**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB/A**
 **(Amendment
        No. 1)**
  **ANNUAL
        REPORT UNDER SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
  **For
        the Fiscal Year Ended December 31, 2003**
  **Commission
        File Number 000-17510**
  
  **MEGA
        GROUP, INC.**
 **(Name
        of Small Business Issuer in Its Charter)**
  **New
                  York**
              
              **14-1653446****(State
                  or Other Jurisdiction**
                **of
                  Incorporation or Organization)**
              
              **(I.R.S.
                  Employer**
                **Identification
                  No.)**
  **1730
                  Rhode Island Ave., N.W., Suite 415**
                **Washington,
                  DC 20036**
              
              **(202)
                  296-9594****(Address
                  of Principal Executive Offices)**
              
              **(Issuer’s
                  Telephone Number)**
  
  **Securities
        registered under Section 12(b) of the Exchange Act:**
  **None**
  **Securities
        registered under Section 12(g) of the Exchange Act:**
  **Common
        Stock, $.016 Par Value**
 **(Title
        of Class)**
  
  Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or 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  ̈ No x
  Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of the registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB.  ̈
  State
        issuer’s revenues for its most recent fiscal year: $18,030.
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). o Yes x No
  State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date: 9,516,959 shares of common stock (including
        75,302 shares held of record by our wholly-owned subsidiary), as of June
        30,
        2006.
 
 Note:
        If
        determining whether a person is an affiliate will involve an unreasonable
        effort
        and expense, the issuer may calculate the aggregate market value of the common
        equity held by non-affiliates on the basis of reasonable assumptions, if
        the
        assumptions are stated.
 
 **(USERS
        INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
        YEARS)**
 
 Check
        whether the issuer has filed all documents and reports required to be filed
        by
        Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
        securities under a plan confirmed by a
        court.    Yes  ̈ No  ̈
 
 **(APPLICABLE
        ONLY TO CORPORATE REGISTRANTS)**
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date. **As
        of December 31, 2003: 9,333,625 Shares of common stock, $.016 par
        value.**
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 
 If
        the
        following documents are incorporated by reference, briefly describe them
        and
        identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which
        the document is incorporated: (1) any annual report to security holders;
        (2) any
        proxy or information statement; and (3) any prospectus filed pursuant to
        Rule
        424 (b) or (c) of the Securities Act of 1933 (Securities Act”). The listed
        documents should be clearly described for identification purposes (e.g.,
        annual
        report to security holders for fiscal year ended December 24,
        1990).
 
 Transitional
        Small Business Disclosure Format (Check
        one):    Yes  ̈ No x
  
 
  **MEGA
        GROUP, INC**
  INDEX
  PART
                  IIItem
                  6.
              
              Management’s
                  Discussion and Analysis or Plan of Operation
              3Item
                  7.
              
              Financial
                  Statements
              4PART
                  IIIItem
                  13.
              
              Exhibits
                  and Reports on Form 8-K
              4Signatures
              
              
              
              
              6
  2
  **PART
        II**
  **EXPLANATORY
        NOTE**
  This
        Form
        10-KSB/A (Amendment No. 1) is being filed to amend and restate certain financial
        information disclosed in Items 6 and 7 of Part II of the Form 10-KSB filed
        on
        July 24, 2006 for the fiscal year ended December 31, 2003. Items 6 and 7
        of the
        previous filing did not indicate accurately that the comparative financial
        statements for the fiscal year ended December 31, 2002 contained therein
        were
        unaudited.
 
 ***Item
        6.***  ***Management’s
        Discussion and Analysis or Plan of Operation (All Information Related to
        2002 is
        Unaudited)***
 
 The
        following discussion and analysis should be read in conjunction with the
        Company’s audited financial statements, and notes thereto and financial
        information included elsewhere in this report.
  The
        intent of the Company’s management is to direct it into new business lines
        providing financial services to currently underserved ethnic minorities through
        alliances with churches and other organizations serving those groups. The
        Company intends in the near term to obtain additional equity funding and
        to
        obtain additional debt financing to pursue these new lines of business and
        to
        provide the funds to satisfy its current obligations. The extent to which
        the
        Company can raise additional equity and financing and achieve profitable
        operations from new business activities will determine if the Company can
        continue as a going concern. Management believes it will be successful in
        obtaining additional equity and debt financing, but no assurances can be
        given
        in this regard.
 
 We
        have
        not been successful to date in executing our business plan and there are
        no
        guarantees that we will be successful in implementing it in the future. We
        have
        not generated revenue or income from our business plan and have primarily
        relied
        upon contributions and loans from shareholders to fund operations. We will
        require significant new capital funding to implement our business plan and
        to
        satisfy our cash requirements for the next twelve months. There are no
        guarantees our shareholders will continue to fund operations or that there
        is a
        viable market for us to raise the required capital. We are in default on
        the
        majority of our debt, are significantly delinquent on amounts owed to vendors
        and employees. We currently have a significant working capital deficit and
        will
        require additional capital funding in order to fund the deficit. We are
        delinquent in all required tax filings for the years ending December 31,
        2003,
        2004, and 2005.
  The
        nature of our business and proposed business does not require any significant
        product research and development, purchase or sale of plant and equipment,
        or
        changes in the number of employees.
 
 **Results
        of Operations**  **(All
        Information Related to 2002 is Unaudited)**
  During
        the years ended December 31, 2003 and 2002, after nominal revenue of $18,000
        and
        $30,000, respectively, operating expenses in the total amount of $579,282
        and
        $586,594, respectively, interest expenses of $59,515 and $127,845 respectively
        and gain from settlement of claims of $1,047,492 and $0, we recognized net
        income of $426,725 and $(684,439), respectively. The increase in operating
        expenses was primarily a result of inflationary factors. Interest expense
        decreased as a result of settlement of claims and notes against the Company
        during the year ended December 31, 2003. Various claims against the Company
        were
        settled in during the year ended December 31, 2003, no settlements occurred
        in
        the year ending December 31, 2002. During the fiscal year period ended December
        31, 2003, we sustained
        operations substantially through private borrowings in the aggregate amount
        of
        $209,023, of which $55,996 was funded from and $31,973 was repaid to
        stockholders and officers of the Company.
 
 3
  **Financial
        Condition, Liquidity and Capital Resources** **(All
        Information Related to 2002 is Unaudited)**
 
 Our
        cash
        position increased from $5,056 at December 31, 2002 to $6,622 at December
        31,
        2003 primarily due to private debt offerings used to fund ongoing operations
        of
        the Company. We
        have
        applied a 100% valuation allowance for our net deferred tax assets of
        approximately $3,966,000, which is primarily from our net operating loss
        carry-forward, because the realization of the net deferred tax asset is likely
        not to be realized as a result of either change in control limitations or
        lack
        of income prior to expiration.
  Our
        total
        liabilities decreased from $2,480,297 as of December 31, 2002 to $2,003,728
        as
        of December 31, 2003 as a result of settlement of claims against the Company
        (at
        no charge to the Company) offset by private borrowings and withholding payments
        to vendors, employees, and debt holders
 
 As
        of
        December 31, 2003 the Company has a deficiency in stockholders’ equity and
        working capital of approximately $1,989,000. In addition, the Company is
        in
        default on the majority of our notes payable and is significantly delinquent
        in
        amounts owed to vendors and employees. We have and will continue to primarily
        rely upon private debt offerings and stockholder contributions to fund liquidity
        requirements. There is no guarantee that stockholders will continue to fund
        operations or that there is a viable market for us to raise equity or debt
        in
        the future. We plan to fund the deficiency by implementation of our business
        plan and through additional equity fundings.
 
 As
        of
        December 31, 2003, the Company has capital resources primarily consisted
        of cash
        of $6,622. The Company is committed to pay approximately $150,000 as part
        of a
        non-cancelable lease agreement over the next six years. The Company is in
        default or has debt coming due in 2004 of approximately $921,888. Additionally,
        the Company has approximately $177,000 of accrued and unpaid interest related
        to
        the debt required to be paid in 2004. The Company plans to raise capital
        through
        equity and debt means to fulfill these capital requirements. There is no
        guarantee that there is a viable market for us to raise the required equity
        or
        debt in the future.
 
 **Critical
        Accounting Policies**
 
 *Revenue
        Recognition*
 
 Consulting
        fee revenue represents fees earned in connection with financial consulting
        services rendered. Revenue from these services is recognized as the services
        are
        performed.
 
 *Income
        Taxes*
 
 The
        Company recognizes income taxes based on earnings in the financial statements.
        The Company also recognizes deferred income taxes for the difference in earnings
        reported for income tax purposes and financial reporting purposes. As of
        December 31, 2003 and 2002, the Company had provided a 100% valuation allowance
        on its net deferred tax asset, which was primarily from the Company’s net
        operating loss carry-forward, because the realization of the net deferred
        tax
        asset is likely not to be realized either from change in control limitations
        or
        lack of income prior to expiration.
 
 **Item
        7.**  ***Financial
        Statements.***
  See
        pages
        F-1 through F-18 attached hereto.
 
 **PART
        III**
 
 **Item
        13.** ***Exhibits
        and Reports on Form 8-K.***
  (a)  *Exhibits.*
  4
  The
        following exhibits are filed as part of this report or incorporated by
        reference:
  **EXHIBITS
        AND INDEX OF EXHIBITS**
 
 **Exhibit**
                **No.**
              
              **SEC
                  Ref.**
                **No.**
              
              **Title
                  of Document**
              
              **Location**1
              
              31
              
              Officer
                  Certifications
              
              Attached2
              
              32
              
              Certification
                  of the Principal Executive Officer pursuant to U.S.C. Section 1350
                  as
                  adopted pursuant to Section 906 of the Sarbanes Oxley Act of
                  2002*
              
              Attached
 
 *
        The
        Exhibit attached to this Form 10-KSB shall not be deemed “filed” for purposes of
        Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or
        otherwise subject to liability under that section, nor shall it be deemed
        incorporated by reference in any filing under the Securities Act of 1933,
        as
        amended, or the Exchange Act, except as expressly set forth by specific
        reference in such filing.
 
 (b)  *Reports
        on Form 8-K.*
  We
        have
        filed a concurrent report on Form 8-K for the period and subject matter covered
        by this report.
  5
  **SIGNATURES**
  **In
        accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
        as
        amended, the registrant caused this report to be signed on its behalf by
        the
        undersigned, thereunto duly authorized.**
 MEGAGROUP,INC.By:
              /s/ JOHNH.
                  BROWN**John
                  H. Brown**
                **Chairman
                  of the Board of**
                **Directors
                  and Chief Executive Officer**Date:
                  November 20, 2006
  **In
        accordance with the Securities Exchange Act of 1934, as amended, this report
        has
        been signed below by the following persons on behalf of the registrant and
        in
        the capacities and on the dates indicated.**
 By:
              /s/ JOHNH.
                  BROWN**John
                  H. Brown,**
                **Principal
                  Executive Officer and**
                **Chairman
                  of the Board of Directors**Date:
                  November 20, 2006
 
 By:
                /s/ Joyce
                      Brown**Joyce
                    Brown,**
                    **Principal
                      Financial and**
                    **Accounting
                      Officer and Director**Date:
                      November 20, 2006
 By:
                    /s/ VERNS.
                            MORRIS**Vern
                          S. Morris,**
                        **Director**Date:
                            November 20,
                            2006
  6


**December
        31, 2003 and 2002**
 
 **CONTENTS**
 
 Report
                  of Independent**Registered
                  Public Accounting Firm
              
              
              F-2Consolidated
                  Balance Sheets
              
              
              F-3Consolidated
                  Statements of Operations
              
              
              F-4Consolidated
                  Statements of Changes in Stockholders’ Deficit
              
              
              F-5Consolidated
                  Statements of Cash Flows
              
              
              F-6Notes
                  to Consolidated Financial Statements
              
              
              F-7
  
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  The
        Board
        of Directors and Stockholders
 Mega
        Group, Inc.
  We
        have
        audited the accompanying consolidated balance sheet of Mega Group, Inc. (the
        “Company”) as of December 31, 2003, and the related consolidated statements of
        operations, changes in stockholders’ deficit, and cash flows for the year then
        ended. These consolidated financial statements are the responsibility of
        the
        Company’s management. Our responsibility is to express an opinion on these
        consolidated financial statements based on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Mega Group, Inc. as of
        December 31, 2003, and the results of its operations and cash flows for the
        year
        then ended, in conformity with accounting principles generally accepted in
        the
        United States.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 2 to the
        financial statements, the Company's recurring losses, defaults on the majority
        of its debts, significant delinquencies on payables and limited capitalization
        raise substantial doubt about its ability to continue as a going concern.
        Management's plans regarding those matters also are described in Note 2.
        The
        consolidated financial statements do not include any adjustments that might
        result from the outcome of this uncertainty.
 
 /s/
        Stegman & Company
 
 Baltimore,
        Maryland
 July
        17,
        2006
  F-2
  **CONSENT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 We
        hereby
        consent to the incorporation by reference in the Registration Statements
        filed
        by Mega Group, Inc. on Form S-8 (Nos. 333-64317, 333-64319, 333-60214, and
        333-105159) of our report dated July 17, 2006 with respect to the consolidated
        balance sheet of Mega Group, Inc. as of December 31, 2003, and the related
        consolidated statements of operations, changes in stockholders’ deficit, and
        cash flows for the year then ended, which appear in the Annual Report on
        Form
        10-KSB Amendment No. 1 of Mega Group, Inc. for the year ended December 31,
        2003.
  /s/ Stegman & CompanyBaltimore,
                  Maryland
                November
                  20, 2006
 
 F-3
  **Mega
        Group, Inc. and Subsidiary**
  **Consolidated
        Balance Sheets**
 **As
        of December 31, 2003 and 2002 (Unaudited)**
 
 **2003**
              
              **2002****(Unaudited)****Assets**Cash
                  and cash equivalents
              
              **$**
              **6,622**
              
              $
              5,056Accounts
                  receivable
              
              
              **—**
              
              
              30,000Loans
                  receivable
              
              
              —
              
              
              21,571Other
                  assets
              
              
              **2,099**
              
              
              —Total
                  current assets
              
              
              **8,721**
              
              
              56,627Equipment,
                  net of accumulated depreciation of $19,459 and $16,587,
                  respectively
              
              
              **6,204**
              
              
              8,553**Total
                  Assets**
              
              **$**
              **14,925**
              
              $
              65,180**Liabilities
                  and Stockholders’ Deficit****Liabilities**Accounts
                  payable and accrued liabilities
              
              **$**
              **904,711**
              
              $
              1,138,475Accrued
                  interest
              
              
              **177,129**
              
              
              218,682Due
                  to shareholders and officers, including convertible notes payable
                  of
                  $15,000,
                respectively
              
              
              **276,888**
              
              
              246,960Notes
                  payable
              
              
              **645,000**
              
              
              876,180Total
                  current liabilities
              
              
              **2,003,728**
              
              
              2,480,297**Stockholders’
                  Deficit**Preferred
                  stock, cumulative 8%, $1 par value per share, 400,000 shares authorized,
                  10,000 shares issued and outstanding with a liquidation preference
                  of $1
                  per share.
              
              
              **10,000**
              
              
              10,000Common
                  stock, $0.016 par value per share, 25,000,000 shares authorized,
                  9,333,625
                  and 9,359,303, respectively, shares issued and outstanding
              
              
              **149,338**
              
              
              149,749Additional
                  paid-in capital
              
              
              **245,849**
              
              
              245,849Accumulated
                  deficit
              
              
              **(2,393,990**
              **)**
              
              (2,820,715
              )Total
                  stockholders’ deficit
              
              
              **(1,988,803**
              **)**
              
              (2,415,117
              )**Total
                  liabilities and stockholders’ deficit**
              
              **$**
              **14,925**
              
              $
              65,180
  The
        accompanying notes are an integral part of these consolidated balance
        sheets.
  F-4
  **Mega
        Group, Inc. and Subsidiary**
  **Consolidated
        Statements of Operations**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **2003**
              
              **2002**(Unaudited)**Revenue**
              
              **$**
              **18,030**
              
              $
              30,000**Operating
                  expenses**Compensation
                  and benefits
              
              
              **353,292**
              
              
              204,187****Other
                  selling, general and administrative
              
              
              **223,118**
              
              
              371,289****Depreciation
              
              
              **2,872**
              
              
              11,118**Total
                  operating expenses**
              
              
              **579,282**
              
              
              586,594**Loss
                  from operations**
              
              
              **(561,252**
              **)**
              
              (556,594
              )**Other
                  income (expense)**Interest
                  expense to stockholders and officers
              
              
              **(19,657**
              **)**
              
              (15,555
              )Interest
                  expense
              
              
              **(84,958**
              **)**
              
              (112,290
              )Gain
                  from settlement of claims
              
              
              **1,092,592**
              
              
              —**Total
                  other income (expense)**
              
              
              **987,977**
              
              
              (127,845
              )**Income
                  (loss) before provision for income taxes**
              
              
              **426,725**
              
              
              (684,439
              )**Provision
                  for income taxes**
              
              
              **—**
              
              
              —Net
                  income (loss)
              
              **$**
              **426,725**
              
              $
              (684,439
              )**Basic
                  and diluted net loss per common share:******Basic
                  and diluted net loss per common share
              
              **$**
              **0.05**
              
              $
              (0.08
              )****Basic
                  and diluted weighted average common shares
              
              
              **9,333,625**
              
              
              8,589,327
  The
        accompanying notes are an integral part of these consolidated balance
        sheets.
  F-5
  **Mega
        Group, Inc. and Subsidiary**
  **Consolidated
        Statements of Changes In Stockholders' Deficit**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **Preferred**
                **Stock**
              
              **Common**
                **Stock**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Accumulated**
                **Deficit**
              
              **Total**Balance,
                  January 1, 2002**(Unaudited)**
              
              $
              10,000
              
              $
              128,911
              
              $
              164,144
              
              $
              (2,136,276
              )
              $
              (1,833,221
              )Issuance
                  of stock for:Compensation
              
              
              —
              
              
              11,078
              
              
              30,465
              
              
              —
              
              
              41,543Membership
                  dues
              
              
              —
              
              
              160
              
              
              840
              
              
              
              
              
              1,000Loan
                  financing cost
              
              
              —
              
              
              1,600
              
              
              8,400
              
              
              —
              
              
              10,000Consulting
                  and professional services
              
              
              —
              
              
              8,000
              
              
              42,000
              
              
              —
              
              
              50,000Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (684,439
              )
              
              (684,439
              )Balance,
                  December 31, 2002**(Unaudited)**
              
              
              10,000
              
              
              149,749
              
              
              245,849
              
              
              (2,820,715
              )
              
              (2,415,117
              )Purchase
                  of Common Shares
              
              
              —
              
              
              (411
              )
              
              —
              
              
              —
              
              
              (411
              )Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              426,725
              
              
              426,725Balance,
                  December 31, 2003
              
              $
              10,000
              
              $
              149,338
              
              $
              245,849
              
              $
              (2,393,990
              )
              $
              (1,988,803
              )
  The
        accompanying notes are an integral part of these consolidated balance
        sheets.
  F-6
 
 **Mega
        Group, Inc. and Subsidiary**
  **Consolidated
        Statements of Cash Flow**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
 
 **2003**
              
              **2002****Cash
                  flow from operating activities**
              
              
              
              (Unaudited)Net
                  income (loss)
              
              $
              426,725
              
              $
              (684,439
              )**Adjustment
                  to reconcile changes in net assets to net cash flow from operating
                  activities**Depreciation
              
              
              **2,872**
              
              
              11,118Accretion
                  of discount
              
              
              **8,333**
              
              
              —Bad
                  debt expense
              
              
              **49,246**
              
              
              28,019Gain
                  on settlement of claims
              
              
              **(1,092,592**
              **)**
              
              —Common
                  stock issued for services
              
              
              **—**
              
              
              51,000Interest
                  paid on behalf of Company by shareholder
              
              
              **—**
              
              
              8,175**Effect
                  of changes in non-cash working capital balances**Accounts
                  receivable and other assets
              
              
              **(2,099**
              **)**
              
              (30,000
              )Accounts
                  payable and accrued liabilities
              
              
              **280,648**
              
              
              227,499Accrued
                  interest
              
              
              **119,821**
              
              
              104,352**Net
                  cash flow used in operating activities**
              
              
              **(207,046**
              **)**
              
              (284,276
              )**Cash
                  flow from investing activities**Advances
                  under notes receivables
              
              
              **—**
              
              
              (7,041
              )Payments
                  received under notes receivable
              
              
              **—**
              
              
              3,167**Net
                  cash flow used in investing activities**
              
              
              **—**
              
              
              (3,874
              )**Cash
                  flow from financing activities**Common
                  stock purchased
              
              
              **(411**
              **)**
              
              —Debt
                  proceeds from stockholders and officers
              
              
              **55,996**
              
              
              15,000Debt
                  proceeds
              
              
              **185,000**
              
              
              300,000Payments
                  on debt
              
              
              **—**
              
              
              (6,739
              )Payments
                  on debt to stockholders and officers
              
              
              **(31,973**
              **)**
              
              (33,180
              )**Net
                  cash flow provided by financing activities**
              
              
              **208,612**
              
              
              275,081Change
                  in cash and cash equivalents
              
              
              **1,566**
              
              
              (13,069
              )Cash
                  and cash equivalents, beginning of year
              
              
              **5,056**
              
              
              18,125**Cash
                  and cash equivalents, end of year**
              
              $
              6,622
              
              $
              5,056**Cash
                  Paid for Interest**
              
              $
              —
              
              $
              —**Cash
                  Paid for Taxes**
              
              $
              —
              
              $
              —
  The
        accompanying notes are an integral part of these consolidated balance
        sheets.
  F-7




**Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
 
 **1.**  **ORGANIZATION
        AND SIGNIFICANT ACCOUNTING POLICIES**
 
 **Organization**
 
 Mega
        Group, Inc. (Company) was incorporated on December 28, 1983 in the State
        of New
        York and provides diversified financial services to ethnic communities and
        faith-based entities in the United States and provides loans and investments
        for
        businesses in low and moderate income communities.
 
 **Basis
        of Accounting**
 
 The
        consolidated financial statements of the Company have been prepared on the
        accrual basis of accounting in accordance with accounting principles generally
        accepted in the United States of America.
 
 **Principles
        of Consideration**
 
 The
        consolidated financial statements include accounts of Mega Group, Inc. and
        those
        of its wholly owned subsidiary, Small Business Investment Corporation of
        America, Inc. (SBICOA). All significant intercompany transactions have been
        eliminated in consolidation.
  **Use
        of 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 the disclosure of contingent assets and liabilities at the
        date
        of the financial statements and the reported amounts of revenue and expenses
        during the reporting period. Actual results could differ significantly from
        those estimates.
 
 **Revenue
        Recognition**
 
 Consulting
        fee revenue represents fees earned in connection with financial consulting
        services rendered. Revenue from these services is recognized as the services
        are
        performed.
  F-8
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **1.**  **ORGANIZATION
        AND SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 **Cash
        and Cash Equivalents**
 
 The
        Company considers all highly liquid debt instruments with initial maturities
        of
        ninety days or less to be cash equivalents. The Company maintains cash balances
        which may exceed federally insured limits, but the Company does not believe
        that
        this results in any significant risk.
 
 **Equipment**
 
 Equipment
        consists of furniture and equipment, is recorded at cost and is being
        depreciated using the straight-line method over the estimated useful lives
        of 5
        to 7 years.
 
 **Income
        Taxes**
 
 The
        Company recognizes income taxes based on earnings in the financial statements.
        The Company also recognizes deferred income taxes for the difference in earnings
        reported for income tax purposes and financial reporting purposes. As of
        December 31, 2003 and 2002, the Company had provided a 100% valuation allowance
        on its net deferred tax asset, which was primarily from the Company’s net
        operating loss carry-forward, because the realization of the net deferred
        tax
        asset is likely not to be realized as a result of either change in control
        limitations or lack of income realized prior to expiration.
 
 **Concentrations**
 
 All
        2003
        and 2002 revenue was earned under a consulting agreement with one
        customer.
 
 **Fair
        Value of Financial Instruments**
 
 The
        carrying amounts of cash, accounts payable, notes payable, and accrued expense
        obligations approximate their fair value due to the short-term nature of
        their
        underlying terms.
 
 **Stock
        Options**
 
 The
        Company adopted the fair-value recognition provision of SFAS No. 123 (as
        revised
        in 2004 and referred to as “SFAS No. 123R”) Accounting for Stock-based
        Compensation. SFAS 123R generally eliminates variable accounting and requires
        companies to recognize in the income statement over the vesting period of
        the
        options an estimate of expense based on the fair value of those options,
        typically as of the date of grant.
  F-9
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **1.**  **ORGANIZATION
        AND SIGNIFICANT ACCOUNTING POLICIES (continued)**
 
 **Net
        Loss per Common Share**
 
 Basic
        net
        loss per common share is calculated by dividing the net loss attributable
        to
        common stockholders by the weighted average number of common shares outstanding
        during the year. Diluted earnings per share is calculated using the weighted
        average number of common shares plus dilutive common stocks equivalents
        outstanding during the period. Anti-dilutive common stock equivalents are
        excluded. Common stock equivalents are stock options.
 
 **New
        Accounting Pronouncements**
 
 In
        April
        2003, the Financial Accounting Standards Board (“FASB”) issued and the Company
        adopted Statement of Financial Accounting Standards (“SFAS”) No. 149, Amendment
        of Statement No. 133 on Derivative Instruments and Hedging Activities. This
        Statement amends and clarifies financial accounting and reporting for derivative
        instruments, including certain derivative instruments embedded in other
        contracts, and for hedging activities under SAFS No. 133, Accounting for
        Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149
        did
        not have a material impact on the Company’s financial statements.
 
 In
        January 2003, the FASB issued and the Company adopted Interpretation No .46
        (“FIN 46”), Consolidation of Variable Interest Entities. This interpretation
        provides new accounting guidance on how to identify a variable interest entity
        (“VIE”) and determine when the assets, liabilities, non-controlling interest and
        results of operation of a VIE need to be included in a Company’s consolidated
        financial statements. The adoption of FIN 46 did not have a material impact
        on
        the Company’s financial statements.
 
 In
        May
        2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
        with Characteristics of both Liabilities and Equity. This Statement establishes
        standards for how an issuer classifies and measures certain financial
        instruments with characteristics of both liabilities and equity. It requires
        that an issuer classify a financial statement that is within its scope as
        a
        liability (or an asset in some circumstances). Many of those instruments
        were
        previously classified as equity. Some of the provisions of this statement
        are
        consistent with the current definition of liabilities in FASB Concepts Statement
        No. 6, Elements of Financial Statements. The remaining provisions of this
        Statement are consistent with the Board’s proposal to revise that definition to
        encompass certain obligations that a reporting entity can or must settle
        by
        issuing its own equity shares, depending on the nature of the relationship
        established between the holder and the issuer. While the Board still plans
        to
        revise that definition through an amendment to Concepts Statement 6, the
        Board
        decided to defer issuing that amendment until it has concluded its deliberations
        on the next phase of this project. That next phase will deal with certain
        compound financial instruments including puttable shares, convertible bonds,
        and dual-indexed financials instruments. These provisions of
        SFAS **** No **.** 150
        did
        not have a material impact on the Company’s operations.
  F-10
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **1.**  **ORGANIZATION
        AND SIGNIFICANT ACCOUNTING POLICIES (continued)**
  The
        Financial Accounting Standards Board (FASB) has issued Statement of Financial
        Accounting Standards (SFAS) No.154, *Accounting
        Change and Error Corrections,* which
        is
        effective for fiscal years beginning after December 15, 2005. The Company
        has
        not implemented this standard and does not expect it to have a material impact
        on the financial statements.
 
 **Reclassifications**
 
 Certain
        amounts have been reclassified in the December 31, 2002 financial statements
        to
        conform with current year presentation.
 
 **2.
        GOING CONCERN**
  The
        Company’s financial statements have been presented on the basis that it will
        continue as a going concern. The Company’s ability to continue as a going
        concern is dependent on its ability to obtain additional financing, to generate
        sufficient cash flows to meet its obligations on a timely basis, and ultimately
        to attain profitability.
  As
        of
        December 31, 2003, the Company has a deficiency in stockholders’ equity and a
        working capital deficit of approximately $1,988,000. The Company has not
        been
        successful to date in executing its business plan and there are no guarantees
        that it will be successful in implementing it in the future. The Company
        has not
        generated significant revenue from its business plan and has primarily relied
        upon contributions and loans from shareholders to fund operations. The Company
        will require significant new capital funding to implement the business plan
        and
        to satisfy the Company’s cash requirements for the next twelve months. There are
        no guarantees the Company’s shareholders will continue to fund operations or
        that there is a viable market for the Company to raise the required capital.
        The
        Company is in default on the majority of its debt and is significantly
        delinquent on amounts owed to vendors and employees. The Company will require
        capital funding in order to fund the capital deficit. The Company is delinquent
        in all required income tax filings for the years ending December 31, 2003,
        2004,
        and 2005.
  The
        intent of the Company’s management is to direct it into new business lines
        providing financial services to currently underserved ethnic minorities through
        alliances with churches and other organizations serving those groups. The
        Company intends in the near term to obtain additional equity funding and
        to
        obtain additional debt financing to pursue these new lines of business and
        to
        provide the funds to satisfy its current obligations.
  F-11
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **2.
        GOING CONCERN,**  **continued**
  The
        extent to which the Company can raise additional equity and financing and
        achieve profitable operations from new business activities will determine
        if the
        Company can continue as a going concern. Management believes it will be
        successful in obtaining additional equity and debt financing, but no assurances
        can be given in this regard.
  **3.
        DUE TO STOCKHOLDER AND OFFICERS**
 
 The
        Company owes a stockholder $146,986 and $148,212 as of December 31, 2003
        and
        2002, respectively, of which $24,114 and $25,340, respectively is a note
        payable
        for redemption of common shares and $122,872 was for expenses paid by the
        stockholder on the Company’s behalf. The $24,114 obligation bears interest at 6%
        and is due June 15, 2000. The Company is in default on this note. The Company
        originally owed a stockholder $139,538 (Stockholder Obligation) for expenses
        paid on the Company’s behalf. The Stockholder Obligations has no specified terms
        for interest or repayment. The Stockholder Obligation was discounted by $25,000
        based on a 6% discount rate during the year ending December 31, 2003 based
        on
        the Company repaying the stockholder in the year ending December 31, 2006.
        The
        Stockholder Obligation is being amortized into the liability through interest
        expense. For the year ending December 31, 2003, the Stockholder Obligation
        accreted by $8,333.
 
 **Notes
        Payable**
 
 The
        Company is obligated under notes payable totaling $127,402 and $104,653 as
        of
        December 31, 2003 and 2002, respectively to certain of our stockholders and
        officers. These obligations are described in detail in Note 5.
 
 **4.
        LOANS RECEIVABLE**
 
 The
        Company has made informal loans to and incurred various expenses on behalf
        of
        investment brokers with whom the Company shares its office space. These loans
        totaled $21,571 and $19,904 as of December 31, 2003 and 2002 respectively.
        However, the Company has provided an allowance for the entire amount as
        collection is uncertain.
  F-12
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **5.
        LONG-TERM DEBT**
 
 As
        of
        December 31, 2003 and 2002, debt consisted of the following:
  **2003**
                
                **2002**(Unuadited)Note
                    payable to a stockholder and officer, unsecured, bearing interest
                    at 15%,
                    due January 2004. The Company is in default on this note, and
                    accordingly,
                    it is classified as a current liability.
                
                
                **51,000**
                
                
                15,000Note
                    payable to a stockholder and officer, unsecured, bearing interest
                    at 5%,
                    due May 2004. The Company is in default on this note, and accordingly,
                    it
                    is classified as a current liability.
                
                
                **2,500**
                
                
                —Note
                    payable to a stockholder and officer, unsecured, bearing interest
                    at 15%,
                    due December 2003. The Company is in default on this note, and
                    accordingly, it is classified as a current liability.
                
                
                **61,402**
                
                
                74,653Note
                    payable to a stockholder and officer of the Company, unsecured,
                    convertible into common shares at a conversion price of $ 0.3333
                    per share
                    due on January 2004, bearing interest at 15%. The Company is
                    in default on
                    this note, and accordingly, it is classified as a current
                    liability.
                
                
                **15,000**
                
                
                15,000Total
                    amount payable to officers
                
                
                **129,902**
                
                
                104,653Note
                    payable to a stockholder of the Company for redemption of the
                    Company’s
                    common shares, unsecured, bearing interest at 6%, due June 15,
                    2000. The
                    Company is in default on this note, and accordingly, it is classified
                    as a
                    current liability.
                
                
                **24,114**
                
                
                25,340Total
                    amount payable to stockholders and officers
                
                
                **154,016**
                
                
                129,993Note
                    payable to an individual for a cash loan, unsecured, bearing
                    interest at
                    12%. The noteholder insists the loan is in default, and accordingly,
                    it is
                    classified as a current liability.
                
                
                **100,000**
                
                
                100,000Note
                    payable, unsecured, bearing interest at 12.5%, due June 2003.
                    The Company
                    is in default on this note and, accordingly, it is classified
                    as a current
                    liability.
                
                
                **60,000**
                
                
                60,000Working
                    capital notes payable to Matah Holding, LLC, bearing interest
                    at 12%, due
                    April 14, 2003. The Company is in default on the obligation,
                    and,
                    accordingly, it is classified as a current liability.
                
                
                **485,000**
                
                
                300,000Note
                    payable for agency purchase, requiring monthly payments based
                    upon
                    revenues generated by the book of business purchased, including
                    interest
                    imputed at 10%. Guaranteed by former Company directors. The Company
                    is in
                    default on the obligation and, accordingly, it is classified
                    as a current
                    liability. The note was settled during 2003 at no cost to the
                    Company.
                
                
                —
                
                
                157,381
  F-13
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
 
 **5.
        LONG-TERM DEBT, continued**
 Notes
                    payable for agency purchases, requiring monthly payments ranging
                    from
                    approximately $600 to $6,000, including interest, both stated
                    and imputed,
                    ranging from 8% to 9%, with scheduled maturities through December
                    2008.
                    The Company is in default on the obligations and, accordingly,
                    they are
                    classified as current liabilities. (Includes $146,397 related
                    to a
                    November 2000 court order, as described in Note 8). The note
                    was settled
                    during 2003 at no cost to the Company.
                
                
                —
                
                
                161,618Notes
                    payable for agency purchase, as settled, requiring 48 monthly
                    payments of
                    $3,705 including interest at 9%, guaranteed by the president
                    and his
                    spouse, final payment due March 2004. The note was settled in
                    2003 at no
                    cost to the Company.
                
                
                **—**
                
                
                49,181Capital
                    lease obligation, refinanced in May 1998, requiring monthly payments
                    of
                    $2,221, including imputed interest at 10%, final payment due
                    May 2001,
                    collateralized by the leased equipment. The Company is in default
                    on the
                    obligation and, accordingly, it is classified as a current liability.
                    In
                    June 2000 the lessor commenced legal action against the Company
                    for
                    $56,000. A judgment was entered against the Company for $48,000
                    in
                    December 2000. The obligation was settled in 2003 at no cost
                    to the
                    Company.
                
                
                **—**
                
                
                48,000**Total**
                
                
                **799,016**
                
                
                1,006,173Less:
                    Current portion
                
                
                **799,016**
                
                
                1,006,173**Net
                    long-term debt**
                
                $
                —
                
                $
                —
 During
        the years ending December 31, 2003 and 2002, the Company sold $185,000 and
        $15,000 ($15,000 is convertible), respectively of notes payable in a private
        offering. The convertible notes are convertible prior to the maturity date
        of
        the note at the holder’s option at a price of $0.3333 per share.
 
 During
        the years ending December 31, 2003 and 2002, the Company incurred $104,615
        and
        $127,845 respectively, of interest expense.
 
 **6.
        STOCKHOLDERS’ DEFICIT**
 
 **Preferred
        stock**
 
 The
        Company has suspended the payment of dividends on the 8% cumulative preferred
        stock. As a result, although recorded in the accompanying consolidated financial
        statements, the Company is in arrears in payment of the dividends for all
        years
        1993 through 2003. As of December 31, 2003 and 2002, the aggregate amount
        in
        arrears was $8,800 and $8,000, respectively. Upon any voluntary liquidation,
        dissolution or winding up of the Company, preferred stockholders are entitled,
        before any distribution shall be made to common stockholders, to be paid
        out an amount equal to $1.00 per preferred share plus any accrued but unpaid
        dividends.
  F-14
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **6.
        STOCKHOLDERS’ DEFICIT, continued**
  **Stock
        Options**
 
 In
        June
        2001, the Company granted one of its directors options, exercisable until
        June
        30, 2006 or until 30 days prior to the commencement of any registered public
        offering of its
 equity
        securities, whichever comes first, to purchase a total of 100,000 shares
        of its
        common stock for $.50 per share. The Company has estimated the value of these
        options to be insignificant based on the Black-Scholes model with the following
        assumptions: expected life: 2.9 years; Volatility: 0.0%; Risk-free interest
        rate: 5.0% and dividend yield: 0.0%.
 
 **Convertible
        debt**
 
 As
        of
        December 31, 2003 and 2002, the Company has $15,000 of convertible notes
        payable. These notes plus accrued interest can be converted at the holder’s
        option at a price of $0.3333 per share prior to the maturity of the notes
        payable.
 
 **Common
        stock**
 
 On
        May 7,
        2002, the Company issued 692,391 shares of its common stock to its Chief
        Executive Officer for payment of previously accrued and unpaid wages valued
        at
        $41,543 ($0.06 per share based on the trading price of the Company’s shares on
        the issuance date).
 
 On
        June
        30, 2002, the Company issued 10,000 shares of its common stock for payment
        of
        membership dues to the Center for New Black Leadership valued at $1,000 ($0.10
        per share, based on management’s estimate of the fair market value of the shares
        at the issuance date).
 
 On
        July
        15, 2002, the Company issued 100,000 shares of its common stock to Matah
        Holdings, LLC as partial consideration, valued at $10,000 ($0.10 per share,
        based on management’s estimate of the fair market value of the shares at the
        issuance date), for entering into a loan and security agreement.
 
 On
        September 30, 2002 the Company issued 400,000 shares of its common stock
        to a
        nonaffiliated investment bank for financial consulting services valued at
        $40,000 ($0.10 per share, based on management’s estimate of the fair market
        value of the shares at the issuance date).
 
 On
        September 30, 2002, the Company issued 100,000 shares of its common stock
        to a
        former executive for past professional services valued at $10,000 ($0.10
        per
        share, based on management’s estimate of the fair market value of the shares at
        the issuance date).
  F-15
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **7.
        INCOME TAX**
 
 The
        Company’s provision for income taxes for the years ended December 31, 2003 and
        2002 is summarized as follows:
 **2003**
                
                **2002**Taxes
                    currently payable
                
                $
                —
                
                $
                —Deferred
                    taxes- Federal
                
                
                147,611
                
                
                (232,672
                )Deferred
                    taxes- State
                
                
                18,625
                
                
                (42,908
                )(Decrease)
                    increase in valuations on deferred tax asset
                
                
                (166,236
                )
                
                275,580Income
                    tax expense for the year
                
                $
                —
                
                $
                —
 
 A
        reconcilement of the difference between statutory Federal income tax rate
        and
        the effective tax rate for the Company is as follows:
 **2003**
                
                **2002**Federal
                    income tax
                
                $
                145,087
                
                $
                (232,672
                )State
                    income taxes, net of Federal income tax effect
                
                
                18,307
                
                
                (42,908
                )Utilization
                    of operating loss carry-forward
                
                
                (166,236
                )
                
                —Other
                
                
                2,842
                
                
                (21,686
                )Tax
                    provision
                
                
                —
                
                
                (297,266
                )Increase
                    in valuation allowance
                
                
                —
                
                
                297,266Net
                    tax provision
                
                $
                —
                
                $
                —
 
 The
        significant component of the Company’s deferred tax assets are net operating
        losses of approximately $1.7 million as of December 31, 2003 and 2002. The
        Company has provided a 100% valuation allowance on its net deferred tax asset
        as
        the realization of the asset is likely not to occur as a result of either
        change
        in control limitations or lack of income realized prior to expiration. As
        of
        December 31, 2003, net operating loss of approximately $3,966,000 is available
        to offset future taxable income and expires as follows:
  Expiring
                      December 31,
                  
                  Amount2004
                  
                  $
                  56,0002005
                  
                  
                  903,0002006
                  
                  
                  132,0002007
                  
                  
                  513,0002008
                  
                  
                  76,0002009
                  
                  
                  51,0002010
                  
                  
                  123,0002011
                  
                  
                  274,0002012
                  
                  
                  68,0002018
                  
                  
                  89,0002019
                  
                  
                  100,0002020
                  
                  
                  313,0002021
                  
                  
                  587,0002022
                  
                  
                  681,000**Total**
                  
                  $
                  3,966,000
  F-16
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
 
 **7.**  **INCOME
        TAXES, continued**
 
 Subsequent
        to year end, $959,000 of net operating losses expired.
  **8.**  **COMMITMENTS
        AND CONTINGENCIES**
 
 **Operating
        leases**
 
 The
        Company leases office space and equipment under non-cancelable operating
        leases.
        Future minimum rental commitments under existing operating leases having
        initial
        or remaining non-cancelable lease terms in excess of one year as of December
        31,
        2003 is as follows:
 Year
                    Ending December 31
                
                Amount2004
                
                $
                23,8492005
                
                
                29,4042006
                
                
                28,7452007
                
                
                29,6072008
                
                
                30,7912009
                
                
                7,773Total
                
                $
                150,169
 
 During
        the years ended December 31, 2003 and 2002, the Company incurred $20,161
        of rent
        expense.
 
 **Litigation**
 
 The
        Company was one of several defendants in a civil action, for the payment
        of a
        promissory note, captioned *David
        G. Becking, et al. v. Mega Group, Inc., et al.,* which
        commenced April 29, 1997 in the Supreme Court for the County of Albany, New
        York. The plaintiffs were the former owners of an insurance agency which
        the
        Company purchased on December 30, 1988. The other defendants were guarantors
        of
        the promissory note. Several of the defendants asserted claims against
        third-party defendants who included the Company’s former president, director,
        and principal shareholder, Steven C. Gregory. As of March 15, 2000, the
        plaintiffs’ claim against the defendants, including principal and interest,
        totaled $754,758. On that date, the Company settled with the plaintiffs for
        a
        payment to them of $92,000 in cash and by delivering to them two promissory
        notes, each in the amount of $75,000 due and payable in 48 consecutive monthly
        installments, with interest at the rate of 9% per annum, payable $1,852
        commencing April 1, 2000, with the final payment due March 1, 2004. By order
        dated November 16, 2000, the court obligated the Company to pay defendant
        Martin
        J. Keary any portion of a judgment for $146,397 which he must pay to the
        plaintiffs and to reimburse him for his attorney’s fees in defending the action
        in an amount which the court will approve. During the year ended December
        31,
        2003, all claims and notes were settled at no cost to the Company.
 
 F-17
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
 **8. 
          **COMMITMENTS
          AND CONTINGENCIES, continued****
  The
        Company was the intervener-petitioner in a civil action for damages and
        injunctive relief captioned *Mega
        Personal Lines, Inc. v. Robert L. Halton, et al.,* which
        commenced June 12, 2001 and is pending in the Supreme Court for the County
        of
        Saratoga, New York.
 
 The
        petitioner is the purchaser, effective April 1, 2000, of substantially all
        of
        the Company’s remaining assets, and the respondents include the Company’s
        judgment creditor, Robert L. Halton, and various third-party garnishees.
        Mega
        Personal Lines, Inc. seeks the return and release to it of insurance commissions
        which, it alleges, were improperly garnished by Mr. Halton in *Mega
        Group, Inc. v. Robert L. Halton* .
        Mr.
        Halton seeks to invalidate and set aside the transfer of the Company’s assets to
        Mega Personal Lines, Inc., so that the assets, including the insurance
        commissions, might be used to satisfy his September 29, 2000 partial summary
        judgment against the Company. He alleges generally that the transfer of the
        assets was not supported by fair consideration and was made with actual intent
        to hinder, delay, or defraud the Company’s creditors. The Company is defending
        itself against Mr. Halton’s claims. During the year ended December 31, 2003, the
        case was settled at no cost to the Company.
 
 The
        Company was one of several defendants in a civil action for equitable relief
        captioned *Halton
        v. Gregory, et al* .,
        which
        commenced on July 22, 2002, and is pending in the Supreme Court for the County
        of Saratoga, New York. The plaintiff, Robert L. Halton, is the Company’s
        judgment creditor, and the defendants also include the Company’s president,
        Steven C. Gregory. In the action, Mr. Halton seeks to invalidate and set
        aside
        the transfer, effective April 1, 2000, of the Company’s remaining assets to Mr.
        Gregory, as described in Note 1, so that the assets might be used to satisfy
        Mr.
        Halton’s September 29, 2000 partial summary judgment against the Company. Mr.
        Halton also seeks an accounting of the asset transfer. He alleges generally
        that
        the transfer of the assets was not for a fair equivalent value and was made
        with
        the actual interest to hinder, delay, or defraud our creditors. During the
        year
        ended December 31, 2003, the case was settled at no cost to the
        Company.
 
 The
        Company was a respondent in a civil action, for confirmation of an arbitration
        award captioned *Herman
        Adler v. Mega Group, Inc.* , *et
        al.,* which
        commenced on November 15, 1999, in the Supreme Court for the County of Albany
        New York. The petitioner, now deceased, was the former owner of an insurance
        agency which we purchased in 1985. He claimed that the Company failed to
        honor
        the payment terms of the agency purchase agreement. On December 15, 1999,
        an
        arbitrator rendered, and on March 7, 2000 the arbitrator modified, an award
        in
        favor of the petitioner and against the Company in the amount of $157,381.
        On
        January 8, 2001, the Supreme Court confirmed the arbitration award and entered
        judgment against the Company for $168,808 including costs and interest. The
        judgment creditor restrained the Company from making any sale, assignment,
        transfer, or interference with any property in which the Company has an interest
        until the judgment is satisfied or vacated. During the year ended December
        31,
        2003, all claims and notes were settled at no cost to the Company.
  F-18
  **Mega
        Group, Inc. and Subsidiary**
  **Notes
        to Consolidated Statements**
 **For
        the Years Ended December 31, 2003 and 2002 (Unaudited)**
  **8.  **COMMITMENTS
          AND CONTINGENCIES, continued****
  The
        Company was the defendant in a civil action for money damages, for breach
        of a
        computer financing agreement, captioned *First
        State Bank v. Mega Group, Inc.* ,
        in the
        Supreme Court for the County of Saratoga, New York. On December 14, 2000,
        the
        Supreme Court entered judgment against the Company in the amount of $48,000.
        The
        judgment creditor restrained the Company from making any sale, assignment,
        transfer, or interference with any property in which the Company has an interest
        until the judgment is satisfied or vacated. During the year ended December
        31,
        2003, all claims and notes were settled at no cost to the Company.
 
 The
        Company is currently is dispute with a former employee for wages owed. While
        the
        dispute has not elevated to formal litigation and the Company will rigorously
        defend its position that no wages are owed, the Company has accrued the entire
        amount in question of $218,750.
 
 The
        Company has entered into routine proceedings incidental to its business,
        and
        does not expect that these proceedings will have a material adverse effect
        on
        the Company.
 
 F-19