**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-KSB**




**ANNUAL
      REPORT UNDER SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      the Fiscal Year Ended December 31, 2004**




**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: $9,000.





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).   ̈Yes   xNo





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days: $535,629 as of June 30, 2006, based
      on
      the last reported sale price on that date.




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, 2004: 9,433,625 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
                I
            Item
                1.
            Description
                of BusinessItem
                2.
            Description
                of PropertyItem
                3.
            Legal
                ProceedingsItem
                4.
            Submission
                of Matters to a Vote of Security HoldersPART
                II
            Item
                5.
            Market
                for Common Equity and Related Stockholder MattersItem
                6.
            Management’s
                Discussion and Analysis or Plan of OperationItem7.
            Financial
                StatementsItem
                8.
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                DisclosurePART
                III
            Item
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16 (a) of the Exchange ActItem
                10.
            Executive
                CompensationItem
                11.
            Security
                Ownership of Certain Beneficial Owners and ManagementItem
                12.
            Certain
                Relationships and Related TransactionsItem
                13.
            Exhibits
                and Reports on Form 8-KItem
                14.
            Principal
                Accountant Fees and ServicesSignatures




(Inapplicable
      items have been omitted)









**FORWARD
      LOOKING STATEMENT NOTICE**





When
      used
      in this report, the words “may,” “will,” “expect,” “anticipate,” “continue,”
“estimate,” “project,” “intend,” and similar expressions are intended to
      identify forward looking statements within the meaning of Section 27A of the
      Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
      regarding events, conditions, and financial trends that may affect the Company’s
      future plans of operations, business strategy, operating results, and financial
      position. Persons reviewing this report are cautioned that any forward-looking
      statements are not guarantees of future performance and are subject to risks
      and
      uncertainties and that actual results may differ materially from those included
      within the forward-looking statements as a result of various factors. Such
      factors are discussed under the headings “Item 1. Description of Business,” and
“Item 6. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations,” and also include general economic factors and conditions that
      may directly or indirectly impact the Company’s financial condition or results
      of operations.





**PART
      I**




**Item
      1.** ***Description
      of the Business.***





Mega
      Group, Inc. (the Company) was incorporated in the state of New York on December
      28, 1983.




Effective
      October 11, 2000, the Company acquired all of the issued and outstanding common
      stock of Small Business Investment Corporation of America, Inc. (SBICOA), an
      Oregon corporation, in a stock-for-stock exchange. As a result of the
      transaction, SBICOA’s former shareholders acquired a total of 9,309,396 shares
      of our common stock, or 86.4% of the common shares then issued and outstanding.




Since
      the
      SBICOA acquisition, pending the obtaining of necessary financing, our business
      plan has been to provide diversified financial services to ethnic communities
      and faith-based entities in the United States. We have sought no government
      approvals for, and we believe that none are necessary to, our proposed business.
      Currently we have four officer-employees, and our wholly-owned subsidiary,
      SBICOA, has one additional officer-employee, all of them employed full-time.




Directly
      or through SBICOA, we propose to operate as a specialized financial institution,
      known as a Community and Individual Investment Corporation (“CIIC”), under an
      initiative of the U.S. Department of Housing and Urban Development (“HUD”).
      CIICs are for-profit, resident-owned, non-bank “banks” that, in the words of
      HUD, “serve an important function by making business and housing loans for
      projects in low- and moderate-income communities.” HUD’s CIIC initiative has
      been designed to provide start-up money and other capital to CIICs. The
      initiative is intended to capitalize CIICs so they may provide forgivable loans
      for workforce development, job creation, and business growth. HUD’s funding
      requires CIICs to form partnerships to attract additional private funds and
      credit.




CIICs
      are
      intended to supplement the growing availability of credit to inner-city
      communities afforded by community development banks, community development
      credit unions, and other for-profit lending institutions providing credit and
      loans to locally owned and operated businesses and affordable housing developers
      under programs of the U.S. Treasury Department; banks, other financial
      institutions, and state and local development companies providing loans,
      micro-loans, and intensive marketing, management, and technical assistance
      to
      small business concerns in areas of high unemployment or low income under
      programs of the U.S. Small Business Administration (“SBA”); and community
      development block grants for economic development, and the empowerment zone
      and
      enterprise community programs, administered by HUD.




CIICs
      are
      for-profit corporations that invest in economic development activities where
      at
      least 51% of the residents are of low and moderate income. CIICs must offer
      those residents an opportunity to purchase shares in the corporation. HUD
      provides CIICs with community development block grant funds, Section 108 loan
      guarantees, and economic development initiative loans. Community development
      block grants fund the creation of a CIIC and some of its subsequent activities.
      Section 108 allows a CIIC, through HUD, to guarantee repayment of bonds issued
      by local governments to raise money for approved projects in the CIIC’s
      community. The guarantee permits the participating local governments to borrow
      funds at below-market interest rates.




1




Under
      the
      CIIC initiative, codified at 42 U.S.C. §§ 5301-20 and 24 C.F.R. Part 570, CIICs
      may use HUD funds to provide community development and business loans, business
      start-up or expansion loans, and rental housing rehabilitation loans. CIICs
      can
      also use HUD funds to:





·
            Provide
                a secondary market for loans from mainstream
                banks;




·
            Offer
                management technical assistance to business
                borrowers;




·
            Give
                home ownership counseling to new
                borrowers;




·
            Develop
                programs to get residents to patronize locally-owned
                businesses;




·
            Help
                residents to enter the banking and investment
                field;




·
            Involve
                mainstream banks in training and hiring local residents;
                and




·
            Help
                local businesses train and hire local
                residents.




In
      addition, directly or through SBICOA, and subject to approval by the SBA, we
      propose to acquire, or become licensed to operate as, a Small Business
      Investment Company (“SBIC”) and a New Markets Venture Capital Company (“NMVCC”),
      under the Small Business Investment Act of 1958, as recently amended, and
      accordingly to provide:




·
            SBA-guaranteed
                debt financing or equity capital, or both, to small-business concerns;
                and




·
            Developmental
                venture capital financing to concerns in identified low-income geographic
                areas.




We
      also
      propose to support community-based financing, through other financial
      institutions, by making direct investments, providing loan guarantees and other
      credit enhancements, and purchasing loans. We intend to provide technical
      assistance to lenders and borrowers and to assist banks in complying with the
      requirements of the Community Reinvestment Act (“CRA”). The CRA, codified at 12
      U.S.C. 2901 and 12 C.F.R. Parts 25, 228, 345, and 563e, encourages depository
      institutions to help meet the credit needs of the communities in which they
      operate by, among other things, helping to fund Community Development Entities
      (“CDE”) and Specialized Small Business Investment Companies (“SSBIC”). CDEs and
      SSBICs target loans for small- and medium-sized business entities. If properly
      funded and operated, CDEs and SSBICs can leverage investments from financial
      institutions and other funding sources to expand the availability of credit,
      investment capital, and financial services in urban and rural communities.
      We
      expect to facilitate that process by investing in CDEs and SSBICs, and by acting
      as a liquid intermediary between the capital markets, depository institutions,
      and CDEs and SSBICs.





As
      discussed below, through our proposed business development company (“BDC”)
      affiliate, the Emerging Growth Opportunity Fund (“EGOF”), w e
      also
      expect to package, service, and advise closed-end investment companies and
      other
      savings and investment programs that will permit community-based equity
      participation in these efforts. We propose to partner with a major financial
      services provider, not yet identified, to offer fee-based memberships in an
      investment plan and other investment and community reinvestment products through
      faith-based organizations nationwide.





Finally,
      we propose to provide fee-based financial consulting services to local
      governments and businesses throughout the United States.


2




A
      report
      made available by the U.S. Department of Commerce states minorities currently
      accounting for approximately 26% of the
      U.S. population - will grow to comprise nearly 50% of the
      population over the next 50 years. Meanwhile, minority-owned businesses have
      shown impressive growth since 1990. According to U.S. Bureau of the Census
      estimates, there are now nearly two million minority-owned firms in the United
      States heavily concentrated in wholesale and retail trade, having total annual
      sales of $205 billion. Of these, nearly 25,000 firms have annual sales in excess
      of $1,000,000 each. On average, the owners of minority enterprises today possess
      higher levels of education and managerial skills, and cater to a much more
      diverse clientele, than their counterparts of only a generation or two
      ago.




This
      combination of changing demographics and the rapidly emerging minority business
      community may be expected to present significant opportunities for sophisticated
      investors. A 1990 study by Opportunity Funding Corp. estimated the total annual
      demand for capital in the minority business community at $144 billion per year,
      only a portion of which was then apparently being met. We estimate, based on
      statistics made available by the SBA, that there is an untapped market in the
      United States of at least $47 billion for minority-owned enterprise investments
      and loans.




Since
      October 11, 2000, through SBICOA, we have sustained our operations substantially
      through private borrowings.




On
      July
      15, 2002, together with SBICOA, we entered into a loan and security agreement
      with Matah Holdings, L.L.C., a nonaffiliated lender. The agreement provided
      us
      with a working capital facility under which we had the right to borrow up to
      $500,000, of which $485,000 is currently in use. The borrowings are evidenced
      by
      promissory notes due, together with interest at 12% per annum, on January 14,
      2003 and are personally guaranteed by our chairman of the board of directors,
      chief executive officer, and principal shareholder, John H. Brown, and by our
      secretary-treasurer, director, and principal shareholder, Joyce L. Brown. We
      are
      currently in default on this note and the remaining $15,000 of facility is
      not
      available to us.




As
      discussed below, we believe that our implementation of a new business model
      and
      strategy will offer prospective shareholders and customers:




·
            Liquidity


·
            An
                experienced and focused management
                team


·
            Access
                to the underserved faith-based community


·
            A
                low cost and renewable pool of assets, thus ensuring sustainable
                earnings
                growth.





**Business
      Strategy**





Our
      primary goals are to increase shareholder value by: (1) generating sustainable
      earnings growth and stock appreciation; and (2) maintaining our unique access
      to
      the capital markets. Our business plan is to offer diversified financial
      services to and to make investments in companies that meet our criteria such
      as
      ethnic communities and faith-based entities in the United States. Our business
      plan shall be implemented in two phases.





*Phase
      One*





Phase
      one
      of our business plan contemplates engaging in one or more public or non-public
      equity financings and using the proceeds of such offerings (1) to invest in
      companies with substantial growth potential that will provide us with a revenue
      stream through equity participation and revenue sharing agreements with the
      companies in which we invest; (2) to initiate our investments in, product
      offerings to and consulting services for ethnic communities and faith-based
      entities; and (3) to provide seed money to form and register our BDC under
      the
      Investment Company Act of 1940, as amended. Our initial strategy is to invest
      in
      companies with substantial growth potential that will provide us with a revenue
      stream. We believe that our business model can successfully and profitably
      address the expanding and profitable under-served small and medium sized
      business entities (“SME”) market segment by:





·
            Financing
                the growth and expansion of CDEs and
                SMEs


3





·
            Building
                on our strategic relationships established in the SME
                community


·
            Increasing
                access to investment capital sources by providing our proprietary
                investment products, and financial literacy training and consulting
                services to ethnic community and faith-based investment
                entities


·
            Leveraging
                equity investments in SSBICs


·
            Utilizing
                the network of more than 600 CDEs and SSBICs to enhance quality deal
                flow





*Phase
      Two*





Implementation
      of the second phase of our business plan contemplates operating and managing
      our
      to be registered affiliate, EGOF, as a BDC under the Investment Company Act
      of
      1940. Our BDC’s primary focus will be investing in or lending to small to medium
      size entities and making managerial assistance available to them. Our BDC may
      use capital provided from public offerings of securities and from other sources
      to make long-term investments in private growing businesses. BDCs can provide
      its shareholders with the potential liquidity of a publicly traded company,
      while sharing in the possible benefits, if any, of investing in privately-held
      companies. If successfully formed and registered, our BDC affiliate may be
      entitled to issue equity and debt securities, subject to the laws, rules and
      regulations of the Investment Company Act of 1940.




**The
      Market**




We
      believe the market opportunity is significant because our research indicates
      that there is an unmet need for capital investment in urban communities. There
      are approximately 2 million minority-owned businesses in the United States
      and
      an additional 15 million SMEs, annually accounting for $202 billion and $3.3
      trillion worth of transactions, respectively. The *Wall
      Street Journal* reported
      on April 25, 2002, that minority-owned companies are growing at twice the rate
      of small firms in general. Moreover, recent legislation and public policy
      initiatives encourage the federal government and large corporations to set
      aside
      twenty-three percent (23%) of their purchasing needs for fulfillment by SMEs
      and
      minority businesses.  Based
      upon interviews conducted, we believe that little effort is made to attract
      the
      minority middle-class to invest in the capital markets, and even less is done
      to
      finance SMEs in urban and rural areas, or to provide investment savings and
      financial literacy training.





We
      are
      well positioned to be the financial intermediary between the mainstream
      institutions, the CRA depositary community, SMEs, individuals and community
      development organizations. By virtue of being a publicly traded company, Mega
      affords individual and institutional investors the information, access,
      valuation, and liquidity they demand. Most small business investments do not
      afford investors timely information, liquidity or an exit strategy for their
      investments. Our current and planned organizational and operational structure
      may enable us to accommodate those investment requirements, and is uniquely
      positioned to offer investors fiscally responsible investments, and in some
      cases significant tax credits. For example, the New Markets Tax Credit permits,
      under certain conditions, individual and corporate taxpayers to receive a credit
      against Federal income taxes of up to 39 percent of invested funds for qualified
      equity investments in CDEs. To obtain detailed information regarding this
      program, you should visit the U.S. Department of the Treasury’s website at
      www.cdfifund.gov.





Moreover,
      prospective loan and investment opportunity growth may come from the hundreds
      of
      networking contacts around the country that our senior management currently
      enjoys. These sources include investment bankers, community leaders, principals
      of other private funds and the more than 600 CDEs and SBICs located around
      the
      country.





**Investment
      Strategy**





Our
      proposed investment strategy is to make loans to and investments in SMEs and
      CDEs with annual revenues in the range of $1 million to $50 million, a market
      which traditionally does not have ready access to long-term, unsecured debt
      financing. Our loans may include features such as detachable warrants, equity
      kickers, and in some cases, may accrue tax benefits to investors’ under the U.S.
      Treasury’s New Markets Tax Credit program discussed above. Through EGOF, we plan
      to adhere to strict underwriting procedures and criteria when making loans
      to
      and investments in SMEs and CDEs.


4




**Underwriting
      Procedures**




Our
      underwriting procedures and criteria for making loans to and investments in
      CDEs
      and SMEs, as well as for joint investments with other SBICs, includes, but
      is
      not limited to:





·
            Evaluating
                target investment portfolio company assumptions including recession
                impact
                analyses.


·
            Preparing
                cash flow coverage of debt service models under extreme
                conditions.


·
            Participating
                in or membership on boards of directors in our portfolio
                companies.


·
            Assisting
                portfolio companies with making strategic business or accretive
                acquisitions, as well as devising investment exit
                strategies.





Generally,
      we will require that companies in which we invest demonstrate:





·
            strong
                market position;


·
            community
                involvement;


·
            sales
                growth;


·
            positive
                cash flow; and


·
            profitability





We
      will
      also evaluate the quality of management, and seek experienced entrepreneurs
      with
      a proven track record, relevant industry experience, and significant cash equity
      in their business. We do not expect to invest, either directly or indirectly,
      in
      startups, turnarounds, high technology or highly leveraged
      entities.





Our
      business model carries elements of risk relevant to any investment activity,
      and
      may include, but is not limited to:





·
            Investment
                risks associated with SMEs that are undercapitalized, poorly managed
                or
                that lack access to the capital markets for expansion and
                growth


·
            Economic
                risks, including periodic business downturns that impact portfolio
                companies


·
            Competition
                for quality investment and loan opportunities with other investors/lenders
                who target our target market


·
            In
                the case of SBICs, CDEs and BDCs, the risk that government regulations
                may
                adversely affect our investment
                strategies




We
      will
      seek to mitigate these underwriting risks by ensuring strict adherence to our
      investment policies and procedures. In all cases, our primary objective is
      the
      preservation of principal. Consequently, we will:




·
            Conduct
                extensive initial due diligence, including the use of risk models
                to
                stress test debt coverage under a variety of business and economic
                conditions.


·
            Continuously
                monitor portfolio companies, including stress testing and imposition
                of a
                grading system to measure the finacial viability of a portfolio
                company.


·
            We
                will aggressively intervene in cases when certain “threshold” financial
                ratios indicate financial
                deterioration.


·
            Spread
                and diversify risk by partnering with other investment funds, CDEs
                and
                SBICs to fund our portfolio
                companies.


·
            Maintain
                our network of quality investment opportunities through affiliations
                with
                national business, legal, and financial
                leaders.


·
            Maintain
                relationships with other investment funds to voice our collective
                concerns
                at the state and Federal level.




5




**Competition**




Commercial
      banks, private placement offerings, and mezzanine funds are the primary
      competitors for our loans to and investments in CDEs and SMEs. Commercial banks
      primarily provide senior secured and unsecured short-term debt. Generally,
      commercial banks do not provide long-term unsecured loans. Commercial finance
      companies generally provide senior secured long-term debt. Private placement
      offerings of equity and high-yield debt generally involve very large
      transactions, typically well in excess of $50 million.





Private
      mezzanine funds also provide unsecured long-term debt to private companies,
      but
      the shareholder or stakeholder nature of our investment strategy may permit
      us
      to be a better long-term partner for our portfolio companies compared to a
      traditional mezzanine fund, which typically has a defined investment horizon.





Generally,
      our investments will be structured as unsecured, subordinated loans that carry
      a
      fixed interest rate, with revenue sharing features to provide us with current
      income. Moreover, the presence of equity kickers on loans may provide additional
      income. Loans made by us may have interest only payments in the early years,
      with principal and interest payments in later years with maturities ranging
      from
      five to ten years. Moreover, we may consider preferred stock investments
      structured to provide us with dividend yield income. In addition, we will seek
      to generate management or consulting fees for managerial and consulting services
      that we provide to companies, as well as to our portfolio
      companies.





Presently,
      we have not identified any other company that has penetrated or controls the
      urban and rural segment of the financial services market. Given our “first to
      market” status and senior management’s well-established community and
      faith-based contacts and partnerships, our prospects are reasonable for
      capturing a significant market share of this segment.




**Item
      2.** ***Description
      of Property.***




We
      occupy
      approximately 1,000 square feet of office space, as a lessee of a nonaffiliate,
      at 1730 Rhode Island Ave., N.W., Suite 415, Washington, D.C. 20036. We do not
      own, or invest in, any real property.





**Item
      3.** ***Legal
      Proceedings.***





We
      are
      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.





We
      are
      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.


6




We
      are
      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.





We
      are 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.





We
      are
      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 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.




**Item
      4.** ***Submission
      of Matters to a Vote of Security Holders.***




Not
      applicable.





**PART
      II**




**Item
      5.** ***Market
      for Common Equity and Related Stockholder Matters.***




According
      to our transfer agent, there were 151 record holders of our common stock on
      December 31, 2004. It was listed on the OTC Bulletin Board until January 10,
      2000. Since then it has traded in the over-the-counter market and been quoted
      in
      the “pink sheets,” and accordingly the public trading market for our common
      stock is limited. As a result of our delinquencies in required filings, the
      SEC
      has stopped all trading of our securities. The range of the high and low bid
      prices for each quarter within the last two fiscal years, according to
      information provided by the electronic quotations service of Pink Sheets LLC,
      follows. These quotations reflect inter-dealer prices, without retail mark-up,
      mark-down, or commission, and may not represent actual transactions.




7





**QuarterEnded**
            
            **HighBid**
            
            **LowBid**March
                31, 2003
            
            $
            2.00
            
            $
            2.00June
                30, 2003
            
            $
            1.30
            
            $
            .71September
                30, 2003
            
            $
            1.04
            
            $
            .60December
                31, 2003
            
            $
            .90
            
            $
            .25March
                31, 2004
            
            $
            1.30
            
            $
            .25June
                30, 2004
            
            $
            3.00
            
            $
            .35September
                30, 2004
            
            $
            1.05
            
            $
            .25December
                31, 2004
            
            $
            .50
            
            $
            .16




We
      have
      declared no dividends on our common equity since December 31, 1999 and, to
      preserve liquidity, are unlikely to pay any dividends on our common equity
      in
      the foreseeable future.





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.





In
      July
      and August 2001, the Company granted a promissory note holder options to
      purchase a total of 60,000 shares of its common stock for $.50 per share, of
      which options to purchase 40,000 and 20,000 shares are exercisable until July
      17, 2003 and August 6, 2003, respectively, or until 15 days prior to the
      effective date of any registration statement covering its equity securities
      to
      be publicly offered and sold, whichever comes first. In October 2001, the
      Company granted a promissory note holder options, exercisable until September
      24, 2003 or until 90 days after the closing of any registered public offering
      of
      equity securities, whichever comes first, to purchase 120,000 shares of its
      common stock for $.50 per share. None of these options were
      exercised.




We
      issued
      or granted all of these securities, without registration under the Securities
      Act of 1933, in non-underwritten, non-public transactions. In each case, we
      relied on the exemptions from registration in Section 4(2) or 4(6) of the
      Securities Act, and Rule 506 thereunder, for offers and sales to accredited
      and
      other sophisticated investors. The persons acquiring our securities executed
      written representations consistent with status as an accredited or other
      sophisticated investor.




The
      following table provides information, as of December 31, 2004, concerning the
      number of shares of our common stock issuable under options then outstanding:




**Plan
                Category**
            
            **Number of Securities to
                be Issued upon Exercise of Outstanding Options,
                Warrants, and Rights**
            
            **Weighted Average
                Exercise Price of Outstanding Options,
                Warrants, and Rights**
            
            **Number of Securities
                Remaining Available for Future Issuance**Equity
                Compensation Plans Not Approved by Securities Holders
            
            
            100,000
                shares
            
            $
            0.50
            
            
            —




**Item
      6.** ***Management’s
      Discussion and Analysis or Plan of Operation.***




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.


8




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 income 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**




During
      the years ended December 31, 2004 and 2003, after nominal revenue of $9,000
      and
      $18,000, respectively, operating expenses in the total amount of $535,651 and
      $579,282, respectively, interest expenses of $139,547 and $104,615 respectively
      and gain from settlement of claims of $0 and $1,092,592, we recognized net
      (loss) income of $(665,500) and $426,725. The decreases in operating expenses
      were primarily a result of better cost control by management. Interest expense
      increased as a result of borrowings made during the year ended December 31,
      2004. Various claims against the Company were settled in 2003, no settlements
      occurred in the year ending December 31, 2004. During the fiscal year period
      ended December 31, 2004, we sustained
      operations substantially through private borrowings in the aggregate amount
      of
      $119,225, all of which was funded or repaid from stockholders and officers
      of
      the Company.





**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      position decreased from $6,622 at December 31, 2003 to $0 at December 31, 2004
      primarily due to funding ongoing operations of the Company. We
      have
      applied a 100% valuation allowance for our net deferred tax assets of
      approximately $4,525,000, 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 increased from $2,003,728 as of December 31, 2003 to $2,610,407
      as
      of December 31, 2004 as a result of private borrowings, and withholding payments
      to vendors, employees, and debt holders





As
      of
      December 31, 2004 the Company has a deficiency in stockholders’ equity and
      working capital of approximately $2,604,000. 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, 2004, the Company has no capital resources. The Company is
      committed to pay approximately $126,000 as part of a non-cancelable lease
      agreement over the next five years. The Company is in default or has debt coming
      due in 2005 of approximately $918,000. Additionally, the Company has
      approximately $308,000 of accrued and unpaid interest related to the debt
      required to be paid in 2005. 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.




9


**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, 2004 and 2003, 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-23 attached hereto.




**Item
      8.** ***Changes
      In and Disagreements With Accountants on Accounting and Financial Disclosure.***




On
      March
      20, 2006, we engaged Stegman and Company as our independent auditors and
      replaced the firm of Singer, Lewak, Greenbaum & Goldstein LLP (Singer) whom
      was terminated as our independent auditors on March 20, 2006 in accordance
      with
      a recommendation from the Board of Directors. Stegman and Company will audit
      our
      financial statements for the years ending December 31, 2003, 2004, and 2005.
      Singer never provided reports on our financial statements. Prior to Singer,
      Aronson & Company reports on our financial statements for the fiscal years
      ending December 31, 2002 and 2001 did not contain an adverse opinion or a
      disclaimer of opinion, or was qualified or modified as to uncertainty, audit
      scope, or accounting principles other than a going concern statement on its
      report on our financial statements. There were no disagreements with Aronson
      & Company for the years ending December 31, 2002 and 2001 and no
      disagreements with Singer for the fiscal years ending December 31, 2003, 2004,
      and 2005 and for the interim period through the date of Singer’s termination on
      March 20, 2006 on any matter of accounting principles or practices, financial
      statement disclosure, or auditing scope or procedure.





**Item
      8A.** ***Controls
      and Procedures***





(a)
            Evaluation
                of Disclosure Controls and Procedures. The Company’s management, with the
                participation of the chief executive officer and the chief financial
                officer, carried out an evaluation of the effectiveness of the Company’s
                “disclosure, controls and procedures” (as defined in the Securities
                Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e) as
                of the end of the period covered by this annual report (the “Evaluation
                Date”). Based on the evaluation, the chief executive officer and the chief
                financial officer concluded that, as of the Evaluation Date, the
                Company’s
                disclosure, controls and procedures are effective, providing them
                with
                material information relating to the Company as required to be disclosed
                in the reports the Company files or submits under the Exchange Act
                on a
                timely basis.


(b)
            Changes
                in Internal Control over Financial Reporting. There were no changes
                in the
                Company’s internal controls over financial reporting, known to the chief
                executive officer or the chief financial officer, that occurred during
                the
                period covered by this report that has material affected, or is reasonably
                likely to materially affect, the Company’s internal control over financial
                reporting.




10


**Item
      8B.** ***Other Information***





There
      are
      no further disclosures. All information that was required to be disclosed in
      a
      Form 8-K during the fourth quarter, 2004 has been disclosed.




**PART
      III**




**Item
      9.** ***Directors,
      Executive Officers, Promoters and Control Persons; Compliance With Section
      16(a)
      of the Exchange Act.***




**Directors
      and Executive Officers**




Our
      directors and executive officers are as follows:




**Name**
            
            **Positions
                and Offices**John
                H. Brown
            
            Chairman
                of the Board of Directors and Chief Executive OfficerJoyce
                L. Brown
            
            Secretary,
                Treasurer, and DirectorSteven
                C. Gregory
            
            DirectorVern
                S. Morris
            
            Director




John
      H.
      Brown, 58, has been our chairman of the board of directors and chief executive
      officer since October 2000 and chairman of the board of directors and chief
      executive officer of SBICOA since March 2000. From August 1999 to October 2001,
      he was vice president and branch manager of Paulson Investment Co., Inc., an
      investment banking firm and member of the National Association of Securities
      Dealers, Inc. From April 1998 to July 1999, he was director of syndicate
      operations for The Chapman Company, another investment banking firm. Mr. Brown
      managed Global Venture Group, a venture capital company financing minority-owned
      enterprises, from June 1995 to April 1998. He is past president of the Oregon
      chapter of the National Association of Minority Contractors. He is the husband
      of Joyce L. Brown.




Joyce
      L.
      Brown, 57, has been our vice president, secretary, and director since October
      2000 and an officer and director of SBICOA since March 2000. Since 1990, she
      has
      been a management information systems consultant and staff coordinator.




Steven
      C.
      Gregory, 48, has been our president and director since October 1997. Since
      1981,
      he has been president of Associates of Clifton Park, Inc., an insurance
      agency.




Vern
      S.
      Morris, 49, has been our director since October 2000 and a director of SBICOA
      since March 2000. Since February 1998, he has been market manager of Brinker
      International, Inc., a retailer, with responsibility for multi-unit store
      operations having sales of approximately $5 million per year. From January
      1996
      to February 1998, he was area director for Boston Market, a restaurant operator
      and franchiser, with responsibility for multi-unit store operations having
      sales
      of approximately $8 million per year.




Each
      director serves until the next annual meeting of shareholders and until his
      or
      her successor shall have been elected and qualified. Each executive officer
      serves until the first meeting of directors following the next annual meeting
      of
      shareholders and until his or her successor shall have been elected and
      qualified.




11


**Significant
      Employees**




Gordon
      T.
      Gant, 60, has been SBICOA’s vice president of government and community affairs
      since November 2001. Since January 2001, he has been a government relations
      consultant based in Washington, D.C. Mr. Gant was a senior advisor and analyst
      with the U.S. Department of Commerce, from August 1998 to January 2001, and
      the
      U.S. Department of Defense, from August 1997 to August 1998.




**Section
      16(a) Beneficial Ownership Reporting Compliance**




Several
      of our directors, officers, and more than 10% beneficial owners of our common
      stock furnished us copies of Forms 3, 4, and 5 which they filed, during our
      last
      fiscal year, with the Securities and Exchange Commission, under Section 16(a)
      of
      the Securities Exchange Act of 1934. Based solely on a review of those filings,
      it appears that some were not filed on a timely basis. Information concerning
      the late filings has previously been reported.




**Item
      10.** ***Executive
      Compensation.***




The
      table
      below sets forth certain information concerning all plan and non-plan
      compensation which was earned by, or which we awarded or paid to, the
      individuals serving as our chief executive officer in 2004 and, if compensated
      and serving at year-end, as any of our other executive officers during our
      fiscal year ended December 31, 2004 (collectively, the “named executive
      officers”).




**SUMMARY
      COMPENSATION TABLE**




**Annual
                Compensation**
            
            **Long-Term
                Compensation****Name
                and Principal Position**
            
            **Fiscal**
              **Year**
            
            **Salary**
            
            **Bonus**
            
            **Other
                Annual**
              **Comp.**
            
            **Restricted**
              **Stock**
              **Awards**
            
            **Securities
                Underlying Options/SARs**
            
            **LTIP
                Payouts**
            
            **All**
              **Other
                Comp.**John
                H. Brown,
            
            
            2004
            
            $
            150,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Chairman
                and Chief Executive
            
            
            2003
            
            $
            150,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Officer
            
            
            2002
            
            $
            75,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Joyce
                L. Brown,
            
            
            2004
            
            $
            150,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Secretary
                and Treasurer
            
            
            2003
            
            $
            150,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —2002
            
            $
            75,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —





During
      our fiscal year ended December 31, 2004, we granted no stock options or stock
      appreciation rights to either of the named executive officers, and neither
      of
      them exercised any stock options or stock appreciation rights. At fiscal year
      end, neither of the named executive officers held any unexercised options or
      stock appreciation rights, or any restricted stock subject to performance-based
      conditions to vesting. During our fiscal year ended December 31, 2004, we
      granted no awards to either of the named executive officers under any long-term
      incentive plan.




We
      have
      no standard arrangement under which we compensate our directors and, except
      as
      noted below, none of our directors received any compensation for any service
      as
      a director during our fiscal year ended December 31, 2004. On June 8, 2001,
      we
      granted an option, to our former director, Anthony W. Robinson, for the purchase
      of 100,000 shares of our common stock. The option is exercisable, at $.50 per
      share, until June 30, 2006 or until 30 days prior to the commencement of any
      public offering of our equity securities, whichever comes first.




Neither
      named executive officer has entered into any currently effective employment
      agreement with us, and there is no compensatory plan or arrangement under which
      either named executive officer may receive any remuneration upon his
      resignation, retirement, or any other termination of his employment with us
      or
      from a change in control or a change in the named executive officer’s
      responsibilities following a change in control.




12





**Item
      11.** ***Security
      Ownership of Certain Beneficial Owners and Management.***




The
      following table sets forth certain information, as of December 31, 2004,
      concerning the shares of our common stock owned by each more-than-five-percent
      beneficial owner of our common stock, each of our directors and named executive
      officers, and all of our directors and executive officers as a group:




**SECURITY
      OWNERSHIP TABLE**




**Name
                and Address**
              **of
                Beneficial Owner**
            
            **Shares
                Beneficially Owned**
            
            **Percent
                of Class**John
                H. Brown
              1730
                Rhode Island Ave., N.W., #415
              Washington,
                D.C. 20036
            
            
            2,603,132
            
            
            32.3%(1
            )Joyce
                L. Brown
              1730
                Rhode Island Ave., N.W., #415
              Washington,
                D.C. 20036
            
            
            3,103,132
            (2)
            
            38.6%(1
            )Steven
                C. Gregory
              313
                Ushers Road
              Ballston
                Lake, NY 12019
            
            
            501,125
            (3)
            
            6.2%(1
            )Vern
                S. Morris
              46619
                Carriage Court
              Sterling,
                VA 20164
            
            
            505,498
            
            
            6.3%(1
            )Directors
                and Executive Officers as a Group (4 Persons)
            
            
            6,722,287
            
            
            83.4%(1
            )




On
      December 31, 2000, Robert L. Halton, our former officer and director, owned
      10,000 shares of our 8% cumulative nonconvertible preferred stock, representing
      all of the issued and outstanding shares of our preferred stock, our only other
      outstanding class of equity securities.




Except
      as
      otherwise indicated, all of the persons named above hold their shares directly
      and of record. None of them hold any shares under a trust or other comparable
      agreement. We know of no arrangements which may result in a change in our
      control.







(1)
            
            Based
                on 8,833,605 shares of common stock issued and outstanding, less
                75,302
                shares held of record or beneficially by SBICOA, our wholly-owned
                subsidiary, plus any additional shares deemed “beneficially owned” by the
                respective beneficial owners, computed as provided in Section 13(d)(4)
                of
                the Securities Exchange Act of 1934 and SEC Rule 13d-3. John H. and
                Joyce
                L. Brown exercise shared voting and investment power with respect
                to the
                shares held by SBICOA.


(2)
            
            Includes
                9,400 shares of common stock held of record by Small Business Investment
                Club of America, an affiliated general partnership, as to which Joyce
                L.
                Brown exercises voting and investment power.


(3)
            
            Includes
                1,125 shares held of record by Margaret Laguardia Gregory, Mr. Gregory’s
                wife. Mr. Gregory disclaims beneficial ownership of the shares held
                by his
                wife.




**Item
      12.** ***Certain
      Relationships and Related Transactions.***




During
      the years ending December 31, 2004 and 2003, the Company borrowed from John
      and
      Joyce Brown $172,827 and $52,722, respectively, evidenced by promissory notes
      payable, with interest at 15%. During the years ending December 31, 2004 and
      2003 the Company repaid Joyce Brown $53,602 and $29,973, respectively for
      amounts previously borrowed under promissory notes payable.




13




**Item
      13.** ***Exhibits
      and Reports on Form 8-K.***




(a) *Exhibits.*




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
            
            99.1
            
            Code
                of Ethics
            
            *2
            
            32.1
            
            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**
            
            Attached3
            
            23.2
            
            Consent
                of Stegman & Company
            
            Attached





*
      Filed
      as an Exhibit on Form 10-KSB for the fiscal year ending December 31, 2003 which
      was filed July 21, 2006, is incorporated herein by reference.





**
      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
      filed
      no reports on Form 8-K during the last quarter of the period covered by this
      report.





**Item
      14. Principal Accountant Fees and Services**





The
      aggregate fees billed for each of the last two fiscal years for professional
      services rendered by the principal accountant for the audit of the Company’s
      annual financial statements and review of financial statements included in
      the
      Company’s 10-QSB reports and services normally provided by the accountant in
      connection with statutory and regulatory filings or engagements were $47,000
      for
      fiscal year ended 2004 and $98,000for fiscal year ended 2003. The aggregate
      fees
      billed in each of the last two fiscal years for assurance and related services
      by the principal accountant that are reasonably related to the performance
      of
      the audit or review of the Company’s financial statements that are not reported
      above were $0 for fiscal years ended 2004 and 2003. The aggregate fees billed
      in
      each of the last two fiscal years for professional services rendered by the
      principal accountant for tax compliance, tax advice, and tax planning were
      $0
      for fiscal years ending 2004 and 2003. There were no other aggregate fees billed
      in either of the last two fiscal years for products and services provided by
      the
      principal accountant, other than the services reported above.





We
      do not
      have an audit committee currently serving and as a result our board of directors
      performs the duties of an audit committee. Our board of directors will evaluate
      and approve in advance, the scope and cost of the engagement of an auditor
      before the auditor renders audit and non-audit services. We do not rely on
      pre-approval policies and procedures.


14





**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: July 21, 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: July 21, 2006


By:
                /s/    Joyce
                        Brown**Joyce
                        Brown,**
                      **Principal
                        Financial and**
                      **Accounting
                        Officer and Director**Date: July 21, 2006




By:
                /s/    VERNS.
                          MORRIS**Vern
                          S. Morris,**
                        **Director**Date: July 21, 2006


15


**December
      31, 2004 and 2003**





**CONTENTS**





Report
                of Independent Registered Public Accountants
            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 sheets of Mega Group, Inc. (the
      “Company”) as of December 31, 2004 and 2003, and the related consolidated
      statements of operations, changes in stockholders’ deficit, 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 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 audits provide 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, 2004 and 2003, and the results of its operations and cash flows
      for
      the years 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
      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


**Mega
      Group, Inc. and Subsidiary**




**Consolidated
      Balance Sheets**


**As
      of December 31, 2004 and 2003**


**2004**
              
              **2003****Assets**Cash
                  and cash equivalents
              
              **$**
              **-**
              
              $
              6,622Other
                  assets
              
              
              **2,285**
              
              
              2,099Total
                  current assets
              
              
              **2,285**
              
              
              8,721Equipment,
                  net of accumulated depreciation of $21,845 and $19,459,
                  respectively
              
              
              **3,819**
              
              
              6,204**Total
                  Assets**
              
              **$**
              **6,104**
              
              $
              14,925**Liabilities
                  and Stockholders’ Deficit****Liabilities**Accounts
                  payable and accrued liabilities
              
              **$**
              **1,253,417**
              
              $
              904,711Accrued
                  interest
              
              
              **307,544**
              
              
              177,129Due
                  to shareholders and officers, including convertible notes payable
                  of
                  $59,002 and $15,000, respectively
              
              
              **404,446**
              
              
              276,888Notes
                  payable
              
              
              **645,000**
              
              
              645,000Total
                  current liabilities
              
              
              **2,610,407**
              
              
              2,003,728**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,
                  9,433,625
                  and 9,333,625, respectively, shares issued and outstanding
              
              
              **150,938**
              
              
              149,338Additional
                  paid-in capital
              
              
              **294,249**
              
              
              245,849Accumulated
                  deficit
              
              
              **(3,059,490**
              **)**
              
              (2,393,990
              )Total
                  stockholders’ deficit
              
              
              **(2,604,303**
              **)**
              
              (1,988,803
              )**Total
                  liabilities and stockholders’ deficit**
              
              **$**
              **6,104**
              
              $
              14,925


The
        accompanying notes are an integral part of these consolidated balance
        sheets.


F-3


**Mega
      Group, Inc. and Subsidiary**




**Consolidated
      Statements of Operations**


**For
      the Years Ended December 31, 2004 and 2003**





**2004**
            
            **2003****Revenue**
            
            **$**
            **9,698**
            
            $
            18,030**Operating
                expenses**Compensation
                and benefits
            
            
            **345,000**
            
            
            353,292Other
                selling, general and administrative
            
            
            **188,265**
            
            
            223,118Depreciation
            
            
            **2,386**
            
            
            2,872**Total
                operating expenses**
            
            
            **535,651**
            
            
            579,282**Loss
                from operations**
            
            
            **(525,953**
            **)**
            
            (561,252
            )**Other
                income (expense)**Interest
                expense to stockholders and officers
            
            
            **(29,939**
            **)**
            
            (19,657
            )Interest
                expense
            
            
            **(109,608**
            **)**
            
            (84,958
            )Gain
                from settlement of claims
            
            
            **-**
            
            
            1,092,592**Total
                other (expense) income**
            
            
            **(139,547**
            **)**
            
            987,977**(Loss)
                income before provision for income taxes**
            
            
            **(665,500**
            **)**
            
            426,725**Provision
                for income taxes**
            
            
            **-**
            
            
            -Net
                (loss) income
            
            **$**
            **(665,500**
            **)**
            $
            426,725**Basic
                and diluted net (loss) income per common share:******Basic
                and diluted net (loss) income per common share
            
            **$**
            **(0.07**
            **)**
            $
            0.05****Basic
                and diluted weighted average common shares
            
            
            **9,433,625**
            
            
            9,333,625




The
      accompanying notes are an integral part of these consolidated balance
      sheets.




F-4





**Mega
      Group, Inc. and Subsidiary**




**Consolidated
      Statements of Changes in Stockholders’ Deficit**


**For
      the Years Ended December 31, 2004 and 2003**





**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional
                Paid-in Capital**
            
            **Accumulated
                Deficit**
            
            **Total**Balance,January
                1, 2003
            
            $
            10,000
            
            $
            149,749
            
            $
            245,849
            
            $
            (2,820,715
            )
            $
            (2,415,117
            )Purchased
                Common Stock
            
            
            -
            
            
            (411
            )
            
            -
            
            
            -
            
            
            (411
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            426,725
            
            
            426,725Balance,December
                31, 2003
            
            
            10,000
            
            
            149,338
            
            
            245,849
            
            
            (2,393,990
            )
            
            (1,988,803
            )Issued
                Common Stock
            
            
            -
            
            
            1,600
            
            
            48,400
            
            
            -
            
            
            50,000Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (665,500
            )
            
            (665,500
            )Balance,December
                31, 2004
            
            $
            10,000
            
            $
            150,938
            
            $
            294,249
            
            $
            (3,059,490
            )
            $
            (2,604,303
            )




The
      accompanying notes are an integral part of these consolidated balance
      sheets.


F-5


**MEGA
      GROUP, INC. AND SUBSIDIARY**




**Consolidated
      Statements of Cash Flows**


**For
      the Years Ended December 31, 2004 and 2003**




**2004**
            
            **2003****Cash
                flow used in operating activities**Net
                (loss) income
            
            **$**
            **(665,500**
            **)**
            $
            426,725**Adjustment
                to reconcile changes in net assets to net cash flow from operating
                activities**Common
                stock issued for services
            
            
            **50,000**Depreciation
                and amortization
            
            
            **2,386**
            
            
            2,872Accretion
                of discount
            
            
            **8,333**
            
            
            8,333Bad
                debt expense
            
            
            **-**
            
            
            49,246Gain
                on settlement of claims
            
            
            **-**
            
            
            (1,092,592
            )**Effect
                of changes in non-cash working capital balances**Other
                assets
            
            
            **(186**
            **)**
            
            (2,099
            )Accounts
                payable and accrued liabilities
            
            
            **348,706**
            
            
            280,648Accrued
                interest
            
            
            **130,414**
            
            
            119,821**Net
                cash flow used in operating activities**
            
            
            **(125,847**
            **)**
            
            (207,046
            )**Cash
                flow from financing activities**Common
                stock purchased
            
            
            **-**
            
            
            (411
            )Debt
                proceeds from stockholders and officers
            
            
            **172,827**
            
            
            55,996Debt
                proceeds
            
            
            **-**
            
            
            185,000Payments
                on debt to stockholders and officers
            
            
            **(53,602**
            **)**
            
            (31,973
            )**Net
                cash flow provided by financing activities**
            
            
            **119,225**
            
            
            208,612Change
                in cash and cash equivalents
            
            
            **(6,622**
            **)**
            
            1,566Cash
                and cash equivalents, beginning of year
            
            
            **6,622**
            
            
            5,056**Cash
                and cash equivalents, end of year**
            
            $
            **-**
            
            $
            6,622**Cash
                Paid for Interest**
            
            **$**
            **-**
            
            $
            -**Cash
                Paid for Taxes**
            
            **$**
            **-**
            
            $
            -**Non
                cash transactions****Common
                stock issued for payment of services**
            
            **$**
            **50,000**
            
            
            **-**




The
      accompanying notes are an integral part of these consolidated balance
      sheets.




F-6


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**




**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.





**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.


F-7


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**




**1.** **ORGANIZATION
      AND SIGNIFICANT ACCOUNTING POLICIES (continued)**





**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, 2004 and 2003, 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
      2004
      and 2003 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-8


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**




**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 stock equivalents
      outstanding during the period. Anti-dilutive common stock equivalents are
      excluded. Common stock equivalents consist entirely of stock
      options.





**New
      Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Boards (“FASB”) issued
      Statements of Financial Accounting Standards (“SFAS”) No 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”). SFAS 123R is a revision of FASB Statement
      No. 123, “Accounting for Stock-Based Compensation” and it supersedes APB Opinion
      No.25, “Accounting for Stock Issued to Employees”, and its related
      implementation guidance. SFAS 123R establishes standards for the accounting
      for
      transactions in which an entity exchanges its equity in instruments for goods
      or
      services. It also addresses transactions in which an entity incurs liabilities
      in exchange for goods or services that are based on the fair value of the
      entity’s equity instruments or that may be settled by the issuance of those
      equity instruments. SFAS 123R does not change the accounting guidance for
      share-based payment transactions with parties other than employees provided
      in
      Statement 123 as originally issued and Emerging Issues Task Force (“EITF”)
      Issues No.96-18, “Accounting for Equity Instruments That Are Issued to Other
      than Employees for acquiring, or in conjunction with selling, goods or
      services.” SFAS 123R does not address the accounting for employee share
      ownership plans, which are subject to AICPA Statement of Position 93-6,
      Employers’ Accounting for Employee Stock Ownership Plans.





SFAS
      123R
      requires companies to measure compensation expense for all share-based payments
      (including employee stock options) at fair value and recognize the expense
      over
      the related service period. Additionally, excess tax benefits, as defined in
      SFAR 123R, will be recognized as an addition to paid-in capital and will be
      reclassified from operating cash flows to financing cash flows in the
      Consolidated Statements of Cash Flows.





The
      Company has transitioned to the fair value based accounting for stock-based
      compensation using a modified version of prospective application (“modified
      prospective application”). Under the modified prospective application, as it is
      applicable to the Company, SFAS No. 123 (R) applies to new awards and to awards
      modified, repurchased or cancelled after January 1, 2006. Additionally,
      compensation cost for the portion of awards for which the requisite service
      has
      not yet been rendered (generally referring to non-vested awards) that are
      outstanding as of January 1, 2006 must be recognized as the remaining requisite
      service is rendered during the period of, or the periods after, adoption of
      SFAS
      No. 123 (R). The attribution of compensation cost for those earlier awards
      is
      based on the same method and on the same grant-date fair values previously
      determined for the pro forma disclosures provided by the
      Company.


F-9


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**




**1.** **ORGANIZATION
      AND SIGNIFICANT ACCOUNTING POLICIES (continued)**





FASB
      issued in December 2004, SFAS No. 153, “Exchanges of Nonmonetary Assets-an
      amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 eliminates the exception
      for nonmonetary exchanges of similar productive assets in APB 29 an replaces
      it
      with a general exception for exchanges of nonmonetary assets that do not have
      commercial substance. A nonmonetary exchange has commercial substance if the
      future cash flows of the entity are expected to change significantly as a result
      of the exchange. SFAS 153 will be effective for nonmonetary exchanges occurring
      in the fiscal periods beginning after June 15, 2005. The Company anticipates
      that adoption of SFAS 153 will not have a material impact on its net income
      or
      financial condition.





In
      November 2004, the FASB issued SFAS No.151,”Inventory Costs-an amendments of ARB
      No.43, Chapter 4” (“SFAS 151”). SFAS 151 requires that “abnormal” amounts of
      idle facility expense, freight, handling costs, and wasted material (spoilage)
      be recognized as current -period charges. In addition, the allocation of fixed
      production overhead to cost of conversion is required to be based on the normal
      capacity of the production facilities. SFAS 151 is effective prospectively
      for
      financial statements for fiscal years beginning after June 15, 2005. The Company
      anticipates that adoption of SFAS 151 will not have a material impact on its
      net
      income or financial condition.





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.





**2.** **GOING
      CONCERN**




The
      Company’s consolidated 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, 2004, the Company has a deficiency in stockholders’ equity and a
      working capital deficit of approximately $2,604,000. 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.




F-10


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**




**2.       
      GOING CONCERN, continued**




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.





**3.       
      DUE TO STOCKHOLDER AND OFFICERS**





The
      Company owes a stockholder $155,319 and $146,986 as of December 31, 2004 and
      2003, respectively, of which $24,114 is a note payable for redemption of common
      shares and $131,205 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
      each of the years ending December 31, 2004 and 2003, the Stockholder Obligation
      accreted by $8,333.




F-11


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**





**3.       
      DUE TO STOCKHOLDER AND OFFICERS, continued**





**Notes
      Payable**





The
      Company is obligated under notes payable totaling $249,127 and $127,902 as
      of
      December 31, 2004 and 2003, 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 $23,026 and $21,571 as of December 31, 2004 and 2003, respectively.
      However, the Company has provided an allowance for the entire amount as
      collection is uncertain.





**5.        LONG-TERM
      DEBT**




As
      of
      December 31, 2004 and 2003, debt consisted of the following:




**2004**
            
            **2003**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.
            
            **$**
            **179,825**
            
            $
            51,000Note
                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**
            
            
            2,500Note
                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.
            
            
            **7,800**
            
            
            61,402Note
                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.
            
            
            **59,002**
            
            
            15,000Total
                amount payable to officers
            
            
            **249,127**
            
            
            129,902Note
                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**
            
            
            24,114Total
                amount payable to stockholders and officers
            
            
            **273,241**
            
            
            154,016Note
                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**
            
            
            100,000





F-12


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**




**5.       
      LONG-TERM DEBT, continued**





Note
                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**
            
            485,000**Total**
            
            **918,241**
            
            799,016Less:
                Current portion
            
            **918,241**
            
            799,016**Net
                long-term debt**
            **$**
            **-**
            $
            -





During
      the years ending December 31, 2004 and 2003, the Company sold $172,827 ($44,002
      is convertible) and $185,000 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, 2004 and 2003, the Company incurred $139,547
      and
      $104,615 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 2004. As of December 31, 2004 and 2003, the aggregate amount in
      arrears was $9,600 and $8,800, 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.




**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%.




F-13


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**





**6.** **STOCKHOLDERS’
      DEFICIT, continued**





**Common
      stock issued**





During
      the year ended December 31, 2004, the Company issued 100,000 shares of common
      stock for services valued at $50,000 by the vendor.





**Convertible
      Debt**





As
      of
      December 31, 2004 and 2003, the Company has $59,002 and $15,000, respectively
      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.





**7.       
      INCOME TAX**





The
      Company’s provision for income taxes for the years ended December 31, 2004 and
      2003 is summarized as follows:




**2004**
            
            **2003**Taxes
                currently payable
            
            $
            -
            
            $
            -Deferred
                taxes- Federal
            
            
            (208,524
            )
            
            147,611Deferred
                taxes- State
            
            
            (26,311
            )
            
            18,625Increase
                (decrease) in valuations on deferred tax asset
            
            
            234,835
            
            
            (166,236
            )Income
                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:




**2004**
            
            **2003**Federal
                income tax
            
            $
            (209,814
            )
            $
            145,087State
                income taxes, net of Federal income tax effect
            
            
            (26,227
            )
            
            18,307Utilization
                of operating loss carry-forward
            
            
            -
            
            
            (166,236
            )Other
            
            
            3,703
            
            
            2,842Tax
                provision
            
            
            (232,338
            )
            
            -Increase
                in valuation allowance
            
            
            232,338
            
            
            -Net
                tax provision
            
            $
            -
            
            $
            -





The
      significant component of the Company’s deferred tax assets are net operating
      losses of approximately $1.4 million and $1.7 million as of December 31, 2004
      and 2003. 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, 2004, net operating loss of approximately
      $4,525,000 is available to offset future taxable income and expires as
      follows:


F-14


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**





**7.       
      INCOME TAXES, continued**








Expiring
                December 31,
            
            Amount2005
            
            $
            903,0002006
            
            
            132,0002007
            
            
            513,0002008
            
            
            76,0002009
            
            
            51,0002010
            
            
            123,0002011
            
            
            274,0002012
            
            
            68,0002018
            
            
            89,0002019
            
            
            100,0002020
            
            
            313,0002021
            
            
            587,0002022
            
            
            681,0002024
            
            
            615,000**Total**
            
            $
            4,525,000





Subsequent
      to year end, $903,000 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,
      2004 is as follows:





Year
                Ending December 31
            
            Amount2005
            
            $
            29,4042006
            
            
            28,7452007
            
            
            29,6072008
            
            
            30,7912009
            
            
            7,773Total
            
            $
            126,320





During
      the years ended December 31, 2004 and 2003, the Company incurred $23,849 and
      $20,161 respectively, of rent expense.





F-15




**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**




**8.** **COMMITMENTS
      AND CONTINGENCIES, continued**





**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.





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.


F-16


**Mega
      Group, Inc. and Subsidiary**





**Notes
      to Consolidated Financial Statements**


**December
      31, 2004 and 2003**





**8.** **COMMITMENTS
      AND CONTINGENCIES, continued**





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.





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 expect that these proceedings will have a material adverse effect on the
      Company.


F-17