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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File No.:  001-32620

QSGI INC.

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

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

400 Royal Palm Way, Palm Beach, FL  33480

(Address of Principal Executive Offices) (Zip Code)

(561) 835-9757

(Registrant's Telephone Number)

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

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

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

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

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

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

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

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

The aggregate market value of the common stock held by non-affiliates of the Registrant as of June 29, 2007 (the business day of the Registrant’s most recently completed second fiscal quarter), was $22,756,083 (31,172,716 shares x $0.73 per share).

Number of shares outstanding of the Registrant’s Common stock, as of March 1, 2008, is 31,172,716.

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

	Table Of Contents
Item		Description	Page
		Part I
1.		Business	1
1A.		Risk Factors	8
1B.		Unresolved Staff Comments	13
2.		Property	13
3.		Legal Proceedings	14
4.		Submissions of Matters to a Vote of Security Holders	14
		Part II
5.		Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
6.		Selected Financial Data	18
7.		Management’s Discussion And Analysis of Financial Condition and Results of Operations	18
7A.		Quantitative and Qualitative Disclosures About Market Risk	27
8.		Financial Statements and Supplementary Data	27
9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	29
9A(T)		Controls and Procedures	29
9B.		Other Information	31
		Part III
10.		Directors, Executive Officers and Corporate Governance	31
11.		Executive Compensation	34
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
13.		Certain Relationships and Related Transactions, and Director Independence	42
14.		Principal Accountant Fees and Services	44
		Part IV
15.		Exhibits, Financial Statement Schedules	45
		Signatures	46
		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.

1

What We Do

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

Segments

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

A.   Data Center Maintenance

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

B.   Data Center Hardware

We are a reseller of refurbished enterprise-class hardware and associated peripheral products to companies.  We remarket refurbished IBM mainframe processors, IBM midrange processors and associated peripheral products including tape and disk products and connectivity products.

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.

2

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

Data 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, Illinois, Indiana, Kansas, Maine, Michigan, Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Wyoming.

Data Center Hardware Segment:

We support our Data Center Maintenance clients' IT hardware needs as well as the IT needs of companies nationwide through our selling of refurbished enterprise-class hardware and associated peripheral products.

3

The enterprise-class products that we market include:

-   IBM mainframe products

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

-   IBM/OEM tape storage

-   IBM/OEM disk storage

-   Hitachi Data Systems (HDS) products

-   EMC products

-   Connectivity products, controllers and mainframe printers

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

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

Businesses that have already made purchasing decisions and saved money in the secondary market understand that there is often a fine line between “latest” technology and “current” technology.  Others understand, however, that technology that is only one year old can easily meet their data center requirements – that year-old technology is still “current” for their purposes. Yet, the key difference is that those who choose “current” technology (as opposed to “latest”) do not absorb the initial depreciation and may pay only a fraction of the price of “new” technology.

Currently, IBM is the only manufacturer of mainframes in the world marketplace.  This gives IBM the luxury of having no competition for new mainframes. Subject to our ability to re-furbish or reconfigure a used mainframe, the lack of competition for new mainframes creates a unique opportunity for us to sell used mainframes to customers needing to control capital budgets for IT hardware.

Technology that is introduced by IBM can be available in the used marketplace as early as 9-12 months after being introduced as a result of companies merging data centers, upgrading to the latest technology, filing bankruptcy or when hardware goes off lease.

During the third quarter, IBM significantly diminished our ability to resell zSeries mainframe systems by setting onerous restrictions around the ability to upgrade or downgrade the configuration deployed on a system.  As a result, we discontinued the hardware trading portion of our hardware business.  This caused goodwill and intangible impairment and the Company had to totally write off the goodwill and intangibles related to this segment.  The Company believes these restrictions to be actionable, anti-competitive practices.  The Company will continue to support the IT hardware needs of its maintenance customers.

Our Data Center Hardware group has its technical facilities in Minnesota along with sales and marketing.

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.

4

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 any where in the world regardless of the amount of equipment to be processed.  QSGI’s current client-site Data Security & Compliance offerings include:

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

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

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

5

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 sales, marketing and business development offices in New Hampshire, Florida, Oklahoma and Colorado.

Dependence on Major Customers

With the exception of several of our hardware maintenance contracts and 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 minimal assets in foreign countries.

6

We sell and deliver our technology services to customers throughout the United States and on 6 continents worldwide.  For the years ended December 31, 2007 and 2006, sales to our top ten customers comprised 31% and 44% of our revenue, respectively.

A portion of our revenues is also derived from export sales.  For the years ended December 31, 2007 and 2006, export sales comprised 17% and 14% 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, 2008, we employed 83 full-time and 16 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.

7

Recent Developments

Other Information

On June 22, 2006, under the terms of the acquisition agreement, as amended, with Qualtech International Corporation and its affiliate, Qualtech Services Group, Inc. that was completed on May 28, 2004, additional merger consideration was paid to the selling shareholders.  The selling shareholders were entitled to receive additional merger consideration in the form of restricted shares of the Company.  2,063,545 shares were issued at a value of approximately $1.66 per share resulting in additional goodwill in the amount of $3,432,089.

On January 17, 2007, the Company completed the financing of a new $7.5 million working facility with Wells Fargo Bank, which increased and replaced a similar based line of credit of $4.25 million.  The new revolving line of credit agreement provides for borrowing limited to the lesser of $7,500,000 or the borrowing base of 85% of eligible accounts receivable plus 45% of eligible inventory, with eligible inventory not to exceed $3,000,000.  On June 29, 2007, we completed an amendment to the revolving line-of-credit which reset some of the covenants.

On September 17, 2007, the Company held its annual stockholders meeting in Palm Beach, Florida and re-elected Seth A. Grossman and R. Keith Elliott to the Company's Board of Directors to hold office until the Company's Annual Meeting of Stockholders in 2010 or until their successors are duly elected and qualified; ratified the appointment of RubinBrown LLP as the Company's independent certified public accountant for the fiscal year ending December 31, 2007.

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.

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.

8

Fluctuations In Future Quarterly Results

We have been in business since October 2001 and have only twenty five 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, 2007 and 2006, our top ten customers accounted for approximately 31% and 44% 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.

9

       For the years ended December 31, 2007 and 2006, 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, 2007 and 2006, export sales comprised 17% and 14% 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 more than 25 different vendors, and we have no formal commitments with or from any of them.  We cannot assure you that our current vendors will continue to sell equipment to us as they have in the past, or that we will be able to establish new vendor relationships that ensure equipment will be available to us in sufficient quantities and at favorable prices.  If we are unable to obtain sufficient quantities of equipment at favorable prices, our business will be adversely affected.  In addition, we may become obligated to deliver specified types of computer equipment in a short time period and, in some cases, at specified prices.  Because we have no formal relationships with vendors, we may not be able to obtain the required equipment in sufficient quantities in a timely manner, which could adversely affect our ability to fulfill these obligations.

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.

10

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

We believe that cash that may be generated from operations, together with other available cash resources, will be sufficient to meet our cash requirements for at least the next 12 months.  However, we may need to raise additional funds to finance unanticipated working capital requirements or acquire complementary businesses.  If funds are not available when required for our unanticipated working capital needs or other transactions, our ability to carry out our business plan could be adversely affected, and we may be required to scale back our growth and operations to reflect the extent of available funding.

The Company was unable to achieve these covenants in the fourth quarter, 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.

As the Company is in default under its line-of-credit agreement, it is pursuing certain options, such as negotiating new terms with the financial institution or other financial institutions.  However, there can be no guarantee that the Company would be able to negotiate new agreements.  Additionally, if the Company were to be successful in negotiating new agreements, they could be on terms that are less favorable to the Company than the current line-of-credit agreement.

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; and

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

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

11

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

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

The Industry In Which We Compete In Is Highly Competitive

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

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

·   privately and publicly owned businesses such as Redemtech, 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 Circuit City Stores, 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 employment contracts with our key employees.  Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel.  Competition for qualified personnel is particularly intense in our industry and in our location.  This makes it difficult to retain our key personnel and to recruit highly qualified personnel.  We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications.  To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees.

12

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 to be:

Name	Position
Marc Sherman	Chairman, Chief Executive Officer, Director
Seth A. Grossman	President , Chief Operating 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 $178,000, 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.  In addition, the company leases additional warehouse space pursuant to a month to month lease at a monthly rental of $200.  These warehouses have sufficient capacity for our current and estimated future business needs.

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This segment also leases the following space:

1.   In Portsmouth, New Hampshire approximately 1,600 square feet of office space pursuant to a one-year lease at a current annual rental of approximately $44,000.  This lease expires in October 2008.

2.   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.

3.   In Palm Beach, Florida approximately 2,662 square feet of office space pursuant to a five-year lease at a current annual rental of approximately $113,000.  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 rental of approximately $15,000 per month.  This facility is in good condition and has adequate capacity for our current and estimated future business needs.  This lease expires in October 2009.

Item 3.                                Legal Proceedings

The Company settled out of court a suit that had been initialed in the United States District Court, Southern District of Florida, QSGI v. Anysystems, et. al.  In this suit, the Company was seeking damages for losses incurred as a result of the Company's dealings and interactions with the named Defendants.

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

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, 2007.

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.”

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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, 2007	High	Low
First Quarter	$ 1.40	$ 0.90
Second Quarter	0.99	0.62
Third Quarter	0.88	0.47
Fourth Quarter	0.59	0.20
Years Ended December 31, 2006
First Quarter	$2.10	$ 1.55
Second Quarter	1.85	1.27
Third Quarter	1.74	1.26
Fourth Quarter	1.56	0.95

Holders

As of March 1, 2008, there were approximately 3,300 holders of record of the Company’s Common Stock and the closing price was $0.34.  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 2007, the Company paid $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 2007 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, 2007, 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	7,569,834	$1.807	6,433,500
Equity compensation plans not approved by security holders	3,800,000	$2.177	-
Total	11,369,834	$1.930	6,433,500

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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, or (6) the exercise of stock warrants.

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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	N	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

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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.

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.

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.

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Overview

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

Results Of Operations

The following table sets forth, for the periods indicated below, the relationships to total revenue of line items in our statements of operations for the years ended December 31, 2007 and 2006.

	Year Ended	Year Ended
	December 31, 2007	December 31, 2006
	%	%
Product Revenue	80.9	88.6
Service Revenue	19.1	11.4
Total Revenue	100.0	100.0
Cost of Products Sold	68.5	74.9
Cost of Services Sold	6.8	3.9
Cost of sales	75.3	78.8
Gross profit	24.7	21.2
Selling, general and administrative expenses	26.6	20.8
Goodwill and asset impairment	19.4	-
Depreciation and amortization	1.9	1.5
Interest expense	1.1	0.5
Loss before provision (benefit) for income taxes	(24.3)	(1.6)
Provision (benefit) for income taxes	0.6	(0.5)
Net loss	(24.9)	(1.1)

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenue for the year ended December 31, 2007 was $37,221,110 compared to revenue of $46,408,917 for the year ended December 31, 2006, a $9,187,807 decrease, or 19.8%.  This sharp decline is 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, have had a substantial, adverse financial impact on the Data Center Hardware segment and has caused the Company to be in default of the financial covenants of its line-of-credit agreement with Wells Fargo Bank and has caused impairment of goodwill and intangibles associated with the Data Center Hardware segment.  Discussions are ongoing with the OEM to address the practices believed to be anticompetitive.  We also experienced a decrease in revenues in our Data Security and Compliance segment as a result of a decrease in our wholesale remarketing revenues caused by delays in corporate IT rollouts.  These decreases were partially offset by a 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.

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Our revenues categorized by products and services are as follows:

	Year Ended		Year Ended
	December 31, 2007		December 31, 2006
Revenue
Products	$	30,126,257	$	41,111,420
Services		7,094,853		5,297,497
Total Revenue	$	37,221,110	$	46,408,917

Our revenue by geographic segment is as follows:

Years Ended December 31,	2007	%	2006	%	Change	% Change
United States	$31,028,368	83%	$40,024,087	86%	$(8,995,719)	(22)%
Asia	1,394,935	4%	1,824,038	4%	(429,103)	(24)%
Europe	478,557	1%	219,608	1%	258,949	118%
Africa	593,044	2%	602,447	1%	(9,403)	(2)%
United Kingdom	485,478	1%	935,473	2%	(449,995)	(48)%
Canada	556,392	2%	324,056	1%	232,336	72%
Middle East	2,404,862	6%	1,823,709	4%	581,153	32%
Australia	--	--	12,825	--	(12,825)	(100)%
South America	279,474	1%	642,674	1%	(363,200)	(57)%
Total	$37,221,110	100%	$46,408,917	100%	$(9,187,807)	(20)%

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, 2007 and 2006, export sales comprised approximately 17% and 14% 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, 2007 was $9,178,441 compared to a gross profit of $9,860,403 for the year ended December 31, 2006, a $681,962 decrease, or 6.9%.  Gross margin was 24.7% for the year ended December 31, 2007 compared to 21.2% for the year ended December 31, 2006.  Gross margins increased due to a 31% organic growth in services gross profit.  This growth along with a decline in product gross profit caused service gross profit to be a higher percentage of total gross profit thereby increasing our margins.

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.

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Selling, general and administrative expenses for the year ended December 31, 2007, were $9,905,064 compared to selling, general and administrative expenses of $9,663,812 for the year ended December 31, 2006, a $241,252 increase, or 2.5%.  Selling, general and administrative expense increased due to an increase in professional fees, and an increase in our India sales office expenses, which was closed as we moved this operation back to the United States.

Depreciation and amortization for the year ended December 31, 2007, was $702,310 compared to depreciation and amortization of $685,216 for the year ended December 31, 2006, a $17,094 increase, or 2.5%.  This increase was the result of amortization of intangibles as the result of assets acquired in a small asset purchase.

Interest expense for the year ended December 31, 2007, was $396,417 compared to interest expense of $238,985 for the year ended December 31, 2006, a $157,432 increase, or 65.9%, commensurate with an increase in the Company’s borrowings and an increase in interest rates during 2007.

The Company recorded a federal tax expense for the year ended December 31, 2007 and a tax benefit for the year ended December 31, 2006.  At December 31, 2007, 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 three segments that clearly focus our services into easy-to-understand categories for our target audiences:

Data Center Maintenance

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

Data Center Hardware

We are a reseller of refurbished enterprise-class hardware and associated peripheral products to companies around the world.  We remarket refurbished IBM mainframe processors, IBM midrange processors and associated peripherals including tape and disk products and connectivity products.

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

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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.

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

	2007			2006
Revenues
Data Security And Compliance	$	20,741,618		$	22,013,739
Data Center Hardware		11,100,092			20,035,133
Data Center Maintenance		6,264,981			4,847,885
Intersegment Elimination		(885,581	)		(487,840	)
Consolidated Total	$	37,221,110		$	46,408,917

Data Center Maintenance Segment

	Year Ended		Year Ended
	December 31, 2007		December 31, 2006
Revenue	$	6,264,981	$	4,847,885
Gross Profit		4,021,823		3,260,003
Selling, General and Administration		2,739,891		1,937,004
Depreciation and Amortization		59,308		62,342
Income Before Provision
for Income Taxes		1,222,624		1,259,910
Segment Assets		3,559,629		2,629,689
Goodwill		1,489,621		1,489,621
Expenditures for Property and
Equipment		-		10,007

Revenue for the year ended December 31, 2007 was $6,264,981 compared to revenue of $4,847,885 for the year ended December 31, 2006, a $1,417,096 increase, or 29.2%.  The increase was 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, 2007 was $4,021,823 compared to gross profit of $3,260,003 for the year ended December 31, 2006, a $761,820 increase, or 23.4%.  Gross margin in our Data Center Maintenance segment for the year ended December 31, 2007 was 64.2% of revenue compared to 67.2% of revenue for the year ended December 31, 2006.  Gross profit increased as a result of the increase in revenues.

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Selling, general and administrative expenses for the year ended December 31, 2007 were $2,739,891 compared to selling, general and administrative expenses of $1,937,004 for the year ended December 31, 2006, a $802,887 increase or 41.4%.  This increase was mainly the result of compensation and benefits as we increased personnel to support the growth in revenues.

Depreciation and amortization for the year ended December 31, 2007 was $59,308 compared to depreciation and amortization of $62,342 for the year ended December 31, 2006, a $3,034 decrease, or 4.9%.  This was the result of some of our assets becoming fully depreciated during 2007.

Data Center Hardware Segment

	Year Ended			Year Ended
	December 31, 2007			December 31, 2006
Revenue	$	11,100,092		$	20,035,133
Gross Profit		2,341,091			3,752,742
Selling, General and Administration		1,999,516			2,580,299
Depreciation and Amortization		343,347			397,358
Income (Loss) Before Provision
(Benefit) for Income Taxes		(7,208,456	)		775,849
Segment Assets		1,264,945			12,669,721
Goodwill		-			5,154,782
Expenditures for Property and
Equipment		21,631			16,564

Revenue for the year ended December 31, 2007 was $11,100,092 compared to revenue of $20,035,133 for the year ended December 31, 2006, an $8,935,041 decrease, or 44.6%.  This sharp decline is due to what the Company believes to be actionable, 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.  This OEM significantly diminished our ability to resell 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 is in default of the financial covenants of its line-of-credit agreement with Wells Fargo Bank and has caused total impairment of goodwill and intangibles associated with the Data Center Hardware segment.

Gross profit for the year ended December 31, 2007 was $2,341,091 compared to gross profit of $3,752,742 for the year ended December 31, 2006, a $1,411,651 decrease, or 37.6%.  Gross margin in our Data Center Hardware segment for the year ended December 31, 2007 was 21.1% of revenue compared to 18.7% of revenue for the year ended December 31, 2006.  Although margins increased on lower revenues, gross profit decreased due to lower revenues.

Selling, general and administrative expenses for the year ended December 31, 2007 were $1,999,516 compared to selling, general and administrative expenses of $2,580,299 for the year ended December 31, 2006, a $580,783 decrease, or 22.5%.  The decrease was the result of a strict cost containment policy instituted at the beginning of 2006 coupled with personnel reductions as we discontinued the trading of hardware equipment.

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Depreciation and amortization for the year ended December 31, 2007 was $343,347 compared to depreciation and amortization of $397,358 for the year ended December 31, 2006, a $54,011 decrease, or 13.6%.  This was the result of the sale of a portion of our assets coupled with many assets becoming fully depreciated during 2007.

Data Security & Compliance Segment

	Year Ended			Year Ended
	December 31, 2007			December 31, 2006
Revenue	$	20,741,618		$	22,013,739
Gross Profit		2,815,527			2,847,658
Selling, General and Administration		5,165,657			5,146,509
Depreciation and Amortization		299,655			225,516
Loss Before Benefit
for Income Taxes		(3,046,216	)		(2,763,369	)
Segment Assets		8,592,896			8,879,411
Goodwill		-			-
Expenditures for Property and
Equipment		190,082			127,087

Revenue for the year ended December 31, 2007 was $20,741,618 compared to revenue of $22,013,739 for the year ended December 31, 2006, a $1,272,121 decrease or 5.8%.  Revenues decreased as a result of a decrease in our wholesale remarketing revenue due to a decrease in the flow of wholesale remarketing product.  This was caused by a decrease in the number of IT rollouts.  Offsetting this decrease was an increase in the number of new and existing corporate customers utilizing our full suite of services which helped our service revenue more than double to approximately $1,000,000.

Gross profit for the year ended December 31, 2007 was $2,815,527 compared to gross profit of $2,847,658 for the year ended December 31, 2006, a $32,131 decrease or 1.1%.  Gross margin for the year ended December 31, 2007 was 13.6% compared to 12.9% for the year ended December 31, 2006.  The improvement in gross margin reflects the increase in the number of corporate customers utilizing our full suite of higher margin data security services.

Selling, general and administrative expense for the year ended December 31, 2007 was $5,165,657 compared to selling, general and administrative expense of $5,146,509 for the year ended December 31, 2006, a $19,148 increase.  This small increase in selling, general and administrative expense shows the relative fixed cost nature of our expenses even though individual expense categories may differ from year to year.  During 2007, we saw an increase in professional fees and insurance expense which was offset by a decrease in bad debt expense.

Depreciation for the year ended December 31, 2007 was $299,655 compared to depreciation of $225,516 for the year ended December 31, 2006, a $74,139 increase or 32.9%.  This was mainly due to amortization of intangibles as the result of assets acquired in a small asset purchase plus one full year of depreciation for fixed asset acquisitions that occurred during 2006 and a portion of the year for 2007.

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Liquidity and Capital Resources

Our current ratios at December 31, 2007 and December 31, 2006 were 1.7 to 1 and 2.1 to 1, respectively.  Working capital at December 31, 2007 was $4,363,914 compared to $7,539,917 at December 31, 2006.  Working capital at December 31, 2007 decreased due to financing the operations of the company and a decrease in accounts receivable.  This was offset by an increase in inventory.

Net cash provided by operating activities for the year ended December 31, 2007 was $234,828 compared to $1,583,230 of cash used in operating activities for the year ended December 31, 2006.  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.  Cash used in operating activities for the year ended December 31, 2006 was primarily a result of an increase in accounts receivable, inventories, deferred taxes and the net loss.  This was offset by an increase in accounts payable and accrued expenses, common stock issued for services, and depreciation and amortization.

Net cash used in investing activities for the years ended December 31, 2007 and 2006 was $192,462 and $145,454, respectively.  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.  For the year ended December 31, 2006, cash was used for the purchase of property and equipment.

Net cash used in financing activities for the year ended December 31, 2007 was $547,591.  Net cash provided by financing activities for the years ended December 31, 2006 was $2,207,838.  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.  For the year ended December 31, 2006, net cash was provided by proceeds from the issuance of redeemable convertible preferred stock, and net amounts borrowed under revolving lines of credit, reduced by preferred stock dividends.

On January 17, 2007, we completed the financing of a new $7.5 million working capital facility with Wells Fargo Bank, which increased and replaced a similar based line of credit of $4.25 million.  The new revolving line of credit agreement provides for borrowings limited to the lesser of $7,500,000 or the borrowing base of 85% of eligible accounts receivable plus 45% of eligible inventory, with eligible inventory not to exceed $3,000,000.  All principal and any outstanding interest is due January 24, 2010.  In accordance with EITF Issue No. 95-22, the line of credit is classified as a current liability due to the agreement containing a subjective acceleration clause and a lock-box arrangement.  All loans or lines of credit that the Company had prior to this date were paid and cancelled.

On June 29, 2007, we completed an amendment to the revolving line-of-credit which reset some of the covenants.  Interest on the loan is payable monthly at the prime rate plus one and one-half percent (8.75% at December 31, 2007), with all principal and interest due January 24, 2010.  Prior to June 29, 2007, interest on this loan was payable monthly at the prime rate.  Interest on our previous loan was payable monthly at the prime rate plus one percent.

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The amended revolving line-of-credit agreement contains certain financial covenants, including minimum net income requirements as follows:

	Year To Date
	Net Income
Period Ending	(Loss)
March 31, 2007	$	(250,000	)
June 30, 2007		(428,000	)
September 30, 2007		(337,000	)
December 31, 2007		(49,000	)
March 31, 2008		100,000
June 30, 2008		300,000
September 30, 2008		500,000
December 31, 2008		800,000
March 31, 2009		100,000
June 30, 2009		300,000
September 30, 2009		500,000
December 31, 2009		800,000

The Company was unable to achieve these covenants in the fourth quarter, 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.

As the Company is in default under its line-of-credit agreement, it is pursuing certain options, such as negotiating new terms with the financial institution or other financial institutions.  However, there can be no guarantee that the Company would be able to negotiate new agreements.  Additionally, if the Company were to be successful in negotiating new agreements, they could be on terms that are less favorable to the Company than the current line-of-credit agreement.

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.

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.

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 2007 or 2006 and do not expect any in 2008.  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.

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On June 22, 2006, under the terms of the acquisition agreement, as amended, with Qualtech International Corporation and its affiliate, Qualtech Services Group, Inc. that was completed on May 28, 2004, additional merger consideration was paid to the selling shareholders.  The selling shareholders were entitled to receive additional merger consideration in the form of restricted shares of the Company.  2,063,545 shares were issued at a value of approximately $1.66 per share resulting in additional goodwill in the amount of $3,432,089.

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-32.

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, 2007 and 2006.  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.

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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 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.  As of December 31, 2006 the Company performed impairment tests and determined that the carrying value of such assets were not impaired as of that date.

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.

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Impact Of Recently Issued Accounting Standards

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for fiscal years ending after November 15, 2006.  The adoption of SAB No. 108 did not have an impact on the company's financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for the Company beginning January 1, 2008.  The Company is currently assessing the potential impact that adoption of SFAS No. 157 will have on its financial statements.

In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires recognition of tax benefits that satisfy a greater than 50% probability threshold. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 was effective for the Company beginning January 1, 2007.

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

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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934) as of December 31, 2007.  Based upon this evaluation our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective, due to the material weaknesses in internal control over financial reporting described below, at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Management's Report on Internal Control Over Financial Reporting

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

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

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2007.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.  Based on this evaluation, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2007, our internal control over financial reporting was not effective based on those criteria.

Our Board of Directors were advised by RubinBrown LLP., our independent registered public accounting firm, that during their performance of the audit for the year ended December 31, 2007, they identified two material weaknesses in our internal control over financial reporting.  They are as follows:

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1.   A material weakness in the Company's internal controls exists in that there is not an effective control to ensure the accuracy and completeness in the determination of the allowance for doubtful accounts.

Management is required to apply judgment in evaluating that the allowance for doubtful accounts is adequate.  To remedy the situation, the Chief Financial Officer, President and Chief Executive Officer will sign off on the recommended allowance for doubtful accounts.

2.   A material weakness in the Company's internal controls exists in that there is not an effective control related to: (i) the application of appropriate assumptions related to goodwill and intangible impairment analysis; and (ii) the monitoring of the recording of appropriate reserves for income taxes.

Although the Company uses an outside firm to calculate the goodwill and intangible impairment and outside firm to calculate the appropriate amount of income taxes for the year, the Company will monitor the calculations more closely in the future.

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, 2008, Our Directors and Executive Officers are:

Name	Age	Position
Marc Sherman	44	Chairman, Chief Executive Officer, Director
Seth A. Grossman	42	President, Chief Operating Officer, Director
Edward L. Cummings	59	Chief Financial Officer, Treasurer, Director
David Harris	45	Vice President, Information Technology and Systems
R. Keith Elliott	66	Director
Robert W. VanHellemont	62	Director
Geoffrey A. Smith	50	Director
John F. Cunningham	64	Director

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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 hadjoined the Board of Directors in November 2003.  His term of office expires at the 2010 annual meeting.  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.

Edward L. Cummings co-founded QSGI INC. and has served as its Chief Financial Officer and Treasurer since inception.  His term of office expires at the 2008 annual meeting.  Mr. Cummings joined the Board of Directors of the Company in February 2004 to fill a vacancy.  He served as Executive Vice President, Chief Financial Officer and Secretary of Intellesale, Inc. from July 1999 to February 2001.  He joined its predecessor company Universal Commodities Corp. in October 1995 as controller and was elected to the board of directors in January 1997.  From September 1994 to October 1995 he owned TCC, Inc., an operator of several retail gift shops.  From December 1981 to September 1994 he was Chief Financial Officer and Treasurer of Albert E. Price, Inc., a giftware import and export company.

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

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Robert W. VanHellemont was appointed to the Board of Directors in August 2004 to fill a vacancy. His term of office expires at the 2009 annual meeting.  Mr. VanHellemont is the founder and chief executive officer of the Varilease companies. The Varilease companies are leading North American business equipment and financing providers, which have financed more than $2 billion in assets worldwide. Mr. VanHellemont founded Varilease Corp. in 1987 and founded Varilease Technology Finance Group, Inc. in 2000. Additionally, Mr. VanHellemont served as senior vice president of Thomson-McKinnon Securities and spent over 10 years in senior positions at CMI Corp.  Mr. VanHellemont serves as Chairman of the Audit Committee and is a member of the Compensation Committee of the Board of Directors.  The Board of Directors has determined that Mr. VanHellemont is independent, as that term is defined under the enhanced independence standards for audit committee members in the Securities Exchange Act of 1934 and rules there under.

Geoffrey A. Smith was appointed to the Board of Directors in September 2005 to fill a vacancy.  His term of office expires at the 2008 annual meeting.  Mr. Smith is the founder and president of LP Enterprises, LLC.  LP Enterprises, LLC provides Information Technology, Strategy, and Customer Relationship Management expertise across a broad range of direct clients – private sector, corporations, non-profits and the sports industry.  From 1979 through 2005, he worked for Procter & Gamble.  During his career with P & G, he progressed through a variety of IT/business responsibilities, ultimately reaching the role of Deputy CIO.  He is a graduate of Cornell University with a B.S. degree in Industrial Engineering and Operations research.  Mr. Smith is on the Board of Tech Corps Ohio, a non-profit dedicated to the enhancement of K-12 education through the effective use of technology in schools.  Mr. Smith is a member of the Audit Committee and a member of the Corporate Governance Committee.  The board of Directors has determined that Mr. Smith is independent, as that term is defined under the enhanced independence standards for audit committee members in the Securities Exchange Act of 1934 and rules there under.

John F. Cunningham was appointed to the Board of Directors in September 2005 to fill a vacancy.  His term of office expires at the 2008 annual meeting.  Mr. Cunningham is the Chairman and CEO of Cunningham & Co, Inc., which offers highly specialized strategic and valuation services to technology and computer related companies.  From 1985 to 1989, he served as chairman and CEO of CCI, an Amex-listed company.  Previously, Mr. Cunningham served as president and chief operating officer of Wang Laboratories.  Mr. Cunningham is a Trustee Associate of Boston College and an independent trustee director of Federated Funds.  He has previously served as a director of the First National Bank of Boston, Apollo Computer Inc., Computervision Corp., EMC Corp., and Honeywell Federal Systems Corp.  Mr. Cunningham serves as Chairman of the Corporate Governance Committee and is a member of the Compensation Committee of the Board of Directors.

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;

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·   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.

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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.

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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 2006 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, 2006, are shown in the table below.  Information relating to options exercised during 2006 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.

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     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, 2007 and 2006.

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)	2007	$ 424,000	-	-	-	-	-	$ 20,000	$   444,000
Chairman, CEO and	2006	$ 424,000	$   67,690	-	-	-	-	$ 20,000	$   511,690
President
Seth A. Grossman(1)	2007	$ 339,200	-	-	-	-	-	$          -	$   339,200
President and Chief	2006	$ 339,200	$   51,455	-	-	-	-	$          -	$   390,655
Operating Officer
Edward L. Cummings(1)	2007	$ 254,400	-	-	-	-	-	$          -	$   254,400
CFO and Treasurer	2006	$ 254,400	$   24,270	-	-	-	-	$          -	$   278,677
Joel L. Owens(2)	2007	$ 463,457	-	-	-	-	-	$         -	$   463,457
Vice President	2006	$ 463,877	-	-	-	-	-	$         -	$   463,877
Vivek J. Agarwal(3)	2007	$ 158,057	-	-	4,828	-	-	$         -	$   162,885
Sales Representative	2006	$ 200,000	-	-	-	-	-	$         -	$   200,000

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

(2)   Employment ended on November 15, 2007.

(3)   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.

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Grants of Plan-Based Awards

The following table contains information concerning the grant of Stock Options to the named executive officers during 2007:

		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 ($/Sh)
		Threshold ($)	Target  ($)	Maximum (#)	Threshold ($)	Target ($)	Maximum (#)
Marc Sherman	-	-	-	-	-	-	-	-	-	-
Seth A. Grossman	-	-	-	-	-	-	-	-	-	-
Edward L. Cummings	-	-	-	-	-	-	-	-	-	-
Joel L. Owens	-	-	-	-	-	-	-	-	-	-

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, 2007:

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	--	--
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	--	--
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	--	--

(1)   All options have vested.

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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	$ 25,000	-	-	-	-	-	$ 25,000
R. Keith Elliott	$ 25,000	-	-	-	-	-	$ 25,000
Geoffrey Smith	$ 25,000	-	-	-	-	-	$ 25,000
Robert W. VanHellemont	$ 25,000	-	-	-	-	-	$ 25,000

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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.

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.

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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, 2007:

Post Employment Compensation
Name	2008 ($)	2009 ($)	2010 ($)
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, 2007:

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	6,025,000	14.2%
Common	Seth A. Grossman c/o 70 Lake Drive Hightstown, NJ 08520	3,425,000	8.1%
Common	Edward L. Cummings c/o 70 Lake Drive Hightstown, NJ 08520	3,718,200	8.7%
Common	R. Keith Elliott c/o 70 Lake Drive Hightstown, NJ 08520	525,000	1.2%
Common	John F. Cunningham c/o 70 Lake Drive Hightstown, NJ 08520	255,000	*
Common	Geoffrey A. Smith c/o 70 Lake Drive Hightstown, NJ	100,000	*
Common	Robert W. VanHellemont c/o 70 Lake Drive Hightstown, NJ  08520	298,500	*
Common	All Directors and Executive Officers as a Group (7 Persons)	14,346,000	33.7%

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

1.   This table includes presently exercisable stock options.   The following directors and executive officers hold the number of presently exercisable options (all of which may be exercised at any time) set forth following their respective names: Edward L. Cummings – 1,600,000; R. Keith Elliott – 525,000; Seth A. Grossman –3,425,000; Marc Sherman –3,375,000; John F. Cunningham – 100,000; Geoffrey A. Smith – 100,000; Robert W. VanHellemont – 275,000; and all directors and executive officers as a group (7 persons) – 9,400,000.

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, 2008, 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
Professional Offshore Opportunity Fund, LTD 1400 Old Country Road Westbury, NY  11590	2,930,478	9.4%
Pike Capital Partners, LP 275 Madison Avenue Suite 418 New York, NY  10016	5,555,982	17.8%

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, 2007 and 2006, 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 and Michael Sheerr, a former employee and officer of the Company.  Keystone Memory Group is owned by Michael P. Sheerr and his wife.  Mrs. Sheerr is Marc Sherman’s sister.  Mr. Sherman has no business experience with Keystone, and Mr. Sheerr had no business experience with Keystone while employed by the Company.

Sales to Keystone amounted to approximately $85,000 and $158,000 for the years ended December 31, 2007 and 2006, respectively.  Accounts receivable from this customer amounted to $49,529 at December 31, 2007.  No accounts receivable from this customer was outstanding at December 31, 2006.

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

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, 2007 and 2006, rent expense for this lease amounted to $221,788 and $179,585, respectively.  No accounts payable were due to this vendor at December 31, 2007 and 2006.

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.  No accounts payable was outstanding to this vendor at December 31, 2007 and 2006.

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

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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 2007 and 2006, we paid the following fees, including out of pocket expense reimbursements, to RubinBrown LLP:

2007		2006
Audit Fees Audit-Related Fees (1) Tax Fees (2) Total	$200,000 62,000 48,000 $310,000	$ 147,109 43,123 22,950 $ 213,182

(1) 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.

(2)  Tax Fees include tax planning, compliance for federal and state income taxes, and assistance with IRS examinations.

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.

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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 47.
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
Notes To Financial Statements		F-8 – F-32

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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:                      April 14, 2008	By:	/s/ Marc Sherman
		Marc Sherman
		Chief Executive Officer

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

Signature	Title	Date
/s/ Marc Sherman Marc Sherman	Chairman of the Board, and Chief Executive Officer	April 14, 2008
/s/ Seth A. Grossman Seth A. Grossman	President, Chief Operating Officer and Director	April 14, 2008
/s/ Edward L. Cummings Edward L. Cummings	Chief Financial Officer, Treasurer and Director	April 14, 2008
/s/ R. Keith Elliott R. Keith Elliott	Director	April 14, 2008
/s/ Robert W.  VanHellemont Robert W. VanHellemont	Director	April 14, 2008
/s/ Geoffrey A. Smith Geoffrey A. Smith	Director	April 14, 2008
/s/ John F. Cunningham John F. Cunningham	Director	April 14, 2008

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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)).

47

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 RubinBrown LLP
31.1***	Chairman and Chief Executive Officer Certification
31.2***	President and Chief Operating Officer Certification
31.3***	Chief Financial Officer and Treasurer 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.

48

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIALSTATEMENTS

DECEMBER 31, 2007

Contents

	Page
Report Of Independent Registered Public
Accounting Firm	F-1 - F-2
Financial Statements
Consolidated Balance Sheets	F-3 - F-4
Consolidated Statements Of Operations	F-5
Consolidated Statements Of Stockholders’ Equity	F-6
Consolidated Statements Of Cash Flows	F-7
Notes To Consolidated Financial Statements	F-8 - F-33

Report Of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

QSGI INC.

Hightstown, New Jersey

We have audited the accompanying consolidated balance sheets of QSGI INC. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years 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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

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, 2007 and 2006, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 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 1.  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-2

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Page 1 Of 2

Assets
	December 31,
	2007		2006
Current Assets
Cash and cash equivalents	$	127,723	$	632,948
Accounts receivable, net of reserve of $955,599
and $780,116 in 2007 and 2006, respectively		3,853,362		8,012,421
Inventories		6,578,031		4,982,710
Prepaid expenses and other assets		163,553		183,069
Deferred income taxes		—		598,661
Total Current Assets		10,722,669		14,409,809
Property And Equipment, Net		286,766		410,241
Goodwill		1,489,621		6,644,403
Intangibles, Net		470,348		2,555,584
Other Assets		448,066		158,784
	$	13,417,470	$	24,178,821

See the accompanying report letter and notes to consolidated financial statements.

Page F-3

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

Page 2 Of 2

Liabilities And Stockholders' Equity
	December 31,
	2007			2006
Current Liabilities
Revolving line of credit	$	3,754,061		$	3,915,825
Accounts payable		1,109,940			1,382,336
Accrued expenses		654,461			601,850
Accrued payroll		88,818			329,658
Deferred revenue		439,865			517,439
Other current liabilities		311,610			122,784
Total Current Liabilities		6,358,755			6,869,892
Long-Term Deferred Revenue		142,772			416,239
Deferred Income Taxes		27,300			451,625
Total Liabilities		6,528,827			7,737,756
Redeemable Convertible Preferred Stock		4,238,685			4,220,577
Commitments And Contingencies (Notes 1, 6 And 13)
Stockholders' Equity
Common shares: authorized 95,000,000 in 2007 and 2006,
$0.01 par value; 31,172,716 shares issued and outstanding
in 2007 and 2006		311,727			311,727
Additional paid-in capital		14,134,298			14,390,976
Retained earnings (deficit)		(11,796,067	)		(2,482,215	)
Total Stockholders' Equity		2,649,958			12,220,488
	$	13,417,470		$	24,178,821

See the accompanying report letter and notes to consolidated financial statements.

Page F-4

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For The Years
	Ended December 31,
	2007			2006
Product Revenue	$	30,126,257		$	41,111,420
Service Revenue		7,094,853			5,297,497
Total Revenue		37,221,110			46,408,917
Cost Of Products Sold		25,525,836			34,742,022
Cost Of Services Sold		2,516,833			1,806,492
Cost Of Sales		28,042,669			36,548,514
Gross Profit		9,178,441			9,860,403
Selling, General And Administrative Expenses		9,905,064			9,663,812
Goodwill And Asset Impairment		7,206,698			—
Depreciation And Amortization		702,310			685,216
Interest Expense, Net		396,417			238,985
Loss Before Provision (Benefit) For Income Taxes		(9,032,048	)		(727,610	)
Provision (Benefit) For Income Taxes		243,804			(242,373	)
Net Loss		(9,275,852	)		(485,237	)
Accretion To Redemption Value Of Preferred Stock		18,108			17,056
Preferred Stock Dividend		258,000			256,389
Net Loss Available To Common Stockholders	$	(9,551,960	)	$	(758,682	)
Net Loss Per Common Share - Basic	$	(0.31	)	$	(0.03	)
Net Loss Per Common Share - Diluted	$	(0.31	)	$	(0.03	)
Weighted Average Number Of Common Shares
Outstanding - Basic		31,172,716			30,127,255
Weighted Average Number Of Common Shares
Outstanding - Diluted		31,172,716			30,127,255

See the accompanying report letter and notes to consolidated financial statements.

Page F-5

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For The Years Ended December 31, 2007 And 2006

					Additional			Retained			Total
	Common Stock				Paid-In			Earnings			Stockholders'
	Shares		Amount		Capital			(Deficit)			Equity
Balance (Deficit) -
January 1, 2006		28,670,631	$	286,706	$	11,093,881		$	(1,996,978	)	$	9,383,609
Exercise Of Stock Options		350,000		3,500		5,600			—			9,100
Shares Issued For Services		88,540		885		160,802			—			161,687
Common Shares Issued For
QualTech Earn-Out		2,063,545		20,636		3,385,954			—			3,406,590
Stock Option Compensation		—		—		18,184			—			18,184
Preferred Stock Dividend		—		—		(256,389	)		—			(256,389	)
Accretion To The Redemption
Value Of Preferred Stock		—		—		(17,056	)		—			(17,056	)
Net Loss		—		—		—			(485,237	)		(485,237	)
Balance (Deficit) -
December 31, 2006		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

See the accompanying report letter and notes to consolidated financial statements.

Page F-6

QSGI INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For The Years
	Ended December 31,
	2007			2006
Cash Flows From Operating Activities
Net loss	$	(9,275,852	)	$	(485,237	)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Goodwill and asset impairment		7,206,698			—
Depreciation and amortization		702,130			685,216
Stock option compensation expense		19,430			18,184
Deferred income taxes		174,336			(271,686	)
Allowance for doubtful accounts		713,500			822,965
Common stock issued for services		—			161,687
Changes in assets and liabilities:
Accounts receivable		2,977,775			(1,821,257	)
Inventories		(1,595,321	)		(846,406	)
Prepaid expenses and other current assets		23,389			18,034
Other assets		(50,417	)		(3,770	)
Accounts payable, accrued expenses and other liabilities		(660,840	)		139,040
Net Cash Provided By (Used In) Operating Activities		234,828			(1,583,230	)
Cash Flows From Investing Activities
Advances for notes receivable		(96,250	)		—
Collections of notes receivable		53,200			—
Purchases of property and equipment		(211,713	)		(153,728	)
Proceeds from sale of equipment		62,301			8,274
Net Cash Used In Investing Activities		(192,462	)		(145,454	)
Cash Flows From Financing Activities
Proceeds from the issuance of redeemable preferred stock		—			2,236,301
Payments for financing costs		(127,827	)		(40,000	)
Stock options exercised		—			9,100
Preferred stock dividends		(258,000	)		(256,389	)
Net amounts borrowed (repaid) under revolving line of credit		(161,764	)		284,325
Stock issuance costs		—			(25,499	)
Net Cash Provided By (Used In) Financing Activities		(547,591	)		2,207,838
Net Increase (Decrease) In Cash And Cash Equivalents		(505,225	)		479,154
Cash And Cash Equivalents - Beginning Of Year		632,948			153,794
Cash And Cash Equivalents - End Of Year	$	127,723		$	632,948
Supplemental Disclosure Of Cash Flow Information
Income taxes paid	$	62,591		$	25,428
Interest paid		406,306			243,196
Supplemental cash flow information (Note 15)

See the accompanying report letter and notes to consolidated financial statements.

Page F-7

QSGI INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007 And 2006

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.

See the accompanying report letter.

Page F-8

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.

The Company has office and warehouse space in Hightstown, New Jersey, and Eagan, Minnesota, and satellite sales and business development offices in Colorado, Florida, Illinois, Indiana, Kansas, Maine, Michigan, New Hampshire, New York, North Carolina, Nebraska, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas, and Wyoming.

Management’s Plans, Liquidity And Going Concern Considerations

The Company has incurred net losses in each of the last three years, and is currently in default of its line of credit agreement (Note 6).  The lender has the right to immediately call the loan due and payable in full.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

Management believes that the Company and the Bank continue to work together in a cooperative and constructive manner.  At the same time, the Company is exploring alternative financing.  However, there can be no guarantee that the Company will be able to obtain alternative financing, or if obtained, will be on terms favorable to the Company.

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.

See the accompanying report letter.

Page F-9

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, 2007 and 2006, 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.

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.

See the accompanying report letter.

Page F-10

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

The allowance for doubtful accounts at December 31, 2007 and 2006, 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
2006	$   80,000	$ 822,965	$ 122,849	$ 780,116
2007	780,116	713,500	538,017	955,599

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.  Capitalized values of property under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less.

See the accompanying report letter.

Page F-11

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

Deposits

Deposits principally consist of the lease deposits for the Company’s Data Security and Compliance segment.  These deposits are refundable at the expiration of the lease.  Since the lease terms extend beyond 12 months, the deposits are classified as a long-term asset in other assets on the consolidated balance sheet.

Advertising Costs

Advertising costs are expensed on the first date the advertisement takes place.  Advertising expense amounted to $89,477 in 2007 and $50,486 in 2006.

Income Taxes

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

Loss Per Share

Basic loss per share is computed on the basis of the weighted average number of common share outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of all dilutive potential common shares that were outstanding during the period.

See the accompanying report letter.

Page F-12

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

	2007			2006
Net loss available to common stockholders	$	(9,551,960	)	$	(758,682	)
Determination of basic and diluted shares:
Basic weighted average shares outstanding		31,172,716			30,127,255
Diluted weighted average shares outstanding		31,172,716			30,127,255
Net Loss Per Common Share - Basic	$	(0.31	)	$	(0.03	)
Net Loss Per Common Share - Diluted	$	(0.31	)	$	(0.03	)

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.

In 2006, the Company excluded 1,104,348 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.

See the accompanying report letter.

Page F-13

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

The weighted average per share fair value of the options granted was $1.41 and $1.43 for the years ended December 31, 2007 and 2006, respectively.  The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2007			2006
Risk-free interest rates		4.15	%		4.59	%
Expected option lives	1.6 Years			5.0 years
Expected volatilities		70	%		75	%
Expected dividend yields		0	%		0	%

Impact Of Recently Issued Accounting Standards

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have an impact on the Company’s financial position or results of operations.

See the accompanying report letter.

Page F-14

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.  This statement is effective for the Company beginning January 1, 2008.  The Company is currently assessing the potential impact that adoption of SFAS No. 157 will have on its financial statements.

On January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”).  This Interpretation clarifies accounting for uncertainty in income taxes recognized in an enterprise’s financial statements.  FIN 48 prescribes a recognition threshold and measurement process for a tax position or expected position to be taken in a tax return.

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 (deficit).  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.

2.Inventories

Inventories consist of:

	2007			2006
Finished goods	$	6,120,473		$	4,810,843
Inventory in transit		708,558			246,867
Allowance for excess and obsolescence		(251,000	)		(75,000	)
	$	6,578,031		$	4,982,710

See the accompanying report letter.

Page F-15

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

3.Property And Equipment

Property and equipment consist of:

	2007		2006
Furniture and fixtures	$	114,798	$	152,384
Equipment		454,921		458,537
Leasehold improvements		130,754		92,862
Computer equipment and software		599,503		610,004
		1,299,976		1,313,787
Less:  Accumulated depreciation		1,013,210		903,546
	$	286,766	$	410,241

Depreciation and amortization charged against income for all property and equipment amounted to $278,887 and $341,100 for the years ended December 31, 2007 and 2006, respectively.

4.           Goodwill and Other Intangible Assets

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

Goodwill increased during 2006 due to the additional merger consideration payment of $3,432,089.

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.

See the accompanying report letter.

Page F-16

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

During the fourth quarter of 2007, the Company performed an impairment test on goodwill and intangibles and has 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.  During the fourth quarter of 2006, the Company performed an impairment test and determined that the carrying value of such assets were not impaired as of that date.

The 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.

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, 2007 and 2006, the balance of goodwill and intangible assets is as follows:

	2007		2006
Goodwill	$	1,489,621	$	6,644,403
Intangible assets with indefinite lives		70,000		910,000
Intangible assets with finite lives, net		400,348		1,645,584
	$	1,959,969	$	9,199,987

See the accompanying report letter.

Page F-17

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

At December 31, 2007 and 2006, the balance of goodwill is as follows:

					Data
	Data		Data		Security
	Center		Center		And
	Hardware		Maintenance		Compliance		Total
Balance December 31, 2006	$	5,154,782	$	1,489,621	$	—	$	6,644,403
Less:  Goodwill impairment		5,154,782		—		—		5,154,782
Balance December 31, 2007	$	—	$	1,489,621	$	—	$	1,489,621

Intangibles with indefinite lives relate principally to trade names.  At December 31, 2007 and 2006, the balance of intangibles with indefinite lives is as follows:

					Data
	Data		Data		Security
	Center		Center		And
	Hardware		Maintenance		Compliance		Total
Balance December 31, 2006	$	840,000	$	70,000	$	—	$	910,000
Less:  Impairment		840,000		—		—		840,000
Balance December 31, 2007	$	—	$	70,000	$	—	$	70,000

Intangibles with finite lives relate principally to the following:

								2007
	2006		2007			2007		Adjusted
	Cost		Impairment			Additions		Cost
Customer lists	$	1,640,000	$	(1,520,000	)	$	—	$	120,000
Database		400,000		(400,000	)		25,000		25,000
Employee		450,000		(278,000	)		25,000		197,000
noncompetes
Website		—		—			50,000		50,000
EBay Storefront		—		—			240,000		240,000
Total	$	2,490,000	$	(2,198,000	)	$	340,000	$	632,000

See the accompanying report letter.

Page F-18

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

	2006							2007		2007		Remaining
	Accumulated		2007		2007			Accumulated		Net		Amortization
	Amortization		Amortization		Impairment			Amortization		Intangibles		Life (Years)
Customer lists	$	485,888	$	182,208	$	(619,256	)	$	48,840	$	71,160		5.3
Database		118,528		48,612		(162,976	)		4,164		20,836	2.5 to 5.3
Employee
noncompetes		240,000		94,164		(203,852	)		130,312		66,688	1.3 to 2.5
Website		—		8,334		—			8,334		41,666		2.5
EBay Storefront		—		40,002		—			40,002		199,998		2.5
Total	$	844,416	$	373,320	$	(986,084	)	$	231,652	$	400,348

					2006		2006		Remaining
	2006		2006		Accumulated		Net		Amortization
	Cost		Amortization		Amortization		Intangibles		Life (Years)
Customer lists	$	1,640,000	$	182,208	$	485,888	$	1,154,112		6.4
Database		400,000		44,448		118,528		281,472		6.4
Employee
noncompetes		450,000		90,000		240,000		210,000		2.4
Total	$	2,490,000	$	316,656	$	844,416	$	1,645,584

Amortization of intangibles is computed on a straight-line basis and based on December 31, 2007 balances, expected amortization expense in each of the next five years and thereafter is as follows:

Year	Amount
2008	$	161,052
2009		138,096
2010		70,000
2011		13,320
2012		13,320
Thereafter		4,560
	$	400,348

See the accompanying report letter.

Page F-19

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

5.           Other Assets

Other assets consist of:

	2007		2006
Deposits	$	83,306	$	78,422
Trademark		7,885		7,885
Patent, net of amortization of $4,541
in 2007 and $3,330 in 2006		19,675		20,886
Deferred loan costs		116,435		40,000
Notes receivable		150,725		—
Other		70,040		11,591
	$	448,066	$	158,784

The patent is being amortized over a 20-year life.  Patent amortization expense in 2007 and 2006 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 and one former employee, bearing interest at rates from 0% to 12.5%, payable in varying amounts through 2011.

6.           Financing Arrangements

Revolving Line Of Credit

On January 17, 2007, the Company completed the financing of a new $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 new revolving line-of-credit agreement provides 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 new revolving line-of-credit agreement contains certain financial covenants, including minimum net income requirements.

See the accompanying report letter.

Page F-20

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

On June 29, 2007, the Company completed an amendment to the revolving line of credit which reset some of the covenants.  The amended revolving line-of-credit minimum net income requirements are as follows:

	Year To Date
Period Ending	Net Income
March 31, 2008	$ 100,000
June 30, 2008	300,000
September 30, 2008	500,000
December 31, 2008	800,000
March 31, 2009	100,000
June 30, 2009	300,000
September 30, 2009	500,000
December 31, 2009	800,000

Availability on the borrowing base at December 31, 2007 was $287,684.  Interest on this loan is 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 is 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 has notified the Company that it is out of compliance with its covenants and is in default on the loan.  The bank has the right to immediately call the loan due and payable in full.  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.

7.           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.

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.

See the accompanying report letter.

Page F-21

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8.           Stockholders’ Equity

Stock Option Grants

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

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

Stock option compensation expense in the amount of $19,430 and $18,184 was recorded in 2007 and 2006, respectively.

See the accompanying report letter.

Page F-22

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

A summary of stock option activity is as follows:

	2007					2006
				Weighted -					Weighted -
				Average					Average
				Exercise					Exercise
	Shares			Price		Shares			Price
Outstanding -
January 1		12,221,834		$	1.972		12,566,834		$	1.918
Granted		40,000			1.405		30,000			1.430
Exercised		—			—		(350,000	)		0.026
Forfeited		(892,000	)		2.471		(25,000	)		1.540
Outstanding on December 31		11,369,834		$	1.930		12,221,834		$	1.972
Exercisable on December 31		11,330,834		$	1.932		12,165,167		$	1.973

Unrecognized stock option compensation cost related to unvested stock options amounts to approximately $34,000.  The cost is expected to be recognized over the next four years.

The following table summarizes information about the options outstanding at December 31, 2007:

				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	4.1	$ 0.026	1,740,000	$ 0.026
1.01 to 1.90	2,433,334	6.2	1.671	2,394,334	1.674
2.00 to 2.13	2,255,000	6.9	2.007	2,255,000	2.007
2.50 to 2.75	4,725,000	7.2	2.659	4,725,000	2.659
3.45 to 3.46	216,500	3.0	3.450	216,500	3.450
	11,369,834			11,330,834

See the accompanying report letter.

Page F-23

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Warrants

In October 2004, the Company issued 350,000 warrants with an exercise price of $2.00 to certain warrant holders in exchange for their exercise of 500,000 warrants for which the Company received $750,000.  The fair value of the 350,000 new warrants plus the fair value of the 500,000 warrants with a decreased exercise period was less than the fair value of the 500,000 warrants before the modification.  As such, no value was assigned to the new warrants.  In October 2007, these warrants expired.

A schedule of common stock warrant activity is as follows:

				Weighted -
	Number			Average
	Of			Exercise
	Shares			Price
Outstanding at December 31, 2006 and 2005		933,333		$	3.00
Warrants issued		—			—
Warrants expired		(350,000	)		2.00
Outstanding at December 31, 2007		583,333		$	3.60

The following table summarizes information about the warrants outstanding at December 31, 2007:

	Outstanding Stock Warrants			Exercisable Warrants
		Weighted-
		Average	Weighted-		Weighted-
		Remaining	Average		Average
Exercise		Contractual	Exercise		Exercise
Price	Number	Life	Price	Shares	Price
$ 3.60	583,333	1.38	$ 3.60	583,333	$ 3.60

See the accompanying report letter.

Page F-24

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

9.           Income Taxes

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

	2007		2006
Current	$	69,468	$	29,313
Deferred		174,336		(271,686	)
	$	243,804	$	(242,373	)

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:

	2007			2006
Deferred Tax Assets
Liabilities and reserves	$	651,393		$	356,220
Net operating loss carryforwards		1,612,300			1,499,268
Stock options		19,362			36,732
Inventory capitalization		240,024			129,585
Property and equipment		66,559			31,526
		2,589,638			2,053,331
Valuation allowance		(2,527,374	)		(873,183	)
		62,264			1,180,148
Deferred Tax Liabilities
Prepaid expenses		26,449			28,113
Patent and trademark		7,859			8,321
Intangibles		55,256			996,678
		89,564			1,033,112
Net Deferred Tax Asset (Liability)	$	(27,300	)	$	147,036

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

	2007			2006
Current deferred tax asset	$	—		$	598,661
Long-term deferred tax liability		(27,300	)		(451,625	)
	$	(27,300	)	$	147,036

See the accompanying report letter.

Page F-25

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:

	2007			2006
Statutory federal rate		34	%		34	%
State income taxes, net of federal benefits		1			1
Goodwill impairment		(19	)		—
Change in valuation allowance		(18	)		—
Meals, entertainment and club dues		(1	)		(2	)
		(3	)%		33	%

The Company’s ability to utilize the cumulative tax net operating loss carryforward of approximately $4,700,000 at December 31, 2007 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.

The Company adopted the provisions of FIN 48 as of January 1, 2007.  As a result of the implementation of FIN 48, the Company recognized a $38,000 increase in the liability for unrecognized tax benefits which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.  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	)
	$	12,500

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 the current year.

See the accompanying report letter.

Page F-26

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

The entire balance of $12,500 of unrecognized tax benefits at December 31, 2007 would impact the effective tax rate if recognized.  The Company recognizes interest and penalties related to unrecognized tax benefits in accrued expenses.  The liability for unrecognized tax benefits included accrued interest of $3,000 and $1,000 at January 1, 2007 and December 31, 2007, respectively.  The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and various state income tax authorities from 2005 through 2007.

11.           Concentrations

Major Customers

For the years ended December 31, 2007 and 2006, sales to the Company’s top ten customers comprised approximately 31% and 44% of revenue, respectively.  Sales to one of these customers comprised approximately 6% and 11% of sales in 2007 and 2006, respectively. The Company’s top ten customers also comprised approximately 19% and 51% of the accounts receivable balance at December 31, 2007 and 2006, respectively.

Purchases

The Company purchases a majority of its products from a small number of suppliers.  Approximately 61% and 51% of product purchases were from three vendors for the years ended December 31, 2007 and 2006, respectively.

12.           Benefit Plan

The Company has a 401(k) defined contribution benefit plan for all eligible employees.  The Company contributes 3% of eligible employees’ salaries to the plan.

The Company contributed $185,502 and $63,327 to the plan during the years ended December 31, 2007 and 2006, respectively.

See the accompanying report letter.

Page F-27

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

13.           Commitments And Contingencies

Lease

The Company has three operating leases on New Jersey real property. Two are month to month leases and the other expires 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 Hampshire real property expiring in the year 2008.

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

The Company has an operating lease on New York real property expiring in the year 2009.

The Company has an operating lease on Florida real property expiring in the year 2012.

The Company has an operating lease on equipment expiring in the year 2008.

Rent expense and other charges totaled $831,801 and $782,979 for the years ended December 31, 2007 and 2006, respectively.

The approximate minimum payments required under these operating leases at December 31, 2007 are:

Year	Amount
2008	$	655,717
2009		502,208
2010		299,509
2011		255,007
2012		28,350
	$	1,740,791

See the accompanying report letter.

Page F-28

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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 2007.  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

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

14.           Related Party Transactions

In 2007 and 2006, 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, 2007 and 2006 amounted to approximately $85,000 and $158,000, respectively.  Accounts receivable from this customer amounted to $49,529 at December 31, 2007.  No accounts receivable from this customer was outstanding at December 31, 2006.

See the accompanying report letter.

Page F-29

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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, 2007 and 2006, rent expense for this lease amounted to $221,788 and $179,585, 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.  No accounts payable was outstanding to this vendor at December 31, 2007 or 2006.

15.           Supplemental Cash Flow Information

During 2007, the Company issued no additional shares of common stock.  During 2006, the Company issued 88,540 shares of its common stock for services rendered during 2006 with two vendors for $161,687.  During 2006, the Company issued 2,063,545 shares of its common stock valued at $3,432,089 as final payment for the acquisition of QualTech.

On July 1, 2007, the Company completed a small asset purchase.  The majority of the purchase price was assigned to intangibles in the Data Security and Compliance segment.  The amortization of these intangible assets is computed on a straight-line basis over a three-year life starting in July 2007.  The acquisition price was funded by the reduction of the seller’s accounts receivable balance due to the Company.

16.           Segment Information

The Company operates in three business segments:  Data Security And Compliance, Data Center Hardware and Data Center Maintenance.  The overall concept that QSGI INC. employs in determining its operating segments is to present the results in a manner consistent with how the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products and services offered and the target market.

See the accompanying report letter.

Page F-30

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Data Security And Compliance Segment

This segment provides data security and regulatory compliance services for end-of-life business-computing IT assets. The Company offers a variety of 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 (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 one client location or at multiple locations, onsite, at the Company’s facilities or through the use of the Company’s mobile audit and erasure truck.

Data Center Hardware Segment

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

Data Center Maintenance

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

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies, with the following exceptions.  Intersegment sales 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 and Data Center Maintenance segments for certain corporate services.  Management fees charged to the Data Center Hardware segment amounted to $480,000 in 2007 and 2006.  Management fees charges to the Data Center Maintenance segment amounted to $720,000 and $660,000 in 2007 and 2006, respectively.  These intersegment transactions have been eliminated in consolidation.

See the accompanying report letter.

Page F-31

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

	2007			2006
Revenues
Products	$	30,126,257		$	41,111,420
Services		7,094,853			5,297,497
	$	37,221,110		$	46,408,917
Revenues
Data Security And Compliance	$	20,741,618		$	22,013,739
Data Center Hardware		11,100,092			20,035,133
Data Center Maintenance		6,264,981			4,847,885
Intersegment Elimination		(885,581	)		(487,840	)
Consolidated Total	$	37,221,110		$	46,408,917

Income (Loss) Before Benefit For
Income Taxes
Data Security And Compliance	$	(3,046,216	)	$	(2,763,369	)
Data Center Hardware		(7,208,456	)		775,849
Data Center Maintenance		1,222,624			1,259,910
Consolidated Total	$	(9,032,048	)	$	(727,610	)

Depreciation And Amortization
Data Security And Compliance	$	299,655	$	225,516
Data Center Hardware		343,347		397,358
Data Center Maintenance		59,308		62,342
Consolidated Total	$	702,310	$	685,216

Segment Assets
Data Security And Compliance	$	8,592,896	$	8,879,411
Data Center Hardware		1,264,945		12,669,721
Data Center Maintenance		3,559,629		2,629,689
Consolidated Total	$	13,417,470	$	24,178,821

See the accompanying report letter.

Page F-32

QSGI INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

	2007		2006
Goodwill
Data Security And Compliance	$	—	$	—
Data Center Hardware		—		5,154,782
Data Center Maintenance		1,489,621		1,489,621
Consolidated Total	$	1,489,621	$	6,644,403

Expenditures For Property And
Equipment
Data Security And Compliance	$	190,082	$	127,087
Data Center Hardware		21,631		16,564
Data Center Maintenance		—		10,077
Consolidated Total	$	211,713	$	153,728

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 2007 or 2006.

For the years ended December 31, 2007 and 2006, export sales comprised 17% and 14%, respectively, of revenue.

Revenue by Geographic Segment comprised:

	2007		2006
United States	$	31,028,368	$	40,024,087
Asia		1,394,935		1,824,038
Middle East		2,404,862		1,823,709
Europe		478,557		219,608
Africa		593,044		602,447
United Kingdom		485,478		935,473
Canada		556,392		324,056
Australia		—		12,825
South America		279,474		642,674
Consolidated Total	$	37,221,110	$	46,408,917

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