As
filed with the Securities and Exchange Commission on March 31, 2009


UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-K





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


THE
SECURITIES EXCHANGE ACT OF 1934


For the
fiscal year ended December 31, 2008





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


THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from ________ to ________







Commission
File No.:  001-32620





QSGI
INC.


(Exact
name of 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.)





400
Royal Palm Way, Palm Beach, FL  33480


(Address
of Principal Executive Offices) (Zip Code)





(561)
835-9757


(Registrant's
Telephone Number)




Securities
registered pursuant to Section 12(b) of the Exchange
Act:  None






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






Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x




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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-X ( §229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.x




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




Large
accelerated filer [ ]       Accelerated filer
[ ]        Non-accelerated filer [
]       Small Reporting Companyx







As
filed with the Securities and Exchange Commission on March 31,
2008




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




The
aggregate market value of the common stock held by non-affiliates of the
Registrant as of June 30, 2008 (the business day of the Registrant’s most
recently completed second fiscal quarter), was $9,617,520 (45,797,716 shares x
$0.21 per share).




Number of
shares outstanding of the Registrant’s Common stock, as of March 1, 2009,
is 48,547,716.




A
description of “Documents Incorporated by Reference” is contained in Item 15
Exhibits and Financials Statements.

















Table
      Of
      ContentsItem
              Description
              PagePart
      I1.
              Business
              11A.
              Risk
      Factors
              101B.
              Unresolved
      Staff Comments
              152.
              Property
              153.
              Legal
      Proceedings
              164.
              Submissions
      of Matters to a Vote of Security Holders
              16Part
      II5.
              Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              166.
              Selected
      Financial Data
              207.
              Management’s
      Discussion And Analysis of Financial Condition and Results of
      Operations
              207A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              298.
              Financial
      Statements and Supplementary Data
              299.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              349A(T)
              Controls
      and Procedures
              349B.
              Other
      Information
              35Part
      III10.
              Directors,
      Executive Officers and Corporate Governance
              3511.
              Executive
      Compensation
              3812.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              4513.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              4614.
              Principal
      Accountant Fees and Services
              48Part
      IV15.
              Exhibits,
      Financial Statement Schedules
              49Signatures
              49Financial
      Statements and Exhibits
              50















PARTI






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





Segments





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





A.
            Data
      Center Maintenance





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





B.
            Data
      Center Hardware





We
support our Data Center Maintenance clients' IT hardware needs as well as the IT
needs of companies nationwide through our selling of refurbished
enterprise-class hardware including mainframe processors, midrange processors
and associated peripheral products and replacement parts to
companies.





C.
            Data
      Security and Compliance





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


- Data
erasure to Department of Defense standards for hard drives


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


- IT
asset remarketing for IT assets with market value


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





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





D.
            Network Indrastructure Design
      and Support





2


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




Across
all four 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
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.  We offer:





24/7/365
Call Center capabilities


"Call
Home" feature on hardware


Escalation
planning (customizable)


Industry-leading
field engineers backed by supervisory-level technical support


Comprehensive
inventory of whole systems and critical back-up parts


Upgrades,
features, add-ons in inventory


Preventive
maintenance


Current
patch and EC-level upgrades





Products
we maintain include:


-
            IBM
      mainframe products including z9 BC, z9 EC, z990, z890, z800, z900, 9672(G5
      & G6)


-
            IBM
      midrange products including pSeries, Sun and Hewlett
    Packard


-
            IBM/OEM
      tape storage


-
            IBM/OEM
      disk storage


-
            Hitachi
      Data Systems (HDS) products


-
            SAN
      and Storage maintenance including IBM, EMC and Hitachi Data System
      (HDS)


-
            Tape:
      IBM, Sun/STK 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.


-
            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.  In addition, we have technical coverage and sales offices
in 15 other states including Colorado, Connecticut, Georgia, Illinois, Indiana,
Kansas, Michigan, Missouri, Nebraska, New Jersey, New York, Ohio, Pennsylvania,
South Carolina, Texas and Wyoming.





3


Data
Center Hardware Segment:





We
support our Data Center Maintenance clients' IT hardware needs as well as the IT
needs of companies nationwide through our selling of refurbished
enterprise-class hardware including mainframe processors, midrange processors
and associated peripheral products and replacement parts to
companies.





Our Data Center Hardware group has its
technical facilities in Minnesota.





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.





The
primary services that we offer are:





Data security and regulatory compliance
services:


§
            Auditing
      and Detagging





§
            Erasing of Hard
      Drive


-  Department
      of Defense standard 3x up to 99X hard drive data erasure with
      no  human intervention


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





§
            Tape
      and Hard Drive Degaussing


-  For
      failed or older storage media, QSGI uses (on-site at a client location or
      in our QSGI facility) a DoD grade degaussing machine to permanently
      destroy the storage media.





§
            Regulatory
      Compliance Certification and
Indemnification


-  QSGI,
      through its data security processes, indemnifies our clients for all
      assets we process.  This is to ensure our clients exceed all federal,
      state and local regulatory compliance
statutes.





§
            Real
      Time Extranet Reporting


-  All
      reporting of assets (processed on-site at a client’s location or in our
      QSGI facility) is performed online. Clients have access to each asset
      processed and can track the progress from pick up to final audit and
      erasure.





§
            Remarketing
      and Revenue Sharing Program


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





§
            EPA
      Compliant Recycling


-  All
      assets that need to be recycled are done via EPA approved
      partners.





Reverse Logistics:


§
            Pack
      and ship service


§
            Full
      logistics management





4


Client-Site
Audit & Erasure Solutions:


§
            Eliminating
      any risk even a single data breach that arises during transport from a
      client’s company’s facilities is why QSGI’s full suite of services
      described above, can be provided directly at the client’s facilities. QSGI
      provides all on-site services tailored to the client’s specific needs any
      where in the world regardless of the amount of equipment to be
      processed.  QSGI’s current client-site Data Security &
      Compliance offerings include:





§
            High Volume Solution—
      Mobile Audit & Erasure Vehicle Solution-All assets that need to be
      recycled are done via EPA approved
partners.





§
            Mid Volume Solution—
      Transportable On-Site Server Solution
(OSS)





§
            Low Volume &
      Multiple/Remote Site Solution— Web-Based Or Wan-Deployed Disk Drive
      Erasure Solution as well as QSGI’s
  eraseyourharddrive.com





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.





-
            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.





5


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 and New York, and a sales,
marketing and business development office in Florida.





Network
Infrastructure Design and Support





CCSI
provides service for a full spectrum of technologies from mainframes to PCs,
including network infrastructure, managed services, IP security, IP telephony
and storage solutions.  CCSI maintains Cisco equipment under the OEM's
SmartNet banner as well as it provides it own third party maintenance of Cisco
and other networking hardware under the CCSINet banner.  It has expanded
its hardware maintenance offerings to include 24/7 repair/replacement of
desktops, printers and LAN components. The company later formed a networking
division to provide full-service LAN/WAN design and support
services.





Tied into
its networking and maintenance division, CCSI also maintains one of the most
comprehensive Network Operation Centers (NOC) in the US. This state-of-the
art facility resides within its 30,000 square foot corporate offices in Bohemia,
New York.  The NOC is complemented by a sister site in the United
Kingdom, which belongs to its business alliance partner Affiniti, formerly known
as Kingston Communications (www.kcom.com).





For more
than 30 years it has been providing IT services to a client base of corporations
in the finance, and healthcare industries as well as the public sector, and
education, predominantly focused on East Coast in the Mid-Atlantic
Region.




NETWORK OPERATING CENTER (NOC)
      SERVICES





o
            Fault
      Identification and Performance Analysis on the core infrastructure
      and communication lines as well as analysis on specific network
      devices and/or appliances.


o
            Intrusion
      detection and prevention


o
            Detect
      unusual network behavior


o
            Proactive
      response


o
            Audit
      trails





MAINTENANCE
      SERVICES





o
            Hardware
      Field Service: on-site repair


o
            Network
      Equipment


o
            Mainframe


o
            Server
      & PC /Desktop


o
            Preventative
      Maintenance


o
            Warranty
      Support  & 24 X 7 On-site
Support





NETWORK
      SERVICES





o
            Continuous
      Network Monitoring & Dispatch
24/7




6


o
            Wireless
      voice/data/video


o
            Storage


o
            VPN
      Infrastructure


o
            Network
      design


o
            Project
      Management & Systems
Engineering


o
            Wireless
      Networking


o
            Mainframe
      Services/support


o
            LAN
      / WAN Infrastructure Design and
Support


o
            Voice
      & Unified Network Communications Security
  Services





This
segment provides our corporate, government and educational clients with network
infrastructure services including network design, implementation and monthly
maintenance services on corporations' network hardware and related
infrastructure as well as 24/7 IT monitoring and diagnostics through its North
American Network Operating Center (NOC).





Our
Network Infrastructure Design and Support group has technical facilities in New
York and New Jersey.





Dependence
on Major Customers




With the
exception of some of our hardware maintenance contracts and some of our data
security 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 products or services. At present, we operate primarily in the United States
and have no 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, 2008
and 2007, sales to our top ten customers comprised 27% and 31% of our revenue,
respectively.




A portion
of our revenues is also derived from export sales.  For the years
ended December 31, 2008 and 2007, export sales comprised 11% and 17% 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, 2009, we employed 164 full-time and 7 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.





7





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-K, quarterly reports on Form 10-Q, 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.




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 one of
several EPA certified recyclers.  For a fee, these recyclers manage
commodities and materials for recycling in accordance with applicable local,
state and federal laws, rules and regulations. Upon receipt of materials for
recycling, they 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




Other
Information




On
February 6, 2008, Wells Fargo Bank notified the Company that although the
Company has performed its monetary obligations pursuant to its credit facility,
the Company did not meet certain operating metrics in its credit facility for
the fiscal year ended December 31, 2007.   While Wells Fargo Bank
has indicated to the Company that such an event constitutes a default under the
credit facility, it continues to work with the Company in a cooperative and
constructive manner in order to allow the Company to continue toward meeting the
operating metrics.  As a consequence, Wells Fargo Bank has charged the
Company a fee of $20,000 for maintaining the existing credit facility and
notified the Company that it will amend its borrowing rate to that of the prime
rate plus 2.5%.  Should the Company come back into compliance,
interest will be reduced to the prime rate.




On
June 5, 2008, the Company entered into a Senior Security Purchase Agreement with
Victory Park Capital.  This agreement allows the Company to borrow up
to $10 million to finance both working capital needs and future
acquisitions.  The new facility replaced the Company's $7.5 million
asset based working capital facility with Wells Fargo Bank.  The new
revolving line of credit agreement provides for borrowings limited to the lesser
of $10,000,000 or the borrowing base of 80% of eligible accounts receivable plus
50% of eligible inventory plus 60% of eligible pre-billed service
receivables.  The interest rate per annum charged is the greater of
prime plus seven percent (7.00%) and twelve percent (12.00%).  As of
December 31, 2008, the Company had requested an over advance and as a result was
paying interest at fifteen percent (15%) per annum, with all principal and
interest due December 1, 2010.  We had no availability on the
borrowing base at December 31, 2008. 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.




The
Company incurred $486,250 in origination fees paid to Victory Park Capital,
including the




8


issuance
of 1,125,000 shares of the Company’s common stock.  These fees were
recorded as a reduction of the loan proceeds.  The original issue
discount will be recognized as interest expense on a straight-line basis over
the thirty month term of the financing agreement.  During the yea31,
2008, the Company recognized $130,010 of interest expense related to the
original issue discount, and has $476,240 remaining to be
recognized.  These costs have the effect of making the interest rate
approximately 4% higher than the stated rate for thirty months based on
anticipated future borrowings.




The
Company also signed a Registration Rights Agreement with Victory Park Capital
where upon written request by Victory Park Capital to the Company, the Company
within 45 days shall file a registration statement.  This registration
statement must be declared effective 90 days from the filing
deadline.  The registration statement must remain effective until the
underlying securities are sold.  If the filing deadline, the
effectiveness deadline, or the continued effectiveness requirement is not met,
the Company shall pay Victory Park Capital, in cash, one and one half percent
(1.5%) of the aggregate outstanding principal amount of investor notes until
such filing failures are cured.  The Registration Rights Agreement
does not provide for any limitation as to the maximum potential consideration to
be paid.  At December 31, 2008, the Company has not recorded any
liability for the registration rights payment arrangement as this amount cannot
be determined and no demand by Victory Park Capital has been made.




As part
of the Amended and Restated Securities Purchase Agreement dated July 10, 2008,
750,000 additional shares were due to Victory Park Capital.  The value
of the shares issued was $120,000.  This amount was recorded as
additional debt issuance costs in July 2008 and will be recognized as interest
expense on a straight-line basis over the thirty month term of the financing
agreement.  During the year ended December 31, 2008, the Company
recognized $96,000 of interest expense related to the original issue
discount.  Additionally upon the earlier of December 1, 2010 or the
date of the voluntary prepayment of all Notes due to Victory Park Capital, if
the Company has not issued a total of 2,600,000 shares of common stock to
Victory Park Capital, then the Company shall owe Victory Park Capital the result
of 2,600,000 shares of common stock minus the number of shares of common stock
issued to date multiplied by fifty percent (50%).




Commencing
June 30, 2009, there are certain monthly financial covenants that need to be
met.




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




On
November 17, 2008, the Registrant signed a $750,000 Senior Secured Term Note
(the “Loan”) with Victory Park Credit Opportunities Master Fund, Ltd. (the
“Holder”).  The interest rate on the Note is 20.0% and has a maturity
date of April 16, 2009.  The Loan is secured in accordance with that
certain Pledge and Security Agreement by and between the Company and the Agent,
dated June 5, 2008.  Closing fees and costs were $50,000 plus
2,000,000 shares of Common Stock of the Company that were issued, in accordance
with the Security Purchase Agreement between the Company and Agent dated June 5,
2008, as amended and re-stated.




On
September 24, 2008, the Company's Audit Committee engaged Morison Cogen LLP as
the Company's independent auditors to audit the Company's financial
statements.




9


Item1A.                      Risk
Factors






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 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 twenty nine quarters of
historic quarterly operating results, only five 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




10


effectively,
our business could be seriously harmed.




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




We
operate solely in the United States.  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, 2008 and 2007, our top ten customers accounted for approximately
27% and 31% of our total revenues, respectively. 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.




With the
exception of several of our maintenance contracts and data security contracts,
we do not have any exclusive long-term arrangements with our customers for the
continued sales of our products or services.  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, 2008 and 2007, 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, 2008 and
2007, export sales comprised 11% and 17% of revenue,
respectively.  All of our purchases and sales are denominated in US
dollars.  We had a small call center in India, which we closed in
2007, where we recorded a small currency loss in our selling, general and
administrative expenses.




Although
we are striving to broaden our market focus to include sales to other markets,
both nationally and internationally, 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
many 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.




11


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 FinanceAcquisitions, 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, may not be sufficient to meet our current cash
requirements for at least the next 12 months and may need to raise additional
funds to finance unanticipated working capital requirements or acquire
complementary businesses.  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 or discontinue our operations to reflect the extent of
available funding.




The
Company was unable to meet covenants with its lender in the fourth quarter of
2008, and is considered to be in default of the line-of-credit.  As
the Company is in default, the lender has the right to terminate the agreement,
causing all amounts to become immediately due and payable.




The
Company is pursuing certain options, such as negotiating new terms with its
current lenders or other financial institutions.  However, there can
be no guarantee that the Company would be able to negotiate new
agreements.  Additionally, if the Company is to be successful in
negotiating new or modified agreements, the new or modified agreements may be on
terms that are less favorable to the Company than the current
agreements.




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





12


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.  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;


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


·
            the
      failure of the acquired entity to perform as
  anticipated.




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.




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.  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, Intechra and Tech Turn
      that offer asset management and end-of-life product refurbishment and
      remarketing services;




·
            traditional
      store-based computer retailers, such as Best Buy Co., Inc.,
      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




13


suppliers
as the use of the Internet and other online services increases.  Our
competitors may be able to 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
long term 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
locations.  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 one of the following members of our management team, our overall
operations could be adversely affected.  We consider our key
individuals as of this filing to be:




Name
            PositionMarc
      Sherman
            Chairman,
      Chief Executive Officer, DirectorEdward
      L.
      Cummings
            Chief
      Financial Officer, Treasurer, DirectorDavid
      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




14


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.




Item1B.                      Unresolved
Staff Comments




None




Item2.                        
Properties




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 $183,000, 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.  This lease expires in September 2011.  This
warehouse has sufficient capacity for our current and estimated future business
needs.




This
segment also leases the following space:




1.
            In
      Pleasantville, New York approximately 7,000 square feet of general
      warehouse and office space pursuant to a two-year lease at a current
      annual rental of approximately $70,000.  This facility, with
      approximately 5,000 feet of warehouse space, is in good
      condition.  This lease expires in October
  2009.




2.
            In
      Palm Beach, Florida approximately 2,700 square feet of office space
      pursuant to a five-year lease at a current annual rental of approximately
      $118,000.  This lease expires in March,
  2012.




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 annual rental of approximately
$178,000.  This facility is in good condition and has adequate
capacity for our current and estimated future business needs.  This
lease expires in October 2009.




Our
Network Infrastructure Design and Support segment leases approximately 29,500
square feet of general warehouse and office space in Bohemia, New York pursuant
to a five-year lease at a current annual rental of approximately
$200,000.  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 18,000 feet of warehouse
space, is in good condition and has adequate capacity for our current and
estimated future business needs.  This lease expires in May
2013.  This segment also leases office space in Lyndhurst, NJ pursuant
to a five-year lease at a current annual rental of approximately
$42,000.  In additional to fixed rentals, the real property lease
requires the Company to pay all maintenance, real estate taxes and
insurance.  This facility is in good condition and has adequate
capacity for our current and estimated future business needs.  This
lease expires in May 2013.  This segment also leases office space in
New York, New York pursuant to a one-year lease at a current annual rental of
approximately $43,000.  This facility is in good condition and has
adequate capacity for our current needs.  This lease expires in May,
2009.




15


Item3.                                Legal
Proceedings




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




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




Item4.                              
Submission of Matters to a Vote of Security Holders




There
were no submissions of matters to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 2008.  During
October 2008, a vote of the majority shareholders was held by proxy
vote.  The purpose of the vote was to elect Seth A. Grossman to a
three year term beginning October 1, 2008 and to ratify Morison Cogen LLP as the
Company's Certified Public Accountant for the year ended December 31,
2008.  The Company received a majority of shareholder votes in favor
of electing Seth A. Grossman to a three year term and ratifying Morison Cogen
LLP as the Company's Certified Public Accountant.









PART
II




Item5.                             
Market for Registrant's Common Equity, Related Stockholder matters and Issuer
Purchases of Equity Securities




Market
Information




The
Company’s Common Stock is listed on the OTC Bulletin Board under the symbol
“QSGI.OB.”  Our Common Stock became listed on this exchange on
November 29, 2006.  Prior to that date, our stock was listed on the
ArcaEx exchange under the symbol “QGI.”





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 OTC
Bulletin Board.




Years
      Ended December 31, 2008
                          High
                          
                          LowFirst
      Quarter
                          
                          $
      0.37
                          
                          $
      0.22Second
      Quarter
                          
                          0.30
                          
                          0.18Third
      Quarter
                          
                          0.25
                          
                          0.16




16


Fourth
      Quarter
            
            0.24
            
            0.08Years
      Ended December 31, 2007First
      Quarter
            
            $1.40
            
            $
      0.90Second
      Quarter
            
            0.99
            
            0.62Third
      Quarter
            
            0.88
            
            0.47Fourth
      Quarter
            
            0.59
            
            0.20




Holders




As of
March 1, 2009, there were approximately 1,800 holders of record of the Company’s
Common Stock and the closing price was $0.05.  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.




During
2008, the Company paid or accrued a total of $258,000 in dividends on its
redeemable convertible preferred stock. The 6% dividend is payable quarterly in
cash or additional preferred securities, at the same price as originally issued,
at the Company’s option.  The company chose to pay all 2008 dividends
in cash.




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, 2008, 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
            9,524,834
            $1.469
            5,475,166Equity
      compensation plans not approved by security holders
            3,800,000
            $2.177
            -Total
            13,324,834
            $1.671
            5,475,166




Equity
Compensation Plan not Approved by Security Holders






The
material features of the plan are:




17




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.




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-K.




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, (7) shares issued for funding, and
(8) acquisition shares.




Name/Entity/Nature
                                                                                              Date Issued
                                                                                              Note
                                                                                              Number
      of
                                                                                                Persons
                                                                                              Issued For
                                                                                              Number
      of
                                                                                                Common
                                                                                                SharesMichael
      Weiss
                                                                                              May
      - 04
                                                                                              1
                                                                                              1
                                                                                              Private
      Placement Shares
                                                                                              83,400Odin
      Partners, LP
                                                                                              May
      - 04
                                                                                              1
                                                                                              1
                                                                                              Private
      Placement Shares
                                                                                              116,600Barron
      Partners, LP
                                                                                              May
      - 04
                                                                                              1
                                                                                              1
                                                                                              Private
      Placement Shares
                                                                                              4,833,333Guerilla
      Partners, LP
                                                                                              May
      - 04
                                                                                              1
                                                                                              1
                                                                                              Private
      Placement Shares
                                                                                              716,600Guerilla
      IRA Partners, LP
                                                                                              May
      - 04
                                                                                              1
                                                                                              1
                                                                                              Private
      Placement Shares
                                                                                              83,400Bismark
      Investment
                                                                                              May
      - 04
                                                                                              1
                                                                                              1
                                                                                              Private
      Placement Shares
                                                                                              166,667




18
 
 Name/Entity/Nature
                Date Issued
                Note
                Number
      of
                  Persons
                Issued For
                Number
      of
                  Common
                  Shares


Joel
      Owens
                May
      - 04
                2
                1
                Acquisition
                1,715,911Jolene
      Owens
                May
      - 04
                2
                1
                Acquisition
                241,920Robert
      Jackson
                Nov
      - 04
                3
                1
                Exercise
      of Stock Options
                200,000Carl
      Saracino
                Nov
      - 04
                3
                1
                Exercise
      of Stock Options
                150,000Michael
      Sheerr
                Nov
      - 04
                3
                1
                Exercise
      of Stock Options
                150,000Guerilla
      IRA Partners, LP
                Oct
      - 04
                4
                1
                Exercise
      of Stock Warrants
                41,700Guerilla
      Partners, LP
                Oct
      - 04
                4
                1
                Exercise
      of Stock Warrants
                358,300Odin
      Partners, LP
                Oct
      - 04
                4
                1
                Exercise
      of Stock Warrants
                58,300Michael
      Weiss
                Oct
      - 04
                4
                1
                Exercise
      of Stock Warrants
                41,700Andrew
      T. Trailor
                Jul
      - 04
                5
                1
                Shares
      Issued for Services
                35,140Duncan
      J Farmer
                Jul
      - 04
                5
                1
                Shares
      Issued for Services
                35,141Alan
      Burger
                Jul
      - 04
                5
                1
                Shares
      Issued for Services
                35,141Andrew
      T. Trailor
                Dec
      - 04
                5
                1
                Shares
      Issued for Services
                6,000Alan
      Burger and Dana
                  Burger,
      Joint Tenants
                Dec
      - 04
                5
                2
                Shares
      Issued for Services
                6,000Duncan
      J Farmer
                Dec
      - 04
                5
                1
                Shares
      Issued for Services
                6,000Lois
      Rosenberg
                Jan
      - 05
                3
                1
                Exercise
      of Stock Options
                125,000Robert
      Jackson
                Jan
      - 05
                3
                1
                Exercise
      of Stock Options
                75,000David
      A. Loppert
                Jan
      - 05
                3
                1
                Exercise
      of Stock Options
                375,000Brian
      Cockerham
                Feb
      - 05
                3
                1
                Exercise
      of Stock Options
                10,000Eleanor
      Macdonald
                Feb
      - 05
                3
                1
                Exercise
      of Stock Options
                25,000Wayne
      Neuls
                Feb
      - 05
                3
                1
                Exercise
      of Stock Options
                25,000Louis
      Nuccio
                Feb
      - 05
                3
                1
                Exercise
      of Stock Options
                50,000Jack
      Tull
                Feb
      - 05
                3
                1
                Exercise
      of Stock Options
                10,000David
      A. Loppert
                Mar
      - 05
                3
                1
                Exercise
      of Stock Options
                1,100,000David
      Rubin
                Aug
      - 05
                3
                1
                Exercise
      of Stock Options
                6,666Dominick
      & Dominick
                Mar
      - 05
                4
                1
                Exercise
      of Stock Warrants
                400,000Paul
      Lee Newman
                Mar
      - 05
                4
                1
                Exercise
      of Stock Warrants
                100,000Bismark
      Intervest
                Apr
      - 05
                4
                1
                Exercise
      of Stock Warrants
                183,333Barron
      Partners
                Apr
      - 05
                4
                1
                Exercise
      of Stock Warrants
                550,000Alan
      Burger and Dana
                  Burger,
      Joint Tenants
                Dec
      - 05
                5
                2
                Shares
      Issued for Services
                51,375Duncan
      J. Farmer
                Dec
      - 05
                5
                1
                Shares
      Issued for Services
                34,250Michael
      Sheerr
                Jan
      - 06
                3
                1
                Exercise
      of Stock Options
                100,000John
      W. Heilshorn
                Feb
      - 06
                5
                1
                Shares
      Issued for Services
                24,000Keith
      L. Lippert
                Feb
      - 06
                5
                1
                Shares
      Issued for Services
                24,000Whitmer
      & Worrall, LLC
                Mar
      - 06
                5
                1
                Shares
      Issued for Services
                40,540Michael
      Sheerr
                Mar
      - 06
                3
                1
                Exercise
      of Stock Options
                250,000Joel
      Owens
                Jun
      - 06
                6
                1
                Acquisition
                2,063,545Victory
      Park Credit Opportunities Master Fund
                Jun
      - 08
                7
                1
                Shares
      Issued for Funding
                1,875,000John
      S. Riconda
                Jun
      - 08
                8
                1
                Acquisition
                13,500,000Victory
      Park Credit Opportunities Master Fund
                Jun
      - 08
                7
                1
                Shares
      Issued for Funding
                2,000,000




1.
                              
                              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




19


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.2.
            
            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.3.
            
            Represents
      shares issued in connection with the exercise of common stock
      options.4.
            
            Represents
      shares issued in connection with the exercise of common stock
      warrants.5.
            
            Represents
      shares issued for services rendered.6.
            
            Represents
      shares used in connection with the payment of additional merger
      consideration that was due in conjunction with the acquisition of Qualtech
      International Corporation and Affiliate, valued at $1.66 per
      share.7.
            
            Represents
      shares issued that were issued as part of the Securities Purchase
      Agreement between the Company and Victory Park Credit Opportunities Master
      Fund, Ltd.8.
            
            Represents
      contingent shares that were part of the acquisition of CCSI Inc. that are
      being held in escrow to be released as the CCSI Inc. meets certain
      financial milestones.




Item6.
            Selected
      Financial Data




The
Company qualifies as a smaller reporting company and is not required to provide
the information required by this item.




Item7.
            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 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




20


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







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, 2008 and 2007.




Year
      Ended
              Year
      EndedDecember
      31, 2008
              December
      31, 2007%
              %Product
      Revenue
              57.9
              80.9Service
      Revenue
              42.1
              19.1Total
      Revenue
              100.0
              100.0Cost
      of Products Sold
              55.9
              68.5Cost
      of Services Sold
              22.2
              6.8Cost
      of sales
              78.1
              75.3Gross
      profit
              21.9
              24.7Selling,
      general and administrative expenses
              32.2
              26.6Goodwill
      and asset impairment
              -
              19.4Depreciation
      and amortization
              2.1
              1.9Interest
      expense
              4.2
              1.1Loss
      before provision (benefit) for income taxes
              (16.6)
              (24.3)Provision
      (benefit) for income taxes
              -
              0.6Net
      loss
              (16.6)
              (24.9)




Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007




Revenue
for the year ended December 31, 2008 was $34,150,900 compared to revenue of
$37,221,110 for the year ended December 31, 2007, a $3,070,210 decrease, or
8.3%.  We had a decrease in revenues as the result of a sharp decline
in revenues at our Data Center Hardware segment.  This, in part, was
due to what the Company believes to be anti-competitive practices by a leading
OEM.  These practices have significantly impacted the entire industry
for remarketing zSeries mainframe systems and,




21


since
implemented during the third quarter of 2007, have had a substantial, adverse
financial impact on the Data Center Hardware segment.  We also
experienced a decrease in revenues in our Data Security and Compliance segment
as a result of a decrease in the flow of wholesale OEM remarketing product as
the Company stopped speculating on inventory and instead, only purchased product
where we had a buyer in place.  We concentrated on our fee based
business where our customers use our full suite of services.  During
the third quarter, we started doing business with a new customer in our Data
Security and Compliance segment that has accounted for 9.2% of our yearly
revenues.  This customer remarkets our product through their website,
direct mailings, and email.  During the second quarter, we completed
the acquisition of CCSI.  This acquisition along with the double digit
organic growth within the Data Center Maintenance segment and double digit
organic growth within the services revenue within the Data Security and
Compliance segment helped to offset some of the declines in revenues. This
acquisition along with the double digit organic growth within the Data Center
Maintenance segment and double digit organic growth of the service revenue
within the Data Security and Compliance segment helped to offset some of the
declines in revenues.




Our
revenues categorized by products and services are as follows:


Year
      Ended
              Year
      EndedDecember
      31, 2008
              December
      31, 2007RevenueProducts
              $
      19,768,862
              $
      30,126,257Services
              14,382,038
              7,094,853Total
      Revenue
              $
      34,150,900
              $
      37,221,110




Our
revenue by geographic segment is as follows:




Years
      Ended December 31,
                2008
                %
                2007
                %
                Change
                %
                  ChangeUnited
      States
                
                $30,253,279
                89%
                $31,028,368
                83%
                $  (775,089)
                (2%)Asia
                
                1,872,359
                5%
                1,394,935
                4%
                477,424
                34%Europe
                
                209,506
                1%
                478,557
                1%
                (269,051)
                (56%)Africa
                
                410,412
                1%
                593,044
                2%
                (182,632)
                (31%)United
      Kingdom
                
                97,557
                --
                485,478
                1%
                (387,921)
                (80%)Canada
                
                517,615
                2%
                556,392
                2%
                (38,777)
                (7%)Middle
      East
                
                706,630
                2%
                2,404,862
                6%
                (1,698,232)
                (71%)Australia
                
                14,330
                --
                --
                --
                14,330
                (100%)South
      America
                
                69,212
                --
                279,474
                1%
                (210,262)
                (75%)Total
                
                $34,150,900
                100%
                $37,221,110
                100%
                $(3,070,210)
                (8%)







We
operate primarily in the United States and have minimal assets in foreign
countries.  However, we sell to customers in foreign
countries.  For the years ended December 31, 2008 and 2007, export
sales comprised approximately 11% and 17% of revenue,
respectively.  All of our purchases and sales are denominated in US
dollars.  We had a small call center in India which we closed in 2007
where we recorded a small currency loss in our selling, general and
administrative expenses.




Gross
profit for the year ended December 31, 2008 was $7,479,977 compared to a gross
profit of $9,178,441 for the year ended December 31, 2007, a $1,698,464
decrease, or 18.5%.  Gross margin was




22


21.9% for
the year ended December 31, 2008 compared to 24.7% for the year ended December
31, 2007.  Gross profit and margins decreased from 2007 as the result
of the onerous restrictions instituted during the third quarter of 2007 by a
major OEM restricting our ability to reconfigure and remarket Z series mainframe
computer equipment as we were forced to sell product in inventory at a loss to
generate cash.  Gross profit and margins were also affected as we
increased our inventory reserves over prior year by approximately
$848,000.




The
overall management of computer equipment throughout its life cycle represents a
growing burden on companies.  The continual growth of liability
concerns associated with IT assets and the compliance with relatively new
government legislation is what is going to have the biggest impact on the
Company’s future revenues.  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, 2008, were
$10,983,302 compared to selling, general and administrative expenses of
$9,905,064 for the year ended December 31, 2007, a $1,078,238 increase, or
10.9%.  Selling, general and administrative expense increase was
mainly due to the expenses incurred by our acquisition CCSI during the second
quarter of 2008.




Depreciation
and amortization for the year ended December 31, 2008, was $727,581 compared to
depreciation and amortization of $702,310 for the year ended December 31, 2007,
a $25,271 increase, or 3.6%.  This increase was the result of
amortization of intangibles as the result of assets acquired in the acquisition
of CCSI and the amortization of a 2007 small asset purchase.




Interest
expense for the year ended December 31, 2008, was $1,432,065 compared to
interest expense of $396,417 for the year ended December 31, 2007, a $1,035,648
increase, or 261.3%, commensurate with an increase in the Company’s borrowings
and an increase in interest rates during 2008.




The
Company recorded a federal tax benefit for the year ended December 31, 2008 and
a tax expense for the year ended December 31, 2007.  At December 31,
2008, the Company did not recognize a deferred tax benefit as it increased its
deferred tax asset valuation allowance to be 100% of the Company's deferred tax
assets.  The tax amount is adjusted by estimated state tax obligations
in jurisdictions where the Company cannot file a consolidated income tax
return.






Segments





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





Data
Center Maintenance





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





Data
Center Hardware





We
support our Data Center Maintenance clients' IT hardware needs as well as the IT
needs of




23


companies
nationwide through our selling of refurbished enterprise-class hardware
including mainframe processors, midrange processors and associated peripheral
products and replacement parts to companies.





Data
Security & Compliance





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


- Data
erasure to Department Of Defense standards for hard drives


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


- IT
asset remarketing for IT assets with market value


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





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





Network
Infrastructure Design and Support





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





Our
revenues for the years ended December 31, 2008 and 2007 generated by each
division are as follows:




2008
                
                2007RevenuesData Security And
      Compliance
                $
      17,516,751
                
                $
      20,741,618Data Center
      Hardware
                2,280,855
                
                11,100,092Data Center
      Maintenance
                7,052,583
                
                6,264,981Network Infrastructure Design
      and Support
                7,490,939
                
                --Intersegment
      Elimination
                (190,228)
                
                (885,581)Consolidated
    Total
                $
      34,150,900
                
                $
      37,221,110








24


Data
Center Maintenance Segment





Year
      Ended
              
              Year
      EndedDecember
      31, 2008
              
              December
      31, 2007Revenue
              $
      7,052,583
              
              $
      6,264,981Gross
      Profit
              3,775,924
              
              4,021,823Selling,
      General and Administration
              3,028,088
              
              2,739,891Depreciation
      and Amortization
              3,880
              
              59,308Income
      Before Provisionfor
      Income Taxes
              743,876
              
              1,222,624Segment
      Assets
              2,725,538
              
              3,559,629Goodwill
              1,489,621
              
              1,489,621Expenditures
      for Property andEquipment
              1,675
              
              -




Revenue
for the year ended December 31, 2008 was $7,052,583 compared to revenue of
$6,264,981 for the year ended December 31, 2007, a $787,602 increase, or
12.6%.  Revenue for the year ended included product revenue of
$563,241 as we sold some product to support our maintenance
customers.  Revenues also increased as the result of signing
additional service contracts with new and existing customers this year as well
as new contracts that were signed last year.  These contracts are
generally one to three years terms.




Gross
profit for the year ended December 31, 2008 was $3,775,924 compared to gross
profit of $4,021,823 for the year ended December 31, 2007, a $245,899 decrease,
or 6.1%.  Gross margin in our Data Center Maintenance segment for the
year ended December 31, 2008 was 53.5% of revenue compared to 64.2% of revenue
for the year ended December 31, 2007.  Gross profit decreased as we
added additional technical personnel to handle new customers and additional
maintenance work in pSeries, tape and disk and storage units each of which carry
a lower gross margin percentage than our traditional zSeries mainframe
work.  During 2008, we increased our inventory reserves by
$132,000.  In the second quarter we sold product to support our
maintenance customers.  Without the sale of product where our profit
was minimal, our gross margins for the year ended December 31, 2008 would have
been 58%.




Selling,
general and administrative expenses for the year ended December 31, 2008 were
$3,028,088 compared to selling, general and administrative expenses of
$2,739,891 for the year ended December 31, 2007, a $288,197 increase or
10.5%.  This increase was mainly the result of an increase in the
allocation of the corporate overhead charge.




Depreciation
and amortization for the year ended December 31, 2008 was $3,880 compared to
depreciation and amortization of $59,308 for the year ended December 31, 2007, a
$55,428 decrease, or 93.5%.  This was the result of some of our assets
becoming fully depreciated during 2007.





Data
Center Hardware Segment





Year
      Ended
              
              Year
      EndedDecember
      31, 2008
              
              December
      31, 2007Revenue
              $
      2,280,855
              
              $
      11,100,092Gross
      Profit
              (356,527)
              
              2,341,091Selling,
      General and Administration
              966,103
              
              1,999,516Depreciation
      and Amortization
              15,470
              
              343,347Income
      (Loss) Before Provision(Benefit)
      for Income Taxes
              (1,338,100)
              
              (7,208,456)Segment
      Assets
              373,536
              
              1,264,945Goodwill
              -
              
              -Expenditures
      for Property andEquipment
              11,507
              
              21,631







25


Revenue
for the year ended December 31, 2008 was $2,280,855 compared to revenue of
$11,100,092 for the year ended December 31, 2007, an $8,819,237 decrease, or
79.5%.  Revenues decreased substantially due to onerous restrictions
instituted during the 3rd quarter of 2007 by a major OEM restricting our ability
to reconfigure and remarket zSeries mainframe computer
equipment.  These restrictions since their inception have had an
adverse financial impact on the Data Center Hardware segment, as well as the
Company.




Gross
profit for the year ended December 31, 2008 was $(356,527) compared to gross
profit of $2,341,091 for the year ended December 31, 2007, a $2,697,618
decrease, or 115.2%.  Gross margin in our Data Center Hardware segment
for the year ended December 31, 2008 was (15.6%) of revenue compared to 21.1% of
revenue for the year ended December 31, 2007.  This decrease was the
result of the aforementioned OEM policy change.




Selling,
general and administrative expenses for the year ended December 31, 2008 were
$966,103 compared to selling, general and administrative expenses of $1,999,516
for the year ended December 31, 2007, a $1,033,413 decrease, or
51.7%.  The decrease was mainly the result of the restructuring that
took place during the fourth quarter of 2007 caused by the OEM policy change
described above.




Depreciation
and amortization for the year ended December 31, 2008 was $15,470 compared to
depreciation and amortization of $343,347 for the year ended December 31, 2007,
a $327,877 decrease, or 95.5%.  This was the result of the reduction
in intangible assets that were impaired and written off at December 31,
2007.





Data
Security & Compliance Segment




Year
      Ended
              
              Year
      EndedDecember
      31, 2008
              
              December
      31, 2007Revenue
              $
      17,516,751
              
              $
      20,741,618Gross
      Profit
              1,723,520
              
              2,815,527Selling,
      General and Administration
              4,658,980
              
              5,165,657Depreciation
      and Amortization
              622,183
              
              299,655Loss
      Before Benefitfor
      Income Taxes
              (4,478,191)
              
              (3,046,216)Segment
      Assets
              7,728,562
              
              8,592,896Goodwill
              -
              
              -Expenditures
      for Property andEquipment
              72,202
              
              190,082




26


Revenue
for the year ended December 31, 2008 was $17,516,751 compared to revenue of
$20,741,618 for the year ended December 31, 2007, a $3,224,867 decrease or
15.5%.  Revenues decreased as a result of a decrease in our wholesale
remarketing revenue due to a decrease in the flow of wholesale remarketing
product as the Company stopped speculating on inventory and instead, only
purchased product where we had a buyer in place.  We concentrated on
our fee based business where our customers use our full suite of
services.  During the third quarter, we started doing business with a
new customer that has accounted for 9.2% of the Company's revenue.




Gross
profit for the year ended December 31, 2008 was $1,723,520 compared to gross
profit of $2,815,527 for the year ended December 31, 2007, a $1,092,007 decrease
or 38.8%.  Gross margin for the year ended December 31, 2008 was 9.8%
compared to 13.6% for the year ended December 31, 2007.  This decrease
was caused by an increase in inventory reserves of $200,000 and lower revenues
which resulted in lower available gross profit dollars to cover our semi-fixed
cost of goods sold.




Selling,
general and administrative expense for the year ended December 31, 2008 was
$4,658,980 compared to selling, general and administrative expense of $5,165,657
for the year ended December 31, 2007, a $506,677 decrease or
9.8%.  This decrease was mainly due to an increase in the amount of
overhead that was absorbed by the other segments.




Depreciation
and amortization for the year ended December 31, 2008 was $622,183 compared to
depreciation of $299,655 for the year ended December 31, 2007, a $322,528
increase or 107.6%.  This was mainly caused by the write-off of
deferred loan costs associated with changing lenders and increased amortization
intangibles as the result of assets acquired in the acquisition of CCSI and a
full year of amortization from a small asset purchase completed in July
2007.





Network
Infrastructure Design and Support





Year
      Ended
              
              Year
      EndedDecember
      31, 2008
              
              December
      31, 2007Revenue
              $
      7,490,939
              
              -Gross
      Profit
              2,337,060
              
              -Selling,
      General and Administration
              2,330,132
              
              -Depreciation
      and Amortization
              86,048
              
              -Interest
      Expense, Net
              511,436
              
              -Income
      (Loss) Before Provision(Benefit)
      for Income Taxes
              (590,555)
              
              -Segment
      Assets
              14,487,806
              
              -Goodwill
              6,445,006
              
              -Expenditures
      for Property and
              
              
              -Equipment
              529,056
              
              -





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







27


Liquidity
and Capital Resources




Our
current ratios at December 31, 2008 and December 31, 2007 were 0.91 to 1 and 1.7
to 1, respectively.  Working capital at December 31, 2008 was
$(1,016,233) compared to $4,363,914 at December 31, 2007.  Working
capital at December 31, 2008 decreased due to financing the operations of the
company, an increase in accounts payable and accrued expenses and a decrease in
inventory.  This was offset by an increase in accounts
receivable.




Net cash
used in operating activities for the year ended December 31, 2008 was $1,574,569
compared to $234,828 of cash provided by operating activities for the year ended
December 31, 2007.  Cash used in operating activities for the year
ended December 31, 2008 was primarily a result of an increase in accounts
receivable, an increase in prepaid expenses and the net loss.  This
was offset by a decrease in inventory and an increase in accounts payable,
accrued expenses and other liabilities.   Inventory decreased due
to a decrease in the inventory in transit and an increase in our inventory
allowance.  Cash provided by operating activities for the year ended
December 31, 2007 was primarily a result of a decrease in accounts receivable,
mainly attributable to the decrease in revenues in our Data Center Hardware
segment.  This was offset by an increase in inventory, a decrease in
accounts payable, accrued expenses and other liabilities and the net
loss.  Inventory increased due to new product purchases and an
increase in parts needed to support our maintenance contracts.




Net cash
used in investing activities for the years ended December 31, 2008 and 2007 was
$44,550 and $192,462, respectively.  For the year ended December 31,
2008, cash was used for the purchase of property and equipment and the cost of
the acquisition.  This was offset by cash provided from the
acquisition.  For the year ended December 31, 2007, cash was used for
the purchase of property and equipment and advances for notes receivable, offset
by the proceeds from the sale of property and equipment and the collections on
notes receivable.




Net cash
provided by financing activities for the year ended December 31, 2008 was
$1,765,546.  Net cash used in financing activities for the years ended
December 31, 2007 was $547,591.  For the year ended December 31, 2008,
net cash was provided by net amounts borrowed under the current revolving line
of credit, reduced by net amounts paid under previous revolving lines of credit,
preferred stock dividends and payments for financing costs.  For the
year ended December 31, 2007, net cash was used to pay for loan financing costs,
preferred stock dividends and to reduce the revolving line of
credit.




On June
5, 2008, the Company entered into a Senior Security Purchase Agreement with
Victory Park Capital.  This agreement allows the Company to borrow up
to $10 million to finance both working capital needs and future
acquisitions.  The new facility replaced the Company's $7.5 million
asset based working capital facility with Wells Fargo Bank.  The new
revolving line of credit agreement provides for borrowings limited to the lesser
of $10,000,000 or the borrowing base of 80% of eligible accounts receivable plus
50% of eligible inventory plus 60% of eligible pre-billed service
receivables.  The interest rate per annum charged is the greater of
prime plus seven percent (7.00%) and twelve percent (12.00%).  As of
December 31, 2008, the Company had requested an over advance and as a result was
paying interest at fifteen percent (15%) per annum, with all principal and
interest due December 1, 2010.  We had no availability on the
borrowing base at December 31, 2008.





On
November 17, 2008, the Registrant signed a $750,000 Senior Secured Term Note
(the “Loan”) with Victory Park Credit Opportunities Master Fund, Ltd. (the
“Holder”).  The interest rate on the Note is 20.0% and has a maturity
date of April 16, 2009.  The Loan is secured in accordance with that
certain Pledge and Security Agreement by and between the Company and the Agent,
dated June 5, 2008.  Closing fees and costs were $50,000 plus
2,000,000 shares of Common Stock of the Company that were issued, in accordance
with the Security Purchase Agreement between the Company and Agent dated June 5,
2008, as amended and re-stated.





28


As of
December 31, 2008, the Company was not in compliance with the covenants as they
were originally set in the Amended and Restated Securities Purchase
Agreement.  As a result, the Company signed a Second Amendment to
Amended and Restated Securities Purchase Agreement.  This Amendment
waived the December 31, 2008 violation and amended the financial
covenants.  The amended financial covenants will take effect
commencing June 30, 2009.  The new financial covenants that need to be
met are as follows:




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





We
believe that the anticipated cash flow from operations and current financing
arrangements in 2008 will be sufficient to meet our cash requirements for at
least the next 12 months.  However, we may need to raise additional
funds to finance unanticipated working capital requirements or to acquire
complementary businesses.




We do not
have any material commitments for capital expenditures nor do we expect to incur
any material commitments for capital expenses during 2008.




We did
not have any significant elements of income or loss not arising from continuing
operations in 2008 or 2007 and do not expect any in 2009.  While our
business is marginally seasonal, we do not expect this seasonality to have a
material adverse effect on our results of operations or cash flows.




Off-Balance
Sheet Arrangements




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






Item7A.            
Quantitative and Qualitative Disclosures About Market Risk




The
Company qualifies as a smaller reporting company and is not required to provide
the information required by this item.




Item8.              
Financial
Statements AND Supplementary Data




Our financial statements included in
this Annual Report on Form 10-K are listed in Item 13 and begin immediately
after Item 14 on pages F-1 through F-42.




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.




29


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 8.




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 its 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 approximately 4% of Company’s sales that are covered under this
warranty are returned to the Company.  The Company has alternative
methods to sell the returned 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, 2008 and
2007.  Therefore, no warranty reserve has been
recorded.  Should a reserve be recorded, it would increase both cost
of sales and accrued expenses.  The Company has however set up a sales
returns and allowances reserve of $18,000.  This account is reviewed
quarterly and any additional reserve would decrease sales and increase the
reserve.




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 collectability of accounts receivable on an
account by account basis, with a reserve set up 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
resalable.  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.




The
Company accounts for stock-based employee compensation awards using a fair value
method and records such expense in the consolidated financial statements in
accordance with the provisions of the Statement of Financial Accounting
Standards (SFAS) No. 123R, Share Based Payment that was issued by the
FASB.




The
Company in accordance with the SFAS No. 142, Goodwill and Other Intangible
Assets, performs impairment tests in the fourth quarter of each
year.  As of December 31, 2008, the Company performed impairment tests
and determined that the carrying values of such assets were not impaired as




30


of that
date.  As a result of the impairment test performed at December 31,
2007, the Company determined that the carrying value of goodwill and intangibles
was impaired and recorded an impairment charge of $7,206,698.  Of this
amount $5,154,782 was for goodwill impairment and $2,051,916 was for intangible
impairment.  These impairment charges were all associated with the
Data Center Hardware reporting unit.  This impairment was caused by
what the Company believes to be anti-competitive practices by a leading
OEM.  These practices have significantly impacted the entire industry
for remarketing zSeries mainframe systems and, since implemented during the
third quarter, have had a substantial, adverse financial impact on the Data
Center Hardware segment.




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.




Impact
Of Recently Issued Accounting Standards





RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS





SFAS No.
157 – Fair Value Measurements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.
157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FSP No. SFAS 157-2,
Effective Date of FASB Statement No. 157, which provides a one-year deferral of
the effective date of SFAS No. 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore the Company has adopted
the provisions of SFAS No. 157 with respect to its financial assets and
liabilities only. However, the Company does not anticipate that the full
adoption of SFAS 157 will significantly impact their consolidated financial
statements.





SFAS No.
159 – The Fair Value Option for Financial Assets and Financial
Liabilities





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company adopted SFAS No. 159 on January
1, 2008, and did not elect the fair value option for any of its assets or
liabilities.




SFAS No.
162 – The Hierarchy of Generally Accepted Accounting
Principles





31


In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The
Hierarchy of Generally Accepted Accounting Principles (“FAS 162"). This Standard
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles. FAS 162 directs the hierarchy to the entity,
rather than the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with generally accepted accounting principles. Effective November 15, 2008, the
Company adopted SFAS No. 162, which did not have any impact on the Company’s
financial statements.





RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED




SFAS No.
141R – Business Combinations




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. This statement
is effective for the Company beginning January 1, 2009 and will change the
accounting for business combinations on a prospective basis.





SFAS No.
160 – Non-controlling interest in Consolidated Financial
Statements




On
December 4, 2007, the FASB issued SFAS No. 160, Non-controlling interest in
Consolidated Financial Statements (SFAS No. 160).  SFAS No. 160
requires all entities to report non-controlling (minority) interests in
subsidiaries as equity in the consolidated financial statements. The statement
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation and expands
disclosures in the consolidated financial statements. SFAS No. 160 is effective
for fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years.  The Company has not yet determined the impact of
the adoption of SFAS No. 160 on its consolidated financial statements and
footnote disclosures.




SFAS No.
161 – Disclosures about Derivative Instruments and Hedging




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, which is effective January 1, 2009. SFAS 161 requires
enhanced disclosures about derivative instruments and hedging activities to
allow for a better understanding of their effects on an entity’s financial
position, financial performance, and cash flows. Among other things, SFAS 161
requires disclosures of the fair values of derivative instruments and associated
gains and losses in a tabular formant. SFAS 161 is not currently applicable to
the Company since the Company does not have derivative instruments or hedging
activity.





FSA 142-3
– Determination of the Useful Life of Intangible Assets





In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. This Staff Position is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
Company is currently evaluating the impact that FSP No. 142-3 will have on its
consolidated financial statements.





32


EITF
03-6-1 – Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities





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





APB 14-1
– Accounting for Convertible Debt That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (“FSP 14-1”)





In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for
Convertible Debt That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) ("FSP 14-1"). FSP 14-1 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008. The FSP
includes guidance that convertible debt instruments that may be settled in cash
upon conversion should be separated between the liability and equity components,
with each component being accounted for in a manner that will reflect the
entity's nonconvertible debt borrowing rate when interest costs are recognized
in subsequent periods. FSP 14-1 is currently not applicable to the Company since
the Company does not have any convertible debt.





EITF
07-05 – Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock





In June
2008, the FASB issued EITF Issue No. 07-05, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF Issue No.
07-05”) which is effective for financial statements for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years.  The Issue addresses the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which is the first
part of the scope exception in Paragraph 11(a) of SFAS No. 133 for the purpose
of determining whether the instrument is classified as an equity instrument or
accounted for as a derivative instrument which would be recognized either as an
asset or liability and measured at fair value.  The guidance shall be
applied to outstanding instruments as of the beginning of the fiscal year in
which this Issue is initially applied.  Any debt discount that was
recognized when the conversion option was initially bifurcated from the
convertible debt instrument shall continue to be amortized.  The
cumulative effect of the change in accounting principles shall be recognized as
an adjustment to the opening balance of retained earnings.  The
Company is currently evaluating the impact of EITF Issue No. 07-05 on its
consolidated financial statements and footnote disclosure.




As a
result of the implementation of FIN 48, the Company recognized an increase of
$38,000 in the liability for income taxes and accrued interest, of which $3,000
related to accrued interest.  This was accounted for as a reduction to
the January 1, 2007 balance of retained earnings.  Including the
cumulative effect increase on January 1, 2007, the Company had $368,000 of
unrecognized tax benefits




33


of which
$35,000 would affect the effective tax rate if recognized.  Following
implementation, the ongoing recognition of changes in measurement of uncertain
tax positions as well as interest and penalties related to unrecognized tax
benefits will be reflected as a component of income tax expense.




Item9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure




None




Item9A (T).
            Controls
      and procedures




Evaluation of Disclosure Controls and
Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods required by the Securities and
Exchange Commission, including, without limitation, those controls and
procedures designed to ensure that such information is accumulated and
communicated to our management to allow timely decisions regarding required
disclosures.




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have conducted an evaluation
of the effectiveness of the design and operation 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, 2008.  Based upon this evaluation our
management, including our Chief Executive Officer and Chief Financial Officer,
has concluded that our disclosure controls and procedures as of the end of the
period covered by this report were not effective, due to the material weaknesses
in internal control over financial reporting described below, at the reasonable
assurance level such that the information required to be disclosed by us in
reports filed under the Exchange Act is (i) recorded, processed, summarized
and reported within the time periods specified in the rules and forms of
the Securities and Exchange Commission and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls system cannot provide absolute
assurance, however, that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been
detected.




Management's
Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United
States.




However,
because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.  Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that internal controls may become inadequate because of changes in conditions,
or the degree of compliance with policies may vary.




34




Our
management, with the participation of the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Company's internal control
over financial reporting as of December 31, 2008. In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework. Based on this evaluation, our management,
with the participation of the Chief Executive Officer and Chief Financial
Officer, concluded that, as of December 31, 2008, our internal control over
financial reporting was effective based on those criteria.




Our Board
of Directors were advised by Morison Cogen LLP., our independent registered
public accounting firm, that during their performance of the audit for the year
ended December 31, 2008, they did not identify any material weaknesses in our
internal control over financial reporting.




No
Attestation of Registered Public Accounting Firm




This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.






Item9B.
            Other
      Information




None




Part
III




Item10.
            Directors,
      Executive Officers, and Corporate
Governance




AS
of March 1, 2009, Our Directors and Executive Officers are:




Name
            Age
            PositionMarc
      Sherman
            45
            Chairman,
      Chief Executive Officer, DirectorSeth
      A. Grossman  (1)(2)
            43
            President,
      Chief Operating Officer, DirectorEdward
      L. Cummings
            60
            Chief
      Financial Officer, Treasurer, DirectorDavid
      Harris
            46
            Vice
      President, Information Technology and SystemsR.
      Keith Elliott (3)
            67
            DirectorRobert
      W. VanHellemont
            63
            DirectorGeoffrey
      A. Smith
            51
            Director(1)
      Resigned from Board on March 7, 2009(2)
      Employment ended March 9, 2009(3)
      Resigned from Board on February 27, 2009




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 2009 annual meeting. Mr.
Sherman served




35


as a
director of and Chief Executive Officer 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
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.




Seth A. Grossmanwas hired on
March 14, 2005 as the President and Chief Operating Officer.He hadjoined the Board of
Directors in November 2003.  He resigned from the Board of Directors
on March 7, 2009.  Prior to joining the Company, Mr. Grossman was the
Executive Vice President and Chief Strategic Officer of ION Media Networks
(AMEX:ION), formerly Paxson Communications Corporation.  He joined ION
Media Networks 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 ION, 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 has previously served as a director on the Board
of the Enterprise Development Corporation of South Florida, a not-for-profit
technology enterprise development concern.  Mr. Grossman's employment
ended on March 9, 2009.




Edward L. Cummings co-founded
QSGI INC. and has served as its Chief Financial Officer and Treasurer since
inception.  He resigned from the Board on October 23, 2008 to reduce
the size of the Board.  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. Harrisjoined 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 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 2010 annual
meeting.  Mr. Elliott is the retired chairman and chief executive
officer of Hercules, Inc.  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.  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,
Wilmington Trust Company, which provides customized financial alternatives for
wealth advisory clients, corporate clients, and regional banking clients,and the
Institute for Defense Analyses, a federally funded research and development
company.  Mr. Elliott serves as Chairman of the Compensation Committee
and is a member of the Audit




36


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.  Effective
February 27, 2009, Mr. Elliott tendered his resignation from the Board of
Directors for personal reasons.




Robert W. VanHellemont was
appointed to the Board of Directors in August 2004 to fill a vacancy. His term
of office expires at the 2009 annual meeting.  Mr. VanHellemont 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 $2 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 2008 annual
meeting.  Mr. Smith 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 a 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.




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.







37




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.qsgi.com.




Compliance
with Section 16(a) of the Exchange Act




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




Item11.                      Executive
Compensation




Oversight of Executive Compensation
Program




The
Compensation Committee (the “Committee”), composed entirely of independent
directors, administers QSGI's executive compensation program.  The
role of the Committee includes establishing and overseeing compensation and
benefit programs for our executive officers including the Chief Executive
Officer (“CEO”), the other executive officers and other key executives listed in
the Summary Compensation Table (the “Named Executives”).  The
Committee also evaluates the performance of the CEO and reviews the performance
of other Named Executives every year.  The Committee reviews
management performance, succession planning and executive development on a
regular and ongoing basis with formal reviews conducted at least
annually.  Elements of our executive compensation program include:
base salary; annual incentive bonus; long-term equity-based incentive awards;
and employee benefits and executive perquisites.




In establishing and overseeing the
program, the Committee’s goal is to ensure that we can attract and retain
superior management talent critical to our long-term success. To ensure that
executive compensation is aligned with the performance of QSGI and the interests
of its shareholders, a significant portion of compensation available to
executives is linked directly with financial results and other factors that
influence shareholder value.




Compensation Philosophy and
Objectives




The Committee’s policy is to compensate
and reward the CEO and other Named executives based on the combination of some
or all of the following factors, depending on the executive’s responsibilities:
corporate performance, business unit performance and individual
performance.  The Committee evaluates corporate performance and
business unit performance by reviewing the extent to which QSGI has accomplished
strategic business objectives, such as revenue growth, earnings and cash
flow.  The Committee also evaluates individual performance by
reviewing actual accomplishments.  The Committee determines increases
in base salary and annual cash incentive awards based on a combination of actual
accomplishments, corporate performance and business unit performance and may
recommend cash incentive awards to reward executive officers and other key
executives even if corporate performance may not meet
expectations.  It is the Committee's belief that it is prudent to
provide competitive base salaries and benefits in order to attract and retain
the management talent necessary to achieve our strategic long-term
objectives.




38


Based on these philosophies and
objectives, the Committee believes that QSGI's executive compensation program
should consist of the following elements:




•
            
            Base
      salary,•
            
            Annual
      cash incentive opportunity,•
            
            Long-term
      equity-based incentive awards, and•
            
            Benefits
      and executive perquisites




Additional details on each element of
compensation program are outlined below.




Base Salaries




The base salary takes into account
individual duties, responsibilities, scope of control and accountability for
each position.  The Committee also considers the competitiveness of
the base salary.  The Committee reviews salaries of the CEO and other
Named Executives annually and awards increases, as appropriate.  The
Committee approves all increases in base salary for the CEO and other Named
Executives in advance.




Annual Incentive
Compensation




Annual incentive compensation bonus
awards are available to the CEO and other Named Executives based on achievement
of our short-term business objectives, stockholders’ interests as a whole,
individual performance which includes long hours, hard work and dedication to
the Company's future and its goals.  The Committee reviews the
individual performance, attainment of our short-term business objectives and
stockholders' interests as a whole and recommends a bonus based on a combination
of these factors and may recommend cash incentive awards to reward the CEO and
other Named Executives even if corporate performance may not meet expectations.
It is the Committee's belief that it is prudent to provide competitive base
salaries and benefits in order to attract and retain the management talent
necessary to achieve our strategic long-term objectives.




Long-Term Equity-Based Incentive
Compensation




The Committee provides stock incentives
to the CEO and other Named Executives that are tied to QSGI's long-term
performance in order to link the executive’s interests to those of our
shareholders and to encourage stock ownership by executives.




The 2002 Flexible Stock Plan, which was
approved by our shareholders in January 2002, provides for the granting of stock
options, performance-based share awards and restricted shares to the CEO and
other Named Executives, and other employees. The Committee believes that the
stock options, performance-based share awards and restricted shares granted
under the Stock Plan provide a significant link between the compensation of the
CEO and other Named Executives on the one hand and QSGI's long-term goals and
shareholders’ interests on the other.




Since 2002, annual grants of
equity-based incentive awards to our CEO and other Named Executives have
consisted of stock options.  Such awards are usually made by the
Committee at its




39


February
meeting. Generally, the CEO and other Named Executives, receive annual grants
with an exercise price of the options based on the closing price of the
Company's stock on the date the grant.  Details on these equity awards
are outlined below.   Stock options are granted at other times
during the year only in conjunction with the hiring or promotion of employees
and then only as approved by the Committee and pursuant to the terms of the
Stock Plan.




Stock options granted under the
Flexible Stock Plan may vest ratably, or over a period of five or ten
years.  The term is at the discretion of the Committee.  The
number of shares of stock underlying options granted to the CEO and each Named
Executives in 2008 and 2007 is shown in the table below.  The number
of shares, option exercise prices, and expiration dates relating to all
outstanding stock options that are held by the CEO and each of the Named
Executives as of December 31, 2008 and 2007, are shown in the table
below.  Information relating to options exercised during 2008 and 2007
for the CEO and each Named Executive is shown in the table below.




Benefits and
Executive Perquisites




The Committee believes that attracting
and retaining superior management talent requires an executive compensation
program that is competitive in all respects with the programs provided in the
market place.  In addition to salaries, incentive bonus and stock
awards, competitive executive compensation programs include retirement and
welfare benefits and reasonable executive perquisites. At QSGI, executive
officers participate in the same retirement and welfare benefit plans as all
salaried employees. We also provide certain perquisites to executive officers,
subject to an annual allowance approved by the Committee. The Committee reviews
actual spending on executive perquisites annually.




Retirement
Benefits




The Company contributes 3% of an
eligible employee's annual compensation to a qualified 401(k) savings
plan.  A participant in the plan may elect to contribute additional
funds subject to annual limits established under the Internal Revenue Code.
Employee and Company matching contributions are fully vested immediately.
Participants may receive distribution of their QSGI Savings Plan accounts any
time after they cease service with the Company.




Welfare Benefits




All executive officers, including the
Named Executives, are eligible for welfare benefits from QSGI including:
medical, dental, life insurance, short-term disability, and long-term
disability. Executives participate in these plans on the same basis and subject
to the same costs, terms and conditions as other salaried employees of the same
defined employee class.




Perquisites




QSGI provides a taxable allowance for
club membership dues of up to $20,000 as a perquisite for the CEO.




Tax Implications of Executive
Compensation




Section 162(m) of the Internal
Revenue Code imposes a limit, with certain exceptions, on the amount that a
publicly held corporation may deduct in any year for the compensation paid to
its five most highly compensated officers. The Committee believes that the
annual incentive bonuses paid and the awards and options granted pursuant to the
Stock Plan will qualify as “performance-based” compensation and will meet the
requirements of the current tax law and Internal Revenue Service regulations so
as to




40


preserve
the tax deductibility of the executive compensation paid pursuant to such
plans.  The Committee attempts to structure executive compensation to
preserve tax deductibility and consistent with the overall compensation
objectives and philosophy discussed above.




The
following summary compensation table sets forth all compensation awarded to,
earned by, or paid to the named executive officers and the two other most highly
compensated officers that was paid by us during the fiscal years ended December
31, 2008 and 2007.




Summary Compensation
  TableName and
      Principal
                Position
              Year
              Salary
                ($)
              Bonus
                ($)
              Stock Awards
      ($)
              Option Awards
                ($)
              Non-Equity
      Incentive Plan Compensation Earnings
                ($)
              Change in
      Pension Value and Nonqualified Deferred Compensation Earnings
                ($)
              
              All Other
      Compensation
                ($)
              
              Total
                ($)Marc
      Sherman (1)
      (6)
              2008
              $
      424,000
              $         -
              $        -
              $
      66,656
              $         -
              $         -
              
              $
      20,000
              
              $  510,656Chairman,
      CEO and
              2007
              $
      424,000
              $         -
              $        -
              $           -
              $         -
              $         -
              
              $
      20,000
              
              $  444,000PresidentSeth
      A. Grossman(1) (3)
      (6)
              2008
              $
      339,200
              $         -
              $        -
              $  33,328
              $         -
              $         -
              
              $          -
              
              $  372,528President
      and Chief
              2007
              $
      339,200
              $         -
              $        -
              $            -
              $         -
              $         -
              
              $          -
              
              $  339,200Operating
      OfficerEdward
      L. Cummings(1)
      (6)
              2008
              $
      254,400
              $         -
              $        -
              $  33,328
              $         -
              $         -
              
              $          -
              
              $  287,728CFO
      and Treasurer
              2007
              $
      254,400
              $         -
              $        -
              $            -
              $         -
              $         -
              
              $          -
              
              $  254,400Joel
      L. Owens(2)
              2008
              $             -
              $         -
              $        -
              $          -
              $         -
              $         -
              
              $          -
              
              $         -Vice
      President
              2007
              $
      463,457
              $         -
              $        -
              $          -
              $         -
              $         -
              
              $          -
              
              $
      463,457Vivek
      J. Agarwal(4)
      (5)
              2008
              $
      80,516
              $         -
              $        -
              $          -
              $         -
              $         -
              
              $         -
              
              $   80,516Sales
      Representative
              2007
              $
      158,057
              $         -
              $        -
              $  4,828
              $         -
              $         -
              
              $         -
              
              $
      162,885


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




(2)
            Employment
      ended on November 15, 2007.




(3)
            Employment
      ended on March 9, 2009




(4)
            Two
      grants were issued.  The option value was based on the grant
      date fair value of $1.01 and $1.80 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
      88.36%; risk-free interest rate of 4.15%; and expected lives of 1.6
      years.




(5)
            Employment
      ended on October 31, 2008.




(6)
            One
      grant was issued for each Officer.  The option value was based
      on the grant date fair value of $0.16 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
      80.61%; risk-free interest rate of 3.01%; and expected lives of 10
      years.




41


Grants
of Plan-Based Awards




The
following table contains information concerning the grant of Stock Options to
the named executive officers during 2008:




Grants
      of Plan-Based AwardsName
                                      Grant
      Date
                                      Estimated
      Future Payouts
                                        Under
      Non-Equity Incentive Plan Awards
                                      
                                      Estimated
      Future Payouts Under Equity Incentive Plan Awards
                                      
                                      All Other
      Stock Awards: Number of Shares of Stock or Units
                                        (#)
                                      
                                      All Other
      Option Awards:  Number of Securities Underlying Options
                                        (#)
                                      Exercise or
      Base Price of Option Awards ($/Sh)Threshold
                                        ($)
                                      
                                      Target
                                        ($)
                                      
                                      Maximum
                                        (#)
                                      
                                      Threshold
                                        ($)
                                      
                                      Target
                                        ($)
                                      
                                      Maximum
                                        (#)Marc
      Sherman
                                      9/19/2008
                                      $         -
                                      
                                      $         -
                                      
                                      -
                                      
                                      $         -
                                      
                                      -
                                      
                                      -
                                      
                                      500,000
                                      
                                      -
                                      $0.16Seth
      A. Grossman(1)
                                      9/19/2008
                                      $         -
                                      
                                      $         -
                                      
                                      -
                                      
                                      $         -
                                      
                                      -
                                      
                                      -
                                      
                                      250,000
                                      
                                      -
                                      $0.16Edward
      L. Cummings
                                      9/19/2008
                                      
                                      $         -
                                      
                                      $         -
                                      
                                      -
                                      
                                      $         -
                                      
                                      -
                                      
                                      -
                                      
                                      250,000
                                      
                                      -
                                      $0.16




(1)Employment
ended on March 9, 2009




Outstanding
Equity Awards at Fiscal Year-End




The
following table sets forth information with respect to the named executive
officers concerning Equity Awards held on December 31, 2008:




Outstanding
      Equity Awards at Fiscal Year-EndOption
      Awards
                      
                      Stock
      AwardsName
                      
                      Number of
      Securities Underlying unexercised Options (#) Exercisable
      (1)
                      
                      Number of
      Securities Underlying unexercised Options (#)
      Unexercisable
                      
                      Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options (#)
                      
                      Option
      Exercise Price ($)
                      
                      Option
      Expiration Date
                      
                      Exercisable
                      
                      UnexercisableMarc
      Sherman
                      
                      250,000
                      
                      --
                      
                      --
                      
                      $0.026
                      
                      2011
                      
                      --
                      
                      --Marc
      Sherman
                      
                      125,000
                      
                      --
                      
                      --
                      
                      $0.026
                      
                      2012
                      
                      --
                      
                      --Marc
      Sherman
                      
                      1,000,000
                      
                      --
                      
                      --
                      
                      $2.00
                      
                      2014
                      
                      --
                      
                      --Marc
      Sherman
                      
                      500,000
                      
                      --
                      
                      --
                      
                      $1.44
                      
                      2014
                      
                      --
                      
                      --Marc
      Sherman
                      
                      500,000
                      
                      --
                      
                      --
                      
                      $1.90
                      
                      2014
                      
                      --
                      
                      --Marc
      Sherman
                      
                      1,000,000
                      
                      --
                      
                      --
                      
                      $2.50
                      
                      2015
                      
                      --
                      
                      --Marc
      Sherman
                      
                      500,000
                      
                      --
                      
                      --
                      
                      $0.16
                      
                      2018Seth
      A. Grossman
                      
                      125,000
                      
                      --
                      
                      --
                      
                      $2.13
                      
                      2013
                      
                      --
                      
                      --Seth
      A. Grossman
                      
                      100,000
                      
                      --
                      
                      --
                      
                      $2.00
                      
                      2014
                      
                      --
                      
                      --Seth
      A. Grossman
                      
                      100,000
                      
                      --
                      
                      --
                      
                      $1.44
                      
                      2014
                      
                      --
                      
                      --Seth
      A. Grossman
                      
                      100,000
                      
                      --
                      
                      --
                      
                      $1.90
                      
                      2014
                      
                      --
                      
                      --Seth
      A. Grossman
                      
                      3,000,000
                      
                      --
                      
                      --
                      
                      $2.75
                      
                      2015
                      
                      --
                      
                      --Seth
      A. Grossman
                      
                      250,000
                      
                      --
                      
                      --
                      
                      $0.16
                      
                      2018Edward
      L. Cummings
                      
                      250,000
                      
                      --
                      
                      --
                      
                      $0.026
                      
                      2011
                      
                      --
                      
                      --Edward
      L. Cummings
                      
                      100,000
                      
                      --
                      
                      --
                      
                      $0.026
                      
                      2012
                      
                      --
                      
                      --Edward
      L. Cummings
                      
                      250,000
                      
                      --
                      
                      --
                      
                      $2.00
                      
                      2014
                      
                      --
                      
                      --Edward
      L. Cummings
                      
                      250,000
                      
                      --
                      
                      --
                      
                      $1.44
                      
                      2014
                      
                      --
                      
                      --Edward
      L. Cummings
                      
                      250,000
                      
                      --
                      
                      --
                      
                      $1.90
                      
                      2014
                      
                      --
                      
                      --Edward
      L. Cummings
                      
                      500,000
                      
                      --
                      
                      --
                      
                      $2.50
                      
                      2015
                      
                      --
                      
                      --Edward
      L. Cummings
                      
                      250,000
                      
                      --
                      
                      --
                      
                      $0.16
                      
                      2018




(1)
            All
      options have vested.




42


Options
Exercises and Stock Vested




Outstanding
      Equity Awards at Fiscal Year-EndOption
      Awards
            
            Stock
      AwardsName
            
            Number of
      Shares
              Acquired on
              Exercise
      (#)
            Value
      Realized
              on Exercise
      ($)
            
            Exercisable
            
            UnexercisableMarc
      Sherman
            
            --
            --
            
            --
            
            --Seth
      A. Grossman
            
            --
            --
            
            --
            
            --Edward
      L. Cummings
            
            --
            --
            
            --
            
            --Joel
      L. Owens
            
            --
            --
            
            --
            
            --




Pension
Benefits




None.  Not
applicable.




Nonqualified
Deferred Compensation




None.  Not
applicable.




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.




Director CompensationName of
      Director
              Fees Earned
      or Paid in Cash ($)
              Stock Awards
      ($)
              Option Awards
      ($)
              Non-Equity
      Incentive Plan Compensation ($)
              Change in
      Pension Value and Nonqualified Deferred Compensation Earnings
      ($)
              
              All Other
      Compensation ($)
              
              Total  ($)John
      Cunningham
              $
      6,250
              -
              -
              -
              -
              
              -
              
              $
      6,250R.
      Keith Elliott
              $
      25,000
              -
              -
              -
              -
              
              -
              
              $
      25,000Geoffrey
      Smith
              $
      25,000
              -
              -
              -
              -
              
              -
              
              $
      25,000Robert
      W. VanHellemont
              $
      25,000
              -
              -
              -
              -
              
              -
              
              $
      25,000




On April
18, 2008, John Cunningham resigned from the Board of Directors due to personal
reasons.  On October 23, 2008, Edward L. Cummings resigned from the
Board of Directors to reduce the size of the Board of Directors to create
managerial efficiencies at the Board level.  On February 27, 2009, R.
Keith Elliott resigned from the Board of Directors due to personal
reasons.




43




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
      CompensationMarc
      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
            $        254,400




(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)
            On
      December 29, 2008, Mr. Grossman was advised by the Company that his
      contract would no longer roll and shall hereafter be for a period of three
      (3) calendar years starting with January 1,
  2009.




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 or Early
Termination.  In the event of a change in control of the
Company or early termination, 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.  In the event of early termination, the Company shall pay the
employee a severance payment equal to three (3) times the amount of compensation
paid in the twelve (12) months prior to termination.  This amount is
to be paid over thirty six (36) months in equal payments.  If, after
the announcement of a change in control or a change of control, the employee may
terminate his employment at his sole discretion within one year after the change
of control.  In the event of such termination, the Company shall pay
employee a severance payment equal to three (3) times the then bonus plus three
(3) times the base salary minus $1.00.




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.




44




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.






The
following table shows post employment compensation as if the triggering event
took place on December 31, 2008:




Post
      Employment CompensationName
            
            2009
      ($)
            20010
      ($)
            2011
      ($)Marc
      Sherman
            
            424,000
            424,000
            424,000Seth
      A. Grossman
            
            339,200
            339,200
            339,200Edward
      L. Cummings
            
            254,400
            254,400
            254,400




Item12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




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, 2008:




Title of Class
                  Name and Address of Beneficial
      Owner
                  Amount
      and Nature ofBeneficial Owner(1)
                  Percent of ClassCommon
                  Marc
      Sherman (2)
                    c/o
      70 Lake Drive
                    Hightstown,
      NJ 08520
                  6,525,800
                  8.5%Common
                  Seth
      A. Grossman
                    c/o
      70 Lake Drive
                    Hightstown,
      NJ 08520
                  3,675,000
                  4.8%Common
                  Edward
      L. Cummings
                    c/o
      70 Lake Drive
                    Hightstown,
      NJ 08520
                  3,968,200
                  5.2%Common
                  R.
      Keith Elliott
                    c/o
      70 Lake Drive
                    Hightstown,
      NJ 08520
                  525,000
                  *





45


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 (6 Persons)
              15,092,500
              19.8%


________________________________


*       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 – 1,850,000; R. Keith
      Elliott – 525,000; Seth A. Grossman –3,675,000; Marc Sherman
      –3,875,000;  Geoffrey A. Smith – 100,000; and Robert W.
      VanHellemont – 275,000.  All directors and executive officers as
      a group (6 persons) – 10,300,000.


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 1, 2009, 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 ClassJohn
      S. Riconda
              c/o
      CCSI
              200
      Knickerbacher Avenue
              Bohemia,
      NY  11716
            
            16,500,000
            
            21.6%Pike
      Capital Partners, LP
              275
      Madison Avenue
              Suite
      418
              New
      York, NY  10016
            
            5,555,973
            
            7.3%






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.




Item13.               Certain
Relationships and Related Transactions, and Director Independence




Loans
from Principal Stockholders/Executive Officers




As of
December 31, 2008 and 2007, there were no outstanding loans or notes due to or
due from principal stockholders or executive officers.




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.  Marc
Sherman's sister is part owner of Keystone Memory Group.  Mr. Sherman
has no business experience with Keystone.




Sales to
Keystone amounted to approximately $47,000 and $85,000 for the years ended
December 31, 2008 and 2007, respectively.  Accounts receivable from
this customer amounted to $10,852 at December 31, 2008 and $49,529 at December
31, 2007.




46


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 Random Access Memory modules.




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.  For the years ended December 31, 2008 and 2007, rent expense
for this lease amounted to $81,464 and $221,788,
respectively.  Accounts payable to this vendor were $2,086 and $0 at
December 31, 2008 and 2007, respectively.




In
November 2007, the Company exercised an option to purchase a portion of the
assets from Varilease Technology Finance Group for approximately
$35,000.  This purchase reduces the monthly rental by approximately
$10,600 per month.




In
October 2008, the Company released a portion of the assets from Varilease
Technology Finance Group for $2,086 per month for twenty four
months.  This release reduces the monthly rental by approximately
$6,500 per month.




Shares
issued to Principal Stockholders/Executive Officers




Principal Stockholder / Executive
      Officer
              Date Issued
              Note
              Issued For
              Number
      of Common
                SharesEdward
      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.




47




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.




Item14.           
Principal accountant fees and services




During 2008 and 2007, we paid the
following fees, including out of pocket expense reimbursements, to Morison Cogen
LLP and RubinBrown LLP:




2008
              Morison
      Cogen LLP
            2008
              RubinBrown
      LLP
            2007
              RubinBrown
      LLPAudit
      Fees
              Audit-Related
      Fees (2)
              Tax
      Fees (3)
              Total
            $17,800
              0
              0
              $
      0
            $26,000
      (1)
              3,705
              27,500
              $57,205
            $
      200,000
              62,000
              48,000
              $
      310,000




(1)  Audit
fees consist of fees for the review of the first and second quarter 2008
financial statements.




(2)
Audited-related fees include consultation concerning financial accounting and
reporting standards and acquisitions, acquisition due diligence services, and
work performed in connection with registration statements filed with the
SEC.




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






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 Morison Cogen LLP and
RubinBrown LLP required by Independence Standards Board Standard No. 1, as
currently in effect, and has discussed with Morison Cogen LLP and RubinBrown LLP
their independence.




48




PART
IV




Item15.                      Exhibits
and Financial Statements




ExhibitsSee
      List of Exhibits filed as part of this Report on Form
  10-K.The
      financial statements listed below appear immediately after page
      51.Report
      of Independent Registered Public Accounting Firm
            F-1 – F-3Financial
      StatementsBalance
      Sheet
            F-4 – F-5Statement
      Of Operations
            F-6Statement
      Of Stockholders’ Equity
            F-7Statement
      Of Cash Flows
            F-8 – F-9Notes
      To Financial Statements
            F-10 – F-44






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,
    2009
            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, and Chief Executive Officer
                      March
      30, 2009/s/
      Edward L. Cummings
                        Edward
      L. Cummings
                      Chief
      Financial Officer,  & Treasurer
                      March
      30, 2009/s/
      Robert W.  VanHellemont
                        Robert
      W. VanHellemont
                      Director
                      March
      30, 2009/s/
      Geoffrey A. Smith
                        Geoffrey
      A. Smith
                      Director
                      March
      30, 2009





49







ListOf Exhibits




Exhibit
                  Number
                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 Merger2.4***
                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 Corporation4.1
                Specimen
      Common Stock Certificate of WindsorTech, Inc. (Incorporated herein
      reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form
      10-QSB filed with the Commission on August 19, 2002 (Commission file
      number 000-07539)).4.2
                Form
      of Stock Purchase Agreements with Barron Partners, L.P., Guerrilla
      Capital, and Odin Partners et al. dated May 26, 2004.4.3
                Form
      of Registration Rights Agreements with Barron Partners, L.P., Guerrilla
      Capital, and Odin Partners et al. dated May 26, 2004.4.4
                Form
      of Common Stock Purchase Warrant at $1.50 per share dated May 28,
      2004.4.5
                Form
      of Common Stock Purchase Warrant at $3.60 per share dated May 28,
      20044.6
                Form
      of Registration Rights Agreement with Joel Owens and Jolene Owens dated
      May 1, 2004.10.1*
                Employment
      and Non-Compete Agreement – Edward L. Cummings **10.2*
                Employment
      and Non-Compete Agreement – David A. Loppert **10.3*
                Employment
      and Non-Compete Agreement – Carl C. Saracino **10.4*
                Employment
      and Non-Compete Agreement – Michael P. Sheerr **10.5*
                Employment
      and Non-Compete Agreement – Marc Sherman **10.6*
                2002
      Flexible Stock Plan (Incorporated herein reference to Exhibit 10.6 to the
      Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on
      April 16, 2002 (Commission file number
  000-07539)).


10.7
            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)).


50
 
 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 Morison Cogen LLP23.2***
              Consent of RubinBrown LLP31.1***
              Chairman and Chief Executive Officer
      Certification31.2***
              President and Chief Operating 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-K.
  51
 Contents
 PageReport
      Of Independent Registered PublicAccounting
      Firms
                  F-1 - F-4Financial
      StatementsConsolidated
      Balance Sheets
                  F-4 - F-5Consolidated
      Statements Of Operations
                  F-6Consolidated
      Statement Of Stockholders’ Equity (Deficit)
                  F-7Consolidated
      Statements Of Cash Flows
                  F-8 - F-9Notes
      To Consolidated Financial Statements
                  F-10 - F-44
 
 
 
 
 ReportOf Independent Registered Public Accounting
Firm
 
 
 Board of
Directors and Stockholders
 QSGI
INC.
 Hightstown,
New Jersey
 
 
 We have
audited the accompanying consolidated balance sheet of QSGI INC. and
subsidiaries as of December 31, 2008 and the related consolidated statements of
operations, stockholders’ deficit and cash flows for the year then
ended.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audit 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 consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financing 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 consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
  
 Board Of
Directors And Stockholders
 QSGI,
INC.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of QSGI INC. and
subsidiaries as of December 31, 2008 and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 2
to the consolidated financial statements, the Company has reported significant
losses from operations and is in default of its line-of-credit
agreement.  These conditions raise substantial doubt about its ability
to continue as a going concern.  Management’s plans regarding those
matters also are described in Note 2.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 
 /s/
Morison Cogen, LLC
 Bala
Cynwyd, Pennsylvania
 March 27,
2009
  Page
F-2
 Report
Of Independent Registered Public Accounting Firm
 
 
 Board of
Directors and Stockholders
 QSGI
INC.
 Hightstown,
New Jersey
 
 
 We have
audited the accompanying consolidated balance sheet of QSGI INC. and
subsidiaries as of December 31, 2007, and the related consolidated statements of
operations, stockholders’ equity and cash flows for the year then
ended.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit 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 consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financing 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 consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of QSGI INC. and
subsidiaries as of December 31, 2007, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Notes 2
and 8 to the consolidated financial statements, the Company has reported
significant losses from operations and was in default of its line-of-credit
agreement.  These conditions raise substantial doubt about its ability
to continue as a going concern.  Management’s plans regarding those
matters also are described in Note 2.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 /s/
RubinBrown LLP
 
 St.
Louis, Missouri
 April 14,
2008
 
 Page
F-3
  QSGIINC. AND SUBSIDIARIES
 Page
1 Of 2
 
 AssetsDecember
      31,2008
                            
                            
                            2007Current
      AssetsCash
      and cash equivalents
                            
                            $
                            274,150
                            
                            
                            $
                            127,723Accounts
      receivable, net of reserve of $1,075,471and
      $955,599 in 2008 and 2007, respectively
                            
                            
                            4,689,376
                            
                            
                            
                            3,853,362Inventories
                            
                            
                            5,144,010
                            
                            
                            
                            6,578,031Prepaid
      expenses and other assets
                            
                            
                            242,659
                            
                            
                            
                            163,553Total
      Current Assets
                            
                            
                            10,350,195
                            
                            
                            
                            10,722,669Property
      And Equipment, Net
                            
                            
                            727,454
                            
                            
                            
                            286,766Goodwill
                            
                            
                            7,934,627
                            
                            
                            
                            1,489,621Intangibles,
      Net
                            
                            
                            6,017,968
                            
                            
                            
                            470,348Other
      Assets
                            
                            
                            285,198
                            
                            
                            
                            448,066Total
      Assets
                            
                            $
                            25,315,442
                            
                            
                            $
                            13,417,470
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 Page
F-4
  QSGI
INC. AND SUBSIDIARIES
 Page
2 Of 2
 
 Liabilities
      And Stockholders' Equity (Deficit)December
      31,
                            
                            
                            December
      31,2008
                            
                            
                            2007Current
      LiabilitiesRevolving
      line of credit
                            
                            $
                            5,351,130
                            
                            
                            $
                            3,754,061Accounts
      payable
                            
                            
                            4,128,170
                            
                            
                            
                            1,109,940Accrued
      expenses
                            
                            
                            1,048,652
                            
                            
                            
                            654,461Accrued
      payroll
                            
                            
                            164,311
                            
                            
                            
                            88,818Deferred
      revenue
                            
                            
                            385,805
                            
                            
                            
                            439,865Other
      current liabilities
                            
                            
                            288,360
                            
                            
                            
                            311,610Total
      Current Liabilities
                            
                            
                            11,366,428
                            
                            
                            
                            6,358,755Long-Term
      Deferred Revenue
                            
                            
                            19,000
                            
                            
                            
                            142,772Notes
      Payable - Principal Stockholder
                            
                            
                            10,000,000
                            
                            
                            
                            —Deferred
      Income Taxes
                            
                            
                            27,300
                            
                            
                            
                            27,300Total
      Liabilities
                            
                            
                            21,412,728
                            
                            
                            
                            6,528,827Redeemable
      Convertible Preferred Stock
                            
                            
                            4,257,910
                            
                            
                            
                            4,238,685Commitments
      And Contingencies (Notes 2, 8 And 14)Stockholders'
      Equity (Deficit)Preferred
      shares: authorized 5,000,000 in 2008and
      2007, $0.01 par value, none issued
                            
                            
                            —
                            
                            
                            
                            —Common
      shares: authorized 95,000,000 in 2008 and 2007,$0.01
      par value; 48,547,716 shares issued and outstanding in
    2008,of
      which 10,000,000 shares were contingent acquisition shares
      heldin
      escrow, and 31,172,716 shares issued and outstanding in
    2007
                            
                            
                            385,477
                            
                            
                            
                            311,727Additional
      paid-in capital
                            
                            
                            16,723,724
                            
                            
                            
                            14,134,298Accumulated
      deficit
                            
                            
                            (17,464,397
                            )
                            
                            
                            (11,796,067
                            )Total
      Stockholders' Equity (Deficit)
                            
                            
                            (355,196
                            )
                            
                            
                            2,649,958Total
      Liabilities and Stockholders' Equity (Deficit)
                            
                            $
                            25,315,442
                            
                            
                            $
                            13,417,470
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 Page
F-5
  QSGIINC. AND SUBSIDIARIES
  For
      The YearsEnded
      December 31,2008
                                  
                                  
                                  2007Product
      Revenue
                                  
                                  $
                                  19,768,862
                                  
                                  
                                  $
                                  30,126,257Service
      Revenue
                                  
                                  
                                  14,382,038
                                  
                                  
                                  
                                  7,094,853Total
      Revenue
                                  
                                  
                                  34,150,900
                                  
                                  
                                  
                                  37,221,110Cost
      Of Products Sold
                                  
                                  
                                  19,079,155
                                  
                                  
                                  
                                  25,525,836Cost
      Of Services Sold
                                  
                                  
                                  7,591,768
                                  
                                  
                                  
                                  2,516,833Cost
      Of Sales
                                  
                                  
                                  26,670,923
                                  
                                  
                                  
                                  28,042,669Gross
      Profit
                                  
                                  
                                  7,479,977
                                  
                                  
                                  
                                  9,178,441Selling,
      General And Administrative Expenses
                                  
                                  
                                  10,983,302
                                  
                                  
                                  
                                  9,905,064Goodwill
      And Asset Impairment
                                  
                                  
                                  —
                                  
                                  
                                  
                                  7,206,698Depreciation
      And Amortization
                                  
                                  
                                  727,581
                                  
                                  
                                  
                                  702,310Interest
      Expense, Net of interest income
                                  
                                  
                                  1,432,065
                                  
                                  
                                  
                                  396,417Loss
      Before Provision For Income Taxes
                                  
                                  
                                  (5,662,971
                                  )
                                  
                                  
                                  (9,032,048
                                  )Provision
      For Income Taxes
                                  
                                  
                                  5,359
                                  
                                  
                                  
                                  243,804Net
      Loss
                                  
                                  
                                  (5,668,330
                                  )
                                  
                                  
                                  (9,275,852
                                  )Accretion
      To Redemption Value Of Preferred Stock
                                  
                                  
                                  19,225
                                  
                                  
                                  
                                  18,108Preferred
      Stock Dividend
                                  
                                  
                                  258,708
                                  
                                  
                                  
                                  258,000Net
      Loss Available To Common Stockholders
                                  
                                  $
                                  (5,946,263
                                  )
                                  
                                  $
                                  (9,551,960
                                  )Net
      Loss Per Common Share - Basic and Diluted
                                  
                                  $
                                  (0.17
                                  )
                                  
                                  $
                                  (0.31
                                  )Weighted
      Average Number Of Common SharesOutstanding
      - Basic and Diluted
                                  
                                  
                                  34,340,066
                                  
                                  
                                  
                                  31,172,716
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 Page
F-6
  QSGIINC. AND SUBSIDIARIES
 For
The Years Ended December 31, 2008 And 2007
  Additional
                            
                            
                            Retained
                            
                            
                            TotalCommon
      Stock
                            
                            
                            Paid-In
                            
                            
                            Earnings
                            
                            
                            Stockholders'Shares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            (Deficit)
                            
                            
                            EquityBalance
      (Deficit) -January
      1, 2007
                            
                            
                            31,172,716
                            
                            
                            $
                            311,727
                            
                            
                            $
                            14,390,976
                            
                            
                            $
                            (2,482,215
                            )
                            
                            $
                            12,220,488Fin
      48 Adoption
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (38,000
                            )
                            
                            
                            (38,000
                            )Stock
      Option Compensation
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            19,430
                            
                            
                            
                            —
                            
                            
                            
                            19,430Preferred
      Stock Dividend
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (258,000
                            )
                            
                            
                            —
                            
                            
                            
                            (258,000
                            )Accretion
      To The RedemptionValue
      Of Preferred Stock
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (18,108
                            )
                            
                            
                            —
                            
                            
                            
                            (18,108
                            )Net
      Loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (9,275,852
                            )
                            
                            
                            (9,275,852
                            )Balance
      (Deficit) -December
      31, 2007
                            
                            
                            31,172,716
                            
                            
                            
                            311,727
                            
                            
                            
                            14,134,298
                            
                            
                            
                            (11,796,067
                            )
                            
                            
                            2,649,958Stock
      issued for acquisition
                            
                            
                            3,500,000
                            
                            
                            
                            35,000
                            
                            
                            
                            735,000
                            
                            
                            
                            —
                            
                            
                            
                            770,000Warrants
      issued for acquisition
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,287,878
                            
                            
                            
                            —
                            
                            
                            
                            1,287,878Stock
      issued for financing
                            
                            
                            3,875,000
                            
                            
                            
                            38,750
                            
                            
                            
                            695,000
                            
                            
                            
                            —
                            
                            
                            
                            733,750Stock
      Option Compensation
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            149,481
                            
                            
                            
                            —
                            
                            
                            
                            149,481Preferred
      Stock Dividend
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (258,708
                            )
                            
                            
                            —
                            
                            
                            
                            (258,708
                            )Accretion
      To The RedemptionValue
      Of Preferred Stock
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (19,225
                            )
                            
                            
                            —
                            
                            
                            
                            (19,225
                            )Net
      Loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (5,668,330
                            )
                            
                            
                            (5,668,330
                            )Balance
      (Deficit) -December
      31, 2008
                            
                            
                            38,547,716
                            
                            
                            $
                            385,477
                            
                            
                            $
                            16,723,724
                            
                            
                            $
                            (17,464,397
                            )
                            
                            $
                            (355,196
                            )
  The
accompanying notes are an integral part of these consolidated financial
statements.
 Page
F-7
  QSGIINC. AND SUBSIDIARIES
  For
      The YearsEnded
      December 31,2008
                              
                              
                              2007Cash
      Flows From Operating ActivitiesNet
      loss
                              
                              $
                              (5,668,330
                              )
                              
                              $
                              (9,275,852
                              )Adjustments
      to reconcile net loss to net cash provided by(used
      in) operating activitiesGoodwill
      and asset impairment
                              
                              
                              —
                              
                              
                              
                              7,206,698Depreciation
      and amortization
                              
                              
                              727,581
                              
                              
                              
                              702,130Stock
      option compensation expense
                              
                              
                              149,481
                              
                              
                              
                              19,430Amortization
      of Original Issue Discount
                              
                              
                              258,083
                              
                              
                              
                              —Deferred
      income taxes
                              
                              
                              (56,247
                              )
                              
                              
                              174,336Allowance
      for doubtful accounts
                              
                              
                              418,885
                              
                              
                              
                              713,500Inventory
      allowance
                              
                              
                              848,000
                              
                              
                              
                              176,000Changes
      in assets and liabilities; net of acquisitionAccounts
      receivable
                              
                              
                              (321,878
                              )
                              
                              
                              2,977,775Inventories
                              
                              
                              1,075,146
                              
                              
                              
                              (1,771,321
                              )Prepaid
      expenses and other current assets
                              
                              
                              (100,912
                              )
                              
                              
                              23,389Other
      assets
                              
                              
                              435,622
                              
                              
                              
                              (50,417
                              )Accounts
      payable, accrued expenses and other liabilities
                              
                              
                              660,000
                              
                              
                              
                              (660,840
                              )Net
      Cash Provided By (Used In) Operating Activities
                              
                              
                              (1,574,569
                              )
                              
                              
                              234,828Cash
      Flows From Investing ActivitiesAdvances
      for notes receivable
                              
                              
                              —
                              
                              
                              
                              (96,250
                              )Collections
      of notes receivable
                              
                              
                              —
                              
                              
                              
                              53,200Cost
      of Acquisition
                              
                              
                              (192,563
                              )
                              
                              
                              —Cash
      from business acquired
                              
                              
                              255,714
                              
                              
                              
                              —Purchases
      of property and equipment
                              
                              
                              (107,701
                              )
                              
                              
                              (211,713
                              )Proceeds
      from sale of equipment
                              
                              
                              —
                              
                              
                              
                              62,301Net
      Cash Used In Investing Activities
                              
                              
                              (44,550
                              )
                              
                              
                              (192,462
                              )Cash
      Flows From Financing ActivitiesNet
      amounts paid under previous revolving line of credit
                              
                              
                              (3,776,929
                              )
                              
                              
                              —Payments
      for financing costs
                              
                              
                              (25,614
                              )
                              
                              
                              (127,827
                              )Preferred
      stock dividends
                              
                              
                              (258,708
                              )
                              
                              
                              (258,000
                              )Net
      amounts borrowed under current revolving line of credit
                              
                              
                              5,826,797
                              
                              
                              
                              (161,764
                              )Net
      Cash Provided By (Used In) Financing Activities
                              
                              
                              1,765,546
                              
                              
                              
                              (547,591
                              )Net
      Increase (Decrease) In Cash And Cash Equivalents
                              
                              
                              146,427
                              
                              
                              
                              (505,225
                              )Cash
      And Cash Equivalents - Beginning Of Year
                              
                              
                              127,723
                              
                              
                              
                              632,948Cash
      And Cash Equivalents - End Of Year
                              
                              $
                              274,150
                              
                              
                              $
                              127,723
  The
accompanying notes are an integral part of these consolidated financial
statements.
 Page
F-8
 QSGI
INC. AND SUBSIDIARIES
 
 
 
 For
      The YearsEnded
      December 31,2008
                    
                    
                    2007Supplemental
      disclosure of cash flow informationIncome
      Taxes Paid
                    
                    $
                    63,982
                    
                    
                    $
                    62,591Interest
      Paid
                    
                    
                    526,738
                    
                    
                    
                    406,306Supplemental
      schedule of non-cash financing and investing activitiesStock
      issued for financing
                    
                    $
                    733,750
                    
                    
                    
                    —Assets
      acquired through the reduction of accounts receivable
                    
                    
                    —
                    
                    
                    $
                    346,000Stock
      issued for acquisition
                    
                    $
                    770,000
                    
                    
                    
                    —Warrants
      issued for acquisition
                    
                    
                    1,287,878
                    
                    
                    
                    —Note
      issued for acquisition
                    
                    
                    10,000,000
                    
                    
                    
                    —Accrued
      acquisition costs
                    
                    
                    940,559
                    
                    
                    
                    —
   
 The
accompanying notes are an integral part of these consolidated financial
statements.
 Page
F-9
 
  QSGIINC. AND SUBSIDIARIES
 December
31, 2008 And 2007
 
  1.        
Summary Of Significant Accounting Policies
 
 Business
Organization
  The
Company is a data security and regulatory compliance provider offering a full
suite of end-of-life and other life-cycle services for a Fortune 1000
corporation’s and government client’s entire information technology (IT)
platform. The Company offers a variety of solutions to companies whose business
computing technologies (desktops, laptops, printers, and servers) have come to
the end of their life cycle. These services include data erasure to Department
of Defense standards for hard drives, asset auditing/life cycle management which
allows customers to minimize their overall IT expenditure and maximize their
return on investment, IT asset remarketing for IT assets with market value and
environmental compliance for IT products. The Company is geared towards the
users of business-computing hardware (desktops, laptops, related peripherals and
servers) as well as maintaining and providing services on enterprise-class
hardware (mainframes, midrange servers, tape storage products and disk storage
products).
 
 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, Apple, Sony, Fujitsu, Hewlett-Packard, 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.  QualTech
Services Group, Inc. provides hardware maintenance solutions and information
systems consulting services to businesses in the United States.
 
 Page
F-10
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 On
October 17, 2005, the stockholders 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.
 
 On July
8, 2008, the Company purchased Contemporary Computer Services, Inc.
(CCSI).  CCSI provides corporate, government and education clients
with network infrastructure services including network design, implementation
and monthly maintenance services on corporations’ network hardware and related
infrastructure as well as 24/7 monitoring and diagnostics through its North
American Network Operating Center (NOC).
 
 The
Company has office and warehouse space in Hightstown, New Jersey, Eagan,
Minnesota, Bohemia, New York and Carteret, New Jersey and satellite sales and
business development offices in Colorado, Connecticut, Florida, Georgia,
Illinois, Indiana, Kansas, Michigan, Missouri, Nebraska, New Jersey, New York,
Ohio, Pennsylvania, South Carolina, Texas, and Wisconsin.
 
 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.
 
 Page
F-11
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 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, 2008 and 2007, 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.
 
 Cash
And Cash Equivalents
  The
Company considers all liquid instruments purchased with maturity of three months
or less to be cash equivalents.
 
 Concentration
of Credit Risk Involving Cash
 
 At
December 31, 2008, the Company has deposits with a financial institution that
exceed the FDIC deposit insurance coverage of $250,000.
 
 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 which 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.
 
 Page
F-12
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 The
allowance for doubtful accounts at December 31, 2008 and 2007, and changes in
the allowance for the years then ended are as follows:
 
 Balance
      At
                    Provision
                    Write-Offs,
                    BalanceBeginning
                    For
      Doubtful
                    Net
      Of
                    At
      EndYear
                    Of
      Year
                    Accounts
                    Recoveries
                    Of
      Year2007
                    $  780,116
                    $
      713,500
                    $
      538,017
                    $
      955,5992008
                    955,599
                    418,885
                    299,013
                    1,075,471
 
 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 disassembled 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 of 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.  Leasehold improvements are amortized over the life of the
lease or the estimated life of the asset, whichever is less.
 
 Page
F-13
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 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 deposits for the Company’s Data Security and
Compliance segment.  These deposits are refundable at the expiration
of the lease.  Since the lease terms extend beyond 12 months, the
deposits are classified as a long-term asset in other assets on the consolidated
balance sheet.
 
 Advertising
Costs
  Advertising
costs are expensed on the first date the advertisement takes
place.  Advertising expense amounted to $99,291 in 2008 and $89,477 in
2007.
 
 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.
 
 Loss
Per Share
  Basic
loss per share is computed on the basis of the weighted average number of common
share outstanding. Diluted loss 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-14
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 The
following table presents the computation of basic and diluted net loss per
share:
 2008
                                
                                
                                2007Net
      loss available to common stockholders
                                
                                $
                                (5,946,263
                                )
                                
                                $
                                (9,551,960
                                )Determination
      of basic and diluted shares:Basic
      weighted average shares outstanding
                                
                                
                                34,340,066
                                
                                
                                
                                31,172,716Diluted
      weighted average shares outstanding
                                
                                
                                34,340,066
                                
                                
                                
                                31,172,716Net
      Loss Per Common Share - Basic
                                
                                $
                                (0.17
                                )
                                
                                $
                                (0.31
                                )Net
      Loss Per Common Share - Diluted
                                
                                $
                                (0.17
                                )
                                
                                $
                                (0.31
                                )
 
 In 2008,
the Company excluded 1,048,175 weighted average common share equivalents related
to stock options and 1,911,111 weighted average common share equivalents related
to convertible preferred stock because their effect would have been
anti-dilutive.
 
 In 2007,
the Company excluded 1,370,879 weighted average common share equivalents related
to stock options and 1,911,111 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, notes 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.
 
 Page
F-15
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
   Stock-Based
Compensation
  In
December 2004, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based
Payment. SFAS No. 123R requires measurement of all employee stock-based
compensation awards using a fair value method and the recording of such expense
in the consolidated financial statements. In addition the adoption of SFAS No.
123R requires additional accounting related to the income tax effects and
additional disclosure regarding the cash flow effects resulting from share-based
payment arrangements. Effective January 1, 2006, the Company adopted SFAS No.
123R using the modified prospective method.
 
 The
weighted average per share fair value of the options granted was $0.11 and $1.41
for the years ended December 31, 2008 and 2007, respectively.  The
fair value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model.
 
 RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS
 
 SFAS No.
157 – Fair Value Measurements
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.
157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FSP No. SFAS 157-2,
Effective Date of FASB Statement No. 157, which provides a one-year deferral of
the effective date of SFAS No. 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore the Company has adopted
the provisions of SFAS No. 157 with respect to its financial assets and
liabilities only. However, the Company does not anticipate that the full
adoption of SFAS 157 will significantly impact their consolidated financial
statements.
 
 SFAS No.
159 – The Fair Value Option for Financial Assets and Financial
Liabilities
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. The objective
  Page
F-16
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
  is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company adopted SFAS No. 159 on January
1, 2008, and did not elect the fair value option for any of its assets or
liabilities.
  SFAS No.
162 – The Hierarchy of Generally Accepted Accounting Principles
 
 In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The
Hierarchy of Generally Accepted Accounting Principles (“FAS 162"). This Standard
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles. FAS 162 directs the hierarchy to the entity,
rather than the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with generally accepted accounting principles. Effective November 15, 2008, the
Company adopted SFAS No. 162, which did not have any impact on the Company’s
financial statements.
 
 RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
  SFAS No.
141R – Business Combinations
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. This statement
is effective for the Company beginning January 1, 2009 and will change the
accounting for business combinations on a prospective basis.
 
 SFAS No.
160 – Non-controlling interest in Consolidated Financial Statements
  On
December 4, 2007, the FASB issued SFAS No. 160, Non-controlling interest in
Consolidated Financial Statements (SFAS No. 160).  SFAS No. 160
requires all
  Page
F-17
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
   entities
to report non-controlling (minority) interests in subsidiaries as equity in the
consolidated financial statements. The statement establishes a single method of
accounting for changes in a parent’s ownership interest in a subsidiary that do
not result in deconsolidation and expands disclosures in the consolidated
financial statements. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years.  The
Company has not yet determined the impact of the adoption of SFAS No. 160 on its
consolidated financial statements and footnote disclosures.
  
 SFAS No.
161 – Disclosures about Derivative Instruments and Hedging
  In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, which is effective January 1, 2009. SFAS 161 requires
enhanced disclosures about derivative instruments and hedging activities to
allow for a better understanding of their effects on an entity’s financial
position, financial performance, and cash flows. Among other things, SFAS 161
requires disclosures of the fair values of derivative instruments and associated
gains and losses in a tabular formant. SFAS 161 is not currently applicable to
the Company since the Company does not have derivative instruments or hedging
activity.
 
 FSA 142-3
– Determination of the Useful Life of Intangible Assets
 
 In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. This Staff Position is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
Company is currently evaluating the impact that FSP No. 142-3 will have on its
consolidated financial statements.
 
 EITF
03-6-1 – Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities
 
 In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions are Participating Securities. This FSP
provides that unvested share-based payment awards that contain non-forfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. The Company does not
  Page
F-18
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
  currently
have any share-based awards that would qualify as participating securities.
Therefore, application of this FSP is not expected to have an effect on the
Company's financial reporting.
 
 APB 14-1
– Accounting for Convertible Debt That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (“FSP 14-1”)
 
 In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for
Convertible Debt That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) ("FSP 14-1"). FSP 14-1 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008. The FSP
includes guidance that convertible debt instruments that may be settled in cash
upon conversion should be separated between the liability and equity components,
with each component being accounted for in a manner that will reflect the
entity's nonconvertible debt borrowing rate when interest costs are recognized
in subsequent periods. FSP 14-1 is currently not applicable to the Company since
the Company does not have any convertible debt.
 
 EITF
07-05 – Determining Whether an Instrument (or Embedded Feature) is Indexed to an
Entity’s Own Stock
 
 In June
2008, the FASB issued EITF Issue No. 07-05, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF Issue No.
07-05”) which is effective for financial statements for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years.  The Issue addresses the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which is the first
part of the scope exception in Paragraph 11(a) of SFAS No. 133 for the purpose
of determining whether the instrument is classified as an equity instrument or
accounted for as a derivative instrument which would be recognized either as an
asset or liability and measured at fair value.  The guidance shall be
applied to outstanding instruments as of the beginning of the fiscal year in
which this Issue is initially applied.  Any debt discount that was
recognized when the conversion option was initially bifurcated from the
convertible debt instrument shall continue to be amortized.  The
cumulative effect of the change in accounting principles shall be recognized as
an adjustment to the opening balance of retained earnings.  The
Company is currently evaluating the impact of EITF Issue No. 07-05 on its
consolidated financial statements and footnote disclosure.
 
 2. Management's
Plans, Liquidity and Going Concern
 
 The
Company has incurred net losses in each of the last four years.  This
condition raises substantial doubt about the Company's ability to continue as a
  Page
F-19
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
  going
concern.  These consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and, accordingly, do
not include any adjustments that might result from the outcome of this
uncertainty.  Management believes that the Company and the Lender
continue to work together in a cooperative and constructive manner.
 
 3. Inventories
 
 Inventories
consist of:
 
 2008
                        
                        
                        2007Finished
      goods
                        
                        $
                        6,206,761
                        
                        
                        $
                        6,120,473Inventory
      in transit
                        
                        
                        36,249
                        
                        
                        
                        708,558Allowance
      for excess and obsolescence
                        
                        
                        (1,099,000
                        )
                        
                        
                        (251,000
                        )$
                        5,144,010
                        
                        
                        $
                        6,578,031
 
 4. Property
And Equipment
 
 Property
and equipment consist of:
 
 2008
                        
                        
                        2007Furniture
      and fixtures
                        
                        $
                        576,831
                        
                        
                        $
                        114,798Equipment
                        
                        
                        2,012,792
                        
                        
                        
                        454,921Leasehold
      improvements
                        
                        
                        827,812
                        
                        
                        
                        130,754Computer
      equipment and software
                        
                        
                        584,674
                        
                        
                        
                        599,5034,002,109
                        
                        
                        
                        1,299,976Less:  Accumulated
      depreciation
                        
                        
                        3,274,655
                        
                        
                        
                        1,013,210$
                        727,454
                        
                        
                        $
                        286,766
  Depreciation
and amortization charged against income for all property and equipment amounted
to $255,587 and $278,887 for the years ended December 31, 2008 and 2007,
respectively.
 
 5.        
Goodwill and Other Intangible Assets
 
 Page
F-20
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 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, Data Center Maintenance and Network
Infrastructure Design and Support reporting units at their
acquisition.
 
 Intangibles
increased during 2008 as the result of the acquisition of Contemporary Computer
Services, Inc. (CCSI) that was completed effective July 1, 2008 (Note
6).  The intangibles consisted of customer lists and employee
non-compete agreements.  Amortization of those intangibles is computed
on a straight-line basis over six to nine years starting July 1,
2008.  The increase in intangibles occurred in the Network
Infrastructure Design and Support segment.  The acquisition was funded
by a combination of 3,500,000 shares of common stock and a $10,000,000 note
payable which bears an interest rate of ten percent per annum.
 
 Intangibles
increased during 2007 as the result of an asset purchase completed July 1,
2007.  The intangibles acquired consisted of a website, database, EBay
storefront and employee non-competes.  Amortization of those
intangibles is computed on a straight-line basis over a three-year life starting
July 1, 2007.  The increase in intangibles assets occurred in the Data
Security and Compliance segment.  The acquisition was funded by the
reduction of the seller’s accounts receivable balance due to the
Company.
 
 During
the fourth quarter of 2008, the Company performed an impairment test and
determined that the carrying value of goodwill and intangibles were not impaired
as of that date.  During the fourth quarter of 2007, the Company
performed an impairment test on goodwill and intangibles and had determined that
their carrying value was impaired and recorded an impairment charge of
$5,154,782 for goodwill and $2,051,916 for intangibles associated with the Data
Center Hardware reporting unit.
 
 The 2007
impairment of goodwill and intangibles was due to what the Company believes to
be actionable, anticompetitive business practices by a leading
OEM.  This OEM significantly diminished the Company’s ability to
resell IBM zSeries mainframe systems by setting onerous restrictions around the
ability to upgrade or downgrade the configuration deployed on the
system.  As a result, the Company’s hardware trading business was
significantly reduced, which resulted in a total write-off of goodwill and
intangibles in the Data Center Hardware segment.
 
 Page
F-21
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 To
determine fair values for the purposes of calculating impairment in the Data
Center Hardware segment, the Company used both a market and an income approach
to derive fair value.  The market approach compares the value of the
assets to similar business interests of other companies of similar
size.  The income approach applies a discounted cash flow analysis to
the Company’s future sales and income projections.
 
 At
December 31, 2008 and 2007, the balance of goodwill and intangible assets is as
follows:
  2008
                        
                        
                        2007Goodwill
                        
                        $
                        7,934,627
                        
                        
                        $
                        1,489,621Intangible
      assets with indefinite lives
                        
                        
                        3,100,000
                        
                        
                        
                        70,000Intangible
      assets with finite lives, net
                        
                        
                        2,917,968
                        
                        
                        
                        400,348$
                        13,952,595
                        
                        
                        $
                        1,959,969
 
 At
December 31, 2008 and 2007, the balance of goodwill by segment is as
follows:
 
 Data
                      
                      
                      NetworkData
                      
                      
                      Data
                      
                      
                      Security
                      
                      
                      InfrastructureCenter
                      
                      
                      Center
                      
                      
                      And
                      
                      
                      Design
      andHardware
                      
                      
                      Maintenance
                      
                      
                      Compliance
                      
                      
                      Support
                      
                      
                      TotalBalance
      January 1, 2007
                      
                      $
                      5,154,782
                      
                      
                      $
                      1,489,621
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      6,644,403Less:
      Impairment
                      
                      
                      (5,154,782
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (5,154,782
                      )Balance
      December 31, 2007
                      
                      $
                      —
                      
                      
                      $
                      1,489,621
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      1,489,621Add:  Acq.
      of CCSI
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      6,445,006
                      
                      
                      
                      6,445,006Balance
      December 31, 2008
                      
                      $
                      —
                      
                      
                      $
                      1,489,621
                      
                      
                      $
                      —
                      
                      
                      $
                      6,445,006
                      
                      
                      $
                      7,934,627
 
 Page
F-22
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
  Intangibles
with indefinite lives relate principally to trade names.  At
December 31, 2008 and 2007, the balance of intangibles with indefinite
lives by segment is as follows:
  Data
                      
                      
                      NetworkData
                      
                      
                      Data
                      
                      
                      Security
                      
                      
                      InfrastructureCenter
                      
                      
                      Center
                      
                      
                      And
                      
                      
                      Design
      andHardware
                      
                      
                      Maintenance
                      
                      
                      Compliance
                      
                      
                      Support
                      
                      
                      TotalBalance
      January 1, 2007
                      
                      $
                      840,000
                      
                      
                      $
                      70,000
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      910,000Less:
      Impairment
                      
                      
                      (840,000
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (840,000
                      )Balance
      December 31, 2007
                      
                      $
                      —
                      
                      
                      $
                      70,000
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      70,000Add:  Acq.
      of CCSI
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      3,030,000
                      
                      
                      
                      3,030,000Balance
      December 31, 2008
                      
                      $
                      —
                      
                      
                      $
                      70,000
                      
                      
                      $
                      —
                      
                      
                      $
                      3,030,000
                      
                      
                      $
                      3,100,000
 
 Intangibles
with finite lives relate principally to the following:
 
 20082007
                            
                            
                            2008
                            
                            
                            AdjustedCost
                            
                            
                            Additions
                            
                            
                            CostCustomer
      lists
                            
                            $
                            120,000
                            
                            
                            $
                            2,760,000
                            
                            
                            $
                            2,880,000Database
                            
                            
                            25,000
                            
                            
                            
                            —
                            
                            
                            
                            25,000Employeenon-competes
                            
                            
                            197,000
                            
                            
                            
                            80,000
                            
                            
                            
                            277,000Website
                            
                            
                            50,000
                            
                            
                            
                            —
                            
                            
                            
                            50,000EBay
      Storefront
                            
                            
                            240,000
                            
                            
                            
                            —
                            
                            
                            
                            240,000Total
                            
                            $
                            632,000
                            
                            
                            $
                            2,840,000
                            
                            
                            $
                            3,472,000
 
 Amortization2007
                        
                        
                        on
      Intangibles
                        
                        
                        Amortization
                        
                        
                        2008
                        
                        
                        2008
                        
                        
                        RemainingAccumulated
                        
                        
                        acquired
      prior
                        
                        
                        on
      2008
                        
                        
                        Accumulated
                        
                        
                        Net
                        
                        
                        AmortizationAmortization
                        
                        
                        to
      2008
                        
                        
                        Acquisition
                        
                        
                        Amortization
                        
                        
                        Intangibles
                        
                        
                        Life
      (Years)Customer
      lists
                        
                        $
                        48,840
                        
                        
                        $
                        13,320
                        
                        
                        $
                        153,330
                        
                        
                        $
                        215,490
                        
                        
                        $
                        2,664,510
                        
                        
                        4.3
      to 8.5Database
                        
                        
                        4,164
                        
                        
                        
                        8,328
                        
                        
                        
                        —
                        
                        
                        
                        12,492
                        
                        
                        
                        12,508
                        
                        
                        
                        1.5Employeenon-competes
                        
                        
                        130,312
                        
                        
                        
                        42,732
                        
                        
                        
                        7,998
                        
                        
                        
                        181,042
                        
                        
                        
                        95,958
                        
                        
                        0.3
      to 5.5Website
                        
                        
                        8,334
                        
                        
                        
                        16,668
                        
                        
                        
                        —
                        
                        
                        
                        25,002
                        
                        
                        
                        24,998
                        
                        
                        
                        1.5EBay
      Storefront
                        
                        
                        40,002
                        
                        
                        
                        80,004
                        
                        
                        
                        —
                        
                        
                        
                        120,006
                        
                        
                        
                        119,994
                        
                        
                        
                        1.5Total
                        
                        $
                        231,652
                        
                        
                        $
                        161,052
                        
                        
                        $
                        161,328
                        
                        
                        $
                        554,032
                        
                        
                        $
                        2,917,968
 
 
 Page
F-23
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 
 January
      1,
                    
                    
                    
                    
                    
                    
                    
                    
                    December
      31,2007
                    
                    
                    Additions
                    
                    
                    Impairments
                    
                    
                    2007Customer
      lists – gross
                    
                    $
                    1,640,000
                    
                    
                    $
                    —
                    
                    
                    $
                    (1,520,000
                    )
                    
                    $
                    120,000Less
      accumulated amortization
                    
                    
                    485,888
                    
                    
                    
                    182,208
                    
                    
                    
                    (619,256
                    )
                    
                    
                    48,840Customer
      lists – net
                    
                    
                    1,154,112
                    
                    
                    
                    (182,208
                    )
                    
                    
                    (900,744
                    )
                    
                    
                    71,160Database
      – gross
                    
                    
                    400,000
                    
                    
                    
                    25,000
                    
                    
                    
                    (400,000
                    )
                    
                    
                    25,000Less
      accumulated amortization
                    
                    
                    118,528
                    
                    
                    
                    48,612
                    
                    
                    
                    (162,976
                    )
                    
                    
                    4,164Database
      – net
                    
                    
                    281,472
                    
                    
                    
                    (23,612
                    )
                    
                    
                    (237,024
                    )
                    
                    
                    20,836Employee
      non-competes – gross
                    
                    
                    450,000
                    
                    
                    
                    25,000
                    
                    
                    
                    (278,000
                    )
                    
                    
                    197,000Less
      accumulated amortization
                    
                    
                    240,000
                    
                    
                    
                    94,164
                    
                    
                    
                    (203,852
                    )
                    
                    
                    130,312Employee
      non-competes – net
                    
                    
                    210,000
                    
                    
                    
                    (69,164
                    )
                    
                    
                    (74,148
                    )
                    
                    
                    66,688Website
      – gross
                    
                    
                    —
                    
                    
                    
                    50,000
                    
                    
                    
                    —
                    
                    
                    
                    50,000Less
      accumulated amortization
                    
                    
                    —
                    
                    
                    
                    8,334
                    
                    
                    
                    —
                    
                    
                    
                    8,334Website
      – net
                    
                    
                    —
                    
                    
                    
                    41,666
                    
                    
                    
                    —
                    
                    
                    
                    41,666EBay
      Storefront – gross
                    
                    
                    —
                    
                    
                    
                    240,000
                    
                    
                    
                    —
                    
                    
                    
                    240,000Less
      accumulated amortization
                    
                    
                    —
                    
                    
                    
                    40,002
                    
                    
                    
                    —
                    
                    
                    
                    40,002Ebay
      Storefront – net
                    
                    
                    —
                    
                    
                    
                    199,998
                    
                    
                    
                    —
                    
                    
                    
                    199,998Total
      finite lived intangibles- gross
                    
                    
                    2,490,000
                    
                    
                    
                    340,000
                    
                    
                    
                    (2,198,000
                    )
                    
                    
                    632,000Less
      accumulated amortization
                    
                    
                    844,416
                    
                    
                    
                    373,320
                    
                    
                    
                    (986,084
                    )
                    
                    
                    231,652Total
      finite  lived intangibles- net
                    
                    $
                    1,645,584
                    
                    
                    $
                    (148,888
                    )
                    
                    $
                    (1,211,916
                    )
                    
                    $
                    400,348
 
 Amortization
of intangibles is computed on a straight-line basis and based on December 31,
2008 balances, expected amortization expense in each of the next five years and
thereafter is as follows:
 
 Page
F-24
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 Year
                      
                      Amount2009
                      
                      $
                      460,7522010
                      
                      
                      392,6562011
                      
                      
                      335,9762012
                      
                      
                      335,9762013
                      
                      
                      319,238Thereafter
                      
                      
                      1,073,370$
                      2,917,968
 
 6.        
Business Acquisition
 
 In July,
the Company completed the purchase of all of the outstanding shares of
Contemporary Computer Service, Inc. (CCSI).  CCSI provides corporate,
government and educational clients with network infrastructure services
including network design, implementation and monthly maintenance services on
corporations’ network hardware and related infrastructure as well as 24/7
monitoring and diagnostics through its North American Network Operating Center
(NOC).  The cost of the acquired entity was $13,191,080 plus an
additional stock earn out of up to an additional 10 million shares of common
stock based on achieving certain performance milestones.  The
$13,191,080 purchase price was financed through a combination of the issuance of
3,500,000 shares of common stock in the Company, valued at $770,000, based upon
the average market price for QSGI’s common stock for two days before, the day of
and two days after May 7, 2008, the announcement date, senior bank and seller
financing in the amount of $10 million dollars, both secured by the assets of
the Company.  In connection with the seller financing, the Company
issued warrants to purchase 12,000,000 shares of Common Stock at a purchase
price of $0.30 per share valued at $1,287,878, based upon the closing price on
July 7, 2008, the date immediately prior to the announcement.  The
Company also incurred direct acquisition costs of $1,133,202.
 
 Certain
cost of the acquisition was allocated to identifiable intangibles of $5,870,000
and goodwill of $6,445,006.
 
 The
identifiable intangibles are comprised of the following:
 
 Page
F-25
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 Identifiable
      Intangible Asset
                          
                          Fair
      Value
                          
                          Remaining
      Useful LifeNon-Competition
      Agreement
                          
                          $
                          80,000
                          
                          6
      yearsTrademark/Trade
      Name
                          
                          
                          3,030,000
                          
                          IndefiniteList
      of Customers
                          
                          
                          2,760,000
                          
                          9
      yearsTotal
                          
                          $
                          5,870,000
 
 The
amortizable expense related to the acquisition amounted to $161,108 for the year
ended December 31, 2008.
 
 The
goodwill and trademark recorded in connection with this acquisition will not be
amortized to expense, but will be subject to periodic testing for impairment in
accordance with SFAS No 142, Goodwill and Other Intangible
Assets.
 
 The
following table summarizes the fair value of the CCSI assets acquired and
liabilities assumed as of July 1, 2008:
 
 (Unaudited)Assets
      acquired:Current
      assets
                    
                    $
                    1,776,826Property,
      plan and equipment
                    
                    
                    588,573Intangible
      assets subject to amortization:Software
                    
                    
                    2,958Other
      Assets
                    
                    
                    62,622Total
      assets acquired
                    
                    $
                    2,430,979Liabilities
      assumed:Accounts
      payable and accrued expenses
                    
                    $
                    1,382,714Deferred
      revenue
                    
                    
                    341,890Notes
      and loans payable
                    
                    
                    22,801Total
      liabilities
                    
                    
                    1,747,405Net
      assets acquired
                    
                    $
                    683,574
 
 In
considering the benefits of the CCSI acquisition, management recognized the
strategic complement of CCSI’s trade name, services and customer
database.  This complement provides a strong platform for further
development of our management services.
 
 The
results of CCSI have been included in the Condensed Consolidated Financial
Statements since July 1, 2008.  Unaudited pro-forma results of
operations for the twelve months ended December 31, 2008 are included
below.  Such pro-forma information assumes that the acquisition had
occurred as of January 1, 2008, and
   Page
F-26
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
  revenue
is presented in accordance with our accounting policies.  This summary
is not necessarily indicative of that our result of operations would have been
had CCSI been a combined entity during such periods, nor does it purport to
represent results of operations for any future periods.
  Year
      Ended December 31, 2008
                  Year
      Ended December 31, 2007Revenue
                  $
      40,122,736
                  $
      50,944,148Net
      (Loss) Available to Common Stockholders
                  (6,425,036)
                  (9,214,194)Net
      Income Per Common Share – Basic and Diluted
                  $
      (0.18)
                  $
      (0.27)
 
 7.        
Other Assets
 
 Other
assets consist of:
 
 2008
                          
                          
                          2007Deposits
                          
                          $
                          155,748
                          
                          
                          $
                          83,306Trademark
                          
                          
                          7,885
                          
                          
                          
                          7,885Patent,
      net of amortization of $5,751in
      2008 and $4,541 in 2007
                          
                          
                          18,464
                          
                          
                          
                          19,675Deferred
      loan costs
                          
                          
                          42,132
                          
                          
                          
                          116,435Notes
      receivable
                          
                          
                          60,036
                          
                          
                          
                          150,725Other
                          
                          
                          933
                          
                          
                          
                          70,040$
                          285,198
                          
                          
                          $
                          448,066
 
 The
patent is being amortized over a 20-year life.  Patent amortization
expense in 2008 and 2007 amounted to $1,211.  Expected amortization
expense in each of the next five years is $1,211 per year.
 
 Notes
receivable consist of secured amounts due from one current employee, bearing
interest at a rate of 0% payable in varying amounts through 2011.
 
 8.        
Financing Arrangements
 
 Revolving
Line Of Credit
  Page
F-27
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 
 On June
5, 2008, the Company entered into a Senior Security Purchase Agreement with
Victory Park Capital.  This agreement allows the Company to borrow up
to $10 million to finance both working capital needs and future
acquisitions.  The new facility replaced the Company's $7.5 million
asset based working capital facility with Wells Fargo Bank.  The new
revolving line of credit agreement provides for borrowings limited to the lesser
of $10,000,000 or the borrowing base of 80% of eligible accounts receivable plus
50% of eligible inventory plus 60% of eligible pre-billed service
receivables.  The interest rate per annum charged is the greater of
prime plus seven percent (7.00%) and twelve percent (12.00%).  As of
December 31, 2008, the Company had requested an over advance and as a result was
paying interest at fifteen percent (15%) per annum, with all principal and
interest due December 1, 2010.  We had no availability on the
borrowing base at December 31, 2008. 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.
 
 The
Company incurred $486,250 in origination fees paid to Victory Park Capital,
including the issuance of 1,125,000 shares of the Company’s common
stock.  These fees were recorded as a reduction of the loan
proceeds.  The original issue discount will be recognized as interest
expense on a straight-line basis over the thirty month term of the financing
agreement.  During the year ended December 31, 2008, the Company
recognized $130,010 of interest expense related to the original issue discount,
and has $476,240 remaining to be recognized.  These costs have the
effect of making the interest rate approximately 4% higher than the stated rate
for thirty months based on anticipated future borrowings.
 
 The
Company also signed a Registration Rights Agreement with Victory Park Capital
where upon written request by Victory Park Capital to the Company, the Company
within 45 days shall file a registration statement.  This registration
statement must be declared effective 90 days from the filing
deadline.  The registration statement must remain effective until the
underlying securities are sold.  If the filing deadline, the
effectiveness deadline, or the continued effectiveness requirement is not met,
the Company shall pay Victory Park Capital, in cash, one and one half percent
(1.5%) of the aggregate outstanding principal amount of investor notes until
such filing failures are cured.  The Registration Rights Agreement
does not provide for any limitation as to the maximum potential consideration to
be paid.  At December 31, 2008, the Company has not recorded any
liability for the registration rights payment arrangement as this amount cannot
be determined and no demand by Victory Park Capital has been made.
  Page
F-28
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
  As part
of the Amended and Restated Securities Purchase Agreement dated July 10, 2008,
750,000 additional shares were due to Victory Park Capital.  The value
of the shares issued was $120,000.  This amount was recorded as
additional debt issuance costs in July 2008 and will be recognized as interest
expense on a straight -line basis over the thirty month term of the financing
agreement.  During the year ended December 31, 2008, the Company
recognized $96,000 of interest expense related to the original issue
discount.  Additionally upon the earlier of December 1, 2010 or the
date of the voluntary prepayment of all Notes due to Victory Park Capital, if
the Company has not issued a total of 2,600,000 shares of common stock to
Victory Park Capital, then the Company shall owe Victory Park Capital the result
of 2,600,000 shares of common stock minus the number of shares of common stock
issued to date multiplied by fifty percent (50%).
  As of
December 31, 2008, the Company was not in compliance with the covenants as they
were originally set in the Amended and Restated Securities Purchase
Agreement.  As a result, the Company signed a Second Amendment to
Amended and Restated Securities Purchase Agreement.  This Amendment
waived the December 31, 2008 violation and amended the financial
covenants.  The amended financial covenants will take effect
commencing June 30, 2009.  The new financial covenants that need to be
met are as follows:
  Maximum
      Senior Leverage
                    4.0
      to 1.0Maximum
      Senior Leverage
                    10.0
      to 1.0Interest
      Coverage
                    1.5
      to 1.0Fixed
      Charge Coverage
                    1.25
      to 1.0Capital
      Expenditures not in excess of $200,000 for any calendar
    year
 
 On
November 17, 2008, the Company signed a $750,000 Senior Secured Term Note (the
“Loan”) with Victory Park Credit Opportunities Master Fund, Ltd. (the
“Holder”).  The interest rate on the Note is 20.0% and has a maturity
date of April 16, 2009.  The Loan is secured in accordance with that
certain Pledge and Security Agreement by and between the Company and the Agent,
dated June 5, 2008.  Closing fees and costs were $50,000 plus
2,000,000 shares of Common Stock of the Company that were issued, in accordance
with the Security Purchase Agreement between the Company and Agent dated June 5,
2008, as amended and re-stated.
 
 Page
F-29
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 Previous
Revolving Line Of Credit
  On
January 17, 2007, the Company completed the financing of a $7,500,000 working
capital facility with Wells Fargo Bank, which increased and replaced a similar
based line of credit of $4,250,000.  The revolving line-of-credit
agreement provided for borrowings limited to the lesser of $7,500,000 or the
borrowing base of 85% of eligible accounts receivable plus 45% of inventories,
with eligible inventories not to exceed $3,000,000.  The revolving
line-of-credit agreement contained certain financial covenants, including
minimum net income requirements.
 
 Availability
on the borrowing base at December 31, 2007 was $287,684.  Interest on
this loan was payable monthly at the prime rate plus 1.5% (8.75% at
December 31, 2007), with all principal and interest due January 24,
2010.  In accordance with Emerging Issues task Force (EITF) Issue No.
95-22, the line of credit was classified as a current liability due to the
agreement containing a subjective acceleration clause and a lock-box
arrangement.
 
 The
Company was in not in compliance with all of its covenants at December 31,
2007.  The bank had notified the Company that it was out of compliance
with its covenants and was in default on the loan.  In February 2008,
the bank began charging interest at a default rate equal to the prime rate plus
2.5%, and charged a fee of $20,000.  This loan was paid in full in
July 2008 in connection with the new line of credit arrangement.
 
 9.        
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 $2,236,301
was received at the beginning of January 2006.
 
 Page
F-30
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 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 20 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.
 
 10.      
Stockholders’ Equity
 
 Stock
Option Grants
  Stock
option compensation expense in the amount of $149,481 and $19,430 was recorded
in 2008 and 2007, respectively.
 
 A summary
of stock option activity is as follows:
 
 2008
                                
                                
                                2007Weighted
      -
                                
                                
                                
                                
                                
                                Weighted
      -Average
                                
                                
                                
                                
                                
                                AverageExercise
                                
                                
                                
                                
                                
                                ExerciseShares
                                
                                
                                Price
                                
                                
                                Shares
                                
                                
                                PriceOutstanding
      -January
      1
                                
                                
                                11,369,834
                                
                                
                                $
                                1.930
                                
                                
                                
                                12,221,834
                                
                                
                                $
                                1.972Granted
                                
                                
                                1,955,000
                                
                                
                                
                                0.160
                                
                                
                                
                                40,000
                                
                                
                                
                                1.405Exercised
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                —Forfeited
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                (892,000
                                )
                                
                                
                                2.471Outstanding
      at December 31
                                
                                
                                13,324,834
                                
                                
                                $
                                1.671
                                
                                
                                
                                11,369,834
                                
                                
                                $
                                1.930Exercisable
      at December 31
                                
                                
                                12,532,834
                                
                                
                                $
                                1.763
                                
                                
                                
                                11,330,834
                                
                                
                                $
                                1.932
 
 Options
amounting to 1,955,000 were issued to employees in 2008 at an exercise price of
$0.16.  Stock option compensation expense related to options in the
amount of $149,481 was recorded in 2008.  Options amounting to 40,000
were issued to employees in 2007 at an exercise price of $1.40.  Stock
option compensation related to options in the amount of $19,430 was recorded in
2007.
 
 Page
F-31
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 The
weighted average per share fair value of the options granted was $0.16 and $1.41
for the years ended December 31, 2008 and 2007, respectively.  The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an option award, with the following assumptions for
2008:  no dividend yield, expected option lives 7.6 years (2007: 1.6
years), expected volatility of 81% (2007: 70%), and a risk -free interest rate
of 3.0% to 3.8% (2007: 4.2%).  In determining the volatility of the
Company's options, the Company used the average volatility of the Company's
stock.
 
 Unrecognized
stock option compensation cost related to unvested stock options amounts to
approximately $108,000.  The cost is expected to be recognized over
the next five years.
 
 The
following table summarizes information about the options outstanding at December
31, 2008:
 
 ExercisableOutstanding
      Stock Options
                    
                    Stock
      OptionsWeighted
      -Average
                    Weighted
      -
                    
                    
                    Weighted
      -Range
      Of
                    
                    Remaining
                    Average
                    
                    
                    AverageExercise
                    
                    Contractual
                    Exercise
                    
                    
                    ExercisePrices
                    Shares
                    Life
                    Price
                    
                    Shares
                    Price$
      0.026
                    1,740,000
                    3.1
                    $
      0.026
                    
                    1,740,000
                    $
      0.0260.160
                    1,955,000
                    7.3
                    0.160
                    
                    1,191,000
                    0.1601.01
      to 1.90
                    2,433,334
                    5.2
                    1.671
                    
                    2,405,334
                    1.6912.00
      to 2.13
                    2,255,000
                    5.9
                    2.007
                    
                    2,255,000
                    2.0072.50
      to 2.75
                    4,725,000
                    6.2
                    2.659
                    
                    4,725,000
                    2.6593.45
      to 3.46
                    216,500
                    2.0
                    3.450
                    
                    216,500
                    3.45013,324,834
                    
                    
                    
                    12,532,834
 
 Page
F-32
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 Warrants
  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 October 2007, these warrants expired.
 
 In July
2008, the Company issued 12,000,000 warrants with an exercise price of $0.30 as
part of the acquisition of Contemporary Computer Services, Inc. (Note
6).  Three million of these warrants are exercisable every six months
beginning July, 2010 and expire five years from the date the warrants are
exercisable.  A schedule of common stock warrant activity is as
follows:
 
 Page
F-33
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 A summary
of warrant activity is as follows:
 
 2008
                              
                              
                              2007Weighted
      -
                              
                              
                              
                              
                              
                              Weighted
      -Average
                              
                              
                              
                              
                              
                              AverageExercise
                              
                              
                              
                              
                              
                              ExerciseShares
                              
                              
                              Price
                              
                              
                              Shares
                              
                              
                              PriceOutstanding
      -January
      1
                              
                              
                              583,333
                              
                              
                              $
                              3.60
                              
                              
                              
                              933,333
                              
                              
                              $
                              3.00Granted
                              
                              
                              12,000,000
                              
                              
                              
                              0.30
                              
                              
                              
                              —
                              
                              
                              
                              —Exercised
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Expired
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (350,000
                              )
                              
                              
                              2.00Outstanding
      at December 31
                              
                              
                              12,583,000
                              
                              
                              $
                              0.45
                              
                              
                              
                              583,000
                              
                              
                              $
                              3.60Exercisable
      at December 31
                              
                              
                              583,000
                              
                              
                              $
                              3.60
                              
                              
                              
                              583,000
                              
                              
                              $
                              3.60
 
 2008
                          
                          2007ExercisableOutstanding
      Warrants
                          
                          WarrantsWeighted
      -Average
                          Weighted
      -
                          
                          
                          Weighted
      -Range
      Of
                          
                          Remaining
                          Average
                          
                          
                          AverageExercise
                          
                          Contractual
                          Exercise
                          
                          
                          ExercisePrices
                          Shares
                          Life
                          Price
                          
                          Shares
                          Price$
      0.30
                          12,000,000
                          6.21
                          0.30
                          
                          —
                          $—3.60
                          583,333
                          .37
                          3.60
                          
                          583,333
                          3.60Outstanding
      as
                            of
      December 31
                          12,583,333
                          5.94
                          $
      0.45
                          
                          583,333
                          $  3.60Exercisable
      at
                            December
      31
                          583,333
                          .37
                          $
      3.60
                          
                          583,333
                          $  3.60
 
 11.      
Income Taxes
 
 The
expense (benefit) for income taxes consists of the following:
 
 2008
                          
                          
                          2007Current
                          
                          $
                          5,359
                          
                          
                          $
                          69,468Deferred
                          
                          
                          —
                          
                          
                          
                          174,336$
                          5,359
                          
                          
                          $
                          243,804
 
 Page
F-34
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 The tax
effects of temporary differences and carry forwards that give rise to
significant portions of deferred tax assets and liabilities consist of the
following:
 
 2008
                                          
                                          
                                          2007Deferred
      Tax AssetsLiabilities
      and reserves
                                          
                                          $
                                          901,489
                                          
                                          
                                          $
                                          651,393Net
      operating loss carryforwards
                                          
                                          
                                          3,449,912
                                          
                                          
                                          
                                          1,612,300Stock
      options
                                          
                                          
                                          77,660
                                          
                                          
                                          
                                          19,362Inventory
      capitalization
                                          
                                          
                                          306,181
                                          
                                          
                                          
                                          240,024Property
      and equipment
                                          
                                          
                                          29,899
                                          
                                          
                                          
                                          66,5594,765,141
                                          
                                          
                                          
                                          2,589,638Valuation
      allowance
                                          
                                          
                                          (4,665,299
                                          )
                                          
                                          
                                          (2,527,374
                                          )99,842
                                          
                                          
                                          
                                          62,264Deferred
      Tax LiabilitiesPrepaid
      expenses
                                          
                                          
                                          20,631
                                          
                                          
                                          
                                          26,449Patent
      and trademark
                                          
                                          
                                          8,025
                                          
                                          
                                          
                                          7,859Intangibles
                                          
                                          
                                          98,486
                                          
                                          
                                          
                                          55,256127,142
                                          
                                          
                                          
                                          89,564Net
      Deferred Tax Asset (Liability)
                                          
                                          $
                                          (27,300
                                          )
                                          
                                          $
                                          (27,300
                                          )
 
 The
current and long-term components of the net deferred tax liability are as
follows:
 2008
                          
                          
                          2007Current
      deferred tax asset
                          
                          $
                          —
                          
                          
                          $
                          —Long-term
      deferred tax liability
                          
                          
                          (27,300
                          )
                          
                          
                          (27,300
                          )$
                          (27,300
                          )
                          
                          $
                          (27,300
                          )
 
 Page
F-35
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 The
reconciliation of the effective tax rate with the statutory federal income tax
benefit rate is as follows:
  2008
                          
                          
                          2007Statutory
      federal rate
                          
                          
                          34
                          %
                          
                          
                          34
                          %State
      income taxes, net of federal benefits
                          
                          
                          5
                          
                          
                          
                          1Goodwill
      impairment
                          
                          
                          —
                          
                          
                          
                          (19
                          )Change
      in valuation allowance
                          
                          
                          (39
                          )
                          
                          
                          (18
                          )Meals,
      entertainment and club dues
                          
                          
                          —
                          
                          
                          
                          (1
                          )—
                          
                          
                          
                          (3
                          )%
 
 The
Company’s ability to utilize the cumulative tax net operating loss carryforward
of approximately $9,400,000 at December 31, 2008 against future taxable income
will begin to expire on December 31, 2022 and is subject to Section 382
limitations, as defined by Section 382 of the Internal Revenue Code of 1986, of
approximately $594,000 per year.  Our net operating loss carry-forward
may be subject to significant future limitations, if our cumulative ownership
change percentage increases by more than 50% over a three-year period, as
defined by Section 382.
 
 The
Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109, as of January 1,
2007.  As a result of the implementation of FIN 48, the Company
recognized a $368,000 increase in the liability for unrecognized tax benefits,
$38,000 of which was accounted for as a reduction to the January 1, 2007 balance
of retained earnings.  The majority of these unrecognized tax benefits
were resolved during 2007, with the reversal of the temporary differences
related to the issues.
 
 A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
 
 Balance
      at January 1, 2007
                                  
                                  $
                                  368,000Additions
      based on tax positions related to the current year
                                  
                                  
                                  2,500Settlements
                                  
                                  
                                  (358,000
                                  )Balance
      at January 1, 2008
                                  
                                  
                                  12,500Additions
      based on tax positions related to the current year
                                  
                                  
                                  19,500Settlements
                                  
                                  
                                  —Balance
      at December 31, 2008
                                  
                                  $
                                  31,500
 
 Included
in the balance of unrecognized tax benefits at December 31, 2008 are $12,500 of
tax benefits that, if recognized, would affect the effective tax
rate.
 
 Page
F-36
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 The
Company recognizes interest and penalties, if any, related to unrecognized tax
benefits in income tax expense.  The liability for accrued expenses
included accrued interest of $1,000 at December 31, 2008 and December 31,
2007.  The Company is currently open to audit under the statute of
limitations by the Internal Revenue Service and the appropriate state income tax
authorities from 2005 through 2008.  We are also subject to
examination by the taxing authorities of India.
 
 During
the second quarter of 2007, the Internal Revenue Service (IRS) completed the
examination of the Company’s consolidated federal income tax return for
2004.  The examination resulted in additional tax due of approximately
$6,400, as well as adjustments to the Company’s balance of net operating loss
carryforwards.  As a result of the completion of the examination, the
Company reduced its unrecognized tax benefits by $358,000.  In 2007,
the Company accrued an additional liability of $2,500 for tax positions related
to that year.
 
 12.      
Concentrations
 
 Major
Customers
  For the
years ended December 31, 2008 and 2007, sales to the Company’s top ten customers
comprised approximately 27% and 31% of revenue, respectively.  Sales
to two of these customers comprised approximately 13% and 6% of sales in 2008
and 2007, respectively. No individual customer exceeded 10% of the Company's
sales.  The Company’s top ten customers also comprised approximately
39% and 19% of the accounts receivable balance at December 31, 2008 and 2007,
respectively.
 
 Major
Suppliers
  The
Company purchases a majority of its products from a small number of
suppliers.  Approximately 25% and 61% of product purchases were from
two and three vendors for the years ended December 31, 2008 and 2007,
respectively.  The Company's top two and three vendors comprised of
approximately 4% and 0% of the accounts payable balance at December 31, 2008 and
2007, respectively.
 
 13.      
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.
 
 Page
F-37
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 The
Company contributed $325,126 and $185,502 to the plan during the years ended
December 31, 2008 and 2007, respectively.
 
 14.      
Commitments And Contingencies
 
 Lease
  The
Company has an operating lease on Minnesota real property expiring in October
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 is looking to move into a smaller space at the
end of the lease.
 
 The
Company has an operating lease on New York real property expiring in October
2009.  The Company anticipates releasing the same property at the end
of the lease.
 
 The
Company has an operating lease on New Jersey real property expiring in the year
2011.  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 York real property expiring in the year
2013.  In addition to the 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 Jersey real property expiring in the year
2013.  In addition to the 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 Florida real property expiring in the year
2012.
 
 Rent
expense and other charges totaled $986,572 and $831,801 for the years ended
December 31, 2008 and 2007, respectively.
 
 The
approximate minimum payments required under these operating leases at December
31, 2008 are:
 
 Page
F-38
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 Year
                        
                        Amount2009
                        
                        $
                        816,4222010
                        
                        
                        613,7232011
                        
                        
                        569,2212012
                        
                        
                        338,9242013
                        
                        
                        128,900$
                        2,467,190
 
 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 consolidated financial
statements.
 
 Employment
Contracts
  In 2005,
the Company entered into employment contracts with three of its executive
officers.  Their contracts are initially for three-year terms, and
were renewed for an additional term of three years in 2008.  These
contracts include “change of control” provisions, under which the employees may
terminate their employment within one year after a change in control, and be
entitled to receive specified severance payments generally equal to three times
their ending average compensation for the proceeding year.  In
addition, these employees could also receive these payments if they were
involuntarily terminated without cause, even if there is no change in
control.
 
 Legal
Proceedings
  From time
to time, the Company may be party to legal proceedings which arise generally in
the ordinary course of business.  In the opinion of management, these
proceedings, except as discussed in the following paragraph, are not likely to
have a material adverse affect on the financial position, results of operations
or cash flows of the Company.
 
 Page
F-39
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 The
Company may be involved in legal proceedings which may have a material adverse
affect on the financial position, results of operations or cash flows of the
Company. Therefore estimates of potential impact of legal proceedings on the
Company could change in the future depending upon matters in suit and the course
of specific litigation.  One such proceeding is currently pending in
the Supreme Court, State of New York.  In this action, Agile Equity,
LLC. seeks approximately $500,000 from the Company in connection with investment
banking relating to the acquisition of CCSI.  The Company has asserted
multiple defenses and a counter-claim against Agile Equity, LLC. including
breach of duty, doctrine of first breach and breach of contract.  The
Company has not yet made of determination as to the amount, if any, it may be
required to pay Agile Equity, LLC. should the court determine the Company has
liability to Agile Equity, LLC.
 
 15.      
Related Party Transactions
 
 In 2008
and 2007, the Company had sales to one customer related to one stockholder and
officer of the Company.  Sales to this customer for the years ended
December 31, 2008 and 2007 amounted to approximately $47,000 and $85,000,
respectively.  Accounts receivable from this customer amounted to
$10,852 and $49,529 at December 31, 2008 and 2007, respectively.
 
 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.  For the years ended December 31, 2008 and
2007, rent expense for this lease amounted to $83,256 and $221,788,
respectively.
 
 In
November 2007, the Company exercised an option to purchase a portion of the
assets on lease from Varilease Technology Finance Group for approximately
$35,000.  This purchase reduces the monthly rental by approximately
$10,600 per month.  Accounts payable to this vendor amounted to $2,086
and $-0- at December 31, 2008 and 2007, respectively.
 
 Page
F-40
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 17.      
Segment Information
 
 The
Company operates in four business segments:  Data Security and
Compliance, Data Center Hardware, Data Center Maintenance and Network
Infrastructure design and support.  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 Information Technology (IT) assets. The Company
offers a variety of solutions to companies whose business computing technologies
(desktops, laptops, printers, servers and enterprise storage systems) have come
to the end of their life cycle. These services include data erasure to
Department of Defense standards for hard drives, asset auditing/life cycle
management which allows customers to minimize their overall IT expenditure and
maximize their return on investment, IT asset remarketing for IT assets with
market value and environmental compliance (proper recycling or safe disposal)
for IT assets. These services can be custom tailored to meet the customer’s
needs. This can be implemented at QSGI facilities or at one client-site location
or at multiple client-site locations, through the use of one of our client-site
solutions including our mobile audit and erasure truck and our client suitcase
server.
 
 Data
Center Hardware Segment
  This
segment remarkets refurbished mainframe processors, midrange processors and
associated peripherals including tape and disk products and connectivity
products.
 
 Data
Center Maintenance
  This
segment provides hardware maintenance services for enterprise-class hardware
including mainframes, mid-range processors, tape, disk and storage as well as
associated peripheral products and Data Center consulting to companies
throughout the United States.
 
 Network
Infrastructure Design and Support
 
 Page
F-41
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 This
segment provides our corporate, government and educational clients with network
infrastructure services including network design, implementation and monthly
maintenance services on corporations' network hardware and related
infrastructure as well as 24/7 IT monitoring and diagnostics through its North
American Network Operating Center (NOC).
 
 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 are generally accounted for as sales
to third parties at cost and eliminated in consolidation.  The Data
Security and Compliance segment charges management fees to the Data Center
Hardware, Data Center Maintenance and Network Infrastructure Design and Support
segments for certain corporate services.  Management fees charged to
the Data Center Hardware segment amounted to $120,000 and $480,000 in 2008 and
2007, respectively.  Management fees charged to the Data Center
Maintenance segment amounted to $1,080,000 and $720,000 in 2008 and 2007,
respectively.  Management fees charged to the Network Infrastructure
Design and Support amounted to $450,000.  These intersegment
transactions have been eliminated in consolidation.
 
 2008
                          
                          
                          2007RevenuesProducts
                          
                          $
                          19,768,862
                          
                          
                          $
                          30,126,257Services
                          
                          
                          14,382,038
                          
                          
                          
                          7,094,853$
                          34,150,900
                          
                          
                          $
                          37,221,110RevenuesData
      Security And Compliance
                          
                          $
                          17,516,751
                          
                          
                          $
                          20,741,618Data
      Center Hardware
                          
                          
                          2,280,855
                          
                          
                          
                          11,100,092Data
      Center Maintenance
                          
                          
                          7,052,583
                          
                          
                          
                          6,264,981Network
      Infrastructure Design & Support
                          
                          
                          7,490,939
                          
                          
                          
                          —Intersegment
      Elimination
                          
                          
                          (190,228
                          )
                          
                          
                          (885,581
                          )Consolidated
      Total
                          
                          $
                          34,150,900
                          
                          
                          $
                          37,221,110
 
 Page
F-42
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 Income
      (Loss) Before Provision ForIncome TaxesData Security And
      Compliance
                        
                        $
                        (4,269,139
                        )
                        
                        $
                        (3,046,216
                        )Data Center
      Hardware
                        
                        
                        (1,338,100
                        )
                        
                        
                        (7,208,456
                        )Data Center
      Maintenance
                        
                        
                        696,151
                        
                        
                        
                        1,222,624Network Infrastructure Design
      & Support MaintenanceData Center MaintenanceData Center
      Maintenance
                        
                        
                        (751,883
                        )
                        
                        
                        —Consolidated
      Total
                        
                        $
                        (5,662,971
                        )
                        
                        $
                        (9,032,048
                        )Provision
      (Benefit) for Income Taxes
                        
                        
                        5,359
                        
                        
                        
                        243,804Accretion
      to Redemption Value of Preferred Stock
                        
                        
                        19,225
                        
                        
                        
                        18,108Preferred
      Stock Dividend
                        
                        
                        258,708
                        
                        
                        
                        258,000Net
      Loss Available to Common Stockholders
                        
                        $
                        (5,946,263
                        )
                        
                        $
                        (9,551,960
                        )
 
 Depreciation
      And AmortizationData
      Security And Compliance
                        
                        $
                        413,131
                        
                        
                        $
                        299,655Data
      Center Hardware
                        
                        
                        15,470
                        
                        
                        
                        343,347Data
      Center Maintenance
                        
                        
                        51,604
                        
                        
                        
                        59,308Network
      Infrastructure Design & Support
                        
                        
                        247,376
                        
                        
                        
                        —Consolidated
      Total
                        
                        $
                        727,581
                        
                        
                        $
                        702,310
 
 Segment
      AssetsData Security And
      Compliance
                        
                        $
                        7,728,562
                        
                        
                        $
                        8,592,896Data Center
    Hardware
                        
                        
                        373,536
                        
                        
                        
                        1,264,945Data Center
      Maintenance
                        
                        
                        2,725,538
                        
                        
                        
                        3,559,629Network
      Infrastructure Design & Support
                        
                        
                        14,487,806
                        
                        
                        
                        —Consolidated
      Total
                        
                        $
                        25,315,442
                        
                        
                        $
                        13,417,470
 
 2008
                      
                      
                      2007GoodwillData Security And
      Compliance
                      
                      $
                      —
                      
                      
                      $
                      —Data Center
    Hardware
                      
                      
                      —
                      
                      
                      
                      —Data Center
      Maintenance
                      
                      
                      1,489,621
                      
                      
                      
                      1,489,621Network
      Infrastructure Design & Support
                      
                      
                      6,445,006
                      
                      
                      
                      —Consolidated
    Total
                      
                      $
                      7,934,627
                      
                      
                      $
                      1,489,621
 
 Expenditures
      For Property AndEquipmentData Security And
      Compliance
                        
                        $
                        72,202
                        
                        
                        $
                        190,082Data Center
    Hardware
                        
                        
                        11,507
                        
                        
                        
                        21,631Data Center
      Maintenance
                        
                        
                        1,675
                        
                        
                        
                        —Network
      Infrastructure Design & Support
                        
                        
                        22,317Consolidated
    Total
                        
                        $
                        107,701
                        
                        
                        $
                        211,713
 
 Page
F-43
 
 QSGI
INC. AND SUBSIDIARIES
 Notes To
Consolidated Financial Statements
 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 had a small call center in India, which
closed in 2007.  Foreign currency transaction gains or losses were not
material in 2008 or 2007.
 
 For the
years ended December 31, 2008 and 2007, export sales comprised 11% and 17%,
respectively, of revenue.
 
 Revenue
by Geographic Segment comprised:
 
 2008
                        
                        
                        2007United
      States
                        
                        $
                        30,253,279
                        
                        
                        $
                        31,028,368Asia
                        
                        
                        1,872,359
                        
                        
                        
                        1,394,935Middle
      East
                        
                        
                        706,630
                        
                        
                        
                        2,404,862Europe
                        
                        
                        209,506
                        
                        
                        
                        478,557Africa
                        
                        
                        410,411
                        
                        
                        
                        593,044United
      Kingdom
                        
                        
                        97,558
                        
                        
                        
                        485,478Canada
                        
                        
                        517,615
                        
                        
                        
                        556,392Australia
                        
                        
                        14,330
                        
                        
                        
                        —South
      America
                        
                        
                        69,212
                        
                        
                        
                        279,474Consolidated
    Total
                        
                        $
                        34,150,900
                        
                        
                        $
                        37,221,110