UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 1999

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

For the transition period from ______________________ to________________________

                         Commission file number 0-16730

                         MARKETING SERVICES GROUP, INC.
                         ------------------------------
                 (Name of small business issuer in its charter)


            Nevada                                    88-0085608
            ------                                    ----------
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

     333 Seventh Avenue, 20th Floor
          New York, New York                                   10001
    -------------------------------                            -----
(Address of principal executive offices)                     (Zip Code)

Issuer's telephone number, including area code:         (917) 339-7100
                                                         -------------
Securities registered pursuant to Section 12(b) of the Act:       None

Securities registered pursuant to Section 12(g) of the Act:       ____

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of class)

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


Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-K is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

As of September 24, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $202,152,613.

As of  September  24, 1999,  there were  25,288,239  shares of the  Registrant's
common stock outstanding.

Documents incorporated by reference:  Portions of the Company's definitive proxy
statement  expected to be filed  pursuant to  Regulation  14A of the  Securities
Exchange Act of 1934 have been  incorporated  by reference into Part III of this
report.
<PAGE>
                                       PART I

Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Some of the statements  contained in this Annual Report on Form 10-K discuss our
plans and strategies for our business or state other forward-looking statements,
as this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking  statements involve known and unknown risks,  uncertainties
and  other  factors  which  may  cause  the  actual   results,   performance  or
achievements of the Company, or industry results to be materially different from
any future  results,  performance or  achievements  expressed or implied by such
forward-looking  statements.  Such factors include, among others, the following:
general economic and business  conditions;  industry capacity;  direct marketing
and other industry trends;  demographic  changes;  competition;  the loss of any
significant  customers;  changes in  business  strategy  or  development  plans;
availability and successful integration of acquisition candidates; availability,
terms and  deployment  of capital;  advances in  technology;  year 2000  issues;
retention  of clients  not under  long-term  contract;  quality  of  management;
business  abilities  and  judgment  of  personnel;   availability  of  qualified
personnel;  changes in, or the failure to comply with,  government  regulations;
and technology, telecommunication and postal costs.

Item 1 - Business
-----------------

General
-------

Marketing   Services   Group,   Inc.  (the  "Company"  or  "MSGI")  through  its
subsidiaries  is  a  vertically  integrated  provider  of  direct  and  Internet
marketing services to large and medium sized companies.  Through internal growth
and a series of  acquisitions,  MSGI's  revenues  have grown from $16 million in
fiscal  1996 to over $110  million in fiscal 1999 on a pro forma  basis.  MSGI's
operating  subsidiaries  consist of two business segments,  the Direct Group and
the Internet Group.

The MSGI Direct Group assists  clients to acquire new  customers,  promote their
products and develop strategies for customer retention. Customer acquisition and
maintenance services include strategic planning,  direct and database marketing,
telemarketing and telefundraising and media planning and buying. The MSGI Direct
Group expects to continue to leverage its client base and services with those of
its recent acquisitions, offering a one-stop integrated shopping approach to its
thousands of clients worldwide.

The MSGI Internet Group provides Internet  marketing,  e-commerce  applications,
Web development and hosting,  online advertising sales and consulting  services.
Currently,  the  Internet  Group's  primary  focus is on an  automated  Internet
marketing application known as Permission Plus(TM).  Permission Plus(TM) enables
companies to conduct customer surveys online and utilize an interactive database
to market goods via e-mail.  Permission Plus(TM) is an innovative suite of tools
which  captures  detailed  user  information,   including  product  preferences,
interests and demographics,  provides powerful marketing  research  information,
and enables  companies to proactively  communicate with their customers  through
one-on-one e-mail  communications.  This information allows the Internet Group's
clients to conduct  and measure  the  results of  Internet  marketing  campaigns
quickly and  efficiently in order to reduce cycle time and improve  performance.
Additionally,  the MSGI  Internet  Group will  continue to  acquire,  invest in,
partner with and incubate Internet companies. MSGI's acquisition of CMG Direct's
Permission  Plus(TM) and its investments in GreaterGood.com and Screenzone Media
Network LLC illustrate MSGI's Internet investment strategy.

MSGI's major clients include GE Capital,  MBNA Bank,  N.A., Walt Disney Company,
American Express  Publishing Corp.,  Gymboree,  Madison Square Garden,  Carnegie
Hall, New York  Philharmonic,  Levi Strauss & Co., Federal Express  Corporation,
McGraw-Hill  Companies,  Sierra  Club,  and  the  World  Wildlife  Fund.  MSGI's
institutional  investors  include GE Capital and CMGI,  Inc. each of whom have a
history  of  successfully   investing  in  rapidly  growing  Internet  and  high
technology companies.

The Company's Strategy
----------------------
MSGI's  strategy to enhance its position as a  value-added  premium  provider of
direct and internet and marketing services is to:

o    Increase revenues by expanding the range of Internet and marketing services
     offered and selling additional services to existing clients;

o    Deepen market  penetration in new industries and market segments as well as
     those currently served by the Company;

o    Develop  existing  and  creating  new  proprietary  databases,  proprietary
     database software and database management applications; and

o    Pursue strategic  acquisitions,  joint ventures and marketing  alliances to
     expand the services offered and industries served.

The Company has no agreements  to acquire any companies  other than as described
in this Annual Report on Form 10-K (this "Form 10-K"). There can be no assurance
that the Company will be able to acquire such companies.

Background
----------
The Company was originally  incorporated in Nevada in 1919. The current business
of MSGI,  previously  known as All-Comm Media  Corporation  and prior to that as
Sports-Tech,  Inc.,  arose out of a 1995 merger and  concurrent  acquisition  of
Stephen  Dunn  &  Associates,   Inc.  ("SD&A"),  a  leading   telemarketing  and
telefundraising  company specializing in direct marketing services for the arts,
educational and other institutional tax-exempt organizations. The refocus of the
Company in the Marketing services and Internet space began on July 1, 1997.

SD&A was formed in 1983.  Clients of SD&A include many of the larger  performing
arts and cultural institutions,  such as major symphonies,  theatres and musical
arts companies,  along with public  broadcasting  stations,  advocacy groups and
educational  institutions.  SD&A's  clients  include  over  150 of the  nation's
leading institutions and universities. SD&A has its headquarters in Los Angeles,
California,  where it manages  telemarketing/telefundraising  services which are
conducted  both on-site at  client-provided  facilities  and also at its calling
center in Berkeley, California.

Effective  October 1, 1996, the Company acquired Metro Direct,  Inc.  ("Metro").
Metro was formed in 1987.  Clients  include many of the same performing arts and
cultural  institutions,  public  broadcasting,  advocacy  groups and educational
institutions  as SD&A, as well as a variety of commercial  organizations  in the
publishing,  financial services and retail industries. Metro is headquartered in
New York City, with satellite offices in Illinois, California, and Georgia.

Metro develops and markets a variety of database and direct  marketing  products
and services to a wide range of commercial clients and nonprofit  organizations.
Metro vertically  integrates the three elements needed for most direct marketing
campaigns;  strategy, information and technology. Most of their account managers
were  recruited  from the client side and that  experience  has resulted in very
high client retention rates. Services include: consulting and campaign strategy,
market penetration mapping, database marketing,  demographic/psychographic  data
overlay,  Carrier  Route  coding,  list  brokerage,  sub-minimum  list  rentals,
response  analysis,  merge/purge,   predictive  modeling,  response  enhancement
modeling,  telemarketing lead generation, telephone appendage, list maintenance,
data entry, label generation and laser letters.

Pegasus  Internet,  Inc.  ("Pegasus") was formed in 1994 by former executives of
BMG and was acquired by the Company  effective July 1, 1997.  Pegasus provides a
full suite of Internet  services,  including  content  development and planning,
marketing  strategy,  on-line  ticketing  system  development,   technical  site
hosting,  graphic design,  multimedia  production and electronic  commerce.  The
Company had a strategic alliance with Pegasus dating back to 1995.

Effective  December 1, 1997,  MSGI acquired  Media  Marketplace,  Inc. and Media
Marketplace Media Division,  Inc.  (collectively "MMI"). MMI was founded in 1973
and specializes in providing list management,  list brokerage and media planning
services to national  publishing and fundraising clients in the direct marketing
industry,  including magazines,  continuity clubs, membership groups and catalog
buyers.

In May 1998, the Company formed Metro  Fulfillment,  Inc. ("MFI").  MFI provides
clients with services such as online commerce,  real-time  database  management,
inbound/  outbound  customer  service,  custom  packaging,  assembling,  product
warehousing, shipping, payment processing and retail distribution.


Developments During Fiscal 1999
-------------------------------
Effective  January  1, 1999,  MSGI  acquired  all of the issued and  outstanding
capital stock of Stevens-Knox and Associates, Inc., Stevens-Knox List Brokerage,
Inc. and Stevens-Knox  International,  Inc. (collectively "SK&A"). SK&A provides
list  management,  brokerage and database  management  services.  SK&A is widely
considered to be the first list management firm in the United States.

Effective  March 1, 1999, the Company sold 85% of the common stock of MFI to the
then chief  executive  officer of MFI. The investment in MFI is being  accounted
for under the cost method of accounting.  Accordingly,  effective  March 1, 1999
the results of  operations  of MFI are no longer  consolidated  in the Company's
statement of operations.

On May 13, 1999, MSGI acquired all of the  outstanding  capital stock CMG Direct
Corporation,   from  CMGI,   Inc.,   including   its  business   unit  known  as
PermissionPlus(TM).   CMG  Direct  provides  database  services  to  the  direct
marketing  and  internet  industries.  PermissionPlus(TM),  a  Web  application,
enables  companies  to  automate  Web site  customer  acquisition  and  increase
customer  lifetime  value.  It combines the power of market  research,  database
management, e-mail service bureau, campaign management tool, Web site navigation
system and a real-time response tracking and analysis system into one integrated
internet application.

Subsequent Events
-----------------
In July 1999,  MSGI entered into an agreement to acquire all of the  outstanding
common stock of Atlanta-based Grizzard  Communications Group. The purchase price
is $50  million  cash  and  $50  million  dollars  in  MSGI  common  stock.  The
acquisition is targeted to close by the end of calendar year 1999 and is subject
to certain  conditions,  including  approval of the  stockholders  of  Grizzard.
Grizzard  Communications Group was founded in 1919 and is ranked the 6th largest
Direct Response Agencies in the country (with internal production  capabilities)
in reported capitalized billings by the Direct Marketing Association. Grizzard's
services   include   strategic   planning,    creative,   database   management,
print-production,   mailing  and  Internet  marketing.  Grizzard's  client  base
includes  retail,  consumer and  business-to-business  companies as well as many
premier not-for-profit clients.

In July 1999,  the  Company  invested  $1,555,000  to acquire a 10%  interest in
Screenzone Media Network,  LLC  ("Screenzone").  Screenzone is a new interactive
broadcast  gateway that was  developed to advertise and promote  movies,  music,
live events and other entertainment at shopping malls and over the Internet. The
investment will be accounted for under the cost method of accounting.


In September 1999, the Company  completed an investment of $5,000,000 to acquire
convertible  preferred  stock of  GreaterGood.com.  The Company  owns 18% of the
outstanding shares of GreaterGood.com on a fully diluted basis.  GreaterGood.com
builds,  co-markets  and manages  online  shopping  villages for  not-for-profit
organization  web sites.  The  investment  will be accounted  for under the cost
method of accounting.

In September 1999, the Company completed a private placement of 3,130,586 shares
of  common  stock  for  proceeds  of   approximately   $30.8  million,   net  of
approximately $2,000,000 of placement fees and expenses. The shares have certain
registration  rights.  The  proceeds  of the private  placement  will be used in
connection with the investments described in the preceding paragraphs,  to repay
certain short-term debt and for working capital purposes.

The Company's  shares are traded on the NASDAQ  National Market under the symbol
"MSGI".  The Company's  principal  executive  offices are located at 333 Seventh
Avenue, 20th Floor, New York, NY 10001. Its telephone number is (917) 339-7100.


Capital Stock and Financing Transactions
----------------------------------------

Conversion of Redeemable Convertible Preferred Stock:

On April 21, 1999, the Company  exercised its right to convert all 50,000 shares
of General Electric Capital  Corporation's Series D Convertible  Preferred Stock
into  approximately  4.8 million shares of common stock. In conjunction with the
conversion,  all preferred  shareholder rights,  including quarterly  dividends,
financial covenants,  acquisition approvals and board seats, were cancelled.  As
of  June  30,  1999,  GE  Capital  owned  approximately  22% of the  issued  and
outstanding shares of the Company's Common Stock.

Change in warrant issued in connection  with  Redeemable  Convertible  Preferred
Stock:

In  connection  with  the  acquisition  of  CMG  Direct,  the  Company  borrowed
$10,000,000  from GE Capital under a short term promissory note due November 17,
1999 which bears interest at 12% per annum.  (See Footnote 9 of the Notes to the
Consolidated  Financial  statements  for details on the terms of the  promissory
note).  Concurrent with the execution of the promissory note, the warrant issued
on  December  24,  1997 in  connection  with GE  Capital's  purchase of Series D
Convertible  Preferred Stock was amended. The first amendment provided that upon
completion of a secondary  offering on or before December 31, 1999 permitting GE
Capital to sell 1,766,245  shares of the Company's common stock at a price of at
least $8.75 per share,  as adjusted,  the warrant to purchase  200,000 shares of
common  stock at $.01 per share  would be  replaced  with a warrant to  purchase
300,000  shares  of common  stock at  one-third  of the per share  price of such
secondary  offering.  The  amendment  did not  change the  original  term of the
warrant  which  included a clause  that if a public  secondary  offering  is not
completed by December 31, 1999,  GE Capital  would be entitled to purchase up to
10,670,000  shares of the  Company's  common stock if the Company's did not meet
certain financial goals as set forth in the agreement.

Subsequent  to June 30, 1999,  the Company and GE Capital  entered into a second
amendment  to the warrant.  The new  amendment  permitted a private  offering in
addition to a public  offering of common stock to satisfy its  obligations  with
respect to the secondary  offering for such portion of GE Capital's  holdings of
the  Company's  common  stock.  In  addition,  the  deadline  for the Company to
complete  a public or  private  secondary  offering  was  changed  to the period
commencing on December 20, 1999 and ending on April 30, 2000.  The effect of the
second  amendment  allows  more time for the  Company to  complete  a  secondary
offering thereby reducing the number of shares GE Capital may acquire.

1999 Stock Option Plan:

In March 1999,  the  stockholders  voted to establish the 1999 Stock Option Plan
which  authorized  up to 1,000,000  shares of common stock under  qualified  and
nonqualified stock options.

The Direct Marketing Industry
-----------------------------
Overview.  Direct  marketing  is  used  for  a  variety  of  purposes  including
lead-generation  and prospecting for new customers,  enhancing existing customer
relationships,  exploring  the  potential  for new  products  and  services  and
establishing  new products.  Unlike  traditional mass marketing aimed at a broad
audience and focused on creating  image and general brand or product  awareness,
successful  direct  marketing   requires  the  identification  and  analysis  of
customers  and  purchasing  patterns.  Such patterns  enable  businesses to more
easily  identify  and  create a  customized  message  aimed at a highly  defined
audience.  Previous direct marketing  activity  consisted  principally of direct
mail,  but  now  has  expanded  into  the  use  of  multiple  mediums  including
telemarketing,  print,  television,  radio, video, CD-ROM, on-line services, the
Internet and a variety of other interactive marketing formats.

The  success of a direct  marketing  program is the  result of the  analysis  of
customer   information   and  related   marketing  data.   Database   management
capabilities   allow  for  the  creation  of  customer   lists  with   specific,
identifiable attributes.  Direct marketers use these lists to customize messages
and marketing  programs to generate new customers whose purchasing  patterns can
be  statistically  analyzed to isolate key  determinants.  In turn, this enables
direct marketers to continually evaluate and adjust their marketing programs, to
measure  customer  response  rates in  order  to  assess  returns  on  marketing
expenditures, and to increase the effectiveness of such marketing programs.

Database  management  covers a range of services,  including  general  marketing
consultation,  execution of marketing  programs and the creation and development
of customer  databases  and sales  tracking  and data  analysis  software.  Data
analysis software consolidates and analyzes customer profile information to find
common  characteristics  among buyers of certain  products.  The results of such
tracking  and  analysis  are used to  define  and  match  customer  and  product
attributes from millions of available database files for future direct marketing
applications.  The  process  is one of  continual  refinement,  as the number of
points of contact with customers  increases,  together with the proliferation of
mediums available to reach customers.

Telemarketing/telefundraising  projects generally require significant amounts of
customer  information  supplied  by the client or third  party  sources.  Custom
telemarketing/telefundraising  programs  seek  to  maximize  a  client's  direct
marketing  results by  utilizing  appropriate  databases to  communicate  with a
specific audience.  This  customization is often achieved through  sophisticated
and  comprehensive  data analysis which identifies  psychographic,  cultural and
behavioral patterns in specific geographic markets.

Industry  Growth.  The use of direct  marketing has increased  over the last few
years due in part to the relative cost efficiency of direct  marketing  compared
to mass  marketing,  as well as the rapid  development of more powerful and more
cost-effective  information technology and data capture capabilities.  According
to industry  sources,  over the next decade,  demographic  shifts and changes in
lifestyle,  combined with new marketing  mediums,  are expected to create higher
demand  by  businesses  for  marketing   information  and  services  to  provide
businesses  with direct access to their  customers and a more efficient means of
targeting  specific audiences and developing  long-term customer  relationships.
According to a study commissioned by the Direct Marketing  Association  ("DMA"),
expenditures  for  direct  marketing  services  in 1998  reached  $163  billion.
Expenditures for  interactive/internet  marketing  reached $603 million in 1998.
This number is expected to grow to $5.3 billion by 2003.

Corporate  marketing  departments often lack the technical  expertise to create,
manage and control highly technical aspects of the direct marketing process.  As
a result,  the  Company  believes  that there is a growing  trend  among  direct
marketers to outsource direct marketing programs.

Industry  Consolidation.  The direct marketing industry is extremely fragmented.
According to industry sources, there are almost 11,000 direct marketing services
and database services firms in the United States. The Company believes that most
of  such  businesses  are  small,  specialized  companies  which  offer  limited
services.  However,  industry  consolidation has increased in the last few years
resulting in a greater number of large companies  providing  services similar to
those provided by the Company. See "Competition." The Company believes that much
of this  consolidation  is due to: (i) economies of scale in hardware,  software
and  other  marketing  resources;  (ii)  cross-selling  of  services;  and (iii)
coordinating  various components of direct marketing and media programs within a
single,  reliable  environment.  The Company believes these trends are likely to
continue due in part to client demand for more cost-effective service to perform
increasingly complex functions.

Services
--------
The Company's operating  businesses provide  comprehensive  database management,
Internet marketing, custom telemarketing/telefundraising,  fulfillment and other
direct  marketing  services.  The principal  advantages  of customized  services
include: (i) the ability to expand and adapt a database to the client's changing
business  needs;  (ii) the ability to have services  operate on a flexible basis
consistent with the client's goals;  and (iii) the integration with other direct
marketing,  Internet,  database management and list processing functions,  which
are necessary to keep a given  database  current.  Some services  offered by the
Company are described below.

Marketing Services
------------------
Database Management  Services.  The Company's database management services begin
with database  creation and  development,  which include the planning stages and
analytical  processes  to review all of the client's  customer  and  operational
files.   Utilizing  both  proprietary  and  commercial  software,   the  Company
consolidates all of the separate  information and relationships  across multiple
files and converts the client's raw information into a consolidated format. Once
the client's customer data is consolidated and the database created, the data is
enhanced using a wide selection of demographic, geographic, census and lifestyle
information  for over 95  million  households  and 153  million  individuals  to
identify  patterns and  probabilities  of behavior.  The Company  licenses  this
information from a variety of leading data compilers.

The combination of each client's  proprietary customer information with external
data files provides a customized  profile of a client's customer base,  enabling
the client,  through the use of the  Company's  behavior  modeling  and analysis
services,  to design a direct marketing  program for its customers.  Through the
development  of a scoring  model,  the  client  can  segment  its  database  and
determine  its best  customers  and  prospects in each  marketplace.  The entire
process results in a customized direct marketing program that can be targeted to
distinct  audiences  with a high  propensity  to buy the  client's  products  or
services.  Because of the  dynamic  nature and  complexity  of these  databases,
clients  frequently  request  that the Company  update such  databases  with the
results of recent marketing  programs and  periodically  perform list processing
services as part of the client's ongoing direct marketing efforts.

Data Processing. The Company's primary data processing service is to manage from
the Company's data centers, all or a portion of a client's marketing information
processing  needs.  After  migrating a client's raw data to one of the Company's
data centers,  the Company's technology allows the client to continue to request
and access all available information from remote sites. The database can also be
verified  for  accuracy  and overlaid  with  external  data  elements to further
identify specific consumer behavior.

Other  data  processing   services  provided  include  migration  (takeover  and
turnover)  support for  database  maintenance  or  creation,  merge/purge,  data
overlay  and postal  qualification.  The Company  also offers  on-line and batch
processing capacity, technical support, and data back-up and recovery.

List  Services.  List  processing  includes the  preparation  and  generation of
comprehensive  name  and  address  lists  which  are  used in  direct  marketing
promotions.  The  Company's  state-of-the-art  data  centers  and  large  volume
processing  capabilities  allow the Company to meet the list processing needs of
its clients through its advanced list  processing  software  applications,  list
brokerage and list management operations. The Company customizes list processing
solutions by  utilizing a variety of licensed  software  products and  services,
such as Address Conversion and Reformat,  Address  Standardization  and Enhanced
Merge/Purge,  in  addition to services  provided  by third  parties,  including;
National Change of Address (NCOA),  Delivery Sequence File and Locatable Address
Conversion   System.   Other  licensed   products  include  databases  used  for
suppressions such as the DMA Mail Preference File and the American  Correctional
Association Prison Suppress File.

The Company also offers an array of list acquisition  techniques.  Approximately
12,000  lists are  available  for  rental in the list  industry.  The  Company's
account managers, many of whom are recruited from existing Company accounts, use
their  industry  experience  as  well  as  sophisticated  computer  profiles  to
recommend  particular  lists for  customer  acquisition  campaigns.  The Company
acquires  hundreds of  millions of records  annually  for  customer  acquisition
campaigns. The Company also manages several hundred lists for rental purposes on
behalf of list owners.

Database Product  Development.  To further leverage its database  management and
list processing  services,  the Company has participated in the development of a
new  product  using  client/server  technology.  The  product  is  a  scaleable,
three-tiered   client/server   data  warehouse  system  that  provides  desktop,
real-time decision support and marketing analysis to a non-technical  user. This
application  is an intuitive,  graphical  user  interface  tool that offers both
flexibility and the ability to access and analyze large customer files exceeding
100 million records. The incorporation of third-party  software,  relational and
multidimensional  database  technology in an open system environment is intended
to allow the Company's  clients to take advantage of the latest  developments in
high-speed computing, utilizing both single and multi-processor hardware.

Market  Analysis.   The  Company's  market  research  services  include  problem
conceptualization,  program design,  data gathering and results analysis.  These
services are conducted through telephone, mail and focus groups. Through the use
of data  capture  technology,  the  Company  is also able to obtain  data from a
statistically  predictable  sample of market survey  contacts.  The Company then
tabulates and analyzes fielded data using multi-variate  statistical techniques,
and produces detailed reports to answer clients' marketing questions and suggest
further marketing opportunities.

Direct Mail Support Services. The Company's direct mail support services include
preparing     and     coordinating      database     services     and     custom
telemarketing/telefundraising   services  for  use  in  addressing  and  mailing
materials  to current and  potential  customers.  The Company  obtains  name and
address  data from clients and other  external  sources,  processes  the data to
eliminate   duplicates,   corrects  errors,   sorts  for  postal  discounts  and
electronically  prepares the data for other vendors who will address pre-printed
materials.

Media Planning and Buying. The Company's Media Division is a multifaceted direct
response media broker  specializing in direct  advertising such as:  traditional
print advertising;  cooperative direct mail programs;  Sunday supplements;  card
decks and more.

Internet  Services.  The Company provides a full suite of Internet services such
as content planning to market  strategy,  from technical site hosting to graphic
design and multimedia  production.  The Company has developed Web sites from the
perspective  of both  client and  presence  provider,  resulting  in an intimate
knowledge  of the  issues  encountered  by both  entities  in a Web  development
project.   From  the  initial  planning   sessions  and   identification  of  an
organization's  promotional objectives to the live cutover of the finished site,
the Company takes a proactive  role in ensuring the most  efficient  development
process  for the  client  and the most  rewarding  experience  for their  online
clientele.  Once the site is up and  running,  the  Company  provides  technical
maintenance and ongoing consulting to keep Web resource current, technologically
up-to-date  and  graphically  ahead of the curve.  The Company  generates  usage
reports, complete with optional analysis and feedback features.

Automated   Internet   Marketing.   The  Company's  primary  Internet  marketing
application is Permission  Plus(TM).  Permission  Plus(TM) enables  companies to
conduct  customer  surveys online and utilize an interactive  database to market
goods via  e-mail.  Permission  Plus(TM) is an  innovative  suite of tools which
captures detailed user information, including product preferences, interests and
demographics,  provides powerful  marketing  research  information,  and enables
companies to proactively  communicate  with their customers  through  one-on-one
e-mail  communications.  This information allows the Internet Group's clients to
conduct and measure the  results of  Internet  marketing  campaigns  quickly and
efficiently in order to reduce cycle time and improve performance.


Custom Telemarketing/Telefundraising Services
---------------------------------------------
Custom  telemarketing/telefundraising  services  are  designed  according to the
client's  existing  database and any other  databases  which may be purchased or
rented  on  behalf  of the  client  to  create a  direct  marketing  program  or
fundraising campaign to achieve specific objectives. After designing the program
according to the marketing information derived from the database analysis, it is
conceptualized in terms of the message content of the offer or solicitation, and
an assessment is made of other supporting elements,  such as the use of a direct
mail letter campaign.

Typically,  a campaign is designed in  collaboration  with a client,  tested for
accuracy  and  responsiveness  and  adjusted  accordingly,  after which the full
campaign is  commenced.  The full campaign  runs for a mutually  agreed  period,
which can be shortened or extended depending on the results achieved.

An  important  feature of the custom  telemarketing/telefundraising  campaign is
that it can be implemented  either on-site at a  client-provided  facility or at
the Company's  calling  center in Berkeley,  California.  On-site  campaigns are
generally  based  on  what  is  called  a  "relationship"  or  "affinity"  sale.
Telemarketing  campaigns  often require  multiple calls whereby a caller must be
knowledgeable  about the  organization  and the subject  matter and will seek to
engage  a  prospect   selected  from  the  client's   database  in  an  extended
conversation  which  serves to: (i) gather  information;  (ii) convey the offer,
describe its merits and cost, and solicit gifts or donations; and (iii) conclude
with a purchase, donation or pledge.  Telefundraising from the Company's calling
center usually involves  campaigns that do not use the multiple call format, but
instead use computer  driven  predictive  dialing  systems which are designed to
maximize  the usage rate for all  telephones  as the system  works  through  the
calling database.

The Company maintains a state-of-the-art outbound  telemarketing/telefundraising
calling center in Berkeley,  California.  The Berkeley  calling center increases
the  efficiency  of its  outbound  calling  by using a  computerized  predictive
dialing  system  supported by a UNIX-based  call  processing  server  system and
networked  computers.  The predictive dialing system,  using relational database
software, supports 72 outbound telemarketers and maximizes calling efficiency by
reducing the time between calls for each calling station and reducing the number
of calls connected to wrong numbers,  answering machines and electronic devices.
The system provides on-line real time reporting of caller  efficiency and client
program  efficiency  as well as flexible  and  sophisticated  reports  analyzing
caller  sales  results and client  program  results  against  Company and client
selected parameters. The Berkeley calling center has the capacity to serve up to
15 separate  clients or projects  simultaneously  and can produce  27,000  valid
contacts per week  (1,400,000 per year) or 3,400 calling hours per week (176,800
per year) on a single shift basis. A valid contact occurs when the caller speaks
with the intended person and receives a "yes," "no" or "will consider" response.
The existing  platform can be expanded to  accommodate  100  predictive  dialing
stations with a single shift capacity of approximately  1,900,000 valid contacts
per year.


Marketing and Sales
-------------------
The Company's  marketing  strategy is to offer customized  solutions to clients'
database management,  Internet,  telemarketing/telefundraising,  fulfillment and
other direct  marketing  requirements.  Historically,  the  Company's  operating
businesses  have acquired new clients and marketed  their  services by attending
trade shows,  advertising in industry  publications,  responding to requests for
proposals,  pursuing client referrals and cross-selling to existing clients. The
Company  targets  those  companies  that have a high  probability  of generating
recurring  revenues  because of their ongoing direct marketing needs, as well as
companies  which have large customer bases that can benefit from targeted direct
marketing     database    and     fulfillment     services    and     customized
telemarketing/telefundraising services.

The Company markets its marketing  services  through a sales force consisting of
both  salaried  and  commissioned  sales  persons.  In some  instances,  account
representatives,  will  coordinate  a client's  database  management,  Internet,
custom telemarketing/telefundraising,  fulfillment and/or other direct marketing
needs to identify cross-selling opportunities.

Account  representatives  are  responsible  for keeping  existing and  potential
clients informed of the results of recent marketing  campaigns,  industry trends
and new developments in the Company's technical database  resources.  Often, the
Company  develops  an initial  pilot  program  for new or  potential  clients to
demonstrate the  effectiveness  of its services.  Access to data captured during
such pilot  programs  allows the Company and its clients to identify  previously
unrecognized  target market  opportunities and to modify or enhance the client's
marketing effort on the basis of such information.  Additionally, the Company is
able to provide  its clients  with  current  updates on the  progress of ongoing
direct marketing programs.

Pricing for direct  marketing  services is dependent  upon the complexity of the
services required.  In general,  the Company  establishes pricing for clients by
detailing a broad range of service options and quotation  proposals for specific
components of a direct marketing program.  These quotes are based in part on the
volume of records to be  processed,  complexity  of  assembly,  and the level of
customization required.  Additionally, if the level of up-front customization is
high,  the  Company  charges  a  one-time  development  fee.  Pricing  for  data
processing services is dependent upon the anticipated range of computer resource
consumption.  Typically,  clients are charged a flat or stepped-up rate for data
processing services provided under multi-year contracts. If the processing time,
data  storage,  retrieval  requirements  and output  volume  exceed the budgeted
amounts, the client may be subject to an additional charge.  Minimum charges and
early  termination   charges  are  typically  included  in  contracts  or  other
arrangements between the Company and the client.

On-site telemarketing and telefundraising fees are generally based on a mutually
agreed  percentage of amounts received by the Company's clients from a campaign.
Off-site fees are typically based on a mutually agreed amount per contact with a
potential donor.


Client Base
-----------
The Company  believes  that its large and  diversified  client base is a primary
asset which contributes to stability and the opportunity for growth in revenues.
The Company has over 2,000 clients who utilize its various  marketing  services.
These  clients are  comprised of leading  commercial  businesses  and  nonprofit
institutions in the publishing,  entertainment  marketing,  public broadcasting,
education,  retail, financial services (including credit card, home mortgage and
home equity services),  education, travel and leisure and healthcare industries.
No single client accounted for more than 5% of total revenue in fiscal 1999.


Competition
-----------
The direct  marketing  services  industry is highly  competitive and fragmented,
with no single  dominant  competitor.  The Company  competes with companies that
have more extensive  financial,  marketing and other resources and substantially
greater assets than those of the Company,  thereby  enabling such competitors to
have an advantage in obtaining client contracts where sizable asset purchases or
investments  are required.  The Company also  competes  with  in-house  database
management,  telemarketing/telefundraising and direct mail operations of certain
of its clients or potential clients.

Competition  is based on quality  and  reliability  of  products  and  services,
technological  expertise,  historical experience,  ability to develop customized
solutions  for  clients,  technological  capabilities  and  price.  The  Company
believes that it competes  favorably,  especially in the arts and entertainment,
publishing,  financial services and fundraising sectors. The Company's principal
competitors in the database  management  services field are: Acxiom Corporation,
Abacus Direct, Experian,  Fair-Isaac, Inc. and Harte-Hanks Communications,  Inc.
The Company's principal competitors in the custom  telemarketing/telefundraising
field are Arts Marketing,  Inc., Ruffalo, Cody & Associates and The Share Group.
The Company's principal  competitors in the Internet marketing services industry
are Kana,  Egain,  and  Message  Media.  There are  relatively  low  barriers to
entering the Internet marketing services industry.  The current market is highly
competitive and the Company  anticipates  that new competitors  will continue to
enter the market.


Facilities
----------
The Company leases all of its real property: facilities for its headquarters are
in New York City;  its sales and  service  offices are located in New York City;
Newtown,  Pennsylvania;   Valencia  and  Los  Angeles,  California;   Wilmington
Massachusetts;  and  London;  its data  centers are located in New York City and
Boston;  and its  telemarketing  calling  center  in  Berkeley,  California.  To
accommodate its rapid growth, the Company is currently expanding its data center
and administrative offices in New York. The Company's  administrative office for
its telemarketing/telefundraising operations in Los Angeles is located in office
space leased from the former owner of SD&A,  which lease the Company believes is
on terms no less favorable  than those that would be available from  independent
third  parties.  The Company  believes  that all of its  facilities  are in good
condition  and are  adequate for its current  needs  through  fiscal  2000.  The
Company  believes  such space is readily  available at  commercially  reasonable
rates and terms.  The Company also  believes that its  technological  resources,
including  the  mainframe  computer and other data  processing  and data storage
computers  and  electronic  machinery  at its data  centers in New York City and
Boston, as well as its related operating,  processing and database software, are
all  adequate  for its needs  through  fiscal  2000.  Nevertheless,  the Company
intends to expand  its  technological  resources,  including  computer  systems,
software,  telemarketing equipment and technical support. Any such expansion may
require the leasing of additional operating office space.


Intellectual Property Rights
----------------------------
The Company relies upon its trade secret protection  program and  non-disclosure
safeguards  to  protect  its   proprietary   computer   technologies,   software
applications  and systems  know-how.  In the ordinary  course of  business,  the
Company  enters into license  agreements  and contracts  which specify terms and
conditions  prohibiting  unauthorized  reproduction  or usage  of the  Company's
proprietary  technologies and software  applications.  In addition,  the Company
generally enters into  confidentiality  agreements with its employees,  clients,
potential clients and suppliers with access to sensitive  information and limits
the  access  to  and  distribution  of  its  software  documentation  and  other
proprietary  information.  No  assurance  can be given that  steps  taken by the
Company will be adequate to deter misuse or  misappropriation of its proprietary
rights or trade  secret  know-how.  The  Company  believes  that  there is rapid
technological  change  in its  business  and,  as a  result,  legal  protections
generally   afforded  through  patent  protection  for  its  products  are  less
significant  than the knowledge,  experience and know-how of its employees,  the
frequency of product  enhancements  and the  timeliness  and quality of customer
support in the usage of such products.


Government Regulation and Privacy Issues
----------------------------------------
The telemarketing industry has become subject to an increasing amount of federal
and state regulation.  Violation of these rules may result in injunctive relief,
monetary  penalties  or  disgorgement  of  profits  and can give rise to private
actions for damages.  While the Federal  Trade  Commission's  new rules have not
required or caused the  Company to alter its  operating  procedures,  additional
federal or state  consumer-oriented  legislation  could limit the  telemarketing
activities of the Company or its clients or significantly increase the Company's
costs of  regulatory  compliance.  Several of the  industries  which the Company
intends to serve,  including the financial services,  and healthcare industries,
are subject to varying  degrees of government  regulation.  Although  compliance
with these regulations is generally the responsibility of the Company's clients,
the Company could be subject to a variety of enforcement or private  actions for
its failure or the failure of its clients to comply with such regulations.

In  addition,  the  growth of  information  and  communications  technology  has
produced a proliferation of information of various types and has raised many new
issues  concerning the privacy of such  information.  Congress and various state
legislatures have considered legislation which would restrict access to, and the
use of, credit and other personal information for direct marketing purposes. The
direct marketing services industry,  including the Company,  could be negatively
impacted in the event any of these or similar types of legislation are enacted.

With the exception of regulations applicable to business generally, with respect
to the Company's Internet products and services, we are not currently subject to
direct regulation by any government agency. Due to increasing popularity and use
of the  Internet,  however,  it is possible that a number of laws may be adopted
with  respect to the  Internet  in the  future,  covering  such  issues as: user
privacy;  pricing  of goods and  services  offered;  and types of  products  and
service offered.

If the government adopts any additional laws or regulations  covering use of the
Internet,  such  actions  could  decrease the growth of the  Internet.  Any such
reduction  in the growth of the  Internet  may reduce  demand for the  Company's
goods and services and raise the cost to the Company of producing such goods and
services.  Finally, the sales of goods and services may be reduced and the costs
to produce  such goods and  services  may be increased if existing U.S state and
federal  laws and foreign  laws  governing  issues such as  commerce,  taxation,
property ownership,  defamation and personal privacy are increasingly applied to
the Internet.


Employees
---------
At September 1, 1999, the Company employed  approximately 1,450 persons, of whom
410 were  employed on a full-time  basis.  None of the  Company's  employees are
covered by collective  bargaining  agreements and the Company  believes that its
relations with its employees are good.
<PAGE>

Item 2 - Properties
-------------------

The Company and its subsidiaries lease facilities for office space summarized as
follows and in Note 11 of Notes to Consolidated Financial Statements.

         Location                      Square Feet
         --------                      -----------
         Patterson, New York                250
         Venice, California               5,500
         Berkeley, California             6,600
         Newtown, Pennsylvania           10,270
         New York, New York              31,500
         Wilmington, Massachusetts       20,000
         London, England                    460


Item 3 - Legal Proceedings
--------------------------

The Company has been party to certain legal  proceedings in the ordinary  course
of its business. The outcome of these legal proceedings are not expected to have
a material adverse effect on the consolidated financial condition,  liquidity or
expectations of the Company, based on the Company's current understanding of the
relevant facts and law.

<PAGE>
                                     PART II

Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
------------------------------------------------------------------------------

The common stock of the Company trades on the NASDAQ  National  Market under the
symbol "MSGI.  Prior to July 26, 1999 the  Company's  common stock was traded on
the NASDAQ Small Cap Market. The following table reflects the high and low sales
prices for the  Company's  common stock for the fiscal  quarters  indicated,  as
furnished by the NASD:

                                               Common Stock
                                               ------------
                                   Low Sales Price      High Sales Price
                                   ---------------      ----------------
           Fiscal 1999
             Fourth Quarter             $15.93              $51.25
             Third Quarter                3.25               14.50
             Second Quarter               2.18                3.87
             First Quarter                2.03                3.87

           Fiscal 1998
             Fourth Quarter              $3.00               $4.19
             Third Quarter                3.50                5.56
             Second Quarter               3.88                5.50
             First Quarter                2.75                5.25


As of June 30, 1999, there were  approximately 794 registered  holders of record
of the Company's  common stock.  (This number does not include  investors  whose
accounts are maintained by securities firms in "street name".)

The Company has not paid any cash  dividends  on any of its capital  stock in at
least the last five years.  The Company  intends to retain future  earnings,  if
any, to finance the growth and development of its business and, therefore,  does
not anticipate paying any cash dividends in the foreseeable future.
<PAGE>

Item 6 - Selected Financial Data
--------------------------------

The selected  historical  consolidated  financial data for the Company presented
below as of and for the five fiscal  years ended June 30, 1999 have been derived
from the Company's audited consolidated financial statements.

<TABLE>
<CAPTION>

                                                                   Historical
                                         ------------------------------------------------------------
                                                               Years ended June 30,
                                         ------------------------------------------------------------
                                         1995(1)       1996          1997(2)       1998(3)       1999(4)
                                         ----          ----          ----          ----          ----
OPERATING DATA:
<S>                                   <C>         <C>           <C>           <C>           <C>
Revenue                                 $3,630       $15,889       $24,145       $51,174       $82,242
Amortization and depreciation             $117          $501          $970        $1,486        $2,282
Income (loss) from continuing
    operations                         $(1,255)        $(460)      $(3,574)(5)     $(580)      $(7,072)
Net income (loss)                         $110(6)    $(1,094)      $(5,377)(7)     $(780)      $(7,646)
Net income (loss) attributable to
    common shareholders                   $110       $(1,094)     $(20,199)      $(4,724)(8)  $(20,181)(9)
Income (loss) per common share:
     From continuing operations         $(0.07)       $(0.36)       $(2.85)       $(0.37)       $(1.39)
     From discontinued operations        $0.13         $0.00         $0.00         $0.00         $0.00
                                        ------        ------        ------        ------        ------
                                         $0.06        $(0.36)       $(2.85)       $(0.37)       $(1.39)
Weighted average common shares
      outstanding                         1,808         3,068         7,089        12,892       14,552

OTHER DATA:
EBITDA(10)                             $(1,138)          $41            $4          $906       $(4,346)
Net cash used in
      operating activities             $(2,128)        $(884)      $(2,664)      $(1,886)         $(45)
Net cash provided by (used in)
      investing activities              $2,635         $(572)         $578       $(7,281)     $(18,939)
Net cash provided by
      financing activities                $292        $1,631        $3,622       $12,474       $16,035


                                                                   Historical
                                         ------------------------------------------------------------
                                                                 As of June 30,
                                         ------------------------------------------------------------
                                         1995(2)       1996          1997(3)       1998          1999
                                         ----          ----          ----          ----          ----
BALANCE SHEET DATA:
Cash                                    $1,218        $1,393        $2,929        $6,235        $3,285

Working capital (deficit)                 $578        $1,651          $189        $5,013       $(9,647)
Total intangible assets                 $7,273        $7,851       $16,127       $24,771       $62,494
Total assets                           $11,824       $13,301       $25,391       $49,781       $97,627
Total long term debt, net of
      current portion                   $3,000        $1,517        $3,205          $204        $5,937
Redeemable convertible
    preferred stock                          -        $1,306             -       $14,367             -
Total stockholders' equity              $5,165        $6,945       $13,686       $17,325       $48,928

</TABLE>
<PAGE>

(1)On April 25, 1995, the Company acquired all of the outstanding  common shares
   of Alliance Media Corporation.  The assets of Alliance consisted primarily of
   all the issued and  outstanding  shares of Stephen  Dunn &  Associates,  Inc.
   ("SD&A"). The results of operations for Alliance and SD&A are included in the
   consolidated statements of operations beginning April 25, 1995.

(2)Effective  October 1,  1996,  the  Company  acquired  all of the  outstanding
   common shares of Metro Services Group, Inc.,  renamed Metro Direct,  Inc. The
   results of  operations  for Metro  Direct are  included  in the  consolidated
   statements of operations beginning October 1, 1996.

(3)Effective July 1, 1997, the Company  acquired all of the  outstanding  common
   shares of Pegasus  Internet,  Inc. The results of operations  for Pegasus are
   included in the consolidated statements of operations beginning July 1, 1997.
   Effective  December 1, 1997,  the  Company  acquired  all of the  outstanding
   common  shares  of  Media  Marketplace,  Inc.  and  Media  Marketplace  Media
   Division,  Inc. The results of operations for Media  Marketplace are included
   in the consolidated  statements of operations  beginning December 1, 1997. In
   May 1998,  MSGI formed Metro  Fulfillment,  Inc., a new operating  subsidiary
   providing on-line commerce,  real time database management,  inbound/outbound
   customer  service,   custom  packaging,   assembling,   product  warehousing,
   shipping, payment processing and retail distribution.

(4)Effective  January 1,  1999,  the  Company  acquired  all of the  outstanding
   common  shares  of  Stevens-Knox  List  Brokerage,  Inc.,  Stevens-Knox  List
   Management, Inc. and Stevens-Knox International, Inc. (collectively,  "SKA").
   The  results  of  operations  for  SK&A  are  included  in  the  consolidated
   statements of operations  beginning January 1, 1999.  Effective March 1, 1999
   the  Company  sold  85% of its  subsidiary  Metro  Fulfillment.  Accordingly,
   effective  March 1,  1999 the  results  of  operations  of MFI are no  longer
   consolidated in the Company's  statement of operations.  On May 13, 1999, the
   Company acquired all of the outstanding common shares of CMG Direct, Inc. The
   results of operations for CMGD Direct,  Inc. are included in the consolidated
   statements of operations beginning May 14, 1999.

(5)Loss from  operations  includes  compensation  expense  on  option  grants of
   $1,650  which  were  granted  at  exercise  prices  below  market  value  and
   approximately $958 for restructuring costs.

(6) Net loss includes a gain from sale of securities of approximately $1,580.

(7)Net loss  includes a charge for  approximately  $113 for discounts on warrant
   exercises and approximately  $1,180 for the costs associated with a withdrawn
   public offering.

(8)Net loss attributable to common shareholders  include the impact of dividends
   on  preferred  stock  for a  non-cash,  non-recurring  beneficial  conversion
   feature of $3,214.

(9)Net  loss  from  continuing  operations  and  net  loss  include  a  one-time
   severance  charge of $1,125 and a  compensation  expense on option  grants of
   $444 which were granted at exercise prices below market value.

(10) EBITDA  is  defined  as  earnings  before  interest  expense,  income  tax,
   depreciation,  amortization  and other non-cash  items.  EBITDA should not be
   construed as an alternative to operating  income or net income (as determined
   in accordance with generally accepted accounting principles), as an indicator
   of MSGI's operating performance,  as an alternative to cash flows provided by
   operating  activities  (as determined in accordance  with generally  accepted
   accounting  principles),  or as a measure of  liquidity.  EBITDA is presented
   solely as a  supplemental  disclosure  because  management  believes  that it
   enhances the  understanding  of the financial  performance  of a company with
   substantial  amortization  and  depreciation  expense.  MSGI's  definition of
   EBITDA may not be the same as that of similarly  captioned  measures  used by
   other companies.
<PAGE>

Item 7 - Management's Discussion and Analysis
---------------------------------------------

Introduction
------------
This discussion  summarizes the significant  factors  affecting the consolidated
operating results,  financial condition and liquidity/cash  flows of the Company
for the  twelve  month  period  ended  June 30,  1999.  This  should  be read in
conjunction with the financial statements,  and notes thereto,  included in this
Form 10-K.

Effective December 1, 1997, the Company acquired all of the outstanding  capital
stock of Media  Marketplace,  Inc. and Media  Marketplace  Media Division,  Inc.
(collectively  "MMI").  The results of  operations  of MMI are  reflected in the
consolidated  financial  statements using the purchase method of accounting from
the date of acquisition.  MMI provides list management, list brokerage and media
planning services.

In May 1998, the Company formed Metro  Fulfillment,  Inc. ("MFI"),  a subsidiary
providing  online  commerce,  real-time  database  management,  inbound/outbound
customer service, custom packaging,  assembling, product warehousing,  shipping,
payment processing and retail distribution. As more fully described in Note 4 to
the  consolidated  financial  statements  included in this Form 10-K,  effective
March 1, 1999,  the Company sold 85% of the common stock of MFI. The  investment
in MFI is being  accounted  for by the cost method of  accounting.  Accordingly,
effective  March  1,  1999  the  results  of  operations  of MFI  are no  longer
consolidated in the Company's statement of operations.

As more  fully  described  in Note 3 to the  consolidated  financial  statements
included in this Form 10-K,  effective January 1, 1999, the Company acquired all
of  the  outstanding   common  shares  of   Stevens-Knox  &  Associates,   Inc.,
Stevens-Knox  List  Brokerage,   Inc.  and  Stevens-Knox   International,   Inc.
(collectively  "SK&A").  The results of  operations of SK&A are reflected in the
consolidated  financial  statements using the purchase method of accounting from
the date of acquisition.  SK&A provides list management,  brokerage and database
management services.

As more  fully  described  in Note 3 to the  consolidated  financial  statements
included in this Form 10-K,  effective May 13, 1999, the Company acquired all of
the outstanding common shares of CMG Direct Corporation ("CMGD"). The results of
operations of CMGD are reflected in the consolidated  financial statements using
the purchase method of accounting  from the date of  acquisition.  CMGD provides
database services to the direct marketing and internet industries.


Results of Operations Fiscal 1999 Compared to Fiscal 1998
---------------------------------------------------------

Revenues of  approximately  $82.2  million for the year ended June 30, 1999 (the
"current  period")  increased  by $31.0  million or 61% over  revenues  of $51.2
million  during  the year  ended  June 30,  1998 (the  "prior  period").  Of the
increase,  approximately  $27.8 million is attributable to an increase in direct
and internet  marketing  resulting  from the  acquisitions  of SK&A and CMGD and
including the  acquisition of MMI for a full year as compared to seven months in
the prior  period.  Direct and internet  marketing  revenue,  not  including the
effects of acquisitions and telemarketing and telefundraising revenue, increased
by $3.4 million or 10% over the prior period.  These  increases  were  partially
offset  by  a  decrease  in  telemarketing  and   telefundraising   revenues  of
approximately  $1.3  million or 8%. In  addition,  fulfillment  revenue  for the
current period increased by approximately $1.1 million due to inclusion of eight
months of operations in the current  period as compared to a month and a half in
the prior period.  The decrease in telemarketing and  telefundraising  primarily
resulted from a loss of revenue due to an unsuccessful  attempt by third parties
to unionize  the calling  center.  New  management  has been put in place at the
start of the new fiscal year and have refocused its  priorities.  The Company is
still in the process of opposing certain issues with the union but expects to be
successful in its efforts.

Direct costs of  approximately  $52.5 million in the current period increased by
$25.7 million or 96% over direct costs of $26.8 million in the prior period.  Of
the  increase,  approximately  $24.4 million is  attributable  to an increase in
direct and internet  marketing  direct costs resulting from the  acquisitions of
SK&A and CMGD and including the  acquisition  of MMI for a full year as compared
to seven  months in the prior  period.  Direct  costs for  direct  and  internet
marketing not including the effects of acquisitions  increased by $.9 million or
4% which is due to the increase in revenue.  The remaining increase is primarily
due to fulfillment direct costs of approximately $.4 million which is consistent
with the growth in revenue.  The Company's  direct costs consist  principally of
commissions paid to use marketing lists. Direct costs as a percentage of revenue
increased  from  52% in the  prior  period  to 64% in the  current  period.  The
increase in the direct costs as a percentage of revenue  results from the mix in
services sold. Most of the acquisitions made in the past two years resulted in a
substantial  increase to the list management and list brokerage services.  These
services have a high direct cost percentage.  As MSGI acquires new companies and
internet  revenues  become a higher  percentage of overall  revenue,  management
expects the direct cost percentage of revenue to begin to decrease.

Salaries  and  benefits of  approximately  $26.2  million in the current  period
increased  by $6.9 million or 36% over  salaries  and benefits of  approximately
$19.3 million in the prior period. Of the increase,  approximately  $3.5 million
is  attributable  to an increase in direct and internet  marketing  salaries and
benefits  resulting  from the  acquisitions  of SK&A and CMGD and  including the
acquisition  of MMI for a full  year as  compared  to seven  months in the prior
period.  Salaries  and  benefits  relating  to  direct  and  internet  marketing
excluding  acquisitions  increased by  approximately  $1.8 million or 10% due to
increase in head count to manage current and anticipated future growth. Salaries
and benefits relating to fulfillment increased by approximately $1.4 million due
to inclusion of eight months of operations in the current  period as compared to
a month and a half in the prior period.  Salaries and benefits  associated  with
corporate  overhead  increased  approximately  $.2 million in the current period
principally  due to an increase in head count to manage current and  anticipated
future growth.

General and administrative expenses of approximately $6.8 million in the current
period increased by approximately  $2.5 million or 62% over comparable  expenses
of $4.2 million in the prior period. Of the increase, approximately $1.4 million
is  attributable  to an increase in direct and  internet  marketing  general and
administrative  expenses  resulting from the  acquisitions  of SK&A and CMGD and
including the  acquisition of MMI for a full year as compared to seven months in
the  prior  period.   Direct  and  internet   marketing   services  general  and
administrative  expenses excluding  acquisitions  increased by approximately $.3
million  principally  due to  increased  professional  fees  associated  with an
unsuccessful  attempt  by third  parties  to  unionize  the  calling  center and
increased  rent expense due to expansion of certain  office  space.  General and
administrative  expenses relating to fulfillment  increased by approximately $.4
million due to inclusion of eight months of operations in the current  period as
compared to a month and a half in the prior period.  The  remaining  increase is
primarily due to an increase in corporate  expenses of approximately $.4 million
due to an increase in professional  fees, travel and  entertainment,  board fees
and  reporting  fees  associated  with the  increase  in merger and  acquisition
activity and becoming a larger company.

Depreciation  and  amortization  expense of  approximately  $2.2  million in the
current  period  increased  by  approximately  $.7 million  over expense of $1.5
million in the prior  period.  Of the  increase,  approximately  $.6  million is
attributable to an increase in direct and internet  marketing  depreciation  and
amortization  expense  resulting  from  the  acquisitions  of SK&A  and CMGD and
including the  acquisition of MMI for a full year as compared to seven months in
the prior period.

In the current  period the Company  incurred $1.1 million in severance  costs in
connection  with the  termination  of two  employment  contracts.  There  are no
further amounts to be paid under such contracts.

In the current  period  400,000  stock  options were granted with a below market
exercise price on the date of the employment agreement to a key executive of the
Company.  The  pricing  of  such  options  was  part  of  a  negotiation  of  an
acquisition.  133,000 of the options vest  immediately  and 11,125 per month for
the next two  years.  Accordingly,  the  aggregate  difference  of $1.2  million
between the exercise  price and the market  price has been  recorded as deferred
compensation and included in stockholders'  equity. The deferred compensation is
being  amortized  into  compensation  expense  over the  vesting  period  of the
options.  The  Company  recognized  compensation  expense of  approximately  $.4
million during the current period.

Net interest expense of  approximately  $516,000 in the current period increased
by approximately $330,000 over net interest expense of approximately $186,000 in
the prior period. Such expenses increased principally due to accrued interest on
outstanding  borrowings  relating  to the  acquisitions  of SK&A  and  CMGD.  In
addition,  interest  income from cash  invested  decreased  due to cash used for
stock buyback and to fund the fulfillment operations.

The net  provision  for income  taxes of  approximately  $57,000 in the  current
period  increased by  approximately  $42,000 over the provision of approximately
$15,000 in the prior period.  The Company records provisions for state and local
taxes incurred on taxable income at the operating  subsidiary level which cannot
be offset by losses  incurred  at the parent  company  level or other  operating
subsidiaries.

Results of Operations Fiscal 1998 Compared to Fiscal 1997
---------------------------------------------------------

Revenues  of $51.2  million  for the year ended June 30,  1998  ("Fiscal  1998")
increased by $27.1 million over revenues of $24.1 million  during the year ended
June 30,  1997  ("Fiscal  1997").  Of the  increase,  $22.4  million  was due to
acquisitions and start-up  operations during Fiscal 1998.  Revenues from on-site
telemarketing and  telefundraising  campaigns  increased $0.9 million from $12.9
million in Fiscal  1997 to $13.8 in Fiscal  1998 offset by a decrease in calling
center revenues of $0.3 million.  Revenues from marketing services totaled $12.2
million and $8.2  million in Fiscal 1998 and Fiscal  1997,  respectively,  or an
increase of $4.0 million.  The increase was  principally due to the inclusion of
twelve  months of operations in the current year versus nine months in the prior
year, combined with continued sales growth.

Direct costs of $26.8  million in Fiscal 1998  increased  by $21.2  million over
direct  costs  of  $5.6  million  in  Fiscal  1997.  $19.2  of the  increase  is
principally due to acquisitions  during Fiscal 1998.  Direct costs for marketing
services increased by $2.0 million  principally due to the inclusion of the full
year of  expenses in the current  year,  as well as an increase in revenue.  The
Company's direct costs consist  principally of commissions paid to use marketing
lists.

Salaries and benefits of $19.2 million in Fiscal 1998  increased by $4.2 million
over salaries and benefits of $15.0 million in Fiscal 1997,  principally  due to
the inclusion of $2.4 million from  acquisitions and start-up  operations during
Fiscal 1998.  Salaries and benefits from telemarketing  activities  increased by
$0.4 million or 3%,  consistent with its overall increase in revenues.  Salaries
and benefits from marketing services  activities  increased by $1.4 million from
$1.8 million in Fiscal 1997 to $3.2  million in Fiscal  1998.  This was due to a
full year of expenses in Fiscal 1998,  against  nine months in Fiscal  1997,  as
well as an  increase  in head count to manage  current  and  anticipated  future
growth.

Selling,  general and  administrative  expenses  of $4.3  million in Fiscal 1998
increased  by $0.7 million  over  comparable  expenses of $3.6 million in Fiscal
1997.  Acquisitions and start-up  operations  accounted for $0.7 million of such
expenses.  Administrative  expenses  for  marketing  services  increased by $0.2
million, principally due to the inclusion of the full year of expenses in Fiscal
1998. Corporate administration decreased by $0.2 generally due to cost reduction
measures  implemented upon the change in the Company's  management at the end of
Fiscal 1997.

In Fiscal 1997, the Company  incurred a  non-recurring,  non-cash charge of $1.7
million  to  compensation  expense  relating  to  options  granted to two former
principal  executive  officers.  Such charge was  incurred  because the exercise
price of each such  option,  which was based upon the market price of the common
stock on May 30, 1996 (the date which the Company  intended as the effective day
of the grant)  rather than the market  price on  September  26, 1996 (the actual
effective  date of the  grant),  was lower than the  market  price of the common
stock on September 26, 1996.

Restructuring costs of $1.0 million were incurred in Fiscal 1997, as the Company
effected certain corporate  restructuring  steps,  including  reducing corporate
staff and related  corporate  office  expenses,  as well as making two executive
management changes.

Depreciation  and  amortization of $1.5 million in Fiscal 1998 increased by $0.5
million  over  comparable  expenses  of $1.0  million  in  Fiscal  1997.  Of the
increase,  $0.4 million is due to acquisitions and start-up  operations  entered
into during Fiscal 1998. The remaining increase was principally due to inclusion
of a full year of expenses for marketing services.

Discounts on warrant  exercises  of $113,000  were  incurred in Fiscal 1997.  To
reduce the overhang associated with the existence of such warrants and to obtain
working capital subsequent to the withdrawal of its proposed underwritten public
offering,  the Company accepted offers from certain  warrant-holders to exercise
their warrants for shares of Common Stock at discounted exercise prices. For the
warrants  which  arose  from  a  previous  financing  transaction,  the  Company
recognized the dates of acceptances as new measurement  dates and,  accordingly,
recorded the non-cash charges to reflect the market value of the discounts.

Withdrawn public offering costs of $1.2 million were recorded in Fiscal 1997. In
October 1996, the Company filed a  registration  statement on Form SB-2 with the
Securities and Exchange  Commission  relating to an underwritten public offering
of 2.1 million shares.  In February 1996 the Company  withdrew the  registration
statement and costs incurred in the process were expensed.

Interest  expense  and other,  net, of  $186,000  in Fiscal  1998  decreased  by
$215,000  over expenses of $401,000 in Fiscal 1997.  Such expenses  decreased by
$407,000  principally  due to  conversions  of  convertible  securities and debt
repayments,  interest  income  earned on invested  surplus cash and interest and
other miscellaneous  income provided by certain acquisitions during Fiscal 1998.
These changes were offset by increased interest expense at certain  subsidiaries
of  $192,000  due to a change  in  borrowing  relationship  in  August  1997 and
increase in current year  borrowings  on lines of credit for working  capital to
support internal growth.

The  provision  for income taxes of $15,000 in Fiscal 1998  decreased by $94,000
over the provision of $109,000 in Fiscal 1997.  During Fiscal 1998,  the Company
determined that it qualified to file as a combined entity in a certain state for
the fiscal years  beginning  July 1, 1996.  The Company had  estimated its state
income tax for such state on a  stand-alone  basis for each  subsidiary  for the
year ended June 30,  1997.  The impact on the  current  year for this  change in
estimate  resulted in a benefit of  approximately  $70,000.  The Company records
provisions for state and local taxes incurred on taxable income at the operating
subsidiary  level,  which can not be offset by  losses  incurred  at the  parent
company level.


Capital Resources and Liquidity
-------------------------------

Historically,  the Company has funded its operations,  capital  expenditures and
acquisitions primarily through cash flows from operations, private placements of
equity  transactions,  and its credit facilities.  At June 30, 1999, the Company
had cash and cash  equivalents  of $3.3 million and accounts  receivable  net of
allowances of $27.4 million.

The Company  incurred  losses  from  operations  of $7.1  million in the current
period. Cash used in operating activities was approximately $45,000. Net used in
operating activities  principally resulted from decrease in accounts receivable,
increase in accrued  expenses and other  liabilities  and the non-cash effect of
depreciation and amortization.

In the  current  period,  net  cash of  $18.9  million  was  used  in  investing
activities  consisting  of: $17.7 million for the  acquisitions  of SK&A and CMG
Direct,  $.5 million for the purchases of property and equipment and $.9 for the
final contingent  payment for the acquisition of SD&A. In the prior period,  net
cash used in investing  activities of $7.3 million consisted of $6.0 million for
the acquisitions of Pegasus Internet and Media Marketplace, Inc, $.4 million for
a contingent  payment for the acquisition of SD&A, $.3 million for the purchases
of property and equipment and $.6 million for the purchase of a note receivable.

In the  current  period,  net cash of $16.0  million was  provided by  financing
activities. Net cash provided by financing activities consisted of $10.0 million
proceeds  from a  promissory  note  issued  in  connection  with the CMG  Direct
acquisition,  $5.5 million in proceeds  from the  exercise of stock  options and
warrants,  $2.8  million in net  proceeds  from  lines of credit  offset by $1.3
million used for the purchase of treasury  stock and $.8 million for  repayments
on acquisition debt, other notes payable and capital leases.

At June 30,  1999,  the Company had amounts  outstanding  of $5.3 million on its
lines of credit.  As of June 30, 1999 the Company  was in  violation  of certain
financial covenants.  The Company has obtained a waiver of such violations.  The
Company had  approximately  $1.4 million  available on its lines of credit as of
June 30, 1999.

On April 21, 1999, the Company  exercised its right to convert all 50,000 shares
of General Electric Capital  Corporation's Series D Convertible  Preferred Stock
to  approximately  4.8 million shares of common stock.  In conjunction  with the
conversion,  all preferred  shareholder rights,  including quarterly  dividends,
financial  covenants,  acquisition  approvals and board seats,  were immediately
cancelled.

The Company  believes that funds on hand,  funds  available from its operations,
its  unused  lines of  credit,  and  funds  received  subsequent  to year end in
connection with a private placement should be adequate to finance its operations
and capital  expenditure  requirements,  and enable the Company to meet interest
and debt  obligations  for the  next  twelve  months.  In  conjunction  with the
Company's acquisition and growth strategy,  additional financing may be required
to complete any such acquisitions and to meet potential  contingent  acquisition
payments.


The Year 2000
-------------

The Year 2000 issue could result in system failures or  miscalculations  causing
disruption of operations of the companies.  To date, MSGI has  experienced  very
few problems  related to the Year 2000 issue,  and MSGI does not believe that it
has a material exposure problem.

MSGI has  conducted a review of its computer  systems and other  systems for the
purpose of  assessing  its  readiness  for Year 2000,  and is in the  process of
modifying or replacing  those systems which are not Year 2000  compliant.  Based
upon this review, management believes such systems will be compliant by November
1999 for its existing  business-critical  systems. However, if modifications are
not made or completed  timely,  there could be a significant  adverse  impact on
MSGI's operations.

In  addition,  MSGI has  communicated  with its major  vendors and  suppliers to
determine  their state of  readiness  relative to the Year 2000  compliance  and
MSGI's  possible  exposure to Year 2000 issues of such third  parties.  However,
there can be no  guarantee  that the systems of other  companies,  which  MSGI's
systems may rely upon, will be timely converted or representations  made to MSGI
by these  parties are  accurate.  As a result,  the failure of a major vendor or
supplier  to  adequately  address  their  Year  2000  compliance  could  have  a
significant adverse impact on MSGI's operations.

As of the date hereof,  MSGI has incurred  insignificant  costs  (primarily  for
internal labor) related to the identification and evaluation of MSGI's Year 2000
issues  related  to  the  system  applications.  Primarily  as a  result  of the
acquisition  of CMG Direct, the  Company  anticipates  spending  an  additional
$520,000 to become Year 2000 compliant for its  business-critical  systems prior
to the end of November 1999. The estimated  completion  date and remaining costs
are based upon management's best estimates,  as well as third party modification
plans and other factors.  However, there can be no guarantee that such estimates
are accurate and actual results could differ from these estimates.


Item 8 - Financial Statements and Supplementary Data
----------------------------------------------------

The Consolidated  Financial  Statements required by this Item 8 are set forth as
indicated in the index following Item 13(a)(1).


Item 9 -  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------

None.


<PAGE>

                                      PART III

The  information  required by this Part III (items 10, 11, 12, and 13) is hereby
incorporated by reference from the Company's definitive proxy statement which is
expected to be filed pursuant to Regulation  14A of the Securities  Exchange Act
of 1934 not later than 120 days after the end of the fiscal year covered by this
report.

Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------

(a) (1)  Financial statements - see "Index to Financial Statements" on page 28.
    (2)  Financial statement schedules - see "Index to Financial  Statements"
         on page 28.
    (3)  Exhibits:

         2.1    Stock Purchase Agreement between Marketing  Services Group, Inc.
                and Ralph Stevens (n)
         2.2    Stock Purchase Agreement between Marketing  Services Group, Inc.
                and CMGI, Inc.(o)
         2.3    Agreement and Plan of Merger By and Among Marketing  Services
                Group, Inc., GCG Merger Corp., and Grizzard Advertising, Inc.(p)
         3(i)   Amended and Restated Articles of Incorporation (b)
         3(ii)  Certificate of Amendment to the Amended and Restated Articles of
                Incorporation of the Company (b)
         3(iii) Certificate of Amendment to the Articles of  Incorporation  for
                change of name to All-Comm Media Corporation (e)
         3(iv)  By-Laws (b)
         3(v)   Certificate  of Amendment of Articles of  Incorporation  for
                increase in number of authorized shares to 36,300,000 total (h)
         3(vi)  Certificate of Amendment of Articles of  Incorporation  for
                change of name to Marketing Services Group, Inc. (k)
         3(vii) Certificate  of  Amendment  of Articles of  Incorporation  for
                increase in number of authorized shares to 75,150,000 total (q)
         3(viii)The Amended  Certificate of  Designation,  Preferences and
                Relative, Participating and Optional and Other Special Rights of
                Preferred Stock and Qualifications, Limitations and Restrictions
                Thereof for the Series D Convertible Preferred Stock (l)
         10.1   1991 Stock Option Plan (c)
         10.2   Letter  from  Seller of SD&A  agreeing  to long-term  obligation
                payment and restructuring (g)
         10.3   Agreement and Plan of Merger between  All-Comm Media Corporation
                and Metro Services Group, Inc. (i)
         10.4   Security  Agreement between Milberg Factors,  Inc. and Metro
                Services Group, Inc. (j)
         10.5   Security  Agreement between Milberg Factors,  Inc. and Stephen
                Dunn & Associates, Inc. (k)
         10.6   Agreement and Plan of Merger between  Marketing  Services Group,
                Inc. and Pegasus Internet, Inc. (k)
         10.7   J. Jeremy Barbera Employment Agreement (c)
         10.8   Robert M. Budlow Employment Agreement (i)
         10.9   Janet Sautkulis Employment Agreement (i)
         10.10  Robert Bourne Employment Agreement (k)
         10.11  Thomas Scheir Employment Agreement (k)
         10.12  Form of Private Placement Agreement (j)
         10.13  Fourth Memorandum of Understanding (q)
         10.14  Stock  Purchase Agreement among Marketing Services Group, Inc.,
                Stephen M. Reustle and Thomas R. Kellogg (m)
         10.15  Purchase agreement dated as of December 24, 1997, by and between
                the Company and GE Capital (l)
         10.16  Stockholders  Agreement by and among the Company, GE Capital and
                certain  existing  stockholders  of  the Company,  dated  as  of
                December 24, 1997 (l)
         10.17  Registration  Rights  Agreement  by and among the Company and GE
                Capital, dated as of December 24, 1997 (l)
         10.18  Warrant, dated as of December  24, 1997,  to purchase  shares of
                Common Stock of the Company (l)
         10.19  Form of Employment  Agreement by and among Marketing  Services
                Group, Inc. and Stephen M. Reustle (m)
         10.20  Form of Employment  Agreement by and among Marketing  Services
                Group, Inc. and Ralph Stevens (n)
         10.21  Form of Employment  Agreement by and among Marketing  Services
                Group, Inc. and Edward Mullen (a)
         10.22  First Amendment to Preferred Stock Purchase Agreement Between
                General Electric Capital Corporation and Marketing Services
                Group, Inc. (r)
         10.23  Promissory note (r)
         10.24  Warrant agreement (r)
         10.25  Second Amendment (s)
         21     List of Company's subsidiaries (a)
         23     Consent of PricewaterhouseCoopers, LLP (a)
         27     Financial Data Schedule (a)

(a)  Incorporated herein
(b)  Incorporated by reference from the Company's Registration Statement on Form
     S-4, Registration Statement No. 33-45192
(c)  Incorporated by reference to the Company's  Registration  Statement on Form
     S-8, Registration Statement 333-30839
(d)  Incorporated  herein by reference to the Company's Report on Form 8-K dated
     April 25, 1995
(e)  Incorporated  by  reference  to the  Company's  Report on Form 10-K for the
     fiscal year ended June 30, 1995
(f)  Incorporated  by  reference  to the  Company's  Report on Form 10-Q for the
     quarter ended March 31, 1996
(g)  Incorporated by reference to the Company's Report on Form 8-K dated June 7,
     1996
(h)  Incorporated  by reference to the Company's  Report on Form 10-K dated June
     30, 1996
(i)  Incorporated by reference to the Company's Report on Form 8-K dated October
     11, 1996
(j)  Incorporated  by  reference  to the  Company's  Report on Form 10-Q for the
     quarter ended March 31, 1997
(k)  Incorporated  by reference to the  Company's  Report on Form 10-KSB for the
     fiscal year ended June 30, 1997
(l)  Incorporated by reference to the Company's Report on Form 8-K dated January
     13, 1998
(m)  Incorporated  by reference to the Company's  Report on Form 8-K dated March
     16,1998
(n)  Incorporated  by  reference  to the  Company's  Report  on Form  8-K  dated
     February 1, 1999
(o)  Incorporated  by reference to the Company's  Report on Form 8-K dated March
     24, 1999
(p)  Incorporated by reference from the Company's Registration Statement on Form
     S-4, Registration Statement No. 33-85233.
(q)  Incorporated by reference to the Company's Report on Form 10-KSB for the
     fiscal year ended June 30, 1998.
(r)  Incorporated by reference to the Company's Report on Form 8-K dated May, 13
     1999.
(s)  Incorporated by reference to the Company's Report on Form 8-K dated August,
     30, 1999.


(b)  Reports on Form 8-K.

     During the fourth  quarter  1999,  Form 8-K/A dated April 5, 1999 was filed
     pursuant  to Item 2  (Acquisition  or  Disposition  of  Assets)  and Item 7
     (Financial  Statements  and  Exhibits).  On May 24, 1999 Form 8-K was filed
     pursuant  to Item 2  (Acquisition  or  Disposition  of  Assets)  and Item 7
     (Financial Statements and Exhibits).

<PAGE>
                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                               MARKETING SERVICES GROUP, INC.
                               ------------------------------
                               (Registrant)


                               By: /s/ J. Jeremy Barbera
                               ---------------------
                               J. Jeremy Barbera
                               Chairman of the Board and Chief Executive Officer

Date:   October 7, 1999
        ---------------

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

Signature                  Title                                Date
---------                  -----                                ----

/s/ J. Jeremy Barbera      Chairman of the Board and Chief      October 7, 1999
---------------------      Executive Officer
J. Jeremy Barbera         (Principal Executive Officer)


/s/ Edward E. Mullen       President and Director               October 7, 1999
---------------------
Edward E. Mullen


/s/ Cindy H. Hill          Chief Financial Officer (Principal   October 7, 1999
-----------------          Financial and Accounting Officer)
Cindy H. Hill


/s/ Alan I. Annex          Director and Secretary               October 7, 1999
---------------------
Alan I. Annex


/s/ S. James Coppersmith   Director                             October 7, 1999
------------------------
S. James Coppersmith


/s/ John T. Gerlach        Director                             October 7, 1999
---------------------
John T. Gerlach


/s/ Seymour Jones          Director                             October 7, 1999
-----------------
Seymour Jones


/s/ C. Anthony Wainwright  Director                             October 7, 1999
-------------------------
C. Anthony Wainwright


<PAGE>

                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

                          INDEX TO FINANCIAL STATEMENTS
                                    [Item 14]



       (1) FINANCIAL STATEMENTS:                                Page
           ---------------------                                ----

           Report of Independent Accountants                     29

           Consolidated Balance Sheets as of June 30,
              1999 and June 30, 1998                             30

           Consolidated Statements of Operations
              Years Ended June 30, 1999, 1998, and 1997          31

           Consolidated Statement of Stockholders' Equity
              Years Ended June 30, 1999, 1998, and 1997         32-33

           Consolidated Statements of Cash Flows
              Years Ended June 30, 1999, 1998, and 1997         34-36

           Notes to Consolidated Financial Statements           37-51

      (2)  FINANCIAL STATEMENT SCHEDULES
           -----------------------------

           Schedule II - Valuation and Qualifying Accounts       52

           Schedules other than those  listed above are omitted
           because they are not required or are  not applicable
           or the information is shown in the audited financial
           statements or related notes.

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and
Stockholders of Marketing Services Group, Inc.:


In our opinion, the consolidated financial statements listed in the accompanying
index  present  fairly,  in all material  respects,  the  financial  position of
Marketing  Services Group,  Inc. and Subsidiaries at June 30, 1999 and 1998, and
the  consolidated  results of their  operations and their cash flows for each of
the three years in the period ended June 30, 1999, in conformity  with generally
accepted  accounting  principles.  In addition,  in our opinion,  the  financial
statement  schedule listed in the  accompanying  index presents  fairly,  in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated  financial statements.  These financial statements
and  financial  statement  schedule  are  the  responsibility  of the  Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements and financial  statement  schedule based on our audits.  We conducted
our audits of these  statements in accordance with generally  accepted  auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.


                                                /s/ PRICEWATERHOUSECOOPERS LLP


September 24, 1999



<PAGE>


                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

            CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND 1998

                                                              June 30,

ASSETS                                                   1999          1998
------                                                   ----          ----
Current assets:
   Cash and cash equivalents                       $  3,285,217    $  6,234,981
   Accounts receivable, billed, net of
     allowance for doubtful accounts of
     $394,910 and $421,861, respectively             23,527,798      12,606,468
   Accounts receivable, unbilled                      3,862,907       3,259,437
   Note receivable- current portion                     685,873               -
Other current assets                                  1,168,653         724,032
                                                    -----------     -----------
     Total current assets                            32,530,448      22,824,918

Property and equipment, net                           1,504,826       1,645,957
Intangible assets, net                               62,493,949      24,771,045
Note receivable                                         474,127               -
Other assets                                            623,599         539,507
                                                   ------------    ------------
     Total assets                                   $97,626,949     $49,781,427
                                                    ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Lines of credit                                  $ 5,316,775    $  2,522,306
   Accounts payable-trade                            23,214,278      11,420,386
   Accrued expenses and other current liabilities     8,151,764       2,433,871
   Current potion of note payable-related party       4,871,750               -
   Current portion of capital lease obligations          52,099         117,911
   Current portion of long term obligations             570,653       1,317,540
                                                    -----------       ---------
     Total current liabilities                       42,177,319      17,812,014

Capital lease obligations, net of current portion        67,407          87,250
Long-term obligations, net of current portion           997,890         116,667
Note payable- related party, net of current portion   4,871,750               -
Other liabilities                                       584,954          72,937
                                                     ----------       ---------
     Total liabilities                               48,699,320      18,088,868
                                                    -----------     -----------

Redeemable convertible preferred stock -
  $.01  par  value;  150,000  shares authorized;
  50,000 shares of Series D convertible preferred
  stock issued and outstanding as of June 30, 1998                   14,367,301
                                                                     ----------
Commitments and contingencies

Stockholders' equity:
   Common  stock - $.01  par  value;  75,000,000
     authorized;  22,513,772 and 13,098,510 shares
     issued as of June 30, 1999 and 1998,
     respectively                                       225,138         130,985
   Additional paid-in capital                        70,812,973      29,612,816
   Accumulated deficit                              (19,928,677)    (12,283,074)
   Deferred compensation                               (788,095)
   Less: 423,894 and 11,800 shares of common
     stock in treasury, at cost as of
     June 30, 1999 and 1998, respectively            (1,393,710)       (135,469)
                                                    ------------    -----------

     Total stockholders' equity                      48,927,629      17,325,258
                                                    -----------     -----------
     Total liabilities and stockholders' equity     $97,626,949     $49,781,427
                                                    ===========     ===========

The  accompanying  notes  are an  integral  part of the  Consolidated  Financial
Statements.

<PAGE>

                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997


                                              1999         1998         1997
                                            --------     --------     --------

Revenues                                $82,241,894   $51,174,063   $24,144,874
                                        -----------   -----------   -----------
Operating costs and expenses:
  Direct costs                           52,510,154    26,771,611     5,587,343
  Salaries and benefits                  26,188,341    19,255,348    14,967,420
  Selling, general and administrative     6,764,488     4,240,805     3,585,972
  Depreciation and amortization           2,282,251     1,486,106       969,594
  Severance costs                         1,125,000             -             -
  Compensation expense on
    option grants                           443,905             -     1,650,000
  Restructuring costs                             -             -       958,376
                                         ----------    ----------    ----------
     Total operating costs and expenses  89,314,139    51,753,870    27,718,705
                                         ----------    ----------    ----------

     Loss from operations               (7,072,245)      (579,807)   (3,573,831)
                                        ----------       --------    ----------

Other expense:
   Withdrawn public offering costs                -             -    (1,179,571)
   Interest expense and other, net         (516,099)     (185,967)     (514,321)
                                           --------      --------      --------
     Total other expense                   (516,099)     (185,967)   (1,693,892)
                                           --------      --------    ----------
   Loss before income taxes              (7,588,344)     (765,774)   (5,267,723)
   Provision for income taxes               (57,259)      (14,704)     (109,373)
                                            -------       -------      --------

Net loss                               $ (7,645,603)   $ (780,478)  $(5,377,096)
                                       ============    ==========   ===========

Net loss attributable to
  common stockholders*                 $(20,180,933)  $(4,724,480) $(20,199,038)
                                       ============   ===========  ============

Net loss per common share,
  basic and diluted                       $ (1.39)       $ (.37)      $ (2.85)
                                          =======        ======       =======

Weighted average common shares
  outstanding                            14,552,444    12,892,323     7,089,321
                                         ==========    ==========     =========


*  The year ended June 30, 1999  includes  the impact of  dividends on preferred
   stock  for  (a)  adjustment  of the  conversion  ratio  for  $11,366,022  for
   exercises  of  stock  options  and  warrants;   (b)  $949,365  in  cumulative
   undeclared  preferred stock dividends;  and (c) $219,943 of periodic non-cash
   accretions of preferred stock.

   The year ended June 30, 1998  include the impact of  dividends  on  preferred
   stock for (a) a  non-cash,  non-recurring  beneficial  conversion  feature of
   $3,214,400;  (b) $152,512 from adjustment of the conversion ratio for certain
   issuances of common stock and  exercises  of stock  options;  (c) $464,816 in
   cumulative  undeclared  dividends;  and (d)  $112,274  of  periodic  non-cash
   accretions on preferred stock.

   The year ended June 30, 1997 include the impact of non-recurring dividends on
   preferred  stock for (a) $8.5  million  non-cash  dividend on  conversion  of
   Series B Preferred  Stock;  (b) $573,000 on  repurchase of Series C Preferred
   Stock;  (c)  periodic  non-cash  accretions  on preferred  stock;  and (d) $5
   million in discounts on warrant exercises.



The  accompanying  notes  are an  integral  part of the  Consolidated  Financial
Statements.
<PAGE>

                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997

<TABLE>
<CAPTION>



                                               Common Stock       Additional                      Treasury Stock
                                               ------------        Paid-in     Accumulated        --------------
                                            Shares      Amount     Capital       Deficit        Shares       Amount       Totals
                                            ------------------     -------       -------        -------------------       ------
<S>                                       <C>         <C>       <C>           <C>             <C>         <C>          <C>
Balance July 1, 1996                       3,198,534   $31,985   $13,173,520   $(6,125,500)    (11,800)   $(135,469)    $6,944,536

Shares issued upon exercise of options         7,925        79           (79)
Purchase of warrants by consultants                                   81,000                                                81,000
Accretion of redeemable convertible
  preferred stock                                                   (806,425)                                             (806,425)
Issuance of restricted shares for
  SD&A earn-out                               96,748       967       424,033                                               425,000
Non-recurring issuance of options for
  compensation of executive officers                               1,650,000                                             1,650,000
Issuance of common stock for acquisition
  of Metro Services Group                  1,814,000    18,140     7,237,860                                             7,256,000
Recapitalization:
    Conversion of 6,200 shares of
    Series B redeemable convertible
    preferred stock into common            2,480,000    24,800     1,661,288                                             1,686,088
Accretion on repurchase of 2,000 shares
  of Series C redeemable preferred stock                            (573,305)                                             (573,305)
Issuances of restricted stock in exchange
  for warrants                               600,000     6,000        (6,000)
Issuances of restricted stock for accrued
  interest on Series B&C redeemable
  convertible preferred stock                 88,857       889       144,864                                               145,753
Issuances of restricted shares upon
  exercise of discounted warrants          3,152,500    31,526     2,033,600                                             2,065,126
Discounts granted on exercise of
  warrants                                                           113,137                                               113,137
Issuances of warrants to consultants                                  76,000                                                76,000
Net and comprehensive loss                                                      (5,377,096)                             (5,377,096)
                                          ----------   -------    ----------    ----------     --------    ---------    ----------
Balance June 30, 1997                     11,438,564   114,386    25,209,493   (11,502,596)    (11,800)    (135,469)    13,685,814

Shares issued upon exercise of options         4,135        41         8,229                                                 8,270
Issuance of warrants to consultants                                   19,500                                                19,500
Issuance of restricted shares for
  SD&A earn-out                              139,178     1,392       423,608                                               425,000
Issuance of common stock for acquisition
      of Pegasus Internet                    600,000     6,000     1,794,000                                             1,800,000
Conversion of $1.7 million of convertible
  debt to common stock, net of discount
  and stock issuance costs                   694,411     6,944     1,629,228                                             1,636,172
Sale of Series D Preferred Stock,
  net of stock issuance costs                                      3,474,982                                             3,474,982
Dividend for non-cash, non-recurring
  beneficial conversion feature                                   (3,214,400)                                           (3,214,400)
Issuance of common stock for acquisition
  of  Media Marketplace, Inc.                222,222     2,222       997,778                                             1,000,000
Adjustment to conversion ratio for
  redeemable convertible preferred stock                            (152,512)                                             (152,512)
Cumulative undeclared dividends for
  redeemable convertible preferred stock                            (464,816)                                             (464,816)
Accretion of redeemable convertible
  preferred stock                                                   (112,274)                                             (112,274)
Net and comprehensive loss                                                        (780,478)                               (780,478)
                                          ----------   -------    ----------    ----------     -------      -------     ----------
Balance June 30,1998                      13,098,510   130,985    29,612,816   (12,283,074)    (11,800)    (135,469)    17,325,258

</TABLE>


The  accompanying  notes  are an  integral  part of the  Consolidated  Financial
Statements.
<PAGE>
                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                    YEARS ENDED JUNE 30, 1999, 1998, AND 1997
                                   (CONTINUED)

<TABLE>
                                 Common Stock       Additional                                     Treasury Stock
                                 ------------        Paid-in      Deferred      Accumulated        --------------
                              Shares      Amount     Capital    Compensation      Deficit        Shares       Amount       Totals
                              ------------------     -------    ------------    -----------      -------------------       ------
<S>                       <C>           <C>       <C>           <C>           <C>             <C>        <C>          <C>
Balance July 1,1998        13,098,510    $130,985  $29,612,816            -    $(12,283,074)    (11,800)   $(135,469)  $17,325,258

Purchase of common stock
  held in treasury                                                                             (412,094)  (1,258,241)   (1,258,241)
Shares issued upon
  exercise of stock
  options                   1,590,101      15,901    4,352,241                                                           4,368,142
Shares issued upon
  exercise of warrants        439,455       4,395    1,087,085                                                           1,091,480
Conversion of $558,765
  of convertible debt and
  interest to common stock    224,000       2,240      556,525                                                             558,765
Issuance of common stock
  for acquisition of CMG
  Direct Corporation        2,321,084      23,211   19,311,411                                                          19,334,622
Warrants issued in
  connection with debt                                 342,000                                                             342,000
Adjustment to conversion
  ratio for redeemable
  convertible preferred
  stock                                            (11,366,022)                                                        (11,366,022)
Cumulative undeclared
  dividends for redeemable
  convertible preferred
  stock                                               (949,365)                                                           (949,365)
Accretion of redeemable
  convertible preferred
  stock                                               (219,943)                                                           (219,943)
Conversion of Series D
  Preferred Stock           4,840,622      48,406   26,854,225                                                          26,902,631
Issuance of below market
  stock options                                      1,232,000   $(1,232,000)                                                    -
Recognition of stock
  based compensation
  expense                                                            443,905                                               443,905
Net and comprehensive loss                                                       (7,645,603)                            (7,645,603)
                           ----------    --------  -----------     ---------   ------------     -------  -----------   -----------
Balance June 30,1999       22,513,772    $225,138  $70,812,973     $(788,095)  $(19,928,677)   (423,894) $(1,393,710)  $48,927,629

</TABLE>

The  accompanying  notes  are an  integral  part of the  Consolidated  Financial
Statements.

<PAGE>

                    MARKETING SERVICES GROUP AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED JUNE 30, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
                                                                      1999                 1998                 1997
                                                                      ----                 ----                 ----
<S>                                                              <C>                  <C>                  <C>
Operating activities:
   Net loss                                                       $(7,645,603)          $(780,478)         $(5,377,096)
   Adjustments to reconcile loss to net cash
    used in  operating activities:
     Gain on sale of land                                                   -                   -              (90,021)
     Gain on sale of MFI                                              (16,604)
     Depreciation                                                     673,154             412,212              250,194
     Amortization                                                   1,609,097           1,073,894              719,400
     Loss on disposal of assets                                             -                   -               35,640
     Discounts on exercise of warrants                                      -                   -              113,137
     Compensation expense on option grants                            443,905                   -            1,650,000
     Accretion on note payable and redeemable stock                    85,500              37,555              161,597
     Warrant Issuances to consultants and creditors                         -              19,500              152,000
     Promissory notes issued for settlement agreements                      -                   -              499,524
     Bad debt expense                                                 162,715              70,170                    -
   Changes in assets and liabilities net of effects
    from acquisitions:
     Accounts receivable                                            1,211,918            (487,516)            (483,959)
     Other current assets                                              29,716            (398,413)            (119,263)
     Other assets                                                    (341,006)           (362,671)            (144,237)
     Trade accounts payable                                          (482,908)         (1,240,126)            (312,493)
     Accrued expenses and other liabilities                         4,224,861            (230,616)              281,539
                                                                    ---------            --------               -------
   Net cash used in operating activities                              (45,255)         (1,886,489)           (2,664,038)
                                                                      -------          ----------            ----------
Investing activities:
   Proceeds from sale of land                                               -                   -               860,443
   Acquisition of MMI, net of cash acquired of $340,550                     -          (5,691,172)                    -
   Acquisition of Metro, net of cash acquired of $349,446                   -                   -               207,327
   Acquisition of Pegasus, net of cash acquired of $43,811                  -            (277,692)                    -
   Acquisition of SK&A, net of cash acquired of $290,946           (3,599,276)                  -                     -
   Acquisition of CMG Direct, net of zero cash acquired           (14,066,608)                  -                     -
   Earn-out relating to acquisition of SD&A                          (850,000)           (425,000)                    -
   Purchases of property and equipment                               (523,437)           (287,529)             (489,846)
   Proceeds from sale of MFI                                          100,000                   -                     -
   Purchase of note receivable                                              -            (600,000)                    -

   Net cash provided by (used in) investing activities            (18,939,321)         (7,281,393)              577,924
                                                                  -----------          ----------               -------
Financing activities:
   Proceeds from sale of convertible preferred stock,
     net of issue costs of $1,101,719                                       -           13,898,280                    -
   Net proceeds from credit facilities                              2,794,467              860,598                    -
   Proceeds from exercise of stock options and warrants             5,459,624                8,271             2,070,125
   Proceeds from  convertible  notes  payable                               -                    -             2,200,000
   Proceeds from short term  note  payable                         10,000,000                    -                     -
   Repayment  of land  option                                               -                    -              (150,000)
   Proceeds  from bank loans and credit facilities                          -                    -             1,686,546
   Repayments of bank loans and credit facilities                           -                    -              (524,838)
   Payments on promissory notes                                      (134,385)                   -               (51,889)
   Repayments  of  note  payable                                     (117,540)            (330,095)           (1,000,000)
   Principal payments under capital lease obligation                 (125,779)             (96,537)              (41,195)
   Purchase of treasury stock                                      (1,258,241)                   -                     -
   Repayments of acquisition debt                                    (583,334)          (1,866,666)             (566,667)
                                                                     --------           ----------              --------

   Net cash provided by financing activities                       16,034,812            12,473,851            3,622,082
                                                                   ----------            ----------            ---------

Net increase (decrease) in cash and cash equivalents               (2,949,764)            3,305,969            1,535,968
   Cash and cash equivalents at beginning of year                   6,234,981             2,929,012            1,393,044
                                                                    ---------             ---------            ---------

Cash and cash equivalents at end of year                           $3,285,217            $6,234,981           $2,929,012
                                                                   ==========            ==========           ==========
</TABLE>

The  accompanying  notes  are an  integral  part of the  Consolidated  Financial
Statements.

<PAGE>
Supplemental disclosures of cash flow data:

                                                1999        1998         1997
                                                ----        ----        -----
   Cash paid during the year for:
     Interest                                 $547,209   $ 439,264    $243,482
     Financing charge                          $75,000  $1,101,719    $154,000
     Income tax paid                          $162,107   $ 45,019$     $45,154


Supplemental  schedule of non cash investing and financing  activities
----------------------------------------------------------------------

o Details of businesses acquired in purchase transactions:

                                          1999          1998          1997
                                          ----          ----          ----
  Working deficit, other than
    cash acquired                     $(1,527,513)   $(203,142)     $(389,310)
  Fair value of other assets
    acquired                          $39,830,212   $9,091,306     $8,528,772
  Liabilities assumed or incurred      $1,302,194     $119,300     $1,090,789
  Fair value of stock issued for
    acquisitions                      $19,334,621   $2,800,000     $7,256,000


  Cash paid for acquisitions
   (including related expenses)       $17,956,830   $6,353,225       $142,119
  Cash acquired                          $290,946     $384,361       $349,446
                                         --------     --------       --------
  Net cash paid for (provided by)
    acquisitions                      $17,665,884   $5,968,864      $(207,327)


For the year ended June 30, 1999:

o  The Company recorded the following  non-cash  preferred  dividends as of June
   30, 1999: (a) $11,366,022 adjustment of the conversion ratio for exercises of
   stock options and warrants;  (b)$949,365 cumulative undeclared dividends; and
   (d) $219,943 of periodic,  non-cash  accretions on preferred  stock. On April
   21, 1999,  the Company  exercised  its right to convert all 50,000  shares of
   General Electric Capital  Corporation's Series D Convertible  Preferred Stock
   into  approximately  4.8 million shares of common stock. In conjunction  with
   the  conversion,   all  preferred  shareholder  rights,  including  quarterly
   dividends,  financial covenants,  acquisition approvals and  board seats were
   cancelled.

o  Convertible  debt and accrued  interest with an aggregate  amount of $558,765
   was converted into 224,000 shares of common stock.

o  Capital lease obligations of $47,934 were incurred for the leasing of certain
   equipment.

o  The Company  sold 85% of the issued and  outstanding  common stock of MFI for
   $1,260,000  consisting of a cash payment of $100,000 and a promissory note of
   $1,160,000.

o  145,000  outstanding  warrants were  converted  into 116,406 shares of common
   stock in a cashless exercise.


For the year ended June 30, 1998:

o  As a result of the sale of  $15,000,000 of redeemable  convertible  preferred
   stock and  warrants  to  General  Electric  Capital  Corporation,  more fully
   described  in Note 12,  the  Company  has  recorded  the  following  non-cash
   preferred   dividends  as  of  June  30,  1998:  (a)   $3,214,400   non-cash,
   non-recurring  beneficial  conversion feature; (b) $152,512 adjustment of the
   conversion ratio for certain issuances of common stock and exercises of stock
   options; (c) $464,816 cumulative  undeclared  dividends;  and (d) $112,274 of
   period, non-cash accretions on preferred stock.

o  Convertible debt and accrued  interest with an aggregate  principal amount of
   $1,700,000  was converted  into 694,411  shares of common stock.  Unamortized
   deferred  financing costs relating to the  convertible  debt in the amount of
   $99,857 were written off to paid in capital upon conversion.

o  Capital  lease  obligations  of  $142,231  were  incurred  for the leasing of
   certain equipment and automobiles.

o  Property and equipment in the amount of $626,356  were  acquired  through the
   foreclosure on a note receivable.

o  The Company issued 139,178 shares of common stock, valued at $425,000,  as an
   earn-out  payment to the former owner of SD&A for achieving  certain targeted
   earnings  for the fiscal  year ended June 30,  1997.  The  Company  increased
   intangible  assets by $780,000 and $91,112 due to an earn-out payment paid to
   the former owner of SD&A for the achievement of defined results of operations
   for the fiscal year ended June 30, 1998 and 1997, respectively.


The  accompanying  notes  are an  integral  part of the  Consolidated  Financial
Statements.
<PAGE>

For the year ended June 30, 1997:

o  7,925 shares of common stock were issued upon  exercise of stock  options for
   15,000  shares,  using 7,075  outstanding  shares as payment of the  exercise
   price.

o  The Company issued 96,748 shares of common stock,  valued at $425,000,  as an
   earn-out  payment to the former owner of SD&A for achieving  certain targeted
   earnings for the fiscal year ended June 30, 1996.

o  Two former  members of executive  management  were granted  stock options for
   600,000  shares  of  common  stock  as part of their  employment  agreements.
   Compensation  expense of $1,650,000 was recognized for the difference between
   the exercise price and the fair market value on the date of grant.

o  The Company issued  3,168,857  shares of its common stock and $1,000,000 face
   value  in debt as part of a  recapitalization.  6,200  shares  of  Redeemable
   Series B Preferred Stock were converted into 2,480,000  common shares;  2,000
   shares of Redeemable Series C Preferred Stock were repurchased for $1,000,000
   in notes;  warrants for 3,000,000  shares were  exchanged for 600,000  common
   shares and $145,753 in accrued  interest  was  converted  into 88,857  common
   shares (see Note 18).

o  The Company  entered into promissory  notes payable for executive  management
   settlement  agreements at a discounted  value of $499,524,  of which $447,635
   was unpaid at June 30, 1997.

o  The Company made  prepayments on a portion of discounted  long-term debt to a
   former owner of Metro Services Group,  Inc., in non-cash accretion of $23,810
   on the discounted debt and goodwill.  Accretion of the discount on the unpaid
   notes was $33,333.

o  Intangible  assets were  increased by $758,888,  payable half in common stock
   and  half in cash to the  former  owner of SD&A as  additional  consideration
   resulting from SD&A's  achievement of defined  results of operations,  during
   fiscal 1997.

o  On July 1, 1997,  the Company  consummated  an agreement to purchase  Pegasus
   Internet,  Inc. At June 30, 1997,  the Company had accrued  $80,000 in unpaid
   acquisition costs.


The  accompanying  notes  are an  integral  part of the  Consolidated  Financial
Statements.

<PAGE>

                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION:

The consolidated financial statements include the accounts of Marketing Services
Group,  Inc.  and its  wholly-owned  subsidiaries.  ("MSGI"  or the  "Company").
Operating  Subsidiaries  include:  Stephen  Dunn &  Associates  ("SD&A");  Metro
Direct,  Inc.  ("Metro  Direct");  Pegasus  Internet,  Inc.  ("Pegasus");  Media
Marketplace, Inc. ("MMI"); Metro Fulfillment, Inc. ("MFI") (through April 1999);
Stevens-Knox & Associates, Inc.; Stevens-Knox List Brokerage, Inc.; Stevens-Knox
International,  Inc.  (collectively  "SK&A);  and CMG Direct  Corporation  ("CMG
Direct").   All  material  intercompany  accounts  and  transactions  have  been
eliminated in consolidation.

The  Company  provides  direct  and  database   marketing,   telemarketing   and
telefundraising,  media  planning and buying,  online  consulting  and commerce,
automated Internet  marketing and Web design services.  Substantially all of the
Company's  business  activity is principally  conducted  with customers  located
within the United States and Canada.


2. SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents:

The Company  considers  investments with an original maturity of three months or
less to be cash equivalents.

Property and Equipment:

Property and equipment are stated at cost.  Depreciation  and  amortization  are
computed using the  straight-line  method over the estimated useful lives of the
respective assets. Estimated useful lives are as follows:

            Furniture and fixtures.................2 to 7 years
            Computer equipment and software........3 to 5 years

Leasehold  improvements are amortized,  using the straight-line method, over the
shorter of the estimated useful life of the asset or the term of the lease.

The  costs of  additions  and  betterments  are  capitalized,  and  repairs  and
maintenance  are  expensed  as  incurred.   The  cost  and  related  accumulated
depreciation  and  amortization  of property and  equipment  sold or retired are
removed  from the  accounts  and  resulting  gains or losses are  recognized  in
current operations.

Intangible Assets:

Intangible  assets  consist of covenants not to compete,  proprietary  software,
customer base, list databases,  assembled work force, present value of favorable
leases and the remaining  excess purchase price paid over identified  intangible
and tangible net assets of acquired  companies.  Intangible assets are amortized
under the  straight-line  method over the period of expected  benefit of 3 to 40
years.

Long-Lived Assets:

The Company  assesses the  recoverability  of its long-lived  assets  (including
property  and  equipment  and  intangible  assets) by  determining  whether  the
amortization of the unamortized balance over its remaining life can be recovered
through projected future cash flows (undiscounted and without interest charges).
If projected future cash flows indicate that the unamortized amounts will not be
recovered,  an adjustment  will be made to reduce the net amounts to fair value.
No  impairment  was  required to be  recognized  in the  accompanying  financial
statements.

Revenue Recognition:

Revenues derived from direct and database marketing are recognized when services
have been fully performed and completed (the "Service Date"),  but does not bill
for such services,  in accordance  with industry  practices,  until all services
relating to a client's campaign, including services to be performed by unrelated
third  parties,  have been  completed.  The client's  obligation  to pay for its
completed  services is not  contingent  upon  completion  of the  services to be
performed by these unrelated third parties. In any event,  clients are billed no
later than a predetermined  mailing date for their respective  campaigns,  which
date is  generally  not more than thirty days after the Service  Date.  Unbilled
receivables  represent the portion of revenues  recognized in excess of revenues
billed in accordance with this practice.

Revenues  derived from  telemarketing  and  telefundraising  are recognized when
pledged cash is received for on-site  campaigns  and when  services are provided
for off-site campaigns.  Revenues derived from media planning and buying, online
consulting and commerce and Web design products are recognized when services are
performed. Deferred revenue represents billings in excess of revenue recognized.

Income Taxes:

The Company  recognizes  deferred  taxes for  differences  between the financial
statement and tax bases of assets and liabilities at currently enacted statutory
tax  rates  and laws for the  years in which the  differences  are  expected  to
reverse.  The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.  Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

Use of 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  at the date of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. The most significant estimates and assumptions made in the
preparation  of the  consolidated  financial  statements  relate to the carrying
amount and amortization of intangible assets,  deferred tax valuation  allowance
and the allowance for doubtful accounts.  Actual results could differ from those
estimates.

Concentration of Credit Risk:

Financial  instruments that potentially  subject the Company to concentration of
credit  risk  consist   primarily  of  temporary  cash   investments  and  trade
receivables.  The Company  restricts  investment of temporary  cash to financial
institutions with high credit standings.  A significant portion of cash balances
are maintained with one financial institution and may, at time, exceed federally
insurable  amounts.  Collateral  is  generally  not  required on trade  accounts
receivable.  Credit risk on trade  receivables  is  minimized as a result of the
large and diverse nature of the Company's customer base.

Earnings (Loss) Per Share:

In October 1997,  the Company  adopted the  provisions of Statement of Financial
Accounting  Standards No. 128,  "Earnings  Per Share"  ("EPS").  This  statement
requires the  presentation  of basic and diluted  earnings per share.  Basic EPS
does not give effect to common stock  equivalents  whereas the  presentation  of
diluted  earnings per share gives effect to all dilutive common shares that were
outstanding  during the period.  Stock options and warrants with exercise prices
below average  market price in the amount of 3,354,238,  1,138,264 and 3,027,624
shares for the years ended June 30, 1999, 1998 and 1997, respectively,  were not
included in the computation of diluted EPS as they are  antidilutive as a result
of net losses during the periods presented.


Employee Stock-Based Compensation:

The  accompanying  financial  position and results of operations for the Company
have been prepared in accordance with APB Opinion No. 25,  "Accounting for Stock
Issued  to  Employees"  ("APB  No.  25").  Under  APB  No.  25,  generally,   no
compensation  expense is recognized  in the  financial  statements in connection
with the awarding of stock option grants to employees  provided  that, as of the
grant date,  the number of shares and the exercise  price of the award are fixed
and the fair value of the Company's  stock, as of the grant date, is equal to or
less than the amount an employee must pay to acquire the stock as defined.

The Company has elected the disclosure only provisions of Statement of Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
123").  Pro forma  operating  results had the  Company  prepared  its  financial
statements in accordance with the  fair-value-based  method of accounting  under
SFAS 123 have been included in Note 14.

Comprehensive Income:

The Company adopted SFAS No. 130, "Reporting  Comprehensive Income" ("SFAS 130")
during the current fiscal year. SFAS 130 establishes standards for the reporting
and display of comprehensive income and its components. The Company has no items
of other comprehensive income in any period presented.

Segment Reporting:

The Company adopted SFAS No. 131,  "Disclosures  about Segments of an Enterprise
and Related  Information"  ("SFAS 131") during the current fiscal year. SFAS 131
establishes  standards  for the way  that  public  business  enterprises  report
information about operating segments in annual financial statements and requires
that those enterprises  report selected  information about operating segments in
interim financial reports issued to shareholders.  It also establishes standards
for related disclosures about products and services,  geographic areas and major
customers.  SFAS 131 requires the  presentation  of financial  information  in a
manner  similar in nature to how the company  views its  business.  MSGI has two
segments,   traditional  direct  marketing  and  Internet  marketing.   Internet
operations for the years ended June 30, 1999, 1998 and 1997 were immaterial.

Start-up Activities:

The Company  adopted  Accounting  Standards  Executive  Committee  "Statement of
Position 98-5 Reporting on the Costs of Start-Up Activities" ("SOP 98-5") during
the current  fiscal year.  SOP 98-5 requires  costs of start-up  activities  and
organization  costs to be  expensed  as  incurred.  There  was no  effect on the
Company's financial statements as a result of adoption of SOP 98-5.

Fair Value of Financial Instruments:

The carrying  amounts of the Company's  financial  instruments,  including cash,
accounts receivable, accounts payable and accrued liabilities,  approximate fair
value because of their short  maturities.  The carrying  amount of the Company's
line of credit and note payable  approximates the fair value of such instruments
based upon  management's best estimate of interest rates that would be available
to the Company for similar debt  obligations  at December 31,  1999,  1998,  and
1997.

Reclassifications:

Certain   reclassifications  have  been  made  to  the  prior  years'  financial
statements to conform with the current year's presentation.


3. ACQUISITIONS

CMG Direct Corporation:

On May 13, 1999,  MSGI  acquired  all of the  outstanding  capital  stock of CMG
Direct Corporation,  a wholly-owned subsidiary of CMGI, Inc. Total consideration
for the acquisition was $33,029,237 which included $13,464,857 in cash, net of a
purchase  price  adjustment  of  $371,992  received  subsequent  to year end, an
aggregate of 2,321,084  shares of common stock of MSGI valued at $19,334,621 and
acquisition costs of $229,759. The cost of the acquisition has been allocated to
the assets  acquired and  liabilities  assumed,  based on their  estimated  fair
value, as follows:

              Working capital                          $    39,274
              Property and equipment                       433,063
              Intangible assets                         32,556,900
                                                        ----------
                                                       $33,029,237

CMG Direct  provides  database  services to the direct  marketing  and  internet
industries.  PermissionPlus, a Web application developed by CMGD Direct, enables
companies  to automate  Web site  customer  acquisition  and  increase  customer
lifetime value.

Stevens-Knox & Associates:

Effective  January 1, 1999,  MSGI  entered  into a stock  purchase  agreement to
acquire  all of the issued and  outstanding  capital  stock  (the  "Shares")  of
Stevens-Knox  and  Associates,  Inc.,  Stevens-Knox  List  Brokerage,  Inc.  and
Stevens-Knox  International,  Inc.  (collectively "SK&A"). The total cost of the
acquisition was  $3,890,222,  consisting of a cash purchase price of $3,254,417,
assumption  and payment of notes and loans  payable of $385,445 and  transaction
and other costs of $250,360.  The cost of the  acquisition has been allocated to
the assets  acquired and  liabilities  assumed based upon their  estimated  fair
values, as follows:

                  Working deficit             $(1,647,833)
                  Property and equipment           78,115
                  Other assets                     63,725
                  Other liabilities            (1,302,194)
                  Intangible assets             6,698,409
                                              -----------
                                               $3,890,222
                                              ===========

The agreement  includes a contingent payment of up to $1,000,000 a year for each
of the next three fiscal years,  adjustable  forward to apply to the next fiscal
year if no  contingent  payment  is due for one  such  year.  The  payments  are
contingent upon (a) SK&A meeting targeted earnings before interest and taxes and
(b) certain targeted billings of MSGI  subsidiaries and affiliates,  as defined.
In  addition,   the  Seller  is  entitled  to  receive   $500,000  in  stock  as
consideration for the Shares,  in the event that certain  conditions are met for
the period February 1, 1999 through January 31, 2000.

SK&A provides list management, brokerage and database management services.

These  acquisitions  have  been  accounted  for  using  the  purchase  method of
accounting.  Accordingly,  the  operating  results  of  these  acquisitions  are
included  in the  results  of  operations  from  the  date of  acquisition.  The
following  summary,  prepared on a pro forma basis,  presents  the  consolidated
results of  operations of MSGI as if CMG Direct and SK&A had been acquired as of
July 1,  1997,  after  including  the  impact of  certain  adjustments,  such as
amortization of intangibles,  adjustments in salaries and increased  interest on
acquisition  debt.  The summary also includes the  conversion of the  redeemable
preferred  stock  as if the  conversion  occurred  prior  to  July 1,  1997.  In
addition,  the pro  forma  results  of MSGI for the  year  ended  June 30,  1998
includes  the  consolidated  results  of  operation  as if MMI,  an  acquisition
completed  in  1998,  had  been  acquired  as of the  beginning  of  the  period
presented.

                                  Supplemental
                              Pro forma information
                           For the year ended June 30,
                                   Unaudited

                                              1999            1998
                                              ----            ----
            Revenues                      $110,214,738    $110,042,929
            Net loss                      $(11,379,079)    $(4,781,025)
            Loss per common share,
              basic and fully diluted        $(.56)           $(.24)

The unaudited pro forma information is provided for informational purposes only.
It is based on  historical  information  and is not  necessarily  indicative  of
future results of operations of the consolidated entities.


4. DISPOSITION OF MFI

In May 1998, the Company formed Metro  Fulfillment,  Inc., ("MFI"), an operating
subsidiary   providing  on-line   commerce,   real-time   database   management,
inbound/outbound  customer  service,  custom  packaging,   assembling,   product
warehousing, shipping, payment processing and retail distribution.

Effective  March 1, 1999,  the  Company  sold 85% of the issued and  outstanding
common stock of MFI for $1,260,000  consisting of a cash payment of $100,000 and
a promissory  note of $1,160,000.  The promissory note is payable in nine annual
installments  and  bears  interest  at prime  plus 1%.  The note  receivable  is
collateralized  by certain  stock  options  held by the  purchaser  of MFI.  The
transaction  resulted in an immaterial  gain.  The purchaser of MFI has retained
the right to acquire the remaining shares under the same terms and conditions as
the original agreement.

The  investment  in MFI  has  been  accounted  for  under  the  cost  method  of
accounting.  Accordingly,  effective  March 1, 1999 the results of operations of
MFI are no longer consolidated in the Company's statement of operations.

In  September  1999,  the  purchaser  elected to acquire the  remaining  15% for
$222,353 which  consisted of a promissory  note. The note is payable  $22,235 on
October 1, 1999 and the  remainder in nine equal annual  installments  and bears
interest  at prime plus 1%. The note  receivable  is  collateralized  by certain
stock options held by the purchaser.


5. PROPERTY AND EQUIPMENT:

Property and equipment at June 30, 1999 and 1998 consist of the following:

                                                        1999           1998
                                                        ----           ----
       Office furniture and equipment             $  2,048,252    $ 1,937,144
       Assets under capital leases                     342,590        303,723
       Leasehold improvements                          355,502        208,879
       Construction in progress                         84,492              -
                                                    ----------     ----------
                                                     2,830,836      2,449,746
       Less accumulated depreciation and
         Amortization                               (1,326,010)      (803,789)
                                                    ----------     ----------
                                                   $ 1,504,826    $ 1,645,957
                                                   ===========    ===========

Assets under capital leases as of June 30, 1999 and 1998,  consist  primarily of
computer  and  related  equipment.  Accumulated  amortization  for  such  assets
amounted to $260,399 and $127,583 as of June 30, 1999 and 1998, respectively.


6. INTANGIBLE ASSETS:

Intangible assets at June 30, 1999 and 1998, consist of the following:

                                    Lives                1999             1998
                                    -----                ----             ----
Covenants not to compete            5 years        $ 1,650,000      $ 1,650,000
Proprietary software                3-7 years        4,340,526          350,000
Customer base                       15-20 years      3,361,573                -
List databases                      3-10 years         966,748                -
Assembled workforce                 5 years            540,655                -
Present value of favorable lease    53 months          347,920                -
Goodwill                            25-40 years     55,112,973       24,988,394
                                                    ----------       ----------
                                                    66,320,395       26,988,394
Less accumulated amortization                       (3,826,446)      (2,217,349)
                                                    -----------      ----------
                                                   $62,493,949      $24,771,045

The  increase  in  intangible  assets  during  1999  was  due to the  identified
intangible assets and costs in excess of net assets acquired in the SK&A and CMG
Direct acquisitions, as well as recording a contingent payment of $70,000 due to
the former owner of SD&A  subsequent to the  achievement  of defined  results of
operations of SD&A during the year ended June 30, 1998.


7. SHORT TERM BORROWINGS:

Certain of the Company's  subsidiaries have renewable two-year credit facilities
with a lender for lines of credit aggregating $7,500,000,  collateralized by all
the  tangible  assets of the  Company,  except  for the  assets  of CMG  Direct.
Borrowings are limited to the lesser of the maximum availability or a percentage
of  eligible  receivables.  Interest is payable  monthly at the Chase  Manhattan
reference  rate (8 1/2% at June 30,  1999 and  1998)  plus 1 1/2% with a minimum
annual interest requirement of $320,000.  The facility requires an annual fee of
1% of the maximum  available line and has tangible net worth and working capital
covenants. As of June 30, 1999 the Company was in violation of certain financial
covenants. The Company has obtained a waiver of such violations.  As of June 30,
1999, the Company had approximately $1,400,000 available on its lines of credit.


8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

Accrued expenses as of June 30, 1999 and 1998 consisted of the following:

                                                    1999              1998
                                                    ----              ----

      Salaries and benefits                      $1,134,987        $ 962,048
      Severance costs                             1,000,000                -
      Stock option withholding taxes              2,977,088                -
      Other                                       3,039,689        1,471,823
                                                  ---------        ---------
              Total                              $8,151,764       $2,433,871
                                                 ==========       ==========


9. NOTE PAYABLE AND OTHER RELATED PARTY TRANSACTIONS:

In connection  with the  acquisition of CMG Direct,  the Company  entered into a
promissory note agreement with GE Capital in the amount of $10,000,000. The note
is payable in full on November  17, 1999 and accrues  interest at 12% per annum.
Interest is payable in arrears on August 17, 1999 and on the maturity  date.  As
of June 30, 1999 GE Capital owned  approximately  22% of the outstanding  common
stock of the Company.  Concurrent  with  issuance of the  promissory  note,  the
original  outstanding  warrant which was issued in connection  with GE Capital's
purchase of redeemable convertible preferred stock was amended (See Note 12).

The Company recorded the promissory note at a discount of $342,000 to reflect an
allocation of the proceeds to the estimated  value of the amended  warrant.  The
discount is being amortized into interest expense using the straight line method
over the term of the debt.  Approximately  $85,500 of such discount was included
as interest expense for the year ended June 30, 1999.

In August 1999,  the note was amended to extend the maturity date to October 15,
2000 with interest to be paid  quarterly  and provides for certain  increases in
the  interest  rate  based on the time the  principal  remains  outstanding.  In
addition,  in the event the Company  completes a private placement as defined on
or before December 20, 1999 the maturity date is subject to acceleration. During
September  1999, the Company  completed a private  placement of common stock for
net proceeds of  approximately  $30.8 million (See Note 20). In accordance  with
the amendment,  $5,000,000,  net of discount is included in current  liabilities
and the remaining balance is due on July 1, 2000.

On December 2, 1998, MSGI loaned an officer of the Company $100,000  pursuant to
a promissory  note.  The note bore  interest at the rate earned on the Company's
money market fund. Principal and interest were payable in full in a lump sum. In
April 1999, the promissory note, including accrued interest was repaid.

A member of the Board of  Directors,  is a partner in a law firm which  provides
legal services for which the Company incurred expenses aggregating approximately
$94,000, $176,000 and $110,000 during fiscal 1999, 1998 and 1997, respectively.

During fiscal 1997, two directors  purchased  warrants to acquire 100,000 common
shares for $5,000 pursuant to consulting  agreements entered into prior to their
appointments.


10. LONG TERM OBLIGATIONS:

Long term obligations as of June 30, 1999 and 1998 consist of the following:

                                                         1999              1998
                                                         ----              ----
         Promissory notes to former shareholder
            of SD&A, payable monthly at
         8% interest through October 1999          $   233,333       $  816,667
         Promissory notes to former shareholder
            of SK&A, payable monthly at
            5.59% interest through January 2004      1,242,585                -
         Promissory notes to former shareholders
            of SK&A payable in quarterly
         installments at 12% interest through
         March 2000                                     92,625                -
         Promissory notes to former executives,
            net of unamortized discount, payable
         in equal monthly installments
         through September 1998 (see Note 18).               -          117,540
         6% convertible notes (a)                            -          500,000
                                                   -----------     ------------
         Total                                       1,568,543        1,434,207
         Less:  current portion                       (570,653)      (1,317,540)
                                                   ------------    ------------
         Total long-term obligations                $  997,890      $   116,667
                                                    ==========      ===========


(a)  In April  1997,  the Company  received  $2,046,000,  net of fees,  from the
     private  placement  of 6%  convertible  notes,  with  a  stated  amount  of
     $2,200,000.  The notes were payable with interest on April 15, 1999, if not
     previously  converted.  The notes  were  convertible  at the  option of the
     holder,  into shares of the  Company's  Common Stock at the lesser of $2.50
     per  share or 83% of the  average  closing  bid price of the  Common  Stock
     during the last five trading days prior to conversion.  During fiscal 1998,
     $1,700,000 face value of the notes,  plus accrued  interest,  was converted
     into 694,412 shares. During fiscal 1999 the remaining $500,000 of principal
     plus accrued  interest was converted  into 224,000  shares of the Company's
     common stock.


11. COMMITMENTS AND CONTINGENCIES:

Leases:   The  Company  leases   various   office  space  and  equipment   under
non-cancelable  long-term  leases.  The Company  incurs all costs of  insurance,
maintenance and utilities.

Future minimum rental  commitments under all  non-cancelable  leases, as of June
30, 1999 are as follows:

                                 Operating Leases      Capital Leases
                                 ----------------      --------------
                  2000             $1,865,871              $85,359
                  2001              1,234,913               46,489
                  2002              1,116,654                8,105
                  2003              1,061,890                    -
                  2004                697,143                    -
                  Thereafter        4,197,034                    -
                                    ---------            ---------
                                  $10,173,505              139,953
                                  ===========
Less interest                                              (20,447)
                                                           -------
Present value of capital lease
   obligation                                             $119,506
                                                          ========

Rent expense was approximately $840,000, $646,000 and $445,000, for fiscal years
ended 1999, 1998 and 1997, respectively.

Contingencies:   In  June  1999,   certain   employees  of  SD&A  voted  against
representation by the International  Longshore and Warehouse Union ("ILWU"). The
ILWU has filed unfair labor  practices with the National Labor  Relations  Board
("NLRB")  alleging  that the Company  engaged in unlawful  conduct  prior to the
vote. The NLRB has issued a complaint  seeking a bargaining order and injunctive
relief  compelling  the  Company to  recognize  and bargain  with the ILWU.  The
Company  intends to vigorously  defend  against these  charges.  An  unfavorable
finding will not have any direct financial impact on the Company.

Litigation:  In September,  1999, an action was commenced against the Company in
the Supreme Court of New York,  Kings County alleging damages of $4.3 million in
connection  with the  Company's  alleged  failure  to deliver  warrants  due the
plaintiff.  The Company  denies all liability  and intends to vigorously  defend
against this action.

In addition to the above,  certain  other legal actions are pending to which the
Company is a party. The Company does not expect that the ultimate  resolution of
pending  legal  matters in future  periods  will have a  material  effect on the
financial condition, results of operations or cash flows.


12. PREFERRED STOCK:

On December 24, 1997, the Company and General Electric Capital  Corporation ("GE
Capital")  entered into a stock purchase  agreement  (the "Purchase  Agreement")
providing  for the  purchase  by GE  Capital  of (i)  50,000  shares of Series D
redeemable  convertible  preferred  stock,  par  value  $0.01  per  share,  (the
"Convertible  Preferred Stock"), and (ii) a warrant to purchase up to 10,670,000
shares of Common Stock (the "Warrants"),  all for an aggregate purchase price of
$15,000,000.  The Convertible  Preferred  Stock was  convertible  into shares of
Common Stock at a conversion  rate,  subject to  antidilution  adjustments.  The
Warrant  is  exercisable  in  November  2001  and is  subject  to  reduction  or
cancellation based on the Company's meeting certain financial goals set forth in
the  Warrant or upon  occurrence  of a  qualified  secondary  offering  within a
certain time period, as defined.

The  Company  recorded  the  Convertible   Preferred  Stock  at  a  discount  of
approximately  $1,362,000,  to  reflect an  allocation  of the  proceeds  to the
estimated  value of the warrant and was being  amortized as dividends  using the
"interest  method"  over  the  redemption  period.  Approximately  $219,000  and
$112,000 of such  discount  has been  included as a dividend for the years ended
June 30,  1999 and 1998,  respectively.  In  addition,  the  Company  recorded a
non-cash,  non-recurring  deemed  dividend of $3,214,400 for the year ended June
30,  1998  representing  the  difference  between  the  conversion  price of the
Convertible  Preferred Stock and the fair market value of the common stock as of
the date of the agreement.


Dividends  were  cumulative  and  accrued  at  the  rate  of 6% per  annum.  The
convertible  preferred stock was  mandatorily  redeemable for $300 per share, if
not previously  converted,  on the sixth  anniversary of the original issue date
and was redeemable at the option of the holder upon the occurrence of an organic
change in the Company, as defined in the purchase agreement.

On April 21, 1999, the Company  exercised its right to convert all 50,000 shares
of  GE  Capital's   Series  D  redeemable   convertible   preferred  stock  into
approximately  4.8  million  shares of common  stock.  In  conjunction  with the
conversion,  all preferred  shareholder rights,  including quarterly  dividends,
financial  covenants,  acquisition  approvals  and board seats,  were  cancelled
effective immediately.

In May 1999,  the warrant to purchase up to  10,670,000  shares of common  stock
("Original Warrant") was amended in connection with the issuance of a promissory
note (See Note 9). Upon an  occurrence  of a Qualified  Secondary  Offering,  as
defined in the agreement,  the Original Warrant was fixed at 200,000 shares with
an  exercise  price of $.01 per  share.  The  amendment  changed  the amount and
exercise  price per share to 300,000  shares with an exercise price of one-third
of the secondary  offering  price upon an  occurrence  of a Qualified  Secondary
Offering.  In August  1999,  the  warrant was amended a second time to amend the
definition  of a Qualified  Secondary  Offering  to include a Qualified  Private
Placement,  as  defined,  and to change the time frame for the  completion  of a
Qualified  Secondary  Offering or Private Placement from December 31, 1999 to on
or after December 20, 1999 through April 30, 2000.


13. RECAPITALIZATION:

On December 23, 1996 the Company and certain of its security  holders effected a
recapitalization  of the Company's  capital  stock,  whereby:  (i) the Company's
Series B Convertible  Preferred  Stock,  par value $.01 per share (the "Series B
Preferred Stock"), was converted into 2,480,000 shares of Common Stock; (ii) the
Company's  Series C Convertible  Preferred  Stock, par value $.01 per share (the
"Series  C  Preferred  Stock"),  was  repurchased  for  promissory  notes  in an
aggregate principal amount of $1.0 million, which promissory notes bore interest
at a rate of 8% per  annum  and were  paid in full in  April,  1997;  (iii)  all
accrued  interest  on the Series B  Preferred  Stock and the Series C  Preferred
Stock was converted into 88,857 shares of Common Stock; (iv) warrants related to
the Series C Preferred  Stock were exchanged for 600,000 shares of Common Stock.
Upon conversion of the Series B Preferred Stock and accumulated interest thereon
into Common Stock, the Company incurred a non-cash,  non-recurring  dividend for
the difference  between the conversion  price and the market price of the Common
Stock,  totaling $8.5 million.  Upon repurchase of the Series C Preferred Stock,
the Company  incurred a  non-recurring  dividend of $573,000 for the  difference
between  the  repurchase  price  and the  accreted  book  value of the  stock at
December 23, 1996.

Prior to the recapitalization,  the Company recorded dividends in fiscal 1997 of
$806,425 to its  preferred  stockholders  to accrete  the value  assigned to the
stock at the date of sale up to its  convertible  value at the date of automatic
conversion.


14. COMMON STOCK AND STOCK OPTIONS:

On September 23, 1998, the Company  announced its intention to acquire,  in open
market transactions, up to 1,000,000 shares of its Common Stock, par value, $.01
per share (the "Common Stock"), subject to and in compliance with the provisions
and  limitations  of  Rule  10b-18  of the  Securities  Exchange  Act  of  1934.
Purchases,  if any, may be made from time to time at  prevailing  market  prices
during the one-year period which commenced on September 28, 1998.  Purchases may
be discontinued at any time during the one-year period without purchasing all of
the  1,000,000  shares.  The Company will not solicit the purchase of any of its
Common  Stock or otherwise  tender for the purchase of any of its Common  Stock.
The source of funds for the  purchase of any shares  will be from the  Company's
general  corporate  funds,  and any shares  purchased  will be held in treasury.
During 1999, the Company bought back 412,094 shares at a cost of $1,258,241.

During fiscal years ended 1998 and 1997,  the Company  issued 139,178 and 96,748
shares of common stock, respectively, as additional contingent payment resulting
from SD&A's  achievement  of defined  results of operations  for fiscal 1997 and
1996.

Stock  Options:  The Company  maintains a  non-qualified  stock option plan (the
"1991 Plan") for key employees,  officers, directors and consultants to purchase
3,150,000  shares of common  stock.  In February  1999,  the Board of  Directors
approved a stock  option  plan (the "1999  Plan") for the  issuance  of up to an
additional  1,000,000  shares of common stock under qualified and  non-qualified
stock options. Both plans are administered by the compensation  committee of the
Board of Directors  which has the authority to determine  which officers and key
employees  of the  Company  will  be  granted  options,  the  option  price  and
exercisability of the options.  In no event shall an option expire more than ten
years after the date of grant.

On November  16,  1998,  the  compensation  committee  of the Board of Directors
agreed to  reprice  certain  stock  options of  employees  of the  Company.  All
employee  stock options with an exercise  price greater than $3.11 were repriced
to $3.11. As a result, stock options in the amount of 950,458 were repriced.  On
November 16, 1998, the closing price of the Company's stock was $2.189.

The following  summarizes the stock option  transactions under the 1991 Plan for
the three years ended June 30, 1999:
                                            Number         Option Price
                                          of Shares          Per Share
                                          ---------          ---------
         Outstanding at July 1, 1996       524,807

         Granted                         1,117,000        $2.50 to $3.00
         Exercised                         (15,000)           $2.625
         Canceled                          (40,060)       $2.00 to $2.50
                                        ----------
         Outstanding at June 30, 1997    1,586,747

         Granted                         1,302,100        $2.825 to $6.00
         Exercised                          (4,135)            $2.00
         Canceled                          (93,132)       $2.00 to $16.00
                                          --------

         Outstanding at June 30, 1998    2,791,580

         Granted                           379,200        $3.00 to $8.50
         Exercised                      (1,590,101)      $2.00 to $4.1875
         Canceled                          (20,626)       $2.00 to $3.00
                                          --------

         Outstanding at June 30, 1999    1,560,053

The following  summarizes the stock option  transactions under the 1999 Plan for
the year ended June 30, 1999:

                                            Number         Option Price
                                          of Shares         Per Share
                                          ---------         ---------

         Granted                           190,000        $5.17 to $8.50
                                           -------
         Outstanding at June 30, 1999      190,000
                                           =======

During  fiscal  1999,  400,000  stock  options  were granted with a below market
exercise price on the date of employment to an executive of the Company. 133,000
options vested  immediately and the balance ratably over the next two years. The
aggregate  difference  of $1,232,000  between the exercise  price and the market
price on the date of  grant  has been  recorded  as  deferred  compensation  and
included in stockholders'  equity. The deferred  compensation is being amortized
into  compensation  expense over the vesting period of the options.  The Company
recognized  compensation expense of approximately $444,000 during the year ended
June 30, 1999.

During  fiscal 1997,  the Company  incurred a non-cash  charge of  $1,650,000 in
connection with the granting of options to certain members of management.

In addition to the 1991 and 1999 Plans,  the Company has option  agreements with
current  and  former  officers  and  employees  of the  Company.  The  following
summarizes transactions for the three years ended June 30, 1999:

                                              Number       Option Price
                                            of Shares        Per Share
                                            ---------        ---------

         Outstanding at July 1, 1996           2,250
         Granted                           1,000,000      $2.625 to $3.50
                                           ---------
         Outstanding at June 30, 1997      1,002,250
         Canceled                             (2,250)         $16.00
                                             -------
         Outstanding at June 30, 1998      1,000,000
         Granted                             400,000           $5.17
                                           ---------
         Outstanding at June 30, 1999      1,400,000
                                           =========


As of June 30, 1999,  1,128,549  options are  exercisable.  The weighted average
exercise  price of all  outstanding  options is $3.53 and the  weighted  average
remaining  contractual  life is 5.25 years.  Except as noted above,  all options
granted in fiscal years 1999, 1998 and 1997 were issued at fair market value. At
June 30, 1999, 810,000 options were available for grant.

Had the Company determined compensation cost based on the fair value methodology
of SFAS 123 at the grant date for its stock options,  the Company's net loss and
earnings per share would have been adjusted to the pro forma  amounts  indicated
below:
                                                    Years ended June 30,
                                             --------------------------------
                                             1999          1998          1997
                                             ----          ----          ----
 Net loss                 as reported    $(7,645,603)   $(780,478)  $(5,377,096)
                          pro forma      $(9,913,855) $(2,798,152)  $(7,822,901)
 Net loss attributable
  to common stockholders  as reported   $(20,180,933) $(4,724,480) $(20,199,038)
                          pro forma     $(22,449,185) $(6,742,154) $(22,644,843)

 Earnings per share       as reported      $(1.39)        $(.37)       $(2.85)
                          pro forma        $(1.54)        $(.52)       $(3.19)

Pro forma net loss  reflects  only options  granted in fiscal 1996 through 1999.
Therefore,  the full impact of calculating  compensation  cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts  presented
above because  compensation  cost is reflected over the options' maximum vesting
period of seven years and compensation cost for options granted prior to July 1,
1995, has not been considered.  The fair value of each stock option is estimated
on the date of grant  using the  Black-Scholes  option  pricing  model  with the
following  weighted  average  assumptions:  an expected life of vesting plus two
years,  expected  volatility of 90%, no dividend yield and a risk-free  interest
rate ranging from 4.5% to 6%.


15. WARRANTS:

In August 1996,  consultants paid $5,000 for warrants valued at $81,000,  as per
consulting agreements, which the Company recorded as an expense.

In March 1997,  the Company  accepted  offers from  certain  warrant  holders to
exercise  their  warrants for  3,152,500  shares of common  stock at  discounted
exercise  prices.  The  Company  recognized  the  dates  of  acceptance  as  new
measurement  dates and,  accordingly,  recorded  non-cash  charges totaling $5.1
million in March 1997,  to reflect  the market  value of the  discounts.  Of the
total,  $113,000  was charged  directly to  interest  expense as the  underlying
transaction  was  debt  related,  and the  remainder  was  charged  directly  to
stockholders' equity.

In May and June 1997, the Company  issued  warrants for 240,000 shares of common
stock valued at $76,000 to three consultants for financial advisory services.

As of June 30, 1999,  the Company has 204,185  warrants  outstanding to purchase
shares of common stock at prices  ranging from $2.50 to $8.00.  All  outstanding
warrants are currently exercisable.


16. INCOME TAXES:

A  reconciliation  of the  Federal  statutory  income tax rate to the  effective
income tax rate based on pre-tax loss from continuing operations follows:

                                            1999         1998        1997
                                            ----         ----        ----
         Statutory rate                      (34)%       (34)%       (34)%
         Change in valuation allowance        29%         13 %        34 %
         State income taxes, net of
            Federal benefit                    1%          9 %         2 %
         Non-deductible expenses               4%         36 %         -
         Non-taxable income                    -         (10)%         -
         Prior year tax benefit                -         (11)%         -
         Other                                 -          (1)%         -
                                            ----          ----      ----

         Effective rate                        0%          2 %        2 %
                                            ====          ====       ====


                                                         As of June 30,
                                                         --------------
                                                      1999          1998
                                                      ----          ----
        Deferred tax assets:
           Net operating loss carryforwards      $21,909,217    $1,810,178
           Compensation on option grants             150,928       619,310
           Amortization of intangibles                66,655       121,423
           Other                                     285,760       119,034
                                                 -----------  ------------
        Total deferred tax assets                 22,412,560     2,669,945
        Valuation allowance                      (22,412,560)   (2,669,945)
                                                 ------------   -----------
        Net deferred tax assets                  $         -    $         -
                                                 ============  ============


The Company has a net operating loss  carryforward of approximately  $64,400,000
available  which expires from 2009 through  2019.  Of these net  operating  loss
carryforwards  approximately  $52 million is the result of  windfall  deductions
related to the exercise of non-qualified stock options. The realization of these
net operating loss carryforwards would result in a credit to equity.  These loss
carryforwards are subject to annual limitations.


17. WITHDRAWAL OF REGISTRATION STATEMENT:

On October 17, 1996, the Company filed a Form SB-2  registration  statement (the
"Registration  Statement")  with the  Securities  and Exchange  Commission.  The
Registration  Statement  related to a proposed  underwritten  public offering of
2,100,000  shares of Common Stock, of which 1,750,000  shares were being offered
by the Company and 350,000  were being  offered by certain  stockholders  of the
Company.  It also  related to the sale of  1,381,056  shares of Common  Stock by
certain selling  stockholders on a delayed basis. Due to market  conditions,  on
February 11, 1997, the Company withdrew the Registration Statement and wrote-off
approximately $1.2 million in accrued offering costs.


18. RESTRUCTURING COSTS:

During  the  year  ended  June  30,  1997,  the  Company  effected  a  corporate
restructuring,  including the decision to reduce corporate  staffing and related
administrative  costs, as well as making two executive  management  changes.  In
connection  with the  restructuring,  expenses of $986,000 were recorded,  which
included  $942,000 in  executive  management  and other  settlement  costs.  The
executive  management  settlement  agreements included two non-interest  bearing
promissory  notes with face values of $290,000 and $250,000  payable in eighteen
equal monthly  installments.  These notes were  discounted to reflect  effective
interest rates of 10% and were fully paid during fiscal 1999.


19. EMPLOYEE RETIREMENT SAVINGS PLAN (401K):

Certain  subsidiaries  sponsor tax deferred  retirement  savings plans  ("401(k)
plans") which permit  eligible  employees to contribute  varying  percentages of
their  compensation  up to the  annual  limit  allowed by the  Internal  Revenue
Service.

Certain  subsidiaries  match employees'  contributions to a maximum of 2% of the
employee's  salary.  Matching  contributions  charged to expense were $63,523, $
48,822 and $23,353  for the fiscal  years  ended June 30,  1999,  1998 and 1997,
respectively.

Certain  subsidiaries  also  provide for  discretionary  company  contributions.
Discretionary  contributions charged to expense for the fiscal year end June 30,
1999  and  1998  were  $63,391  and  $24,959,   respectively.  No  discretionary
contributions were made in the fiscal year ended June 30, 1997.


20. SUBSEQUENT EVENTS

In July 1999,  MSGI entered into an agreement to acquire all of the  outstanding
common stock of Atlanta-based Grizzard  Communications Group. The purchase price
is $50  million  cash  and  $50  million  dollars  in  MSGI  common  stock.  The
acquisition is targeted to close by the end of calendar year 1999 and is subject
to certain  conditions,  including  approval by the  stockholders  of  Grizzard.
Grizzard's services include strategic planning,  creative,  database management,
print-production,   mailing  and  Internet  marketing.  Grizzard's  client  base
includes  retail,  consumer and  business-to-business  companies as well as many
premier not-for-profit  clients. The acquisition will be accounted for under the
purchase method of accounting.

In July 1999,  the  Company  invested  $1,555,000  to acquire a 10%  interest in
Screenzone Media Network,  LLC  ("Screenzone").  Screenzone is a new interactive
broadcast  gateway that was  developed to advertise and promote  movies,  music,
live events and other entertainment at shopping malls and over the Internet. The
investment will be accounted for under the cost method of accounting.

In September 1999, the Company  completed an investment of $5,000,000 to acquire
convertible  preferred  stock of  GreaterGood.com.  The Company  owns 18% of the
outstanding shares of GreaterGood.com on a fully diluted basis.  GreaterGood.com
builds,  co-markets  and manages  online  shopping  villages for  not-for-profit
organization  web sites.  The  investment  will be accounted  for under the cost
method of accounting.

In September 1999, the Company completed a private placement of 3,130,586 shares
of  common  stock  for  proceeds  of   approximately   $30.8  million,   net  of
approximately $2,000,000 of placement fees and expenses. The shares have certain
registration  rights.  The  proceeds  of the private  placement  will be used in
connection with the investments described in the preceding paragraphs,  to repay
certain short-term debt and for working capital purposes.

In October 1999, the Company  completed an acquisition of  approximately  85% of
the outstanding common stock of Cambridge  Intelligence  Agency for $1.8 million
in common stock of the Company, subject to certain adjustments.  The acquisition
will be accounted for under the purchase method of accounting.

<PAGE>

                                                                   Schedule II

                         Marketing Services Group, Inc.
                       Valuation and Qualifying Accounts
                For the Years Ended June 30, 1999, 1998 and 1997


------------------------------------------------------------------------------
Column A        Column B             Column C            Column D     Column E
------------------------------------------------------------------------------
                                     Additions
                              -----------------------
                Balance at    Charged To   Charged To
Description     Beginning     Costs And      Other      Deductions-   Balance At
                Of Period      Expenses    Accounts-    Describe 1      End Of
                                           Describe 2                   Period
--------------------------------------------------------------------------------
Allowance for
doubtful accounts

Fiscal 1999     $421,861      $162,715      $361,377     $394,910       $551,043


Fiscal 1998      $32,329       $70,170      $319,362            -       $421,861


Fiscal 1997      $34,906             -       $39,700      $42,277        $32,329




------------
1 Represents accounts written off during the period.
2 Represents  allowance  for  doubtful  account  balance on the opening  balance
  sheets for acquisitions made during the year.