QSGI Reports Second Quarter Financial Results

HIGHTSTOWN, N.J., and PALM BEACH, Fla., Aug. 14 -- QSGI Inc. (BULLETIN BOARD: QSGI) , the most comprehensive provider of information technology services to help corporations better manage IT assets, data center maintenance expenses, and ensure best practices for data security and regulatory compliance, today reported financial results for the three months ending June 30, 2008.

Recent Developments:

-- 16% increase in services revenue, reflecting additional business from existing accounts as well as 4 new data center maintenance customers and 3 new end-user data security & compliance customers

-- Signed on first customer through newly-formed strategic alliance with IBM Global Financing (IGF) for on-site auditing and data erasure services

-- Completed acquisition of Contemporary Computer Services, Inc. (CCSI) in July 2008

-- Secured $10 million senior credit facility from Victory Park Capital to replace existing $7.5 million asset based working capital facility

Marc Sherman, chairman and chief executive officer of QSGI, commented, "The events of the second quarter have strengthened the foundation from which our transition into a full service, nationwide data center maintenance and IT services organization was launched earlier this year. The transition is well underway with the acquisition of CCSI and the winding down of our data center hardware business, which continued to negatively impact our overall results during the second quarter. At the same time we have begun to de-emphasize our OEM wholesale remarketing of distributed computing equipment (desktops, notebooks, servers) and instead focus our sales efforts on the higher margin end-user auditing and erasure services. As a result, our lower margin product revenues were down substantially, offset by a 16% increase in services revenue, which includes both our data center maintenance and end-user data security and compliance services. This shift will become even more apparent as we begin to recognize revenues from our CCSI acquisition. Overall, our strategic initiatives have been orchestrated to maximize new business opportunities, increase efficiencies, improve margins and ensure sustained profitability."

"CCSI's exemplary team of professionals and impressive customer base consisting of corporate, educational and government entities are fertile ground for providing our full range of services which now include a network operating center (NOC) for performance management and fault management services that are done remotely from a central location. CCSI, now operating through a wholly-owned subsidiary of QSGI since completing the acquisition in early July, has already signed [four] new customer agreements across its service offerings, with more in the pipeline. CCSI generated approximately $13.7 million in revenue in 2007, up from $11.0 million in 2006 and generated EBITDA of approximately $2.1 million in 2007. As we continue to gain critical mass in the market place, we are finding that more and more of our business is being derived from customer referrals and contract expansions from existing customers. This appears to be a trend among both QSGI's and CCSI's customers. We view this as validation of the quality of our services and an indication of customer satisfaction. We plan to build upon this strong foundation in the months and years ahead."

"Our recent alliance with IBM Global Financing (IGF) for on-site auditing and data erasure services has already resulted in a large new customer and based upon indications from IBM we continue to be hopeful it will expand in scope. A pilot program with IGF was initiated in April 2008 under which IGF will offer its customers QSGI's on-site data audit and erasure services for enterprise storage systems within data centers and in the corporate environment. We continue to work hard to ensure success with our pilot and we collectively feel this program will be a winner for both QSGI and IBM. We have more opportunities with IBM's sales force then ever and some of these are large in scope and overall program term. New laws now being enforced, such as the state of Connecticut, which recently implemented new rules with respect to data erasure and disposal, further validate our services. Importantly, we believe that IBM's strong brand recognition will shorten the selling cycle for these services."

Mr. Sherman concluded, "Even in a challenging economic environment, the value proposition that QSGI offers can benefit companies seeking to cut expenses for needed IT services. With our expanded product offerings, recurring revenue streams, and new alliance with IGF, the foundation is now built for solid performance and steady growth in financial performance."

Total revenue for the second quarter of 2008 was $6.1 million, as compared with $9.7 million for the same period in 2007. The decline in revenue reflects a decrease in IT product remarketing revenue to $4.1 million from $8.0 million for the same period last year, offset by a 16% increase in services revenue to $2.0 million from $1.7 million for the same period last year. The decline in product revenue was primarily related to the Data Center Hardware division, reflecting the anti-competitive change in business practice instituted by a major OEM that affected QSGI and the entire industry, as previously disclosed, coupled with a decline in wholesale remarketing revenue within the Data Security and Compliance division. Gross profit for the company was $1.1 million, compared to gross profit of $2.5 million in the second quarter of 2007. The decline in gross profit reflects QSGI's de-emphasis of its wholesale remarketing revenue, a sharp decline in the Data Center Hardware division and non-cash expenses associated with conservatively increasing reserves on inventory by $230,000. Selling, general and administrative expenses were $2.5 million versus $2.4 million for the same period last year, which included $215,000 relating to fees paid to our former lender, and to consultants and attorneys associated with our prior lender. Net loss available to common stockholders for the second quarter of 2008 was $1.9 million or $0.06 per share, compared to a net loss of $145,000, or $0.00 per share, for the same period in 2007.

Conference Call

QSGI will host a conference call at 11 a.m. Eastern Time, today, August 14, 2008. During the call, Marc Sherman, chairman and chief executive officer, Seth Grossman, president and chief operating officer, and Ed Cummings, chief financial officer, will discuss the Company's quarterly performance and financial results. The telephone number for the conference call is (201) 689-8054. A live webcast of the call will also be available on the company's website, www.QSGI.com. To listen to the live call online, please visit the site at least 10 minutes early to register, download and install any necessary audio software.

The webcast will be archived on the site, and investors will be able to access an encore recording of the conference call for one week by calling (201) 612-7415 and entering account #286, ID #294038. The encore recording will be available two hours after the conference call has concluded.

About QSGI

QSGI provides a full suite of information technology services to help corporations and governmental agencies better manage hardware assets, reduce maintenance expenses, build best practices for data security and assure regulatory compliance. With a focus on the entire range of IT platforms -- from mainframes, midrange servers and PC, to network infrastructure and enterprise storage hardware, the services offered by QSGI are specifically designed to reduce total cost of ownership for IT assets and maximize the clients' return on their IT investment.

For enterprise class hardware in the data center, QSGI offers hardware maintenance services, hardware environment planning and consultation, refurbished whole systems, parts, features, upgrades and add-ons. Additionally, for desktop IT assets, servers and SAN products, QSGI offers a range of end-of-life services that include: automated asset auditing, Department of Defense (DOD) level data destruction, documentation for regulatory compliance, hardware refurbishment with worldwide remarketing or proper IT asset recycling.

Additionally, through its acquisition of Contemporary Computer Services, Inc. (CCSI), an enterprise class IT services provider with an extensive list of corporate, educational, and government customers, QSGI also performs network design, implementation, and monthly maintenance services on corporations' networking infrastructure as well as 24/7 IT monitoring and diagnostics through its North American Network Operating Center (NOC).

Given the sensitive nature of the company's client relationships, it does not provide the names of its clients. Additional information about the company is available at www.qsgi.com.

Statements about QSGI's future expectations, including future revenues and earnings, and all other statements in this press release other than historical facts are '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 as that term is defined in the Private Litigation Reform Act of 1995. QSGI intends that such forward-looking statements involve risks and uncertainties and are subject to change at any time, and QSGI's actual results could differ materially from expected results. QSGI undertakes no obligation to update forward-looking statements to reflect subsequently occurring events or circumstances.

                             (tables follow)



                  CONDENSED CONSOLIDATED BALANCE SHEETS
                               (Unaudited)

                                                     June 30,     Dec. 31,
                                                       2008         2007
                                    Assets

  Current Assets
      Cash and cash equivalents                      $141,682     $127,723
      Accounts receivable, net of reserve of
       $1,070,280 and $955,599 in 2008 and
       2007, respectively                           2,028,068    3,853,362
      Inventories                                   5,604,347    6,578,031
       Prepaid expenses and other assets              134,213      163,553
              Total Current Assets                  7,908,310   10,722,669
  Property and Equipment, Net                         260,575      286,766
  Goodwill                                          1,489,621    1,489,621
  Intangibles, Net                                    389,822      470,348
  Other Assets                                        549,113      448,066

                                                  $10,597,441  $13,417,470

                Liabilities And Stockholders' Equity (Deficit)
  Current Liabilities
      Revolving line of credit, net of original
       issue discount                              $3,142,273   $3,754,061
      Accounts payable                              1,934,054    1,109,940
      Accrued expenses                                614,922      654,461
      Accrued payroll                                  78,564       88,818
  Deferred revenue                                    269,352      439,865
  Other liabilities                                   259,229      311,610
              Total Current Liabilities             6,298,394    6,358,755

  Long-Term Deferred Revenue                           27,650      142,772
  Deferred Income Taxes                                27,300       27,300
              Total Liabilities                     6,353,344    6,528,827

  Redeemable Convertible Preferred Stock            4,248,154    4,238,685

  Stockholders' Equity (Deficit)
      Preferred shares: Authorized 5,000,000 shares in
       2008 and 2007, $0.01 par value, none issued          -            -
      Common shares: authorized 95,000,000 shares in
       2008 and 2007, $0.01 par value; 45,797,716
       shares issued and outstanding in 2008, of which
       13,500,000 shares were contingent acquisition
       shares held in escrow; 31,172,716 shares
       issued and outstanding in 2007                 322,977      311,727
      Additional paid-in capital                   14,204,120   14,134,298
      Retained earnings (deficit)                 (14,531,154) (11,796,067)
              Total Stockholders' Equity (Deficit)     (4,057)   2,649,958

                                                  $10,597,441  $13,417,470



             CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
        For The Three and Six Months Ended June 30, 2008 and 2007
                               (Unaudited)

                                Three Months Ended      Six Months Ended
                                     June 30,               June 30,
                                 2008        2007        2008       2007


  Product Revenue           $4,113,245  $7,951,514  $10,388,427 $15,906,683
  Service Revenue            1,983,994   1,713,675    3,914,387   3,152,673
  Total Revenue              6,097,239   9,665,189   14,302,814  19,059,356

  Cost Of Products Sold      4,354,773   6,538,501   10,310,239  12,712,657
  Cost Of Services Sold        683,417     633,072    1,361,853   1,176,001
  Total Cost Of Sales        5,038,190   7,171,573   11,672,092  13,888,658

  Gross Profit               1,059,049   2,493,616    2,630,722   5,170,698

  Selling, General And
   Administrative Expenses   2,486,812   2,378,407    4,758,880   4,993,303

  Depreciation And
   Amortization                208,334     167,709      315,720     339,717

  Interest Expense, net        199,792      43,353      256,442     131,192

  Loss Before Provision
   (Benefit) For Income
   Taxes                    (1,835,889)    (95,853)  (2,700,320)   (293,514)

  Provision (Benefit) For
   Income Taxes                  8,511     (19,294)      34,767     (78,113)


  Net Loss                  (1,844,400)    (76,559)  (2,735,087)   (215,401)

  Preferred Stock Dividends     64,323      64,323      128,648     127,939

  Accretion To Redemption
   Value of Preferred Stock      4,769       4,493        9,468       8,918

  Net Loss Available to
   Common Stockholders     $(1,913,492)  $(145,375) $(2,873,203)  $(352,258)

  Net Loss Per Common Share -
   Basic                        $(0.06)      $0.00       $(0.09)     $(0.01)
  Net Loss Per Common Share -
   Diluted                      $(0.06)      $0.00       $(0.09)     $(0.01)

  Weighted Average Number Of
   Common Shares Outstanding
   -Basic                   31,469,419  31,172,716   31,321,068  31,172,716
  Weighted Average Number Of
   Common Shares Outstanding
   -Diluted                 31,469,419  31,172,716   31,321,068  31,172,716



             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
             For The Six Months Ended June 30, 2008 and 2007
                               (Unaudited)

                                                           2008       2007

  Cash Flows From Operating Activities
      Net Loss                                      $(2,735,087) $(215,401)
      Adjustments to reconcile net loss to net
       cash provided by operating activities:
              Depreciation and amortization             315,720    339,717
                Non-cash interest expense                16,208
                Stock option compensation expense         5,438      7,300
                Deferred income taxes                         -    (99,170)
                Provision for doubtful accounts         194,176    (11,212)
              Changes in assets and liabilities:
                  Accounts receivable                 1,631,119  1,551,129
                  Inventories                           973,684 (2,509,350)
                  Prepaid expenses and other assets    (183,988)   103,347
                  Accounts payable and accrued
                   expenses                             436,304   (454,471)
  Net Cash Provided by (Used in) Operating Activities   653,574 (1,288,111)

  Cash Used In Investing Activities
       Purchases of property and equipment              (71,107)   (85,649)
  Net Cash Used In Investing Activities                 (71,107)   (85,649)

  Cash Flows From Financing Activities
       Payment for financing costs                      (25,614)  (142,827)
       Net amounts borrowed under current revolving
        lines of credit, net of OID                   3,339,815          -
       Net amounts borrowed (paid) under previous
        revolving lines of credit                    (3,754,061) 1,872,345
      Preferred stock dividends                        (128,648)  (127,939)
  Net Cash Provided By (Used In) Financing Activities  (568,508) 1,601,579

  Net Increase In Cash And Cash Equivalents              13,959    227,819

  Cash And Cash Equivalents - Beginning Of Period       127,723    632,948
  Cash And Cash Equivalents - End of Period            $141,682   $860,767