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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB/A

(Amendment No. 2)



ANNUAL REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For
the Fiscal Year Ended December 31, 2002



Commission File
Number 000-17510



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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)         



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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  x    
No ̈



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: $30,000.



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: $791,247 as of June 30, 2003, 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: 9,359,303 shares of common stock (including 75,302 shares held of record by our wholly-owned subsidiary), as of August 1, 2003.



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PART II



EXPLANATORY NOTE



This Form 10-KSB/A (Amendment No. 2) is being filed to amend and restate the information disclosed in Item 7 of Part II of the Form 10-KSB filed on March
7, 2003, as amended on April 15, 2003, for the fiscal year ended December 31, 2002 to record the 1999 and 2000 stock transactions with Small Business Investment Corporation of America, Inc. using the purchase method of accounting. The Company
previously accounted for these transactions as a pooling of interests in its financial statements for the year ended December 31, 2000.



Item 7.Financial Statements.



See pages F-1 through F-21 attached hereto.



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##### Table of Contents

Mega Group, Inc. and Subsidiary



INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS



|Audited Consolidated Financial Statements For Years Ended December 31, 2002 and 2001
|------------------------------------------------------------------------------------
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    



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##### Table of Contents

Independent Auditors Report



Board of
Directors

Mega Group, Inc.

Washington, DC



We have audited the accompanying Consolidated Balance Sheets of Mega Group, Inc. and
Subsidiary as of December 31, 2002 and 2001, and the related Consolidated Statements of Operations, Comprehensive Income (Loss), Deficiency in Stockholders Equity and Cash Flows for the years then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audits 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 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Mega Group, Inc. and Subsidiary as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.



The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10 to the consolidated financial statements, the Company has deficiencies in stockholders equity
and working capital and is in default on certain of its obligations. These conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans regarding those matters are also described in Note
10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



As described in Note 13, the Company has restated the accompanying financial statements to record its 1999 and 2000 stock transactions with Small Business Investment
Corporation of America, Inc. using the purchase method of accounting. The Company previously accounted for these transactions as a pooling of interests in its financial statements for the year ended December 31, 2000.



/s/    Aronson & Company



Rockville, Maryland

February 12, 2003, except for Notes 6, 7, 10

and 13, as to which the date is August 11, 2003



F-1

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##### Table of Contents

Mega Group, Inc. and Subsidiary



Consolidated Balance Sheets



|December 31,                                    |  | 2001 (as restated) |         |   | 2002 (as restated) |  
|----------------------------------------------- |  | ------------------ | ------- | - | ------------------ | -
|Assets                                          |  |                    |         |   |                    |  
|Current assets                                  |  |                    |         |   |                    |  
|Cash                                            |  | $                  | 17,100  |   |                    | $
|Marketable securities                           |  |                    | 1,544   |   |                    |  
|Accounts receivable                             |  |                    |        |   |                    |  
|Loans receivable                                |  |                    | 45,134  |   |                    |  
|Loan financing costs, net                       |  |                    |        |   |                    |  
|                                                |  |                    |         |   |                    |  
|Total current assets                            |  |                    | 63,778  |   |                    |  
|                                                |  |                    |         |   |                    |  
|Property and equipment                          |  |                    |         |   |                    |  
|Computer equipment                              |  |                    | 10,683  |   |                    |  
|Office furniture and equipment                  |  |                    | 13,695  |   |                    |  
|                                                |  |                    |         |   |                    |  
|Total                                           |  |                    | 24,378  |   |                    |  
|Less: Accumulated depreciation and amortization |  |                    | (13,802 | ) |                    |  
|                                                |  |                    |         |   |                    |  
|Net property and equipment                      |  |                    | 10,576  |   |                    |  
|                                                |  |                    |         |   |                    |  
|Total assets                                    |  | $                  | 74,354  |   |                    | $
|                                                |  |                    |         |   |                    |  



The accompanying Notes
to Financial Statements are an integral part of these financial statements



F-2

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##### Table of Contents

Mega Group, Inc. and Subsidiary



Consolidated Balance Sheets



|                                                                                                                                                             |  | 2001 (as restated) |            |   | 2002 (as restated) |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ---------- | - | ------------------ | -
|Liabilities and Deficiency in Stockholders Equity                                                                                                           |  |                    |            |   |                    |  
|Current liabilities                                                                                                                                          |  |                    |            |   |                    |  
|Accounts payable and accrued expenses                                                                                                                        |  | $                  | 661,429    |   |                    | $
|Accrued wages                                                                                                                                                |  |                    | 291,174    |   |                    |  
|Accrued interest                                                                                                                                             |  |                    | 114,330    |   |                    |  
|Due to stockholders                                                                                                                                          |  |                    | 70,976     |   |                    |  
|Due to affiliate                                                                                                                                             |  |                    | 2,939      |   |                    |  
|Current portion of long-term debt                                                                                                                            |  |                    | 716,582    |   |                    |  
|                                                                                                                                                             |  |                    |            |   |                    |  
|Total current liabilities                                                                                                                                    |  |                    | 1,857,430  |   |                    |  
|Long-term debt, net of current portion                                                                                                                       |  |                    | 49,183     |   |                    |  
|                                                                                                                                                             |  |                    |            |   |                    |  
|Total liabilities                                                                                                                                            |  |                    | 1,906,613  |   |                    |  
|                                                                                                                                                             |  |                    |            |   |                    |  
|Commitments and contingencies                                                                                                                                |  |                    |            |   |                    |  
|Deficiency in stockholders equity                                                                                                                           |  |                    |            |   |                    |  
|Preferred stock, cumulative 8%, $1 par value per share, 400,000 shares authorized, 10,000 shares issued and
outstanding                                      |  |                    | 10,000     |   |                    |  
|Common stock, $0.016 par value per share, 25,000,000 shares authorized, 9,359,303 and 8,056,912 shares issued and outstanding in
2002 and 2001, respectively |  |                    | 128,911    |   |                    |  
|Additional paid-in capital                                                                                                                                   |  |                    | 164,144    |   |                    |  
|Accumulated deficit                                                                                                                                          |  |                    | (2,134,012 | ) |                    |  
|Accumulated other comprehensive loss                                                                                                                         |  |                    | (1,302     | ) |                    |  
|                                                                                                                                                             |  |                    |            |   |                    |  
|Total deficiency in stockholders equity                                                                                                                     |  |                    | (1,832,259 | ) |                    |  
|                                                                                                                                                             |  |                    |            |   |                    |  
|Total liabilities and deficiency in stockholders equity                                                                                                     |  | $                  | 74,354     |   |                    | $
|                                                                                                                                                             |  |                    |            |   |                    |  



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



F-3

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##### Table of Contents

Mega Group, Inc. and Subsidiary



Consolidated Statements of Operations



|Years Ended December 31,                                                             |  | 2001 |           |   | 2002 |  
|------------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | -
|Revenue                                                                              |  | $    |          |   |      | $
|                                                                                     |  |      |           |   |      |  
|Operating expenses                                                                   |  |      |           |   |      |  
|Compensation and benefits                                                            |  |      | 156,024   |   |      |  
|Other selling, general and administrative expenses                                   |  |      | 243,445   |   |      |  
|Depreciation and amortization                                                        |  |      | 3,430     |   |      |  
|                                                                                     |  |      |           |   |      |  
|                                                                                     |  |      |           |   |      |  
|Total operating expenses                                                             |  |      | 402,899   |   |      |  
|                                                                                     |  |      |           |   |      |  
|                                                                                     |  |      |           |   |      |  
|Loss from operations                                                                 |  |      | (402,899  | ) |      |  
|                                                                                     |  |      |           |   |      |  
|Other income (expense)                                                               |  |      |           |   |      |  
|Realized loss on marketable securities                                               |  |      | (84,402   | ) |      |  
|Interest income                                                                      |  |      | 404       |   |      |  
|Interest expense                                                                     |  |      | (107,374  | ) |      |  
|                                                                                     |  |      |           |   |      |  
|Total                                                                                |  |      | (191,372  | ) |      |  
|                                                                                     |  |      |           |   |      |  
|                                                                                     |  |      |           |   |      |  
|Loss before provision (benefit) for income taxes                                     |  |      | (594,271  | ) |      |  
|Provision (benefit) for income taxes                                                 |  |      | (39,634   | ) |      |  
|                                                                                     |  |      |           |   |      |  
|                                                                                     |  |      |           |   |      |  
|Net loss                                                                             |  | $    | (554,637  | ) |      | $
|                                                                                     |  |      |           |   |      |  
|Basic and dilutive net loss per common share:                                        |  |      |           |   |      |  
|Basic and dilutive net loss per common share                                         |  | $    | (0.07     | ) |      | $
|                                                                                     |  |      |           |   |      |  
|Basic and dilutive weighted average common shares used to compute net loss per share |  |      | 8,056,912 |   |      |  
|                                                                                     |  |      |           |   |      |  



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



F-4

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##### Table of Contents

Mega Group, Inc. and Subsidiary



Consolidated Statements of Comprehensive Income (Loss)



|Years Ended December 31,                                                                 |  | 2001 |          |   | 2002 |  
|---------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -
|Net loss                                                                                 |  | $    | (554,637 | ) |      | $
|                                                                                         |  |      |          |   |      |  
|(Increase) decrease in unrealized loss on marketable securities                          |  |      | 14,680   |   |      |  
|                                                                                         |  |      |          |   |      |  
|Reclassification of previously unrealized loss on marketable securities to realized loss |  |      | 84,402   |   |      |  
|                                                                                         |  |      |          |   |      |  
|Tax provision (benefit)                                                                  |  |      | (39,634  | ) |      |  
|                                                                                         |  |      |          |   |      |  
|                                                                                         |  |      |          |   |      |  
|Other comprehensive (loss) income                                                        |  |      | 59,448   |   |      |  
|                                                                                         |  |      |          |   |      |  
|Comprehensive loss                                                                       |  | $    | (495,189 | ) |      | $
|                                                                                         |  |      |          |   |      |  



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



F-5

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Mega Group, Inc. and Subsidiary



Consolidated Statements of Deficiency in Stockholders Equity



Years Ended December 31, 2002 and 2001



|                                                                                                                                    |  | Preferred Stock |  | Common Stock |        | AdditionalPaid-inCapital (asrestated) |           | AccumulatedDeficit (asrestated) |   |         | AccumulatedOtherComprehensiveLoss |   |         | TotalDeficiency inStockholdersEquity |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ | ------ | ------------------------------------- | --------- | ------------------------------- | - | ------- | --------------------------------- | - | ------- | ------------------------------------- | -
|                                                                                                                                    |  | Shares          |  | Amount       |        | Shares                                |           | Amount                          |   |         |                                   |  
|Balance, January 1, 2001                                                                                                            |  | 10,000          |  | $            | 10,000 |                                       | 8,056,912 |                                 | $ | 128,911 |                                   | $ | 164,144 |                                       | $
|Unrealized loss on marketable securities, net of tax and reclassification adjustment for losses included in statement of
operations |  |                |  |              |       |                                       |          |                                 |   |        |                                   |   |        |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Net loss                                                                                                                            |  |                |  |              |       |                                       |          |                                 |   |        |                                   |   |        |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Preferred stock dividend                                                                                                            |  |                |  |              |       |                                       |          |                                 |   |        |                                   |   |        |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Balance, December 31, 2001                                                                                                          |  | 10,000          |  |              | 10,000 |                                       | 8,056,912 |                                 |   | 128,911 |                                   |   | 164,144 |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Issuance of stock for:                                                                                                              |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Compensation                                                                                                                        |  |                |  |              |       |                                       | 692,391   |                                 |   | 11,078  |                                   |   | 30,465  |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Membership dues                                                                                                                     |  |                |  |              |       |                                       | 10,000    |                                 |   | 160     |                                   |   | 840     |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Loan financing cost                                                                                                                 |  |                |  |              |       |                                       | 100,000   |                                 |   | 1,600   |                                   |   | 8,400   |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Consulting and professional services                                                                                                |  |                |  |              |       |                                       | 500,000   |                                 |   | 8,000   |                                   |   | 42,000  |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Unrealized loss on marketable securities, net of tax and reclassification adjustment for losses included in statement of
operations |  |                |  |              |       |                                       |          |                                 |   |        |                                   |   |        |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Net loss                                                                                                                            |  |                |  |              |       |                                       |          |                                 |   |        |                                   |   |        |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Preferred stock dividend                                                                                                            |  |                |  |              |       |                                       |          |                                 |   |        |                                   |   |        |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  
|Balance, December 31, 2002                                                                                                          |  | 10,000          |  | $            | 10,000 |                                       | 9,359,303 |                                 | $ | 149,749 |                                   | $ | 245,849 |                                       | $
|                                                                                                                                    |  |                 |  |              |        |                                       |           |                                 |   |         |                                   |   |         |                                       |  



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



F-6

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##### Table of Contents

Mega Group, Inc. and Subsidiary



Consolidated Statements of Cash Flows



|Years Ended December 31,                                                    |  | 2001 |          |   | 2002 |  
|--------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -
|Cash flows from operating activities                                        |  |      |          |   |      |  
|Net loss                                                                    |  | $    | (554,637 | ) |      | $
|Adjustments to reconcile net loss to net cash used by operating activities  |  |      |          |   |      |  
|Realized loss on sale of marketable securities                              |  |      | 84,402   |   |      |  
|Depreciation and amortization                                               |  |      | 3,430    |   |      |  
|Provision (benefit) for income taxes                                        |  |      | (39,634  | ) |      |  
|Write-off of loans receivable                                               |  |      |         |   |      |  
|Interest paid by shareholder on the Companys behalf                        |  |      |         |   |      |  
|Common stock issued for payment of membership dues                          |  |      |         |   |      |  
|Common stock issued for payment of professional services                    |  |      |         |   |      |  
|Seizure of cash in litigation                                               |  |      | 9,345    |   |      |  
|(Increase) decrease in                                                      |  |      |          |   |      |  
|Accounts receivable                                                         |  |      |         |   |      |  
|Accrued interest receivable                                                 |  |      | 819      |   |      |  
|Increase (decrease) in                                                      |  |      |          |   |      |  
|Accounts payable and accrued expenses                                       |  |      | 101,380  |   |      |  
|Accrued wages                                                               |  |      | 140,000  |   |      |  
|Accrued interest                                                            |  |      | 66,317   |   |      |  
|                                                                            |  |      |          |   |      |  
|Net cash used by operating activities                                       |  |      | (188,578 | ) |      |  
|                                                                            |  |      |          |   |      |  
|Cash flows from investing activities                                        |  |      |          |   |      |  
|Advances made under loans receivable                                        |  |      | (466     | ) |      |  
|Repayments received under loans receivable                                  |  |      | 16,113   |   |      |  
|Proceeds from sale of marketable securities                                 |  |      | 147,332  |   |      |  
|Purchase of marketable securities                                           |  |      | (54,196  | ) |      |  
|Purchase of property and equipment                                          |  |      |         |   |      |  
|                                                                            |  |      |          |   |      |  
|Net cash (used) provided by investing activities                            |  |      | 108,783  |   |      |  
|                                                                            |  |      |          |   |      |  
|Cash flows from financing activities                                        |  |      |          |   |      |  
|Proceeds from notes payable                                                 |  |      | 90,547   |   |      |  
|Principal payments on notes payable                                         |  |      | (75,127  | ) |      |  
|Payments to affiliates                                                      |  |      | (464     | ) |      |  
|Advances from stockholder                                                   |  |      | 56,356   |   |      |  
|Preferred dividends                                                         |  |      | (800     | ) |      |  
|                                                                            |  |      |          |   |      |  
|Net cash provided by financing activities                                   |  |      | 70,512   |   |      |  
|                                                                            |  |      |          |   |      |  
|Net decrease in cash                                                        |  | $    | (9,283   | ) |      | $
|Cashbeginning of year                                                      |  |      | 26,383   |   |      |  
|                                                                            |  |      |          |   |      |  
|Cashend of year                                                            |  | $    | 17,100   |   |      | $
|                                                                            |  |      |          |   |      |  
|Supplemental cash flow information                                          |  |      |          |   |      |  
|Actual cash payments for:                                                   |  |      |          |   |      |  
|Income taxes                                                                |  | $    | 200      |   |      | $
|                                                                            |  |      |          |   |      |  
|Interest                                                                    |  | $    | 33,603   |   |      | $
|                                                                            |  |      |          |   |      |  
|Noncash Investing and Financing Activities:                                 |  |      |          |   |      |  
|Bank enforcement of guaranties against certain stockholders to collect debt |  | $    | 14,620   |   |      | $
|                                                                            |  |      |          |   |      |  
|Common stock issued for payment of loan financing costs                     |  | $    |         |   |      | $
|                                                                            |  |      |          |   |      |  
|Common stock issued for payment of accrued wages                            |  | $    |         |   |      | $
|                                                                            |  |      |          |   |      |  
|Marketable securities exchanged for payment of accrued wages                |  | $    |         |   |      | $
|                                                                            |  |      |          |   |      |  
|Payments made by shareholder on notes payable on behalf of the Company      |  | $    |         |   |      | $
|                                                                            |  |      |          |   |      |  



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



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##### Table of Contents

Mega Group, Inc. and Subsidiary



Notes to Consolidated Financial Statements



|1.      Organizationand significantaccounting policies |  | Nature of business: Mega Group, Inc. (Company) was incorporated on December 28, 1983 in the State of New York. The current business plan is to provide diversified financial
services to ethnic communities and faith-based entities in the United States and to operate as a specialized financial institution providing loans and investments for businesses in low and moderate income communities.                                                                                                                                                                                                                                  
|------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                       | 
|                                                       |  | Principles of consolidation: 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.                                                                                                                                                                                                                                                                                                                                     
|                                                       | 
|                                                       |  | Revenue recognition: Consulting fees 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: For purposes of financial statement presentation, 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.                                                                                                                                                                                                                                                                 
|                                                       | 
|                                                       |  | Marketable securities: Marketable securities consist mainly of an investment in common stock and are classified as available-for-sale and reported at fair value. The fair
value of marketable securities is based on quoted market prices. Unrealized gains and losses on marketable securities are reported at a net amount as a separate component of stockholders equity. As of December 31, 2002, the cost basis of and
unrealized loss on marketable securities was $3,464 and $2,439, respectively. As of December 31, 2001, the cost basis of and unrealized loss on marketable securities was $3,712 and $2,168, respectively.
|                                                       | 
|                                                       |  | Loan fees: Costs of obtaining the working capital notes payable from Matah Holding, LLC in 2002 (Note 4) have been capitalized and are being amortized over six months which
correspond to the loans original term. The capitalized loan fee in the accompanying Balance Sheets at December 31, 2002 are net of amortization costs of $8,333.                                                                                                                                                                                                                                                                                           
|                                                       | 
|                                                       |  | Property and equipment: Property and equipment are stated at cost and are being depreciated using the straight-line method over the estimated useful lives of the related
assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                       | 
|                                                       |  | Income taxes: The asset and liability method of accounting for income taxes is used. Deferred tax assets and liabilities are recognized for the future consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. When necessary, a valuation allowance is recorded to reduce tax assets to an amount for which realization
is more likely than not. The effect of changes in tax rates is recognized in the period in which the rate change occurs.                                                                                  
|                                                       | 
|                                                       |  | Advertising costs: The cost of advertising is expensed as incurred. Advertising expense was $466 and $580 for 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                       | 
|                                                       |  | 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 or their underlying terms.                                                                                                                                                                                                                                                                                                                                                                                                                



F-8

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---

##### Table of Contents

|1.      Organizationand significantaccounting policies
(continued) |  | Stock options: In accounting for stock options to employees, the Company follows the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, as opposed to the fair value method prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123:
|------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Year Ended December 31,2001


2002Net loss, as reported

$
(554,637
)

$
(684,439
)Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects






Pro-forma net loss

$
(554,637
)

$
(684,439
)Earnings per share:Basic and dilutiveas reported

$
(0.07
)

$
(0.08
)Basic and dilutivepro forma

$
(0.07
)

$
(0.08
)This disclosure is in accordance with Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure,
that the Company has adopted in these financial statements.




|                                          |  | 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 are stock options.
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                          | 
|                                          |  | Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.                         
|                                          | 
|2.      Due to stockholders and affiliate |  | Due to affiliate: A partnership in which a controlling stockholder is a partner has incurred various expenses on the Companys behalf. The outstanding balance due to
this partnership totaled $2,939 as of December 31, 2001, and was repaid in full in 2002.                                                                                                                                                                                                                       
|                                          | 
|                                          |  | Due to stockholders: The Company was obligated to a bank under a term note for $14,620 at December 31, 2000. Due to its failure to make all scheduled payments under the
note and financial covenant violations, the bank enforced its guaranties against certain stockholders during 2001. As a result, the stockholders paid the indebtedness on the Companys behalf and the obligation is now due to stockholders as of
December 31, 2002 and 2001.                              



F-9

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---

##### Table of Contents

|2.      Due to stockholders and affiliate (continued) |  | The Company owes its president/stockholder $102,346 and $56,356 at December 31, 2002 and 2001, respectively, for payments made by the president on the Companys behalf. Such
payments were in connection with the David G. Becking, et al. v. Mega Group, Inc., et al. litigation (See Note 8).        
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                      | 
|                                                      |  | The foregoing obligations to stockholders have no specified terms for interest or repayment.                                                                                                                                                                                                            
|                                                      | 
|                                                      |  | Notes payable: The Company is obligated under notes payable totaling $129,994 and $148,174 to certain of our stockholders and officers at December 31, 2002 and 2001,
respectively. These obligations are described in detail in Note 4.                                                                
|                                                      | 
|3.      Loans receivable                              |  | During 2002 and 2001, the Company made informal loans to and incurred various expenses on behalf of investment brokers with whom the Company shares its office space. These loans
totaled $19,904 and $45,134 as of December 31, 2002 and 2001, respectively, and are expected to be repaid during 2003.



F-10

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---

##### Table of Contents

|4. |  | Long-term debt At December 31, 2002 and 2001, long-term debt consisted of the following:
|-- |  | ----------------------------------------------------------------------------------------



2001


2002Note payable for agency purchase, requiring monthly payments based upon revenues generated by the book of business purchased,
including interest imputed at 10%. Guaranteed by former Company directors. The Company is in default on the obligation and, accordingly, it is classified as a current liability. The obligation was subject to arbitration for which an award was
rendered in December 1999.

$
157,381


$
157,381Notes payable for agency purchases, requiring monthly payments ranging from approximately $600 to $6,000, including interest, both
stated and imputed, ranging from 8% to 9%, with scheduled maturities through December 2008. The Company is in default on the obligations and, accordingly, they are classified as current liabilities. (Includes $146,397 related to a November 2000
court order, as described in Note 8).


161,618



161,618Notes payable for agency purchase, as settled, requiring 48 monthly payments of $3,705 including interest at 9%, guaranteed by the
president and his spouse, final payment due March 2004.


87,592



49,181Capital lease obligation, refinanced in May 1998, requiring monthly payments of $2,221, including imputed interest at 10%, final
payment due May 2001, collateralized by the leased equipment. The Company is in default on the obligation and, accordingly, it is classified as a current liability. In June 2000 the lessor commenced legal action against the Company for $56,000. A
judgment was entered against the Company for $48,000 in December 2000.


48,000



48,000Note payable, unsecured, convertible into 6,000 shares of our common stock, bearing interest at 10%, due October 2001. Principal
on the note was paid in full in July 2002.


3,000



Note payable to an individual for a cash loan, unsecured, bearing interest at 12%. The noteholder insists the note is in default,
and accordingly, it is classified as a current liability.


100,000



100,000Note payable to a stockholder and officer, unsecured, bearing interest at 15%, due December 2003.


15,000



15,000Note payable to a stockholder and officer, unsecured, bearing interest at 15%, due December 2003.






15,000Notes payable to a stockholder and officer, unsecured, bearing interest at 10%, due December 2003.


92,627



74,653Note payable to the president 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.


40,547



25,341Note payable, unsecured, bearing interest at 12.5%, due June 2003. The note also granted an option to the payee to purchase
120,000 shares at $.50 per share (Note 7). The holder of the note may apply any part of the outstanding balance to exercise the option.


60,000



60,000Working capital notes payable to Matah Holding, LLC, bearing interest at 12%, due April 14, 2003. (See below)






300,000Total


765,765



1,006,174Less: Current portion


(716,582
)


(1,002,494
)Net long-term debt

$
49,183


$
3,680




F-11

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##### Table of Contents

|4.     Long Term Debt (Continued) |  | 
|--------------------------------- |  | 



Future annual maturities of long-term debt as of December 31, 2002 are as follows:Year Ending December 31

Amount2003

$
1,002,4942004


3,680Total

$
1,006,174




|                     |  | On July 15, 2002, the Company entered into a Loan and Security Agreement with Matah Holdings, LLC (a New Jersey Limited Liability Company) (Matah). The agreement
provides the Company with a working capital loan facility under which it could borrow up to $500,000 from July 18, 2002 through August 28, 2002. During the year ended December 31, 2002, the Company received proceeds from two $150,000 promissory
notes dated July 18, 2002 and July 29, 2002. The notes are personally guaranteed by the Companys Chief Executive Officer and Treasurer (who are also majority stockholders) and are secured by common stock of the Company held by the Chief
Executive Officer and Treasurer. Principal and accrued interest at 12% per annum under each note are due on January 14, 2003 (no monthly payments are required). The Company issued 100,000 shares of its common stock, which was valued at $10,000, as
additional consideration for the loan (See Note 6).
|-------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     | 
|                     |  | In January 2003, Matah extended the maturity date of the loan to April 14, 2003 and loaned the Company an additional $100,000. The agreement called for 50,000 shares of common
stock to be issued to Matah as additional consideration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                     | 
|5.      Income taxes |  | The provision (benefit) for income taxes for 2002 and 2001, all of which is deferred, was calculated as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



2001


2002Federal income taxes at statutory rates

$
(201,984
)

$
(232,672
)State income taxes, net of Federal income tax effect


(37,248
)


(42,908
)Permanent differences


6,469



(21,686
)Income taxes related to other comprehensive income


(39,634
)


Increase in valuation allowance on deferred tax asset


232,763



297,266Provision (benefit) for income taxes

$
(39,634
)

$





F-12

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---

##### Table of Contents

|5.     Income taxes        (continued) |  | 
|-------------------------------------- |  | 



|As of December 31, 2002 net operating losses of approximately $4,132,000 are available to offset future taxable income and expire as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                             
|Expiring December 31,                                                                                                                        
|2003                                                                                                                                         
|2004                                                                                                                                         
|2005                                                                                                                                         
|2006                                                                                                                                         
|2007                                                                                                                                         
|2008                                                                                                                                         
|2009                                                                                                                                         
|2010                                                                                                                                         
|2011                                                                                                                                         
|2012                                                                                                                                         
|2018                                                                                                                                         
|2019                                                                                                                                         
|2020                                                                                                                                         
|2021                                                                                                                                         
|2022                                                                                                                                         
|                                                                                                                                             
|Total                                                                                                                                        
|                                                                                                                                             



|                             |  | The loss carryforwards result in a deferred tax asset available to the Company of approximately $1,660,000 and $1,363,000 at December 31, 2002 and 2001, respectively. The Company
has provided an allowance for the full amount of this deferred tax asset because management has determined it is more likely than not that it will not be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                             | 
|6.      Stockholders equity |  | Preferred stock: The Company has suspended the payment of dividends on the 8% cumulative preferred stock. As a result, although recorded in the accompanying financial
statements, the Company is in arrears in payment of the dividends for all years 1993 through 2002. As of December 31, 2002 and 2001, the aggregate amount in arrears was $8,000 and $7,200, respectively. Upon any voluntary liquidation, dissolution or
winding up of the Corporation, 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. As of December 31,
2002, 10,000 shares of 8% cumulative convertible preferred stock were issued and outstanding. The right to convert these shares into common stock, on a one for one basis, expired in 1993.



F-13

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---

##### Table of Contents

6.      Stockholders equity (continued)

Common stock: On May 7, 2002, the Company issued 692,391 shares of its common stock to its Chief Executive Officer for payment of previously accrued and unpaid wages valued
at $41,543 ($0.06 per share based on the trading price of the Companys shares on the issuance date).On June 30, 2002, the Company issued 10,000 shares of its common stock for payment of membership dues to the Center for New Black Leadership valued at $1,000 ($0.10 per share,
based on managements estimate of the fair market value of the shares at the issuance date).On July 15, 2002, the Company issued 100,000 shares of its common stock to Matah Holdings, LLC as partial consideration, valued at $10,000 ($0.10 per share, based on
managements estimate of the fair market value of the shares at the issuance date), for entering into a loan and security agreement (See Note 4).On September 30, 2002 the Company issued 400,000 shares of its common stock to a nonaffiliated investment bank for financial consulting services valued at $40,000 ($0.10 per
share, based on managements estimate of the fair market value of the shares at the issuance date).On September 30, 2002, the Company issued 100,000 shares of its common stock to a former executive for past professional services valued at $10,000 ($0.10 per share, based on
managements estimate of the fair market value of the shares at the issuance date).7.      Stock and put options

In October 2000, the Company granted three stockholders/employees options, exercisable until March 30, 2001, to purchase a total of 660,000 shares of its common stock for $3.00
per share. Because the exercise price under these stock purchase options is higher than the fair market value of a share of common stock at the date of grant, no expense has been recognized. At the same time, the Company granted the same three
stockholders put options, exercisable until June 28, 2001, which, contingent on the occurrence of certain events, required the Company to purchase a total of 660,000 of such stockholders shares of its common stock for $0.50 per share. These
purchase and put options expired unexercised.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. Because the exercise price under the stock purchase options issued to its director is higher than the fair market value of a
share of its common stock at the grant date, no compensation expense was recorded.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. Using the Black-Scholes method, the Company determined that the resulting fair value of these options was immaterial. Therefore, no allocation of the notes payable proceeds was made to
additional paid-in capital.




F-14

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---

##### Table of Contents

7.      Stock and put options (continued)

The Company determined the fair value of each option granted during the year ended December 31, 2001, using the Black-Scholes option pricing model with the following weighted average
assumptions:




Expected life of options

2.9 yearsVolatility

0.0%Risk-free interest rate

5.0%Divided yield

zeroA summary of the stock options described in the previous paragraphs follows:




Number of Option Shares$ 3.00ExercisePrice


$ 0.50ExercisePrice

TotalOutstanding at January 1, 2001

660,000




660,000Granted during 2001




280,000

280,000Expired during 2001

(660,000
)



(660,000
)Outstanding at December 31, 2001




280,000

280,000Granted during 2002






Expired during 2002






Outstanding at December 31, 2002




280,000

280,000None of the options in the table above, however, would generate compensation costs under either APB 25 or SFAS 123.




F-15

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##### Table of Contents

|8.      Legal matters |  | The Company is 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 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. The court dismissed all
remaining claims against Mr. Gregory and the Company. The entire $146,397 is included in the current portion of long-term debt on the accompanying December 31, 2002 and 2001 Balance Sheets.                                                                                                                                                                                                                                                                                                                                                                  
|--------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      | 
|                      |  | The Company is the plaintiff, counterclaim-defendant, and judgment debtor in a civil action, for money damages and injunctive relief, captioned Mega Group, Inc. v. Robert L.
Halton, which commenced in February 2000 and is pending in the Supreme Court for the County of Saratoga, New York. The defendant is one of the Companys former officers and directors, and a former officer and 49% shareholder of
Anthony-Halton Associates, Inc., an insurance agency which the Company purchased beginning in 1985. In connection with the acquisition, the Company entered into an employment agreement with the defendant. That employment terminated in January 2000.
By order dated September 29, 2000, the court held that the defendant was entitled to partial summary judgment against the Company for $398,842 in deferred compensation and $42,500 in profit sharing under the employment agreement, and the judgment
creditor restrained the Company from making any sale, assignment, transfer, or interference with any property in which we have an interest until the judgment is satisfied or vacated. The court dismissed the defendants counterclaim to the
extent that it sought a continuation or reinstatement of his life and medical insurance benefits as an employee. The judgment has been partially satisfied, and the action is continuing as to the remaining claims and counterclaims, which relate to
the defendants pre-termination compensation and the parties respective rights to own, purchase, and sell defendants book of business upon his termination. The $441,342 partial summary judgment was charged to other
selling, general and administrative expenses in 2000. Prior to December 31, 2000, the Company made payments of $14,895 under the partial summary judgment. The remaining obligation as of December 31, 2002 and 2001 of $409,600, is included in accounts
payable and accrued expenses on the accompanying Balance Sheets.
|                      | 
|                      |  | The Company is 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 our 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. As of December 31, 2002, all pleadings had been served in the litigation, and partial discovery had taken place. Subsequent to December 31, 2001, the Company successfully obtained Court
authorization to intervene in the proceeding, as an interested party. Discovery continues to take place, and no trial date has been set.                                                                                                                                                                                                                                                                                                                                                                                                                           



F-16

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---

##### Table of Contents

|8.      Legal matters (continued) |  | The Company is 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. The Company is defending its position in the action. From December 31, 2001 to the present, the defendants have served their answer, but no discovery has taken place.                                                                                                                               
|--------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                  | 
|                                  |  | The Company is 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. The awarded amount is included in the current portion of long-term debt and related costs and interest are included in accounts payable and accrued expenses on the accompanying December 31,
2002 and 2001 Balance Sheets.
|                                  | 
|                                  |  | The Company is 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. The judgment amount is included in the current portion of long-term debt on the accompanying December 31, 2002 and 2001 Balance
Sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                  | 
|                                  |  | The Company is a defendant in other pending lawsuits which, in the view of management, are not material to the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                  | 
|9.      Concentrations            |  | All 2002 revenue was earned under a consulting agreement with one customer. All of the revenue is included in and represents all of the Companys accounts receivable at
December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



F-17

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##### Table of Contents

|10.    Financial condition |  | The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As of December 31, 2002, the Company has a deficiency in
stockholders equity of approximately $2,415,000 and a working capital deficiency of approximately $2,420,000. In addition, the Company is in default on certain notes payable and other obligations and is involved in significant litigation
involving past business dealings. 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 to pursue these new lines of business. On May 2, 2002, the Company entered into a non-binding letter of intent with an underwriter to engage in a
firm-commitment registered public offering of 1,500,000 units, each unit consisting of one share of its common stock and a warrant to purchase one additional share of its common stock, representing 35% of its equity fully diluted, at an offering
price currently estimated at $6.00 per unit. The letter of intent is subject to various conditions and to the execution of formal written underwriting documents. In June 2003, the letter of intent was rescinded. The Company is now conducting a best
efforts no minimum public offering.
|-------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                           | 
|                           |  | On October 11, 2000, as a condition of the reverse acquisition of Mega by SBICOA, Megas president, Steven Gregory, agreed to indemnify the Company, SBICOA, and its
respective directors, shareholders, affiliates, and certain other associated persons (collectively, the Indemnitee Group) and to hold the Indemnitee Group harmless from and against all claims or liabilities relating to its business, including all
litigation claims then being asserted against the Company (other than the Adler claim described in Note 8). Mr. Gregorys agreement is subject to certain conditions, among them that (i) it is effective until not later than October 11, 2004,
(ii) it is contingent on the successful completion of a securities offering by the Company, and (iii) his obligation shall be satisfied only by his delivery to the Company of such number of its common shares owned by him, valued for this purpose at
$2.50 per share, as shall be equal to the amount of any claim settled or finally determined. Mr. Gregory has granted the Indemnitee Group a security interest in his shares to secure his obligation.                                                                                                                                                                                                                                                                                                                                 
|                           | 
|                           |  | The Companys ability to continue as a going concern is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis until the offering
can be completed. The Company has taken steps to reduce its cash expenditures including: deferring the payment of its officers salaries, negotiating favorable terms in order to defer payments to certain vendors, and minimizing its general and
administrative expenses. This plan assumes no subsequent unfavorable changes in the terms of the Companys notes payable in which the Company is currently in default. To the extent that any of the note holders pursue their rights under the
notes, the Companys cash flow position could be materially affected. As of August 7, 2003, the Company has $40,000 remaining under its working capital loan facility with Matah. In addition, the maturity date of the $500,000 facility was
extended until March 31, 2004. Finally, on August 6, 2003, the Company executed an unconditional commitment letter with Matah to extend an additional credit facility of $300,000. This facility is due and payable on March 31, 2004. Management
believes that these actions will enable the Company to generate sufficient cash flow to meet its obligations on a timely basis until the offering can be completed, but no assurances can be given in this regard.                                                                       



F-18

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---

##### Table of Contents

|11.    Net loss per share |  | The following table sets forth the computation of basic and diluted net loss per share for the years ended December 31, 2002 and 2001:
|------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------



2001


2002Net loss

$
(554,637
)

$
(684,439
)Preferred stock dividends


(800
)


(800
)Net lossbasic

$
(555,437
)

$
(685,239
)Weighted average sharesbasic


8,056,912



8,589,327Common shares issuable upon exercise of stock options






Weighted average shares diluted


8,056,912



8,589,327Basic and diluted net loss per share

$
(0.07
)

$
(0.08
)




|                                         |  | For the years ended December 31, 2002 and 2001, 280,000 common shares issuable upon exercise of stock options were excluded from the dilutive calculation because the effect was
anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                         | 
|12.    Recent accounting pronounce-ments |  | Statement of Financial Accounting Standards No. 145, Recession of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections: The portion of
this Statement applicable to FASB Statement No. 4, applies to fiscal years beginning after May 15, 2002. The other elements of the Statement became applicable during 2002. The portion of the Statement applicable to Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, has the effect of changing the accounting for gains and losses from debt extinguishments from extraordinary to operating. The Company does not believe that this Statement will have any impact on the financial
statements when adopted.                                                                            
|                                         | 
|                                         |  | Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities: This Statement nullifies Emerging Issues Task Force Issue
No. 94-3, which required the recognition of a liability for an exit cost at the date an entity made a commitment to an exit plan. SFAS No. 146 concludes that mere commitment to a plan, by itself, does not create an obligation to others that meets
the definition of a liability. This Statement describes the costs to exit an activity and when a liability for those costs should be recognized. This Statement is applicable to exit or disposal activities initiated after December 31, 2002. The
Company does not believe that this Statement will have any impact on the financial statements when adopted.
|                                         | 
|                                         |  | Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions: This Statement clarifies the accounting for financial institutions as a result
of the new standards issued for business combinations. This Standard is not expected to have any effect on accounting practices or financial reporting since the Companys activities do not involve those of financial
institutions.                                                                                                                                                                                                                                                                                                                                                                              
|                                         | 
|                                         |  | FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others: This Interpretation
supersedes FASB Interpretation No. 34 and requires a guarantor to recognize a liability for a non-contingent guarantee based upon the fair value of the guarantee. The Interpretation requires specific disclosures for guarantees, including product
warranties, and indirect guarantees. This Interpretation is applicable to guarantees issued or modified after December 31, 2002. The Company does not believe that this Statement will have any impact on the financial statements when
adopted.                                                                                                                     
|                                         | 
|                                         |  | FASB Interpretation No. 46, Consolidation of Variable Interest Entities: This interpretation is not expected to have any effect on the Companys accounting practices or
financial reporting since its activities do not include investments in or transactions with such entities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



F-19

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##### Table of Contents

|                   | 
|------------------ | 
|13.    Restatement | 
|                   | 
|                   | 



|Cash                                  |  | $ | 68,000   
|------------------------------------- |  | - | ---------
|Accounts receivable                   |  |   | 121,000  
|Other assets                          |  |   | 321,000  
|                                      |  |   |          
|Total Assets                          |  |   | 510,000  
|                                      |  |   |          
|                                      | 
|Accounts payable and accrued expenses |  |   | 457,000  
|Notes payable                         |  |   | 1,128,000
|                                      |  |   |          
|Total Liabilities                     |  |   | 1,585,000
|                                      |  |   |          
|                                      | 
|Net liabilities acquired              |  | $ | 1,075,000
|                                      |  |   |          



| |  | This transaction was recorded as a purchase. Goodwill recorded related to the transaction was approximately $1,155,000 and was deemed to be impaired
during 1999, and therefore, was written off.                                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 
| |  | 2)      On October 11, 2000, Mega Group, Inc. issued 9,309,396 of its common stock, or
approximately 86% of its common stock after the issuance, to the stockholders of SBICOA for 6,000 shares, or 100%, of the outstanding common stock of SBICOA. The purchase price for the transaction of approximately $3,258,000 was determined based
upon the fair market value of the shares on the transaction date. A summary of the assets and liabilities of Mega Group, Inc. at the transaction date was as follows:



|Cash                                  |  | $ | 9,000    
|------------------------------------- |  | - | ---------
|                                      |  |   |          
|                                      | 
|Accounts payable and accrued expenses |  |   | 627,000  
|Notes payable                         |  |   | 504,000  
|                                      |  |   |          
|Total Liabilities                     |  |   | 1,131,000
|                                      |  |   |          
|                                      | 
|Net liabilities                       |  | $ | 1,122,000
|                                      |  |   |          



F-20

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##### Table of Contents

|13.    Restatement (continued) |  | For accounting purposes the Company has determined that SBICOA was the acquirer based on the following
factors:  1)      SBICOA was in control of the majority of outstanding common stock following the transaction,  2)      operations of SBICOA became the continuing operations of the combined entity,
and  3)      the management of SBICOA was to manage the continuing entity.  In light of SBICOAs pre-existing 53% ownership of Mega Group, Inc., the Company recorded the October 11, 2000 share exchange as a downstream
merger of the percent affected through the purchase of the minority interest of Mega Group, Inc. by SBICOA. Since Mega Group, Inc. was a non-operating entity on that day, the Company recorded the premium over net assets purchased as a reduction to
Additional paid-in capital.
|------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                               | 
|                               |  | Historical cumulative data presented are those of SBICOA (accounting acquirer) and includes its share of 53% of Mega Group, Inc. losses from November 1999 to October 2000. Following
the October 2000 transaction, all (100%) of Mega Group, Inc. net losses are included in the historical cumulative data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                               | 
|                               |  | The following table shows changes as a result of the restatement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



December 31, 2001


December 31, 2002As previouslypresented


As restated


As previouslypresented


As restatedTotal assets

$
74,354


$
74,354


$
65,180


$
65,180Total liabilities


(1,906,613
)


(1,906,613
)


(2,480,297
)


(2,480,297
)Deficiency in Stockholders equity:Preferred stock


(10,000
)


(10,000
)


(10,000
)


(10,000
)Common stock


(128,911
)


(128,911
)


(149,749
)


(149,749
)Additional paid-in capital


(3,463,013
)


(164,144
)


(3,544,718
)


(245,849
)Accumulated Deficit


5,432,881



2,134,012



6,118,120



2,819,251Accumulated other comprehensive loss


1,302



1,302



1,464



1,464Total deficiency in stockholders equity


1,832,259



1,832,259



2,415,117



2,415,117Total liabilities and deficiency in stockholders equity

$
(74,354
)

$
(74,354
)

$
(65,180
)

$
(65,180
)




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##### Table of Contents

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.



MEGA GROUP, INC.By:

/s/    JOHN H. BROWNJohn H. Brown Chairman of the Board of Directors and Chief Executive Officer


Date: August 13, 2003



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.



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|Date: August 13, 2003 |  |  |  | 
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|Date: August 13, 2003 |  |  |  | 
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|Date: August 13, 2003 |  |  |  | 
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|Date: August 13, 2003 |  |  |  | 
|                      |  |  |  | 
|                      |  |  |  | 
|                      |  |  |  | 
|Date: August 13, 2003 |  |  |  | 



II-1