QSGI INC. - FORM 10-K/A - July 23, 2010

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - QSGI INC.	ex31-1.htm
EX-23.1 - EXHIBIT 23.1 - QSGI INC.	ex23-1.htm
EX-12.1 - EXHIBIT 12.1 - QSGI INC.	ex12-1.htm
EX-32.1 - EXHIBIT 32.1 - QSGI INC.	ex32-1.htm
EX-23.2 - EXHIBIT 23.2 - QSGI INC.	ex23-2.htm

As filed with the Securities and Exchange Commission on July 23, 2010

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

[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) 629-5713

(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 Company x

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

As filed with the Securities and Exchange Commission on July 23, 2010

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 Financial Statements.

As filed with the Securities and Exchange Commission on July 23, 2010

Amendment

This Amendment No. 1 on Form 10K/A to the Company’s Annual Report on Form 10K for the year ended December 31, 2010, initially filed with the Securities and Exchange Commission ( “SEC”) on March 31, 2009 reflects an audit of the company’s annual form 10K by the SEC and recommended changes as a result of the audit. The audit recommended wording changes and changes to disclosure items to bring them into compliance with the Securities and Exchange Act.

This form 10K/A amends Item 9A (T) Controls and Procedures that were re-written to include discussions of all the required sections, amends Exhibits 31.1 that were re-written to include all the required certifications and modification of the signatures to include Mr. Sherman the current CFO and Chief Accounting Officer and updating the dates to the time of filing this amendment.

Except as specifically indicated above, the Report has not been updated to reflect events occurring subsequent to the original filing date. Other events occurring after the filing of the Report or other disclosures necessary to reflect subsequent events will be addressed in reports filed with the Securities and Exchange Commission.

	Table Of Contents

Item	Description	Page

	Part I

1.	Business	1
1A.	Risk Factors	9
1B.	Unresolved Staff Comments	14
2.	Property	14
3.	Legal Proceedings	15
4.	Submissions of Matters to a Vote of Security Holders	15

	Part II

5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
6.	Selected Financial Data	19
7.	Management’s Discussion And Analysis of Financial Condition and Results of Operations	19
7A.	Quantitative and Qualitative Disclosures About Market Risk	28
8.	Financial Statements and Supplementary Data	28
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	32
9A(T)	Controls and Procedures	32
9B.	Other Information	33
	Part III

10.	Directors, Executive Officers and Corporate Governance	33
11.	Executive Compensation	36
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43
13.	Certain Relationships and Related Transactions, and Director Independence	44
14.	Principal Accountant Fees and Services	45
	Part IV
15.	Exhibits, Financial Statement Schedules	46



	Signatures	47
	Financial Statements and Exhibits	48

PART I

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.

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 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.

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.

Data Center Hardware Segment:

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

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 anywhere 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.

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 its 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

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

o	Wireless voice/data/video

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.

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 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 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.

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 1.0
Maximum Senior Leverage	10.0 to 1.0
Interest Coverage	1.5 to 1.0
Fixed Charge Coverage	1.25 to 1.0
Capital 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.

Item 1A. 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 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.

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

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

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

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

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

We believe that cash that may be generated from operations, together with other available cash resources, 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.

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 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	Position
Marc Sherman	Chairman, Chief Executive Officer, Director
Edward L. Cummings	Chief Financial Officer, Treasurer, Director
David 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 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.

Item 1B. Unresolved Staff Comments

None

Item 2. 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:

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.

Item 3. 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.

Item 4. 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

Item 5. 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		Low

First Quarter	$	0.37	$	0.22
Second Quarter		0.30		0.18
Third Quarter		0.25		0.16
Fourth Quarter		0.24		0.08

Years Ended December 31, 2007

First Quarter	$	1.40	$	0.90
Second Quarter		0.99		0.62
Third Quarter		0.88		0.47
Fourth 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	5,475,166

Equity 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:

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 Shares
Michael Weiss	May - 04	1	1	Private Placement Shares	83,400
Odin Partners, LP	May - 04	1	1	Private Placement Shares	116,600
Barron Partners, LP	May - 04	1	1	Private Placement Shares	4,833,333
Guerilla Partners, LP	May - 04	1	1	Private Placement Shares	716,600
Guerilla IRA Partners, LP	May - 04	1	1	Private Placement Shares	83,400
Bismark Investment	May - 04	1	1	Private Placement Shares	166,667
Joel Owens	May - 04	2	1	Acquisition	1,715,911
Jolene Owens	May - 04	2	1	Acquisition	241,920
Robert Jackson	Nov - 04	3	1	Exercise of Stock Options	200,000
Carl Saracino	Nov - 04	3	1	Exercise of Stock Options	150,000
Michael Sheerr	Nov - 04	3	1	Exercise of Stock Options	150,000
Guerilla IRA Partners, LP	Oct - 04	4	1	Exercise of Stock Warrants	41,700
Guerilla Partners, LP	Oct - 04	4	1	Exercise of Stock Warrants	358,300
Odin Partners, LP	Oct - 04	4	1	Exercise of Stock Warrants	58,300
Michael Weiss	Oct - 04	4	1	Exercise of Stock Warrants	41,700
Andrew T. Trailor	Jul - 04	5	1	Shares Issued for Services	35,140
Duncan J Farmer	Jul - 04	5	1	Shares Issued for Services	35,141
Alan Burger	Jul - 04	5	1	Shares Issued for Services	35,141
Andrew T. Trailor	Dec - 04	5	1	Shares Issued for Services	6,000
Alan Burger and Dana Burger, Joint Tenants	Dec - 04	5	2	Shares Issued for Services	6,000
Duncan J Farmer	Dec - 04	5	1	Shares Issued for Services	6,000
Lois Rosenberg	Jan - 05	3	1	Exercise of Stock Options	125,000
Robert Jackson	Jan - 05	3	1	Exercise of Stock Options	75,000
David A. Loppert	Jan - 05	3	1	Exercise of Stock Options	375,000
Brian Cockerham	Feb - 05	3	1	Exercise of Stock Options	10,000
Eleanor Macdonald	Feb - 05	3	1	Exercise of Stock Options	25,000
Wayne Neuls	Feb - 05	3	1	Exercise of Stock Options	25,000
Louis Nuccio	Feb - 05	3	1	Exercise of Stock Options	50,000
Jack Tull	Feb - 05	3	1	Exercise of Stock Options	10,000
David A. Loppert	Mar - 05	3	1	Exercise of Stock Options	1,100,000
David Rubin	Aug - 05	3	1	Exercise of Stock Options	6,666
Dominick & Dominick	Mar - 05	4	1	Exercise of Stock Warrants	400,000
Paul Lee Newman	Mar - 05	4	1	Exercise of Stock Warrants	100,000
Bismark Intervest	Apr - 05	4	1	Exercise of Stock Warrants	183,333
Barron Partners	Apr - 05	4	1	Exercise of Stock Warrants	550,000
Alan Burger and Dana Burger, Joint Tenants	Dec - 05	5	2	Shares Issued for Services	51,375
Duncan J. Farmer	Dec - 05	5	1	Shares Issued for Services	34,250
Michael Sheerr	Jan - 06	3	1	Exercise of Stock Options	100,000
John W. Heilshorn	Feb - 06	5	1	Shares Issued for Services	24,000
Keith L. Lippert	Feb - 06	5	1	Shares Issued for Services	24,000
Whitmer & Worrall, LLC	Mar - 06	5	1	Shares Issued for Services	40,540
Michael Sheerr	Mar - 06	3	1	Exercise of Stock Options	250,000
Joel Owens	Jun - 06	6	1	Acquisition	2,063,545
Victory Park Credit Opportunities Master Fund	Jun - 08	7	1	Shares Issued for Funding	1,875,000
John S. Riconda	Jun - 08	8	1	Acquisition	13,500,000
Victory 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 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.

Item 6. Selected Financial Data

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

Item 7. 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.

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.

Overview

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 Ended
	December 31, 2008			December 31, 2007

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

Revenue
Products	$	19,768,862	$	30,126,257
Services		14,382,038		7,094,853
Total Revenue	$	34,150,900	$	37,221,110

Our revenue by geographic segment is as follows:


Years Ended December 31,	2008		%			2007		%			Change			% Change

United 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 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

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

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

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

Consolidated Total	$	34,150,900		$	37,221,110

Data Center Maintenance Segment

	Year Ended		Year Ended
	December 31, 2008		December 31, 2007

Revenue	$	7,052,583	$	6,264,981
Gross Profit		3,775,924		4,021,823
Selling, General and Administration		3,028,088		2,739,891
Depreciation and Amortization		3,880		59,308
Income Before Provision
for Income Taxes		743,876		1,222,624

Segment Assets		2,725,538		3,559,629
Goodwill		1,489,621		1,489,621
Expenditures for Property and
Equipment		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 Ended
	December 31, 2008			December 31, 2007

Revenue	$	2,280,855		$	11,100,092
Gross Profit		(356,527	)		2,341,091
Selling, General and Administration		966,103			1,999,516
Depreciation and Amortization		15,470			343,347
Income (Loss) Before Provision
(Benefit) for Income Taxes		(1,338,100	)		(7,208,456	)

Segment Assets		373,536			1,264,945
Goodwill		-			-
Expenditures for Property and
Equipment		11,507			21,631

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 Ended
	December 31, 2008			December 31, 2007

Revenue	$	17,516,751		$	20,741,618
Gross Profit		1,723,520			2,815,527
Selling, General and Administration		4,658,980			5,165,657
Depreciation and Amortization		622,183			299,655
Loss Before Benefit
for Income Taxes		(4,478,191	)		(3,046,216	)

Segment Assets		7,728,562			8,592,896
Goodwill		-			-
Expenditures for Property and
Equipment		72,202			190,082

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 Ended
	December 31, 2008			December 31, 2007

Revenue	$	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.

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.

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 1.0
Maximum Senior Leverage	10.0 to 1.0
Interest Coverage	1.5 to 1.0
Fixed Charge Coverage	1.25 to 1.0
Capital 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.

Item 7A. 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.

Item 8. 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. 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 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

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.

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 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.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A (T). Controls and procedures

Evaluation of Disclosure Controls and Procedures

We have established a system of disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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 Exchange Act) was performed as of the end of the period covered by this annual report. This evaluation was performed under the supervision and with the participation of management, including our CEO and CFO.

Based upon that evaluation, our CEO and CFO have concluded that these disclosure controls and procedures were effective.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such rule is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation funder the framework in “Internal Control – Integrated Framework,” our management concluded that our internal control over financial reporting was effective as of December 31, 2008

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.

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, 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.

Item 9B. Other Information

None

Part III

Item 10. Directors, Executive Officers, and Corporate Governance

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

Name	Age	Position
Marc Sherman	45	Chairman, Chief Executive Officer, Director
Seth A. Grossman (1)(2)	43	President, Chief Operating Officer, Director
Edward L. Cummings	60	Chief Financial Officer, Treasurer, Director
David Harris	46	Vice President, Information Technology and Systems
R. Keith Elliott (3)	67	Director
Robert W. VanHellemont	63	Director
Geoffrey 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 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. Grossman was hired on March 14, 2005 as the President and Chief Operating Officer. He had joined 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. Harris joined QSGI INC. in May 2002 as Vice President, Information Technology and Systems. Mr. Harris is responsible for the development, implementation and maintenance of the Company’s information technology systems and processes. Prior to joining the Company, Mr. Harris was, from October 2001 to May 2002 a private consultant and, from April 1998 to October 2001, Network and Systems Administrator for Intellesale, Inc. Prior thereto, from 1984 to 1998 he 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 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 2011 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.

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.

Item 11. 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.

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 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 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 Table
Name 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	$	510,656
Chairman, CEO and	2007	$	424,000	$	-	$	-	$	-	$	-	$	-	$	20,000	$	444,000
President

Seth A. Grossman(1) (3) (6)	2008	$	339,200	$	-	$	-	$	33,328	$	-	$	-	$	-	$	372,528
President and Chief	2007	$	339,200	$	-	$	-	$	-	$	-	$	-	$	-	$	339,200
Operating Officer

Edward L. Cummings(1) (6)	2008	$	254,400	$	-	$	-	$	33,328	$	-	$	-	$	-	$	287,728
CFO and Treasurer	2007	$	254,400	$	-	$	-	$	-	$	-	$	-	$	-	$	254,400

Joel L. Owens(2)	2008	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Vice President	2007	$	463,457	$	-	$	-	$	-	$	-	$	-	$	-	$	463,457

Vivek J. Agarwal(4) (5)	2008	$	80,516	$	-	$	-	$	-	$	-	$	-	$	-	$	80,516
Sales 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.

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 Awards
Name	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 ($/Sh)
	Grant Date	Threshold ($)	Target ($)	Maximum (#)	Threshold ($)	Target ($)	Maximum (#)			Exercise or Base Price of Option Awards ($/Sh)
Marc Sherman	9/19/2008	$ -	$ -	-	$ -	-	-	500,000	-	$0.16
Seth A. Grossman(1)	9/19/2008	$ -	$ -	-	$ -	-	-	250,000	-	$0.16
Edward 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-End
	Option Awards					Stock Awards
Name	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	Unexercisable
Marc 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	2018
Seth 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	2018
Edward 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.

Options Exercises and Stock Vested

Outstanding Equity Awards at Fiscal Year-End
	Option Awards		Stock Awards
Name	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)	Exercisable	Unexercisable
Marc 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 Compensation
Name 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		-		-		-		-		-	$	6,250

R. Keith Elliott	$	25,000		-		-		-		-		-	$	25,000

Geoffrey Smith	$	25,000		-		-		-		-		-	$	25,000

Robert 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.

Compensation Committee Interlocks and Insider Participation

None.

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

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

Name	Length		Commencing	Base Compensation
Marc Sherman	3 Year	(1)	October 1, 2004	$ 424,000
Seth A. Grossman	3 Year	(2)	March 14, 2005	$ 339,200
Edward 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.

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

Item 12. 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 of Beneficial Owner(1)	Percent of Class

Common	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	*
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.

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 Class

John S. Riconda c/o CCSI 200 Knickerbocker 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.

Item 13 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.

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 Shares
Edward L. Cummings	Oct - 2001	A	Capital Contribution	5,000,000
	Jan - 2002	B	Merger Consideration	1,800,000
	Dec - 2002	C	Compensation	500,000

David A. Loppert	Oct - 2001	A	Capital Contribution	5,000,000
	Jan - 2002	B	Merger Consideration	1,800,000
	Dec - 2002	C	Compensation	500,000

Carl C. Saracino	Oct - 2001	A	Capital Contribution	5,000,000
	Jan - 2002	B	Merger Consideration	1,800,000
	Dec - 2002	C	Compensation	500,000


Michael P. Sheerr	Oct - 2001	A	Capital Contribution	5,000,000
	Jan - 2002	B	Merger Consideration	1,800,000
	Dec - 2002	C	Compensation	500,000


Marc Sherman	Oct - 2001	A	Capital Contribution	5,000,000
	Jan - 2002	B	Merger Consideration	1,800,000
	Dec - 2002	C	Compensation	500,000

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

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

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

Item 14.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 LLP
Audit Fees Audit-Related Fees (2) Tax Fees (3) Total	$ 0 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 RubinBrown LLP required by Independence Standards Board Standard No. 1, as currently in effect, and has discussed with RubinBrown LLP their independence.

PART IV

Item 15. Exhibits and Financial Statements

Exhibits
See 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-2
Financial Statements
Balance Sheet	F-3 – F-4
Statement Of Operations	F-5
Statement Of Stockholders’ Equity	F-6
Statement Of Cash Flows	F-7 – F-8
Notes To Financial Statements	F-9 – F-42

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: July 23, 2010	By:	/s/ Marc Sherman
		Marc Sherman
		Chairman of the Board, Chief Executive Officer, Chief Financial Officer & Chief Accounting Officer

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

Signature	Title	Date
/s/ Marc Sherman Marc Sherman	Chairman of the Board, Chief Executive Officer, Chief Financial Officer & Chief Accounting Officer	July 23, 2010

List Of Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Merger by and between WindsorTech, Inc., Delta States Oil, Inc. and Alfred D. Morgan, Ph. D dated January 29, 2002 (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2002 (Commission file number 000-07539)).
2.2	Agreement and plan of Merger by and among WindsorTech, Inc., Qualtech International Corporation and Qualtech Service Group, Inc. dated May 1, 2004.
2.3***	Addendum to Agreement and Plan of Merger
2.4***	Second Addendum to Agreement and Plan of Merger.
3.1	Certificate of Amendment of Certificate of Incorporation of WindsorTech, Inc. **
3.2	Amended and Restated ByLaws of WindsorTech, Inc. (Incorporated herein reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
3.3	Action by Consent in Writing of a Majority of Stockholders dated May 19, 2004 concerning Amended and Restated By Laws.
3.4	Action by Consent in Writing of a Majority of Stockholders dated September 17, 2004 increasing the number of shares of the Corporation
4.1	Specimen Common Stock Certificate of WindsorTech, Inc. (Incorporated herein reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
4.2	Form of Stock Purchase Agreements with Barron Partners, L.P., Guerrilla Capital, and Odin Partners et al. dated May 26, 2004.
4.3	Form of Registration Rights Agreements with Barron Partners, L.P., Guerrilla Capital, and Odin Partners et al. dated May 26, 2004.
4.4	Form of Common Stock Purchase Warrant at $1.50 per share dated May 28, 2004.
4.5	Form of Common Stock Purchase Warrant at $3.60 per share dated May 28, 2004
4.6	Form of Registration Rights Agreement with Joel Owens and Jolene Owens dated May 1, 2004.
10.1*	Employment and Non-Compete Agreement – Edward L. Cummings **
10.2*	Employment and Non-Compete Agreement – David A. Loppert **
10.3*	Employment and Non-Compete Agreement – Carl C. Saracino **
10.4*	Employment and Non-Compete Agreement – Michael P. Sheerr **
10.5*	Employment and Non-Compete Agreement – Marc Sherman **
10.6*	2002 Flexible Stock Plan (Incorporated herein reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on April 16, 2002 (Commission file number 000-07539)).
10.7	Promissory Note executed by the Company. As of April 24, 2002 this note was paid in full (Incorporated herein reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
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. Owens
10.13**	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 LLP
23.2***	Consent of RubinBrown LLP
31.1***	Chairman of the Board, Chief Executive Officer, Chief Financial Officer & Chief Accounting Officer Certification
32.1***	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.

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008

Contents

Page

Report Of Independent Registered Public
Accounting Firms	F-1 - F-4


Financial Statements

Consolidated Balance Sheets	F-5 - F-6

Consolidated Statements Of Operations	F-7

Consolidated Statement Of Stockholders’ Equity (Deficit)	F-8

Consolidated Statements Of Cash Flows	F-9 - F-10

Notes To Consolidated Financial Statements	F-11 - F-45

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, 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.

Fage F-1

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

Fage 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.

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.

Fage F-3

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-4

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Page 1 Of 2

Assets


	December 31,
	2008		2007
Current Assets
Cash and cash equivalents	$	274,150	$	127,723
Accounts receivable, net of reserve of $1,075,471
and $955,599 in 2008 and 2007, respectively		4,689,376		3,853,362
Inventories		5,144,010		6,578,031
Prepaid expenses and other assets		242,659		163,553
Total Current Assets		10,350,195		10,722,669

Property And Equipment, Net		727,454		286,766

Goodwill		7,934,627		1,489,621

Intangibles, Net		6,017,968		470,348

Other Assets		285,198		448,066

Total Assets	$	25,315,442	$	13,417,470

The accompanying notes are an integral part of these consolidated financial statements.

Page F-5

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Page 2 Of 2

Liabilities And Stockholders' Equity (Deficit)

	December 31,			December 31,
	2008			2007
Current Liabilities
Revolving line of credit	$	5,351,130		$	3,754,061
Accounts payable		4,128,170			1,109,940
Accrued expenses		1,048,652			654,461
Accrued payroll		164,311			88,818
Deferred revenue		385,805			439,865
Other current liabilities		288,360			311,610
Total Current Liabilities		11,366,428			6,358,755

Long-Term Deferred Revenue		19,000			142,772

Notes Payable - Principal Stockholder		10,000,000			—

Deferred Income Taxes		27,300			27,300

Total Liabilities		21,412,728			6,528,827

Redeemable Convertible Preferred Stock		4,257,910			4,238,685

Commitments And Contingencies (Notes 2, 8 And 14)

Stockholders' Equity (Deficit)
Preferred shares: authorized 5,000,000 in 2008
and 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 held
in escrow, and 31,172,716 shares issued and outstanding in 2007		385,477			311,727
Additional paid-in capital		16,723,724			14,134,298
Accumulated deficit		(17,464,397	)		(11,796,067	)
Total Stockholders' Equity (Deficit)		(355,196	)		2,649,958

Total 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-6

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For The Years
	Ended December 31,
	2008			2007

Product Revenue	$	19,768,862		$	30,126,257
Service Revenue		14,382,038			7,094,853
Total Revenue		34,150,900			37,221,110

Cost Of Products Sold		19,079,155			25,525,836
Cost Of Services Sold		7,591,768			2,516,833
Cost Of Sales		26,670,923			28,042,669

Gross Profit		7,479,977			9,178,441

Selling, General And Administrative Expenses		10,983,302			9,905,064

Goodwill And Asset Impairment		—			7,206,698

Depreciation And Amortization		727,581			702,310

Interest Expense, Net of interest income		1,432,065			396,417

Loss Before Provision For Income Taxes		(5,662,971	)		(9,032,048	)

Provision For Income Taxes		5,359			243,804

Net Loss		(5,668,330	)		(9,275,852	)

Accretion To Redemption Value Of Preferred Stock		19,225			18,108

Preferred Stock Dividend		258,708			258,000

Net 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 Shares
Outstanding - Basic and Diluted		34,340,066			31,172,716

The accompanying notes are an integral part of these consolidated financial statements.

Page F-7

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

For The Years Ended December 31, 2008 And 2007


					Additional			Retained			Total
	Common Stock				Paid-In			Earnings			Stockholders'
	Shares		Amount		Capital			(Deficit)			Equity
Balance (Deficit) -
January 1, 2007		31,172,716	$	311,727	$	14,390,976		$	(2,482,215	)	$	12,220,488

Fin 48 Adoption		—		—		—			(38,000	)		(38,000	)

Stock Option Compensation		—		—		19,430			—			19,430

Preferred Stock Dividend		—		—		(258,000	)		—			(258,000	)

Accretion To The Redemption
Value 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	)		2,649,958

Stock issued for acquisition		3,500,000		35,000		735,000			—			770,000

Warrants issued for acquisition		—		—		1,287,878			—			1,287,878

Stock issued for financing		3,875,000		38,750		695,000			—			733,750



Stock Option Compensation		—		—		149,481			—			149,481

Preferred Stock Dividend		—		—		(258,708	)		—			(258,708	)

Accretion To The Redemption
Value 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-8

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For The Years
	Ended December 31,
	2008			2007
Cash Flows From Operating Activities
Net loss	$	(5,668,330	)	$	(9,275,852	)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Goodwill and asset impairment		—			7,206,698
Depreciation and amortization		727,581			702,130
Stock option compensation expense		149,481			19,430
Amortization of Original Issue Discount		258,083			—
Deferred income taxes		(56,247	)		174,336
Allowance for doubtful accounts		418,885			713,500
Inventory allowance		848,000			176,000
Changes in assets and liabilities; net of acquisition
Accounts receivable		(321,878	)		2,977,775
Inventories		1,075,146			(1,771,321	)
Prepaid expenses and other current assets		(100,912	)		23,389
Other 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	)		234,828

Cash Flows From Investing Activities
Advances for notes receivable		—			(96,250	)
Collections of notes receivable		—			53,200
Cost of Acquisition		(192,563	)		—
Cash from business acquired		255,714			—
Purchases of property and equipment		(107,701	)		(211,713	)
Proceeds from sale of equipment		—			62,301
Net Cash Used In Investing Activities		(44,550	)		(192,462	)

Cash Flows From Financing Activities
Net 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			632,948

Cash And Cash Equivalents - End Of Year	$	274,150		$	127,723

The accompanying notes are an integral part of these consolidated financial statements.

Page F-9

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For The Years
	Ended December 31,
	2008		2007

Supplemental disclosure of cash flow information
Income Taxes Paid	$	63,982	$	62,591
Interest Paid		526,738		406,306

Supplemental schedule of non-cash financing and investing activities
Stock issued for financing	$	733,750		—

Assets acquired through the reduction of accounts receivable		—	$	346,000

Stock 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-10

QSGI INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Fage F-11

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.

Fage F-12

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.

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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,	Balance
	Beginning	For Doubtful	Net Of	At End
Year	Of Year	Accounts	Recoveries	Of Year

2007	$ 780,116	$ 713,500	$ 538,017	$ 955,599
2008	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.

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.

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QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

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.

Fage F-15

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

	2008			2007

Net 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			31,172,716
Effect of dilutive securities:
Stock options		—			—
Warrants		—			—

Diluted weighted average shares outstanding		34,340,066			31,172,716

Net 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.

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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

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

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QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

SFAS No. 141R – Business Combinations

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

Fage F-18

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

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

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

Fage F-19

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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”)

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

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 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.

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QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

3. Inventories

Inventories consist of:

	2008			2007

Finished goods	$	6,206,761		$	6,120,473
Inventory in transit		36,249			708,558
Allowance 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		2007

Furniture and fixtures	$	576,831	$	114,798
Equipment		2,012,792		454,921
Leasehold improvements		827,812		130,754
Computer equipment and software		584,674		599,503
		4,002,109		1,299,976
Less: 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.

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QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

5. Goodwill and Other Intangible Assets

In accordance with the SFAS No. 142, Goodwill and Other Intangible Assets, the Company is required to assess goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The Company’s reporting units are the same as its reportable business segments. Goodwill was assigned to the Data Center Hardware, 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.

Fage F-22

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		2007

Goodwill	$	7,934,627	$	1,489,621
Intangible assets with indefinite lives		3,100,000		70,000
Intangible 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		Network
	Data			Data		Security		Infrastructure
	Center			Center		And		Design and
	Hardware			Maintenance		Compliance		Support		Total

Balance January 1, 2007	$	5,154,782		$	1,489,621	$	—	$	—	$	6,644,403
Less: Impairment		(5,154,782	)		—		—		—		(5,154,782	)
Balance December 31, 2007	$	—		$	1,489,621	$	—	$	—	$	1,489,621
Add: Acq. of CCSI		—			—		—		6,445,006		6,445,006

Balance December 31, 2008	$	—		$	1,489,621	$	—	$	6,445,006	$	7,934,627

Fage F-23

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		Network
	Data			Data		Security		Infrastructure
	Center			Center		And		Design and
	Hardware			Maintenance		Compliance		Support		Total

Balance January 1, 2007	$	840,000		$	70,000	$	—	$	—	$	910,000
Less: Impairment		(840,000	)		—		—		—		(840,000	)
Balance December 31, 2007	$	—		$	70,000	$	—	$	—	$	70,000
Add: Acq. of CCSI		—			—		—		3,030,000		3,030,000

Balance December 31, 2008	$	—		$	70,000	$	—	$	3,030,000	$	3,100,000

Intangibles with finite lives relate principally to the following:

					2008
	2007		2008		Adjusted
	Cost		Additions		Cost

Customer lists	$	120,000	$	2,760,000	$	2,880,000
Database		25,000		—		25,000
Employee
non-competes		197,000		80,000		277,000
Website		50,000		—		50,000
EBay Storefront		240,000		—		240,000

Total	$	632,000	$	2,840,000	$	3,472,000

			Amortization
	2007		on Intangibles		Amortization		2008		2008		Remaining
	Accumulated		acquired prior		on 2008		Accumulated		Net		Amortization
	Amortization		to 2008		Acquisition		Amortization		Intangibles		Life (Years)

Customer lists	$	48,840	$	13,320	$	153,330	$	215,490	$	2,664,510	4.3 to 8.5
Database		4,164		8,328		—		12,492		12,508		1.5
Employee
non-competes		130,312		42,732		7,998		181,042		95,958	0.3 to 5.5
Website		8,334		16,668		—		25,002		24,998		1.5
EBay Storefront		40,002		80,004		—		120,006		119,994		1.5

Total	$	231,652	$	161,052	$	161,328	$	554,032	$	2,917,968

Fage F-24

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements


	January 1,								December 31,
	2007		Additions			Impairments			2007

Customer lists – gross	$	1,640,000	$	—		$	(1,520,000	)	$	120,000
Less accumulated amortization		485,888		182,208			(619,256	)		48,840
Customer lists – net		1,154,112		(182,208	)		(900,744	)		71,160

Database – gross		400,000		25,000			(400,000	)		25,000
Less accumulated amortization		118,528		48,612			(162,976	)		4,164
Database – net		281,472		(23,612	)		(237,024	)		20,836

Employee non-competes – gross		450,000		25,000			(278,000	)		197,000
Less accumulated amortization		240,000		94,164			(203,852	)		130,312
Employee non-competes – net		210,000		(69,164	)		(74,148	)		66,688

Website – gross		—		50,000			—			50,000
Less accumulated amortization		—		8,334			—			8,334
Website – net		—		41,666			—			41,666

EBay Storefront – gross		—		240,000			—			240,000
Less accumulated amortization		—		40,002			—			40,002
Ebay Storefront – net		—		199,998			—			199,998

Total finite lived intangibles- gross		2,490,000		340,000			(2,198,000	)		632,000
Less accumulated amortization		844,416		373,320			(986,084	)		231,652
Total 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:

Fage F-25

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Year	Amount

2009	$	460,752
2010		392,656
2011		335,976
2012		335,976
2013		319,238
Thereafter		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.

Fage F-26

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

The identifiable intangibles are comprised of the following:

Identifiable Intangible Asset	Fair Value		Remaining Useful Life

Non-Competition Agreement	$	80,000	6 years
Trademark/Trade Name		3,030,000	Indefinite
List of Customers		2,760,000	9 years

Total	$	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	$	1,776,826
Property, plan and equipment		588,573
Intangible assets subject to amortization:
Software		2,958
Other Assets		62,622
Total assets acquired	$	2,430,979

Liabilities assumed:
Accounts payable and accrued expenses	$	1,382,714
Deferred revenue		341,890
Notes and loans payable		22,801
Total liabilities		1,747,405
Net 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 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.

Fage F-27

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

	Year Ended December 31, 2008			Year Ended December 31, 2007

Revenue	$	40,122,736		$	50,944,148

Net (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		2007

Deposits	$	155,748	$	83,306
Trademark		7,885		7,885
Patent, net of amortization of $5,751
in 2008 and $4,541 in 2007		18,464		19,675
Deferred loan costs		42,132		116,435
Notes receivable		60,036		150,725
Other		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.

Fage F-28

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Financing Arrangements

Revolving Line Of Credit

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.

Fage F-29

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%).

Maximum Senior Leverage	4.0 to 1.0
Maximum Senior Leverage	10.0 to 1.0
Interest Coverage	1.5 to 1.0
Fixed Charge Coverage	1.25 to 1.0
Capital 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.

Fage F-30

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.

Fage F-31

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				2007
			Weighted -					Weighted -
			Average					Average
			Exercise					Exercise
	Shares		Price		Shares			Price

Outstanding -
January 1		11,369,834	$	1.930		12,221,834		$	1.972
Granted		1,955,000		0.160		40,000			1.405
Exercised		—		—		—			—
Forfeited		—		—		(892,000	)		2.471

Outstanding at December 31		13,324,834	$	1.671		11,369,834		$	1.930

Exercisable 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.

Fage F-32

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:


								Exercisable
		Outstanding Stock Options						Stock Options

				Weighted -
				Average		Weighted -				Weighted -
Range Of				Remaining		Average				Average
Exercise				Contractual		Exercise				Exercise
Prices		Shares		Life		Price		Shares		Price

$	0.026		1,740,000		3.1	$	0.026		1,740,000	$	0.026
	0.160		1,955,000		7.3		0.160		1,191,000		0.160
1.01 to 1.90			2,433,334		5.2		1.671		2,405,334		1.691
2.00 to 2.13			2,255,000		5.9		2.007		2,255,000		2.007
2.50 to 2.75			4,725,000		6.2		2.659		4,725,000		2.659
3.45 to 3.46			216,500		2.0		3.450		216,500		3.450

			13,324,834						12,532,834

Fage F-33

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:

Fage F-34

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

A summary of warrant activity is as follows:

	2008				2007
			Weighted -					Weighted -
			Average					Average
			Exercise					Exercise
	Shares		Price		Shares			Price

Outstanding -
January 1		583,333	$	3.60		933,333		$	3.00
Granted		12,000,000		0.30		—			—
Exercised		—		—		—			—
Expired		—		—		(350,000	)		2.00

Outstanding at December 31		12,583,000	$	0.45		583,000		$	3.60

Exercisable at December 31		583,000	$	3.60		583,000		$	3.60

		2008						2007
								Exercisable
		Outstanding Warrants						Warrants

				Weighted -
				Average		Weighted -				Weighted -
Range Of				Remaining		Average				Average
Exercise				Contractual		Exercise				Exercise
Prices		Shares		Life		Price		Shares		Price

$	0.30		12,000,000		6.21		0.30		—	$	—
	3.60		583,333		.37		3.60		583,333		3.60
Outstanding as of December 31			12,583,333		5.94	$	0.45		583,333	$	3.60
Exercisable 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		2007

Current	$	5,359	$	69,468
Deferred		—		174,336

	$	5,359	$	243,804

Fage F-35

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			2007
Deferred Tax Assets
Liabilities and reserves	$	901,489		$	651,393
Net operating loss carryforwards		3,449,912			1,612,300
Stock options		77,660			19,362
Inventory capitalization		306,181			240,024
Property and equipment		29,899			66,559
		4,765,141			2,589,638
Valuation allowance		(4,665,299	)		(2,527,374	)
		99,842			62,264

Deferred Tax Liabilities
Prepaid expenses		20,631			26,449
Patent and trademark		8,025			7,859
Intangibles		98,486			55,256
		127,142			89,564

Net Deferred Tax Asset (Liability)	$	(27,300	)	$	(27,300	)

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

	2008			2007

Current deferred tax asset	$	—		$	—
Long-term deferred tax liability		(27,300	)		(27,300	)

	$	(27,300	)	$	(27,300	)

Fage F-36

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			2007

Statutory federal rate		34	%		34	%
State income taxes, net of federal benefits		5			1
Goodwill 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	$	368,000
Additions based on tax positions related to the current year		2,500
Settlements		(358,000	)
Balance at January 1, 2008		12,500
Additions based on tax positions related to the current year		19,500
Settlements		—
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.

Fage F-37

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.

Fage F-38

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.

Fage F-39

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

The approximate minimum payments required under these operating leases at December 31, 2008 are:

Year	Amount

2009	$	816,422
2010		613,723
2011		569,221
2012		338,924
2013		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

Fage F-40

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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.

Fage F-41

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.

Fage F-42

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Network Infrastructure Design and Support

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			2007
Revenues
Products	$	19,768,862		$	30,126,257
Services		14,382,038			7,094,853

	$	34,150,900		$	37,221,110

Revenues
Data Security And Compliance	$	17,516,751		$	20,741,618
Data Center Hardware		2,280,855			11,100,092
Data Center Maintenance		7,052,583			6,264,981
Network Infrastructure Design & Support		7,490,939			—
Intersegment Elimination		(190,228	)		(885,581	)

Consolidated Total	$	34,150,900		$	37,221,110

Fage F-43

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Income (Loss) Before Provision For
Income Taxes
Data Security And Compliance	$	(4,269,139	)	$	(3,046,216	)
Data Center Hardware		(1,338,100	)		(7,208,456	)
Data Center Maintenance		696,151			1,222,624
Network 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			243,804
Accretion to Redemption Value of Preferred Stock		19,225			18,108
Preferred Stock Dividend		258,708			258,000

Net Loss Available to Common Stockholders	$	(5,946,263	)	$	(9,551,960	)

Depreciation And Amortization
Data Security And Compliance	$	413,131	$	299,655
Data Center Hardware		15,470		343,347
Data Center Maintenance		51,604		59,308
Network Infrastructure Design & Support		247,376		—

Consolidated Total	$	727,581	$	702,310

Segment Assets
Data Security And Compliance	$	7,728,562	$	8,592,896
Data Center Hardware		373,536		1,264,945
Data Center Maintenance		2,725,538		3,559,629
Network Infrastructure Design & Support		14,487,806		—

Consolidated Total	$	25,315,442	$	13,417,470

	2008		2007
Goodwill
Data Security And Compliance	$	—	$	—
Data Center Hardware		—		—
Data Center Maintenance		1,489,621		1,489,621
Network Infrastructure Design & Support		6,445,006		—

Consolidated Total	$	7,934,627	$	1,489,621

Expenditures For Property And
Equipment
Data Security And Compliance	$	72,202	$	190,082
Data Center Hardware		11,507		21,631
Data Center Maintenance		1,675		—
Network Infrastructure Design & Support		22,317

Consolidated Total	$	107,701	$	211,713

Fage F-44

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		2007

United States	$	30,253,279	$	31,028,368
Asia		1,872,359		1,394,935
Middle East		706,630		2,404,862
Europe		209,506		478,557
Africa		410,411		593,044
United Kingdom		97,558		485,478
Canada		517,615		556,392
Australia		14,330		—
South America		69,212		279,474

Consolidated Total	$	34,150,900	$	37,221,110

Fage F-45

Attached files

QSGI INC. Reports

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