
              **Common**
              **Shares**Stanley
                Adelman
            July
                - 03
            1
            1
            Private
                Placement Shares
            5,000Harvey
                Albert
            July
                - 03
            1
            1
            Private
                Placement Shares
            15,000Mike
                Belise & Linda A Gary
            July
                - 03
            1
            2
            Private
                Placement Shares
            71,429Bismark
                Intervest, Inc.
            July
                - 03
            1
            1
            Private
                Placement Shares
            300,000Edward
                L. Cummings
            July
                - 03
            1
            1
            Private
                Placement Shares
            61,200John
                R. Doss
            July
                - 03
            1
            1
            Private
                Placement Shares
            300,000Steven
                Gadon & Barbara Gadon
            July
                - 03
            1
            2
            Private
                Placement Shares
            85,000Andrew
                L. Granat
            July
                - 03
            1
            1
            Private
                Placement Shares
            15,000Alan
                J Haber
            July
                - 03
            1
            1
            Private
                Placement Shares
            3,000Barry
                S. Hanburger
            July
                - 03
            1
            1
            Private
                Placement Shares
            2,500Bernard
                & Carol Harris, JT TEN WROS
            July
                - 03
            1
            2
            Private
                Placement Shares
            2,000






12


**Name/Entity/Nature**
            **Date
                Issued**
            **Note**
            **Number
                of****Persons**
            **Issued
                For**
            **Number
                of**
              **Common**
              **Shares**


John
                D. Wright, cust for Jonathan Martin Harris, Minor
            July
                - 03
            1
            1
            Private
                Placement Shares
            1,000Rodney
                D. and Linda L. Johnson, JT TEN WROS
            July
                - 03
            1
            1
            Private
                Placement Shares
            2,000Craig
                G. Langweiler
            July
                - 03
            1
            2
            Private
                Placement Shares
            10,000Monte
                Lang & Lillian M Lang, JT TEN WROS
            July
                - 03
            1
            2
            Private
                Placement Shares
            30,000Max
                & Delayne Loppert, JT TEN WROS
            July
                - 03
            1
            1
            Private
                Placement Shares
            70,000Anne
                E.B. Loppert, Minor, David A. Loppert, Custodian
            July
                - 03
            1
            1
            Private
                Placement Shares
            43,500Jeffrey
                E.B. Loppert, Minor, David A. Loppert, Custodian
            July
                - 03
            1
            1
            Private
                Placement Shares
            43,500Martin
                Miller
            July
                - 03
            1
            1
            Private
                Placement Shares
            2,857Robert
                & Penni Parker, JT TEN WROS
            July
                - 03
            1
            2
            Private
                Placement Shares
            14,300RBC
                Dain Rauscher Custodian, FBO Harvey Albert IRA
            July
                - 03
            1
            1
            Private
                Placement Shares
            20,000Lois
                G. Rosenberg
            July
                - 03
            1
            1
            Private
                Placement Shares
            500Paul
                Rosen & Wendy Rosen
            July
                - 03
            1
            2
            Private
                Placement Shares
            85,000Carl
                Saracino
            July
                - 03
            1
            1
            Private
                Placement Shares
            15,000Philip
                & Lilyan Sherman, JT TEN WROS
            July
                - 03
            1
            2
            Private
                Placement Shares
            20,000Michael
                P. Sheerr
            July
                - 03
            1
            1
            Private
                Placement Shares
            44,000Alexandra
                J. Sherman, Minor, Marc Sherman Custodian
            July
                - 03
            1
            1
            Private
                Placement Shares
            28,433Maximilian
                B. Sherman, Minor, Marc Sherman Custodian
            July
                - 03
            1
            1
            Private
                Placement Shares
            28,433Zachary
                T. Sherman, Minor, Marc Sherman Custodian
            July
                - 03
            1
            1
            Private
                Placement Shares
            28,434Jonathan
                E. Stoll
            July
                - 03
            1
            1
            Private
                Placement Shares
            2,500Gail
                M. Thompson
            July
                - 03
            1
            1
            Private
                Placement Shares
            1,000Jack
                B. Tull Sr.
            July
                - 03
            1
            1
            Private
                Placement Shares
            3,000John
                D. & Dorothy J. Wright, JT TEN WROS
            July
                - 03
            1
            2
            Private
                Placement Shares
            1,000Bismark
                Intervest, Inc.
            July
                - 03
            2
            1
            Private
                Placement Shares
            100,000Edith
                Newman Revocable Trust
            July
                - 03
            2
            1
            Private
                Placement Shares
            20,000Paul
                Lee Newman Roth IRA
            July
                - 03
            2
            1
            Private
                Placement Shares
            50,000Paul
                Lee Newman
            July
                - 03
            2
            1
            Private
                Placement Shares
            30,000Michael
                Weiss
            May
                - 04
            3
            1
            Private
                Placement Shares
            83,400Odin
                Partners, LP
            May
                - 04
            3
            1
            Private
                Placement Shares
            116,600Barron
                Partners, LP
            May
                - 04
            3
            1
            Private
                Placement Shares
            4,833,333Guerilla
                Partners, LP
            May
                - 04
            3
            1
            Private
                Placement Shares
            716,600Guerilla
                IRA Partners, LP
            May
                - 04
            3
            1
            Private
                Placement Shares
            83,400Bismark
                Investment
            May
                - 04
            3
            1
            Private
                Placement Shares
            166,667






13




**Name/Entity/Nature**
            **Date
                Issued**
            **Note**
            **Number
                of****Persons**
            **Issued
                For**
            **Number
                of**
              **Common**
              **Shares**


Joel
                Owens
            May
                - 04
            4
            1
            Acquisition
            1,715,911Jolene
                Owens
            May
                - 04
            4
            1
            Acquisition
            241,920Robert
                Jackson
            Nov
                - 04
            5
            1
            Exercise
                of Stock Options
            200,000Carl
                Saracino
            Nov
                - 04
            5
            1
            Exercise
                of Stock Options
            150,000Michael
                Sheerr
            Nov
                - 04
            5
            1
            Exercise
                of Stock Options
            150,000Guerilla
                IRA Partners, LP
            Oct
                - 04
            6
            1
            Exercise
                of Stock Warrants
            41,700Guerilla
                Partners, LP
            Oct
                - 04
            6
            1
            Exercise
                of Stock Warrants
            358,300Odin
                Partners, LP
            Oct
                - 04
            6
            1
            Exercise
                of Stock Warrants
            58,300Michael
                Weiss
            Oct
                - 04
            6
            1
            Exercise
                of Stock Warrants
            41,700Andrew
                T. Trailor
            Jul
                - 04
            7
            1
            Shares
                Issued for Services
            35,140Duncan
                J Farmer
            Jul
                - 04
            7
            1
            Shares
                Issued for Services
            35,141Alan
                Burger
            Jul
                - 04
            7
            1
            Shares
                Issued for Services
            35,141Andrew
                T. Trailor
            Dec
                - 04
            7
            1
            Shares
                Issued for Services
            6,000Alan
                Burger and Dana Burger, Joint Tenants
            Dec
                - 04
            7
            2
            Shares
                Issued for Services
            6,000Duncan
                J Farmer
            Dec
                - 04
            7
            1
            Shares
                Issued for Services
            6,000Alan
                Burger and Dana Burger, Joint Tenants
            Dec
                - 05
            7
            2
            Shares
                Issued for Services
            51,375Duncan
                J. Farmer
            Dec
                - 05
            7
            1
            Shares
                Issued for Services
            34,250









1.
            
            Represents
                shares issued in a Confidential Private Placement. The offering closed
                on
                July 18, 2003. 1,354,586 shares were sold at $.35 per share. Officers
                and
                directors (including their children) purchased 207,200 shares, or
                15.3% of
                the total shares sold.2.
            
            Represents
                shares issued in a Confidential Private Placement. The offering closed
                on
                September 2, 2003. The offering was for 20 units at a price of $10,000
                per
                Unit. Each Unit consisted of (i) 10,000 shares of common stock and
                warrants to purchase 10,000 shares of common stock, exercisable for
                a
                period of three years at a price of $1.00 per share.3.
            
            Represents
                an aggregate of 6,000,000 shares of our own common stock sold to
                6
                investors for a total of $3,600,000, or $.60 per share, which transaction
                was exempt from registration pursuant to Rule 506 of Regulation D
                promulgated under the Securities Act. The Investors were either accredited
                investors or sophisticated investors, and the total offering was
                less than
                10 non-accredited investors. There was no general solicitation or
                advertising for the sale of these shares, and the investors had access
                to
                or were provided with relevant financial and other information relating
                to
                us.4.
            
            Represents
                shares used in connection with the acquisition of Qualtech International
                Corporation and Affiliate, valued at $1.66 per share, which transaction
                was exempt from registration pursuant to Section 4(2) of the
                Act.5.
            
            Represents
                shares issued in connection with the exercise of common stock
                options.6.
            
            Represents
                shares issued in connection with the exercise of common stock
                warrants.7.
            
            Represents
                shares issued for legal services rendered.




**ITEM
      6.**  **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**




The
      following discussion should be read in conjunction with our audited Financial
      Statements and Notes thereto included herein.




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






14




Private
      Securities Litigation Reform Act of 1995. We intend that such forward-looking
      statements be subject to the safe harbors created thereby.




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


·
            Our
                growth strategies.


·
            Anticipated
                trends in our business and
                demographics.


·
            Our
                ability to successfully integrate the business operations of recently
                acquired companies; and ·
            Regulatory, competitive or other economic
              influences.





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




**OVERVIEW**




We
      are a
      technology services company. Our Data Security and Compliance services as well
      as our Data Center Hardware and Data Center Maintenance services are geared
      towards both the users of business-computing hardware (desktops, laptops,
      related peripherals and servers) as well as the users of enterprise-class
      hardware (mainframes, midrange processors, large storage, controllers, etc.).
      We
      use the trade name “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.




**RESULTS
      OF OPERATIONS**




The
      following table sets forth, for the periods indicated below, the relationships
      to total revenue of line items in our statements of operations for the years
      ended December 31, 2005 and 2004.






15




Year
                Ended
            
            Year
                EndedDecember
                31, 2005
            
            December
                31, 2004%
            
            %Revenue
            
            
            100.0
            
            
            100.0Cost
                of sales
            
            
            79.4
            
            
            75.4Gross
                profit
            
            
            20.6
            
            
            24.6Selling,
                general and administrative expenses
            
            
            24.0
            
            
            21.9Depreciation
                and amortization
            
            
            1.8
            
            
            1.8Interest
                expense
            
            
            0.4
            
            
            0.4Income
                (loss) before provision (benefit) for income taxes
            
            
            (5.6
            )
            
            0.5Provision
                (benefit) for income taxes
            
            
            (2.1
            )
            
            (0.4
            )Net
                income (loss)
            
            
            (3.5
            )
            
            0.1






***Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004***






Revenue
      for the year ended December 31, 2005 was $36,386,138 compared to revenue of
      $22,079,796 for the year ended December 31, 2004, a $14,306,342 increase, or
      64.8%. $12,375,105 of the increase was a result of our recent acquisitions
      and
      the balance was due to organic growth of our core business. Revenues increased
      because we were able to find new sources of product, which made more products
      available for sale and we increased our sales staff to help increase our market
      penetration.




Our
      revenues categorized by products and services are as follows:


Year
                Ended
            
            Year
                EndedDecember
                31, 2005
            
            December
                31, 2004RevenueProducts
            
            $
            33,085,383
            
            $
            20,605,647Services
            
            
            3,300,755
            
            
            1,474,149Total
                Revenue
            
            $
            36,386,138
            
            $
            22,079,796




Our
      revenue by geographic segment is as follows:




**Years
                Ended December 31,**
            
            **2005**
            
            **%**
            ****
            **2004**
            ****
            **%**
            ****
            **Change**
            ****
            **%
                Change**United
                States
            
            $
            33,893,593
            
            
            93%
            
            $
            18,094,977
            
            
            82%
            
            $
            15,798,616
            
            
            87%Asia
            
            
            422,870
            
            
            1%
            
            
            983,921
            
            
            4%
            
            
            (561,051
            )
            
            (57)%Europe
            
            
            589,690
            
            
            2%
            
            
            382,866
            
            
            2%
            
            
            206,824
            
            
            54%Africa
            
            
            42,275
            
            
            --
            
            
            604,686
            
            
            3%
            
            
            (562,411
            )
            
            (93)%United
                Kingdom
            
            
            188,067
            
            
            --
            
            
            1,333,544
            
            
            6%
            
            
            (1,145,477
            )
            
            (86)%Canada
            
            
            203,055
            
            
            1%
            
            
            506,262
            
            
            2%
            
            
            (303,207
            )
            
            (60)%Australia
            
            
            --
            
            
            --
            
            
            63,150
            
            
            --
            
            
            (63,150
            )
            
            --South
                America
            
            
            1,046,588
            
            
            3%
            
            
            110,390
            
            
            1%
            
            
            936,198
            
            
            848%Total
            
            $
            36,386,138
            
            
            100%
            
            $
            22,079,796
            
            
            100%
            
            $
            14,306,342
            
            
            65%







We
      operate primarily in the United States and have minimal assets in foreign
      countries. However,






16




we
      sell
      to customers in foreign countries. For the years ended December 31, 2005 and
      2004, export sales comprised approximately 7% and 18% of revenue, respectively.
      All of our purchases and sales are denominated in US dollars, and we recorded
      no
      foreign currency transaction gains or losses during any period.




Gross
      profit for the year ended December 31, 2005 was $7,499,969 compared to a gross
      profit of $5,428,413 for the year ended December 31, 2004, a $2,071,556
      increase, or 38.2%. Gross margin was 20.6% for the year ended December 31,
      2005
      compared to 24.6% for the year ended December 31, 2004. Gross profit increased
      due to organic growth and the acquisitions. However, our margins contracted
      while we strengthened our infrastructure while we built a solid foundation
      for
      our long term growth. We also set up approximately $47,000 in additional
      inventory and sales reserves, sold approximately $300,000 of inventory at little
      to no margin that we received from a settlement with one of our channel partners
      and wrote down approximately $100,000 in inventory.




The
      overall management of the computer equipment through out 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. Our business has been built to keep companies in
      compliance with government legislation whether it is 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.




Selling,
      general and administrative expenses for the year ended December 31, 2005, were
      $8,731,946 compared to selling, general and administrative expenses of
      $4,835,565 for the year ended December 31, 2004, a $3,896,381 increase, or
      80.6%. Selling, general and administrative expense increased as a result of
      the
      acquisitions and the Company hiring additional executive and sales personnel,
      increased rent and facilities expense, and increased expenses building brand
      recognition and promoting the brand name “QSGI” to investors and the wholesale
      market place.




Depreciation
      and amortization for the year ended December 31, 2005, was $634,014 compared
      to
      depreciation and amortization of $391,672 for the year ended December 31, 2004,
      a $242,342 increase, or 61.9%. This increase was the result of depreciation
      and
      the amortization of intangibles from the acquired companies as well as one
      full
      year of depreciation for fixed asset acquisitions and leasehold improvements
      that occurred throughout 2004 and new additions purchased in 2005.




Interest
      expense for the year ended December 31, 2005, was $160,441 compared to interest
      expense of $83,307 for the year ended December 31, 2004, a $77,134 increase,
      or
      92.6%, commensurate with the increase in the Company’s borrowings.




The
      Company recorded a federal tax benefit for the year ended December 31, 2005.
      This benefit was reduced by estimated state tax obligations in jurisdictions
      where the Company cannot file a consolidated income tax return. The Company
      recognized tax expense during 2004. Tax expense during 2004 was $83,393, with
      an
      effective tax rate of 71%. The high effective tax rate was due to the Company
      incurring state income taxes.







**SEGMENTS**





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





**Data
      Security & Compliance**






17





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


-
      Data
      erasure to Department Of Defense standards for hard drives


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


-
      IT
      asset remarketing for IT assets with market value


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





**Data
      Center Hardware**





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





**Data
      Center Maintenance**





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





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








**Data
      Security & Compliance Segment**








Year
                Ended
            
            Year
                EndedDecember
                31, 2005
            
            December
                31, 2004Revenue
            
            $
            14,922,002
            
            $
            10,388,674Gross
                Profit
            
            
            1,362,219
            
            
            2,412,138Selling,
                General and Administration
            
            
            4,793,571
            
            
            3,003,403Depreciation
                and Amortization
            
            
            186,763
            
            
            113,519Income
                (Loss) Before Provision(Benefit)
                for Income Taxes
            
            
            (4,079,144
            )
            
            (983,059
            )Segment
                Assets
            
            
            6,925,009
            
            
            4,428,937Goodwill
            
            
            -
            
            
            -Expenditures
                for Property andEquipment
            
            
            285,694
            
            
            93,129






Revenue
      for the year ended December 31, 2005 was $14,922,002 compared to revenue of






18




$10,388,674
      for the year ended December 31, 2004, a $4,533,328 increase or 43.6%. Revenues
      increased because we were able to find new sources of product, which made more
      products available for sale, and we resumed our wholesale remarketing services
      during the third quarter of 2005 for some of our clients. We had made a critical
      decision not to remarket wholesale IT equipment for clients that would not
      ensure that the hard drives they were providing us were properly erased.
      Although this decision impacted our data security and compliance business in
      the
      beginning of 2005, we were determined that the best approach to this situation
      was to educate our clients about the importance of erasing hard drives. They
      are
      now either contracting with us or are providing these services internally.
      As a
      result, we have been able to resume our wholesale remarketing service to some
      of
      those clients.




Gross
      profit for the year ended December 31, 2005 was $1,362,219 compared to gross
      profit of $2,412,138 for the year ended December 31, 2004, a $1,049,919 decrease
      or 43.5%. Gross profit decreased as we sought to replace higher margin accounts
      that were forgone in the beginning of 2005 as they were not compliant with
      our
      strict data security requirements and as we built our infrastructure for the
      future. In this segment, we also established additional inventory reserves
      of
      $35,000, wrote down inventory by approximately $100,000 and set up an allowance
      for returns of $12,000.




Selling,
      general and administrative expense for the year ended December 31, 2005 was
      $4,793,571 compared to Selling, General and Administrative expense of $3,003,403
      for the year ended December 31, 2004, a $1,790,168 increase or 59.6%. Selling,
      general and administrative expense increased as a result of the Company hiring
      additional executive and sales personnel, increased expenses building brand
      recognition and promoting the brand name “QSGI” to investors and the wholesale
      and retail market place.




Depreciation
      for the year ended December 31, 2005 was $186,763 compared to depreciation
      of
      $113,519 for the year ended December 31, 2004, a $73,244 increase or 64.5%.
      This
      was the result of one full year of depreciation for fixed asset acquisitions
      and
      leasehold improvements that occurred during 2004 and a portion of the year
      for
      2005.





**Data
      Center Hardware Segment**





Year
                Ended
            
            Year
                EndedDecember
                31, 2005
            
            December
                31, 2004Revenue
            
            $
            19,790,234
            
            $
            11,155,459Gross
                Profit
            
            
            4,057,775
            
            
            2,562,942Selling,
                General and Administration
            
            
            2,601,995
            
            
            1,418,447Depreciation
                and Amortization
            
            
            385,820
            
            
            240,351Income
                (Loss) Before Provision(Benefit)
                for Income Taxes
            
            
            1,332,824
            
            
            1,067,296Segment
                Assets
            
            
            10,319,668
            
            
            9,090,494Goodwill
            
            
            2,957,193
            
            
            2,877,544Expenditures
                for Property andEquipment
            
            
            62,842
            
            
            9,938







The
      Data
      Center Hardware segment became part of the Company on May 1, 2004. Although
      the
      numbers reflected above are not fully comparative for the year ended December
      31, 2005, revenues remained relatively flat year over year. Gross profit and
      gross margins for the year are up. Our gross






19




margins
      have increased about 2.5 percentage points over 2004. Selling expenses as a
      percentage of revenues have increased as we increased our infrastructure to
      meet
      the needs of our customers.








**Data
      Center Maintenance Segment**





Year
                Ended
            
            Year
                EndedDecember
                31, 2005
            
            December
                31, 2004Revenue
            
            $
            3,096,222
            
            $
            1,219,646Gross
                Profit
            
            
            2,079,974
            
            
            453,333Selling,
                General and Administration
            
            
            1,336,380
            
            
            413,715Depreciation
                and Amortization
            
            
            61,431
            
            
            37,802Interest
                Expense, Net
            
            
            -
            
            
            -Income
                (Loss) Before Provision(Benefit)
                for Income Taxes
            
            
            729,888
            
            
            33,632Segment
                Assets
            
            
            1,249,236
            
            
            968,934Goodwill
            
            
            255,121
            
            
            248,250Expenditures
                for Property andEquipment
            
            
            3,941
            
            
            103,044







The
      Data
      Center Maintenance segment became part of the Company on May 1, 2004. Although
      the numbers reflected above are not fully comparative for the year ended
      December 31, 2005, revenues have increased approximately 107% over the same
      period in 2004 due to an increase in the number of signed maintenance contracts.
      Gross profit and gross margins for the year are also up. Our gross margins
      for
      the year ended December 31, 2005 have increased approximately 21% over the
      same
      period in 2004 as the result of our ability to spread our costs over increased
      revenues and the number of contracts. Selling expenses as a percentage of
      revenues have remained relatively constant at 43%.







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




Our
      current ratios at December 31, 2005 and December 31, 2004 were 1.7 and 1.8,
      respectively. Working capital at December 31, 2005 was $4,824,481 compared
      to
      $3,359,841 at December 31, 2004. Working capital increased primarily from the
      proceeds received from the issuance of redeemable preferred stock, the exercise
      of stock options and warrants, and net amounts borrowed under revolving lines
      of
      credit. This amount was reduced by financing the operations of the company,
      principal payments on notes payable and repurchase of stock
      warrants.




Net
      cash
      used in operating activities for the year ended December 31, 2005 was $5,186,645
      compared to $2,145,496 of cash used in operating activities for the year ended
      December 31, 2004. Cash used in operating activities for the year ended December
      31, 2005 was primarily a result of an increase in accounts receivable,
      inventories, deferred taxes and the net loss. This was offset by and increase
      in
      payables and accrued expenses, depreciation and amortization, and stock issued
      for services. Cash used in operating activities for the year ended December
      31,
      2004 was primarily a result of an increase in accounts receivable and
      inventories offset by an increase in accounts payable and accrued expenses,
      depreciation, stock option compensation expense and stock issued for services.




Net
      cash
      used in investing activities for the years ended December 31, 2005 and 2004
      was
      $438,997






20




and
      $3,214,496, respectively. For the year ended December 31, 2005, cash was used
      for the purchase of property and equipment and additional payment due for the
      2004 acquisition. For the year ended December 31, 2004, cash was used for the
      acquisitions and to purchase property and equipment.




Net
      cash
      provided by financing activities for the year ended December 31, 2005 was
      $4,934,497 and was provided for by proceeds from the issuance of redeemable
      preferred stock, the exercise of stock options and warrants, net amounts
      borrowed under revolving lines of credit and was reduced to pay off notes
      payable and to repurchase stock warrants. Net cash provided by financing
      activities for the year ended December 31, 2004 was $5,934,776 and was provided
      for by proceeds from the issuance of common stock and warrants, the exercise
      of
      stock options and warrants, net amounts borrowed under revolving lines of
      credit, and net amounts borrowed from certain shareholders.




Since
      the
      2004 acquisition, we have invested in strengthening our infrastructure and
      have
      used cash to increase inventory to a level necessary to support our growth.
      Our
      accounts receivable increased as a result of strong sales in December 2005.
      We
      believe that cash that may be generated from operations, together with available
      cash resources and anticipated exercise of stock options and warrants in 2006
      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 although
      we
      have not identified any specific acquisition candidates.




We
      do not
      have any material commitments for capital expenditures nor do we expect to
      incur
      any material commitments for capital expenses during 2006.




We
      did
      not have any significant elements of income or loss not arising from continuing
      operations in 2005 or 2004 and do not expect any in 2006. While our business
      is
      marginally seasonal, we do not expect this seasonality to have a material
      adverse affect on our results of operations or cash flows.




Under
      the
      terms of the acquisition agreement, as amended, with Qualtech International
      Corporation and its affiliate, Qualtech Services Group, Inc.  that was
      completed on May 28, 2004, additional merger consideration may be due to the
      selling shareholders (see Note 4 to the consolidated financial
      statements).  The selling shareholders shall be entitled to this additional
      merger consideration in the form of restricted shares of the Company
      representing at least fifty (50%) of the total consideration to be paid and
      cash
      of up to fifty percent (50%) of the additional consideration which is to be
      determined at the discretion of the Company.  Any portion that is to be
      paid in cash is due within 30 days following the second anniversary of the
      effective date of the acquisition.  Any portion that is to be paid in stock
      is due on February 15, 2007.  The number of shares is to be determined by
      using the average trading price 15 days prior to February 14, 2007.  As of
      March 1, 2006, the Company has not determined the amount or the method of
      payment.




***Off-Balance
      Sheet Arrangements*** ******




The
      company does not have any off-balance sheet arrangements.




**FACTORS
      AFFECTING FUTURE OPERATING RESULTS**




You
      should carefully consider the following risk factors, together with all other
      information contained or incorporated by reference in this filing, before you
      decide to purchase shares of our stock. These factors could cause our future
      results to differ materially from those expressed in or implied by
      forward-looking statements made by us. Additional risks and uncertainties not
      presently known to us or that we currently deem immaterial may also harm our
      business. The trading price of our common stock could decline due to any of
      these risks, and you may lose all or part of your investment.




***Uncertainty
      Of Future Financial Results***




Our
      future financial results are uncertain. There can be no assurance that we will
      be profitable, and we may incur losses in the foreseeable future. Achieving
      and
      sustaining profitability depends upon many factors, including our ability to
      raise capital when needed, the success of our various marketing








21




programs,
      and the maintenance or reduction of expense levels.




***Fluctuations
      In Future Quarterly Results***




We
      have
      been in business since October 2001 and have only seventeen quarters of historic
      quarterly operating results, only four of which have been profitable. Our
      quarterly operating results may fluctuate based on how well we manage our
      business. Some of the factors that may affect how well we manage our business
      include the timing of our delivery of significant orders; our ability to
      engineer customer solutions in a timely, cost effective manner; our ability
      to
      structure our organization to enable achievement of our operating objectives;
      our ability to meet the needs of our customers and markets; the ability to
      deliver, in a timely fashion, products for which we have received orders; the
      length of the sales cycle; the demand for products and services we offer; the
      introduction or announcements by computer manufacturers relating to the
      remarketing of new and used equipment; the hiring and training of additional
      personnel; as well as general business conditions. If we fail to effectively
      manage our business, this could adversely affect our results of
      operations.




We
      expect
      that the size and timing of our sales transactions may vary substantially from
      quarter to quarter, and we expect such variations to continue in future periods,
      including the possibility of losses in one or more fiscal quarters. These
      fluctuations may be caused by delays in shipping certain computer systems for
      which we receive orders that we expect to deliver during that quarter. In
      addition, our collection periods may fluctuate due to periodic shortages of
      goods available for shipment, which may result in the delay of payment from
      customers who will not pay until their entire order is shipped. Accordingly,
      it
      is likely that in one or more future fiscal quarters, our operating results
      could be below investors’ expectations and, as a result, any future public
      offering of shares of our Common Stock could be materially adversely affected.




***Industry
      cycles may strain our management and resources***




Cycles
      of
      growth and contraction in our industry may strain our management and resources.
      To manage these industry cycles effectively, we must: improve operational and
      financial systems; train and manage our employee base; successfully integrate
      operations and employees of businesses we acquire or have acquired; attract,
      develop, motivate and retain qualified personnel with relevant experience;
      and
      adjust spending levels according to prevailing market conditions. If we cannot
      manage industry cycles effectively, our business could be seriously harmed.








22




***We
      Have Limited Principal Markets And Customers; We Have Significant Dependence
      On
      Major Customers; There Is A Risk Of Industry
      Concentration***




We
      operate primarily in the United States and have minimal assets in foreign
      countries. We sell and deliver computer systems, peripheral devices and parts
      to
      more than 300 customers throughout the United States and on 6 continents
      worldwide. For the years ended December 31, 2005 and 2004, our top ten customers
      accounted for approximately 37% and 39% of our total revenues, respectively.
      In
      each of the periods referred to, one of those customers was Keystone Memory
      Group, a “related party” for accounting purposes. We cannot be certain that
      customers that have accounted for significant revenue in past periods will
      continue to generate revenue. As a result of this concentration of our
      customers, our results of operations could be negatively affected if any of
      the
      following occurs: one or more of our customers becomes insolvent or goes out
      of
      business; one or more of our key customers significantly reduces, delays or
      cancels orders; or one or more of our significant customers selects products
      or
      services from one of our competitors.




Due
      to
      our acquisition, our customer base has broadened significantly and we therefore
      anticipate being less dependent on a relatively small number of customers to
      generate revenue. However, as revenue mix fluctuates from quarter to quarter,
      we
      may become more dependent on a small number of customers for a significant
      portion of our revenue in a particular quarter, the loss of which could
      adversely affect our operation results.




With
      the
      exception of several of our maintenance contracts, we do not have any exclusive
      long-term arrangements with our customers for the continued sales of our
      product. Our failure to acquire additional significant or principal customers
      or
      to maintain our relationships with our existing principal customers could have
      a
      material adverse effect on our results of operations and cash
      flows.




For
      the
      years ended December 31, 2005 and 2004, primarily all of our sales of computer
      systems, peripherals and parts were to remarketers based in the United States
      or
      brokers based both in and out of the United States for whom we directly exported
      product. For the years ended December 31, 2005 and 2004, export sales comprised
      7% and 18% of revenue, respectively. All of our purchases and sales are
      denominated in US dollars and we recorded no foreign currency transaction gains
      or losses during any period.




Although
      we are striving to broaden our market focus to include sales to other markets,
      such as financial services, in the immediate future we expect that we will
      continue to derive a substantial percentage of our sales of product to such
      brokers and remarketers. Accordingly, unfavorable economic conditions or factors
      that relate to these industries, particularly any such conditions that might
      result in reductions in capital expenditures or changes in such companies'
      information processing system requirements, could have a material adverse effect
      on our results of operations.




***We
      Rely On Merchandise Vendors As Sources For Our
      Products***




The
      availability of off-lease and excess inventory computer equipment is
      unpredictable. We have no long-term arrangements with our vendors that assure
      the availability of equipment. We purchase equipment from more than 25 different
      vendors, and we have no formal commitments with or from any of them. We cannot
      assure you that our current vendors will continue to sell equipment to us as
      they have in the past, or that we will be able to establish new vendor
      relationships that ensure equipment will be available to us in sufficient
      quantities and at favorable prices. If we are unable to obtain sufficient
      quantities of equipment at favorable prices, our business will be adversely
      affected. In addition, we may become obligated to deliver specified types of
      computer equipment in a short time period and, in some cases, at specified
      prices. Because we have no formal relationships with vendors, we may not be
      able
      to obtain the required equipment in sufficient quantities in a timely manner,
      which could adversely affect our ability to fulfill these
      obligations.




23




***We
      Are Subject To Risks That Our Inventory May Decline In Value Before We Sell
      It
      Or That We May Not Be Able To Sell The Inventory At The Prices We
      Anticipate***




We
      purchase and warehouse inventory, most of which is “as-is” or excess inventory
      of computer equipment. As a result, we assume inventory risks and price erosion
      risks for these products. These risks are especially significant because
      computer equipment generally is characterized by rapid technological change
      and
      obsolescence. These changes affect the market for refurbished or excess
      inventory equipment. Our success will depend on our ability to purchase
      inventory at attractive prices relative to its resale value and our ability
      to
      turn our inventory rapidly through sales. If we pay too much or hold inventory
      too long, we may be forced to sell our inventory at a discount or at a loss
      or
      write down its value, and our business could be materially adversely
      affected.




***Declining
      Prices For New Computer Equipment Could Reduce Demand For Our
      Products***




The
      cost
      of new computer equipment has declined dramatically in recent years. As the
      price of new computer products declines, consumers may be less likely to
      purchase refurbished computer equipment unless there is a substantial discount
      to the price of the new equipment. Accordingly, if we were to sell “as-is” or
      refurbished equipment directly to end users, we would have to offer the products
      at a substantial discount to the price of new products. As prices of new
      products continue to decrease, our revenue, profit margins and earnings could
      be
      adversely affected. There can be no assurance that we will be able to maintain
      a
      sufficient pricing differential between new products and our “as-is” or
      refurbished products to avoid adversely affecting our revenues, profit margins
      and earnings.




***If
      We Need Additional Financing For Unanticipated Working Capital Needs Or To
      Finance*** ***Acquisitions,
      We May Not Be Able To Obtain Such Capital, Which Could Adversely Affect Our
      Ability To Achieve Our Business Objectives***




We
      believe that cash that may be generated from operations, together with other
      available cash resources, 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 acquire complementary
      businesses, although we have not identified any specific acquisition candidates.
      If funds are not available when required for our unanticipated working capital
      needs or other transactions, our ability to carry out our business plan could
      be
      adversely affected, and we may be required to scale back our growth and
      operations to reflect the extent of available funding.




***We
      have made acquisitions in the past and may make acquisitions in the future,
      if
      advisable, and these acquisitions involve numerous
      risks.***





Our
      growth depends upon market growth and our ability to enhance our existing
      products and services, and to introduce new products and services on a timely
      basis. One of the ways to accomplish this is through acquisitions. In 2004,
      we
      completed the acquisitions of Qualtech International Corporation






24




and
      its
      affiliate Qualtech Services Group. Acquisitions involve numerous risks,
      including, but not limited to, the following:





·
            difficulty
                and increased costs in assimilating employees, including our possible
                inability to keep and retain key employees of the acquired
                business;


·
            disruption
                of our ongoing business;


·
            discovery
                of undisclosed liabilities of the acquired companies and legal disputes
                with founders or shareholders of acquired
                companies;


·
            inability
                to successfully incorporate acquired technology and operations into
                our
                business and maintain uniform standards, controls, policies, and
                procedures;


·
            inability
                to commercialize acquired technology;
                and


·
            the
                need to take impairment charges or write-downs with respect to acquired
                assets.




No
      assurance can be given that our prior acquisitions or our future acquisitions,
      if any, will be successful or provide the anticipated benefits, or that they
      will not adversely affect our business, operating results or financial
      condition. Failure to manage growth effectively and to successfully integrate
      acquisitions made by us could materially harm our business and operating
      results.




***If
      We Experience Problems In Our Distribution Operations, We Could Lose
      Customers***




In
      addition to product vendors, we depend on several other third parties over
      whom
      we have limited control, including, in particular, Federal Express, United
      Parcel Service and common carriers for delivery of products to and from our
      distribution facility and to our customers. We have no long-term relationships
      with any of those parties. We are therefore subject to risks, including risks
      of
      employee strikes and inclement weather, which could result in failures by such
      carriers to deliver products to our customers in a timely manner, which could
      damage our reputation and name.




***The
      Industry In Which We Compete In Is Highly Competitive***




We
      face
      competition in each area of our business, although in the Data Center Hardware
      Segment, there are no significant competitors. Some of our competitors have
      greater resources and a more established market position than we have. Our
      primary competitors include:




·
            major
                manufacturers of computer equipment such as, Dell Computer Corporation,
                Hewlett Packard and IBM, each of which offer “as-is”, refurbished and new
                equipment through their websites and direct e-mail broadcast
                campaigns;




·
            privately
                and publicly owned businesses such as Redemtech, Solectron and
                Spacefitters that offer asset management and end-of-life product
                refurbishment and remarketing services;




·
            traditional
                store-based computer retailers, such as Best Buy Co., Inc., Circuit
                City
                Stores, Inc., and CompUSA; and




·
            online
                competitors and auction sites, such as
                e-Bay




Some
      competitors have longer operating histories, larger customer or user bases,
      greater brand name recognition and significantly greater financial, marketing
      and other resources than we do. Some of these competitors already have an
      established brand name and can devote substantially more resources to increasing
      brand name recognition and product acquisition than we can. In addition, larger,
      well-established and well-financed entities may join with online competitors
      or
      computer manufacturers or suppliers as the use of the Internet and other online
      services increases. Our competitors may be able to






25




secure
      products from vendors on more favorable terms, fulfill customer orders more
      efficiently or adopt more aggressive price or inventory availability policies
      than we can. Traditional store-based retailers also enable customers to see
      and
      test products in a manner that is not possible in the wholesale business. Our
      product offerings must compete with other new computer equipment and related
      products offered by our competitors. That competition may intensify if prices
      for new computers continue to decrease.




***No
      Dividends On Common Stock; Issuance Of Preferred
      Stock***




We
      do not
      have a history of paying dividends on our Common Stock, and there can be no
      assurance that dividends will be paid in the foreseeable future. We intend
      to
      use any earnings, which may be generated to finance the growth of our
      businesses. Our Board of Directors has the right to authorize the issuance
      of
      preferred stock, without further shareholder approval, the holders of which
      may
      have preferences over the holders of the Common Stock as to payment of
      dividends.




***Dependence
      On Key Individuals***




Our
      success depends to a significant extent upon the continued contributions of
      our
      key management, technical and sales personnel, many of who would be difficult
      to
      replace. The loss of one or more of these employees could harm our business.
      Although we have entered into a limited number of employment contracts with
      certain executive officers, we generally do not have employment contracts with
      our key employees. Our success also depends on our ability to identify, attract
      and retain qualified technical, sales, marketing, finance and managerial
      personnel. Competition for qualified personnel is particularly intense in our
      industry and in our location. This makes it difficult to retain our key
      personnel and to recruit highly qualified personnel. We have experienced, and
      may continue to experience, difficulty in hiring and retaining candidates with
      appropriate qualifications. To be successful, we need to hire candidates with
      appropriate qualifications and retain our key executives and
      employees.




We
      are
      organized with a small senior management team. If we were to lose the services
      of the following members of our management team, our overall operations could
      be
      adversely affected. We consider our key individuals to be:




**Name**
            **Position**Marc
                Sherman
            Chairman,
                Chief Executive Officer, DirectorSeth
                A. Grossman
            President
                , Chief Operating Officer, DirectorEdward
                L. Cummings
            Chief
                Financial Officer, Treasurer, DirectorJoel
                L. Owens
            Executive
                Vice President Data Center Hardware and Data Center Services
                GroupDavid
                M. Harris
            Vice
                President, Information Technology and
                Systems




***Anti-Takeover
      Provisions***




Certain
      provisions of our Amended and Restated Certificate of Incorporation, Amended
      and
      Restated By-laws and Delaware law may be deemed to have an anti-takeover effect.
      Our certificate of incorporation provides that our Board of Directors may issue
      additional shares of Common Stock or establish one or more classes or series
      of
      Preferred Stock with such designations, relative voting rights, dividend rates,
      liquidation and other rights, preferences and limitations that the Board of
      Directors fixes without stockholder approval. In addition, we are subject to
      the
      anti-takeover provisions of Section 203 of the Delaware General Corporation
      Law.
      In general, the statute prohibits a publicly held Delaware corporation from
      engaging in a "business combination" with an "interested stockholder" for a
      period of three years after the date of the transaction in which the person
      became an interested stockholder, unless the business combination is approved
      in
      a prescribed manner. Each of the foregoing provisions may have






26




the
      effect of rendering more difficult, delaying, discouraging, preventing or
      rendering more costly an acquisition of the Company or a change in control
      of
      the Company.




**CRITICAL
      ACCOUNTING POLICIES**




Management
      is responsible for the integrity of the financial information presented herein.
      The Company’s financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America. Where
      necessary, they reflect estimates based on management’s judgment. When selecting
      or evaluating accounting alternatives, management focuses on those that produce
      from among the available alternatives information most useful for
      decision-making. Significant accounting policies that are important to the
      portrayal of the Company’s financial condition and results, which in some cases
      require management’s judgment, are summarized in the Notes to Financial
      Statements which are included herein in Item 7.




The
      Company believes that the critical accounting policies discussed below involve
      additional management judgment due to the sensitivity of the methods,
      assumptions and estimates necessary in determining the related asset, liability,
      revenue and expense amounts.




The
      Company recognizes revenue when it is realized or realizable and earned. The
      Company provides a limited “DOA Warranty” in connection with some of our product
      sales. DOA means “Dead On Arrival” and is a commonly used term in the computer
      industry. If provided to our customer, this warranty applies to used computers,
      disk drives, CD drives or DVD drives that do not power-up when they are received
      or, in some cases, for a period of up to 60 days from receipt and provides
      that
      the covered equipment can be returned for a full refund or replacement product,
      if available. The decision whether to provide a refund or replacement product
      is
      generally at our option, but in limited circumstances, it may be at the
      customer’s option. Based on an internal study by management, we determined that
      less that 5% of the Company’s sales are covered under this warranty and, of
      those sales, less than 10% are returned to the Company. If the equipment sold
      does not power-up, the Company has alternative methods to sell this equipment,
      by tearing it down and selling the working components as parts and the
      non-working components to metal recyclers. The alternative sales methods are
      rarely below the original cost of the equipment. The Company has not had any
      significant differences for the years ended December 31, 2005 and 2004.
      Therefore, no warranty reserve has been recorded. Should a reserve be recorded,
      it would increase both cost of sales and accrued expenses.




The
      Company provides estimated inventory allowances for excess, slow-moving and
      obsolete inventory as well as for inventory whose carrying value is in excess
      of
      net realizable value. These reserves are based on current assessments about
      future demands, market conditions and related management initiatives. Management
      continually monitors its inventory valuation, and makes an assessment of its
      inventory allowance on a quarterly basis. If market conditions and actual
      demands are less favorable than those projected by management, additional
      inventory write-downs may be required, which would be a decrease to our
      inventory balance and an increase to cost of sales.




The
      Company provides an estimated allowance for doubtful accounts and an allowance
      for sales returns. The allowance for doubtful accounts is based on management’s
      assessment about future collectibility of accounts receivable on an account
      by
      account basis and sets up a reserve accordingly. If conditions change,
      additional allowances may be required which would decrease our accounts
      receivable balance and increase our bad debt expense. The allowance for sales
      returns is based on historical data and management’s assessment of how much of a
      return of product is resellable. This allowance is reviewed on a quarterly
      basis
      and if required, an adjustment is made to increase or decrease the reserve
      and
      increase or decrease sales.








27




The
      Company accounts for stock-based employee compensation arrangements in
      accordance with the provisions of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      complies with the disclosure provisions of SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      Had the
      Company elected to account for stock-based employee compensation arrangements
      in
      accordance with SFAS No. 123 as an alternative to APB Opinion No. 25, additional
      expense would have been recognized in the statement of operations. For options
      issued to non-employees, the Company applies SFAS No. 123. Expense is recognized
      using the Black -Scholes option pricing model, which contains estimates on
      the
      volatility of the stock price, the risk free interest rate, and the expected
      life of the options granted. The Company bases its estimates on the best
      available information. Increases in estimated volatility, expected life, and
      the
      risk free interest rate would all increase the amount of expense recognized
      in
      the Statement of Operations.




**Impact
      Of Recently Issued Accounting Standards**




In
      December 2003, the FASB issued No. 46 (revised December 2003) (FIN 46R), *Consolidation
      of Variable Interest Entities,* which
      addresses how a business enterprise should evaluate whether it has a controlling
      financial interest in an entity through means other than voting rights and
      accordingly should consolidate the entity. FIN 46R replaces FIN No. 46, *Consolidation
      of Variable Interest Entities* ,
      which
      was issued in January 2003. The Company will be required to apply FIN 46R to
      variable interests in variable interest entities (VIEs) created after December
      31, 2003. For any VIEs that must be consolidated under FIN 46R that were created
      before January 1, 2004, the assets, liabilities and noncontrolling interests
      of
      the VIE initially would be measured at their carrying amounts with any
      difference between the net amount added to the balance sheet and any previously
      recognized interest being recognized as the cumulative effect of an accounting
      change. If determining the carrying amounts is not practicable, fair value
      at
      the date FIN 46R first applies may be used to measure the assets, liabilities
      and noncontrolling interest of the VIE. The adoption of this standard had no
      impact on the Company’s financial position or results of
      operations.





In
      December 2004, the FASB issued SFAS No. 123R, *Share-Based
      Payment.* SFAS No.
      123R requires measurement of all employee stock-based compensation awards using
      a fair value method and the recording of such expense in the consolidated
      financial statements. In addition, the adoption of SFAS No. 123R will require
      additional accounting related to the income tax effects and additional
      disclosure regarding the cash flow effects resulting from share-based payment
      arrangements. SFAS No. 123R is effective for the Company beginning January
      1,
      2006. The Company currently plans to adopt SFAS No. 123R using the modified
      prospective method. The Company is currently assessing the impact of the
      adoption of SFAS No. 123R to its results of operations, financial condition
      and
      compensation strategies. On December 28, 2005, the Company’s board of directors
      approved a resolution that provides for the vesting on December 28, 2005 of
      the
      majority of the Company’s outstanding and unvested stock options previously
      awarded to employees and directors. The purpose of accelerating the vesting
      of
      the employee’s and directors’ options was to enable the Company to avoid
      recognizing in its statement of operations compensation expense associated
      with
      the options in future periods. As a result of the acceleration, the Company
      expects to avoid recognition of up to approximately $493,000 after tax of
      compensation expense in its statement of operations over the course of the
      original vesting period, substantially all of which is expected to be avoided
      in
      2006 and 2007.




**ITEM
      7.**   **FINANCIAL
      STATEMENTS**




Our
      financial statements included in this Annual Report on Form 10-KSB are listed
      in
      Item 13 and begin immediately after Item 14 on pages F-1 through
      F-29.






28




**ITEM
      8.** **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




None




**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**




**Evaluation
      of Disclosure Controls and Procedures**




Our
      management, including our chief executive officer, president and our chief
      financial officer, has conducted an evaluation of the effectiveness of our
      disclosure controls and procedures (as defined in Rule 13a-15(e) under the
      Securities and Exchange Act of 1934) as of December 31, 2005. This evaluation
      was carried out under the supervision and with the participation of our
      management, including our chief executive officer, president and chief financial
      officer. Based upon that evaluation, our chief executive officer, president
      and
      our chief financial officer have concluded that our disclosure controls and
      procedures are effective for timely gathering, analyzing and disclosing the
      information we are required to disclose in our reports filed under the Exchange
      Act.




There
      were no changes in our internal control over financial reporting during the
      quarter ended December 31, 2005 that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.





We
      are
      continuing to evaluate the employees involved and the control procedures in
      place as well as the costs and benefits of making changes in the number and
      duties of employees. We are also working to document controls this year and
      to
      identify items that might require remediation in connection with our compliance
      with Section 404 of the Sarbanes-Oxley Act of 2002.




**PART
      III**




**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(A)
      OF THE EXCHANGE ACT**




***AS
      of March 1, 2006, Our Directors and Executive Officers
      are:***




**Name**
            **Age**
            **Position**Marc
                Sherman
            42
            Chairman,
                Chief Executive Officer, DirectorSeth
                A. Grossman
            40
            President,
                Chief Operating Officer, DirectorEdward
                L. Cummings
            57
            Chief
                Financial Officer, Treasurer, DirectorDavid
                Harris
            42
            Vice
                President, Information Technology and SystemsR.
                Keith Elliott
            63
            DirectorRobert
                W. VanHellemont
            59
            DirectorGeoffrey
                A. Smith
            48
            DirectorJohn
                F. Cunningham
            62
            Director




In
      February 2005, Joel L. Owens resigned as Chief Operating Officer for personal
      reasons.






*Marc
      Sherman* founded
      QSGI INC. in August 2001 and has served as Chairman and Chief Executive Officer
      since then. His term of office expires at the 2006 annual meeting and he has
      indicated he is available for reelection. Mr. Sherman served as a director
      of
      and Chief Executive Officer






29




of
      Intellesale, Inc. (and its predecessor, Universal Commodities Corp.), from
      December 1994 to July 2001, a company that purchased and sold large volumes
      of
      off-lease/off finance excess, used, refurbished and “as-is” computer equipment
      and related products and which provided technology asset management to companies
      wishing to maximize the value of their computer equipment coming to the end
      of
      its useful or book lives. Prior to 1994, Mr. Sherman served in key positions
      in
      various family businesses. Mr. Sherman has over fifteen years of experience
      in
      marketing, operations and executive management. Mr. Sherman is the
      brother-in-law of Mr. Sheerr.




*Seth
      A. Grossman was hired on March 14, 2005 to be President and Chief Operating
      Officer.* He
      had ** joined
      the Board of Directors in November 2003. His term of office expires at the
      2006
      annual meeting and he has indicated that he is available for reelection. Mr.
      Grossman was the Executive Vice President and Chief Strategic Officer of Paxson
      Communications Corporation (AMEX:PAX). He joined Paxson Communications in 1995
      as its Director of Finance, before assuming additional responsibilities as
      SVP
      of Investor Relations and Corporate Development and then Chief Financial
      Officer. Prior to his tenure at Paxson, Mr. Grossman was a Senior Associate
      with
      Houlihan, Lokey, Howard & Zukin, a specialty investment bank in New York
      where he concentrated on corporate finance, valuation advisory and
      restructuring. Mr. Grossman was also a partner with McFerren Holding Co., a
      Central and Eastern European privatization consulting firm. Mr. Grossman holds
      a
      BBA with distinction from the University of Michigan and an MBA from the Harvard
      Graduate School of Business Administration. He currently sits on the Board
      of
      the Enterprise Development Corporation of South Florida, a not-for-profit
      technology enterprise development concern.




*Edward
      L. Cummings* co-founded QSGI INC. and has served as its Chief Financial Officer and Treasurer
      since inception. His term of office expires at the 2006 annual meeting and
      he
      has indicated that he is available for reelection. Mr. Cummings joined the
      Board
      of Directors of the Company in February 2004 to fill a vacancy. He served as
      Executive Vice President, Chief Financial Officer and Secretary of Intellesale,
      Inc. from July 1999 to February 2001. He joined its predecessor company
      Universal Commodities Corp. in October 1995 as controller and was elected to
      the
      board of directors in January 1997. From September 1994 to October 1995 he
      owned
      TCC, Inc., an operator of several retail gift shops. From December 1981 to
      September 1994 he was Chief Financial Officer and Treasurer of Albert E. Price,
      Inc., a giftware import and export company.




*David
      M. Harris* joined
      QSGI INC. in May 2002 as Vice President, Information Technology and Systems.
      Mr.
      Harris is responsible for the development, implementation and maintenance of
      the
      Company’s information technology systems and processes. Prior to joining the
      Company, Mr. Harris was, from October 2001 to May 2002 a private consultant
      and,
      from April 1998 to October 2001, Network and Systems Administrator for
      Intellesale, Inc. Prior thereto, from 1984 to 1998 he has held various positions
      as Network and Systems Administrator and Programmer for various companies.




*R.
      Keith Elliott* was
      appointed to the board of directors in January 2003 to fill a vacancy. His
      term
      of office expires at the 2006 annual meeting and he has indicated he is
      available for reelection. Mr. Elliott is the retired chairman and chief
      executive officer of Hercules, Inc. He had been elected chairman and chief
      executive officer of Hercules, Inc. in 1997. From 1991 to April 2000, he served
      Hercules, Inc. as Senior Vice President and Chief Financial Officer; Executive
      Vice President and Chief Financial Officer; President and Chief Operating
      Officer; President and Chief Executive Officer; and Chairman of the Board of
      Directors. Hercules, Inc. is a multi-national specialty chemical manufacturer
      serving the paper, water, construction, pharmaceutical, food, consumer
      non-durable and adhesive markets and industries. Mr. Elliott is a member of
      the
      Board of Directors of Checkpoint Systems, Inc., a multi-national manufacturer
      of
      electronic labeling systems used in the retail industry to identify products
      and
      reduce theft, Sithe Energies Company, which develops peaking power plants based
      on gas, oil and coal fuels, Wilmington Trust Company, which provides customized
      financial alternatives for wealth advisory






30




clients,
      corporate clients, and regional banking clients,  Computer
      Task Group, an information technology staffing and solutions company, and the
      Institute for Defense Analyses, a federally funded research and development
      company. He also serves as a member of the National Advisory Board for the
      University of South Carolina. Mr. Elliott serves as Chairman of the Compensation
      Committee and is a member of the Audit Committee and the Corporate Governance
      Committee of the Board of Directors. The Board of Directors has determined
      that
      Mr. Elliott is an Audit Committee Financial Expert, as that term is defined
      in
      the rules issued pursuant to the Sarbanes-Oxley Act of 2002. This designation
      does not impose any duties, obligations or liabilities that are greater than
      the
      duties, obligations and liabilities imposed by being a member of the audit
      committee or board of directors. The Board of Directors has also determined
      that
      Mr. Elliott is independent, as that term is defined under the enhanced
      independence standards for audit committee members in the Securities Exchange
      Act of 1934 and rules there under.




*Robert
      W. VanHellemont* was
      appointed to the board of directors in August 2004 to fill a vacancy. .
      His
      term of office expires at the 2006 annual meeting and he has indicated he is
      available for reelection. He
      is the
      founder and chief executive officer of the Varilease companies. The Varilease
      companies are leading North American business equipment and financing providers,
      which have financed more than $1 billion in assets worldwide. Mr. VanHellemont
      founded Varilease Corp. in 1987 and founded Varilease Technology Finance Group,
      Inc. in 2000. Additionally, Mr. VanHellemont served as senior vice president
      of
      Thomson-McKinnon Securities and spent over 10 years in senior positions at
      CMI
      Corp. Mr.
      VanHellemont serves as Chairman of the Audit Committee and is a member of the
      Compensation Committee of the Board of Directors. The Board of Directors has
      determined that Mr. VanHellemont is independent, as that term is defined under
      the enhanced independence standards for audit committee members in the
      Securities Exchange Act of 1934 and rules there under.




*Geoffrey
      A. Smith* was
      appointed to the Board of Directors in September 2005 to fill a vacancy. His
      term
      of office expires at the 2006 annual meeting and he has indicated he is
      available for reelection. He
      is the
      founder and president of LP Enterprises, LLC. LP Enterprises, LLC provides
      Information Technology, Strategy, and Customer Relationship Management expertise
      across a broad range of direct clients - private sector, corporations,
      non-profits and the sports industry. From 1979 through 2005, he worked for
      Procter & Gamble. During his career with P & G, he progressed through a
      variety of IT/business responsibilities, ultimately reaching the role of Deputy
      CIO. He is a graduate of Cornell University with a B.S. degree in Industrial
      Engineering and Operations research. Mr. Smith is on the Board of Tech Corps
      Ohio, a non-profit dedicated to the enhancement of K-12 education through the
      effective use of technology in schools. Mr.
      Smith
      is as member of the Audit Committee and a member of the Corporate Governance
      Committee. The Board of Directors has determined that Mr. Smith is independent,
      as that term is defined under the enhanced independence standards for audit
      committee members in the Securities Exchange Act of 1934 and rules there
      under.




*John
      F. Cunningham* was
      appointed to the Board of Directors in September 2005 to fill a vacancy. His
      term
      of office expires at the 2006 annual meeting and he has indicated he is
      available for reelection. He
      is the
      Chairman and CEO of Cunningham & Co, Inc., which offers highly specialized
      strategic and valuation services to technology and computer related
      companies.  From 1985 to 1989, he served as chairman and CEO of CCI, an
      Amex-listed company. Previously, Mr. Cunningham served as president and chief
      operating officer of Wang Laboratories. Mr. Cunningham is a Trustee Associate
      of
      Boston College and an independent trustee director of Federated Funds.  He
      has previously served as a director of the First National Bank of Boston, Apollo
      Computer Inc., Computervision Corp., EMC Corp., and Honeywell Federal Systems
      Corp. Mr.
      Cunningham serves as Chairman of the Corporate Governance Committee and is
      a
      member of the Compensation Committee of the Board of Directors.






31




None
      of
      the Directors or Executive Officers of the Company:




·
            have
                filed a bankruptcy petition or served as a general partner or an
                executive
                officer of any entity that has filed or had filed against it a bankruptcy
                petition;




·
            have
                been convicted in a criminal proceeding or is the subject of a pending
                criminal proceeding;




·
            are
                subject to any order, judgment or decree, not subsequently reversed,
                suspended or vacated, of any court of competent jurisdiction, permanently
                or temporarily enjoined, barred or suspended or otherwise limited
                in their
                involvement in any type of business, securities or banking activities;
                or




·
            have
                been found by a court of competent jurisdiction in a civil action,
                the
                Commission or the Commodity Futures Trading Commission to have violated
                federal or state securities or commodities law and the judgment has
                not
                been reversed, suspended or
                vacated.







**Code
      of Ethics for Staff Members and Directors**





The
      Company has adopted a Code of Ethics for Staff Members and Directors, which
      applies to all employees, including our Chief Executive and Chief Financial
      Officers. The Code is available on the “Investor Relations” portion of our web
      site at www.qsgiinc.com.




***Compliance
      with Section 16(a) of the Exchange Act***




We
      are in
      compliance with Section 16(a) of the Exchange Act.




**ITEM
      10.** **EXECUTIVE
      COMPENSATION**




The
      following table sets forth certain summary information concerning the total
      remuneration paid in 2005 and 2004 to the Company’s Chief Executive Officer and
      its four other most highly compensated executive officers.




*Summary
                Compensation Table*Long-Term
                CompensationAnnual
                Compensation
            
            Awards
            
            PayoutsName
                and Principal Position
            
            Year
            
            Salary($)
            
            Bonus
                ($)
            
            Other
                Annual Compensation($)
            
            Restricted
                Stock Awards($)
            
            Securities
                Underlying Options/SAR's (#)
            
            LTIP
                Payouts
            
            All
                Other Compensation($)Marc
                Sherman(1)
            
            
            2005
            
            $
            424,000
            
            $
            100,000
            
            
            -
            
            
            -
            
            
            1,000,000
            
            $
            -
            
            $
            -Chairman,
                CEO and
            
            
            2004
            
            $
            265,385
            
            
            -
            
            $
            5,500
            
            
            -
            
            
            1,000,000
            
            $
            -
            
            $
            -PresidentSeth
                A. Grossman(1)
            
            
            2005
            
            $
            267,446
            
            
            
            
            
            -
            
            
            
            
            
            3,000,000President
                and Chief
            
            
            2004
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                OfficerEdward
                L. Cummings(1)
            
            
            2005
            
            $
            254,400
            
            $
            100,000
            
            
            -
            
            
            -
            
            
            500,000
            
            $
            -
            
            $
            -Vice
                President, Treasurer
            
            
            2004
            
            $
            141,346
            
            
            -
            
            $
            5,500
            
            
            -
            
            
            500,000
            
            $
            -
            
            $
            -


and
                  CFO




32




Joel
                L. Owens(3)
            
            
            2005
            
            $
            468,216
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            -
            
            $
            -Chief
                Operating Officer
            
            
            2004
            
            $
            141,667
            
            
            -
            
            
            -
            
            
            -
            
            
            60,000
            
            $
            -
            
            $
            -Vivek
                J. Agarwal
            
            
            2005
            
            $
            151,538
            
            
            -
            
            
            -
            
            
            -
            
            
            300,000
            
            $
            -
            
            $
            -2004
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -David
                A. Harris
            
            
            2005
            
            $
            109,423
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            -
            
            $
            -Vice
                President IT
            
            
            2004
            
            $
            89,415
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            -
            
            $
            -


(1). See
      “Employment Contracts” below for agreements entered into with executive
      officers.


(2).
            
            On
                February 19, 2004, by Action of Consent of Majority Shareholders,
                David A.
                Loppert was removed from the Board of Directors. Thereafter, the
                Board of
                Directors removed Mr. Loppert as an officer of the Company. As part
                of a
                court enforced settlement agreement with Mr. Loppert, the company
                was
                required to issue him 1,100,000 stock options. These were not part
                of the
                2002 Flexible Stock Plan.


(3)
            
            Named
                as COO on September 23, 2004. His employment started on May 1, 2004.
                Mr.
                Owens resigned as COO as of February 14,
                2005.




***Option
      Grants in Last Fiscal Year***




The
      following table contains information concerning the grant of Stock Options
      to
      the named executive officers during 2005:




Individual
                  GrantsName
              
              Number
                  of Securities Underlying Options Granted (#)
              
              %
                  of Total Options Granted to Employees in 2005
              
              Exercise
                  Price ($/Sh)
              
              Expiration
                  Date
              
              Grant
                  Date Present Value ($)Marc
                  Sherman
              
              
              1,000,000
              
              
              16.5
              %
              $
              2.50
              
              
              Mar
                  -15
              
              $
              1,845,000(1
              )Seth
                  A. Grossman
              
              
              3,000,000
              
              
              49.6
              %
              $
              2.75
              
              
              Mar
                  - 15
              
              $
              6,129,000(2
              )Edward
                  L. Cummings
              
              
              500,000
              
              
              8.3
              %
              $
              2.50
              
              
              Mar
                  -15
              
              $
              922,000(1
              )Vivek
                  J. Agarwal
              
              
              300,000
              
              
              .5
              %
              $
              2.75
              
              
              Mar
                  - 11
              
              $
              578,000(3
              )





(1)
            Based
                on the grant date present value of $2.02 per option share which was
                derived using the Black-Scholes option pricing model and is not intended
                to forecast future appreciation of the Company’s common share price. The
                Black-Scholes model was used with the following assumptions: dividend
                yield of 0%; expected volatility of 210.6%; risk-free interest rate
                of
                4.30%; and expected lives of 5 years.




(2)
            Based
                on the grant date present value of $2.24 per option share which was
                derived using the Black-Scholes option pricing model and is not intended
                to forecast future appreciation of the Company’s common share price. The
                Black-Scholes model was used with the following assumptions: dividend
                yield of 0%; expected volatility of 213.5%; risk-free interest rate
                of4.18%; and expected lives of 5
                years.




(3)
            Based
                on the grant date present value of $2.22 per option share which was
                derived using the Black-Scholes option pricing model and is not intended
                to forecast future appreciation of the Company’s common share price. The
                Black-Scholes model was used with the following assumptions: dividend
                yield of 0%; expected volatility of 210.6%; risk-free interest rate
                of
                4.30%; and expected lives of 5
                years.









33






***Option
      Exercises and Fiscal Year-End Values***




The
      following table sets forth information with respect to the named executive
      officers concerning the exercise of options during 2005 and unexercised options
      held on December 31, 2005:




**Aggregate
                  Option Exercises in Last Fiscal Year and Fiscal Year-End Option
                  Values**Exercised
                  in 2005
              
              Number
                  of Securities Underlying Unexercised
                Options
                  at Year End 2005 (#)
              
              Value
                  of Unexercised In-The-Money Options at
                Year
                  End 2005 ($)Name
              
              Shares
                  Acquired Upon Exercise (#)
              
              Value
                  Realized($)
              
              Exercisable
              
              Unexercisable
              
              Exercisable
              
              UnexercisableMarc
                  Sherman
              
              
              --
              
              $
              --
              
              
              3,375,000
              
              
              --
              
              $
              5,839,000
              
              
              --Seth
                  A. Grossman
              
              
              --
              
              $
              --
              
              
              3,425,000
              
              
              --
              
              
              5,925,000
              
              
              --Edward
                  L. Cummings
              
              
              --
              
              $
              --
              
              
              1,600,000
              
              
              --
              
              
              2,768,000
              
              
              --Joel
                  L. Owens
              
              
              --
              
              $
              --
              
              
              60,000
              
              
              --
              
              
              104,000
              
              
              --Vivek
                  J. Agarwal
              
              
              --
              
              $
              --
              
              
              300,000
              
              
              --
              
              
              519,000
              
              
              --David
                  A. Harris
              
              
              --
              
              $
              --
              
              
              225,000
              
              
              --
              
              
              476,000
              
              
              --




***Compensation
      Pursuant to Plans***




Other
      than as disclosed above, the Company has no plans pursuant to which cash or
      non-cash compensation was paid or distributed during the last fiscal year,
      or is
      proposed to be paid or distributed in the future, to the individuals described
      above.




***Compensation
      of Directors***




Beginning
      in the first quarter of 2005, the non-employee director compensation was changed
      from receiving no compensation to fixed quarterly fees in the amount of $6,250
      per non-employee director. Such fee may be paid in cash, options or in shares
      of
      the Company’s Common Stock, at the election of the board of directors.
      Reasonable travel expenses are reimbursed when incurred. Individuals who become
      directors of the Company are automatically granted, on the date they become
      directors, an initial non-qualified stock option to purchase 100,000 shares
      of
      Common Stock, $.01 par value, at the closing price of the Company's Common
      Stock, expiring five years from the grant date. Directors who are not also
      executive officers are not eligible to participate in any other benefit plan
      of
      the Company.




***Compensation
      Committee Interlocks and Insider Participation***




None.




***Employment
      Contracts and Termination of Employment, and Change-in-Control
      Arrangements***




The
      Company entered into employment and non-compete agreements with the following
      named executive officers.


**Name**
              
              **Length**
              
              **Commencing**
              
              **Base
                  Compensation**Marc
                  Sherman
              
              
              3
                  Year(1)
              
              October
                  1, 2004
              
              $
              424,000Seth
                  A. Grossman
              
              
              3
                  Year(2)
              
              March
                  14, 2005
              
              $
              339,200Edward
                  L. Cummings
              
              
              3
                  Year(1)
              October
                  1, 2004
              
              $
              254,400Joel
                  L. Owens
              
              
              2
                  Year(3)
              
              February
                  14, 2005
              
              $
              300,000
              (4)




34




(1)
            The
                term is for continuously rolling three year periods unless either
                party
                gives the other party notice that it wishes to cease the continuously
                rolling term provision feature with the next contract period (i.e.
                October
                1 of each year) and thereby fixing the term of the period of three
                years
                from the next contract anniversary. The employment agreements include
                certain early termination provisions in the event of the employee’s death,
                retirement, or upon the occurrence of certain events of defaults
                in
                performance by either the Company or the employee, as applicable.




(2)
            The
                term is for continuously rolling three year periods unless either
                party
                gives the other party notice that it wishes to cease the continuously
                rolling term provision feature with the next contract period (i.e.
                January
                1 of each year) and thereby fixing the term of the period of three
                years
                from the next contract anniversary. The employment agreements include
                certain early termination provisions in the event of the employee’s death,
                retirement, or upon the occurrence of certain events of defaults
                in
                performance by either the Company or the employee, as applicable.




(3)
            The
                term is for two years ending February 14, 2007, with no extension
                provision. The employment agreement includes certain early termination
                provisions in the event of the employee’s death, retirement, or upon the
                occurrence of certain events.




(4)
            The
                employment agreement provides for a bonus of 20% of net income after
                payment of all taxes (calculated at a tax rate of 38%) of the Data
                Center
                Maintenance segment of the Company.




***Key
      provisions of Employment and Non-Compete Agreements for those executives with
      a
      three year contract***




*Compensation.* In
      addition to the base compensation of each named executive listed above, each
      named executive is entitled to receive such bonuses, incentive compensation,
      and
      other compensation, if any, as the Company’s board of directors or the
      compensation committee thereof, or other designated committee shall award such
      executive from time to time whether in cash, Company stock, stock options,
      other
      stock based compensation, other form of remuneration, or any combination of
      the
      foregoing.




*Change
      of Control.* In the
      event of a change in control of the Company, all options granted to the
      executives will immediately vest, to the extent not already vested, and will
      become exercisable in accordance with the plan or terms and conditions under
      which they were granted. If, after the announcement of a change in control
      or in
      the event of early termination or change of control, there are severance
      payments due to the executive that run concurrent with the non-compete
      provision.




*Excise
      Gross Up.* In the
      event that any payment or benefit payable to an executive under his employment
      contract, and/or under any other agreement or arrangement with the Company
      or
      any person whose actions result in a change of control of the Company, is
      covered by Section 280G(b)(2) of the Internal Revenue Code of 1986 and is
      subject to the excise tax under Section 4999 of the Internal Revenue Code of
      1986, as amended, the Company shall reduce the payment by the smallest amount
      required to eliminate the imposition of the Section 4999 tax.




*Vesting
      of Options.* In the
      event of termination of the executive’s employment for any reason other than
      termination by the Company due to his material default, as described in the
      employment contract, all stock options granted to him by the Company (or any
      subsidiary or affiliate) whether granted under and pursuant to a plan or
      otherwise, will become immediately exercisable to the extent not already
      exercisable and will remain exercisable until their expiration
      date.




*Non-Compete
      Provisions.* During
      the employment term and for a period of three years after termination of
      employment, if such termination is for any reason other than death, the
      executive shall not engage, directly or indirectly, either on his own behalf
      or
      on behalf of any other person, firm, corporation or other entity, in any
      business competitive with the business of the Company, or own more than 5%
      of
      any such firm, corporation or other entity. In addition, the executive must
      furnish the Company with such information, as the Company shall from time to
      time request in order to determine that executive is in compliance with his
      non-compete agreement.




***Key
      provisions of Employment and Non-Compete Agreements for the executive with
      a two
      year contract***






35




*Compensation.* In
      addition to the base compensation of each named executive listed above, each
      named executive is entitled to receive such bonuses, incentive compensation,
      and
      other compensation, if any, as the Company’s board of directors or the
      compensation committee thereof, or other designated committee shall award such
      executive from time to time whether in cash, Company stock, stock options,
      other
      stock based compensation, other form of remuneration, or any combination of
      the
      foregoing.




*Vesting
      of Options.* In the
      event of termination of the executive’s employment for any reason other than
      termination by the Company due to his material default, as described in the
      employment contract, all stock options granted to him by the Company (or any
      subsidiary or affiliate) whether granted under and pursuant to a plan or
      otherwise, will become immediately exercisable to the extent not already
      exercisable and will remain exercisable until their expiration
      date.




*Non-Compete
      Provisions.* During
      the employment term and for a period of up to twelve months after termination
      of
      employment, but no later than February 14, 2007, if employment is terminated
      by
      the Company without cause or executive shall resign before February 14, 2007,
      the executive shall not engage, directly or indirectly, either on his own behalf
      or on behalf of any other person, firm, corporation or other entity, in any
      business competitive with the hardware or maintenance segment of the Company.
      If
      employment is terminated by the Company for cause, the non-compete shall be
      for
      a period of twelve months.




**ITEM
      11.**  **SECURITY
      OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS**




***Ownership
      of Equity Securities in the Company***




The
      following table sets forth information regarding beneficial ownership of the
      Company’s Common Stock by each director and by each executive officer named in
      the Summary Compensation Table and by all the directors and executive officers
      as a group as of December 31, 2005:




**Title
                of Class**
            **Name
                and Address of Beneficial Owner**
            **Amount
                and Nature of****Beneficial Owner****(1)**
            **Percent
                of Class**Common
            Marc
                Sherman(2)
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520
            6,016,300
            14.6%Common
            Seth
                A. Grossman
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520
            3,425,000
            8.3%Common
            Edward
                L. Cummings
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520****
            3,716,200
            9.0%Common
            Joel
                L. Owens
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520****
            70,000
            *Common
            Vivek
                J. Agarwal
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520
            300,000
            *Common
            David
                A. Harris
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520
            425,000
            1.0%Common
            R.
                Keith Elliott
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520
            525,000
            1.3%






36




Common
            John
                F. Cunningham
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520****
            255,000
            *Common
            Geoffrey
                A. Smith
              c/o
                70 Lake Drive
              Hightstown,
                NJ
            100,000
            *Common
            Robert
                W. VanHellemont
              c/o
                70 Lake Drive
              Hightstown,
                NJ 08520
            298,500
            *Common
            All
                Directors and Executive Officers as a Group (10 Persons)
            15,131,000
            36.7%




*
      The
      amount shown is less than 1% of the outstanding shares of common
      stock.


1.
            This
                table includes presently exercisable stock options. The following
                directors and executive officers hold the number of presently exercisable
                options (all of which may be exercised at any time) set forth following
                their respective names: Edward L. Cummings - 1,600,000; R. Keith
                Elliott -
                525,000; Seth A. Grossman -3,425,000; Vivek J. Agarwal - 300,000;
                David A.
                Harris - 275,000; Joel A. Owens - 60,000; Marc Sherman -3,375,000;
                John F.
                Cunningham - 100,000; Geoffrey A. Smith - 100,000; Robert W. VanHellemont
                - 275,000; and all directors and executive officers as a group (10
                persons) - 10,035,000.


2.
            Includes
                85,300 shares beneficially owned by Mr. Sherman’s children for whom Mr.
                Sherman has sole voting and dispositive
                power.





Set
      forth
      in the table below is information, as of March 3, 2006, with respect to persons
      known to the Company (other than the directors and executive officers shown
      in
      the preceding table) to be the beneficial owners of more than five percent
      of
      the Company’s issued and outstanding Common Stock:




**Name
                and Address**
            **Number
                of Shares Beneficially Owned**
            **Percent
                Of Class**Barron
                Partners
              730
                Fifth Avenue
              New
                York, NY 10019
            3,743,333
            13.0%Pike
                Capital Partners, LP
              275
                Madison Avenue
              Suite
                418
              New
                York, NY 10016
            1,714,650
            6.0%




***Securities
      authorized for issuance under equity compensation
      plans***




This
      information is presented in Part II, Item 5 - *“Market
      for Common Equity and Related Stockholder Matters”* above.




**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




***Loans
      from Principal Stockholders/Executive Officers***




A.  On
      April
      24, 2002, the Company entered into secured loan agreements with its principal
      stockholders. These agreements as amended on September 30, 2002 and on February
      28, 2003 provided for each principal stockholder to loan the Company $110,000
      (for an aggregate of $550,000). As of December 31, 2005, all amounts due under
      these loans have been repaid and cancelled. As of December 31, 2004, $355,000
      was due under these agreements as follows:






37




**Name**
            
            **Amount
                of Loan**
            
            **Interest
                Rate**Marc
                Sherman
            
            $
            15,000
            
            
            12
            %Edward
                L. Cummings
            
            $
            80,000
            
            
            12
            %David
                A. Loppert
            
            $
            100,000
            
            
            12
            %Carl
                C. Saracino
            
            $
            70,000
            
            
            12
            %Michael
                P. Sheerr
            
            $
            90,000
            
            
            12
            %




B.  In
      October 2002, the Company executed Company Variable Amount Promissory Notes,
      each in the amount of $125,000 in favor of each of Edward Cummings, David
      Loppert, Carl C. Saracino, Michael Sheerr and Marc Sherman, each an executive
      officer and principal stockholder of the Company, in consideration for each
      executive extending to the Company a revolving line of credit of up to $125,000.
      The amounts outstanding are due on demand and bear interest at the rate of
      12%
      per annum. Interest payments are paid monthly in arrears. As of December 31,
      2005, all amounts due under these notes have been repaid and the notes
      cancelled. As of December 31, 2004, $6,594 was due under these notes.




***Sales
      to Related Party***




The
      Company had sales to Keystone Memory Group, a customer related to Marc Sherman,
      Chairman and CEO, who is a principal stockholder of the Company and Michael
      Sheerr, a former employee and officer of the Company. Keystone Memory Group
      is
      owned by Michael P. Sheerr and his wife. Mrs. Sheerr is Marc Sherman’s sister.
      Mr. Sherman has no business experience with Keystone, and Mr. Sheerr had no
      business experience with Keystone while employed by the Company.




The
      Company also had sales to Micro Memory Bank, a customer related to Michael
      Sheerr, a former employee and officer of the Company. Micro Memory Bank is
      owned
      by Michael Sheerr’s brother. Mr. Sheerr had no business experience with Micro
      Memory Bank while employed by the Company.




Sales
      to
      Keystone amounted to approximately $857,000 and $1,102,000 for the years ended
      December 31, 2005 and 2004, respectively. No accounts receivable from this
      customer was outstanding at December 31, 2005. Accounts receivable from Keystone
      amounted to $119,046 at December 31, 2004.




Sales
      to
      Micro Memory Bank amounted to approximately $0 and $5,400 for the years ended
      December 31, 2005 and 2004, respectively. There was no amount due from Micro
      Memory Bank at December 31, 2005 or December 31, 2004.




Keystone
      primarily sells memory upgrades for Sun, HP, Cisco, Compaq and IBM workstations,
      servers and personal computers as well as other computer parts. We sell personal
      computer memory modules to Keystone in bona fide arms-length negotiated
      transactions at competitive fair market prices. The products primarily consist
      of 32Mb, 64Mb, 128Mb and 256Mb RAM, or “Random Access Memory,”
modules.




Micro
      Memory Bank manufactures and sells memory modules for workstations, servers
      and
      personal computers. We sell personal computer memory modules to Micro Memory
      Bank in bona fide arms-length negotiated transactions at competitive fair market
      prices. The products primarily consist of 32Mb, 64Mb, 128Mb and 256Mb RAM or
      “Random Access Memory” modules.






38




***Other
      Related Party Transaction***




In
      2005,
      the Company signed a 24 month lease for a tractor trailer from Varilease
      Technology Finance Group, Inc., a company that is owned by one of the members
      of
      the Board of Directors. The lease is considered an operating lease. Rent expense
      for this lease amounted to $55,522 for the year ended December 31, 2005.
      Accounts payable to this vendor amounted to $41,218 at December 31,
      2005.






***Shares
      issued to Principal Stockholders/Executive Officers***




**Principal
                Stockholder / Executive Officer**
            **Date
                Issued**
            **Note**
            **Issued
                For**
            **Number
                of**
              **Common**
              **Shares**Edward
                L. Cummings
            Oct
                - 2001
            A
            Capital
                Contribution
            5,000,000Jan
                - 2002
            B
            Merger
                Consideration
            1,800,000Dec
                - 2002
            C
            Compensation
            500,000David
                A. Loppert
            Oct
                - 2001
            A
            Capital
                Contribution
            5,000,000Jan
                - 2002
            B
            Merger
                Consideration
            1,800,000Dec
                - 2002
            C
            Compensation
            500,000Carl
                C. Saracino
            Oct
                - 2001
            A
            Capital
                Contribution
            5,000,000Jan
                - 2002
            B
            Merger
                Consideration
            1,800,000Dec
                - 2002
            C
            Compensation
            500,000Michael
                P. Sheerr
            Oct
                - 2001
            A
            Capital
                Contribution
            5,000,000Jan
                - 2002
            B
            Merger
                Consideration
            1,800,000Dec
                - 2002
            C
            Compensation
            500,000Marc
                Sherman
            Oct
                - 2001
            A
            Capital
                Contribution
            5,000,000Jan
                - 2002
            B
            Merger
                Consideration
            1,800,000Dec
                - 2002
            C
            Compensation
            500,000




A.  In
      October 2001, WindsorTech, Inc. (New Jersey Company) sold an aggregate of 50,000
      shares of its common to Edward
      Cummings, David Loppert, Carl C. Saracino, Michael Sheerr and Marc
      Sherman in
      consideration for $50,000 from each of them. In January 2002, WindsorTech,
      Inc.
      (New Jersey Corporation) affected a 100:1 stock split. These shares were
      restricted within the meaning of the Securities Act of 1933.




B.  On
      January 30, 2002, in connection with the Merger, Delta issued an aggregate
      of
      9,000,000 shares of its common stock to Edward
      Cummings, David Loppert, Carl C. Saracino, Michael Sheerr and Marc
      Sherman in
      exchange for their 25,000,000 shares of common stock in WindsorTech, Inc. (New
      Jersey Corporation). The 9,000,000 shares of common stock were valued at
      $250,000, or $.0278 per share. These shares are restricted within the meaning
      of
      the Securities Act of 1933.




C.  In
      December 2002, the Compensation Committee of the Board of Directors awarded
      each
      executive officer a $13,000 bonus, payable in shares of the Company’s restricted
      common stock. Each executive officer received 500,000 restricted shares of
      common stock valued at $0.026 per share.






39




**ITEM
      13.**  **EXHIBITS
      AND FINANCIAL STATEMENTS**




ExhibitsSee
                List of Exhibits filed as part of this Report on Form 10-KSB.The
                financial statements listed below appear immediately after page
                42.Report
                of Independent Registered Public Accounting Firm
            F-1Financial
                StatementsBalance
                Sheet
            F-2Statement
                Of Operations
            F-3Statement
                Of Stockholders’ Equity
            F-4Statement
                Of Cash Flows
            F-5Notes
                To Financial Statements
            F-6
                - F-31




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




During
      2005 and 2004, we paid the following fees, including out of pocket expense
      reimbursements, to RubinBrown LLP:




**2005**
            **2004**Audit
                Fees
              
              Audit-Related
                Fees (1)
              
              Tax
                Fees (2)
              
              Total
            $
                124,056
              
              11,700
              
              22,870
              
              $
                158,626
            $
                108,358
              
              24,450
              
              9,250
              
              $
                142,058




(1)
      Audited-related fees include consultation concerning financial accounting and
      reporting standards and acquisitions, and work performed in connection with
      registration statements filed with the SEC.




(2)
      Tax
      Fees include tax planning and compliance for federal and state income
      taxes.






40




QSGI
      INC.’s Audit Committee approves the engagement of an accountant to render all
      audit and non-audit services prior to the engagement of the accountant based
      upon a proposal by the accountant of estimated fees and scope of the engagement.
      QSGI INC’s Audit Committee has received the written disclosure and the letter
      from RubinBrown LLP required by Independence Standards Board Standard No. 1,
      as
      currently in effect, and has discussed with RubinBrown LLP their independence.




**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**QSGI
                INC.**
              (Registrant)Dated:March
                30, 2006
            By:/s/Marc ShermanMarc
              ShermanChief
              Executive Officer





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the Registrant and in the capacities and on
      the
      dates indicated.




**Signature**
            **Title**
            **Date**/s/Marc
                Sherman
              (Marc
                Sherman)
            Chairman
                of the Board, Chief Executive Officer and President
            March 30,
                2006/s/Seth
                A. Grossman
              Seth
                A. Grossman
            President,
                Chief Operating Officer and Director
            March 30,
                  2006/s/Edward
                L. Cummings
              Edward
                L. Cummings
            Vice
                President, Treasurer and Chief Financial Officer
            March 30,
                  2006/s/
                R. Keith Elliott
              R.
                Keith Elliott
            Director
            March 30,
                  2006/s/
                Robert W. VanHellemont
              Robert
                W. VanHellemont
            Director
            March 30,
                  2006/s/
                Geoffrey A. Smith
              Geoffrey
                A. Smith
            Director
            March 30,
                  2006/s/
                John F. Cunningham
              John
                F. Cunningham
            Director
            March 30,
                  2006




2
 41




**LIST
      OF EXHIBITS**




ExhibitNumber
            Description2.1
            Agreement
                and Plan of Merger by and between WindsorTech, Inc., Delta States
                Oil,
                Inc. and Alfred D. Morgan, Ph. D dated January 29, 2002 (incorporated
                herein by reference to Exhibit 99.1 to the Registrant’s Current Report on
                Form 8-K filed with the Commission on February 13, 2002 (Commission
                file
                number 000-07539)).2.2
            Agreement
                and plan of Merger by and among WindsorTech, Inc., Qualtech International
                Corporation and Qualtech Service Group, Inc. dated May 1,
                2004.2.3
              ***
            Addendum
                to Agreement and Plan of
                Merger.2.4
              ***
            Second
              Addendum to Agreement and Plan of
              Merger.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 Corporation.4.1
            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,
                2004.4.6
            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
            Promissory
                Note executed by the Company. As of April 24, 2002 this note was
                paid in
                full (Incorporated herein reference to Exhibit 10.7 to the Registrant’s
                Quarterly Report on Form 10-QSB filed with the Commission on August
                19,
                2002 (Commission file number 000-07539)).






42


Exhibit
                  Number
              Description


10.8
            Loan
                Agreement by and among Marc Sherman, Edward L. Cummings, David A.
                Loppert,
                Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc., on and
                as of
                April 24, 2002 (Incorporated herein reference to Exhibit 10.8 to
                the
                Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on
                August 19, 2002 (Commission file number 000-07539)).10.9
            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)).10.10
            Amendment
                to Loan Agreement by and among Marc Sherman, Edward L. Cummings,
                David A.
                Loppert, Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc.,
                on and
                as of September 30, 2002 (Incorporated herein reference to Exhibit
                10.10
                to the Registrant’s Quarterly Report on Form 10-QSB filed with the
                Commission on November 11, 2002 (Commission file number
                000-07539)).10.11
            Second
                Amendment to Loan Agreement by and among Marc Sherman, Edward L.
                Cummings,
                David A. Loppert, Carl C. Saracino, Michael P. Sheerr and WindsorTech,
                Inc., on and as of February 28, 2003 (Incorporated herein reference
                to
                Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-QSB filed
                with the Commission on May 13, 2003 (Commission file number
                000-07539)).10.12
            Employment
                and Non-Compete Agreement - Joel L. Owens10.13**
            Third
                Amendment to Loan Agreement by and among Marc Sherman, Edward L.
                Cummings,
                Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc., on and
                as of
                March 29, 2004.12.1***
            Statement
                re computation of ratios.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)).23.1***
            Consent
                of RubinBrown LLP31.1***
            Chairman
                and Chief Executive Officer
                Certification31.2***
            President
                and Chief Executive Officer
                Certification31.3***
            Chief
                Financial Officer and Treasurer
                Certification32.1***
            Certifications
                Pursuant to 18 U.S.C. Section 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(a) of Regulation S-B.







2
 43





**Contents**


**Page****Report
                Of Independent Registered
                Public****Accounting
                Firm**
            F-1**Financial
                Statements**Consolidated
                Balance Sheets
            F-2Consolidated
                Statements Of
                Operations
            F-3Consolidated
                Statements Of Stockholders’
                Equity
            F-4Consolidated
                Statements Of Cash Flows
            F-5Notes
                To Consolidated Financial
                Statements
            F-6
                - F-31




















**ReportOf
      Independent Registered**


**Public** **Accounting Firm**








Board
      of
      Directors and Stockholders


QSGI
      INC.


Hightstown,
      New Jersey








We
      have
      audited the accompanying c onsolidated
      b alance
      sheets of QSGI INC. (formerly, WindsorTech, Inc.) and subsidiaries as of
      December 31, 2005 and 2004, and the related c onsolidated statements
      of operations, stockholders’ equity and cash flows for the years then ended.
      These financial statements are the responsibility of the Company’s management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company's internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      also
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the c onsolidated financial
      statements referred to above present fairly, in all material respects, the
      c onsolidated financial
      position of QSGI INC. and subsidiaries as of December 31, 2005 and 2004, and
      the
      results of their operations and their cash flows for the years then ended,
      in
      conformity with accounting principles generally accepted in the United States
      of
      America.





/s/
      Rubin
      Brown LLP




St.
      Louis, Missouri


February
      17, 2006














**QSGI
                  INC. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE
                  SHEETS****Assets****December
                  31,****2005**
              
              2004**Current
                  Assets**Cash
                  and cash equivalents
              
              **$**
              **153,794**
              
              $
              844,939Accounts
                  receivable, net of reserve of $80,000and $50,000 in 2005 and 2004, respectively
              
              
              **7,014,129**
              
              
              3,612,530Accounts
                  receivable - related party
              
              
              —
              
              
              119,046Inventories
              
              
              **4,136,304**
              
              
              2,721,505Prepaid
                  expenses and other assets
              
              
              **227,352**
              
              
              165,741Deferred
                  income
                  taxes
              
              
              **155,668**
              
              
              67,511**Total
                  Current
                  Assets**
              
              
              **11,687,247**
              
              
              7,531,272**Property
                  And Equipment, Net**
              
              
              **605,887**
              
              
              552,560**Goodwill**
              
              
              **3,212,314**
              
              
              3,125,794**Intangibles,
                  Net**
              
              
              **2,872,240**
              
              
              3,188,896**Other
                  Assets**
              
              
              **116,225**
              
              
              89,843**$**
              **18,493,913**
              
              $
              14,488,365**Liabilities
                  And Stockholders' Equity****Current
                  Liabilities**Current
                  maturities of notes payable
              
              **$**
              **—**
              
              $
              603,376Revolving
                  lines
                  of credit
              
              
              **3,631,500**
              
              
              1,155,500Accounts
                  payable
              
              
              **2,254,136**
              
              
              1,590,928Accrued
                  expenses
              
              
              **279,090**
              
              
              265,391Accrued
                  payroll
              
              
              **264,134**
              
              
              86,724Deferred
                  revenue
              
              
              **404,540**
              
              
              346,031Other
                  current liabilities
              
              
              **29,366**
              
              
              123,481**Total Current Liabilities**
              
              
              **6,862,766**
              
              
              4,171,431**Deferred
                  Income Taxes**
              
              
              **280,318**
              
              
              1,115,870**Notes
                  Payable**
              
              
              **—**
              
              
              255,000**Total Liabilities**
              
              
              **7,143,084**
              
              
              5,542,301**Redeemable
                  Convertible Preferred Stock**
              
              
              **1,967,220**
              
              
              —**Commitments
                  And Contingencies (Note 13)****Stockholders'
                  Equity**Preferred
                  shares: authorized 5,000,000 in 2005 and 2004,$0.01
                  par
                  value, none issued
              
              
              **—**
              
              
              —Common
                  shares: authorized 55,000,000 in 2005 and 2004,$0.01
                  par
                  value; 28,670,631 shares issued and outstandingin
                  2005
                  and 25,550,007 issued and outstanding in 2004
              
              
              **286,706**
              
              
              255,500Additional
                  paid-in capital
              
              
              **11,093,881**
              
              
              9,421,356Retained
                  earnings (deficit)
              
              
              **(1,996,978**
              **)**
              
              (730,792
              )**Total Stockholders' Equity**
              
              
              **9,383,609**
              
              
              8,946,064**$**
              **18,493,913**
              
              $
              14,488,365


See
      the
      accompanying notes to consolidated financial statements.


Page
            F-2




**QSGI
                INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF
                OPERATIONS****For
                The Years****Ended
                December 31,****2005**
            
            2004**Revenue**
            
            **$**
            **36,386,138**
            
            $
            22,079,796**Cost
                Of Sales**
            
            
            **28,886,169**
            
            
            16,651,383**Gross
                Profit**
            
            
            **7,499,969**
            
            
            5,428,413**Selling,
                General And Administrative Expenses**
            
            
            **8,731,946**
            
            
            4,835,565**Depreciation
                And Amortization**
            
            
            **634,014**
            
            
            391,672**Interest
                Expense, Net**
            
            
            **160,441**
            
            
            83,307**Income
                (Loss) Before Provision (Benefit) For****Income Taxes**
            
            
            **(2,026,432**
            **)**
            
            117,869**Provision
                (Benefit) For Income Taxes**
            
            
            **(760,246**
            **)**
            
            83,393**Net
                Income (Loss)**
            
            
            **(1,266,186**
            **)**
            
            34,476**Preferred
                Stock Dividend**
            
            
            **3,945**
            
            
            **—****Net
                Income (Loss) Available To Common Stockholders**
            
            **$**
            **(1,270,131**
            **)**
            $
            34,476**Net
                Income (Loss) Per Common Share - Basic**
            
            **$**
            **(0.05**
            **)**
            $
            —**Net
                Income (Loss) Per Common Share - Diluted**
            
            **$**
            **(0.05**
            **)**
            $
            —**Weighted
                Average Number Of Common Shares****Outstanding - Basic**
            
            
            **28,132,778**
            
            
            24,659,853**Weighted
                Average Number Of Common Shares****Outstanding - Diluted**
            
            
            **28,132,778**
            
            
            27,944,181




See
              the
              accompanying notes to consolidated financial statements.
 Page
            F-3




**QSGI
                  INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS’ EQUITY**
                **For
                  The Years Ended December 31, 2005 And 2004****Additional**
              
              **Retained**
              
              **Total****Common
                  Stock**
              
              **Paid-In**
              
              **Earnings**
              
              **Stockholders'****Shares**
              
              **Amount**
              
              **Capital**
              
              **(Deficit)**
              
              **Equity****Balance
                  (Deficit) - January 1, 2004**
              
              
              16,468,754
              
              $
              164,688
              
              $
              774,599
              
              $
              (765,268
              )
              $
              174,019**Common
                  Stock Issued**
              
              
              7,957,831
              
              
              79,578
              
              
              4,946,811
              
              
              —
              
              
              5,026,389**Common
                  Stock Warrants Issued**
              
              
              —
              
              
              —
              
              
              1,521,261
              
              
              —
              
              
              1,521,261**Exercise
                  Of Stock Options**
              
              
              500,000
              
              
              5,000
              
              
              894,050
              
              
              —
              
              
              899,050**Tax
                  Effect Of Exercise Of****Stock Options**
              
              
              —
              
              
              —
              
              
              42,003
              
              
              —
              
              
              42,003**Exercise
                  Of Stock Warrants**
              
              
              500,000
              
              
              5,000
              
              
              745,000
              
              
              —
              
              
              750,000**Stock
                  Option Compensation**
              
              
              —
              
              
              —
              
              
              289,666
              
              
              —
              
              
              289,666**Shares
                  Issued For Services**
              
              
              123,422
              
              
              1,234
              
              
              207,966
              
              
              —
              
              
              209,200**Net
                  Income**
              
              
              —
              
              
              —
              
              
              —
              
              
              34,476
              
              
              34,476**Balance
                  (Deficit) - December 31, 2004**
              
              
              25,550,007
              
              
              255,500
              
              
              9,421,356
              
              
              (730,792
              )
              
              8,946,064**Common
                  Stock Warrants****Repurchased**
              
              
              —
              
              
              —
              
              
              (1,256,210
              )
              
              —
              
              
              (1,256,210
              )**Exercise
                  Of Stock Options**
              
              
              1,801,666
              
              
              18,017
              
              
              1,241,791
              
              
              —
              
              
              1,259,808**Tax
                  Effect Of Exercise Of****Stock Options**
              
              
              —
              
              
              —
              
              
              163,244
              
              
              —
              
              
              163,244**Exercise
                  Of Stock Warrants**
              
              
              1,233,333
              
              
              12,333
              
              
              1,337,667
              
              
              —
              
              
              1,350,000**Stock
                  Option Compensation**
              
              
              —
              
              
              —
              
              
              61,334
              
              
              —
              
              
              61,334**Preferred
                  Stock Dividend**
              
              
              —
              
              
              —
              
              
              (3,945
              )
              
              —
              
              
              (3,945
              )**Shares
                  Issued For Services**
              
              
              85,625
              
              
              856
              
              
              128,644
              
              
              —
              
              
              129,500**Net
                  Loss**
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,266,186
              )
              
              (1,266,186
              )**Balance
                  (Deficit) - December 31, 2005**
              
              
              28,670,631
              
              $
              286,706
              
              $
              11,093,881
              
              $
              (1,996,978
              )
              $
              9,383,609




See
              the
              accompanying notes to consolidated financial statements.
 Page
            F-4




**QSGI
                INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH
                FLOWS****ForThe
                Years****Ended
                December 31,****2005**
            
            2004**Cash
                flows from operating activities**Net income (loss)
            
            **$**
            **(1,266,186**
            **)**
            $
            34,476Adjustments to reconcile net income (loss) to net cashused in operating activities:Depreciation and amortization
            
            
            **634,014**
            
            
            391,672Stock option compensation expense
            
            
            **61,334**
            
            
            289,666Deferred income taxes
            
            
            **(760,465**
            **)**
            
            37,735Common stock issued for services
            
            
            **129,500**
            
            
            209,200Change in assets and liabilities:Accounts
                receivable
            
            
            **(3,282,553**
            **)**
            
            (2,177,369
            )Inventories
            
            
            **(1,414,799**
            **)**
            
            (1,538,500
            )Prepaid expenses and other current assets
            
            
            **(92,280**
            **)**
            
            (104,125
            )Other
                assets
            
            
            **(13,921**
            **)**
            
            (2,512
            )Accounts
                payable and accrued expenses
            
            
            **818,711**
            
            
            714,261**Net
                Cash Used In Operating Activities**
            
            
            **(5,186,645**
            **)**
            
            (2,145,496
            )**Cash
                Flows From Investing Activities**Payments for patent and trademark
            
            
            —
            
            
            (3,010
            )Acquisition of business, net of cash acquired
            
            
            **(86,520**
            **)**
            
            (3,005,375
            )Purchases of property and equipment
            
            
            **(352,477**
            **)**
            
            (206,111
            )**Net
                Cash Used In Investing Activities**
            
            
            **(438,997**
            **)**
            
            (3,214,496
            )**Cash
                Flows From Financing Activities**Proceeds from the issuance of common stock and warrants
            
            
            —
            
            
            3,300,000Proceeds from the issuance of redeemable preferred stock
            
            
            **1,967,220**
            
            
            —Stock warrants exercised
            
            
            **1,350,000**
            
            
            750,000Stock options exercised
            
            
            **1,259,808**
            
            
            899,050Stock warrants repurchased
            
            
            **(1,256,210**
            **)**
            
            —Preferred stock dividends
            
            
            **(3,945**
            **)**
            
            —Net amounts borrowed under revolving lines of credit
            
            
            **2,476,000**
            
            
            638,308Amounts borrowed - notes payable
            
            
            **—**
            
            
            500,000Principal payments - notes payable
            
            
            **(858,376**
            **)**
            
            (152,582
            )**Net
                Cash Provided By Financing Activities**
            
            
            **4,934,497**
            
            
            5,934,776**Net
                Increase (Decrease) In Cash And Cash Equivalents**
            
            
            **(691,145**
            **)**
            
            574,784**Cash
                And Cash Equivalents - Beginning Of Year**
            
            
            **844,939**
            
            
            270,155**Cash
                And Cash Equivalents - End Of Year**
            
            **$**
            **153,794**
            
            $
            844,939**Supplemental
                Disclosure Of Cash Flow Information**Income taxes paid (refunds received)
            
            **$**
            **(27,516**
            **)**
            $
            550Interest paid
            
            
            **135,456**
            
            
            58,561Supplemental Cash Flow Information (Note 15)





See
              the
              accompanying notes to consolidated financial statements.
 Page
            F-5





**QSGI
      INC. AND SUBSIDIARIES**


NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS


December
      31, 2005 And 2004





**1.**
            **Summary
                Of Significant Accounting
                Policies**





**Business
      Organization**




The
      Company is a technology services company and its products are geared towards
      both the users of business-computing hardware (desktops, laptops, related
      peripherals and servers) as well as the users of enterprise-class hardware
      (mainframes, midrange processors, large storage, controllers, etc.). The Company
      offers data destruction, regulatory compliance services and remarketing services
      for IT asset management.





The
      Company purchases its products from a variety of sources, including Fortune
      1000
      companies, as well as leasing and finance companies, and re-sells a wide range
      of used and refurbished products, including mainframe processors and associated
      tape and disk products, connectivity products, midrange processors, laptop
      and
      desktop computers, monitors, processors, CD/DVD disk drives, modems, printers
      and memory. Only mainframe and associated peripherals that are manufactured
      by
      IBM are remarketed. The majority of the PC computers the Company sells are
      brand
      name Intel Pentium-class or equivalent products manufactured by IBM, Dell,
      Compaq, Apple, Sony, Fujitsu, Hewlett-Packard, Gateway, Toshiba and other major
      manufacturers.





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





On
      October 17, 2005, the shareholders of the Company voted in favor of changing
      the
      Company name from Windsortech, Inc. to QSGI INC. The Company had employed QSGI
      as a trade name.





The
      Company has office and warehouse space in Hightstown, New Jersey, and Eagan,
      Minnesota, and satellite sales and business development offices in California,
      Colorado, Connecticut, Illinois, New York, Texas, Florida, Michigan and Wyoming.






Page
          F-6


**QSGI
      INC. AND SUBSIDIARIES**


(Continued)




**Principles
      Of Consolidation**




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





**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.





**Revenue
      Recognition**




For
      product sales, the Company recognizes revenue at the time products are shipped
      and title is transferred, which is in accordance with the stated shipping terms.
      Revenue is recognized in accordance with these shipping terms so long as a
      purchase order, electronic, written or phone commitment has been received or
      a
      contract has been executed, there are no uncertainties regarding customer
      acceptance, the sales price is fixed and determinable and collectibility is
      deemed probable. If uncertainties exist regarding customer acceptance or
      collectibility, revenue is recognized when those uncertainties have been
      resolved. The Company provides a limited warranty on some of its products.
      The
      Company analyzes its estimated warranty costs and provides an allowance as
      necessary, based on experience. At December 31, 2005 and 2004, a warranty
      reserve was not considered necessary.





Asset
      management fees are recognized once the services have been performed and the
      results reported to the client. In those circumstances where the Company
      disposes of the client’s product, or purchases the product from the client for
      resale, revenue is recognized as a “product sale” described above.





Maintenance
      service revenue is recognized when the services are performed in accordance
      with
      the service agreement. Any prepaid service contracts are deferred and recognized
      over the term of the applicable agreements on a straight-line
      basis.






Page
          F-7


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)





**Cash
      And Cash Equivalents**




The
      Company considers all liquid instruments purchased with maturity of three months
      or less to be cash equivalents.





**Accounts
      Receivable**




Accounts
      receivable are stated at the amount management expects to collect from
      outstanding balances. Management provides for probable uncollectible amounts
      through a charge to earnings and a credit to a valuation allowance based on
      its
      assessment of the current status of individual accounts. Balances that are
      still
      outstanding after management has used reasonable collection efforts are written
      off through a charge to the valuation allowance and a credit to trade accounts
      receivable.





**Inventories**




Inventories
      consist primarily of computer hardware, parts and related products, and are
      valued at the lower of average cost or market. Substantially all inventory
      items
      are finished goods. The allocated cost of parts disassembled from purchased
      computer hardware is based on the relative fair value of the dissembled
      components. The allocation of cost does not exceed the original cost of the
      computer hardware. The Company closely monitors and analyzes inventory for
      potential obsolescence and slow-moving items on an item-by-item basis. Inventory
      items determined to be obsolete or slow moving are reduced to net realizable
      value. Inventory in-transit consists of items of inventory for which the Company
      has purchased and assumed the risk of loss, but which has not yet been received
      into stock at the Company’s facility.





**Property
      And Equipment**




Property
      and equipment is stated at cost, net of accumulated depreciation. Expenditures
      for maintenance and repairs are charged against operations as incurred. Upon
      retirement or sale, any assets disposed are removed from the accounts and any
      resulting gain or loss is reflected in the results of operations.





Property,
      equipment, leasehold improvements, computer hardware and software are
      depreciated or amortized using the straight-line method over two to five-year
      periods. Capitalized values of property under leases are amortized over the
      life
      of the lease or the estimated life of the asset, whichever is less.






Page
          F-8


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)


Impairment
      losses on long-lived assets, such as equipment and improvements, are recognized
      when events or changes in circumstances indicate that the undiscounted cash
      flows estimated to be generated by such assets are less than their carrying
      value and, accordingly, all or a portion of such carrying value may not be
      recoverable. Impairment losses are then measured by comparing the fair value
      of
      assets to their carrying amounts.





**Deposits**




Deposits
      principally consist of the lease deposit for the Company’s New Jersey facility.
      This deposit is refundable at the expiration of the lease. Since the lease
      term
      extends beyond 12 months, the deposit is classified as a long-term asset in
      other assets on the balance sheet.





**Advertising
      Costs**




Advertising
      costs are expensed on the first date the advertisement takes place. Advertising
      expense amounted to $259,966 in 2005 and $184,163 in 2004.





**Income
      Taxes**




Deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to the differences between the financial statement carrying amounts
      of existing assets and liabilities and their respective tax bases. Deferred
      tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled. The effect on deferred tax assets and liabilities
      of a
      change in tax rates is recognized in income in the period that includes the
      enactment date. A valuation allowance is provided against net deferred tax
      assets where the Company determines realization is not currently judged to
      be
      more likely than not.





**Earnings
      (Loss) Per Share**




Basic
      earnings (loss) per share is computed on the basis of the weighted average
      number of common share 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.






Page
          F-9


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)


The
      following table presents the computation of basic and diluted net income (loss)
      per share:




**2005**
            
            2004Net
                income (loss) available to common stockholders
            
            **$**
            **(1,270,131**
            **)**
            $
            34,476Determination
                of basic and diluted shares:Basic
                weighted average shares outstanding
            
            
            **28,132,778**
            
            
            24,659,853Effect
                of dilutive securities:Stock
                options
            
            
            —
            
            
            1,978,028Stock
                warrants
            
            
            —
            
            
            1,306,300Diluted
                weighted average shares outstanding
            
            
            **28,132,778**
            
            
            27,944,181Net
                Income (Loss) Per Common Share - Basic
            
            **$**
            **(0.05**
            **)**
            $
            0.00Net
                Income (Loss) Per Common Share - Diluted
            
            **$**
            **(0.05**
            **)**
            $
            0.00





In
      2005,
      the Company excluded 1,638,961 weighted average common share equivalents related
      to stock options, 653,101 weighted average common share equivalents related
      to
      stock warrants and 62,831 weighted average common share equivalents related
      to
      convertible preferred stock because their effect would have been
      anti-dilutive.





**Fair
      Value Of Financial Instruments**




The
      carrying amounts of financial instruments including cash and cash equivalents,
      accounts receivable and accounts payable approximate fair value due to the
      relatively short maturity of these instruments. The carrying value of the notes
      payable and capital lease obligations, including the current portion,
      approximate fair value based on the incremental borrowing rates currently
      available to the Company for financing with similar terms and
      maturities.





**Stock-Based
      Compensation**




The
      Company accounts for stock-based employee compensation arrangements in
      accordance with the provisions of Accounting Principles Board (APB) Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      complies with the disclosure provisions of Statement of Financial Accounting
      Standards (SFAS) No. 123, *Accounting
      for Stock-Based Compensation* .
      Under
      APB Opinion No. 25, compensation cost is recognized over the vesting period
      based on the difference, if any, on the date of grant between the fair value
      of
      the Company’s stock and the amount an employee must pay to acquire the stock.






Page
          F-10


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)


Had
      compensation cost for these plans been determined based on the fair value at
      the
      grant dates for awards under these plans, consistent with the alternative method
      set forth under SFAS No. 123, the Company’s expenses for the years ended
      December 31, 2005 and 2004 would have increased. The pro forma amounts are
      indicated below:





**2005**
            
            2004Net
                income (loss) available to commonstockholders,
                as reported
            
            **$**
            **(1,270,131**
            **)**
            $
            34,476Add:
                Stock-based employee compensationexpense
                included in reported net income(loss),
                net of related tax effects
            
            
            **37,414**
            
            
            176,696Deduct:
                Total stock-based employeecompensation
                expense determined underfair
                value based method for all awards, netof
                related tax effects
            
            
            **(7,113,013**
            **)**
            
            (6,567,287
            )Proforma
                net loss available tocommon
                stockholders
            
            **$**
            **(8,345,730**
            **)**
            $
            (6,356,115
            )Earnings
                (loss) per share:Basic
                - as reported
            
            **$**
            **(0.05**
            **)**
            $
            0.00Diluted
                - as reported
            
            **$**
            **(0.05**
            **)**
            $
            0.00Basic
                - Proforma
            
            **$**
            **(0.30**
            **)**
            $
            (0.26
            )Diluted
                - Proforma
            
            **$**
            **(0.30**
            **)**
            $
            (0.26
            )





The
      weighted average per share fair value of the options granted was $2.02 and
      $1.25
      for the years ended December 31, 2005 and 2004, respectively. The fair value
      of
      each option granted is estimated on the date of grant using the Black-Scholes
      option-pricing model with the following weighted-average
      assumptions:





**2005**
            
            2004Risk-free
                interest rates
            
            
            **4.14**
            **%**
            
            3.69
            %Expected
                option lives
            
            
            **5
                years**
            
            
            5
                yearsExpected
                volatilities
            
            
            **96**
            **%**
            
            101
            %Expected
                dividend yields
            
            
            —
            **%**
            
            —
            %









Page
          F-11


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)




**Impact
      Of Recently Issued Accounting Standards**




In
      December 2003, the Financial Accounting Standards Board (FASB) issued FASB
      Interpretation No. 46 (revised December 2003) (FIN 46R), *Consolidation
      of Variable Interest Entities,* which
      addresses how a business enterprise should evaluate whether it has a controlling
      financial interest in an entity through means other than voting rights and
      accordingly should consolidate the entity. FIN 46R replaces FIN No. 46, *Consolidation
      of Variable Interest Entities* ,
      which
      was issued in January 2003. The Company is required to apply FIN 46R to variable
      interests in variable interest entities (VIEs) created after December 31, 2003.
      For any VIEs that must be consolidated under FIN 46R that were created before
      January 1, 2004, the assets, liabilities and noncontrolling interests of the
      VIE
      initially would be measured at their carrying amounts with any difference
      between the net amount added to the balance sheet and any previously recognized
      interest being recognized as the cumulative effect of an accounting change.
      If
      determining the carrying amounts is not practicable, fair value at the date
      FIN
      46R first applies may be used to measure the assets, liabilities and
      noncontrolling interest of the VIE. The adoption of this standard had no impact
      on the Company’s financial position or results of operations.





In
      December 2004, the FASB issued SFAS No. 123R, *Share-Based
      Payment* .
      SFAS
      No. 123R requires measurement of all employee stock-based compensation awards
      using a fair value method and the recording of such expense in the consolidated
      financial statements. In addition, the adoption of SFAS No. 123R will require
      additional accounting related to the income tax effects and additional
      disclosure regarding the cash flow effects resulting from share-based payment
      arrangements. SFAS No. 123R is effective for the Company beginning January
      1,
      2006. The Company currently plans to adopt SFAS No. 123R using the modified
      prospective method. At December 31, 2005, the unvested option expense is
      approximately $39,000 and is expected to be expensed over the next five years.
      The Company is currently assessing the impact of the adoption of SFAS No. 123R
      on its compensation strategies.








**2.**
            **Inventories**





Inventories
      consist of:


**2005**
            
            2004Finished
                goods
            
            **$**
            **3,144,515**
            
            $
            2,546,733Inventory
                in transit
            
            
            **1,041,789**
            
            
            189,772Allowance
                for excess and obsolescence
            
            
            **(50,000**
            **)**
            
            (15,000
            )**$**
            **4,136,304**
            
            $
            2,721,505







Page
          F-12




**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)




**3.**
            **Property
                And Equipment**





Property
      and equipment consist of:


**2005**
            
            2004Furniture
                and fixtures
            
            **$**
            **140,143**
            
            $
            89,786Equipment
            
            
            **448,790**
            
            
            417,537Leasehold
                improvements
            
            
            **69,523**
            
            
            31,859Computer
                equipment and software
            
            
            **514,814**
            
            
            286,061**1,173,270**
            
            
            825,243Less:
                Accumulated depreciation
            
            
            **570,415**
            
            
            272,683**602,855**
            
            
            552,560Construction
                in progress
            
            
            **3,032**
            
            
            —**$**
            **605,887**
            
            $
            552,560





Depreciation
      and amortization charged against income for all property and equipment amounted
      to $298,327 and $179,357 for the years ended December 31, 2005 and 2004,
      respectively.




**4.**
            **Business
                Acquisitions**





In
      May
      2004, the Company completed the purchase of all of the outstanding shares of
      QualTech International Corporation and its affiliate, QualTech Services Group,
      Inc., (collectively “QualTech”). QualTech International Corporation is a
      worldwide re-seller of refurbished IBM mainframes and associated IBM
      peripherals. QualTech Services Group, Inc. provides hardware maintenance
      solutions and information systems consulting services to businesses in the
      United States. The Company’s primary reasons for the acquisition of QualTech
      were to expand the Company’s product offerings to include mainframe hardware and
      mainframe hardware services, to acquire an existing Fortune 1000 customer base
      to allow the Company to market its current product offerings to these customers
      and to acquire a leader in its industry with talented personnel to enhance
      the
      Company’s expertise. The acquisition was accounted for using the purchase method
      of accounting, and the results of operations of the acquired companies are
      included from the effective acquisition date of May 1, 2004.






Page
          F-13


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)





The
      cost
      of the acquired entities of $6,686,520 included payments to QualTech’s
      shareholders of $6,586,520 of which $3,336,520 was in cash and $3,250,000 was
      in
      the Company’s common stock. The value of the Company’s stock was based on its
      average market value several days prior to the acquisition. Direct acquisition
      costs, consisting primarily of legal fees, were $100,000.





In
      addition to the initial purchase price described in the previous paragraph,
      additional contingent consideration is payable, based on QualTech meeting
      certain objectives. QualTech shareholders shall be entitled to receive 5.5
      times
      the average income after taxes, for the two year period following the effective
      date of the merger, that exceeds $1,100,000. A minimum of 50% of this amount
      is
      to be paid in Company stock. The remainder is to be paid in Company stock or
      cash at the discretion of the Company. Any amounts paid under this agreement
      will be considered additional purchase price.  Any
      portion that is to be paid in cash is due within 30 days following the end
      of
      the two-year period. Any portion that is to be paid in stock is due on February
      15, 2007. The number of shares will be determined by the using the average
      trading price 15 days prior to February 14, 2007.





The
      allocation of the aggregate purchase price was performed with the assistance
      of
      an independent valuation firm. The purchase price allocation identified
      $3,400,000 of intangible assets other than goodwill. The goodwill recognized
      amounted to $3,212,314. Goodwill recorded in connection with this acquisition
      will not be amortized to expense, but will be subject to periodic testing for
      impairment in accordance with SFAS No 142, *Goodwill
      and Other Intangible Assets* .
      None of
      this goodwill is expected to be deductible for tax purposes.





The
      fair
      value of the net assets of QualTech as of the date of acquisition is as
      follows:





Cash
            
            $
            345,281Accounts
                receivable
            
            
            1,293,708Inventory
            
            
            824,625Fixed
                assets
            
            
            262,617Other
                assets
            
            
            35,393Intangible
                assets
            
            
            3,400,000Goodwill
            
            
            3,212,314Accounts
                payable
            
            
            (603,480
            )Accrued
                expenses
            
            
            (129,927
            )Short-term
                debt
            
            
            (510,000
            )Deferred
                tax liability
            
            
            (1,179,647
            )Other
                liabilities
            
            
            (264,364
            )$
            6,686,520




Page
          F-14


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)


**Unaudited
      Proforma Results**




The
      following unaudited proforma condensed consolidated financial information for
      the year ended December 31, 2004, is presented to show the results of the
      Company to give effect to the acquisition of QualTech International Corporation
      and its affiliate, QualTech Services Group, Inc., as if it had occurred on
      January 1, 2004. The proforma results include certain adjustments,
      including increased amortization related to intangible assets and are not
      necessarily indicative of what the results would have been had the transaction
      actually occurred on that date.




**2004**Net
                revenue
            
            $
            30,890,968Net
                income
            
            
            190,819Earnings
                per share - basic
            
            $
            0.01Earnings
                per share - diluted
            
            $
            0.01Weighted
                average shares - basic
            
            
            24,602,246Weighted
                average shares - diluted
            
            
            32,464,038








**5.**
            **Goodwill
                And Other Intangible
                Assets**





In
      accordance with the SFAS No. 142, *Goodwill
      and Other Intangible Assets* ,
      the
      Company is required to assess goodwill and indefinite-lived intangible assets
      for impairment annually, or more frequently if circumstances indicate impairment
      may have occurred. The Company’s reporting units are the same as its reportable
      business segments. Goodwill was assigned to the Data Center Hardware and Data
      Center Maintenance reporting units at their acquisition. The Company performed
      impairment tests in the fourth quarter of 2005 and 2004, and has determined
      that
      the carrying value of such assets were not impaired as of those dates. Goodwill
      increased during 2005 due to an additional purchase price payment of $86,520.
      This came as a result of the true-up of the balance sheets of the acquired
      companies at December 31, 2004. At December 31, 2005 and 2004, the balance
      of goodwill and intangible assets are as follows:





**2005**
            
            2004Goodwill
            
            **$**
            **3,212,314**
            
            $
            3,125,794Intangible
                assets with indefinite lives
            
            
            **910,000**
            
            
            910,000Intangible
                assets with definite lives
            
            
            **1,962,240**
            
            
            2,278,896**$**
            **6,084,554**
            
            $
            6,314,690









Page
          F-15


**QSGI
          INC. AND SUBSIDIARIES**
 (Continued)




Intangible
      assets with indefinite lives relate principally to trade names. Intangibles
      with
      definite lives relate principally to the following:





**2005**
            
            **Accumulated**
            
            
            
            **Amortization
                Life****Cost**
            
            **Amortization**
            
            **Amortization**
            
            **Net**
            
            **Life
                (Years)**Customer
                Lists
            
            $
            1,640,000
            
            $
            182,208
            
            $
            303,680
            
            $
            1,336,320
            
            
            9.0Database
            
            
            400,000
            
            
            44,448
            
            
            74,080
            
            
            325,920
            
            
            9.0Employee
                Non-competes
            
            
            450,000
            
            
            90,000
            
            
            150,000
            
            
            300,000
            
            
            5.0Total
            
            $
            2,490,000
            
            $
            316,656
            
            $
            527,760
            
            $
            1,962,240





**2004**
            
            **Accumulated**
            
            
            
            **Amortization
                Life****Cost**
            
            **Amortization**
            
            **Amortization**
            
            **Net**
            
            **Life
                (Years)**Customer
                Lists
            
            $
            1,640,000
            
            $
            121,472
            
            $
            121,472
            
            $
            1,518,528
            
            
            9.0Database
            
            
            400,000
            
            
            29,632
            
            
            29,632
            
            
            370,368
            
            
            9.0Employee
                Non-competes
            
            
            450,000
            
            
            60,000
            
            
            60,000
            
            
            390,000
            
            
            5.0Total
            
            $
            2,490,000
            
            $
            211,104
            
            $
            211,104
            
            $
            2,278,896





Amortization
      of intangible assets is computed on a straight-line basis and based on December
      31, 2005 balances, expected
      amortization expense in each of the next five years is as follows.





**Year**
            
            **Amount**2006
            
            $
            316,6562007
            
            
            316,6562008
            
            
            316,6562009
            
            
            256,6562010
            
            
            226,656$
            1,433,280





Page
          F-16


**QSGI
          INC. AND SUBSIDIARIES**
 (Continued)




**6.**
            **Other
                Assets**





Other
      assets consist of:


**2005**
            
            2004Deposits
            
            **$**
            **76,972**
            
            $
            63,341Trademark
            
            
            **7,885**
            
            
            3,010Patent,
                net of amortization of $1,413 in2005
                and $202 in 2004
            
            
            **22,097**
            
            
            22,803Other
            
            
            **9,271**
            
            
            689**$**
            **116,225**
            
            $
            89,843





The
      patent is being amortized over a 20-year life. Patent amortization expense
      in
      2005 amounted to $706 and in 2004 amounted to $1,211. Expected amortization
      expense in each of the next five years is approximately $1,211 per
      year.








**7.**
            **Financing
                Arrangements**





Notes
      payable consist of the following:


**2005**
            
            2004Notes
                payable - stockholder, secured by substantially all of the Company’s
                assets, with interest only payments at prime plus 2% (7.25% at December
                31, 2004) payable monthly in arrears, with $500,000 in principal
                and
                accrued interest paid on April 22, 2005
            
            **$**
            **—**
            
            $
            500,000Notes
                payable - principal stockholders, secured by substantially all of
                the
                Company’s assets, with interest only payments at 12% payable monthly in
                arrears, with all amounts paid during 2005
            
            
            **—**
            
            
            355,000Capital
                lease obligations
            
            
            **—**
            
            
            3,376**—**
            
            
            858,376Less
                current maturities
            
            
            **—**
            
            
            603,376**$**
            **—**
            
            $
            255,000






Page
          F-17


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)


On
      April
      24, 2002, the Company entered into a secured loan agreement with its principal
      stockholders. This agreement, as amended, provides for each principal
      stockholder to loan the Company $110,000 (for an aggregate of $550,000). As
      of
      December 31, 2005, all amounts due under these loans have been repaid and the
      loans cancelled.





In
      2004,
      the Company entered into a secured loan agreement with Barron Partners, LP,
      one
      of its principal stockholders. This agreement provided for a short-term loan
      to
      the Company in the amount of $500,000, due and payable on April 1, 2005. As
      of
      December 31, 2005, all amounts due under this loan agreement have been repaid
      and the loan cancelled.





**Revolving
      Lines Of Credit**




On
      May 3,
      2005, the Company entered into a revolving line-of-credit agreement that
      provides for borrowings limited to the lesser of $4,250,000 or the borrowing
      base of 80% of eligible accounts receivable plus 40% of inventories and in
      certain circumstances 60% of eligible inventories, with eligible inventories
      not
      to exceed $1,500,000. Availability on the line of credit at December 31, 2005
      was $458,500. Interest on this loan is payable monthly at the prime rate plus
      1%
      (8.25% at December 31, 2005), with all principal and interest due April 1,
      2007.
      In accordance with Emerging Issues Task Force (EITF) Issue No. 95-22, the line
      of credit is classified as a current liability due to the agreement containing
      a
      subjective acceleration clause and a lock-box arrangement. All loans or lines
      of
      credit that the Company had prior to this date were repaid and cancelled.





The
      revolving line-of-credit arrangement contains certain financial covenants,
      including maintaining a minimum tangible net worth, a minimum fixed charge
      coverage ratio, and limiting capital expenditures. The Company exceeded its
      maximum allowable capital expenditures of $300,000 in the third quarter of
      2005.
      The Company received a waiver from the lender and amended the covenant to allow
      for a maximum of $450,000 in capital expenditures in 2005.





The
      Company was in compliance with all of its covenants at December 31, 2005.






Page
          F-18


**QSGI
          INC. AND SUBSIDIARIES**
 (Continued)





**8.**
            **Redeemable
                Convertible Preferred Stock**





In
      December 2005, the Company completed a private placement with a group of
      investors for net proceeds of approximately $4,200,000. The Company received
      the
      proceeds in two payments. The first payment, net of offering costs, of
      $1,967,220 was received at the time of signing and approximately $2,200,000
      was
      received at the beginning of January 2006.





The
      preferred securities issued in the private placement consist of 143,333 shares
      of 6% Series A Preferred Stock with a face value of $30 per share. The 6%
      dividend is payable quarterly in cash or additional preferred securities at
      the
      Company’s option. Each Series A Preferred Share is convertible into
      approximately 13.33 shares of the Company’s common stock. The Company can
      require the holders to convert the shares if the Company’s common stock price
      maintains $2.75 for twenty consecutive business days. The Company can redeem
      the
      preferred securities at any time after December 10, 2007. Additionally, the
      holder may demand redemption in cash, for the original $30 per share, at any
      time after December 10, 2010. Because these preferred securities are
      conditionally redeemable, they are classified as temporary equity in the balance
      sheet.








**9.**
            **Stockholders’
                Equity**





**Stock
      Option Grants**




In
      October 2001, the Company granted 1,350,000 options to its shareholders and
      employees to acquire shares of its common stock at $0.026 per common share
      pursuant to individual option grants. The terms of the grants provided for
      immediate vesting, and the options may be exercised at any time for a period
      of
      ten years commencing October 1, 2001.





In
      January 2002, the Company’s stockholders approved the 2002 Flexible Stock Plan
      (the “2002 Plan”). Under the 2002 Plan, the number of shares which may be issued
      or sold, or for which options, stock appreciation rights (SAR’s) or performance
      shares may be granted to certain directors, officers and employees of the
      Company is 5,000,000, plus an annual increase, effective the first day of each
      calendar year, commencing on January 1, 2003, equal to 10% of the number of
      shares outstanding as of the first day of such calendar year but in no event
      more than 30,000,000 shares in the aggregate.






Page
          F-19
 
 **QSGI
        INC. AND
        SUBSIDIARIES**
 (Continued)





On
      December 28, 2005, the Company’s Board of Directors approved a resolution that
      provided for the immediate accelerated vesting on December 28, 2005 of the
      majority of the Company’s outstanding and unvested stock options previously
      awarded to employees and directors.





The
      purpose of accelerating the vesting of the employees’ and directors’ options was
      to enable the Company to avoid recognizing in its statement of operations
      compensation expense associated with the options in future periods. As a result
      of the acceleration, the Company expects to avoid recognition, on an after
      tax
      basis, of up to approximately $426,000 of compensation expense in its statement
      of operations over the course of the original vesting period, substantially
      all
      of which is expected to be avoided in 2006 and 2007. Such expense is included
      in
      the Company’s proforma stock-based compensation footnote disclosure for the year
      ended December 31, 2005.





A
      summary
      of stock option activity is as follows:





**2005**
            
            2004**Weighted-**
            
            
            
            Weighted-**Average**
            
            
            
            Average**Exercise**
            
            
            
            Exercise**Shares**
            
            **Price**
            
            Shares
            
            PriceOutstanding
                - beginning of period
            
            
            **7,625,000**
            
            $
            1.180
            
            
            5,525,000
            
            $
            0.999Granted
            
            
            **6,042,500**
            
            
            2.713
            
            
            2,600,000
            
            
            1.684Exercised
            
            
            **(701,666**
            **)**
            
            0.070
            
            
            (500,000
            )
            
            1.803Forfeited
            
            
            **(399,000**
            **)**
            
            3.103
            
            
            —
            
            
            —Outstanding
                on December 31
            
            
            **12,566,834**
            
            $
            1.918
            
            
            7,625,000
            
            $
            1.180Exercisable
                on December 31
            
            
            **12,503,500**
            
            $
            1.919
            
            
            7,175,000
            
            $
            1.148






Page
          F-20


**QSGI
          INC. AND SUBSIDIARIES**
 (Continued)


The
      following table summarizes information about the options outstanding at December
      31, 2005:




**Outstanding**
            
            **Exercisable****Stock
                Options**
            
            **Stock
                Options****Weighted-****Average**
            
            **Weighted-**
            
            
            
            **Weighted-****Range
                Of**
            
            
            
            **Remaining**
            
            **Average**
            
            
            
            **Average****Exercise**
            
            
            
            **Contractual**
            
            **Exercise**
            
            
            
            **Exercise****Prices**
            
            **Shares**
            
            **Life**
            
            **Price**
            
            **Shares**
            
            **Price**$
                0.026
            
            
            2,090,000
            
            
            6.1
            
            $
            0.026
            
            
            2,090,000
            
            $
            0.0261.44
                to 1.90
            
            
            2,713,334
            
            
            8.5
            
            
            1.677
            
            
            2,650,000
            
            
            1.6772.00
                to 2.13
            
            
            2,315,000
            
            
            8.7
            
            
            2.008
            
            
            2,315,000
            
            
            2.0082.50
                to 2.75
            
            
            5,025,000
            
            
            8.9
            
            
            2.664
            
            
            5,025,000
            
            
            2.6643.45
                to 3.46
            
            
            423,500
            
            
            5.0
            
            
            3.450
            
            
            423,500
            
            
            3.45012,566,834
            
            
            
            
            
            
            
            
            12,503,500





As
      the
      result of a court decision in 2004, 1,100,000 fully vested options were required
      to be granted to an employee at an exercise price of $1.10 per share. The price
      was $0.25 below the market price of the stock at the date of grant and,
      accordingly, an expense was recorded in 2004 in the amount of
      $275,000.





Additionally,
      400,000 options were issued to employees in 2004 at an exercise price of $1.66
      per share. This was $0.19 below the market price of the stock at the date of
      grant and was being expensed on a straight-line basis over the three year
      vesting life of the options. Expense in the amount of $61,334 and $14,666 was
      recorded in 2005 and 2004, respectively. The expense recognized in 2005 included
      the effects of the acceleration of vesting of these options.





For
      the
      remainder of the options granted in 2004, the exercise price was equal to the
      fair market value at the date of grant, and, accordingly, no compensation cost
      has been recognized under these grants.





**Warrants**




In
      May
      2004, the Company issued 6,000,000 warrants to a group of investors in
      connection with the sale of 6,000,000 shares of common stock. 3,000,000 of
      the
      warrants are exercisable for a period of five years at a price of $1.50 per
      share and 3,000,000 of the warrants are exercisable for a period of five years
      at a price of $3.60 per share. These warrants were valued at $1,521,261, based
      on the relative fair value of the warrants as compared to the common stock
      issued.






Page
          F-21
 
 **QSGI
          INC. AND SUBSIDIARIES**
 (Continued)


In
      October 2004, the Company issued 350,000 warrants with an exercise price of
      $2.00 to certain warrant holders in exchange for their exercise of 500,000
      warrants for which the Company received $750,000. The fair value of the 350,000
      new warrants plus the fair value of the 500,000 warrants with a decreased
      exercise period was less than the fair value of the 500,000 warrants before
      the
      modification. As such, no value was assigned to the new warrants.





In
      December 2005, the Company completed the repurchase and retirement of 4,283,334
      outstanding warrants, including 1,866,667 warrants exercisable at $1.50 per
      share and 2,416,667 warrants exercisable at $3.60 per share. The total purchase
      price for the warrants, including transaction costs, was $1,256,210 in cash.
      These warrants, previously held by an institutional investor, were issued as
      part of the private placement that was completed in May 2004.





A
      schedule of common stock warrant activity is as follows:





**Weighted-****Number**
            
            **Average****Of**
            
            **Exercise****Shares**
            
            **Price**Outstanding
                at December 31, 2003
            
            
            600,000
            
            $
            0.667Warrants
                granted
            
            
            6,350,000
            
            
            2.520Warrants
                exercised
            
            
            (500,000
            )
            
            1.500Outstanding
                at December 31, 2004
            
            
            6,450,000
            
            
            2.426Warrants
                repurchased and cancelled
            
            
            (4,283,334
            )
            
            2.520Warrants
                exercised
            
            
            (1,233,333
            )
            
            0.280Outstanding
                at December 31, 2005
            
            
            933,333
            
            $
            3.000







Page
          F-22
 **QSGI
        INC. AND SUBSIDIARIES**
 Notes
        to
        Consolidated Financial Statements*(Continued)*




The
      following table summarizes information about the warrants outstanding at
      December 31, 2005:




**Outstanding
                Stock Warrants**
            
            **Exercisable
                Warrants****Weighted-****Average**
            
            **Weighted-**
            
            
            
            **Weighted-****Remaining**
            
            **Average**
            
            
            
            **Average****Exercise**
            
            
            
            **Contractual**
            
            **Exercise**
            
            
            
            **Exercise****Prices**
            
            **Number**
            
            **Life**
            
            **Price**
            
            **Shares**
            
            **Price**$
            2.00
            
            
            350,000
            
            
            1.83
            
            $
            1.56
            
            
            350,000
            
            $
            1.563.60
            
            
            583,333
            
            
            3.38
            
            
            3.60
            
            
            583,333
            
            
            3.60933,333
            
            
            
            
            
            
            
            
            933,333








**10.**
            **Income
                Taxes**





The
      provision (benefit) for income taxes consists of the following:





**2005**
            
            2004Current
            
            **$**
            **219**
            
            $
            45,658Deferred
            
            
            **(760,465**
            **)**
            
            37,735**$**
            **(760,246**
            **)**
            $
            83,393









Page
          F-23
 
  **QSGI
          INC. AND SUBSIDIARIES**
 (Continued)


The
      tax
      effects of temporary differences and carryforwards that give rise to significant
      portions of deferred tax assets and liabilities consist of the
      following:





**2005**
            
            2004**Deferred
                Tax Assets**Liabilities
                and reserves
            
            **$**
            **79,779**
            
            $
            68,254Net
                operating loss carryforwards
            
            
            **854,377**
            
            
            228,273Stock
                options
            
            
            **29,640**
            
            
            5,720Inventory
                capitalization
            
            
            **106,205**
            
            
            29,250**1,070,001**
            
            
            331,497**Deferred
                Tax Liabilities**Property
                and equipment
            
            
            **35,445**
            
            
            93,576Prepaid
                expenses
            
            
            **30,317**
            
            
            33,698Patent
                and trademark
            
            
            **8,715**
            
            
            8,913Intangibles
            
            
            **1,120,174**
            
            
            1,243,669**1,194,651**
            
            
            1,379,856**Net
                Deferred Tax Liability**
            
            **$**
            **(124,650**
            **)**
            $
            (1,048,359
            )





The
      current and long-term components of the net deferred tax liability are as
      follows:


**2005**
            
            2004Current
                deferred tax asset
            
            **$**
            **155,668**
            
            $
            67,511Long-term
                deferred tax liability
            
            
            **(280,318**
            **)**
            
            (1,115,870
            )**$**
            **(124,650**
            **)**
            $
            (1,048,359
            )





At
      December 31, 2005, the Company had aggregate net operating loss carryforwards
      of
      approximately $2,136,000 for income tax purposes that expire beginning in
      2022.






Page
          F-24
 
 **QSGI
          INC. AND SUBSIDIARIES**
 (Continued)


The
      reconciliation of the effective tax rate with the statutory federal income
      tax
      benefit rate is as follows:





**2005**
            
            2004Statutory
                federal rate
            
            
            **34**
            **%**
            
            34
            %State
                income taxes, net of federal benefits
            
            
            **2**
            
            
            29Meals
                and entertainment
            
            
            **2**
            
            
            8**38**
            **%**
            
            71
            %





In
      2004,
      the Company reversed the deferred tax asset valuation allowance. This was based
      on the Company’s determination that the deferred tax assets were more likely
      than not realizable in future periods, based on the Company’s projection of
      future taxable income related to its acquisition of QualTech. Because the
      reversal of the valuation allowance was a result of the acquisition of QualTech,
      the offsetting adjustment was recorded in the purchase price allocation of
      the
      QualTech acquisition.








**11.**
            **Concentrations**





**Major
      Customers**




For
      the
      years ended December 31, 2005 and 2004, sales to the Company’s top ten customers
      (including sales to a related party - see Note 14) comprised 37% and 39% of
      revenue, respectively. These customers also comprised 51% and 60% of the
      combined accounts receivable and accounts receivable - related party at December
      31, 2005 and 2004, respectively.





**Purchases**




The
      Company purchases a majority of its products from a small number of suppliers.
      Approximately 17% and 20% of product purchases were from two vendors for the
      years ended December 31, 2005 and 2004, respectively.







Page
          F-25
 
 **QSGI
          INC. AND SUBSIDIARIES**
 (Continued)





**12.**
            **Benefit
                Plan**





The
      Company has a 401(k) defined contribution benefit plan for all eligible
      employees. The Company contributes 3% of eligible employees’ salaries to the
      plan. The Company contributed $59,399 and $47,397 to the plan during the years
      ended December 31, 2005, and 2004, respectively.








**13.**
            **Commitments
                And Contingencies**





**Lease**




The
      Company has two operating leases on New Jersey real property expiring in the
      year 2006. In addition to fixed rentals, the real property lease on one property
      requires the Company to pay all maintenance, real estate taxes and
      insurance.





The
      Company has an operating lease on New Hampshire real property expiring in the
      year 2007.





The
      Company has an operating lease on Minnesota real property expiring in the year
      2009. In addition to fixed rentals, the real property lease requires the Company
      to pay its pro-rata share of all maintenance, real estate taxes, and
      insurance.





The
      Company has an operating lease on New York real property expiring in the year
      2006.





The
      Company has an operating lease on Florida real property expiring in the year
      2007.





The
      Company has an operating lease on equipment expiring in the year
      2007.





Rent
      expense and other charges totaled $621,356 and $305,792 for the years ended
      December 31, 2005 and 2004, respectively.








Page
          F-26
 
 **QSGI
          INC. AND SUBSIDIARIES**
 (Continued)


The
      approximate minimum payments required under these operating leases at December
      31, 2005 are:





**Year**
            
            **Amount**2006
            
            $
            662,0002007
            
            
            391,0002008
            
            
            178,0002009
            
            
            148,000$
            1,379,000





**Environmental**




The
      Company recycles used equipment that may contain hazardous materials. The
      Company contracts with a licensed waste management company for the purpose
      of
      recycling or destruction of these materials in accordance with all applicable
      environmental standards. Therefore, management believes it is not necessary
      to
      record a liability for environmental contingencies in the accompanying financial
      statements.





**Legal
      Proceedings**




The
      Company is party to legal proceedings arising in the ordinary course of
      business. In the opinion of management, these proceedings are not likely to
      have
      a material adverse affect on the financial position, results of operations
      or
      cash flows of the Company. The estimate of potential impact on the Company
      could
      change in the future.








**14.**
            **Related
                Party Transactions**





In
      2005
      and 2004, the Company had sales to two customers related to two stockholders
      and
      officers of the Company. Sales to such customers for the years ended
      December 31, 2005 and 2004 amounted to approximately $857,000 and
      $1,123,000, respectively. Accounts receivable from these customers amounted
      to
      $119,046 at December 31, 2004. No accounts receivable from these customers
      was
      outstanding at December 31, 2005.





In
      2005,
      the Company signed a 24 month lease for a tractor trailer from Varilease
      Technology Finance Group, Inc., a company that is owned by one of the members
      of
      the Board of Directors. Rent expense for this lease amounted to $55,522 for
      the
      year ended December 31, 2005. Accounts payable to this vendor amounted to
      $41,218 at December 31, 2005.






Page
          F-27


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)


**15.**
            **Supplemental
                Cash Flow Information**





During
      2005, the Company issued 85,625 shares of its common stock to settle an accounts
      payable balance with a vendor for $129,500. During 2004, the Company issued
      123,422 shares of its common stock to settle an accounts payable balance with
      a
      vendor for $209,200. During 2004, the Company issued 1,957,831 shares of its
      common stock valued at $3,250,000 as partial payment for the acquisition of
      QualTech.








**16.**
            **Segment
                Information**





As
      a
      result of the acquisition of QualTech, the Company began operating in three
      business segments: Data Security and Compliance, Data Center Hardware, and
      Data
      Center Maintenance. The overall concept that QSGI INC. employs in determining
      its operating segments is to present the results 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.





**Data
      Security And Compliance Segment**




This
      segment provides data security and regulatory compliance services for
      end-of-life business-computing IT assets. The Company offers a variety of
      services to help companies with these assets to ensure compliance with federal
      and state mandates regulating the disposal of such assets. In addition, this
      segment re-sells a wide range of used and refurbished computer products,
      including servers, laptop and desktop computers, monitors, PC processors, CD/DVD
      disk drives, modems, printers and memory.





**Data
      Center Hardware Segment**




This
      segment remarkets refurbished mainframe processors, midrange processors and
      associated peripherals including tape and disk products and connectivity
      products. The Company is one of the leading resellers of refurbished
      enterprise-class hardware and associated peripheral products to companies around
      the world.






Page
          F-28


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)


**Data
      Center Maintenance**




This
      segment provides hardware maintenance services on enterprise-class hardware
      and
      associated peripheral products to companies in the United States.





The
      accounting policies of the operating segments are the same as those described
      in
      the summary of significant accounting policies, with the following exceptions.
      Intersegment sales and transfers are generally accounted for as if the sales
      or
      transfers were to third parties at current market prices. The Data Security
      and
      Compliance segment charges management fees to the Data Center Hardware and
      Data
      Center Maintenance segments for certain corporate services. Management fees
      charged to the Data Center Hardware segment amounted to $480,000 and $280,000
      in
      2005 and 2004, respectively. Management fees charged to the Data Center
      Maintenance segment amounted to $480,000 and $280,000 in 2005 and 2004,
      respectively. These intersegment transactions have been eliminated in
      consolidation.





**2005**
            
            2004**Revenues**Products
            
            **$**
            **33,085,383**
            
            $
            20,605,647Services
            
            
            **3,300,755**
            
            
            1,474,149**Total
                Revenues**
            
            **$**
            **36,386,138**
            
            $
            22,079,796





**Revenues**Data
                Security And Compliance
            
            **$**
            **14,922,002**
            
            $
            10,388,674Data
                Center Hardware
            
            
            **19,790,233**
            
            
            11,155,459Data
                Center Maintenance
            
            
            **3,096,222**
            
            
            1,219,646Intersegment
                Elimination
            
            
            **(1,422,319**
            **)**
            
            (683,983
            )**Consolidated
                Total**
            
            **$**
            **36,386,138**
            
            $
            22,079,796





**Income
                (Loss) Before Provision****(Benefit)
                For Income Taxes**Data
                Security And Compliance
            
            **$**
            **(4,079,144**
            **)**
            $
            (983,059
            )Data
                Center Hardware
            
            
            **1,322,824**
            
            
            1,067,296Data
                Center Maintenance
            
            
            **729,888**
            
            
            33,632**Consolidated
                Total**
            
            **$**
            **(2,026,432**
            **)**
            $
            117,869








Page
          F-29


**QSGI
        INC. AND SUBSIDIARIES**
 (Continued)


**2005**
            
            2004**Depreciation
                And Amortization**Data
                Security And Compliance
            
            **$**
            **186,763**
            
            $
            113,519Data
                Center Hardware
            
            
            **385,820**
            
            
            240,351Data
                Center Maintenance
            
            
            **61,431**
            
            
            37,802**Consolidated
                Total**
            
            **$**
            **634,014**
            
            $
            391,672





**Segment
                Assets**Data
                Security And Compliance
            
            **$**
            **6,925,009**
            
            $
            4,428,937Data
                Center Hardware
            
            
            **10,319,668**
            
            
            9,090,494Data
                Center Maintenance
            
            
            **1,249,236**
            
            
            968,934**Consolidated
                Total**
            
            **$**
            **18,493,913**
            
            $
            14,488,365





**Goodwill**Data
                Security And Compliance
            
            **$**
            —
            
            $
            —Data
                Center Hardware
            
            
            **2,957,193**
            
            
            2,877,544Data
                Center Maintenance
            
            
            **255,121**
            
            
            248,250**Consolidated
                Total**
            
            **$**
            **3,212,314**
            
            $
            3,125,794





**Expenditures
                For Property And****Equipment**Data
                Security And Compliance
            
            **$**
            **285,694**
            
            $
            93,129Data
                Center Hardware
            
            
            **62,842**
            
            
            9,938Data
                Center Maintenance
            
            
            **3,941**
            
            
            103,044**Consolidated
                Total**
            
            **$**
            **352,477**
            
            $
            206,111





**Company
      Data By Geographic Segment**




The
      Company operates solely in the United States and has no assets in foreign
      countries. All of the Company’s purchases and sales are denominated in US
      dollars. The Company has not recorded any foreign currency transaction gains
      or
      losses in 2005 or 2004.





For
      the
      years ended December 31, 2005 and 2004, export sales comprised 7% and 18% of
      revenue, respectively.






Page
          F-30
 
  **QSGI
          INC. AND SUBSIDIARIES**
 (Continued)





Revenue
      by Geographic Segment comprised:





**2005**
            
            2004United
                States
            
            **$**
            **33,893,593**
            
            $
            18,094,977Asia
            
            
            **422,870**
            
            
            983,921Europe
            
            
            **589,690**
            
            
            382,866Africa
            
            
            **42,275**
            
            
            604,686United
                Kingdom
            
            
            **188,067**
            
            
            1,333,544Canada
            
            
            **203,055**
            
            
            506,262Australia
            
            
            **—**
            
            
            63,150South
                America
            
            
            **1,046,588**
            
            
            110,390**Consolidated
                Total**
            
            **$**
            **36,386,138**
            
            $
            22,079,796








Page
      F-31