UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549


**FORM
      10-KSB**




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




For
      the
      fiscal year ended June 30, 2007




OR




oTRANSITION
      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





**MSGI
      Security Solutions, Inc.**


(Exact
      Name of Registrant as Specified in Its Charter)




Nevada
            88-0085608(State
                or other jurisdiction of incorporation or
                organization)
            (I.R.S.
                Employer Identification
                No.)575
                Madison AvenueNew
                York, New York
            10022(Address
                of principal executive
                offices)
            (Zip
                Code)





Issuer’s
      telephone number, including area code:  (917)
      339-7150




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)




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.





Yes
o
      No x





Note
      -
      Checking the box above will not relieve any registrant required to file reports
      pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
      under
      those Sections.





Indicate
      be check mark whether the registrant (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 o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x




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




Yes
o
        No x




The
      issuer’s revenues for its most recent fiscal year were: $177,895.




As
      of
      September 28, 2007, the aggregate market value of the voting stock held by
      non-affiliates of the Registrant was approximately $9,565,198.




As
      of
      September 28, 2007, there were 11,565,557 shares of the Registrant's common
      stock outstanding.




Transitional
      Small Business Disclosure Format: Yes o No x





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.









TABLE
      OF CONTENTS


Part
                    IItem
                    1. Business
                
                
                Page 3
                    - 15Item
                    2. Properties
                
                
                Page
                    16Item
                    3. Legal Proceedings
                
                
                Page
                    16Item
                    4. Submission of Matters to a Vote of Security Holders
                
                
                Page
                    16Part
                    IIItem
                    5. Market for Common Equity and Related Stockholder Matters and
                    Small
                    Business Issuer Purchases
                
                
                Page
                    17Item
                    6. Management’s Discussion and Analysis or Plan of
                    Operations
                
                
                Page
                    17 - 29Item
                    7. Financial Statements
                
                
                Page
                    30 - 58Item
                    8. Changes in and Disagreements With Accountants on Accounting
                    and
                    Financial Disclosures
                
                
                Page 59
                    - 61Item
                  8A Controls and Procedures
                
                
                Page 
                  59Item
                  8T Controls and Procedures
                
                
                Page 
                  61Item
                  8B Other Infomration
                
                
                Page 
                  61Part
                    IIIItem
                    9. Directors, Executive Officers, Promoters and Control Persons:
                    Compliance with Section 16(a) of the Exchange Act
                
                
                Page 62Item
                    10. Executive Compensation
                
                
                Page 62Item
                    11. Security Ownership of Certain Beneficial Owners and Management
                    and
                    Related Stockholder Matters
                
                
                Page 62Item
                    12. Certain Relationships and Related Transactions
                
                
                Page 62Item
                    13. Exhibits
                
                
                Page
                    62 - 63Item
                    14. Principal Accountant Fees and Services
                
                
                Page
                    64


2




**PART
      I**





**Special
      Note Regarding Forward-Looking Statements**




Some
      of
      the statements contained in this Annual Report on Form 10-KSB 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, homeland security
      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, 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





MSGI
      Security Solutions, Inc. is a provider of proprietary security solutions to
      commercial and government organizations. MSGI is developing a combination of
      innovative emerging businesses that leverage information and technology with
      a
      focus on encryption technologies for actionable surveillance and intelligence
      monitoring. The Company is headquartered in New York City where it serves the
      needs of counter-terrorism, public safety, and law enforcement in the United
      States, Europe, the Middle East and Asia.





The
      Company’s Strategy





MSGI
      acquires controlling interests in early-stage, early growth technology and
      software development businesses. These emerging firms are led by entrepreneurs
      and management teams that have “bleeding edge” products, but lack the
      infrastructure, business relationships and financing that MSGI can offer. The
      Company will typically seek to acquire a 51% controlling interest in the target
      company for a combination of cash and securities. The cash component is not
      paid
      to the founding principals; but rather must be reinvested in the company on
      a
      monthly basis by our corporate finance staff.





The
      target company generally must agree to a ratchet provision by which the
      Company’s stake increases up to another 25% for failure to reach first years
      expectations. MSGI generally retains a right of first refusal in the event
      that
      any of the minority parties in the various companies receives an unsolicited
      offer for their interests in the business. To the extent these target companies
      do not meet MSGI’s continuing expectations; the Company will generally dispose
      its interests in such operations.





The
      Company also seeks business and growth opportunities through strategic
      relationships and sub-contract relationships where its experience and expertise
      in coordinating and implementing security technologies may be
      employed.





At
      the
      current time, the MSGI strategy is focused on proprietary security products
      and
      services to commercial and governmental organizations worldwide with a focus
      on
      cutting-edge encryption technologies for surveillance and intelligence
      monitoring in the United States, Europe, the Middle East and Asia. The Company
      has established a relationship with Hyundai Systems, Inc. and Apro Media, Inc.
      (see later discussion) in which the Company aggregates and configures security
      systems.





Background





The
      Company was originally incorporated in Nevada in 1919.





The
      Company had acquired or formed several direct marketing and related companies.
      Due in part to decreased market demands and limited capital resources, the
      Company disposed or ceased operations of all such companies. The following
      acquisitions and dispositions occurred during the past three years:




3


Date
                Name
                    of Company Acquired
                Service
                    PerformedApril
                    2004Acquired
                    51% of Future Developments America, Inc.
                Provider
                    of technology-based products and services specializing in
                    application-specific and custom-tailored restricted-access intelligence
                    products, systems and proprietary solutions .August
                    2004
                Acquired
                    51% of Innalogic, LLC
                Designs
                    and deploys content-rich software products for a wide range of
                    wireless
                    mobile devices.December
                    2004
                First
                    investment in Excelsa S.p.A.
                Provider
                    of Video Control systems and services for security both for the
                    civilian
                    and military markets.January
                    2005
                Second
                    investment in Excelsa S.p.A.May
                    2005
                Renegotiation
                    of second investment in Excelsa S.p.A.June
                    2005
                Acquired
                    51% interest in AONet
                  International
                    S.r.L.
                Provider
                    of application hosting, data redundancy and disaster recovery
                    servicesJuly
                    2005
                Acquired
                    additional equity in Future Developments America, Inc. bringing
                    total
                    ownership stake to 100% and restructured the business with the
                    founders of
                    such business such that Future Developments America, Inc. became
                    a
                    non-exclusive sales organization and the founders (through “FDL” an entity
                    in which the founders own 100% interest) of such business re-acquired
                    the
                    underlying technology and operating assets.August
                    2005
                Acquired
                    additional equity in Innalogic, LLC bringing total ownership
                    stake to
                    76%April
                    1, 2006
                Forfeited
                    51% interest in AONet International S.r.L. as a result of default
                    of
                    provision of the purchase agreement. Results were reclassified
                    to a
                    discontinued operation.January
                    2007
                Excelsa
                    S.p.A. filed for bankruptcy. The investment was fully
                    impaired.April
                    1, 2007
                Entered
                    into a license agreement with CODA Octopus, Inc. (“CODA”) where by MSGI
                    will receive a royalty on sales of products by CODA using the
                    Innalogic
                    proprietary technology. In connection with such transaction,
                    CODA assumed
                    certain development and operational responsibilities of the Innalogic
                    technologies.


Capital
        Stock and Certain Recent Financing Transactions
 
 Notes
        payable at June 30, 2007 and 2006 are summarized as follows:
  Instrument
              
              Maturity
              
              Face
                  Amount
              
              Coupon
                  Interest Rate
              
              Carrying
                  Amount at June 30, 2007, net of discount
              
              Carrying
                  Amount at June 30, 2006, net of discountNotes
                  Payable
              
              
              Demand
              
              $
              500,000
              
              
              N/A
              
              $
              600,000
              
              $
              600,000Notes
                  Payable
              
              
              Various
              
              
              Various
              
              
              Various
              
              
              -
              
              
              842,4278%
                  Notes
              
              
              Dec.
                  13, 2009
              
              
              3,000,000
              
              
              8
              %
              
              1,427,411
              
              
              2,574,5976%
                  Notes
              
              
              Dec.
                  13, 2009
              
              
              2,000,000
              
              
              6
              %
              
              361,111
              
              
              -6%
                  April Notes
              
              
              April
                  4, 2010
              
              
              1,000,000
              
              
              6
              %
              
              83,334
              
              
              -8%
                  Debentures
              
              
              May
                  21, 2010
              
              
              5,000,000
              
              
              8
              %
              
              185,185
              
              
              -Advances
                  from strategic partner (CODA)
              
              
              N/A
              
              
              varies
              
              
              8
              %
              
              -
              
              
              300,000


4


See
        description of the accounting implication of certain features of these notes
        in
        the notes to the consolidated financial statements.
 
 8%
        Notes
  On
        July
        12, 2005, MSGI closed a Callable Secured Convertible Note financing of $3
        million with a New York based institutional investor (the “8% Notes”).
        Substantially all of the assets of the Company are pledged as collateral
        to the
        note holders. The Note initially required repayment over a three-year term
        with
        an 8% interest per annum. Repayment shall be made in cash or in registered
        shares of common stock if the stock price exceeded $4.92 per the agreement
        terms, or a combination of both, at the option of the Company, and payment
        commenced 90 days after the closing date and was payable monthly in equal
        principal installments plus interest over the remaining 33 months. Further,
        the
        Holder has the option to convert all or any part of the outstanding principal
        to
        common stock if the average daily price, as defined in the agreement, for
        the
        preceding five trading days is greater than the defined Initial Market Price
        of
        $6.56. The original conversion price for this holder option was $4.92. The
        Company granted registration rights to the investors for the resale of the
        shares of common stock underlying the notes and certain warrants that were
        issued in the transaction. The Note agreement provides the Company with the
        option to call the loan and prepay the remaining balance due. If the loan
        is
        called early, the Company will be required to pay 125% of the outstanding
        principal and interest as long as the common stock of the Company is at $6.00
        or
        less. If the stock price is higher than $6.00 when the Company exercises
        the
        call option, then the amount owed is based upon a calculation, as defined
        in the
        agreement, using the average daily price. If in any month a default occurs,
        the
        note shall become immediately due and payable at 130% of the outstanding
        principal and interest. In January 2006, the Chief Executive Officer entered
        into a guarantee and pledge agreement with the note holders, whereby, the
        common
        stock of MSGI owned by the Chief Executive Officer (approximately 190,000
        shares) was pledged as additional collateral for these notes. On June 7,
        2006,
        the Company entered into a waiver and amendment agreement which modified
        certain
        payment due dates of the notes to provide for a payment of $395,450 due July
        14,
        2006 for debt service due from April 2006 through July 2006. Such payment
        was
        not made on July 14, 2006. In consideration for the waiver agreement, the
        Company issued 800,000 warrants to the note holders. As of July 14, 2006,
        the
        Company was in technical default of the payment terms of the 8% Notes. This
        default was further waived on December 13, 2006, per the terms below.
 
 On
        December 13, 2006, the Company entered into an agreement for the issuance
        of
        $2,000,000 of 6% callable convertible notes (see below) and also entered
        into a
        letter agreement with certain of the Investors to amend the 8% Notes and
        warrants as well as the promissory notes (See below) previously issued to
        these
        Investors by the Company, and to waive certain defaults under these notes
        and
        warrants. The letter agreement also serves to amend the amortization and
        payment
        terms of the 8% Notes. A single balloon payment will be due on the 8% Notes
        on
        the revised maturity date of December 13, 2009. As a result of the amendments
        to
        the 8% Notes, these notes will continue to accrue interest through the amended
        maturity date. In addition, the conversion rate was amended. The
        amended conversion price of the 8% Notes is 75% of the average of the lowest
        three closing prices of the Company’s common stock for the 20 day period prior
        to such conversion, with a minimum conversion price of $0.50 per share. In
        connection with the issuance of the 8% Notes, the Company also issued five-year
        warrants to the investors for the purchase of up to 75,000 shares of the
        Company's common stock, $0.01 par value, at an original exercise price of
        $7.50
        per share, which are exercisable at any time. The placement agent received
        three-year warrants for the purchase of 12,195 shares of the Company's common
        stock, at an exercise price of $7.50 per share exercisable between the period
        January 12, 2006 and January 11, 2009. In connection with the December 13,
        2006
        letter agreement, the terms of the warrants issued to the note holders were
        modified to change the exercise price to $1.00 per share and to extend the
        term
        of the warrants to expire on the seventh anniversary of the original issuance
        date.
  Other
        Notes Payable
  During
        December 2005, the Company entered into a short-term note in the amount of
        $250,000. This loan bears interest at a rate of 10% through June 30, 2006
        and
        has an annual imputed interest rate of 18.25%. Further, the full amount of
        interest will be paid to the lender regardless of any possible early payment
        of
        principal. This amount has been paid in full through the issuance to the
        lender
        of Series G Convertible Preferred Stock in December 2006 and the subsequent
        conversion of such preferred stock into shares of common stock.
  5
  On
        January 19, 2006, the Company entered into four short-term notes with the
        same
        lenders that also hold the 8% Callable Convertible Notes. These promissory
        notes
        provided proceeds totaling $500,000 to the Company. The notes were originally
        due and payable on April 19, 2006 in the aggregate total of $600,000, including
        imputed interest of $100,000 at an annual imputed interest rate of 80%. In
        the
        event of any defined event of default declared by the lenders by written
        notice
        to the Company, the notes shall become immediately due and payable, and the
        Company shall incur a penalty of an additional 15% of the amounts due and
        payable under the notes. At June 30, 2007 and 2006 the balance due is
        $600,000.
  In
        connection with the waivers and amendments executed for the 8% Callable
        Convertible notes above, as of June 7, 2006 and December 13, 2006, the same
        agreements also waived and amended the maturity date of these short-term
        notes.
        The December 13, 2006 letter agreement amends the maturity date of the
        promissory notes to provide for a balloon payment on December 13, 2009. Any
        and
        all default provisions under the terms of the original promissory notes were
        waived and there are no default interest provisions enforced under the terms
        of
        the original promissory notes.
  During
        the months of February and March 2006, the Company entered into a series
        of
        promissory notes with various private lenders. The notes closed in a series
        of
        four transactions over the period of February 2006 to March 2006. Gross proceeds
        in the amount of $799,585 were obtained and the notes carry an aggregate
        repayment total of $975,103 (which includes imputed interest of $175,518
        or
        21.95%), which is due and payable upon maturity. The notes carried a maturity
        date of February 28, 2007. In addition, warrants for the purchase of up to
        585,062 shares of the Company’s common stock were issued to the individual
        lenders. The warrants carry an original exercise price of $6.50 and a term
        of 5
        years. The warrants also contain a reprice feature and the exercise price
        was
        modified to $1.00. The warrants may be exercised 65 days after the date of
        issuance. Placement fees in the amount of $73,133 were paid to vFinance
        Investments, Inc. as placement agent. Other closing fees and finders fees
        of
        $66,090 were also paid. In addition to the placement fees, warrants for the
        purchase of up to 73,134 shares of the Company’s common stock were issued to the
        placement agent and its designees. The agent warrants carry an exercise price
        of
        $6.50, a term of 5 years and may be exercised 65 days after the date of
        issuance. These notes were satisfied through the issuance of common stock
        during
        fiscal 2007, however the warrants remain outstanding.
 
 6%
        Notes
  On
        December 13, 2006, pursuant to a Securities Purchase Agreement between the
        Company and several institutional investors , MSGI issued $2,000,000 aggregate
        principal amount of callable secured convertible notes (the “6% Notes”) and
        stock purchase warrants exercisable for 3,000,000 shares of common stock
        in a
        private placement for an aggregate offering price of $2,000,000. The conversion
        of the 6% Notes and the exercise of the warrants were subject to stockholder
        approval , which the Company received on March 6, 2007. H.C. Wainwright acted
        as
        a placement agent for a portion ($1,000,000) of the offering. The 6% Notes
        have
        single balloon payment of $2,000,000 on the maturity date of December 13,
        2009
        and will accrue interest at a rate of 6% per annum. The Investors can convert
        the principal amount of the 6% Notes into common stock of the Company, provided
        certain conditions are met, and each conversion is subject to certain volume
        limitations. The conversion price of the 6% Notes is 75% of the average of
        the
        lowest three closing prices of the Company’s common stock for the 20 day period
        prior to such conversion, with a minimum conversion price of $0.50 per share.
        The payment obligation under the Notes may accelerate if the resale of the
        shares of common stock underlying the 6% Convertible Notes and warrants are
        not
        registered in accordance with the terms of the Registration Rights Agreement
        ,
        payments under the Notes are not made when due or upon the occurrence of
        other
        defaults described in the Notes. The warrants became exercisable once
        Stockholder Approval was obtained, on March 6, 2007, and are exercisable
        through
        December 2013. The exercise price of the warrants is $1.00 per share. The
        6%
        Notes and the warrants have anti-dilution protections, and the Company has
        agreed to certain registration rights for the resale of the shares of common
        stock underlying the 6% Notes, pursuant to a Registration Rights Agreement
        entered into simultaneously with the transaction (the “Registration Rights
        Agreement”). The Company has also entered into a Security Agreement and an
        Intellectual Property Security Agreement with the Investors in connection
        with
        the closing, which grants security interests in certain assets of the Company
        and the Company’s subsidiaries to the Investors to secure the Company’s
        obligations under the 6% Notes and warrants. The registration rights agreement,
        as amended on December 13, 2006, provides for a registration filing 120 days
        from the date of closing and a registration effective date within 180 from
        the
        date of closing. The agreement provides for a cash penalty of approximately
        2%
        of the value of the notes to be paid to each of the holders for each thirty-day
        period that is exceeded. This provision has been waived by the investors
        through
        June 30, 2007.
  6
  H.C.
        Wainwright received a placement fee of $100,000 and will receive 5 year warrants
        exercisable for 225,000 shares of common stock at an exercise price of $1.00
        per
        share.


6%
        April Notes
  On
        April
        5, 2007, pursuant to a Securities Purchase Agreement between the Company
        and
        several institutional investors , MSGI issued $1,000,000 aggregate principal
        amount of callable convertible notes (the “6% April Notes”) and stock purchase
        warrants exercisable for 1,500,000 shares of common stock in a private placement
        for an aggregate offering price of $1,000,000. The warrants have an exercise
        price of $1.00 and are exercisable for a term of 7 years. The 6% April Notes
        have single balloon payment of $1,000,000 on the maturity date of April 5,
        2010
        and will accrue interest at a rate of 6% per annum. The Investors can convert
        the principal amount of the 6% April Notes into common stock of the Company,
        provided certain conditions are met, and each conversion is subject to certain
        volume limitations. The conversion price of the 6% April Notes is 75% of
        the
        average of the lowest three closing prices of the Company’s common stock for the
        20 day period prior to such conversion, with a minimum conversion price of
        $0.50
        per share. The payment obligation under these notes may accelerate if the
        resale
        of the shares of common stock underlying the 6% Convertible Notes and warrants
        are not registered in accordance with the terms of the Registration Rights
        Agreement, payments under the Notes are not made when due or upon the occurrence
        of other defaults described in the Notes. The 6% April Notes and the warrants
        have anti-dilution protections, and the Company has agreed to certain
        registration rights for the resale of the shares of common stock underlying
        the
        6% April Notes, pursuant to a Registration Rights Agreement entered into
        simultaneously with the transaction. The Company has also entered into a
        Security Agreement and an Intellectual Property Security Agreement with the
        Investors in connection with the closing, which grants security interests
        in
        certain assets of the Company and the Company’s subsidiaries to the Investors to
        secure the Company’s obligations under the 6% April Notes and warrants. The 6%
        April Notes and Warrants also carry registration rights which contain penalty
        clauses if the underlying shares are not registered per the terms of the
        agreement. The agreement calls for a registration filing 90 days from closing
        date and a registration effective date within 150 days from the date of closing
        of the funding transaction. The agreement provides for a cash penalty of
        approximately 2% of the value of the notes to be paid to each of the holders
        for
        each thirty-day period that is exceeded. This provision in the agreement
        has
        been waived by the investors through June 30, 2007.
 
 8%
        Debentures
  On
        May
        21, 2007, MSGI Security Solutions, Inc. pursuant to a Securities Purchase
        Agreement between
        the Company and several institutional investors issued 8% convertible debentures
        in the aggregate principal
        amount of $5,000,000 (the “8% Debentures”) and stock purchase warrants
        exercisable over a five year period for 1,785,713 shares of common stock
        in a
        private placement. H.C. Wainwright acted as a placement agent for the offering. The
        8%
        Debentures have a maturity date of May 21, 2010 and will accrue interest
        at a
        rate of 8% per annum. Payments of principal under
        the
        Debentures are not due until the maturity date and interest is deferred until
        the maturity date, however the Investors can convert the principal amount
        of the
        8% Debentures into common stock of the Company, provided certain conditions
        are
        met, and each conversion is subject to certain volume limitations. The
        conversion price of the 8% Debentures is $1.40 per share yielding an aggregate
        total of possible shares to be issued as a result of conversion of 3,571,428
        shares. The exercise price of the Warrants is $2.00 per share. The 8% Debentures
        and the Warrants have anti-dilution protections and the Company has agreed
        to
        certain registration rights for the resale of the shares of common stock
        underlying the Debentures and Warrants, pursuant to a registration rights
        agreement entered into simultaneously with the transaction . The Company
        has also entered into a Security Agreement with the Investors in connection
        with
        the closing, which grants security interests in certain assets of the Company
        and the Company’s subsidiaries to the Investors to secure the Company’s
        obligations under the 8% Debentures and Warrants. H.C. Wainwright received
        a
        placement fee of $400,000 and 5 year warrants exercisable for 357,142 shares
        of
        common stock at an exercise price of $2.00 per share.
 
 Advances
        from strategic partner - CODA
  During
        the year ended June 30, 2007, the Company received funding, in the amount
        of
        approximately $722,000 from CODA Octopus Group, Inc. (“CODA”) as an advance
        in  contemplation of a further strategic transaction between the two
        parties. CODA has also paid directly, in support of our subsidiary Innalogic
        LLC, certain operating expenses in the amount of approximately $537,000.
        During
        the year ended June 30, 2007, the Company repaid CODA $234,000 of the $537,000
        paid on our behalf. The net of these transactions brought the aggregate total
        due to this firm to approximately $1.0 million. The advances bore interest
        at a
        rate of 8% and interest expense was $36,552 for the year ended June 30, 2007.
        On
        April 1, 2007 the Company, through its majority-owned subsidiary Innalogic,
        LLC
        entered into a non-exclusive License Agreement with CODA. This agreement
        allows
        for CODA to market the Innalogic, LLC “SafetyWatch” technology to its client
        base, sub-license the Technology to its customers and distributors, use the
        Technology for the purposes of demonstration to potential customers,
        sub-licensors and/or distributors and to further develop the source code
        of the
        Technology as it sees fit. In return, CODA will pay a 20% royalty to MSGI
        from
        the sale of the Technology to its customers. On May 16, 2007 the Company
        issued
        850,000 unregistered common shares to CODA Octopus Group, Inc. as full and
        final
        payment and a release of all financial obligations resulting from advances
        made
        by CODA to the Company and/or Innalogic LLC, the Company's subsidiary through
        the period ended June 30, 2007. CODA assumed certain development and operational
        activities of Innalogic in connection with this transaction.
  7
  Liquidity
  The
        Company has limited capital resources, has incurred significant historical
        losses and negative cash flows from operations and has limited current revenues.
        The Company was also in default of its debt service payments or other provisions
        of the debt agreements of some of its notes payable, but has successfully
        reached a resolution to these defaults. The Company believes that funds on
        hand
        combined with funds that will be available from its various operations will
        not be adequate to finance its operations and capital expenditure
        requirements and enable the Company to meet its financial obligations and
        payments under its convertible notes and promissory notes for the next twelve
        months. Further, there is uncertainty as to timing, volume and
        profitability of transactions that may arise from our relationship with Hyundai
        and Apro (see discussion below). The
        Company is in the process of consummating certain strategic transactions
        that
        may provide significant capital. The Company has engaged the investment banking
        firm of HC Wainwright to raise additional capital to fund operations and
        funding
        events were successfully closed on December 13, 2006, April 4, 2007 and May
        21,
        2007. There are no assurances that any further capital raising transactions
        will
        be consummated. Although certain transactions have been successfully closed,
        failure of our operations to generate sufficient future cash flow and failure
        to
        consummate our strategic transactions or raise additional financing could
        have a
        material adverse effect on the Company's ability to continue as a going concern
        and to achieve its business objectives. These conditions raise substantial
        doubt
        about the Company’s ability to continue as a going concern. The accompanying
        financial statements do not include any adjustments relating to the
        recoverability of the carrying amount of recorded assets or the amount of
        liabilities that might result should the Company be unable to continue as
        a
        going concern.
 
 Industry
 
 *Overview.*
  The
        primary industries in which our companies operate are homeland security and
        international public safety. In the United States and abroad, homeland security
        and public safety are not purely separate areas, but rather law enforcement,
        fire departments, civil defense organizations and medical response teams
        are a
        crucial segment of any crisis situation, and work together with multiple
        government agencies to manage and resolve emergency situations. The Company
        believes its products and services work throughout the chain of threat
        prevention, detection, dissuasion, management and resolution to expedite
        the
        collection and dissemination of data in a secure fashion to field agents
        and
        decision-makers.
  *Industry
        Growth.*
 
 The
        primary industries in which our companies operate are homeland security and
        public safety. The market for homeland security and safety technologies has
        been
        rapidly growing since the terrorist attacks occurred in the eastern United
        States in September 2001.
 
 The
        “critical infrastructure” of the United States that could be subject to attack
        or a non-terrorist crisis (fire, earthquake, flooding) is absolutely enormous.
        According to the Environmental Protection Agency (“EPA”) and the U.S. General
        Accounting Office (“GAO”), there are more than 120 chemical plants within the
        United States that could each potentially expose more than one million people
        if
        an attack on the facility caused chemicals to be released, and there are
        more
        than 66,000 chemical plants nationwide. There are more than 5,800 hospitals,
        2,800 power plants, 5,000 public airports, 300 coastal and inland ports,
        104
        commercial nuclear power plants, 600 natural gas processing facilities, 153
        oil
        refineries, 7,500 bulk petrochemical terminals, 80,000 dams, 3,000
        government-owned facilities and sites, and 460 “key asset” skyscrapers in the
        country, along with more than 250,000 sites owned by firms that are considered
        part of the “defense industrial base”.
 
 8
  The
        U.S.
        Department of Homeland Security (the “DHS”) has identified multiple end users of
        surveillance collection and data transmission technologies, including state
        and
        local governments, border and transportation security (for border entry points,
        transportation hubs, and shipping facilities), critical infrastructure
        protection, various military agencies and the U.S. Coast Guard, and the United
        States Secret Service.
  All
        of
        this surveillance and interoperability improvement activity is expected to
        come
        at a significant cost. The DHS has estimated that reaching an accelerated
        goal
        of communications interoperability will require a major investment of *several
        billion dollars* over the
        next decade. There are several funding resources at all levels to assist
        in the
        development and acquisition of interoperable communications technologies,
        but
        the federal government is the primary source. There are multiple federal
        grant
        programs, including the Homeland Security grants, Urban Area Security
        Initiative, the Office for Community Oriented Policing Services (“COPS”) within
        the Department of Justice (“DOJ”), FEMA interoperable communications grants,
        Assistance to Firefighters grants, DOJ Local Law Enforcement Block Grants,
        and
        National Urban Search and Rescue Grants. The COPS program alone was authorized
        by Congress to administer the Interoperable Communications Technology Program
        beginning in 2003. More than $66 million in grants have been awarded by COPS
        to
        first responders for communications equipment, training and technical
        assistance. The fiscal year 2005 budget for DHS has allocated approximately
        $3.6
        billion in grants for first-responders, $37 million in additional funds to
        help
        build out the Homeland Security Operations Center (the nerve center for homeland
        security information and incident management across the United States) and
        FEMA
        incident-management capabilities, and $3.6 billion to the Office for Domestic
        Preparedness. Approximately $474 million has been earmarked for the
“Intelligence and Warning” segment of the National Strategy Mission Area for
        Homeland Security, which aggregates all non-military spending across the
        entire
        federal budget for that segment, $8.8 billion has been earmarked for the
        “Emergency Preparedness and Response” segment, and $3.4 billion has been
        allocated for “Defending Against Catastrophic Threats”. Roughly $16.6 billion is
        reserved for security, enforcement, and investigational activity by the Bureau
        of Customs and Border Protection, Transportation Security Administration,
        the
        Coast Guard and the Secret Service. More than $5.5 billion in federal grants
        for
        first-responders from previous fiscal years remains available for distribution.
        The Urban Area Security Initiative Grants, given out by DHS to large local
        municipalities for security equipment, training and assistance, have been
        proposed to rise from $727 million in fiscal year 2004 to $1.45 billion in
        fiscal year 2005.
  Beyond
        interoperability of communications between agencies, our products also offer
        significant advancements for surveillance and data collection and dissemination
        within law enforcement and fire department agencies for civilian crimes,
        fires
        and other incidents. For law enforcement, because of the many factors that
        arise
        in situations involving police and private citizens, surveillance technology
        that transmits information to field officers, commanders, and to a repository
        has significant advantages over relying on eyewitness surveillance. We believe
        that recording of video and audio can be very valuable for investigations
        and
        prosecution.
  A
        RAND
        Corporation survey of law enforcement agencies in the United States in 2000
        found a significant proportion of the respondents lacked even the most basic
        surveillance technologies. Approximately 59% of local departments and 33%
        of
        state police departments did not use fixed-site video surveillance, while
        only
        3% of local departments and 7% of state departments reported widespread use
        of
        this technology. Some of the larger cities, such as New York City and Baltimore,
        have quite comprehensive fixed video surveillance in highly trafficked public
        areas, such as Times Square and Central Park. Almost 70% of local departments
        and 27% of state police departments did not use any sort of mobile video
        surveillance cameras, which would be used in a stakeout, hostage or other
        field
        incident. The primary reason cited for not acquiring this equipment was cost.
        Law enforcement agencies are widely expected to improve the quality of their
        surveillance data collection and dissemination technologies over the coming
        years. Even before the 2001 attacks, a 1998 study by the Rocky Mountain Region
        of the National Law Enforcement and Corrections Technology Center estimated
        that
        the use of digital communications systems would nearly double, rising to
        25% of
        all police departments in the country by the end of calendar year 2007.
  9
  We
        also
        are actively marketing our surveillance and data communications products
        and
        services into various agencies and sectors of the United States military
        and
        intelligence services. In an article by Professor Peter Raven-Hansen of the
        George Washington Law School in the U.S. State Department’s journal *U.S.
        Foreign Policy Agenda* ,
        the
        author notes that the first step in bringing terrorists to justice is
        surveillance of potential attackers and prime targets. The U.S. Supreme Court
        has ruled that collection of “security intelligence” for use in a terrorism
        investigation is different than collection of evidence of a regular crime,
        partly because it is needed to prevent terrorism. Congress has enacted laws
        permitting independent judges to authorize surveillance for the purpose of
        collecting foreign intelligence in the United States on a lesser showing
        of
        probable cause than for a regular crime. The agency need only show that there
        is
        probable cause to believe that the target of the surveillance is a foreign
        agent
        or an international terrorist.
 
 Services
        Offered by MSGI’s Operating Subsidiaries
 
 **Relationship
        with Hyundai Syscomm Corp. :**
  On
        September 11, 2006 the Company entered into a License Agreement with Hyundai
        Syscomm Corp. (“Hyundai”) whereby, in
        consideration of a one-time $500,000 fee (of which $300,000 was received
        in
        October 2006 and the remaining 200,000 was received in June 2007), MSGI granted
        to Hyundai a non-exclusive worldwide perpetual unlimited source, development
        and
        support license, for the use of the technology developed and owned by MSGI’s
        majority-owned subsidiary, Innalogic, LLC. This license entitles Hyundai
        to
        onward develop the source code of the technology to provide wireless
        transmission and encryption capabilities that work with any other of Hyundai’s
        products, to use the technology for the purposes of demonstrating the technology
        to potential customers, sub-licensees and distributors, market the technology
        world wide either under its existing name or any name that Hyundai may decide
        and to sub-license the technology to its customers and distributors generally.
        The License Agreement carries certain intellectual property rights which
        state
        that (i) Hyundai will follow all such reasonable instructions as MSGI may
        give
        from time to time with regard to the use of trademarks or other indications
        of
        the property and other rights of MSGI or its subsidiaries, (ii) warrants
        that
        MSGI is the sole proprietary owners of all copyright and intellectual property
        rights subsisting in the technology and undertakes to indemnify Hyundai at
        all
        times against any liability in respect of claims from third parties for
        infringement thereof and (iii) provides that Hyundai acknowledges that the
        intellectual property rights of any developments of the technology that are
        undertaken by MSGI rest and will remain owned by the Company.
 
 On
        October 19, 2006, the Company entered into a Subscription Agreement with
        Hyundai
        for the issuance of 900,000 shares of the Company's common stock. Subject
        to the
        terms and conditions set forth in the Subscription Agreement, the Company
        agreed
        to issue up to 900,000 shares of common stock contingent upon the Company's
        receipt of $500,000 received in connection with a certain License Agreement,
        dated September 11, 2006 (See above), and execution of a certain then pending
        Sub-Contracting Agreement (see below). Under the terms and conditions set
        forth
        in the Subscription Agreement, Hyundai agreed that the Company shall not
        be
        required to issue, or reserve for issuance at any time in accordance with
        Nasdaq
        rule 4350(i), in the aggregate, Common Stock equal to more than 19.99% of
        the
        Company's common stock outstanding (on a pre-transaction basis). Therefore
        the
        Company issued 865,000 shares of common stock at the initial closing of the
        transaction, and the remaining 35,000 shares of common stock shall be issued
        when and if: (a) the holders of a majority of the shares of common stock
        outstanding vote in favor of Hyundai owning more than 19.99% of the Company's
        common stock outstanding; or (b) additional issuances of common stock by
        the
        Company permit such issuance in accordance with Nasdaq rule 4350(i). As of
        the
        date of submission of this report, the Company is obligated to issue the
        remaining 35,000 shares of common stock to Hyundai, per the terms of the
        Subscription Agreement.
 
 On
        October 25, 2006, the Company entered into a Sub-Contracting Agreement with
        Hyundai. The Sub-Contracting Agreement allows for MSGI and its affiliates
        to
        participate in contracts that Hyundai and/or its affiliates now have or may
        obtain hereafter, where the Company's products and/or services for encrypted
        wired or wireless surveillance systems or perimeter security would enhance
        the
        value of the contract(s) to Hyundai or its affiliates. The initial term of
        the
        Sub-Contracting Agreement is three years, with subsequent automatic one year
        renewals unless the Sub-Contracting Agreement is terminated by either party
        under the terms allowed by the Agreement. Further, under the terms of the
        Sub-Contracting Agreement, the Company will provide certain limited product
        and
        software warranties to Hyundai for a period of 12 months after the assembly
        of
        the Company's products and product components by Hyundai or its affiliates
        with
        regard to the product and for a period of 12 months after the date of
        installation of the software by Hyundai or its affiliate with regard to the
        software. The Company will also provide training, where required, for assembly,
        maintenance and usage of the equipment and shall charge its most favored
        price
        for such training services. No title or other ownership of rights in the
        Company's firmware or any copy thereof shall pass to Hyundai or its affiliates
        under this Agreement. Hyundai and its affiliates agree that it shall not
        alter
        and notices on, prepare derivative works based on, or reproduce, disassemble
        or
        decompile any Software embodied in the firmware recorded in the Company's
        products.
  10
  On
        February 7, 2007, the Company issued to Hyundai Syscomm Corp. a warrant to
        purchase up to a maximum of 24,000,000 shares of common stock in exchange
        for a maximum of $80,000,000 in revenue, which is to be realized by the
        Company over a maximum period of four years. The vesting of the Warrant will
        take place quarterly over the four-year period based on 300,000 shares for
        every
        $1,000,000 in revenue realized by the Company. The revenue is subject to
        the
        sub-contracting agreement between Hyundai and the Company dated October 25,
        2006. Additionally, when issued, the shares underlying the warrant were to
        be
        authorized through an increase in the total of authorized capital stock of
        the
        company to be approved by the stockholders. The warrant could not begin to
        vest
        until these underlying shares were authorized. Such approval was obtained
        at the
        Special Meeting of the Stockholders on March 6, 2007. No
        transactions under this agreement have occurred to date.
 
 On
        May
        10, 2007, the Company entered into an exclusive sub-contract and distribution
        agreement with Apro Media Corp. (“Apro” or “Apro Media”) for at least $105
        million of sub-contracting business over seven years to provide commercial
        security services to a Fortune 100 defense contractor.  Under
        the
        terms of contract, MSGI will acquire components from Korea and deliver fully
        integrated security solutions at an average level of $15 million per year
        for
        the length of the seven-year engagement.  MSGI will also immediately
        establish and operate a 24/7/365 customer support facility in the Northeastern
        United States. Apro will provide MSGI with a web-based interface to streamline
        the ordering process and create an opportunity for other commercial security
        clients to be acquired and serviced by MSGI. The contract calls for gross
        profit
        margins estimated to be between 26% and 35% including a profit sharing
        arrangement with Apro Media, which will initially take the form of unregistered
        MSGI common stock, followed by a combination of stock and cash and eventually
        just cash. In the aggregate, assuming all the revenue targets are met over
        the
        next seven years, Apro Media would eventually acquire approximately 15.75
        million shares of MSGI common stock. MSGI was referred to Apro Media by Hyundai
        as part of a general expansion into the Asian security market, however revenue
        under the Apro contract does not constitute revenue under the existing Hyundai
        warrant to acquire common stock of MSGI. The contract requires working capital
        of at least $5 million due to considerable upfront expenses including a $2.5
        million payment by MSGI to Apro Media for the proprietary system development
        requirements of the Fortune 100 client and the formation of a staffed production
        and customer service facility and warehouse.   On May 21, 2007, MSGI
        acquired the funding necessary for the execution of the contract, shortly
        thereafter, made the required payment of $2.5 million to Apro. However, we
        received our first order through Apro during the three months period ended
        June
        30, 2007 and the first shipment of product under this arrangement occurred
        approximately September 30, 2007.
 
 **Innalogic,
        LLC:**
  Innalogic
        LLC (“Innalogic”) is a wireless software product development firm that works
        with clients - such as the U.S. Department of Homeland Security - to
        custom-design technology products that meet specific user, functional and
        situational requirements.
 
 Innalogic
        has a recognized core competency in an area of increasingly vital importance
        to
        security, delivering rich-media content (video, audio, biometric, sensor
        data,
        etc.) to wirelessly enabled mobile devices for public safety and security
        applications over wireless or wired networks.
 
 On
        April
        1, 2007 the Company entered into a non-exclusive License Agreement with the
        CODA
        Octopus Group, Inc., through its majority owned subsidiary, Innalogic, LLC.
        This
        agreement allows for CODA to market the Innalogic, LLC “SafetyWatch” technology
        (the “Technology”) to its client base, sub-license the Technology to its
        customers and distributors, use the Technology for the purposes of demonstration
        to potential customers, sub-licensors and/or distributors and to further
        develop
        the source code of he Technology as it sees fit. In return, CODA will pay
        a 20%
        royalty to MSGI from the sale of the Technology to its customers. CODA has
        assumed certain development and operational activities of
        Innalogic.
 
 Importantly,
        Innalogic’s wireless video applications help clients make the critical upgrade
        of CCTV video security systems from analog to digital technology. Innalogic
        software applications easily integrate with existing systems - camera or
        rich-media networks - and are specially designed to incorporate or integrate
        with new or replacement technologies as they come online.
 
 11
  Currently
        in development is Innalogic SafePassage(tm), an embedded application software
        that installs within firmware at the SOC level and is used secure the
        transmission of IP or packet data in a wireless network environment. Innalogic’s
“Embedded Modular Cryptography Platform” (EMCP) integrates on the application,
        transport, and link layers. Devices, such as PDAs, handheld computers, and
        video
        cameras, using EMCP - EA, can operate with strong encryption in a wireless
        network. EMCP - EA secures wireless data transfer on small devices to support
        real-time wireless network applications like audio and video feeds, financial
        transaction processing, and other types of confidential data
        transmissions.
 
 The
        underlying technology for ECS - SafePassage applies to a wide range of
        functional scenarios.
 Scenarios
        include:
  ·
                Wired
                    or Wireless Video Camera Network  ·
                Sensor Network  ·
                Intelligent
                  Appliances  ·
                Building Automation and
                  Control
  SafePassage
        design modularizes functionality in object oriented software components.
        These
        components integrate with other Innalogic Embedded products, or may be used
        to
        design an embedded product for a unique customer requirement.
  Innalogic
        is comprised of product designers, network engineers, senior software engineers,
        interface designers, and cybersecurity specialists with unparalleled depth
        of
        expertise in designing and deploying wireless technologies. Innalogic’s core
        competencies include:
 
 ·
              Product
                  design
 ·
              Software
                  engineering
 ·
              Hardware
                  integration
 ·
              Network
                  engineering
 ·
              Interface
                  design
 ·
              System
                  integration
 ·
              Cybersecurity
                  engineering
 
 Innalogic
        product designers and engineers collectively bring decades of experience
        in
        software development, hardware deployment (e.g., video camera networks) and
        systems integration. Of particular significance is our ability to custom-write
        software that bridges the functionality of disparate hardware, software,
        and
        network systems and technologies.
 
 Software
        Development
 
 Innalogic
        adopts a straightforward and collaborative approach to software product
        development. Based on iterative design and development principles from Extreme
        Programming, Agile Modeling, and Rational Unified Process, Innalogic’s
        methodology allows the client to guide and continually refine our understanding
        of their design requirements as the product development process
        evolves.
 
 An
        Innalogic product “roadmap” is developed for the client. The roadmap is an
        evolutionary tool that reflects precise client requirements - as they change
        over time. The client can guide the direction of the product roadmap by
        specifying key requirements, standards, and recommendations. The system can
        then
        be strategically updated, enhanced and modified to deploy the latest advances
        in
        video and security technology as determined by the client’s evolving functional
        specifications.
 
 Innalogic
        designs, programs, tests and installs customized software applications to
        ensure
        maximum functionality, usability and client satisfaction.
 
 Clients
        receive a proprietary Software Development Kit (SDK) and application-specific
        APIs that allow the client’s IT leaders to introduce and design new system
        features and functionality as desired.
  12
  Network
        Design and Engineering Services
 
 Innalogic’s
        wireless network development and engineering expertise is applied to deliver
        customized solutions for clients’ specific challenges and requirements. Working
        in close concert with the client’s IT leaders and network administrators,
        Innalogic delivers these benefits:
 
 · Creation
          of customized software applications for a client’s video network - designed
          specifically to optimize the network’s intended functionality and design
          requirements. Innalogic’s network software delivers maximum reliability and
          ease-of-use by client personnel utilizing the system.
 · Customized
          network applications that allow for maximum control, oversight and ongoing
          administration of individual users in all locations where the network is
          deployed.
 Network
        “Command Center”
 
 At
        the
        core of Innalogic’s network design and engineering services is the creation of a
        customized network Command Center.
 
 With
        a
        focus on a network’s current functional requirements and future expansion,
        Innalogic develops an elegantly architected Command Center modeled after
        our
        proprietary SafetyWatchTM software program - which is now being deployed for the
        U.S. Department of Homeland Security. The Command Center is designed to enhance
        the client’s existing network infrastructure, while facilitating the
        introduction of new features and connectivity with other wired and wireless
        devices. Moreover, the Command Center is designed to offer maximum
        scalability.
 
 An
        Innalogic network Command Center delivers these features:
 
 · Local
          or
          remote management — The Command Center enables centralized remote monitoring and
          coordinated recording across multiple sites, regardless of geographical
          location.
 · Integration
          with existing network infrastructure — The Command Center interoperates with
          other wireless or wired networked digital devices and third- party analog
          CCTV
          components, such as cameras, monitors, matrixes and
          multiplexors.
 · Powerful
          recording search facilities — The Command Center is able to quickly analyze
          thousands of recordings using motion, time and camera search criteria -
          thus
          saving valuable incident search time.
 · Review
          incidents while still recording — Video recordings can be viewed without
          interrupting current recording.
 · Simple
          remote system installation — The Command Center allows for device configuration
          remotely.
 · Secure
          control of viewer access — The Command Center supports and provides
          administrative controls for multiple user levels.
 Additionally,
        Innalogic serves as a vital technology partner to the client, supporting
        all
        related technology (hardware and software) initiatives that arise during
        the
        course of a network design and engineering engagement.
  **Future
        Developments America, Inc. (“FDA”):**
  As
        a
        result of our July 1, 2005 amendment to our agreements with the founder’s of
        FDA, the technology and intellectual property being developed was transferred
        to
        a company (“FDL”) controlled by the founders of FDA and we, through our
        subsidiary FDA, are a non-exclusive licensee in the United States of certain
        products developed by FDL and of other products developed by outside
        organizations. We also are entitled to receive royalties on sales of certain
        products by FDL. Some of FDL’s product offerings to be marketed are in the
        development stage at June 30, 2007, and we have not yet generated any revenue
        with respect to those products.
  FDL
        markets a broad variety of off-the-shelf and custom surveillance equipment,
        including antennas, audio “bugs”, body cameras, covert and overt color and
        black-and-white cameras, night vision fixed surveillance cameras, power
        supplies, recording devices and related supplies. The firm sells
        off-the-shelf closed circuit television component (“CCTV”) equipment from a
        broad range of high quality manufacturers and has chosen not to commit to
        "exclusivity" with any specific product manufacturer. In this way, although
        FDA
        is still able to offer competitive pricing, they are also free to make
        suggestions to clients who request such information on equipment best suited
        for
        their specific application without being limited by exclusivity parameters.
  13
  FDL
        also
        markets a one-of-a-kind Digital Video & Audio Transmitter. The product is a
        two-component, digital, encrypted, spread spectrum video and audio transmitter
        receiver set that represents the latest advancement in deploying digital
        wireless technology for intelligence collection, surveillance and security.
        The
        transmitter/receiver has a multitude of applications to many areas of Federal,
        State and local law enforcement, and to numerous agencies within the U.S.
        Department of Homeland Security.
  To
        help
        clients further meet the ongoing challenges of investigation and observation,
        FDL retains a wide range of high-end surveillance systems and equipment
        available for rent, including the latest in many of our custom covert cameras
        (for authorized agencies and organizations only). This often enables agencies,
        organizations and businesses to obtain equipment using operating budgets,
        and
        reduces the time lag between the need for the equipment and implementation.
        Renting is often optimal for short-term crisis situations, special events
        or
        seasonal needs, short-term system supplementation, or for evaluation of a
        system
        prior to purchase. The firm also offers lease or lease-to-purchase options
        for
        its systems.
  FDL
        technicians work to ensure compatibility and smooth integration of new equipment
        with existing security operations such as CCTV monitoring and motion detection,
        alarm and card access controls, and communications systems. The firm provides
        customer training, as well as customer-designed check-lists for ease in trouble
        shooting.
  FDL
        also
        delivers advisory services focused on the selection, design and deployment
        of
        technology-based surveillance networks and systems. FDL consultants work
        closely
        with client representatives to deliver solutions related to all aspects of
        security - from architecture and engineering to system enhancements, upgrades
        and expansion. FDL helps clients devise solutions that  meet
        their functional requirements, while maintaining a constant focus on maximizing
        efficiency and minimizing costs. FDL functions as a primary consulting
        contractor, or it can serve as a sub-contractor as part of a broader consulting
        engagement team (with a level of visibility - or anonymity - as required
        by the
        client). FDL also provides broad-based technology and systems integration
        expertise. The firm works with clients to replace, update or enhance their
        existing electronic surveillance systems - while addressing compatibility
        issues
        and integrating new equipment with existing security systems and installations.
        FDL engineers are conversant with current and emerging trends that impact
        the
        near-term utility and long-term effectiveness of surveillance equipment and
        systems.
  Client
        Base
 
 The
        Company’s potential clients include private and public-sector organizations
        focused on homeland security, law enforcement, and military and intelligence
        operations that support anti-terrorism and national security interests, both
        in
        the United States and in Europe. The
        firm’s clients will come from a broad range of sectors and industries, and
        include law enforcement agencies, federal/state/regional agencies and
        institutions, judicial organizations, oil/gas businesses, commercial properties,
        banking and financial institutions, hotels, casinos, retail, warehousing
        and
        transportation entities, recreational facilities and parks, environmental
        agencies, industrial firms, loss prevention/investigation agencies, disaster
        site surveillance firms, bodyguard services, property management, building
        contractors and construction companies. To date we have provided our technology
        to various private and public sector organizations, both domestically and
        abroad. In come cases we have generated revenues from such deployments, and
        others were trial-basis demonstrations. Our ability to deliver our technology
        to
        customers is hindered by our liquidity and resource issues.
  Competition
 
 There
        are
        several companies now deploying wireless video technologies and covert
        surveillance tools. Only a handful, however, are doing so with wireless product
        offerings aimed exclusively at the homeland security and public safety markets.
        It is difficult to identify direct competitors of the Company in terms of
        the
        Company’s core competencies and basic market positioning. The competitors that
        come closest to mirroring the Company’s business model are Gans & Pugh
        Associates, Inc., a developer of wireless systems that employ traditional
        radio
        frequency technologies; Verint Systems, Inc., a provider of analytic
        software-based solutions for video security which competes against the Company
        in one of its service areas - assessing network-based security relative to
        Internet and data transmissions from multiple communications networks; and
        Vistascape, a provider of a security data management solution that integrates
        the monitoring and management of security hardware and software products.
        The
        Company believes its combination of product development, proprietary Open
        Media
        Delivery Platform rich-media delivery system, advanced encryption technologies,
        and focus on the homeland security and public safety markets are significant
        competitive advantages.
  14
  Facilities
 
 The
        Company leases all of its real property. Facilities for its headquarters
        and for
        its testing and assembly operations to support the Hyundai and Apro contracts
        are in New York City. The Company believes that its remaining facilities
        are in
        good condition and are adequate for its current needs, however, to the extent
        that customer orders become more routine, we may need to seek additional
        facilities and resources. The Company has not yet renewed the lease for its
        headquarters, which terminates in October 2007, but expects to do so in the
        near
        term. The Company believes that its technological resources are all adequate
        for
        its needs through fiscal 2008.
 
 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.
  Research
        and Development
  During
        the fiscal year ended June 30, 2007, the Company incurred expenses in the
        amount
        of $2.5 million for costs related to the sub-contracting agreement entered
        into
        by the Company with Apro Media for the development of the technologies between
        the two companies. There were no such expenses in the fiscal year ended June
        30,
        2006.
  Employees
 
 At
        June
        30, 2007, the Company and its majority owned subsidiaries employed approximately
        5 persons on a full-time basis. Additionally, 8 individuals were engaged
        on a
        consulting basis. We intend to hire additional personnel as the development
        of
        our business makes such action appropriate. Our employees are not represented
        by
        a labor union or other collectively bargained agreement.
 
 15
  **Item
        2. Properties**
 
 The
        Company is headquartered in New York City where it maintains approximately
        2,200
        square feet of office and production space in two locations. We lease
        approximately 1,200 square feet, which is equipped to fully meet the needs
        of
        our corporate finance office. This
        lease runs through October 2007 with a monthly rent of $7,750. The Company
        also
        leases approximately 1,000 square feet of space for our testing and assembly
        facilities. This lease runs through December 2007 with a monthly rent of
        $6,000.
        The Company believes that it will require larger space for its testing and
        assembly facilities and is in the process of identifying such space. The
        company
        believes that such space is readily available in the metropolitan New York
        area.
  **Item
        3. Legal Proceedings**
  Certain
        legal actions in the normal course of business are pending to which the Company
        is a party. The Company does not expect that the ultimate resolution of any
        pending legal matters will have a material effect on the financial condition,
        results of operations or cash flows of the Company.
 
 **Item
        4. Submission of matters to a vote of security holders**
 
 N/A
 
 16
  **PART
        II**
 
 **Item
        5. Market for Registrant's Common Equity and Related Stockholder
        Matters**
 
 The
        common stock of the Company previously traded on the NASDAQ Capital Market
        under
        the symbol “MSGI” and on the “pink sheets” over the counter under the symbol
“MSGI.PK”. Currently, the Company’s stock is traded on the “over the counter
        bulletin board” (“OTC:BB”) under the symbol “MSGI.OB”. 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 NASDAQ, Pink Sheets and
        OTC:BB:
  Low
                
                HighFiscal
                    2007Fourth
                  Quarter
                
                $
                0.85
                
                $
                2.74Third
                  Quarter
                
                
                0.63
                
                
                1.29Second
                  Quarter
                
                
                0.62
                
                
                1.95First
                  Quarter
                
                
                0.71
                
                
                2.70Fiscal
                    2006Fourth
                  Quarter
                
                $
                2.52
                
                $
                4.51Third
                  Quarter
                
                
                3.05
                
                
                4.42Second
                  Quarter
                
                
                2.31
                
                
                4.89First
                  Quarter
                
                
                4.54
                
                
                6.61
 
 As
        of
        June 30, 2007, there were approximately 923 registered holders of record
        of the
        Company’s common stock.
 
 The
        Company has not paid any cash dividends on any of its capital stock in at
        least
        the last six 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 .
  **Item
        6. Management’s Discussion and Analysis**
 
 Critical
        Accounting Policies
 
 Financial
        Reporting Release No. 60 requires all companies to include a discussion of
        critical accounting policies or methods used in the preparation of financial
        statements. This should be read in conjunction with the financial statements,
        and notes thereto, included in this Form 10-KSB. The following is a brief
        description of the more significant accounting policies and methods used
        by the
        Company.
 
 The
        Company's consolidated financial statements are prepared in accordance with
        accounting principles generally accepted in the United States ("GAAP"). The
        preparation of consolidated financial statements in accordance with accounting
        principles generally accepted in the United States of America requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. Actual results could differ from those
        estimates. The Company believes that the estimates, judgments and assumptions
        upon which the Company relies are reasonable based upon information available
        to
        us at the time that these estimates, judgments and assumptions are made.
        To the
        extent there are material differences between these estimates, judgments
        or
        assumptions and actual results, our financial statements will be affected.
        The
        significant accounting policies that the Company believes are the most critical
        to aid in fully understanding and evaluating our reported financial results
        include the following:
  ·
              Revenue
                  Recognition
 ·
              Accounts
                  Receivable
 ·
              Long
                  Lived Assets (amortization and
                  realization)
  17
  ·
              Accounting
                  for Income Taxes
 ·
              Use
                  of Estimates
 ·
              Equity
                  based compensation
 ·
              Debt
                  instruments and the features / instruments contained
                  therein
 ·
              Investments
                  in unconsolidated entities
 
 In
        many
        cases, the accounting treatment of a particular transaction is specifically
        dictated by GAAP and does not require management's judgment in its application.
        There are also areas in which management's judgment in selecting among available
        alternatives would not produce a materially different result. Our senior
        management has reviewed the Company's critical accounting policies and related
        disclosures with our Audit Committee. See Notes to Consolidated Financial
        Statements, which contain additional information regarding our accounting
        policies and other disclosures required by GAAP.
 
 *Revenue
        Recognition:*
  The
        Company accounts for revenue recognition in accordance with Staff Accounting
        Bulletin No. 104, ("SAB 104"), which provides guidance on the recognition,
        presentation and disclosure of revenue in financial statements.
 
 Revenues
        are reported upon the completion of a transaction that meets the following
        criteria (1) persuasive evidence of an arrangement exists; (2) delivery of
        our
        services has occurred; (3) our price to our customer is fixed or determinable;
        and (4) collectibility of the sales price is reasonably assured.
 
 For
        contracts that consists of product and related installation, revenue is
        recognized on a progress-to-completion method, in accordance with SOP 97-2.
        Billings in advance of the completion of the work being delivered is recorded
        as
        deferred revenue. Revenue for maintenance contracts are deferred and recognized
        over the term of the maintenance period.
  *Accounts
        Receivable*
  The
        Company extends credit to its customers in the ordinary course of business.
        Accounts are reported net of an allowance for uncollectible accounts. Bad
        debts
        are provided on the allowance method based on historical experience and
        management’s evaluation of outstanding accounts receivable. In assessing
        collectibility the Company considers factors such as historical collections,
        a
        customer’s credit worthiness, and age of the receivable balance both
        individually and in the aggregate, and general economic conditions that may
        affect a customer’s ability to pay. The Company does not require collateral from
        customers nor are customers required to make up-front payments for goods
        and
        services.
  *Accounting
        for 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 Company uses the liability method of accounting for income taxes,
        as set forth in SFAS No. 109, “Accounting for Income Taxes.” Under this method,
        deferred tax assets and liabilities are recognized for the expected future
        tax
        consequences of temporary differences between the carrying amounts and the
        tax
        basis of assets and liabilities and net operating loss carry-forwards, all
        calculated using presently enacted tax rates. 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 accounting prin ciples
        generally accepted in the United States of America 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 long lived assets,
        deferred tax valuation allowance, valuation of stock options, warrants and
        debt
        features, fair value of net assets acquired and the allowance for doubtful
        accounts. Actual results could differ from those estimates.
 
 18
 
 
 *Equity
        Based Compensation:*
 
 We
        follow
        Statement of Financial Accounting Standards ("SFAS") No. 123 Revised 2004,
        "Share−Based Payment" (“SFAS 123R”). This Statement requires that the cost
        resulting from all share−based payment transactions are recognized in the
        financial statements of the Company. That cost will be measured based on
        the
        fair market value of the equity or liability instruments issued.
 
 *Debt
        instruments, and the features/instruments contained therein:*
 
 Deferred
        financing costs are amortized over the term of its associated debt instrument.
  The
        Company evaluates the terms of the debt instruments to determine if any embedded
        derivatives or beneficial conversion features exist. The Company allocates
        the
        aggregate proceeds of the notes payable between the warrants and the notes
        based
        on their relative fair values. The fair value of the warrants is calculated
        utilizing the Black-Scholes option-pricing model. The Company is amortizing
        the
        resultant discount or other features over the term of the notes through its
        earliest maturity date. If the maturity of the debt is accelerated because
        of
        defaults, then the amortization is also accelerated to the default date.
        The
        Company’s debt instruments do not contain any embedded derivatives at June 30,
        2007.
 
 *Investments
        in Non-Consolidated Companies:*
 
 The
        Company accounts for its investments under the cost basis method of accounting
        if the investment is less than 20% of the voting stock of the investee, or
        under
        the equity method of accounting if the investment is greater than 20% of
        the
        voting stock of the investee. Investments accounted for under the cost method
        are recorded at their initial cost, and any dividends or distributions received
        are recorded in income. For equity method investments, the Company records
        its
        share of earnings or losses of the investee during the period. Recognition
        of
        losses will be discontinued when the Company’s share of losses equals or exceeds
        its carrying amount of the investee plus any advances made or commitments
        to
        provide additional financial support.
 
 An
        investment in non-consolidated companies is considered impaired if the fair
        value of the investment is less than its cost on other than a temporary basis.
        Generally, an impairment is considered other-than-temporary unless (i) the
        Company has the ability and intent to hold an investment for a reasonable
        period
        of time sufficient for an anticipated recovery of fair value up to (or beyond)
        the cost of the investment; and (ii) evidence indicating that the cost of
        the
        investment is recoverable within a reasonable period of time outweighs evidence
        to the contrary. If impairment is determined to be other-than-temporary,
        then an
        impairment loss is recognized equal to the difference between the investment’s
        cost and its fair value.
 
 Overview
 
 **To
        facilitate an analysis of MSGI operating results, certain significant events
        should be considered.**
 
 On
        May
        16, 2005, the Company entered into a Restructuring and Subscription Agreement
        with Excelsa S.p.A. (“Excelsa”), a corporation organized under the laws of the
        Republic of Italy, and stockholders of Excelsa (other than MSGI) owning in
        the
        aggregate more than 51 percent of Excelsa’s issued and outstanding common stock,
        to acquire additional shares of Excelsa common stock at no additional
        consideration such that MSGI then owned approximately 19.5% of the issued
        and
        outstanding shares of common stock of Excelsa, which the parties agreed better
        reflects the value of Excelsa under US generally accepted accounting principles.
        The Company paid approximately $4.2 million for its cumulative investment
        in
        Excelsa. As the Company has less than 20% ownership interest in Excelsa and
        does
        not have the ability to exercise significant influence over Excelsa, this
        aggregate investment is accounted for under the cost method of accounting.
        The
        Company wrote down the value of its investment in Excelsa to $1,650,000 at
        June
        30, 2006. The Company has since learned that Excelsa has filed for bankruptcy
        and has ceased operations. As a result, we have fully impaired the investment
        in
        Excelsa and realized a loss on the investment of $1,650,000 effective September
        30, 2006. (See Note 5 to the financial statements which includes a restatement
        for the prior quarters as initially reported on Form 10-QSB).
  On
        June
        1, 2005, the Company entered into a Stock Purchase Agreement to acquire equity
        ownership interests in AONet International srl (“AONet”), a limited liability
        company organized under the laws of the Republic of Italy, representing 51%
        of
        all of AONet’s equity ownership interests issued and outstanding as of the date
        of the Stock Purchase Agreement on a fully diluted basis. The purchase price
        for
        the 51% stake was 1,100,000 Euro, of which 600,000 Euro was paid and the
        remainder was payable in two equal installments of 250,000 Euro due on each
        of
        December 31, 2005 and March 31, 2006. The Stock Purchase Agreement provides
        that, if the Company fails to pay any of the individual installments within
        48
        hours of the applicable due date, the Stock Purchase Agreement will be
        terminated and the Company will be obligated to return all acquired equity
        ownership interests in AONet to the previous owner, forfeiting any and all
        payments made to that date.
  19
  In
        April
        2006, the Company defaulted on certain payment provisions of the Stock Purchase
        Agreement of AONet International, S.r.l. As of April 1, 2006, all equity
        ownership interests reverted back to the previous owner and, as a result,
        the
        AONet subsidiary has been deconsolidated from the financial statements of
        the
        Company. As
        such,
        the operations and cash flows of AONet have been eliminated from ongoing
        operations and the Company no longer has continuing involvement in the
        operations, and all amounts have been reclassified into discontinued operations.
 
 On
        October 19, 2006 the Company entered into a Subscription Agreement with Hyundai
        Syscomm Corp, a California Corporation, (“Hyundai”) for the sale of 900,000
        shares of the Company’s common stock. Subject to the terms and conditions set
        forth in the Subscription Agreement, Hyundai agrees to purchase from the
        Company
        900,000 shares of common stock in exchange for the Company’s receipt of $500,000
        received in connection with a certain License Agreement, dated September
        11,
        2006, and receipt of a certain pending Sub-Contracting Agreement. Under the
        License Agreement, the Company has agreed to license certain intellectual
        property to Hyundai. Under the Sub-Contracting Agreement, Hyundai will retain
        the Company as a sub-contractor for the Company’s products and
        services.
 
 On
        October 25, 2006 the Company entered into a Sub -Contracting Agreement with
        Hyundai Syscomm Corp. The Sub-Contracting Agreement allows for MSGI and its
        affiliates to participate in contracts that Hyundai and/or its affiliates
        now
        have or may obtain hereafter, where the Company’s products and/or services for
        encrypted wired or wireless surveillance systems or perimeter security would
        enhance the value of the contract(s) to Hyundai or its affiliates. The initial
        term of the Sub-Contracting Agreement is three years, with subsequent automatic
        one year renewals unless the Sub-Contracting Agreement is terminated by either
        party under the terms allowed by the Agreement.
 
 On
        April
        1, 2007 the Company entered into a non-exclusive license agreement with CODA
        Octopus, Inc. (“CODA”) where by the Company will receive a royalty on sales of
        products using the Innalogic proprietary technology. In connection with such
        transaction, CODA assumed certain development and operations responsibilities
        of
        the Innalogic entity.
  On
        May
        10, 2007, the Company entered into an exclusive sub-contract and distribution
        agreement with Apro Media Corp for at least $105 million of sub-contracting
        business over seven years to provide commercial security services to a Fortune
        100 defense contractor.  Under
        the
        terms of contract, MSGI will acquire components from Korea and deliver fully
        integrated security solutions at an average level of $15 million per year
        for
        the length of the seven-year engagement.  MSGI will also immediately
        establish and operate a 24/7/365 customer support facility in the Northeastern
        United States. Apro will provide MSGI with a web-based interface to streamline
        the ordering process and create an opportunity for other commercial security
        clients to be acquired and serviced by MSGI. The contract calls for gross
        profit
        margins estimated to be between 26% and 35% including a profit sharing
        arrangement with Apro Media, which will initially take the form of unregistered
        MSGI common stock, followed by a combination of stock and cash and eventually
        just cash.
  Results
        of Operations Fiscal 2007 Compared to Fiscal 2006
 
 As
        of the
        year ended June 30, 2007 (the “Current Period”), the Company realized revenues
        in the amount of approximately $78,000 from the sales of Innalogic products
        and
        for a $100,000 royalty fee / referral fee income generated from the CODA Octopus
        Group, Inc. (“CODA”). We expect revenues to increase in the future through our
        new relationship with Apro Media, Corp. (“Apro”). As of the year ended June 30,
        2006 (the “Prior Period”), the Company realized revenues in the amount of
        approximately $76,000 from the sales of Innalogic products and a $50,000
        sale of
        Innalogic products to Excelsa. Sales of these products have been sporadic
        and
        based upon the successful attainment and fulfillment of contracts with various
        security agencies, and this process has been difficult to predict due to
        the
        duration of evaluation by our potential customers and due to our lack of
        funding
        to fulfill such contracts. All revenues generated by previously owned
        subsidiaries and AONet during the fiscal year ended June 30, 2005 through
        2006,
        have been reclassified to a single line presentation of Loss from Discontinued
        Operations on the Consolidated Statement of Operations.
  20
  Costs
        of
        goods sold of approximately $50,000 in the Current Period and approximately
        $38,000 in the Prior Period consisted primarily of the expenses related to
        acquiring the components required to provide the specific technology
        applications ordered by each individual customer. All costs of goods sold
        recognized by previously owned subsidiaries during the fiscal year ended
        June
        30, 2006, (the “Prior Period”), have been reclassified to Loss from Discontinued
        Operations on the Consolidated Statement of Operations.
 
 Research
        and development expenses were approximately $2.5 million in the Current Period.
        The Company recognized research and development costs associated with executing
        the sub-contract relationship with Apro. These expenses represent the costs
        associated with development of technologies specifically for a particular
        Fortune 100 client. There were no such costs in the Prior Period as this
        relationship commenced in the Current Period.
  Salaries
        and benefits of approximately $2.1 million in the Current Period decreased
        by
        approximately $1.4 million or 40% from salaries and benefits of approximately
        $3.5 million in the Prior Period. Salaries and benefits decreased due to
        a
        reduction in headcount, both in the Innalogic operation (especially after
        CODA
        assumed some of these activities, including responsibilities for the costs
        of
        certain of the Innalogic personnel) and in management positions. Certain
        of the
        management employees related to the former operations in Italy have subsequently
        been dismissed or their involvement reduced. Further non-cash compensation
        was
        approximately $757,000 in the Current Period as compared to $1.5 million
        in
        Prior period due to the timing and valuation of equity-based securities issued
        to employees and directors of the Company.
 
 In
        the
        Prior Period, the Company recognized an expense for the provision for loss
        on a
        note receivable from the Chief Executive Officer of the Company of approximately
        $1.2 million. The collection of this note by its October 15, 2006 due date
        did
        not occur. The Board of Directors of the Company subsequently elected to
        forgive
        such note receivable and the full amount has been written off. There was
        no such
        cost in the Current Period.
 
 Selling,
        general and administrative expenses of approximately $2.9 million in the
        Current
        Period decreased by approximately $0.9 million or 23% over comparable expenses
        of $3.8 million in the Prior Period. The decrease is due primarily to reductions
        in consulting fees for technical support and management of foreign operations
        of
        approximately $846,000 and to reductions in travel related expenses of
        approximately $416,000. These reductions are due to the decrease of business
        operations in Europe. The reduction of selling, general and administrative
        expenses is also the result of the assumption of certain activities of
        Innalogic conducted by CODA as of April 1, 2007.
 
 During
        the Current Period, the Company recorded depreciation and amortization expense
        of approximately $131,000 compared to expenses of approximately $199,000
        in the
        Prior Period. Most of the long-lived assets of the Company have been fully
        amortized as of June 30, 2007.
 
 During
        the Current Period, the Company recorded a loss from impairment on the
        investment in Excelsa of approximately $1.6 million. There was loss of
        approximately $2.4 million recorded in the Prior Period for such impairment.
        As
        of the year ended June 30, 2007, this investment has been fully impaired.
        See
        Note 5 to the financial statements for further discussion.
 
 During
        the Current Period, the Company recorded a loss from the issuance of shares
        of
        its common stock (settlement of liability) to CODA Octopus Group, Inc. as
        repayment of advances and operating expenses paid by CODA on behalf of
        Innalogic, totaling approximately $812,000, representing the excess fair
        value
        of the shares issued as compared to the obligations due CODA. There was no
        such
        loss in the Prior Period.
 
 Interest
        income of approximately $1,000 in the Current Period represents a decrease
        from
        interest income of approximately $70,000 during the Prior Period. This decrease
        is primarily the result the elimination of the promissory note from the Chief
        Executive Officer.
 21
  Interest
        expense of approximately $2.3 million in the Current period is primarily
        due to
        debt transactions entered into during the Current Period and the value of
        certain equity instruments granted to note holders as inducements to grant
        us
        extensions and waivers of debt defaults. Interest expense was approximately
        $4.5
        million in the prior period during 2006, including the acceleration of the
        amortization of certain debt issuance costs and the value attributable to
        warrants and beneficial conversion features upon the default of certain debt
        provisions. The non-cash component of interest expense was approximately
        $1.4
        million in the Current Period as compared to $3.9 million in the Prior period.
        The cash portion of interest expense increased as a result of additional
        borrowings.
  The
        net
        provision for income taxes of approximately $9,000 in the Current Period
        decreased by approximately $25,000 from net provision for income taxes of
        approximately $34,000 in the Prior Period. Our provision for income taxes
        is
        primarily due to state and local taxes incurred on taxable income or equity
        at
        the operating subsidiary level, which cannot be offset by losses incurred
        at the
        parent company level or other operating subsidiaries. The Company has recognized
        a full valuation allowance against the deferred tax assets because it is
        more
        likely than not that sufficient taxable income will not be generated during
        the
        carry forward period to utilize the deferred tax assets.
 
 As
        a
        result of the above, loss from continuing operations item of approximately
        $12.4
        million in the Current Period decreased by $3.1 million over a comparable
        loss
        of $15.5 in the Prior Period.
  The
        loss
        from discontinued operations-AONet reported in the Prior Period represents
        our
        share of the results of the operations of AONet for the period in which we
        consolidated their operations in our financial statements. The loss on disposal
        of discontinued operations-AONet represents the write-down of the remaining
        book
        value of assets and liabilities associated with the AONet operations to nil
        as
        of April 1, 2006, the date we defaulted on the required debt service payment
        and
        forfeited our ownership.
  The
        loss
        from discontinued operations-other of approximately $5,000 in the Prior Period
        is the result of a write-off of a facility rent deposit for a former subsidiary.
  As
        a
        result of the above, net loss of approximately $12.4 million in the Current
        Period decreased by approximately $5.2 million from comparable net loss of
        $17.6
        million in the Prior Period.
 
 In
        the
        Current Period the Company recognized undeclared dividends on preferred stock
        of
        approximately $15,000 as compared to $178,000 in the Prior Period. This pertains
        to the issuance of the Company’s Series F Convertible Preferred Stock. The
        Company is required to pay an annual dividend of 6% on the Preferred Stock,
        payable in shares of the Company’s common stock. This obligation, although not
        yet declared by the Board of Directors of the Company, still exists although
        all
        of the shares of Series F preferred stock has been converted to common stock.
  As
        a
        result of the above, net loss attributable to common shareholder of
        approximately $12.4 million in the Current Period decreased by approximately
        $5.4 million from comparable net loss of $17.8 million in the Prior
        Period.
 
 Off-Balance
        Sheet Arrangements
 
 Financial
        Reporting Release No. 61, which was recently released by the SEC, requires
        all
        companies to include a discussion to address, among other things, liquidity,
        off-balance sheet arrangements, contractual obligations and commercial
        commitments. The Company currently does not maintain any off-balance sheet
        arrangements.
  Liquidity
        and Capital Resources
 
 Historically,
        the Company has funded its operations, capital expenditures and acquisitions
        pri
        marily through private placements of equity and debt transactions. At June
        30,
        2007, the Company had approximately $2.5 million in cash and cash equivalents.
        The Company believes that existing financing and expected earnings will not
        meet
        their current working capital and debt service requirements for the next
        twelve
        months, since there is uncertainty as to timing, volume and profitability
        of
        transactions that may arise from our relationship with Hyundai and Apro.
        These
        issues raise substantial doubt about our ability to continue as a going concern.
        The accompanying financial statements do not include any adjustments relating
        to
        the recoverability of the carrying amount of recorded assets or the amount
        of
        liabilities that might result should the Company be unable to continue as
        a
        going concern.
  22
  The
        transactions described below are transactions entered into after June 30,
        2007,
        which will impact our liquidity:
 
 On
        May
        31, 2007 the Company received its first purchase order from Apro Media Corp
        in
        the amount of $10 million as part of the sub-contracting agreement to provide
        commercial security services to a Fortune 100 defense contractor. MSGI acquired
        the first shipment of components from a Korean company in June 2007 and began
        to
        deliver fully integrated security systems in August through October 2007.
        MSGI
        will continue to fulfill client requests throughout the first two quarters
        of
        the fiscal year ended June 30, 2008. The Company has secured a new production
        and customer service facility in Manhattan to facilitate these
        operations.
 
 During
        the months of July and August 2007, the Company executed certain conversions
        of
        debt to equity under the provisions of a series of 8% Callable Convertible
        Notes
        issued by the Company during the fiscal year ended June 30, 2006. The Company
        effectively reduced certain debt obligations by approximately $810,000 and
        issued an aggregate total of 1,257,532 shares of its common stock.
  On
        October 9, 2007 the Company announced that Callable Secured Convertible 8%
        Notes
        originally issued during July 2005 to September 2005 and Callable Secured
        6%
        Notes originally issued on December 13, 2006 were purchased by certain
        third-party institutional investors on September 30 and October 3, 2007,
        from
        the original note holders. The Company did not receive any cash as a result
        of
        these transactions. These institutional investors have submitted notification
        to
        the Company of their intentions to fully convert the Notes into shares of
        the
        Company’s common stock which is expected to be accomplished during October 2007.
        The transaction, when completed, will have the effect of eliminating
        approximately $3.95 million of note payable, on a fully accreted basis, from
        the
        Company’s balance sheet. The exercise will result in the issuance of
        approximately 6,700,000 shares of the Company’s common stock, bringing the total
        shares outstanding to approximately 18,265,000.
 
 Analysis
        of cash flows during fiscal years ended June 30, 2007 and 2006:
 
 The
        Company realized a loss from continuing operations of approximately $12.4
        and
        $15.6 million in the Current Period and Prior period, respectively. Cash
        used in
        operating activities from continuing operations was approximately $6.1 and
        $3.1
        million in the Current Period and Prior period, respectively. Net cash used
        in
        operating activities in the Current Period principally resulted from the
        loss
        from continuing operations , including the payment of $2.5 million to Apro
        for
        the research and development fee, plus increases in inventory, adjusted by
        non-cash operating expenses of approximately and offset by an increases in
        accrued liabilities in the Current Period.
  In
        the
        Current Period, the Company was provided net cash of approximately $8.5 million
        from the issuance of debt instruments. These instruments bear coupon interest
        rates ranging from 6% - 8%, however their effective rate is significantly
        higher
        due to the presence of warrants and beneficial conversion features.
 
 Our
        contractual obligations are summarized in the table below
  **Payments
                    Due**
                  **(In
                    thousands)****Contractual
                    Obligations**
                
                **Total**
                
                **Less
                    than**
                  **1
                    year**
                
                **1
                    - 3**
                  **years**
                
                **4
                    - 5**
                  **years**
                
                **More
                    Than**
                  **5
                    years**Operating
                    leases
                
                $
                50
                
                $
                50
                
                $
                -
                
                $
                -
                
                $
                -Notes
                    Payable
                
                
                -
                
                
                -
                
                
                600
                
                
                -
                
                
                -8%
                    Callable convertible Notes payable and interest [1]
                
                
                -
                
                
                -
                
                
                9,389
                
                
                -
                
                
                -6%
                    Callable convertible Notes payable and interest [1]
                
                
                -
                
                
                -
                
                
                3,540
                
                
                -
                
                
                -
  [1]
        Represents ballon payment at maturity plus interest over term of note due
        at
        maturity
  *Leases* :
          The
          Company currently leases various office space and equipment under non-cancelable
          short-term leases which are all less than 1 year. The Company incurs all
          costs
          of insurance, maintenance and utilities.


23


*Debt:*
  Instrument
              
              Maturity
              
              Face
                  Amount
              
              Coupon
                  Interest Rate
              
              Carrying
                  Amount at June 30, 2007, net of discount
              
              Carrying
                  Amount at June 30, 2006, net of discountNotes
                  Payable
              
              
              Demand
              
              $
              500,000
              
              
              N/A
              
              $
              600,000
              
              $
              600,000Notes
                  Payable
              
              
              Various
              
              
              Various
              
              
              Various
              
              
              -
              
              $
              842,4278%
                  Notes
              
              
              Dec.
                  13, 2009
              
              $
              3,000,000
              
              
              8
              %
              
              1,427,411
              
              
              2,574,5976%
                  Notes
              
              
              Dec.
                  13, 2009
              
              $
              2,000,000
              
              
              6
              %
              
              361,111
              
              
              -6%
                  April Notes
              
              
              April
                  4, 2010
              
              $
              1,000,000
              
              
              6
              %
              
              83,334
              
              
              -8%
                  Debentures
              
              
              May
                  21, 2010
              
              $
              5,000,000
              
              
              8
              %
              
              185,185
              
              
              -Advances
                  from strategic partner (CODA)
              
              
              N/A
              
              
              varies
              
              
              8
              %
              
              -
              
              $
              300,000
  Callable
        Secured Convertible Note financing
 
 8%
        Callable Convertible Notes
  On
        July
        12, 2005, MSGI closed a Callable Secured Convertible Note financing of $3
        million with a New York based institutional investor (the “8% Notes”).
        Substantially all of the assets of the Company are pledged as collateral
        to the
        note holders.
 
 The
        Note
        initially required repayment over a three-year term with an 8% interest per
        annum. Repayment shall be made in cash or in registered shares of common
        stock
        if the stock price exceeded $4.92 per the agreement terms, or a combination
        of
        both, at the option of the Company, and payment commenced 90 days after the
        closing date and was payable monthly in equal principal installments plus
        interest over the remaining 33 months.
 
 Further,
        the Holder has the option to convert all or any part of the outstanding
        principal to common stock if the average daily price, as defined in the
        agreement, for the preceding five trading days is greater than the defined
        Initial Market Price of $6.56. The original conversion price for this holder
        option was $4.92. The Company granted registration rights to the investors
        for
        the resale of the shares of common stock underlying the notes and certain
        warrants that were issued in the transaction.
 
 The
        Note
        agreement provides the Company with the option to call the loan and prepay
        the
        remaining balance due. If the loan is called early, the Company will be required
        to pay 125% of the outstanding principal and interest as long as the common
        stock of the Company is at $6.00 or less. If the stock price is higher than
        $6.00 when the Company exercises the call option, then the amount owed is
        based
        upon a calculation, as defined in the agreement, using the average daily
        price.
        If in any month a default occurs, the note shall become immediately due and
        payable at 130% of the outstanding principal and interest.
 
 In
        connection with the issuance of the 8% Notes, the Company also issued five-year
        warrants to the investors for the purchase of up to 75,000 shares of the
        Company's common stock, $0.01 par value, at an original exercise price of
        $7.50
        per share, which are exercisable at any time. The placement agent received
        three-year warrants for the purchase of 12,195 shares of the Company's common
        stock, at an exercise price of $7.50 per share exercisable between the period
        January 12, 2006 and January 11, 2009.
 
 In
        January 2006, the Chief Executive Officer entered into a guarantee and pledge
        agreement with the note holders, whereby, the common stock of MSGI owned
        by the
        Chief Executive Officer (approximately 190,000 shares) was pledged as additional
        collateral for these notes.
 
 On
        June
        7, 2006, the Company entered into a waiver and amendment agreement which
        modified certain payment due dates of the notes to provide for a payment
        of
        $395,450 due July 14, 2006 for debt service due from April 2006 through July
        2006. Such payment was not made on July 14, 2006. In consideration for the
        waiver agreement, the Company issued 800,000 warrants to the note holders.
        Such
        warrants were ascribed a fair value, as computed under the Black-Scholes
        model,
        of $2,224,808 which was recognized as additional interest expense in June
        2006.
        Because of the default of the terms of the notes, the remaining amortization
        of
        the deferred financing costs of approximately $238,200 and beneficial conversion
        costs and debt discount of approximately $990,100 were accelerated and fully
        recognized by June 30, 2006. As of July 14, 2006, the Company was in technical
        default of the payment terms of the 8% Notes. This default was further waived
        on
        December 13, 2006, per the terms below.
 
 24
  On
        December 13, 2006, the Company entered into an agreement for the issuance
        of
        $2,000,000 of 6% callable convertible notes (see below) and also entered
        into a
        letter agreement with certain of the 2006 Investors to amend the 8% Notes
        and
        warrants as well as the promissory notes (see below) previously issued to
        these
        Investors by the Company, and to waive certain defaults under these notes
        and
        warrants. The letter agreement also serves to amend the amortization and
        payment
        terms of the 8% Notes. A single balloon payment will be due on the 8% Notes
        on
        the revised maturity date of December 13, 2009. As a result of the amendments
        to
        the 8% Notes, these notes will continue to accrue interest through the amended
        maturity date. In addition, the conversion rate was amended. The
        amended conversion price of the 8% Notes is 75% of the average of the lowest
        three closing prices of the Company’s common stock for the 20 day period prior
        to such conversion, with a minimum conversion price of $0.50 per share.
 
 In
        connection with the issuance of the 8% Notes, the Company also issued five-year
        warrants to the investors for the purchase of up to 75,000 shares of the
        Company's common stock, $0.01 par value, at an original exercise price of
        $7.50
        per share, which are exercisable at any time. The placement agent received
        three-year warrants for the purchase of 12,195 shares of the Company's common
        stock, at an exercise price of $7.50 per share exercisable between the period
        January 12, 2006 and January 11, 2009. In connection with the December 13,
        2006
        letter agreement, the terms of the warrants issued to the note holders were
        modified to change the exercise price to $1.00 per share and to extend the
        term
        of the warrants to expire on the seventh anniversary of the original issuance
        date.
  8%
        Debentures
 On
        May
        21, 2007 MSGI pursuant to a Securities Purchase Agreement between
        the Company and several institutional investors issued 8% convertible debentures
        in the aggregate principal
        amount of $5,000,000 (the “8% Debentures”) and stock purchase warrants
        exercisable over a five year period for 1,785,713 shares
        of
        common stock in a private placement. H.C. Wainwright acted as a placement
        agent
        for the offering.
 
 The
        8%
        Debentures have a maturity date of May 21, 2010 and will accrue interest
        at a
        rate of 8% per annum. Payments of principal under
        the
        8% Debentures are not due until the maturity date and interest is due on
        a
        quarterly basis, however the Investors can convert
        the principal amount of the 8% Debentures into common stock of the Company,
        provided certain conditions are met, and each
        conversion is subject to certain volume limitations. The conversion price
        of the
        Debentures is $1.40 per share yielding an aggregate
        total of possible shares to be issued as a result of conversion of 3,571,428
        shares. The exercise price of the Warrants is
        $2.00
        per share.
  The
        8%
        Debentures and the Warrants have anti-dilution protections and the Company
        has
        agreed to certain registration rights for the
        resale of the shares of common stock underlying the Debentures and Warrants,
        pursuant to a registration rights agreement entered
        into simultaneously with the transaction. The Company has also entered into a
        Security Agreement with the Investors in connection with the closing, which
        grants security interests
        in certain assets of the Company and the Company’s subsidiaries to the Investors
        to secure the Company’s obligations under
        the
        Debentures and Warrants.
  25
  The
        issuance of the Debentures and Warrants constituted a private placement and
        therefore was exempt from registration in accordance
        with Regulation D of the Securities Act of 1933, as amended.
 
 H.C.
        Wainwright received a placement fee of $400,000 and 5 year warrants exercisable
        for 357,142 shares of common stock at an exercise price of $2.00 per
        share.
 
 6%
        Callable Convertible Notes
  On
        December 13, 2006, pursuant to a Securities Purchase Agreement between the
        Company and several institutional investors, MSGI issued $2,000,000 aggregate
        principal amount of callable secured convertible notes (the “6% Notes”) and
        stock purchase warrants exercisable for 3,000,000 shares of common stock
        in a
        private placement for an aggregate offering price of $2,000,000. The conversion
        of the 6% Notes and the exercise of the warrants were subject to stockholder
        approval, which the Company received on March 6, 2007. H.C. Wainwright acted
        as
        a placement agent for a portion ($1,000,000) of the offering.
 
 The
        6%
        Notes have single balloon payment of $2,000,000 on the maturity date of December
        13, 2009 and will accrue interest at a rate of 6% per annum. The Investors
        can
        convert the principal amount of the 6% Notes into common stock of the Company,
        provided certain conditions are met, and each conversion is subject to certain
        volume limitations. The conversion price of the 6% Notes is 75% of the average
        of the lowest three closing prices of the Company’s common stock for the 20 day
        period prior to such conversion, with a minimum conversion price of $0.50
        per
        share. The payment obligation under the Notes may accelerate if the resale
        of
        the shares of common stock underlying the 6% Convertible Notes and warrants
        are
        not registered in accordance with the terms of the Registration Rights Agreement
        , payments under the Notes are not made when due or upon the occurrence of
        other
        defaults described in the Notes. The warrants became exercisable once
        Stockholder Approval was obtained, on March 6, 2007, and are exercisable
        through
        December 2013. The exercise price of the warrants is $1.00 per
        share
 
 The
        6%
        Notes and the warrants have anti-dilution protections, and the Company has
        agreed to certain registration rights for the resale of the shares of common
        stock underlying the 6% Notes, pursuant to a Registration Rights Agreement
        entered into simultaneously with the transaction . The Company has also entered
        into a Security Agreement and an Intellectual Property Security Agreement
        with
        the Investors in connection with the closing, which grants security interests
        in
        certain assets of the Company and the Company’s subsidiaries to the Investors to
        secure the Company’s obligations under the 6% Notes and warrants.
 
 The
        registration rights agreement, as amended on December 13, 2006, provides
        for a
        registration filing 120 days from the date of closing and a registration
        effective date within 180 from the date of closing. The agreement provides
        for a
        cash penalty of approximately 2% of the value of the notes to be paid to
        each of
        the holders for each thirty-day period that is exceeded. This provision has
        been
        waived by the investors through June 30, 2007. The issuance of the Notes
        and
        Warrants constituted a private placement and therefore was exempt from
        registration in accordance with Regulation D of the Securities Act of 1933,
        as
        amended.
 
 H.C.
        Wainwright received a placement fee of $100,000 and will receive 5 year warrants
        exercisable for 225,000 shares of common stock at an exercise price of $1.00
        per
        share.
  6%
        April Notes
  On
        April
        5, 2007, pursuant to a Securities Purchase Agreement between the Company
        and
        several institutional investors, MSGI issued $1,000,000 aggregate principal
        amount of callable secured convertible notes (the “6% April Notes”) and stock
        purchase warrants exercisable for 1,500,000 shares of common stock in a private
        placement for an aggregate offering price of $1,000,000. The warrants have
        an
        exercise price of $1.00 and are exercisable for a term of 7 years.
 
 The
        6%
        April Notes have single balloon payment of $1,000,000 on the maturity date
        of
        April 5, 2010 and will accrue interest at a rate of 6% per annum. The Investors
        can convert the principal amount of the 6% April Notes into common stock
        of the
        Company, provided certain conditions are met, and each conversion is subject
        to
        certain volume limitations. The conversion price of the 6% April Notes is
        75% of
        the average of the lowest three closing prices of the Company’s common stock for
        the 20 day period prior to such conversion, with a minimum conversion price
        of
        $0.50 per share. The payment obligation under the Notes may accelerate if
        the
        resale of the shares of common stock underlying the 6% April Convertible
        Notes
        and warrants are not registered in accordance with the terms of the Registration
        Rights Agreement , payments under the Notes are not made when due or upon
        the
        occurrence of other defaults described in the Notes.
  26
  The
        6%
        April Notes and the warrants have anti-dilution protections, and the Company
        has
        agreed to certain registration rights for the resale of the shares of common
        stock underlying the 6% April Notes, pursuant to a Registration Rights Agreement
        entered into simultaneously with the transaction. The Company has also entered
        into a Security Agreement and an Intellectual Property Security Agreement
        with
        the Investors in connection with the closing, which grants security interests
        in
        certain assets of the Company and the Company’s subsidiaries to the Investors to
        secure the Company’s obligations under the 6% April Notes and warrants.
 
 The
        6%
        April Notes and Warrants also carry registration rights which contain penalty
        clauses if the underlying shares are not registered per the terms of the
        agreement. The agreement calls for a registration filing 90 days from closing
        date and a registration effective date within 150 days from the date of closing
        of the funding transaction. The agreement provides for a cash penalty of
        approximately 2% of the value of the notes to be paid to each of the holders
        for
        each thirty day period that is exceeded. This provision in the agreement
        has
        been waived by the investors through June 30, 2007.
 
 Other
        Notes Payable
 
 January
        2006 Note Payable:
  On
        January 19, 2006, the Company entered into four short-term notes with the
        same
        lenders that also hold the 8% Callable Convertible Notes (See above). These
        promissory notes provided proceeds totaling $500,000 to the Company. The
        notes
        were originally due and payable on April 19, 2006 in the aggregate total
        of
        $600,000, including imputed interest of $100,000 at an annual imputed interest
        rate of 80%. In the event of any defined event of default declared by the
        lenders by written notice to the Company, the notes shall become immediately
        due
        and payable and the Company shall incur a penalty of an additional 15% of
        the
        amounts due and payable under the notes.
  In
        connection with the waivers and amendments executed for the 8% Callable
        Convertible notes above, as of June 7, 2006 and December 13, 2006, the same
        agreements also waived and amended the maturity date of these short-term
        notes.
        The December 13, 2006 letter agreement amends the maturity date of the
        promissory notes to provide for a balloon payment on December 13, 2009. Any
        and
        all default provisions under the terms of the original promissory notes were
        waived and there are no default interest provisions enforced under the terms
        of
        the original promissory notes. At June 30, 2007, the outstanding balance
        of this
        note is $600,000.
  vFinance
        note payable:
  During
        the months of February and March 2006, the Company entered into a series
        of
        promissory notes with various private lenders. The notes closed in a series
        of
        four transactions over the period of February 2006 to March 2006. Gross proceeds
        in the amount of $799,585 were obtained and the notes carry an aggregate
        repayment total of $975,103 (which includes imputed interest of $175,518
        or
        21.95%) which is due and payable upon maturity. The notes carried a maturity
        date of February 28, 2007. The notes were not paid on February 28, 2007,
        and as
        a result, the Company was technically in default of the payment terms of
        the
        vFinance notes.
 
 In
        addition, warrants for the purchase of up to 585,062 shares of the Company's
        common stock were issued to the individual lenders. The warrants carry an
        original exercise price of $6.50 and a term of 5 years. The warrants may
        be
        exercised 65 days after the date of issuance. The warrant agreement contains
        a
        re-price provision that provides for a change in the exercise price if the
        Company issues more favorable terms to another party, as defined in the
        agreement. Due to the 800,000 warrants issued in connection with the 8% Callable
        Convertible Notes above at an exercise price of $4.50, the exercise price
        of the
        warrants issued with the vFinance note payable were modified to $4.50 as
        of June
        30, 2006. Due to the December 13, 2006 issuance of warrants related to the
        6%
        Notes , the exercise price of the vFinance warrants were modified to $1.00.
 
 The
        vFinance Agreement also contains a registration rights agreement for the
        warrants which contains penalty clauses if the underlying warrant shares
        are not
        registered per the terms of the agreement. The agreement calls for a
        Registration Filing Date within 180 days from closing date and a Registration
        Effective Date within 90 days from the Registration Filing Date. The agreement
        provides for a cash penalty of approximately 1.5% of the value of the notes
        for
        each thirty-day period that is exceeded. As of June 30, 2007, the Company
        has a
        liability recorded of $74,000 to provide for the expected delay in issuing
        this
        registration statement.
  Placement
        fees in the amount of $73,133 were paid to vFinance Investments, Inc. as
        placement agent. In addition to the placement fees, warrants for the purchase
        of
        up to 73,134 shares of the Company's common stock were issued to the placement
        agent and its designees. The agent warrants carry an exercise price of $6.50,
        a
        term of 5 years and may be exercised 65 days after the date of issuance.
        The
        agent warrants were valued at $176,114 using the Black-Scholes option pricing
        model and recorded as part of the financing costs. In addition, a third party
        received a fee equal to 5% of the aggregate offering, in an amount of $40,000,
        which was recorded as part of the financing costs. These warrants also contain
        a
        reprice provision that provides for a change in the exercise price if the
        Company issues more favorable terms to another party, as defined in the
        agreement. Due to the December 13, 2006 issuance of warrants related to the
        6%
        Notes , the exercise price of the placement agent warrants were modified
        to
        $1.00. Total financing costs recorded in connection with the Notes were
        $351,706, including the modification noted above. The deferred financing
        has
        been fully amortized during the period ended June 30, 2007.
  27
  On
        March
        30, 2007, the Company entered into the last of a series of letter agreements
        with all of the individual investors involved in the Bridge Loan Transaction
        and
        the associated promissory notes to accept as payment in full against the
        principal and accrued interest of the promissory notes, shares of common
        stock
        of the Company. The shares of common stock are to be issued at a value of
        $0.75
        per share. The last of these agreements was executed on March 30, 2007. All
        investors involved in the promissory notes transaction agreed to receive
        payment
        in shares of common stock of the Company. The issuance of the shares of common
        stock as payment against the promissory notes effectively eliminated
        approximately $989,000 of debt from the balance sheet of the Company. The
        payment resulted in the issuance of 1,318,088 shares of common stock of the
        Company.
 
 In
        addition, the Company recorded additional interest expense of $197,700 as
        part
        of the transaction based upon the fair value of the stock issued to settle
        the
        debt. The common stock was issued in reliance upon the exemption from
        registration provided by Section 3(a)(9) of the Securities Act of 1933, as
        amended. Further, per the terms of the Letter Agreements, the liquidated
        damages
        accruing from the non-filing and non-timely effectiveness of a registration
        statement related to the shares of common stock which underlie certain warrants
        that were issued by the Company to the investors in the transaction will
        be
        addressed separately. The Company has quantified and accrued those amounts
        as of
        the quarter ended March 31, 2007 as noted above and anticipates stating such
        calculation to each individual investor during the period ended June 30,
        2007,
        at which point in time each investor can elect to receive those payments
        in cash
        based on the extended time frame as discussed in the Letter Agreements, or
        alternately, receive those amounts in the form of further shares of common
        stock
        of the Company.
 
 Advance
        from Strategic Partner:
  During
        the twelve months ended June 30, 2007, the Company received funding, in the
        amount of approximately $722,000 from CODA Octopus Group, Inc. (“CODA”) as an
        advance in contemplation of a further strategic transaction between the two
        parties. This certain firm has also paid directly, in support of our subsidiary
        Innalogic LLC, certain operating expenses in the amount of approximately
        $537,000. During the year ended June 30, 2007, the Company repaid to CODA
        $234,000 of the $537,000 paid on our behalf. CODA is also in the security
        technology business and it is thought that the combined technologies and
        services would yield a stronger competitive offering to potential customers.
        The
        net of these transactions brought the aggregate total due to this firm to
        approximately $1.0 million. The advances bore interest at a rate of 8% and
        interest expense was $36,552 for the twelve months ended June 30,
        2007.
 
 On
        April
        1, 2007 the Company entered into a non-exclusive License Agreement with the
        CODA
        Octopus Group, Inc., through its majority owned subsidiary, Innalogic, LLC.
        This
        agreement allows for CODA to market the Innalogic, LLC “SafetyWatch” technology
        (the “Technology”) to its client base, sub-lecense the Technology to its
        customers and distributors, use the Technology for the purposes of demostation
        to potential customers, sub-licensors and/or distributors and to furterh
        develop
        the source code of he Technology as it sees fit. In return, CODA will pay
        a 20%
        royalty to MSGI from the sale of the Technology to its customers.
 
 On
        May
        16, 2007 the Company issued 850,000 unregistered common shares to CODA Octopus
        Group, Inc. as full and final payment and a release of all financial obligations
        resulting from advances made by CODA to the Company and/or Innalogic LLC,
        the
        Company's subsidiary through the period ended March 31, 2007.
 
 *Preferred
        Stock:*
 
 Series
        F:
  The
        holders of Series F Preferred Stock were entitled to receive cumulative
        dividends at the rate of six percent (6%) payable in additional shares of
        common
        stock of the Company, based on the average closing price per share of the
        Company's common stock for the ten (10) consecutive trading days prior to
        the
        payment of any dividend. As of December 31, 2006, all of the outstanding
        shares
        of Series F Preferred Stock have been converted into shares of common stock
        however the Company had $305,024 of undeclared but accumulated dividends
        at June
        30, 2007. These undeclared dividends may be paid to the former holders of
        Series
        F Preferred Stock in or additional shares of the Company’s common stock, at the
        election of the Company, and as declared by the Board of Directors. Such
        payment
        is expected to be made by the Company during the fiscal year ended June 30,
        2008.
 
 28
  Series
        G:
  On
        December 20, 2006, MSGI filed a certificate of designation with the Secretary
        of
        State of the State of Nevada to designate 200 shares of the Company's preferred
        stock, par value $0.01, as Series G Preferred Stock with a stated value of
        $20,000 per share. The Company had previously entered into Subscription
        Agreements with certain vendors, officers and employees of the Company for
        the
        issuance of a total of approximately 150 shares of Series G Preferred Stock,
        in
        exchange for the conversion of debt owed by the Company for past due invoices
        and accrued salary of approximately $3.0 million. The Series G Preferred
        Stock
        automatically converted into common stock of the Company once the holders
        of a
        majority of the common stock of the Company approved such conversion, at
        a
        conversion rate of the higher of $1.00 per share or the market price as of
        the
        day the stockholders approve such conversion. The Company obtained such approval
        at the Special Meeting of the Stockholders held on March 6, 2007. The market
        price at the close of business on March 6, 2007 was $0.90, therefore the
        effective conversion rate of the Series G Preferred Stock was $1.00. The
        conversion rate of $1.00 did not result in any beneficial conversion feature
        effect to the Company. All Series G Preferred Stock was deemed issued and
        converted to common stock as of March 6, 2007, which resulted in the issuance
        of
        2,758,400 shares of common stock and the conversion of $2,758,400 of liabilities
        (including $642,200 in accrued salaries to officers) from our balance
        sheet.
 
 There
        are
        no outstanding shares of any series of preferred stock as of the period ended
        June 30, 2007.
 
 Summary
        of Recent Accounting Pronouncements
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities - Including an Amendment of FASB
        Statement No. 115”, (“SFAS 159”) which provides companies with an option to
        measure, at specified election dates, many financial instruments and certain
        other items at fair value that are not currently measured at fair value.
        A
        company will report unrealized gains and losses on items for which the fair
        value option has been elected in earnings at each subsequent reporting date.
        This Statement also establishes presentation and disclosure requirements
        designed to facilitate comparisons between entities that choose different
        measurement attributes for similar types of assets and liabilities. SFAS
        159 is
        effective as of the beginning of an entity’s first fiscal year that begins after
        November 15, 2007 (our Fiscal 2009). We have not completed our evaluation
        of the
        potential impact, if any, of the adoption of SFAS No. 159 on our consolidated
        financial position, results of operations and cash flows.
 
 In
        September 2006, the FASB issued FASB Statement No. 157, “Fair Value
        Measurements” (“SFAS 157”). This Statement defines fair value, establishes a
        framework for measuring fair value in generally accepted accounting principles
        (GAAP), and expands disclosures about fair value measurements. This Statement
        applies under other accounting pronouncements that require or permit fair
        value
        measurements, the Board having previously concluded in those accounting
        pronouncements that fair value is a relevant measurement attribute. Accordingly,
        this Statement does not require any new fair value measurements. However,
        for
        some entities, the application of this Statement will change current practices.
        This Statement is effective for financial statements for fiscal years beginning
        after November 15, 2007 with earlier application permitted. The Company adopted
        the provisions of SFAS 157 in the first quarter of fiscal year ended June
        30,
        2007 and the adoption did not have a significant impact to our financial
        statements.
 
 In
        July
        2006, the FASB issued FASB Interpretations No. 48, “Accounting for Uncertainty
        in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for
        Income Taxes” (“FIN 48”). The Interpretation establishes criteria for
        recognizing and measuring the financial statement tax effects of positions
        taken
        on a company's tax returns. A two-step process is prescribed whereby the
        threshold for recognition is a more-likely-than-not test that the tax position
        will be sustained upon examination and the tax position is measured at the
        largest amount of benefit that is greater than 50 percent likely of being
        realized upon ultimate settlement. The Company currently recognizes a tax
        position if it is probable of being sustained. The Interpretation is effective
        for the Company beginning July 1, 2007 and will be applicable to all tax
        positions upon initial adoption. Only tax positions that meet the
        more-likely-than-not recognition threshold at the effective date may continue
        to
        be recognized upon adoption of FIN 48. The Company has completed its initial
        evaluation of the impact of the July 1, 2007 adoption of FIN 48 and determined
        that such adoption is not expected to have a material impact on its financial
        statements.
  29


**Item
      7 Financial Statements**





**Report
      of Independent Registered Public Accounting Firm**








Board
      of
      Directors and Stockholders


MSGI
      Security Solutions, Inc.





We
      have
      audited the accompanying consolidated balance sheets of MSGI Security Solutions,
      Inc. and subsidiaries as of June 30, 2007 and 2006, and the related consolidated
      statements of operations, stockholders’ equity (deficit), and cash flows for the
      years ended June 30, 2007 and 2006. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropri ate
      in
      the circumstances, but not for the purpose of expressing an opinion on the
      effectiveness of the Company’s internal control over financial reporting.
      Accordingly we express no such opinion. An audit includes examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of MSGI Security Solutions,
      Inc. and subsidiaries as of June 30, 2007 and 2006, and the results of its
      operations and its cash flows for the fiscal years ended June 30, 2007 and
      2006,
      in conformity with accounting principles generally accepted in the United
      States.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has suffered recurring losses from operations and
      negative cash flows from operations, all of which raise substantial doubt about
      its ability to continue as a going concern. Management’s plans in regard to
      these matters are also described in Note 1. The financial statements do not
      include any adjustments that might result from the outcome of this
      uncertainty.





/s/
      Amper, Politziner & Mattia, P.C.




October
      15, 2007


Edison,
      New Jersey





30




**MSGI
        SECURITY SOLUTIONS, INC. AND SUBSIDIARIES**
 CONSOLIDATED
        BALANCE SHEETS AS OF JUNE 30,
 2007
                
                2006ASSETSCurrent
                    assets:Cash
                
                $
                2,463,691
                
                $
                -Inventory
                
                
                1,061,800
                
                
                50,176Other
                    current assets
                
                
                9,250
                
                
                13,485Total
                    current assets
                
                
                3,534,741
                
                
                63,661Investment
                    in Excelsa S.p.A.
                
                
                -
                
                
                1,650,000Property
                    and equipment, net
                
                
                19,553
                
                
                153,041Intangible
                    assets, net
                
                
                12,613
                
                
                108,377Other
                    assets, principally deferred financing costs, net
                
                
                1,311,787
                
                
                226,391Total
                    assets
                
                $
                4,878,694
                
                $
                2,201,470LIABILITIES
                    AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
                    liabilities:Cash
                    overdraft
                
                
                -
                
                
                8,223Advances
                    from strategic partner - CODA
                
                
                -
                
                
                300,000Accounts
                    payable-trade
                
                
                1,582,379
                
                
                1,536,651Accrued
                    expenses and other current liabilities
                
                
                1,667,495
                
                
                1,694,642Deferred
                    revenues
                
                
                -
                
                
                59,332Current
                    portion of abandoned lease obligation
                
                
                -
                
                
                987,348Total
                    current liabilities
                
                
                3,249,874
                
                
                4,586,196Other
                    liabilities:Notes
                    payable
                
                
                600,000
                
                
                1,442,4278%
                    Callable convertible notes payable-net of discount
                
                
                1,612,596
                
                
                2,574,5976%
                    Callable convertible notes payable-net of discount
                
                
                444,445
                
                
                -Total
                    other liabilities
                
                
                2,657,041
                
                
                4,017,024Commitments
                    and contingenciesStockholders’
                    equity (deficit):Convertible
                    preferred stock - $.01 par value; 18,750 shares
                    authorized;0
                    and 4,031 shares of Series F issued and outstanding(liquidation
                    preference $305,024
                    and $1,584,060) at June 30, 2007and
                    2006, respectively
                
                
                -
                
                
                40Convertible
                    preferred stock - $.01 par value; 200 shares authorized;0
                    shares of Series G issued and outstandingat
                    June 30, 2007 and 2006
                
                
                -
                
                
                -Common
                    stock - $.01 par value; 100,000,000 authorized; 10,325,687and
                    4,210,729 shares issued; 10,308,025 and 4,193,067 sharesoutstanding
                    as of June 30, 2007 and 2006, respectively
                
                
                103,257
                
                
                42,107Additional
                    paid-in capital
                
                
                256,074,720
                
                
                238,371,269Accumulated
                    deficit
                
                
                (255,812,488
                )
                
                (243,421,544
                )Accumulated
                    other comprehensive income
                
                
                -
                
                
                88Less:
                    17,662 shares of common stock in treasury, at cost
                
                
                (1,393,710
                )
                
                (1,393,710
                )Total
                    stockholders’ equity (deficit)
                
                
                (1,028,221
                )
                
                (6,401,750
                )Total
                    liabilities and stockholders’ equity (deficit)
                
                $
                4,878,694
                
                $
                2,201,470
 The
          accompanying notes are an integral part of these Consolidated Financial
          Statements.
  31


**MSGI
      SECURITY SOLUTIONS, INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF OPERATIONS


FOR
      THE
      YEARS ENDED JUNE 30,


2007
                
                2006Product
                    revenues
                
                $
                77,895
                
                $
                76,080Referral
                    fee revenue - related party
                
                
                100,000
                
                
                -Product
                    revenues - related party
                
                
                -
                
                
                50,750Total
                    revenue
                
                
                177,895
                
                
                126,830Cost
                    of revenue
                
                
                49,886
                
                
                38,322Gross
                    profit
                
                
                128,009
                
                
                88,508Operating
                    costs and expenses:Salaries
                    and benefits
                
                
                2,127,453
                
                
                3,527,859Research
                    and development - Apro
                
                
                2,500,000
                
                
                -Provision
                    for loss on note receivable from officer
                
                
                -
                
                
                1,209,457Selling,
                    general and administrative
                
                
                2,882,459
                
                
                3,800,702Impairment
                    on investment in Excelsa
                
                
                1,650,000
                
                
                2,416,192Depreciation
                    and amortization
                
                
                131,819
                
                
                199,318Total
                    operating costs and expenses
                
                
                9,291,731
                
                
                11,153,528Loss
                    from operations
                
                
                (9,163,722
                )
                
                (11,065,020
                )Other
                    income (expense):Registration
                    penalties
                
                
                (74,000
                )
                
                -Loss
                    on settlement liability to strategic partner-CODA
                
                
                (811,918
                )
                
                -Interest
                    income
                
                
                617
                
                
                69,770Interest
                    expense
                
                
                (2,332,957
                )
                
                (4,518,373
                )Total
                    other expense
                
                
                (3,218,258
                )
                
                (4,448,603
                )Loss
                    from continuing operationsbefore
                    provision for income taxes
                
                
                (12,381,980
                )
                
                (15,513,623
                )Provision
                    for income taxes
                
                
                8,964
                
                
                34,150Loss
                    from continuing operations
                
                
                (12,390,944
                )
                
                (15,547,773
                )Discontinued
                    operations:Loss
                    from discontinued operations-AONet
                
                
                -
                
                
                (1,657,952
                )Loss
                    from disposal of discontinued operations-AONet
                
                
                -
                
                
                (375,976
                )Loss
                    from discontinued operations-other
                
                
                -
                
                
                (4,537
                )Loss
                    from discontinued operations
                
                
                -
                
                
                (2,038,465
                )Net
                    loss
                
                
                (12,390,944
                )
                
                (17,586,238
                )Undeclared
                    dividends on preferred stock
                
                
                15,168
                
                
                177,767Net
                    loss attributable to common stockholders
                
                $
                (12,406,122
                )
                $
                (17,764,005
                )


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




32


**MSGI
      SECURITY SOLUTIONS, INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF OPERATIONS (Continued)


FOR
      THE
      YEARS ENDED JUNE 30,


2007
              
              2006Basic
                  loss per share attributable to common shareholders:Continuing
                  operations
              
              $
              (
                  1.96
              )
              $
              (4.05
              )Discontinued
                  operations
              
              
              -
              
              
              (0.52
              )Basic
                  loss per share attributable to common shareholders
              
              $
              (1.96
              )
              $
              (4.57
              )Diluted
                  loss per share attributable to common shareholders:Continuing
                  operations
              
              $
              (1.96
              )
              $
              (4.05
              )Discontinued
                  operations
              
              
              -
              
              
              (0.52
              )Diluted
                  loss per share attributable to common shareholders
              
              $
              (1.96
              )
              $
              (4.57
              )Weighted
                  average common shares outstanding - basic
              
              
              6,328,467
              
              
              3,884,681Weighted
                  average common shares outstanding - diluted
              
              
              6,328,467
              
              
              3,884,681
 The
          accompanying notes are an integral part of these Consolidated Financial
          Statements




33


**MSGI
        SECURITY SOLUTIONS, INC. AND SUBSIDIARIES**
 CONSOLIDATED
        STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) AND OTHER COMPREHENSIVE INCOME
        (LOSS)
 FOR
        THE
        YEARS ENDED JUNE 30, 2007 AND 2006


Common
                    Stock
                
                Preferred
                    Stock
                
                Additional
                    Paid-in
                
                Deferred
                
                Other
                    Comprehensive Income
                
                Accumulated
                    Other Comprehensive Income
                
                Accumulated
                
                Treasury
                    StockShares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Compensation
                
                (Loss)
                
                (Loss)
                
                Deficit
                
                Share
                
                Amount
                
                Totals**Balance
                    June 30, 2005**
                
                
                **3,849,540**
                
                **$**
                **38,495**
                
                
                **9,844**
                
                **$**
                **98**
                
                **$**
                **233,344,128**
                
                **$**
                **(1,301,974**
                **)**
                
                
                
                **$**
                **28,974**
                
                **$**
                **(225,835,306**
                **)**
                **$**
                **(17,662**
                **)**
                **$**
                **(1,393,710**
                **)**
                **$**
                **4,880,705**Elimination
                    of deferred compensationupon
                    adoption of SFAS 123(R)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,301,974
                )
                
                1,301,974
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Legal
                    fees associated with filing ofa
                    registration statement
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5,104
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5,104
                )Non-cash
                    compensation expense underSFAS
                    123(R)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,523,406
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,523,406Warrants
                    issued to placement agent inNIR
                    Group debt financing
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                57,054
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                57,054Warrants
                    issued to notes holders inNIR
                    Group debt financing
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,629,600
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,629,600Beneficial
                    conversion value of NIRGroup
                    8% convertible notes issued
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,066,377
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,066,377Warrants
                    issued to placement agentin
                    vFinance debt financing
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                612,240
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                612,240Warrants
                    issued to note holders invFinance
                    debt financing
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                176,114
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                176,114Shares
                    of common stock issued to theNIR
                    Group as payment against8%
                    convertible notes
                
                
                75,000
                
                
                750
                
                
                
                
                
                
                
                
                272,232
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                272,982Conversion
                    of Preferred Series Fshares
                    to common stock
                
                
                286,189
                
                
                2,862
                
                
                (5,813
                )
                
                (58
                )
                
                (2,804
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (88
                )
                $
                (28,886
                )
                
                (28,886
                )
                
                
                
                
                
                
                
                
                
                
                (28,886
                )Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (12,390,944
                )
                $
                (17,586,238
                )
                
                
                
                
                (17,586,238
                )
                
                
                
                
                
                
                
                -Total
                    comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (12,391,032
                )
                $
                (17,615,124
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                -**Balance
                    June 30, 2006**
                
                
                **4,210,729**
                
                **$**
                **42,107**
                
                
                **4,031**
                
                **$**
                **40**
                
                **$**
                **238,371,269**
                
                
                -
                
                
                -
                
                **$**
                **88**
                
                **$**
                **(243,421,544**
                **)**
                **$**
                **(17,662**
                **)**
                **$**
                **(1,393,710**
                **)**
                **$**
                **(6,401,750**
                **)**Non-cash
                    compensation expense underSFAS
                    123(R)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                486,302
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                486,302Conversion
                    of Series F ConvertiblePreferred
                    Stock
                
                
                198,470
                
                
                1,985
                
                
                (4,031
                )
                
                (40
                )
                
                (1,945
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Issuance
                    of Series G ConvertiblePreferred
                    Stock
                
                
                
                
                
                
                
                
                138
                
                
                1
                
                
                2,758,236
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,758,237Issuance
                    of common stock tocorporate
                    officers as a bonus
                
                
                125,000
                
                
                1,250
                
                
                
                
                
                
                
                
                269,750
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                271,000Adjustment
                    to fair market valueof
                    warrants issued to lenders andplacement
                    agents
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                533,271
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                533,271Issuance
                    of common stock toAnyuser,
                    Inc. (a Hyundai designee)
                
                
                865,000
                
                
                8,650
                
                
                
                
                
                
                
                
                471,350
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                480,000Issuance
                    of common stock forConversion
                    of Series GConvertible
                    Preferred Stock
                
                
                2,758,400
                
                
                27,584
                
                
                (138
                )
                
                (1
                )
                
                (27,583
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Issuance
                    of common stock tolender
                    for repayment of notes
                
                
                1,318,088
                
                
                13,181
                
                
                
                
                
                
                
                
                1,173,100
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,186,281Issuance
                    of common stock tostrategic
                    partner -CODA
                
                
                850,000
                
                
                8,500
                
                
                
                
                
                
                
                
                1,734,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,742,500Fair
                    market value of warrantsissued
                    to placement agents
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                732,734
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                732,734Fair
                    market value of warrantsissued
                    to lender for settlement of Note
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                215,319
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                215,319Fair
                    market value of warrantsIssued
                    to vendor for services
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                423,352
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                423,352Beneficial
                    conversiondiscount
                    on 2005 8% convertible notes
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                935,565
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                935,565Beneficial
                    conversion discount on 6%convertible
                    notes issued December 2006
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,000,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,000,000Beneficial
                    conversion discount on 6%convertible
                    notes issued April 2007
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,000,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,000,000Beneficial
                    conversion discount on 8%Convertible
                    notes issued May 2007
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,000,000Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (88
                )
                
                (88
                )
                
                
                
                
                
                
                
                
                
                
                (88
                )Net
                    Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (12,390,944
                )
                
                
                
                
                (12,390,944
                )
                
                
                
                
                
                
                
                (12,390,944
                )**Balance
                    June 30, 2007**
                
                
                **10,325,687**
                
                **$**
                **103,257**
                
                
                **-**
                
                **$**
                **-**
                
                **$**
                **256,074,720**
                
                **$**
                
                
                **$**
                (12,391,032
                )
                **$**
                **-**
                
                **$**
                **(255,812,488**
                **)**
                
                **(17,662**
                **)**
                **$**
                **(1,393,710**
                **)**
                **$**
                **(1,028,221**
                **)**
  The
          accompanying notes are an integral part of these Consolidated Financial
          Statements.
  34
 **MSGI
          SECURITY SOLUTIONS, INC. AND SUBSIDIARIES**
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 FOR
          THE
          YEARS ENDED JUNE 30,
  2007
                
                2006OPERATING
                    ACTIVITIES:Net
                    loss
                
                $
                (12,390,944
                )
                $
                (17,586,238
                )Loss
                    from discontinued operations
                
                
                -
                
                
                2,038,465Loss
                    from continuing operations
                
                
                (12,390,944
                )
                
                (15,547,773
                )Adjustments
                    to reconcile net loss to net cash usedin
                    operating activities:Provision
                    for loss on note receivable-related party
                
                
                -
                
                
                1,209,457Provison
                    for doubtful accounts
                
                
                -
                
                
                115,750Write
                    off of license agreement deposit
                
                
                -
                
                
                500,000Depreciation
                
                
                36,056
                
                
                103,855Amortization
                
                
                95,764
                
                
                95,762Amortization
                    of deferred financing costs
                
                
                334,549
                
                
                482,195Non-cash
                    compensation expense
                
                
                757,302
                
                
                1,523,406Non-cash
                    interest expense
                
                
                1,648,383
                
                
                3,909,510Impairment
                    on investment in Excelsa
                
                
                1,650,000
                
                
                2,416,192Loss
                    on settlement of liability to strategic partner - CODA
                
                
                811,918
                
                
                -Non-cash
                      expense warrants issued to vendors
                
                
                423,352
                
                
                -Changes
                    in assets and liabilities:Accounts
                    receivable
                
                
                -
                
                
                (14,851
                )Inventory
                
                
                (1,053,143
                )
                
                (16,153
                )Other
                    current assets
                
                
                4,235
                
                
                76,411Other
                    assets
                
                
                (63,893
                )
                
                (14,605
                )Deferred
                    revenue
                
                
                (2,000
                )
                
                59,332Accounts
                    payable - trade
                
                
                402,253
                
                
                1,013,081Accrued
                    expenses and other liabilities
                
                
                1,281,652
                
                
                997,280Net
                    cash used in continuing operations
                
                
                (6,064,516
                )
                
                (3,091,151
                )Net
                    cash provided by discontinued operations
                
                
                -
                
                
                243,654Net
                    cash used in operating activities
                
                
                (6,064,516
                )
                
                (2,847,497
                )INVESTING
                    ACTIVITIES:Purchase
                    of investment in Excelsa
                
                
                -
                
                
                (3,115
                )Purchases
                    of property and equipment
                
                
                (5,715
                )
                
                (44,953
                )Deposit
                    on license agreement
                
                
                -
                
                
                (500,000
                )Increase
                    in related party note receivable
                
                
                -
                
                
                (69,700
                )Net
                    cash used in continuing operations
                
                
                (5,715
                )
                
                (617,838
                )Net
                    cash used in discontinued operations
                
                
                -
                
                
                (605,888
                )Net
                    cash used in investing activities
                
                
                (5,715
                )
                
                (1,223,726
                )FINANCING
                    ACTIVITIES:Proceeds
                    from the issuance of the 8% convertible notes
                
                
                5,000,000
                
                
                3,000,000Payment
                    of deferred financing costs
                
                
                (440,000
                )
                
                (439,473
                )Payments
                    of 8% convertible notes
                
                
                -
                
                
                (136,364
                )Proceeds
                    from issuance of 6% convertible notes
                
                
                3,000,000
                
                
                -Deferred
                    financing costs related to issuance of 6% convertible
                    notes
                
                
                (243,715
                )
                
                -Amounts
                    received from Hyundai Syscomm
                
                
                500,000
                
                
                -Proceeds
                    from notes payable
                
                
                -
                
                
                1,849,585Payments
                    of notes payable
                
                
                -
                
                
                (300,000
                )Advance
                    from strategic partner
                
                
                959,474
                
                
                300,000Payments
                    made to strategic partner
                
                
                (233,526
                )Costs
                    in connection with registration of stock
                
                
                -
                
                
                (5,014
                )Bank
                    overdraft
                
                
                (8,223
                )
                
                8,223Net
                    cash provided by continuing operations
                
                
                8,534,010
                
                
                4,276,867Net
                    cash (used in) discontinued operations
                
                
                -
                
                
                (289,407
                )Net
                    cash provided by financing activities
                
                
                8,534,010
                
                
                3,987,460Change
                    in accumulated other comprehensive income
                
                
                (88
                )
                
                (28,886
                )Net
                    increase (decrease) in cash
                
                
                2,463,691
                
                
                (112,649
                )Cash
                    at beginning of year
                
                
                -
                
                
                112,649Cash
                    at end of year
                
                $
                2,463,691
                
                $
                -Supplemental
                  disclosure of cash paid:Interest
                
                $
                34,600
                
                $
                -
  See
          Note
          20 for further supplemental cash flow information.
 
 The
          accompanying notes are an integral part of these Consolidated Financial
          Statements.
  35


**MSGI
      SECURITY SOLUTIONS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





1. LIQUIDITY
          AND COMPANY OVERVIEW:




Liquidity :





The
      Company has limited capital resources, has incurred significant historical
      losses and negative cash flows from operations and has limited current revenues.
      The Company was also in default of its debt service payments and other
      provisions of certain notes payable, but has successfully reached a resolution
      to these defaults (See Note 7). The Company believes that funds on hand combined
      with funds that will be available from its various operations will not be
      adequate to finance its operations and capital expenditure requirements and
      enable the Company to meet its financial obligations and payments under its
      convertible notes and promissory notes for the next twelve months. Further,
      there is uncertainty as to timing, volume and profitability of transactions
      that
      may arise from our relationship with Hyundai and Apro. The
      Company is in the process of consummating certain strategic transactions that
      may provide significant capital. The Company has engaged the investment banking
      firm of HC Wainwright to raise additional capital to fund operations and funding
      events were successfully closed on December 13, 2006, April 4, 2007 and May
      21,
      2007 (See Notes 6 and 7). There are no assurances that any further capital
      raising transactions will be consummated. Although certain transactions have
      been successfully closed, failure of our operations to generate sufficient
      future cash flow and failure to consummate our strategic transactions or raise
      additional financing could have a material adverse effect on the Company's
      ability to continue as a going concern and to achieve its business objectives.
      These conditions raise substantial doubt about the Company’s ability to continue
      as a going concern. The accompanying financial statements do not include any
      adjustments relating to the recoverability of the carrying amount of recorded
      assets or the amount of liabilities that might result should the Company be
      unable to continue as a going concern.





Company
      Overview :




MSGI
      Security Solutions, Inc. (“MSGI” or the “Company”) is a proprietary solutions
      provider developing a global combination of innovative emerging businesses
      that
      leverage information and technology. MSGI is principally focused on the homeland
      security and surveillance industry. Substantially all of the Company’s business
      activity is conducted with customers located within the United
      States.





Hyundai
      Transactions:




On
      September 11, 2006 the Company entered into a License Agreement with Hyundai
      Syscomm Corp. (“Hyundai”) whereby, in
      consideration of a one-time $500,000 fee (of which $300,000 was received in
      October 2006 and the remaining $200,000 was received in June 2007), MSGI granted
      to Hyundai a non-exclusive worldwide perpetual unlimited source, development
      and
      support license, for the use of the technology developed and owned by MSGI’s
      majority-owned subsidiary, Innalogic, LLC. This license entitles Hyundai to
      onward develop the source code of the technology to provide wireless
      transmission and encryption capabilities that work with any other of Hyundai’s
      products, to use the technology for the purposes of demonstrating the technology
      to potential customers, sub-licensees and distributors, market the technology
      world wide either under its existing name or any name that Hyundai may decide
      and to sub-license the technology to its customers and distributors generally.
      The License Agreement carries certain intellectual property rights which state
      that (i) Hyundai will follow all such reasonable instructions as MSGI may give
      from time to time with regard to the use of trademarks or other indications
      of
      the property and other rights of MSGI or its subsidiaries, (ii) warrants that
      MSGI is the sole proprietary owners of all copyright and intellectual property
      rights subsisting in the technology and undertakes to indemnify Hyundai at
      all
      times against any liability in respect of claims from third parties for
      infringement thereof and (iii) provides that Hyundai acknowledges that the
      intellectual property rights of any developments of the technology that are
      undertaken by MSGI rest and will remain owned by the Company.





On
      October 19, 2006, the Company entered into a Subscription Agreement with Hyundai
      for the issuance of 900,000 shares of the Company's common stock. Subject to
      the
      terms and conditions set forth in the Subscription Agreement, the Company agreed
      to issue up to 900,000 shares of common stock contingent upon the Company's
      receipt of $500,000 received in connection with a certain License Agreement,
      dated September 11, 2006 (See above and Note 16), and execution of a certain
      then pending Sub-Contracting Agreement (see below). Under the terms and
      conditions set forth in the Subscription Agreement, Hyundai agreed that the
      Company shall not be required to issue, or reserve for issuance at any time
      in
      accordance with Nasdaq rule 4350(i), in the aggregate, Common Stock equal to
      more than 19.99% of the Company's common stock outstanding (on a pre-transaction
      basis). Therefore the Company issued 865,000 shares of common stock at the
      initial closing of the transaction, and the remaining 35,000 shares of common
      stock shall be issued when and if: (a) the holders of a majority of the shares
      of common stock outstanding vote in favor of Hyundai owning more than 19.99%
      of
      the Company's common stock outstanding; or (b) additional issuances of common
      stock by the Company permit such issuance in accordance with Nasdaq rule
      4350(i). As of the date of submission of this report, the Company is obligated
      to issue the remaining 35,000 shares of common stock to Hyundai, per the terms
      of the Subscription Agreement.




36





On
      October 25, 2006, the Company entered into a Sub-Contracting Agreement with
      Hyundai. The Sub-Contracting Agreement allows for MSGI and its affiliates to
      participate in contracts that Hyundai and/or its affiliates now have or may
      obtain hereafter, where the Company's products and/or services for encrypted
      wired or wireless surveillance systems or perimeter security would enhance
      the
      value of the contract(s) to Hyundai or its affiliates. The initial term of
      the
      Sub-Contracting Agreement is three years, with subsequent automatic one year
      renewals unless the Sub-Contracting Agreement is terminated by either party
      under the terms allowed by the Agreement. Further, under the terms of the
      Sub-Contracting Agreement, the Company will provide certain limited product
      and
      software warranties to Hyundai for a period of 12 months after the assembly
      of
      the Company's products and product components by Hyundai or its affiliates
      with
      regard to the product and for a period of 12 months after the date of
      installation of the software by Hyundai or its affiliate with regard to the
      software. The Company will also provide training, where required, for assembly,
      maintenance and usage of the equipment and shall charge its most favored price
      for such training services. No title or other ownership of rights in the
      Company's firmware or any copy thereof shall pass to Hyundai or its affiliates
      under this Agreement. Hyundai and its affiliates agree that it shall not alter
      and notices on, prepare derivative works based on, or reproduce, disassemble
      or
      decompile any Software embodied in the firmware recorded in the Company's
      products.





On
      February 7, 2007, the Company issued to Hyundai Syscomm Corp. a warrant to
      purchase a maximum of 24,000,000 shares of common stock in exchange for a
      maximum of $80,000,000 in revenue, which is to be realized by the Company over
      a
      maximum period of four years. The vesting of the Warrant will take place
      quarterly over the four-year period based on 300,000 shares for every $1 million
      in revenue realized by the Company. The revenue is subject to the
      sub-contracting agreement between Hyundai and the Company dated October 25,
      2006. Additionally, when issued, the shares underlying the warrant were to
      be
      authorized through an increase in the total of authorized capital stock of
      the
      company to be approved by the stockholders. The warrant could not begin to
      vest
      until these underlying shares were authorized. Such approval was obtained at
      the
      Special Meeting of the Stockholders on March 6, 2007. No
      transactions under this agreement have occurred to date.





On
      May
      10, 2007, the Company entered into an exclusive sub-contract and distribution
      agreement with Apro Media Corp (“Apro” or “Apro Media”) for at least $105
      million of sub-contracting business over seven years to provide commercial
      security services to a Fortune 100 defense contractor. Under the terms of
      contract, MSGI will acquire components from Korea and deliver fully integrated
      security solutions at an average level of $15 million per year for the length
      of
      the seven-year engagement. MSGI will also immediately establish and operate
      a
      24/7/365 customer support facility in the Northeastern United States. Apro
      will
      provide MSGI with a web-based interface to streamline the ordering process
      and
      create an opportunity for other commercial security clients to be acquired
      and
      serviced by MSGI. The contract calls for gross profit margins estimated to
      be
      between 26% and 35% including a profit sharing arrangement with Apro Media,
      which will initially take the form of unregistered MSGI common stock, followed
      by a combination of stock and cash and eventually just cash. The terms of the
      agreement call for 3,000,000 shares of unregistered MSGI common stock to be
      issued in exchange for $10 million in revenue, at the point when that revenue
      is
      recognizable by MSGI. Subsequent to the first $10 million in revenue, for every
      $1 million in revenue received, the Company will issue 300,000 warrants for
      shares of common stock under the agreement in years one and two. Starting with
      the third year of the agreement, the number of warrants to be issued decreases
      to 150,000 warrants and the contract then provides for a portion to be paid
      in
      cash at a rate of 25% of the gross profit received in exchange for each $1
      million in revenue recognized. The contract terms continue to decrease the
      warrants and increase the cash portion to a point where in the seventh year
      of
      the contract, no warrants are issuable and cash is paid at a rate of 50% of
      the
      gross profit received. The contract provides for 12,750,000 in warrants to
      be
      issued over the term of the contract, provided that $90 million of revenue
      levels are attained.





In
      the
      aggregate, assuming all the revenue targets are met over the next seven years,
      Apro Media would eventually acquire approximately 15.75 million shares of MSGI
      common stock.




37





MSGI
      was
      referred to Apro Media by Hyundai Syscomm, an MSGI strategic investor; as part
      of a general expansion into the Asian security market, however this contract
      does not constitute revenue under the existing Hyundai Syscomm warrant to
      acquire common stock of MSGI. The Apro contract required working capital of
      at
      least $5 million due to considerable upfront expenses including a $2.5 million
      financial contribution by MSGI to Apro Media for the proprietary system
      development requirements of the Fortune 100 client and the formation of a
      staffed production and customer service facility and warehouse. MSGI paid the
      $2.5 million in May 2007, which is recognized as R&D expense on the
      statement of operations. MSGI financed this investment with the May 21, 2007
      $5
      million 8% Callable Convertible Notes. The first Apro Media purchase order
      was
      received during the three month period ended June 30, 2007 and will include
      monthly deliverables. The first shipment of product under the purchase order
      occurred during fiscal 2008.





The
      Company has taken a position that all of the transactions described above
      associated with Hyundai and Apro should be “bundled” and viewed together
      analogous to the the concepts of EITF No. 00-21, and in consideration that
      all
      of the transactions with Hyundai have not yet been finalized. The Company had
      recognized a receivable and an equal amount in liability for the initial
      $500,000 license fee in the quarter ended September 30, 2006. As a result of
      the
      issuance of the 865,000 shares of common stock to Hyundai in the quarter ended
      December 31, 2006, $480,000 of the $500,000 liability (commensurate with the
      percentage of the shares issued out of the total subscription agreement)
      associated with the License Agreement has been reclassified from liabilities
      to
      additional paid in capital. As no other revenue or equity transactions occurred
      during fiscal 2007, there was no further accounting considerations required.
      Further, as the issuance of the warrants is conditioned upon the receipt of
      sales orders to be fulfilled by MSGI, these warrants are considered
      conditionally issued, and the resultant charge to operations will be recognized
      when the condition is met.




Other
      Operations:





On
      August
      18, 2004, the Company acquired a 51% interest in Innalogic, LLC. In August
      2005,
      MSGI’s equity ownership stake in Innalogic LLC increased to 76%. In September
      2007, MSGI’s equity ownership stake in Innalogic LLC increased to 84%. Innalogic
      LLC is a wireless software product development firm that works with clients
      to
      custom-design technology products that meet specific user, functional and
      situational requirements. Innalogic has a recognized core competency in an
      area
      of increasingly vital importance to security: delivering rich-media content
      (video, audio, biometric, sensor data, etc.) to wirelessly enabled mobile
      devices for public-safety and security applications over wireless or wired
      networks. Innalogic has the resources and expertise to design and install
      building-wide wireless networks. The network’s technological foundation is a
      custom-designed network Command Center utilizing Innalogic’s proprietary
      SafetyWatchTM software. Innalogic-designed networks integrate with a building’s
      existing CCTV system and security infrastructure, thus creating a powerful
      network environment able to accommodate advanced building-wide security
      applications. Importantly, Innalogic’s wireless video applications help clients
      make the critical upgrade of CCTV video security systems from analog to digital
      technology. Innalogic software applications easily integrate with existing
      systems - camera or rich-media networks - and are specially designed to
      incorporate or integrate with new or replacement technologies as they come
      online. On April 1, 2007, Innalogic LLC executed a non-exclusive licensing
      agreement with the CODA Octopus Group, Inc. (“CODA”) whereby CODA assumed
      certain development and operational responsibilities and has the right to market
      the Innalogic proprietary technology to its client base in return for a royalty
      payment of 20% of all revenues earned from the sale of Innalogic technologies
      (See Note 8).





The
      Company, through its subsidiary Future
      Developments America, Inc. (“FDA”) ,
      are a
      non-exclusive licensee in the United States of certain products developed by
      Future Developments Limited (“FDL”) and of other products developed by outside
      organizations. The Company is also entitled to receive royalties on certain
      sales of products by FDL. FDA
      markets a broad variety of off-the-shelf and custom surveillance equipment,
      including antennas, audio “bugs”, body cameras, covert and overt color and
      black-and-white cameras, night vision fixed surveillance cameras, power
      supplies, recording devices and related supplies. The Company has not yet sold
      any FDA products or received any royalties.




On
      June
      1, 2005, the Company acquired a 51% interest in the equity ownership interests
      in AONet International S.r.l. (“AONet”), an Italian company. AONet is focused
      primarily on providing outsourcing of data services and business continuity,
      and
      its offering of several applications that can be run through the data center,
      including video surveillance, digital data interception and mass distribution
      communications. Specifically, its data center was to serve as the backbone
      for
      the delivery of MSGI’s distribution agreement with Verisign for the promotion
      and provision of its NetDiscovery application for digital interception. The
      distribution agreement with Verisign was not finalized and the amounts advanced
      to Verisign during the fiscal year 2006 in pursuit of this license agreement
      of
      $500,000 were written off.




38





On
      March
      31, 2006, the Company defaulted on certain payment provisions of the Stock
      Purchase Agreement of AONet which provided that, if the Company failed to pay
      any of the individual installments within 48 hours of the applicable due date,
      the Stock Purchase Agreement will be terminated and the Company will be
      obligated to return all acquired equity ownership interests in AONet to the
      previous owner, forfeiting any and all payments made to that date. As of April
      1, 2006, all equity ownership interests reverted back to the previous owner
      and,
      as a result, the AONet subsidiary has been deconsolidated from the financial
      statements of the Company. As
      such,
      the operations and cash flows of AONet have been eliminated from ongoing
      continuing operations and the Company no longer has continuing involvement
      in
      the operations. All amounts have been reclassified into discontinued operations
      in the prior fiscal year ended June 30, 2006.





The
      Company learned that Excelsa had filed for bankruptcy in January 2007 and has
      ceased operations. As a result, we have fully impaired the investment in Excelsa
      and recognized a loss on the investment of $1,650,000 as of September 30,
      2006 (See Note 5), which includes a restatement for the prior
      quarters.





2. SUMMARY
          OF SIGNIFICANT ACCOUNTING POLICIES:


*Principles
      of Consolidation* :





The
      consolidated financial statements include the accounts of MSGI and its majority
      owned subsidiaries. All material intercompany accounts and transactions have
      been eliminated in consolidation. Operations of subsidiaries acquired during
      the
      year are recorded from the date of the respective acquisition (see Notes 3
      and
      4). Operations of any subsidiaries sold, or where control is lost, or where
      a
      plan has been instituted to dispose of an operation are presented as
      discontinued operations (See Note 4) for all periods presented and the results
      of those operations and financial position of those operations are reclassified
      into discontinued operations. Investments in unconsolidated subsidiaries where
      the Company has less than a 20% ownership interest and does not exert
      significant control and influence are recorded on the cost basis.





*Cash
      and Cash Equivalents:*





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





*Accounts
      receivable and allowance for doubtful accounts:*





The
      Company extends credit to its customers in the ordinary course of business.
      Accounts are reported net of an allowance for uncollectible accounts. Bad debts
      are provided on the allowance method based on historical experience and
      management’s evaluation of outstanding accounts receivable. In assessing
      collectibility the Company considers factors such as historical collections,
      a
      customer’s credit worthiness, age of the receivable balance both individually
      and in the aggregate, and general economic conditions that may affect a
      customer’s ability to pay. The Company does not require collateral from
      customers nor are customers required to make up-front payments for goods and
      services.





*Deferred
      Financing and other debt-related Costs:*





Deferred
      financing costs are amortized over the term of its associated debt instrument.
      The Company evaluates the terms of the debt instruments to determine if any
      embedded derivatives or beneficial conversion features exist. The Company
      allocates the aggregate proceeds of the notes payable between the warrants
      and
      the notes based on their relative fair values. The fair value of the warrants
      is
      calculated utilizing the Black-Scholes option-pricing model. The Company is
      amortizing the resultant discount or other features over the term of the notes
      through its earliest maturity date. If the maturity of the debt is accelerated
      because of defaults, then the amortization is also accelerated to the default
      date. The Company’s debt instruments do not contain any embedded derivatives at
      June 30, 2007.




39





*Inventories*




Inventories
      consist primarily of various networking equipment purchased as finished goods
      from third party vendors to be used as part of the Company’s product offerings.
      Inventory is recorded at the lower of cost or market.




*Property,
      Plant and Equipment:*




Property,
      plant 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
            
            
            3
                to 7 yearsComputer
                equipment and software
            
            
            3
                to 5 yearsMachinery
            
            
            6
                yearsLeasehold
                improvements
            
            
            shorter
                of 6-11 years or life of lease




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
      cost
      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.





*Investments
      in non-consolidated companies:*





The
      Company accounts for its investments in non-consolidated companies under the
      cost basis method of accounting if the investment is less than 20% of the voting
      stock of the investee, or under the equity method of accounting if the
      investment is greater than 20% of the voting stock of the investee. Investments
      accounted for under the cost method are recorded at their initial cost, and
      any
      dividends or distributions received are recorded in income. For equity method
      investments, the Company records its share of earnings or losses of the investee
      during the period. Recognition of losses will be discontinued when the Company’s
      share of losses equals or exceeds its carrying amount of the investee plus
      any
      advances made or commitments to provide additional financial
      support.





An
      investment in non-consolidated companies is considered impaired if the fair
      value of the investment is less than its cost on an other than temporary basis.
      Generally, an impairment is considered other-than-temporary unless (i) the
      Company has the ability and intent to hold an investment for a reasonable period
      of time sufficient for an anticipated recovery of fair value up to (or beyond)
      the cost of the investment; and (ii) evidence indicating that the cost of the
      investment is recoverable within a reasonable period of time outweighs evidence
      to the contrary. If impairment is determined to be other-than-temporary, then
      an
      impairment loss is recognized equal to the difference between the investment’s
      cost and its fair value. The Company adopted the principles of SFAS No. 157,
      issued in September 2006, to determine the estimated fair value of its
      investment in Excelsa, as described in detail in Note 5.





*Long-Lived
      Assets:*




In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”, the Company reviews for impairment of long-lived assets and
      certain identifiable intangibles whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable. In
      general, the Company will recognize impairment when the sum of undiscounted
      future cash flows (without interest charges) is less than the carrying amount
      of
      such assets. The measurement for such impairment loss is based on the fair
      value
      of the asset. Such assets are amortized over their estimated useful
      life.





*Revenue
      Recognition:*




The
      Company accounts for revenue recognition in accordance with Staff Accounting
      Bulletin No. 104, ("SAB 104"), which provides guidance on the recognition,
      presentation and disclosure of revenue in financial statements.




40





Revenues
      are reported upon the completion of a transaction that meets the following
      criteria of SAB 104 when (1) persuasive evidence of an arrangement exists;
      (2)
      delivery of our services has occurred; (3) our price to our customer is fixed
      or
      determinable; and (4) collectibility of the sales price is reasonably assured.





For
      contracts that consists of product and related installation, revenue is
      recognized on a progress-to-completion method, in accordance with SOP 97-2.
      Billings in advance of the completion of the work being delivered is recorded
      as
      deferred revenue. Revenue for maintenance contracts are deferred and recognized
      over the term of the maintenance period.





The
      Company recognizes sales of its product upon shipment if the above criteria
      have
      been met. During the year ended June 30, 2006, MSGI sold approximately $50,000
      of products to Excelsa at normal selling terms. During the year ended June
      30,
      2007, MSGI received $100,000 from CODA Octopus Group, Inc. for licensing royalty
      fees.




*Cost
      of Revenue:*





Innalogic
      costs of revenue are primarily the expenses related to acquiring, testing and
      assembling the components required to provide the specific technology
      applications ordered by each individual customer.





*Research
      and Development Costs:*





The
      Company recognizes research and development costs associated with certain
      product development activities. The Company realized expenses of $2.5 million
      during the year ended June 30, 2007 as a result of a payment made to Apro Media
      for costs associated with technological development expenses incurred in the
      process of securing a business relationship with and subsequent purchase order
      from a certain Fortune 100 client. There was no such expense in 2006.





*Segment
      Information:*





The
      Company believes it has only one reporting segment from continuing operations,
      the securities technologies segment. The operations of AONet which constituted
      our data center technologies product and service line is reported as
      discontinued operations in the year ended June 30, 2006 (see Note
      4).





*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 Company uses the liability method of accounting for income taxes,
      as set forth in SFAS No. 109, “Accounting for Income Taxes.” Under this method,
      deferred tax assets and liabilities are recognized for the expected future
      tax
      consequences of temporary differences between the carrying amounts and the
      tax
      basis of assets and liabilities and net operating loss carry-forwards, all
      calculated using presently enacted tax rates. 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 accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. The most significant estimates and assumptions
      made
      in the preparation of the consolidated financial statements relate to the
      carrying amount of long lived assets, deferred tax valuation allowance,
      valuation of stock options, warrants and debt features, fair value of net assets
      acquired and the allowance for doubtful accounts. Actual results could differ
      from those estimates.





*Concentration
      of Credit Risk:*





The
      Company’s services are currently provided to a variety of customers, primarily
      located in the continental United States. One entity accounted for 56% of
      revenues for the year ended June 30, 2007. Two customers accounted for 91%
      of
      revenues for the year ended June 30, 2006. Our relationship with Apro Media
      Corp. and Hyundai is considered to be critical to the Company’s ongoing business
      activities.




41





The
      Company’s cash balance is maintained with one financial institution and may, at
      times, exceed federally insurable amounts. The Company has no financial
      instruments with off-balance-sheet risk of accounting loss.





*Earnings
      (Loss) Per Share:*





In
      accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share is
      calculated based on the weighted average number of shares of common stock
      outstanding during the reporting period. Diluted earnings per share gives effect
      to all potentially dilutive common shares that were outstanding during the
      reporting period; however such potentially dilutive common shares are excluded
      from the calculation of earnings (loss) per share if their effect would be
      anti-dilutive. Stock options and warrants with exercise prices below average
      market price in the amount of 6,608,196 and 450,000 shares for the years ended
      June 30, 2007 and 2006, respectively, were not included in the computation
      of
      diluted earnings per share as they are anti-dilutive as a result of net losses
      during the periods presented. In addition, stock options and warrants with
      exercise prices above average market price in the amount of 3,753,390 and
      2,448,731shares for the years ended June 30, 2007 and 2006, respectively were
      not included in the computation of diluted earnings per share as they are
      anti-dilutive. Convertible preferred stock in the amount of 4,032 shares for
      the
      year ended June 30, 2006 were not included in the computation of diluted
      earnings per share as they are anti-dilutive as a result of net losses during
      the period presented. These amounts do not include any securities issuable
      under
      the Hyundai and Apro agreements, as such amounts are considered “contingently
      issuable”, and do not include any securities under the convertible debt as the
      impact would be anti-dilutive.





*Employee
      Stock-Based Compensation* :





The
      Company follows Statement of Financial Accounting Standards ("SFAS") No. 123
      Revised 2004, "Share−Based Payment" (“SFAS 123R”). This Statement requires that
      the cost resulting from all share−based payment transactions are recognized in
      the financial statements of the Company. That cost will be measured based on
      the
      fair market value of the equity or liability instruments issued.





*Fair
      Value of Financial Instruments:*





The
      carrying amounts of the Company’s financial instruments, including cash,
      accounts payable and accrued liabilities, approximate fair value because of
      their short maturities. The carrying amount of the Company’s notes 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 June 30, 2007 and 2006.





*Reclassifications:*




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





*Summary
      of Recent Accounting Pronouncements:*





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an Amendment of FASB
      Statement No. 115”, (“SFAS 159”) which provides companies with an option to
      measure, at specified election dates, many financial instruments and certain
      other items at fair value that are not currently measured at fair value. A
      company will report unrealized gains and losses on items for which the fair
      value option has been elected in earnings at each subsequent reporting date.
      This Statement also establishes presentation and disclosure requirements
      designed to facilitate comparisons between entities that choose different
      measurement attributes for similar types of assets and liabilities. SFAS 159
      is
      effective as of the beginning of an entity’s first fiscal year that begins after
      November 15, 2007 (our Fiscal 2009). We have not completed our evaluation of
      the
      potential impact, if any, of the adoption of SFAS No. 159 on our consolidated
      financial position, results of operations and cash flows.





In
      September 2006, the FASB issued FASB Statement No. 157, “Fair Value
      Measurements” (“SFAS 157”). This Statement defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      (GAAP), and expands disclosures about fair value measurements. This Statement
      applies under other accounting pronouncements that require or permit fair value
      measurements, the Board having previously concluded in those accounting
      pronouncements that fair value is a relevant measurement attribute. Accordingly,
      this Statement does not require any new fair value measurements. However, for
      some entities, the application of this Statement will change current practices.
      This Statement is effective for financial statements for fiscal years beginning
      after November 15, 2007 with earlier application permitted. The Company adopted
      the provisions of SFAS 157 in the first quarter of fiscal year ended June 30,
      2007 and the adoption did not have a significant impact to our financial
      statements.




42





In
      July
      2006, the FASB issued FASB Interpretations No. 48, “Accounting for Uncertainty
      in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for
      Income Taxes” (“FIN 48”). The Interpretation establishes criteria for
      recognizing and measuring the financial statement tax effects of positions
      taken
      on a company's tax returns. A two-step process is prescribed whereby the
      threshold for recognition is a more-likely-than-not test that the tax position
      will be sustained upon examination and the tax position is measured at the
      largest amount of benefit that is greater than 50 percent likely of being
      realized upon ultimate settlement. The Company currently recognizes a tax
      position if it is probable of being sustained. The Interpretation is effective
      for the Company beginning July 1, 2007 and will be applicable to all tax
      positions upon initial adoption. Only tax positions that meet the
      more-likely-than-not recognition threshold at the effective date may continue
      to
      be recognized upon adoption of FIN 48. The Company has completed its initial
      evaluation of the impact of the July 1, 2007 adoption of FIN 48 and determined
      that such adoption is not expected to have a material impact on its financial
      statements.





4.
      TRANSACTIONS WITH AONET INTERNATIONAL SRL





Disposition




On
      March
      31, 2006, the Company defaulted on certain payment provisions of the Stock
      Purchase Agreement which provided that, if the Company failed to pay any of
      the
      individual installments within 48 hours of the applicable due date, the Stock
      Purchase Agreement will be terminated and the Company will be obligated to
      return all acquired equity ownership interests in AONet to the previous owner,
      forfeiting any and all payments made to that date. As of April 1, 2006, all
      equity ownership interests reverted back to the previous owner and, as a result,
      the AONet subsidiary has been deconsolidated from the financial statements
      of
      the Company.





The
      loss
      from discontinued operations of AONet for the nine months ended March 31, 2006
      which have been included in loss from discontinued operations-AONet for the
      years ended June 30, 2006, is as follows:




For
                  the year ended June 30, 2006Revenues
              
              $
              1,806,255Costs
                  of revenues
              
              
              1,712,278Gross
                  profit
              
              
              93,977Operating
                  costs and expenses
              
              
              1,558,202Other
                  expenses
              
              
              166,180Loss
                  before taxes
              
              
              (1,630,405
              )Provision
                  for taxes
              
              
              27,547Net
                  loss from discontinued operations
              
              $
              (1,657,952
              )





The
      loss
      from disposal of discontinued operations of AONet from the Company’s financial
      statement of $375,976 reflects the write-off of the remaining assets and
      liabilities relating to this operation as of March 31, 2006, as the Company
      received no consideration in exchange for the forfeiture of its interest in
      AONet.





5.
      INVESTMENTS





On
      May
      16, 2005, the Company entered into a Restructuring and Subscription Agreement
      with S.p.A. (“Excelsa”), a corporation organized under the laws of the Republic
      of Italy, and stockholders of Excelsa (other than MSGI) owning in the aggregate
      more than 51% of Excelsa’s issued and outstanding common stock, to acquire
      additional shares of Excelsa common stock for no additional consideration such
      that MSGI then owned approximately 19.5% of the issued and outstanding shares
      of
      common stock of Excelsa, which the parties agreed better reflects the value
      of
      Excelsa under US generally accepted accounting principles. The Company paid
      an
      aggregate of approximately $4.2 million for its cumulative investment in
      Excelsa.




43





As
      the
      Company has less than 20% ownership interest in Excelsa and does not have the
      ability to exercise significant influence over Excelsa, this aggregate
      investment is accounted for under the cost method. As of June 30, 2006, as
      we
      were given an indication that sales of Excelsa had declined, we evaluated the
      possibility of impairment to our investment in Excelsa. We determined that
      the
      investment in Exclesa currently had a fair value of $1,650,000. We followed
      the
      principles contained in SFAS No. 157 “Fair Value Measurements,” which was issued
      in September 2006, to determine its fair value estimate. The Company did not
      have a “market approach” based valuation or “income approach” based valuation to
      make its determination. Therefore the Company utilized the principles contained
      under SFAS 157; a weighted average of two “cost approach” metrics (Level 3
      Hierarchy as defined in SFAS No. 157) as follows: 1.) a multiple of annualized
      historical revenues recognized by Excelsa (carrying a 2/3 portion of the
      weighted calculation) and 2.) the most recently reported book value of Excelsa
      (carrying a 1/3 portion of the weighted calculation). The Company believes
      this
      valuation is most representative of fair value within the range of values
      produced by these two metrics. If we used a multiple of annualized historical
      revenues that was 1 times more or less than the factor used in the calculated
      fair value, fair value would have been greater or lesser by approximately
      $540,000. The resulting impairment expense of $2,416,192 was recognized as
      a
      loss on the investment in Excelsa as of June 30, 2006. The Company has since
      learned that Excelsa has since filed for bankruptcy in January 2007 and has
      ceased operations.





As
      a
      result, we have fully impaired the investment in Excelsa and recognized a loss
      on the investment of $1,650,000 as of June 30, 2007. Through the three quarters
      ended March 31, 2007, we carried our investment in Excelsa at $1,650,000. Upon
      learning of the impairment of this investment, we recognized that the financial
      statements for the quarters ended September 30, 2006, December 31, 2006 and
      March 31, 2007 contained an error. As we should have known of the
      impairment earlier, we have taken the impairment in the first quarter of
      fiscal 2007. The effects of restating those financial statements, on a pro-forma
      basis, are below:





As
                reported
            
            Restatement
                Adjustment
            
            As
                revised and restatedFor
                the three months ended September 30, 2006Total
                Assets
            
            $
            2,575,901
            
            $
            (1,650,000
            )
            $
            925,901Net
                Loss Attributable to Common shareholders
            
            
            (1,391,031
            )
            
            (1,650,000
            )
            
            (3,041,031
            )Weighted average shares
                outstanding
            
            
            4,300,950
            
            
            
            
            
            4,300,950Basic
                and Diluted Loss per share attributable to common
                shareholders
            
            $
            (0.32
            )
            
            
            
            $
            (0.71
            )For
                the six months ended December 31, 2006Total
                Assets
            
            $
            3,328,154
            
            $
            (1,650,000
            )
            $
            1,678,154Net
                Loss Attributable to Common shareholders
            
            
            (2,659,946
            )
            
            (1,650,000
            )
            
            (4,309,946
            )Weighted
                average shares outstading
            
            
            4,702,909
            
            
            
            
            
            4,702,909Basic
                and Diluted Loss per share attributable to common
                shareholders
            
            $
            (0.57
            )
            
            
            
            $
            (0.92
            )For
                the nine months ended March 31, 2007Total
                Assets
            
            $
            2,494,584
            
            $
            (1,650,000
            )
            $
            844,584Net
                Loss Attributable to Common shareholders
            
            
            (4,615,857
            )
            
            (1,650,000
            )
            
            (6,265,857
            )Weighted
                average shares outstanding
            
            
            5,159,526
            
            
            
            
            
            5,159,526Basic
                and Diluted Loss per share attributable to common
                shareholders
            
            $
            (0.89
            )
            
            
            
            $
            (1.21
            )




44




There
      would have been no impact to the three months periods ended December 31, 2006
      and March 31, 2007.





During
      the year ended June 30, 2006, MSGI sold approximately $50,000 of products to
      Excelsa at normal selling terms.





6.
      8%
      CALLABLE CONVERTIBLE NOTES PAYABLE




The
      8%
      Callable Convertible Notes Payable consist of the following as of June 30,
      2007:


Instrument
              
              Maturity
              
              Face
                  Amount
              
              Discount
              
              Carrying
                  Amount at
                June
                  30, 2007,
                net
                  of discount8%
                  Notes
              
              
              Dec.
                  13, 2009
              
              $
              2,571,958
              
              $
              1,144,547
              
              $
              1,427,4118%
                  Debentures
              
              
              May
                  21, 2010
              
              
              5,000,000
              
              
              4,814,815
              
              $
              185,185Total
              
              
              
              
              
              
              
              
              
              
              $
              1,612,596




On
      July
      12, 2005, MSGI closed a Callable Secured Convertible Note financing of $3
      million with a New York based institutional investor (the “8% Notes”).
      Substantially all of the assets of the Company are pledged as collateral to
      the
      note holders.





The
      Note
      initially required repayment over a three-year term with an 8% interest per
      annum. Repayment shall be made in cash or in registered shares of common stock
      if the stock price exceeded $4.92 per the agreement terms, or a combination
      of
      both, at the option of the Company, and payment commenced 90 days after the
      closing date and was payable monthly in equal principal installments plus
      interest over the remaining 33 months.





Further,
      the Holder had the option to convert all or any part of the outstanding
      principal to common stock if the average daily price, as defined in the
      agreement, for the preceding five trading days is greater than the defined
      Initial Market Price of $6.56. The original conversion price for this holder
      option was $4.92. The Company granted registration rights to the investors
      for
      the resale of the shares of common stock underlying the notes and certain
      warrants that were issued in the transaction.





The
      Note
      agreement provided the Company with the option to call the loan and prepay
      the
      remaining balance due. If the loan is called early, the Company will be required
      to pay 125% of the outstanding principal and interest as long as the common
      stock of the Company is at $6.00 or less. If the stock price is higher than
      $6.00 when the Company exercises the call option, then the amount owed is based
      upon a calculation, as defined in the agreement, using the average daily price.
      If in any month a default occurs, the note shall become immediately due and
      payable at 130% of the outstanding principal and interest.





In
      connection with the issuance of the 8% Notes, the Company also issued five-year
      warrants to the investors for the purchase of up to 75,000 shares of the
      Company's common stock, $0.01 par value, at an original exercise price of $7.50
      per share, which are exercisable at any time. The placement agent received
      three-year warrants for the purchase of 12,195 shares of the Company's common
      stock, at an exercise price of $7.50 per share exercisable between the period
      January 12, 2006 and January 11, 2009.





In
      January 2006, the Chief Executive Officer entered into a guarantee and pledge
      agreement with the note holders, whereby, the common stock of MSGI owned by
      the
      Chief Executive Officer (approximately 190,000 shares) was pledged as additional
      collateral for these notes.




45





On
      June
      7, 2006, the Company entered into a waiver and amendment agreement which
      modified certain payment due dates of the notes to provide for a payment of
      $395,450 due July 14, 2006 for debt service due from April 2006 through July
      2006. Such payment was not made on July 14, 2006. In consideration for the
      waiver agreement, the Company issued 800,000 warrants to the note holders.
      Such
      warrants were ascribed a fair value, as computed under the Black-Scholes model,
      of $2,224,808 which was recognized as additional interest expense in June 2006.
      Because of the default of the terms of the notes, the remaining amortization
      of
      the deferred financing costs of approximately $238,200 and beneficial conversion
      costs and debt discount of approximately $990,100 were accelerated and fully
      recognized by June 30, 2006. As of July 14, 2006, the Company was in technical
      default of the payment terms of the 8% Notes. This default was further waived
      on
      December 13, 2006, per the terms below.





On
      December 13, 2006, the Company entered into an agreement for the issuance of
      $2,000,000 of 6% callable convertible notes (see Note 7) and also entered into
      a
      letter agreement with certain of the 2006 Investors to amend the 8% Notes and
      warrants as well as the promissory notes (See Note 8) previously issued to
      these
      Investors by the Company, and to waive certain defaults under these notes and
      warrants. The letter agreement also serves to amend the amortization and payment
      terms of the 8% Notes. A single balloon payment will be due on the 8% Notes
      on
      the revised maturity date of December 13, 2009. As a result of the amendments
      to
      the 8% Notes, these notes will continue to accrue interest through the amended
      maturity date. In addition, the conversion rate was amended. The
      amended conversion price of the 8% Notes is 75% of the average of the lowest
      three closing prices of the Company’s common stock for the 20 day period prior
      to such conversion, with a minimum conversion price of $0.50 per share. In
      connection with the December 13, 2006 letter agreement, the terms of the
      warrants issued to the note holders were modified to change the exercise price
      to $1.00 per share and to extend the term of the warrants to expire on the
      seventh anniversary of the original issuance date.





This
      amendment is considered a debt extinguishment, as defined under generally
      accepted accounting principles, but did not result in a significant gain or
      loss. The amended note was treated similar to a newly issued note, and a the
      Company recorded a discount to the note payable of $1,396,735, of which $64,697
      represented the discount allocated to the warrants and $1,332,038 represented
      the beneficial conversion feature of the note. The fair value of the warrants
      was determined using a Black-Scholes option pricing model. The discount on
      the
      note was allocated from the gross proceeds and recorded as additional paid-in
      capital. The discount is being amortized to interest expense over the three-year
      maturity date. Amortization expense was $252,188 for the year ended June 30,
      2007.





On
      May
      21, 2007, MSGI entered into a private placement with several institutional
      investors issued 8% convertible debentures in the aggregate principal amount
      of
      $5,000,000 (the “ 8%
      Debentures”) and warrants for the purchase of up to 1,785,713 of common stock,
      exercisable over a five year period at an exercise price of $2.00.





The
      8%
      Debentures have a maturity date of May 21, 2010 and accrue interest at a rate
      of
      8% per annum. Payments of principal under the Debentures are not due until
      the
      maturity date and interest is deferred until the maturity date, however the
      investors can convert the principal amount of the 8% Debentures into common
      stock of the Company, provided certain conditions are met, and each conversion
      is subject to certain volume limitations. The conversion price of the 8%
      Debentures is $1.40 per share yielding an aggregate total of possible shares
      to
      be issued as a result of conversion of 3,571,428 shares.





The
      Company allocated the aggregate proceeds of the 8% Debentures between the
      warrants and the Notes based on their fair values in accordance with Accounting
      Principle Board No. 14 (“APB 14”), “Accounting for Convertible Debt and Debt
      Issued with Stock Purchase Warrants,” and calculated a beneficial conversion
      feature and warrant discount in an amount in excess of the $5 million in
      proceeds received. Therefore, the total discount was limited to $5 million.
      The
      fair value of the warrants was calculated utilizing the Black-Scholes
      option-pricing model. The discount on the note was allocated from the gross
      proceeds and recorded as additional paid-in capital. The discount is being
      amortized to interest expense over the three-year maturity date.Amortization
      expense was $185,185 for the year ended June 30, 2007. Should the 8% Notes
      be
      converted or paid prior to the payment terms, the amortization of the discount
      will be accelerated.




The
      8%
      Debentures and the Warrants have anti-dilution protections and the Company
      has
      agreed to certain registration rights for
      the
      resale of the shares of common stock underlying the Debentures and Warrants,
      pursuant to a registration rights agreement entered
      into simultaneously with the transaction . The Company has also entered into
      a
      Security Agreement with the Investors in
      connection with the closing, which grants security interests in certain assets
      of the Company and the Company’s subsidiaries to
      the
      Investors to secure the Company’s obligations under the 8% Debentures and
      Warrants.




46





H.C.
      Wainwright acted as placement agent and received a placement fee of $400,000
      and
      5 year warrants exercisable for 357,142 shares of common stock at an exercise
      price of $2.00 per share. These have been valued at $456,650 under the
      Black-Scholes model and included as debt issuance costs, which are being
      amortized over the term of the debt into interest expense. Amortization expense
      was $24,907 for the year ended June 30, 2007.





7.
      6%
      CALLABLE CONVERTIBLE NOTES PAYABLE




The
      6%
      Callable Convertible Notes Payable consist of the following as of June 30,
      2007:


Instrument
              
              Maturity
              
              Face
                  Amount
              
              Discount
              
              Carrying
                  Amount at June 30, 2007,
                net
                  of discount6%
                  Notes
              
              
              Dec.
                  13, 2009
              
              $
              2,000,000
              
              $
              1,638,889
              
              $
              361,1116%
                  April Notes
              
              
              April
                  4, 2010
              
              
              1,000,000
              
              
              916,666
              
              
              83,334Total
              
              
              
              
              
              
              
              
              
              
              $
              444,445




On
      December 13, 2006, pursuant to a Securities Purchase Agreement between the
      Company and several institutional investors, MSGI issued $2,000,000 aggregate
      principal amount of callable secured convertible notes (the “6% Notes”) and
      stock purchase warrants exercisable for 3,000,000 shares of common stock in
      a
      private placement for an aggregate offering price of $2,000,000. The conversion
      of the 6% Notes and the exercise of the warrants were subject to stockholder
      approval, which the Company received on March 6, 2007 (see Note 19).





The
      6%
      Notes have single balloon payment of $2,000,000 due on the maturity date of
      December 13, 2009 and will accrue interest at a rate of 6% per annum. The
      Investors can convert the principal amount of the 6% Notes into common stock
      of
      the Company, provided certain conditions are met, and each conversion is subject
      to certain volume limitations. The conversion price of the 6% Notes is 75%
      of
      the average of the lowest three closing prices of the Company’s common stock for
      the 20 day period prior to such conversion, with a minimum conversion price
      of
      $0.50 per share. The payment obligation under the Notes may accelerate if the
      resale of the shares of common stock underlying the 6% Convertible Notes and
      warrants are not registered in accordance with the terms of the Registration
      Rights Agreement, payments under the Notes are not made when due or upon the
      occurrence of other defaults described in the Notes. The warrants became
      exercisable once Stockholder Approval was obtained, on March 6, 2007, and are
      exercisable through December 2013. The exercise price of the warrants is $1.00
      per share.





The
      6%
      Notes and the warrants have anti-dilution protections, and the Company has
      agreed to certain registration rights for the resale of the shares of common
      stock underlying the 6% Notes, pursuant to a Registration Rights Agreement
      entered into simultaneously with the transaction. The Company has also entered
      into a Security Agreement and an Intellectual Property Security Agreement with
      the Investors in connection with the closing, which grants security interests
      in
      certain assets of the Company and the Company’s subsidiaries to the Investors to
      secure the Company’s obligations under the 6% Notes and warrants. The
      registration rights agreement, as amended on December 13, 2006, provides for
      a
      registration filing 120 days from the date of closing and a registration
      effective date within 180 from the date of closing. The agreement provides
      for a
      cash penalty of approximately 2% of the value of the notes to be paid to each
      of
      the holders for each thirty-day period that is exceeded. This provision has
      been
      waived by the investors through June 30, 2007.




The
      Company allocated the aggregate proceeds of the 6% Notes between the warrants
      and the Notes based on their fair values in accordance with Accounting Principle
      Board No. 14 (“APB 14”), “Accounting for Convertible Debt and Debt Issued with
      Stock Purchase Warrants,” and calculated a beneficial conversion feature and
      warrant discount in an amount in excess of the $2 million in proceeds received.
      Therefore, the total discount was limited to $2 million. The fair value of
      the
      warrants was calculated utilizing the Black-Scholes option-pricing model. The
      Company is amortizing this discount over the remaining term of the 6% Notes
      through December 2009. Amortization expense was $361,111 for the year ended
      June
      30, 2007. Should the 6% Notes be converted or paid prior to the payment terms,
      the amortization of the discount will be accelerated.




47





H.C.
      Wainwright acted as a placement agent for a portion ($1,000,000) of the
      offering. H.C. Wainwright received a placement fee of $100,000 and 5 year
      warrants exercisable for 225,000 shares of common stock at an exercise price
      of
      $1.00 per share. The agent warrants were valued at $199,084 using the
      Black-Scholes model and were recorded as part of the financing costs. The
      aggregate of all the finance charges related to this transaction was $362,799
      and such costs have been deferred and are being amortized over the life of
      the
      6% Notes to interest expense. The amortization expense related to the deferred
      financing costs for the year ended June 30, 2006 was $70,544.





On
      April
      5, 2007, pursuant to a Securities Purchase Agreement between the Company and
      several institutional investors, MSGI issued $1,000,000 aggregate principal
      amount of callable secured convertible notes (the “6% April Notes”) and stock
      purchase warrants exercisable for 1,500,000 shares of common stock in a private
      placement for an aggregate offering price of $1,000,000. The warrants have
      an
      exercise price of $1.00 and are exercisable for a term of 7 years.





The
      6%
      April Notes have single balloon payment of $1,000,000 due on the maturity date
      of April 5, 2010 and will accrue interest at a rate of 6% per annum. The
      Investors can convert the principal amount of the 6% April Notes into common
      stock of the Company, provided certain conditions are met, and each conversion
      is subject to certain volume limitations. The conversion price of the 6% April
      Notes is 75% of the average of the lowest three closing prices of the Company’s
      common stock for the 20 day period prior to such conversion, with a minimum
      conversion price of $0.50 per share. The Company allocated the aggregate
      proceeds of the 6% April Notes between the warrants and the Notes based on
      their
      fair values in accordance with Accounting Principle Board No. 14 (“APB 14”),
“Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,”
and calculated a beneficial conversion feature and warrant discount in an amount
      in excess of the $1 million in proceeds received. Therefore, the total discount
      was limited to $1 million. The fair value of the warrants was calculated
      utilizing the Black-Scholes option-pricing model. The Company is amortizing
      this
      discount to interest expense over the remaining term of the 6% April Notes
      through April 2010. Amortization expense was $83,334 for the year ended June
      30,
      2007. Should the 6% April Notes be converted or paid prior to the payment terms,
      the amortization of the discount will be accelerated.





The
      payment obligation under the Notes may accelerate if the resale of the shares
      of
      common stock underlying the 6% Convertible April Notes and warrants are not
      registered in accordance with the terms of the Registration Rights Agreement,
      payments under the Notes are not made when due or upon the occurrence of other
      defaults described in the Notes.




The
      6%
      April Notes and the warrants have anti-dilution protections, and the Company
      has
      agreed to certain registration rights for the resale of the shares of common
      stock underlying the 6% April Notes, pursuant to a Registration Rights Agreement
      entered into simultaneously with the transaction. The Company has also entered
      into a Security Agreement and an Intellectual Property Security Agreement with
      the Investors in connection with the closing, which grants security interests
      in
      certain assets of the Company and the Company’s subsidiaries to the Investors to
      secure the Company’s obligations under the 6% April Notes and warrants.





The
      April
      6% Notes and Warrants also carry registration rights which contain penalty
      clauses if the underlying shares are not registered per the terms of the
      agreement. The agreement calls for a registration filing 90 days from closing
      date and a registration effective date within 150 days from the date of closing
      of the funding transaction. The agreement provides for a cash penalty of
      approximately 2% of the value of the notes to be paid to each of the holders
      for
      each thirty day period that is exceeded. This provision in the agreement has
      been waived by the investors through June 30, 2007.





H.C.
      Wainwright acted as a placement agent for the offering. H.C. Wainwright received
      a placement fee of $80,000 and 5 year warrants exercisable for 150,000 shares
      of
      common stock at an exercise price of $1.00 per share. The agent warrants were
      valued at $77,000 using the Black-Scholes model and were recorded as part of
      the
      financing costs. The aggregate of all the finance charges related to this
      transaction was $157,000 and such costs have been deferred and are being
      amortized over the life of the 6% April Notes to interest expense. The
      amortization expense related to the deferred financing costs for the year ended
      June 30, 2006 was $13,083.





8.
      OTHER
      NOTES PAYABLE




Other
      Notes payable consist of the following as of June 30, 2007:




January
              2006 Note Payable
            
            $
            600,000




48


January
      2006 Note Payable




On
      January 19, 2006, the Company entered into four short-term notes with the same
      lenders that also hold the 8% Callable Convertible Notes (See Note 6). These
      promissory notes provided proceeds totaling $500,000 to the Company. The notes
      were originally due and payable on April 19, 2006 in the aggregate total of
      $600,000, including imputed interest of $100,000 at an annual imputed interest
      rate of 80%. In the event of any defined event of default declared by the
      lenders by written notice to the Company, the notes shall become immediately
      due
      and payable and the Company shall incur a penalty of an additional 15% of the
      amounts due and payable under the notes.




In
      connection with the waivers and amendments executed for the 8% Callable
      Convertible notes above, as of June 7, 2006 and December 13, 2006, the same
      agreements also waived and amended the maturity date of these short-term notes.
      The December 13, 2006 letter agreement amends the maturity date of the
      promissory notes to provide for a balloon payment on December 13, 2009. Any
      and
      all default provisions under the terms of the original promissory notes were
      waived and there are no default interest provisions enforced under the terms
      of
      the original promissory notes.




vFinance
      note payable




During
      the months of February and March 2006, the Company entered into a series of
      promissory notes with various private lenders. The notes closed in a series
      of
      four transactions over the period of February 2006 to March 2006. Gross proceeds
      in the amount of $799,585 were obtained and the notes carry an aggregate
      repayment total of $975,103 (which includes imputed interest of $175,518 or
      21.95%) which is due and payable upon maturity. The notes carried a maturity
      date of February 28, 2007. The notes were not paid on February 28, 2007, and
      as
      a result, the Company was technically in default of the payment terms of the
      vFinance notes.





In
      addition, warrants for the purchase of up to 585,062 shares of the Company's
      common stock were issued to the individual lenders. The warrants carry an
      original exercise price of $6.50 and a term of 5 years. The warrants may be
      exercised 65 days after the date of issuance. The warrant agreement contains
      a
      re-price provision that provides for a change in the exercise price if the
      Company issues more favorable terms to another party, as defined in the
      agreement. Due to the 800,000 warrants issued in connection with the 8% Callable
      Convertible Notes above at an exercise price of $4.50, the exercise price of
      the
      warrants issued with the vFinance note payable were modified to $4.50 as of
      June
      30, 2006. Due to the December 13, 2006 issuance of warrants related to the
      6%
      Notes (see Note 7), the exercise price of the vFinance warrants were modified
      to
      $1.00. The Company valued the modification of the warrant using the
      Black-Scholes model. This resulted in an additional discount to the Note of
      approximately $250,000, which was fully amortized over the remaining life of
      the
      Note by June 30, 2007.





The
      vFinance Agreement also contains a registration rights agreement for the
      warrants which contains penalty clauses if the underlying warrant shares are
      not
      registered per the terms of the agreement. The agreement calls for a
      Registration Filing Date within 180 days from closing date and a Registration
      Effective Date within 90 days from the Registration Filing Date. The agreement
      provides for a cash penalty of approximately 1.5% of the value of the notes
      for
      each thirty day period that is exceeded. As of June 30, 2007, the Company has
      a
      liability recorded of $74,000 to provide for this penalty.




Placement
      fees in the amount of $73,133 were paid to vFinance Investments, Inc. as
      placement agent. In addition to the placement fees, warrants for the purchase
      of
      up to 73,134 shares of the Company's common stock were issued to the placement
      agent and its designees. The agent warrants carry an exercise price of $6.50,
      a
      term of 5 years and may be exercised 65 days after the date of issuance. The
      agent warrants were valued at $176,114 using the Black-Scholes option pricing
      model and recorded as part of the financing costs. In addition, a third party
      received a fee equal to 5% of the aggregate offering, in an amount of $40,000,
      which was recorded as part of the financing costs. These warrants also contain
      a
      reprice provision that provides for a change in the exercise price if the
      Company issues more favorable terms to another party, as defined in the
      agreement. Due to the December 13, 2006 issuance of warrants related to the
      6%
      Notes (see Note 7), the exercise price of the placement agent warrants were
      modified to $1.00. The Company valued the modification of the warrant using
      the
      Black-Scholes model. This resulted in an additional financing charge of $35,739,
      which will be amortized over the remaining life of the Note as part of the
      deferred financing charges. Total financing costs recorded in connection with
      the Notes were $351,706, including the modification noted above. The deferred
      financing has been fully amortized during the year ended June 30, 2007. The
      Company recorded an original discount to the note payable of $612,240, which
      represented the discount allocated to the warrants. The fair value of the
      warrants was determined using a Black-Scholes option pricing model. The discount
      on the note, and subsequent adjustments as noted above, was allocated from
      the
      gross proceeds and recorded as additional paid-in capital. The total discount
      has been amortized to interest expense as a result of the negotiated payment
      of
      the notes per the terms below. Interest expense for the year ended June 30,
      2007
      and 2006 was $633,000 and $229,590, respectively.




49





On
      March
      30, 2007, the Company entered into the last of a series of letter agreements
      with all of the individual investors involved in the Bridge Loan Transaction
      and
      the associated promissory notes to accept as payment in full against the
      principal and accrued interest of the promissory notes, shares of common stock
      of the Company. The shares of common stock are to be issued at a value of $0.75
      per share. The last of these agreements was executed on March 30, 2007. All
      investors involved in the promissory notes transaction agreed to receive payment
      in shares of common stock of the Company. The issuance of the shares of common
      stock as payment against the promissory notes effectively eliminated
      approximately $989,000 of debt from the balance sheet of the Company. The
      payment resulted in the issuance of 1,318,088 shares of common stock of the
      Company.





In
      addition, the Company recorded additional interest expense of $197,700 as part
      of the transaction based upon the fair value of the stock issued to settle
      the
      debt. The common stock was issued in reliance upon the exemption from
      registration provided by Section 3(a)(9) of the Securities Act of 1933, as
      amended. Further, per the terms of the Letter Agreements, the liquidated damages
      accruing from the non-filing and non-timely effectiveness of a registration
      statement related to the shares of common stock which underlie certain warrants
      that were issued by the Company to the investors in the transaction will be
      addressed separately. The Company has quantified and accrued those amounts
      as of
      June 30, 2007 as noted above. The
      Company also issued 100,000 warrants to an investment firm in connection with
      the settlement on these notes. These warrants were valued at $215,319 using
      the
      Black-Scholes model and this was recorded as expense in selling, general and
      administrative expense.





Advance
      from Strategic Partner-CODA





During
      the year ended June 30, 2007, the Company received funding, in the amount of
      approximately $722,000 from CODA Octopus Group, Inc. (“CODA”) as an advance in
      contemplation of a further strategic transaction between the two parties. CODA
      has also paid directly, in support of our subsidiary Innalogic LLC, certain
      operating expenses in the amount of approximately $537,000. During the year
      ended June 30, 2007, the Company repaid to CODA $234,000 of the $537,000 paid
      on
      our behalf. The net of these transactions brought the aggregate total due to
      this firm to approximately $1.0 million. The advances bore interest at a rate
      of
      8% and interest expense was $36,552 for the year ended June 30,
      2007.





On
      April
      1, 2007, the Company, through its majority-owned subsidiary Innalogic, LLC,
      entered into a non-exclusive License Agreement with CODA. This agreement allows
      for CODA to market the Innalogic, LLC “SafetyWatch” technology to its client
      base, sub-license the Technology to its customers and distributors, use the
      Technology for the purposes of demonstration to potential customers,
      sub-licensors and/or distributors and to further develop the source code of
      he
      Technology as it sees fit. In return, CODA will pay a 20% royalty to MSGI from
      the sale of the Technology to its customers, and
      further CODA assumed certain development and operational activities of
      Innalogic in connection with this transaction.





On
      May
      16, 2007 the Company issued 850,000 unregistered common shares to CODA Octopus
      Group, Inc. as full and final payment and a release of all financial obligations
      resulting from advances made by CODA to the Company and/or Innalogic LLC, the
      Company's subsidiary. This resulted in a charge to the statement of operations
      of $811,918 as the share value exceeded the net obligations on the date of
      the
      transaction.





During
      the year ended June 30, 2007, the Company earned a $100,000 fee from CODA
      resulting from a contract referral we provided them.





Other
      Notes Payable




During
      December 2005, the Company entered into a short-term note in the amount of
      $250,000. This loan bears interest at a rate of 10% through June 30, 2006 and
      has an annual imputed interest rate of 18.25%. Further, the full amount of
      interest will be paid to the lender regardless of any possible early payment
      of
      principal. This amount has been paid in full through the issuance to the lender
      of Series G Convertible Preferred Stock in December 2006 and the subsequent
      conversion of such preferred stock into shares of common stock.




50





9.
      ABANDONED LEASE OBLIGATION





In
      December 2002, the Company terminated a lease for abandoned property. Under
      the
      termination agreement, the Company was obligated to pay $20,000 per month until
      August 2010, which liability was fully accrued at that point. On December 22,
      2006, the Company issued shares of Series G Preferred Stock to the landlord
      and
      its designee for then outstanding $1.0 million remaining obligation, which
      reduced the liability to $100,000. On March 6, 2007, the shares of Series G
      Preferred Stock converted into shares of the Company’s common stock
      automatically upon the approval of the shareholders (See Note 19). The remaining
      $100,000 balance was paid by the Company in cash during the year ended June
      30,
      2007. There was no gain or loss recorded on this transaction.




10.
      PROPERTY, PLANT AND EQUIPMENT:




Property,
      plant and equipment at June 30, consist of:


2007
              
              2006Machinery,
                  equipment and furniture
              
              $
              44,948
              
              $
              207,577Software
              
              
              -
              
              
              4,907Total,
                  at cost
              
              $
              44,948
              
              $
              212,484Less:
                  accumulated depreciation
              
              
              (25,395
              )
              
              (59,443
              )Property,
                  plant & equipment, net
              
              $
              19,553
              
              $
              153,041




Depreciation
      expense was approximately $36,000 and $104,000 for the years ended June 30,
      2007
      and 2006, respectively, including certain direct write offs.





11.
      INTANGIBLE ASSETS:




Identifiable
      intangible assets are amortized under the straight-line method over the period
      of expected benefit of five years.





In
      connection with the acquisition of Innalogic, intangible assets related to
      unpatented technologies totaling $287,288 were acquired.





The
      gross
      carrying amount and accumulated amortization of the Company's intangible assets as
      of
      June 30, 2007 and 2006 are as follows:





June
                30, 2007
            
            June
                30, 2006Amortized
                intangible assetsUnpatented
                technology
            
            $
            287,288
            
            $
            287,288Accumulated
                amortization
            
            
            (274,675
            )
            
            (178,911
            )Net
                book value
            
            $
            12,613
            
            $
            108,377





Amortization
      expense recorded for each of the years ended June 30, 2007 and 2006 were
      approximately $96,000. The remaining amortization expense of $12,613 will be
      recognized in fiscal 2008.





51




12.
      ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:





Accrued
      expenses as of June 30, 2007 and 2006 consist of the following:


2007
              
              2006Accured
                  Salaries and Benefits
              
              $
              481,290
              
              $
              972,336Accrued
                  audit and tax preparation fees
              
              
              247,090
              
              
              213,040Accrued
                  legal fees
              
              
              26,500
              
              
              58,085Accrued
                  consulting fees
              
              
              -
              
              
              126,000Accrued
                  interest
              
              
              365,802
              
              
              60,767Accrued
                  travel & entertainment
              
              
              16,669
              
              
              118,487Accrued
                  penalty for stock registration
              
              
              74,000
              
              
              63,400Accrued
                  taxes
              
              
              26,907
              
              
              17,907Accrued
                  Board fees
              
              
              205,125
              
              
              12,086Accrued
                Settlement
                of abandoned contract
              
              
              150,000
              
              
              -Other
              
              
              74,112
              
              
              52,534Total
              
              $
              1,667,495
              
              $
              1,694,642





13.
      RELATED PARTY TRANSACTIONS:




On
      December 31, 2001, the Company advanced $1,000,000 pursuant to a promissory
      note
      receivable agreement with an officer due and payable to the Company at maturity,
      October 15, 2006. The Company recorded the note receivable at a discount of
      approximately $57,955 to reflect the incremental borrowing rate of the officer
      and is being amortized as interest income over the term of the note using the
      straight-line method. The note receivable was collateralized by current and
      future holdings of MSGI common stock owned by the officer and bore interest
      at
      prime. Interest was due and payable yearly on October 15 th .
      The
      Company recognized interest income of $69,770 for the year ended June 30, 2006.
      As of June 30, 2006, interest due of approximately $162,600 was in arrears.
      Since collectibility of the note receivable was uncertain, the Company had
      provided for the loss of the note receivable during the year ended June 30,
      2006. The collection of this note by its October 15, 2006 due date did not
      occur. The Board of Directors of the Company subsequently elected to forgive
      such note receivable at that point. The full amount had been written off during
      the fiscal year ended June 30, 2006.





In
      July
      2005, an officer of the company provided $100,000 of working capital to the
      Company that was repaid within that same month.





During
      December 2005, the Company entered into a short-term note with a related party
      in the amount of $250,000. This loan bears interest at a rate of 10% through
      June 30, 2006 and has an annual imputed interest rate of 18.25%. The entire
      principal, as well as interest of $25,000, was to be paid in full upon
      completion of a contemplated future funding event. Further, the full amount
      of
      interest will be paid to the lender regardless of any possible early payment
      of
      principal. The total interest due under this note has been fully accrued as
      of
      June 30, 2006. This note was paid in full in by virtue of the issuance, to
      the
      holder of the note, of shares of Series G Convertible Preferred Stock in
      December of 2006, and the subsequent conversion to shares of common stock in
      March 2007.





See
      Note
      1 for description of transactions with Hyundai and Note 8 for description of
      transactions with CODA.





14.
      COMMITMENTS AND CONTINGENCIES:




*Operating
      Leases* :





The
      Company leases certain office space. All of the Company’s current leases are for
      short-terms less than one year and are cancelable. The Company incurs all costs
      of insurance, maintenance and utilities.





52




Future
      minimum rental commitments under all leases as of June 30, 2007 are as
      follows:


Rent
                  Expense2008
              
              
              50,000$
              50,000




Rent
      expense was approximately $199,600and $182,000 for fiscal years ended June
      30,
      2007 and 2006, respectively.





*Contingencies
      and Litigation* :





Certain
      legal actions in the normal course of business are pending to which the Company
      is a party. The Company does not expect that the ultimate resolution of the
      pending legal matters will have a material effect on the financial condition,
      results of operations or cash flows of the Company.





15.
      PREFERRED STOCK:




Series
      F




In
      November 2004, the Company entered into a private placement agreement with
      certain strategic investors in which the Company sold an aggregate of 9,376
      shares of Series F Convertible Preferred Stock, par value $.01 ("Series F
      Preferred Stock") and warrants to acquire 230,797 shares of common stock for
      gross proceeds of $3 million. The preferred stock was convertible into shares
      of
      common stock, at any time at the option of the holder, at a conversion rate
      of
      $6.50. Further, registration rights of the holders of Series F Preferred Stock
      called for a registration statement to be filed by the Company with the
      Securities and Exchange Commission, covering the resale of the shares of the
      Company's common stock underlying the Series F Preferred Shares (the "Reserved
      Shares"), within 180 days of the initial closing date, November 10, 2004. In
      the
      event that the Company did not file such registration statement within 180
      days,
      the Company would have to issue to the holders additional shares of Series
      F
      Preferred Shares equal to 5% of the number of Reserved Shares issued in the
      private placement, for each 30 day period, following the 180 day period, during
      which such registration statement has not been filed. The registration statement
      was not filed within the initial 180 day period, but was filed within the next
      30 day period. Therefore, the Company issued an additional 468.8 Series F
      Preferred Stock, which was convertible into approximately 23,079 shares of
      common stock. The holders of Series F Preferred Stock were entitled to receive
      cumulative dividends at the rate of six percent (6%) payable in additional
      shares of common stock of the Company, based on the average closing price per
      share of the Company's common stock for the ten (10) consecutive trading days
      prior to the payment of any dividend. During the year ended June 30, 2006,
      approximately 5,813 shares of Series F preferred stock were converted into
      common stock. During the year ended June 30, 2007, 4,031 shares of Series F
      Preferred Stock were converted to 198,470 shares of common stock. As of June
      30,
      2007, all of the outstanding shares of Series F Preferred Stock have been
      converted into shares of common stock.The Company has $305,024 of undeclared
      but
      accumulated dividends at June 30, 2007. Since these dividends have not yet
      been
      declared, they are not accrued. However, these dividends have been reflected
      in
      each period earned in determining net loss available to common
      stockholders.





Series
      G




On
      December 20, 2006, MSGI filed a certificate of designation with the Secretary
      of
      State of the State of Nevada to designate 200 shares of the Company's preferred
      stock, par value $0.01, as Series G Preferred Stock with a stated value of
      $20,000 per share. The Company had previously entered into Subscription
      Agreements with certain vendors, officers and employees of the Company for
      the
      issuance of a total of approximately 150 shares of Series G Preferred Stock,
      in
      exchange for the conversion of debt owed by the Company for past due invoices
      and accrued salary of approximately $3.0 million. The Series G Preferred Stock
      automatically converted into common stock of the Company once the holders of
      a
      majority of the common stock of the Company approved such conversion, at a
      conversion rate of the higher of $1.00 per share or the market price as of
      the
      day the stockholders approve such conversion. The Company obtained such approval
      at the Special Meeting of the Stockholders held on March 6, 2007 (See Note
      19).
      The market price at the close of business on March 6, 2007 was $0.90, therefore
      the effective conversion rate of the Series G Preferred Stock was $1.00. The
      conversion rate of $1.00 will not result in any beneficial conversion feature
      effect to the Company. All Series G Preferred Stock was deemed issued and
      converted to common stock as of March 6, 2007, which resulted in the issuance
      of
      2,758,400 shares of common stock and the conversion of $2,758,400 of liabilities
      (including $642,200 in accrued salaries to officers) from our balance
      sheet.





53




There
      are
      no outstanding shares of any series of preferred stock as of the period ended
      June 30, 2007.





16.
      COMMON STOCK, STOCK OPTIONS, AND WARRANTS:




*Common
      Stock Transactions:*





During
      May 2007, the Company issued 100,000 shares of common stock to an officer of
      the
      Company as a bonus, resulting in a non-cash compensation charge of $210,000.
      In
      addition, the Company approved the issuance of 100,000 shares of common stock
      to
      the officer at the end of one year and an additional 100,000 shares of common
      stock to the officer at the end of two years. The Company has accounted for
      this
      additional stock as a liability, under SFAS 123R, in the amount of
      $37,500.





During
      October 2006, the Company issued 865,000 shares of common stock to a designee
      of Hyundai Syscomm Corp. See Note 1 for full details of the
      transaction.





During
      July 2006, the Company issued 25,000 shares of common stock to an officer as
      a
      bonus, resulting in a non−cash compensation expense of $61,000.





During
      the period of January through March, 2007, the Company issued 2,758,400 shares
      of common stock from the conversion of 150 shares of Series G preferred stock.




During
      the year ended June 30, 2007, 4,031 shares of Series F Preferred Stock was
      converted to 198,470 shares of common stock.





In
      March,
      2007, the Company issued 1,318,088 shares of common stock in connection with
      the
      settlement of promissory notes issued to vFinance.





During
      January 2006 through April 2006, 75,000 shares of common stock were issued
      to
      the holders of the 8% Callable Convertible Note for payment of debt
      service.





During
      April 2006 through June 2006, approximately 5,813 shares of Series F Convertible
      Preferred Stock have been converted into approximately 286,189 shares of the
      Company’s common stock, at the election of certain holders of the Series F
      Convertible Preferred Stock.




During
      2007, the Company issued 850,000 shares to CODA as payment of amounts due (See
      Note 8). In connection with this transaction, CODA assumed certain development
      and operational obligations of Innalogic, and entered into license agreement
      for
      the Innalogic technology. The Company recognized a loss of $811,918 on the
      settlement transaction, representing the excess fair value of the shares
      issued as compared to the obligations due CODA.




*Stock
      Options:*





The
      Company maintains a qualified stock option plan (the “1999 Plan”) for the
      issuance of up to 1,125,120 shares of common stock under qualified and
      non-qualified stock options. The plan is 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 vesting of the options. In no event shall an option expire more than
      ten years after the date of grant.





The
      Company accounts for employee stock-based compensation under SFAS 123R,
“Share-Based Payment”, which requires all share−based payments to employees,
      including grants of employee stock options, to be recognized in the financial
      statement at their fair values. The expense is being recognized on a
      straight−line basis over the vesting period of the amounts. The Company did not
      record a tax benefit related to the share−based compensation expense since the
      Company has a full valuation allowance against deferred tax assets.





54




The
      Company adopted SFAS 123R effective July 1, 2005, and in connection with the
      adoption and provisions of SFAS 123R, the Company reversed the deferred
      compensation balance of $1,301,974, resulting from the application of the
      intrinsic value method of accounting for stock options, at July 1, 2005 against
      Additional paid−in capital. This expense is now superseded by the SFAS 123R
      expense, which will be recorded over the remaining vesting period of the stock
      options.





The
      Company has elected to apply the short-cut method to determine the hypothetical
      APIC pool provided by FSP FAS 123R-3, “Transition Election Related to Accounting
      for the Tax Effects of Share-Based Payment Awards.” In future periods, excess
      tax benefits resulting from stock option exercises will be recognized as
      additions to APIC in the period the benefit is realized. In the event of a
      shortfall (i.e., the tax benefit realized is less than the amount previously
      recognized through periodic stock compensation expense recognition and related
      deferred tax accounting), the shortfall would be charged against APIC to the
      extent of previous excess benefits, including the hypothetical APIC pool, and
      then to tax expense.





The
      stock
      based compensation expense related to stock options for the years ended June
      30,
      2007 and 2006 was approximately $486,000 and $1,523,000, respectively.





The
      fair
      value of each stock option is estimated on the date of grant using the
      Black-Scholes option pricing model. The following assumptions were used for
      grants for fiscal year ended June 30, 2007. There were no stock option grants
      during the fiscal year ended June 30, 2006.


2007Expected
                  term (years)
              
              
              6.00Dividend
                  yield
              
              
              NoneExpectedVolatility
              
              
              140%
                  - 142
              %Risk-free
                  interest rate
              
              
              4.75
              %Forfeiture
                  rate
              
              
              0
              %Weighted
                  average fair valueOptions
                  issued equal to market value
              
              $
              1.39Options
                  issued below market value
              
              $
              1.98





Expected
      volatility is based solely on historical volatility of our common stock over
      the
      period commensurate with the expected term of the stock options. We rely solely
      on historical volatility because our traded options do not have sufficient
      trading activity to allow us to incorporate the mean historical implied
      volatility from traded options into our estimate of future volatility. The
      expected term calculation for stock options is based on the “simplified” method
      described in
      Staff
      Accounting Bulletin No. 107, Share−Based Payment. The risk−free interest rate is
      based on the U.S. Treasury yield in effect at the time of grant for an
      instrument with a maturity that is commensurate with the expected term of the
      stock options. The dividend yield of zero is based on the fact that we have
      never paid cash dividends on our common stock, and we have no present intention
      to pay cash dividends. The forfeiture rate is estimated at 0% for options
      granted to directors and officers.





The
      following summarizes the stock option transactions under the 1999 Plan for
      the
      two years ended June 30, 2007:


Number
                  of Shares
              
              Exercise
                  Price Per Share
              
              Weighted
                  Average Exercise Price
              
              Aggregate
                  Intrinsic ValueOutstanding
                  at June 30, 2005
              
              
              520,000
              
              $
              1.50
                  to $7.00
              
              $
              2.40Granted
              
              
              —Exercised
              
              
              —Cancelled
              
              
              —Outstanding
                  at June 30, 2006
              
              
              520,000
              
              $
              1.50
                  to $7.00
              
              $
              2.40
              
              $
              466,550Granted
              
              
              425,000
              
              $
              1.40
                  to $1.50
              
              $
              1.49
              
              $
              2,500Exercised
              
              
              —Cancelled
              
              
              10,000
              
              $
              4.45
              
              $
              4.45Outstanding
                  at June 30, 2007
              
              
              935,000
              
              $
              1.40
                  to $7.00
              
              $
              1.97
              
              $
              4,650




In
      addition to the 1999 Plan, the Company has option agreements with current
      directors of the Company. The following summarizes transactions for the two
      years ended June 30, 2007:


Number
                  of Shares
              
              Exercise
                  Price Per Share
              
              Weighted
                  Average Exercise Price
              
              Aggregate
                  Intrinsic ValueOutstanding
                  at June 30, 2005
              
              
              40,000
              
              $
              1.50
                  to $4.13
              
              $
              2.81Granted
              
              
              —Exercised
              
              
              —Cancelled
              
              
              —Outstanding
                  at June 30, 2006
              
              
              40,000
              
              $
              1.50
                  to $4.13
              
              $
              2.81
              
              $
              21,700Granted
              
              
              —Exercised
              
              
              —Cancelled
              
              
              —Outstanding
                  at June 30, 2007
              
              
              40,000
              
              $
              1.50
                  to $4.13
              
              $
              2.81
              
              $
              100





As
      of
      June 30, 2007, 523,332 options are exercisable, with an aggregate intrinsic
      value of $2,250 and a weighted average contractual life of 6.8 years. The
      weighted average exercise price of all outstanding options is $2.00 and the
      weighted average remaining contractual life is 8.2 years. At June 30, 2007,
      190,122 options were available for grant.





Warrants:




The
      following summarizes the warrant transactions for the two years ended June
      30,
      2007:


Number
                  of Shares
              
              Exercise
                  PriceOutstanding
                  at June 30, 2005
              
              
              793,340
              
              $
              6.00
                  to $8.25Granted
              
              
              1,545,391
              
              $
              1.00Issued
              
              
              -Cancelled
              
              
              -Outstanding
                  at June 30, 2006
              
              
              2,338,731
              
              $
              1.00
                  to $8.25Granted
              
              
              7,317,855
              
              $
              1.00
                  to $2.00Issued
              
              
              -Cancelled
              
              
              270,000
              
              $
              6.00Outstanding
                  at June 30, 2007
              
              
              9,386,586
              
              $
              1.00
                  to $8.25


As
      of
      June 30, 2007, the Company has 9,386,586 warrants outstanding to purchase shares
      of common stock at prices ranging from $1.00 to $8.25. All warrants are
      currently exercisable.





55




In
      December 2006, the Company adjusted the exercise price of certain previously
      issued warrants to certain lenders and placement agents. This adjustment was
      mandated by certain anti−dilution and exercise price protection provisions in
      the previously
      issued warrants agreements. The Company used the Black-Scholes model to value
      the modification and recorded an expense of $250,000. See discussion of the
      efffects of the fiscal 2007 modifications of the warrants issued to lenders
      in
      Note 6, 7 and 8.




On
      February 7, 2007, the Company issued to Hyundai Syscomm Corp. a warrant to
      purchase a maximum of 24,000,000 shares of common stock in exchange for a
      maximum of $80,000,000 in revenue, which is to be realized by the Company over
      a
      maximum period of four years. The vesting of the warrant will take place
      quarterly over the four−year period based on 300,000 shares for every $1 million
      in revenue realized by the Company. The revenue is subject to the
      sub−contracting agreement between Hyundai and the Company dated October 25,
      2006. Such warrants are considered contingent and are not reflected above,
      and
      therefore, the Company will not recognize the accounting impact of these
      warrants until the vesting event occurs.





On
      May
      10, 2007, the Company entered into an agreement with Apro Media, which provides
      for the issuance of up to 12,750,000 warrants to purchase shares of common
      stock
      in exchange for a maximum of $90,000,000 in revenue, which is to be realized
      by
      the Company over a maximum period of seven years. The vesting of the warrant
      will take place based on 300,000 shares for every $1 million in revenue realized
      by the Company. Such warrants are considered contingent and are not reflected
      above, and therefore, the Company will not recognize the accounting impact
      of
      these warrants until the vesting event occurs.





The
      Company issued 200,000 warrants to a vendor as a bonus compensation for
      services. These warrants were valued at $423,352 using the Black-Scholes model
      and this was recorded as expense in selling, general and administrative expense. The
      Company issued 100,000 warrants to an investment firm in connection with a
      stock
      settlement on certain notes payable. These warrants were valued at $215,319
      using the Black-Scholes model and this was recorded as expense in selling,
      general and administrative expense.





17.
      INCOME TAXES:





Income
      tax expense
      consists of domestic minimum state franchise and income taxes.





Deferred
      tax assets are comprised of the following:


As
                  of June 30,2007
              
              2006Deferred
                  tax assets:Net
                  operating loss carry-forwards
              
              $
              42,959,480
              
              $
              39,552,928Abandoned
                  lease reserves
              
              
              -
              
              
              460,345Compensation
                  on option grants
              
              
              1,109,708
              
              
              1,555,269Amortization
                  of intangibles
              
              
              94,776
              
              
              (52,090
              )Provision
                  for loss on note receivable
              
              
              -
              
              
              519,870Capital
                  loss carryfoward
              
              
              2,762,739
              
              
              -Other
              
              
              119,471
              
              
              169,613Total
                  deferred tax assets
              
              
              47,046,174
              
              
              42,205,935Valuation
                  allowance
              
              
              (47,046,174
              )
              
              (42,205,935
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -




The
      difference between the Company’s U.S. federal statutory rate of 35%, as well as
      its state and local rate net of federal benefit of 5%, when compared to the
      effective rate is principally the result of no current domestic income tax
      as a
      result of net operating losses and the recording of a full valuation allowance
      against resultant deferred tax assets. The recorded income tax expense reflects
      domestic state income taxes.





56




The
      Company has a U.S. federal net operating loss carry forward of approximately
      $113,000,000 available, which expires from 2011 through 2026. The Company has
      U.S. Federal capital loss carryforwards of approximately $6 million which
      expires in 2012. These loss carry forwards are subject to annual
      limitations under Internal Revenue Code Section 382 and some loss carry forwards
      are subject to SRLY limitations. The Company has recognized a full valuation
      allowance against deferred tax assets because it is more likely than not that
      sufficient taxable income will not be generated during the carry forward period
      available under the tax law to utilize the deferred tax assets. Of these net
      operating loss carry forwards approximately $61,000,000 is the result of
      deductions related to the exercise of non-qualified stock options in previous
      years. The realization of these net operating loss carry forwards would result
      in a credit to equity.





The
      Company has reviewed its deferred tax assets and has determined that the entire
      amount of its deferred tax assets should be reserved as the assets are not
      considered to be more likely than not recoverable in the future.





18.
      EMPLOYEE RETIREMENT SAVINGS 401(k) PLANS:




The
      Company sponsors a tax deferred retirement savings plan (“401(k) plan”) which
      permits eligible employees to contribute varying percentages of their
      compensation up to the annual limit allowed by the Internal Revenue
      Service.





The
      Company currently matches the 50% of the first $3,000 of employee contribution
      up to a maximum of $1,500 per employee. There were no matching contributions
      made during the fiscal years ended June 30, 2007 or 2006. There were no employee
      contributions to the plan in fiscal 2007 or 2006.





The
      plan
      also provided for discretionary Company contributions. There were no
      discretionary contributions in fiscal years 2007 or 2006.





19.
      SPECIAL MEETING OF THE STOCKHOLDERS





On
      March
      6, 2007, the Company held a Special Meeting of the Stockholders where the
      following proposals were put before the stockholders for approval:





(1)
            To
                consider a proposal to increase the authorized shares of capital
                stock for
                the Company from 9,393,750 to 100,050,000. The capital stock of the
                Company shall be divided into two classes as follows: (i) 50,000
                shares of
                preferred stock of the par value of $.01 per share ("Preferred Stock"),
                and (ii) 100,000,000 shares of common stock of the par value of $.01
                per
                share (“Common Stock”).





(2)
            To
                approve the automatic conversion of our Series G Convertible Preferred
                Stock (the “Series G Preferred Stock”) into up to 3,000,000 shares of
                Common Stock.





(3)
            To
                ratify the issuance of our Series G Preferred Stock to certain of
                our
                executive officers.





(4)
            To
                ratify the private placement transaction with certain institutional
                investors, of the issuance of $2,000,000 in callable secured convertible
                notes and warrants exercisable for 3,000,000 shares of Common Stock
                (the
                "Private Placement") (See Note 6).





(5)
            To
                consider a proposal to amend the Amended and Restated Articles of
                Incorporation of the Company to remove certain business combination
                and
                reclassification provisions.





Proposal
      number 1 - 4 passed. Proposal number 5 did not pass.


57


20.
      SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
      ACTIVITIES:





For
      the
      year ended June 30, 2007:


·
              Liabilities
                    in the amount of $2,758,237 were paid with approximately 150
                    shares of
                    Series G Preferred Stock.  ·
              Approximately
                  150 shares of Series G preferred stock was converted into 2,758,400
                  shares
                  of common stock. Approximately 4,031 shares of Series F preferred
                  stock
                  was converted into 198,470 shares of common
                  stock.  ·
              The
                  Company recorded an aggregate discount of $9,396,735 in connection
                  with 8%
                  and 6% Convertible Notes payable, which represents the beneficial
                  conversion feature and allocation of fair value of the
                  warrants.  ·
              In
                  connection with the 8% and 6% Convertible Notes financings, the
                  Company
                  issued 732,142 warrants to the placement agents with a fair market
                  value
                  of $732,734.  ·
              The
                  Company issued 1,318,088 shares of common stock in payment of the
                  vFinance
                  Notes payable in the amount of $988,568 for principal and interest.
                  This
                  transaction resulted in an additional $197,713 of interest expense
                  which
                  represented the excess fair value of the common shares over the
                  debt
                  payment due.  ·
              Certain
                  warrants issued to vFinance were repriced to an exercise price
                  of $1.00
                  due to anti-dilution provisions and as a result of the issuance
                  of the 6%
                  Convertible Notes. This resulted in an additional discount to the
                  debt of
                  $249,933 as well as additional financing charges of
                  $35,739.


For
      the
      year ended June 30, 2006:




·
            A
                discount of $1,471,169 was recorded on the NIR 8% convertible notes,
                which
                represents a beneficial conversion feature of the note of $1,066,377
                and
                the allocated fair value of the warrants of
                $404,792.




·
            In
                connection with the NIR Group 8% convertible note financing, the
                company
                issued 12,195 warrants to the placement agent with a fair market
                value of
                $57,054.




·
            In
                connection with the NIR Group financing, the company issued 800,000
                warrants to the note holders with a fair market value of
                $2,665,568.




·
            A
                discount of $612,240 was recorded on the vFinance notes, which represents
                the allocated fair value of the 585,062 warrants issued in connection
                with
                this debt.




·
            In
                connection with the vFinance financing, the company issued 73,134
                warrants
                to the placement agent and its designees with a fair market value
                of
                $176,114




·
            In
                connection with the 8% convertible note, the company issued 75,000
                of its
                common stock, in lieu of cash payments, with a fair market value
                of
                $272,982




·
            In
                connection with the adoption of SFAS 123R, deferred compensation
                expense
                of $1,301,974 was reversed against additional paid in
                capital.




·
            Approximately
                5,813 shares of preferred stock were converted into 286,189 shares
                of
                common stock




21.  SUBSEQUENT
      EVENTS:





On
      May
      31, the Company announced that it had received its first purchase order from
      Apro Media Corp. in the amount of $10 million as part of the sub-contracting
      agreement to provide commercial security services to a Fortune 100 defense
      contractor. MSGI acquired the first shipment of components from a Korean company
      in June 2007 and began to deliver fully integrated security systems in August
      2007. MSGI will continue to fulfill client requests throughout the first two
      quarters of the fiscal year ended June 30, 2008. The company has secured a
      new
      production and customer service facility in Manhattan.





During
      the months of July and August 2007, the Company executed certain conversions
      of
      debt to equity under the provisions of a series of 8% Callable Convertible
      Notes
      issued by the Company during the fiscal year ended June 30, 2006. The Company
      effectively reduced certain debt obligations by approximately $810,000 and
      issued an aggregate total of 1,257,532 shares of its common stock.




On
      October 9, 2007, the Company announced that Callable Secured Convertible 8%
      Notes originally issued during July 2005 to September 2005 and Callable Secured
      6% Notes originally issued on December 13, 2006 were purchased by certain
      institutional investors on September 30 and October 3, 2007, from the original
      note holders The Company did not receive any proceeds from this transaction.
      The
      negotiated transaction required that the conversion price for the underlying
      shares be set at the floor of $0.50. In October 2007, the Board of Directors
      of
      MSGI voted in favor of allowing the conversion price to be set at the floor
      of
      $0.50 so that the transaction could be consummated. These institutional
      investors have submitted notification to the Company of their intentions to
      fully convert the Notes into shares of the Company’s common stock, which is
      expected to be accomplished during October 2007. The transaction, when
      completed, will have the effect of eliminating approximately $3.95 million
      of
      note liabilities, on a fully accreted basis, from the Company’s balance sheet.
      The exercise will result in the issuance of 6,700,000 shares of the Company’s
      common stock, bringing the total shares outstanding to approximately 18,265,000.





58




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





N/A





**Item
      8 (a) - Controls and Procedures** ****





Quarterly
      Evaluation of the Company's Disclosure Controls and Internal Controls. As of
      the
      end of the period covered by this Annual Report on Form 10-KSB, the Company
      evaluated the effectiveness of the design and operation of its "disclosure
      controls and procedures" ("Disclosure Controls"), and its "internal controls
      and
      procedures for financial reporting" ("Internal Controls"). This evaluation
      (the
      "Controls Evaluation") was done under the supervision and with the
      participation of our chief executive officer ("CEO") and principal financial
      officer. Rules adopted by the Securities and Exchange Commission ("SEC") require
      that in this section of the Annual Report we present the conclusions of the
      CEO
      and the principal financial officer about the effectiveness of our Disclosure
      Controls and Internal Controls based on and as of the date of the Controls
      Evaluation.





Disclosure
      Controls and Internal Controls. As provided in Rule 13a-14 of the General Rules
      and Regulations under the Securities and Exchange Act of 1934, as amended,
      Disclosure Controls are defined as meaning controls and procedures that are
      designed with the objective of insuring that information required to be
      disclosed in our reports filed under the Securities Exchange Act of 1934, as
      amended (the "Exchange Act"), is recorded, processed, designed and reported
      within the time periods specified by the SEC's rules and forms. Disclosure
      Controls include, within the definition under the Exchange Act, and without
      limitation, controls and procedures to insure that information required to
      be
      disclosed by us in our reports is accumulated and communicated to our
      management, including our CEO and principal financial officer, as appropriate
      to
      allow timely decisions regarding disclosure. Internal Controls are procedures
      which are designed with the objective of providing reasonable assurance that
      (1)
      our transactions are properly authorized; (2) our assets are safeguarded against
      unauthorized or improper use; and (3) our transactions are properly recorded
      and
      reported, all to permit the preparation of our financial statements inconformity
      with generally accepted accounting principles.





Scope
      of
      the Controls Evaluation. The evaluation made by our CEO and principal financial
      officer of our Disclosure Controls and our Internal Controls included a review
      of the controls' objectives and design, the controls' implementation by the
      Company and the effect of the controls on the information generated for use
      in
      this Annual Report. In the course of the Controls Evaluation, we sought to
      identify data errors, control problems or acts of fraud and to confirm that
      appropriate corrective action, including process improvements, were being
      undertaken. This type of evaluation will be done on a quarterly basis so that
      the conclusions concerning controls effectiveness can be reported in our
      Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB. The overall
      goals of these various evaluation activities are to monitor our Disclosure
      Controls and our Internal Controls and to make modifications as necessary;
      our
      intent in this regard is that the Disclosure Controls and the Internal Controls
      will be maintained as dynamic systems that change (including with improvements
      and corrections) as conditions warrant.





Among
      other matters, we sought in our evaluation to determine whether there were
      any
      "significant deficiencies" or "material weaknesses" in the Company's Internal
      Controls, or whether the Company had identified any acts of fraud involving
      personnel who have a significant role in the Company's Internal Controls. In
      the
      professional auditing literature, "significant deficiencies" are control
      deficiencies that adversely affects the entity’s ability to record, process,
      summarize and report financial data in the financial statements such that there
      is more than a remote likelihood that a misstatement of the entitiy’s financial
      statements that is more than inconsequential will not be prevented or detected
      by the entity’s internal control. A "material weakness" is defined in the
      auditing literature as a significant deficiency or combination of significant
      deficiencies that resoluts in more than a remote likelihood that a material
      misstatement to the financial statements will not be prevented or detected
      by
      the entity’s internal control.We also sought to deal with other controls matters
      in the Controls Evaluation, and in each case if a problem was identified, we
      considered what revision, improvement and/or correction to make in accord with
      our on-going procedures.





59




On
      October 12, 2007, our independent registered accounting firm Amper, Politziner
      & Mattia, P.C. ("AP&M"), informed
      us and our Audit Committee of the Board of Directors that they had discovered
      conditions which they deemed to be
      material weaknesses in our internal controls (as defined by standards
      established by the Public Company Accounting Oversight
      Board) summarized as follows:





·
            A
                lack of sufficient resources and an insufficient level of monitoring
                and
                oversight, which restricts the Company's ability to gather, analyze
                and
                report information relative to the financial statement assertions
                in a
                timely manner, including insufficient documentation and review of
                selection and application of generally accepted accounting principles
                to
                significant non-routine
                transactions.





·
            The
                limited size of the accounting department makes it impracticable
                to
                achieve an appropriate segregation of
                duties.





·
            There are no formal documented closing and reporting
              calendar and checklists.  ·
            There
                are no uniform policies with respect to the accounting policies utilized
                by all subsidiaries.





·
            The
                Whistleblower and certain other corporate governance policies should
                be
                disseminated to all employees.





·
            There
                are no formal cash flow forecasts, business plans, and organizational
                structure documents to guide the employees in critical decision-making
                processes.





·
            Documentation
                (and retention thereof) of certain transactions was not completed
                on a
                timely basis.





·
                The
                    Company does not have procedures to routinely monitor the progress
                    and
                    financial results of subsidiaries and
                    affiliates.





·
                The
                    Company does not have procedures in place to monitor inventory
                    procurement
                    activities and costing.





·
                The
                    Company does not have a procedure to ensure the timely issuance
                    of equity
                    securities upon Board or contractual
                    approval.  ·
                Material
                  weaknesses identified in the past have not been
                  remediated.




In
      accordance with SEC requirements, our CEO and principal financial officer each
      have confirmed that, during the most recent fiscal quarter and since the date
      of
      the Controls Evaluation to the date of this Annual Report, there have been
      no
      significant changes in Internal Controls or in other factors that have
      materially affected, or are reasonably likely to materially affect, the
      Company’s Internal Controls, including any corrective actions with regard to
      significant deficiencies and material weaknesses.





Conclusions.
      Based upon the Controls Evaluation, our CEO and principal financial officer
      have
      each concluded that, given the current lack of resources available to the
      Company, our Disclosure Controls are not effective to ensure that all material
      information relating to the Company and its consolidated subsidiaries is made
      known to management, including the CEO and principal financial officer,
      particularly during the periods when our periodic reports are being prepared
      and
      as of the fiscal reporting period ended June 30, 2007. Our CEO and principal
      financial officer also concluded that our Disclosure Controls are not
      effective to ensure that information required to be disclosed in the reports
      that we file or submit under the Exchange Act is accumulated and communicated
      to
      our management, including our CEO and principal financial officer, to allow
      timely decisions regarding required disclosures. The primary reason for said
      deficiencies is a lack of adequate resources and personnel. The Company intends
      to take action to hire additional staff and develop the adequate policies and
      procedures with said enhanced staff to ensure that adequate Disclosure Controls
      are in place to allow for effective and timely management and reporting
      commensurate with the change in the business strategy.





60




**Item
      8A (T) - Controls and Procedures**





N/A





**Item
      8B - Other Information**





None





61




**PART
      III**





The
      information required by this Part III (items 9, 10, 11 and 12) 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
      13. Exhibits**


(a)(1)
                  Financial statements - see "Index to Financial Statements" on page
                  28.
 2.1
                
                Amended
                    and Restated Limited Liability Company Agreement, dated as of
                    August 18,
                    2004, Incorporated by reference to Exhibit No. 2.1of the Company's
                    Current
                    Report on Form 8-K, filed September 2, 20042.2
                
                Investment
                    Agreement, dated as of August 18, 2004, Incorporated by reference
                    to
                    Exhibit No. 2.2 of the Company's Current Report on Form 8-K,
                    filed
                    September 2,2.3
                
                Subscription
                    Agreement, dated December 1, 2004, Incorporated by reference
                    to Exhibit
                    No. 2.1 of the Company's Current Report on Form 8-K, filed December
                    7,
                    20042.4
                
                Subscription
                    Agreement, dated January 3, 2005, Incorporated by reference to
                    Exhibit No.
                    2.1 of the Company's Current Report on Form 8-K, filed January
                    7,
                    20052.5
                
                Restructuring
                    and Subscription Agreement, dated as of May 16, 2005, Incorporated
                    by
                    reference to Exhibit No. 2.1 of the Company's Current Report
                    on Form 8-K,
                    filed May 20, 20052.6
                
                Stock
                    Purchase Agreement, dated as of June 1, 2005, Incorporated by
                    reference to
                    Exhibit No. 2.1 of the Company's Current Report on Form 8-K,
                    filed June 7,
                    20052.7
                
                Stock
                    Purchase Agreement dated as of July 1, 2005, Incorporated by
                    reference to
                    Exhibit No. 2.1 of the Company's Current Report on Form 8-K,
                    filed July 7,
                    2005
 
 (3)
                    Exhibits:
 
 3.1
                
                Amended
                    and Restated Articles of Incorporation, incorporated herein by
                    reference
                    to the Company's Report on Form 8-K dated April 25,
                    19953.2
                
                Certificate
                    of Amendment to the Amended and Restated Articles of Incorporation
                    of the
                    Company, incorporated by reference to the Company's Report on
                    Form 10K-
                    for the fiscal year ended June 30, 20013.3
                
                Certificate
                    of Amendment to the Articles of Incorporation for change of name
                    to
                    All-Comm Media Corporation, incorporated by reference to the
                    Company's
                    Report on Form 10-K for the fiscal year ended June 30,
                    19953.4
                
                By-Laws,
                    included in the Company's Report on Form 10K- for the fiscal
                    year ended
                    June 30, 20043.5
                
                Certificate
                    of Amendment of Articles of Incorporation for increase in number
                    of
                    authorized shares to 36,300,000 total, incorporated by reference
                    to the
                    Company's Report on Form 10-K dated June 30, 19963.6
                
                Certificate
                    of Amendment of Articles of Incorporation for change of name
                    to Marketing
                    Services Group, Inc., incorporated by reference to the Company's
                    Report on
                    Form 10-KSB for the fiscal year ended June 30, 19973.7
                
                Certificate
                    of Amendment of Articles of Incorporation for increase in number
                    of
                    authorized shares to 75,150,000 total, incorporated by reference
                    to the
                    Company's Report on Form 10-KSB dated June 30, 19983.8
                
                Certificate
                    of Amendment of Articles of Incorporation for change of name
                    to MKTG
                    Services, included in the Company's Report on Form 10K- for the
                    fiscal
                    year ended June 30, 20044.1
                
                Form
                    of Subscription Agreement, Incorporated by reference to Exhibit
                    No. 4.1 of
                    the Company's Current Report on Form 8-K, filed January 5,
                    20054.2
                
                Form
                    of Subscription Agreement, Incorporated by reference to Exhibit
                    No. 4.1 of
                    the Company's Current Report on Form 8-K, filed November 16,
                    20044.3
                
                Form
                    of Investors' Warrant, Incorporated by reference to Exhibit No.
                    4.2 of the
                    Company's Current Report on Form 8-K, filed November 16,
                    20044.4
                
                Form
                    of Investors’ Warrant, Incorporated by reference to Exhibit No. 4.2 of the
                    Company's Current Report on Form 8-K, filed January 5,
                    20054.5
                
                Form
                    of Agent's Warrant, Incorporated by reference to Exhibit No.
                    4.3 of the
                    Company's Current Report on Form 8-K, filed November 16,
                    20044.6
                
                Form
                    of Agent’s Warrant, Incorporated by reference to Exhibit No. 4.3 of the
                    Company's Current Report on Form 8-K, filed January 5,
                    20054.7
                
                Form
                    of Securities Purchase Agreement, Incorporated by reference to
                    Exhibit No.
                    4.1 of the Company's Current Report on Form 8-K, filed July 9,
                    2005
 
 62
 
 4.8
                
                Form
                    of Callable Secured Convertible Note, Incorporated by reference
                    to Exhibit
                    No. 4.2 of the Company's Current Report on Form 8-K, filed September
                    9,
                    20054.9
                
                Form
                    of Securities Purchase Warrant, Incorporated by reference to
                    Exhibit No.
                    4.3 of the Company's Current Report on Form 8-K, filed August
                    9,
                    20054.10
                
                Registration
                    Rights Agreement, Incorporated by reference to Exhibit No. 4.4
                    of the
                    Company's Current Report on Form 8-K, filed August 9,
                    20054.11
                
                Security
                    Agreement, Incorporated by reference to Exhibit No. 4.5 of the
                    Company's
                    Current Report on Form 8-K, filed August 31, 20054.12
                
                Form
                    of Agent's Warrant, Incorporated by reference to Exhibit No.
                    4.6 of the
                    Company's Current Report on Form 8-K, filed August 31,
                    20054.13
                
                Form
                    of Agreement to Issue Additional Company Interests, Incorporated
                    by
                    reference to Exhibit No. 4.1 of the Company's Current Report
                    on Form 8-K,
                    filed September 7, 20054.14
                
                Form
                    of Stock Purchase Warrant, Incorporated by reference to Exhibit
                    No. 4.1 of
                    the Company's Current Report on Form 8-K, filed July 7,
                    20064.15
                
                Form
                    of Subscription Agreement, Incorporated by reference to Exhibit
                    No. 4.1 of
                    the Company's Current Report on Form 8-K, filed October 25,
                    20064.16
                
                Form
                    of Sub-Contracting Agreement, Incorporated by reference to Exhibit
                    No. 4.1
                    of the Company's Current Report on Form 8-K, filed October 31,
                    20064.17
                
                Form
                    of Callable Secured Convertible Note, Incorporated by reference
                    to Exhibit
                    No. 4.1 of the Company's Current Report on Form 8-K, filed December
                    18,
                    20064.18
                
                Form
                    of Stock Purchase Warrant, Incorporated by reference to Exhibit
                    No. 4.2 of
                    the Company's Current Report on Form 8-K, filed December 18,
                    20064.19
                
                Form
                  of Convertible Debenture, Incorporated by reference to Exhibit
                  No. 4.2 of
                  the Company's Current Report on Form 8-K, filed May 23, 20074.20
                
                Form
                  of Stock Purchase Warrant, Incorporated by reference to Exhibit
                  No. 4.2 of
                  the Company's Current Report on Form 8-K, filed May 23, 20074.21
                
                Form
                  of Security Agreement, Incorporated by reference to Exhibit No.
                  4.3 of theCompany's Current Report on Form 8-K, filed
                  May 23,
                  20074.22
                
                Form
                  of Subsidiary Gurantee,Incorporated by reference to
                  Exhibit No. 4.4 of the Company's Current Report on Form 8-K, filed
                  May 23,
                  20074.23
                
                Form
                  of Registration Rights Agreement, Incorporated by reference to
                  Exhibit No.
                  4.5 of the Company's Current Report on Form 8-K, filed May 23,
                  200710.1
                
                J.
                    Jeremy Barbera Employment Agreement, incorporated by reference
                    to the
                    Company's Report on Form 10-K for the fiscal year ended June
                    30,
                    200010.2
                
                Form
                    of Bridge Loan Agreement, Incorporated by reference to Exhibit
                    No. 10.1 of
                    the Company's Current Report on Form 8-K, filed February 27,
                    200610.3
                
                Form
                    of Promissory Note, Incorporated by reference to Exhibit No.
                    10.2 of the
                    Company's Current Report on Form 8-K, filed February 27,
                    200610.4
                
                Form
                    of Warrant, Incorporated by reference to Exhibit No. 10.3 of
                    the Company's
                    Current Report on Form 8-K, filed February 27, 200610.5
                
                Form
                    of Registration Rights Agreement, Incorporated by reference to
                    Exhibit No.
                    10.4 of the Company's Current Report on Form 8-K, filed February
                    27,
                    200610.7
                
                Securities
                    Purchase Agreement, dated December 13, 2006, by and among MSGI
                    Security
                    Solutions, Inc. and each of the Purchasers set forth on the signature
                    pages thereto, Incorporated by reference to Exhibit No. 10.1
                    of the
                    Company's Current Report on Form 8-K, filed December 18,
                    200610.8
                
                Registration
                    Rights Agreement, dated December 13, 2006 by and among MSGI Security
                    Solutions, Inc. and each of the undersigned, Incorporated by
                    reference to
                    Exhibit No. 10.2 of the Company's Current Report on Form 8-K,
                    filed
                    December 18, 200610.9
                
                Security
                    Agreement, dated as of December 13, 2006 by and among MSGI Security
                    Solutions, Inc., certain subsidiaries of MSGI and the secured
                    parties
                    which are signatories thereto, Incorporated by reference to Exhibit
                    No.
                    10.3 of the Company's Current Report on Form 8-K, filed December
                    18,
                    200610.10
                
                Intellectual
                    Property Agreement, dated as of December 13, 2006 by and among
                    MSGI
                    Security Solutions, Inc., certain subsidiaries of MSGI and the
                    secured
                    parties which are signatories thereto, Incorporated by reference
                    to
                    Exhibit No. 10.4 of the Company's Current Report on Form 8-K,
                    filed
                    December 18, 200610.5
                
                Letter
                    Agreement, dated December 13, 2006 by and among MSGI Security
                    Solutions,
                    Inc. and the parties thereto, Incorporated by reference to Exhibit
                    No.
                    10.5 of the Company's Current Report on Form 8-K, filed December
                    18,
                    200610.6
                
                Sub-contracting
                  and distribution agreement, dated as of May 9, 2007 by and among
                  MSGI
                  Security Solutions, Inc., and Apro Media Corp. and the secured
                  parties
                  which are signatories thereto, Incorporated by reference to Exhibit
                  No.
                  10.1 of the Company's Current Report on Form 8-K, filed May 15,
                  200710.7
                
                Form
                  of Securities Purchase Agreement, dates as of May 21, 2007, by
                  and among
                  MSGI Security Solutions, Inc., certain subsidiaries of MSGI and
                  the
                  secured parties which are signatories thereto, Incorporated by
                  reference
                  to Exhibit No. 10.1 of the Company's Current Report on Form 8-K,
                  filed May
                  3, 200721
                
                List
                    of Company's subsidiaries23.1
                
                Consent
                    of Amper, Politziner & Mattia, P.C.31.1
                
                Certifications
                    of the Chief Executive Officer Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200231.2
                
                Certifications
                    of the Chief Accounting Officer Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 200232.1
                
                Certifications
                    of the Chief Executive Officer Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 200232.2
                
                Certifications
                    of the Chief Accounting Officer Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002
 
 63


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





The
      aggregate fees billed by Amper, Politziner & Mattia, P.C., independent
      accountants, for professional services rendered to MSGI Security Solutions,
      Inc
      during the fiscal years ended June 30, 2007 and 2006 were comprised of the
      following:


Fiscal
                  Year
              
              Fiscal
                  Year2007
              
              2006Audit
                  Fees
              
              $
              281,200
              
              $
              215,300Tax
                  Fees
              
              
              30,900
              
              
              30,900All
                  other Fees
              
              
              —
              
              
              —Total
                  Fees
              
              $
              312,100
              
              $
              246,200





Audit
      fees include fees for professional services rendered in connection with the
      audit of our consolidated financial statements for each year and reviews of
      our
      unaudited consolidated quarterly financial statements, as well as fees related
      to consents and reports in connection with regulatory filings for those fiscal
      years.





Tax
      fees
      related primarily to tax compliance and advisory services, and the preparation
      of federal and state tax returns for each year.





The
      Company's Audit Committee pre-approves all services provided by Amper,
      Politziner & Mattia, P.C.





64




**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.


MSGI
                SECURITY SOLUTIONS, INC.
              (Registrant)By:
            /s/
              J.
              Jeremy BarberaJ.
                Jeremy Barbera
              Chief
                Executive Officer By:
              /s/
                Richard J. Mitchell IIIRichard
                    J. Mitchell III
                  Chief
                    Accounting Officer and
                  Principle
                    Financial Officer
  Date:
        October 15, 2007





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 Executive
              
              October
                  15, 2007J.
                  Jeremy Barbera
              
              Officer
                  (Principal Executive Officer)/s/
                  John T. Gerlach
              
              Director
              
              October
                  15, 2007John
                  T. Gerlach/s/
                  Seymour Jones
              
              Director
              
              October
                  15, 2007Seymour
                  Jones/s/
                  Joseph Peters
              
              Director
              
              October
                  15, 2007Joseph
                  Peters/s/
                  David Stoller
              
              Director
              
              October
                  15, 2007David
                  Stoller




65