UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K/A

                                  Amendment No. 1

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

                     For the fiscal year ended June 30, 2005
                                       OR
              |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ______________________ to_______________________
                         Commission file number 0-16730

                          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 Avenue
         New 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 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  |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

                   Yes   |_|       No |X|

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

                   Yes   |_|       No |X|

<PAGE>

The aggregate market value of the voting stock held by non-affiliates of the
Registrant on the last business day of its most recently completed second fiscal
quarter was approximately $26,499,906.

Introduction

MSGI Security Solutions, Inc. ("MSGI" or the "Company"), filed with the
Securities and Exchange Commission (the "Commission") its Annual Report on Form
10-K for its fiscal year June 30, 2005 (the "2005 Form 10-K"), dated October 13,
2005. In accordance with General Instruction G to the Form 10-K, the information
called for by items 10, 11, 12, 13 and 14 of Part III of Form 10-K was not
included in the body of the 2005 Form 10-K as filed, but was incorporated by
reference to the Company's Proxy Statement which was expected to be filed with
the Commission within 120 days from its fiscal year end. Because the Company is
not in fact filing its Proxy Statement within such 120 day period, this Form
10-K/A amends the 2005 Form 10-K by deleting therefrom the caption and first
paragraph under Part III and substituting in its entirety the following
replacements for Items 10, 11, 12, 13 and 14.

MSGI is also filing this Amendment on Form 10-K/A to amend its Annual Report on
Form 10-K for the fiscal year ended June 30, 2005 to make corrections to certain
historical information provided in the original Annual Report on Form 10-K, as
well as correcting various minor typographical errors in the Annual Report on
Form 10-K. These typographical errors occurred during the process of preparing
the document for electronic filing with the Securities and Exchange Commission.

The following are the significant revisions to the original Form 10-K, audited
consolidated financial statements and notes as follows:

      o     Item 5 - correction to fiscal 2005 stock price data

      o     Item 6 - corrections to financial data tables

      o     Consolidated Statement of Stockholders' Equity - to correct
            typographical

      o     errors on the totals and some of the fiscal 2004 and 2005 data lines

      o     Footnote 2 - corrected data reported for fiscal 2005 in the Employee

      o     stock-based compensation table

      o     Footnote 3 - corrected pro forma data for fiscal 2005 reported for
            AONet

      o     Footnote 17 - added additional data in the stock options table to
            report

      o     weighted average exercise price

      o     Footnote 18 - corrected data in the deferred tax assets table

      o     Footnote 21 - added in erroneously omitted information in the
            supplemental

      o     disclosure of cash flow data for interest expense for fiscal 2005

      o     Footnote 22 - corrected segment data totals for assets

This form 10-K/A continues to speak as of the date of the original filing of the
Form 10-K. The corrections made have no effect to the Consolidated Financial
Statements and there is no restating of any previously reported financial
results as of June 30, 2005.


                                        1
<PAGE>

                                     PART I

Special Note Regarding Forward-Looking Statements

Some of the statements contained in this Annual Report on Form 10-K discuss our
plans and strategies for our business or state other forward-looking statements,
as this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, industry capacity, 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 and telecommunication costs.

Item 1. Business

General

MSGI Security Solutions, Inc. ("The Company or MSGI") is a leading provider of
proprietary security products and services to commercial and governmental
organizations worldwide with a focus on cutting-edge encryption technologies for
surveillance, intelligence monitoring, and data protection. The corporate
headquarters is located in New York, with regional offices in Washington, DC,
and Milan, Italy.

The Company's Strategy

MSGI typically 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; it 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.

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,
intelligence monitoring, and data protection in the United States, Italy and
Europe. On June 1, 2005, we acquired a 51% interest in AONet International srl,
a Provider of application hosting, data redundancy and disaster recovery
services based in Milan, Italy

Background

The Company was originally incorporated in Nevada in 1919.


                                        2
<PAGE>

During the past ten years, 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, summarized as follows:

<TABLE>
<CAPTION>
Date            Name of Company Acquired                 Service Performed
----            ------------------------                 -----------------
<S>             <C>                                      <C>
May 1995        Stephen Dunn & Associates, Inc.          Provides telemarketing and telefundraising,
                                                         specializing in the arts, educational and other
                                                         institutional tax exempt organizations.

October 1996    Metro Direct, Inc.                       Develops and markets a variety of database marketing
                                                         and direct marketing products. (sold as part of the
                                                         December 2002 sale of the direct market business)

July 1997       Pegasus Internet, Inc.                   Provides a full suite of Internet services including
                                                         content development and planning, marketing
                                                         strategy, on-line ticketing system development, technical
                                                         site hosting, graphic design, multimedia production
                                                         and electronic commerce.(these operations were
                                                         either terminated or moved to other operating divisions)

December 1997   Media Marketplace, Inc.                  Specializes in providing list management, list brokerage and
                Media Marketplace Media Division, Inc.   media planning and buying services. (sold as part of
                                                         the December 2002 sale of the direct market business)

May 1998        Formed Metro Fulfillment, Inc.           Performed services such as on-line commerce, real-time
                                                         database management inbound/outbound customer service,
                                                         custom packaging, assembling, product warehousing,
                                                         shipping, payment processing and retail distribution.
                                                         (sold in March and September of 1999)

January 1999    Stevens-Knox & Associates, Inc.          Specializes in providing list management, list brokerage and
                Stevens-Knox List Brokerage, Inc.        database management services. (sold as part of
                Stevens-Knox International, Inc.         the December 2002 sale of  the direct market business)

May 1999        CMG Direct Corporation                   Specializes in database services. (part of this business
                                                         became WiredEmpire, the balance was sold as part of the
                                                         December 2002 sale of the direct marketing business)
</TABLE>


                                        3
<PAGE>

<TABLE>
<S>               <C>                                        <C>
October 1999      Acquired 87% of Cambridge Intelligence
                  Agency and formed WiredEmpire, Inc.        A licensor of email marketing tools.

March 2000        Grizzard Advertising, Inc.                 Specialized in strategic planning,
                                                             creative services, database
                                                             management, print-production,
                                                             mailing and Internet marketing.

March 2000        The Coolidge Company                       Specializes in list management
                                                             and list brokerage services. (sold in July 2001)

September 2000    Begin plan to discontinued the
                  operation of Wired                         Empire, Inc. (completed in January 2001).
</TABLE>

In April and August 2004, the Company acquired majority interests in the Future
Developments America, Inc. and Innalogic, LLC businesses that are focused in the
homeland security and surveillance sectors. In June 2005, the Company acquired a
majority interest in AONet International, S.r.L., a business located in Milan,
Italy which is a provider of application hosting, data redundancy and disaster
recovery services.

<TABLE>
<S>              <C>                                         <C>
April 2004       Acquired 51% of Future Developments         Provider of technology-based products and
                 America, Inc.                               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% of AONet International Srl     Provider of application hosting, data redundancy
                                                             and disaster recovery services.

July 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 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%
</TABLE>


                                        4
<PAGE>

Capital Stock and Certain Recent Transactions

In December 2002, the Company completed its sale of substantially all the assets
relating to its direct list sales and database services and website development
and design business held by certain of its wholly owned subsidiaries (the
"Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly owned
subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash plus
the assumption of all directly related liabilities. As such, the operations and
cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the results of operations and cash flows for the years
ended June 30, 2003 have been reclassified into a one-line presentation and is
included in Loss from Discontinued Operations and Net Cash Used by Discontinued
Operations.

In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments. There
was no tax impact on this loss.

In December 2002, the Company negotiated a termination of a lease for an
abandoned lease property. The agreement required an up front payment of $.3
million and the Company is obligated to pay approximately $60,000 per month
until the landlord has completed certain leasehold improvements for a new tenant
which was completed in July 2003 and then Company is obligated to pay $20,000
per month until August 2010, and the Company was released from all other
obligations under the lease. The gain on lease termination represents a change
in estimate representing the difference between the Company's present value of
its future obligations and the entire obligation that remained on the books
under the original lease obligation. The remaining obligation has been recorded
in accrued expenses and other current liabilities and other liabilities.

On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. Par value of the common stock remains $.01 per share
and the number of authorized shares of common stock is reduced to 9,375,000. The
stock split was effective January 27, 2003. All stock prices, per share and
share amounts have been retroactively restated to reflect the reverse split and
are reflected in this document.

In January 2003, the Company redeemed the outstanding shares of the Series E
preferred stock for a cash payment of approximately $6.0 million and the
issuance of 362,604 shares of common stock valued at approximately $.2 million.
The carrying value of the preferred stock was approximately $20.2 million which
included a beneficial conversion feature of approximately $10.3 million. The
transaction resulted in a gain on redemption of approximately $14.0 million and
is reflected in net income attributable to common stockholders for the year
ended June 30, 2003.

In January 2003, the Company entered into an agreement and settled the
outstanding amount owed to the former Grizzard shareholders in connection with a
holdback agreement. The Company paid approximately $4.6 million and utilized its
restricted cash. Approximately $.3 million of restricted cash became available
for general company use.

In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934
was commenced against General Electric Capital Corporation ("GECC") by Mark
Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of Company
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a $1.3
million payment to be made to the Company by GECC and for GECC to reimburse the
Company for the reasonable cost of mailing a notice to stockholders up to
$30,000. On April 29, 2002, the court approved the settlement for approximately
$1.3 million, net of attorney fees plus reimbursement of mailing costs. In July
2002, the court ruling became final and the Company received and recorded the
net settlement payment of approximately $965,000 plus reimbursement of mailing
costs. The net settlement was recorded as a gain from settlement of lawsuit and
is included in the statement of operations for the year ending June 30, 2003.


                                        5
<PAGE>

In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MSGI, MSGI and WiredEmpire, Inc. The plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising from the plaintiffs' acquisition of
WiredEmpire Preferred Series A stock in a private placement. The plaintiffs
sought attorney's fees and punitive damages of approximately $1,650,000, which
equaled their investment in WiredEmpire's preferred stock. On February 8, 2002,
the defendants filed a petition to remove the action to federal court on the
grounds of diversity of citizenship. In December 2003, action was settled, and
stipulations of dismissal with prejudice were filed. See below paragraph for
accounting impact.

In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of Media Services
Group, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other
things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)
of the Securities Act of 1934 and Rule 10(b)(5) promulgated thereunder, and
various provisions of Alabama state law and common law, arising from Red
Mountain's acquisition of WiredEmpire Preferred Series A stock in a private
placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and
it seeks that amount, attorney's fees and punitive damages. In December 2003,the
action was settled, and stipulations of dismissal with prejudice were filed. As
a result of the settlement of the two actions, during the period ended June 30,
2004 the Company reversed reserves of approximately $760,860 that had been
previously accrued in connection with such lawsuits.

In March 2004, the Company completed its sale of substantially all the assets
relating to its telemarketing and telesales services business held by its wholly
owned subsidiary MKTG Teleservices, Inc. to SD&A Teleservices, Inc. (SD&A) a
wholly owned subsidiary of the Robert W. Woodruff Arts Center, Inc. for
approximately $2.8 million in cash plus the assumption of certain related
liabilities, subject to a final working capital adjustment. As such, the
operations and cash flows of the telemarketing and telefunding business have
been eliminated from ongoing operations and the Company no longer has continuing
involvement in the operations. Accordingly, the operations and cash flows for
the periods ended June 30, 2004 and 2003 have been reclassified into a one-line
presentation and is included in loss from discontinued operations and net cash
used by discontinued operations.

At March 31, 2004, the Company retired all outstanding balances on its line of
credit facility. The Company subsequently terminated its relationship with the
credit provider.

In May and June 2004, the Company entered into definitive agreements with
certain strategic European investors for a private placement of an aggregate of
500,000 shares of common stock to be sold at a price of $4.00 per share for
gross proceeds of approximately $2,000,000. The Company also agreed to issue to
the investors, and third party affiliates, warrants to purchase an additional
300,000 shares of common stock at a price of $6.00 per share under a three-year
term. The first round, in the amount of $1,000,000, was closed and funded on May
13, 2004. A second round, in the amount of $1,000,000 was closed and was funded
on three separate dates. A funding of $200,000 occurred on May 27, 2004, a
funding of $500,000 occurred on June 28, 2004, and two final rounds of funding
in the amounts of $200,000 and $100,000 occurred on July 12 and 19, 2004.

In November 2004 the Company entered into and closed on definitive agreements
with certain strategic investors for the purchase of 9,376 shares of Series F
Convertible Preferred Stock at $320.00 per share for gross proceeds of
approximately $3 million. On an as converted basis, the Series F Convertible
Preferred Stock in this transaction equates to approximately 461,538 shares of
Common Stock at a price of $6.50 per share. In connection with the issuance of
the preferred stock, warrants were issued to the investors to purchase
approximately 230,770 shares of Common stock at an exercise price of $8.125 per
share. Also, in connection with the issuance of the preferred stock, warrants
will be issued to the placement agent to purchase approximately 27,692 shares of
Common Stock at an exercise price of $6.50. The Company will pay an annual
dividend of 6% on the Preferred Stock, payable in shares of the Company's common
stock. There are no reset provisions or anti-dilution provisions associated with
this Series F Convertible Preferred Stock.


                                        6
<PAGE>

During December 2004 the Company conducted a closing on the sale to certain
strategic investors for the purchase of 419,354 shares of the Company's Common
Stock at $7.75 per share generating gross proceeds of approximately $3.25
million. In connection with the offering, five-year warrants were issued to the
investors to purchase 209,686 shares of Common Stock at an exercise price per
share of $8.25. The investors have "piggyback" registration rights with respect
to the shares of common stock issuable upon the exercise of the warrants. As
compensation for their services as placement agents in the offering, the
placement agents received five-year warrants substantially identical to those
received by the investors to purchase approximately 25,162 shares of Common
Stock at an exercise price per share equal to $7.75. The placement agents also
received cash compensation equal to 6% of the gross proceeds obtained through
the private placement.

On February 7, 2005, the Board of Directors approved a two-for-one split of the
common stock. Par value of the common stock remains $.01 per share. The stock
split was effective March 9, 2005. All stock prices, per share and share amounts
have been retroactively restated to reflect the split and are reflected in this
document.

During June 2005, the Company issued 100,000 shares of the Company's Common
Stock to a certain placement agent with relation to the closing of the
acquisition of the 51% ownership stake of AONet International Srl. The fair
market value of these shares, at the time of issuance, is estimated at
approximately $774,000.

During July, 2005, MSGI closed a Callable Secured Convertible Note financing of
$3 million with a New York based institutional investor. The instrument requires
repayment over 36 months with a maximum of 8% interest per annum. Repayment
shall be in cash or in registered shares of common stock. The monthly
amortization shall commence 90 days after closing according to a 33 month
amortization schedule. At the Investor's option, the note may be repaid upon the
issuance of common stock at the conversion price; otherwise all payments must be
in cash. The Conversion price shall be equal to 75% of the initial market price,
which was $6.56. The interest rate resets to zero for any monthly period in
which the stock price is greater than 125% of the initial market price. 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 Company received $2 million in gross proceeds
upon closing, and received an additional $500,000 upon filing of the
registration statement relating to this offering, and received an additional
$500,000 upon the effectiveness of such registration statement. The Company also
issued 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 exercise price of $7.50 per
share. The placement agent received warrants for the purchase of 12,195 shares
of the Company's common stock, at an exercise price of $7.50 per share and a fee
equal to 7% of the aggregate offering.

Liquidity

The Company has limited capital resources and has incurred significant
historical losses and negative cash flows from operations. The Company believes
that funds on hand, funds available from its remaining operations and the funds
raised through the Callable Secured Note financing in July 2005 should be
adequate to finance its operations and capital expenditure requirements and
enable the Company to meet interest and debt obligations (including those of the
Callable Secured Notes and payments due to acquire our interests in AONet
International srl) for the next twelve months. As explained in Notes 16, 17 and
23, the Company recently closed on various fund raising transactions that have
provided significant capital for MSGI. As described in Notes 3 and 4 some of
these funds have been used to invest in new and emerging companies as well as to
fund current operations. The Company believes, after the integration period,
that its newly acquired operations in Italy should generate sufficient future
cash flow to fund their operations and pay delinquent liabilities. Failure of
these new operations to generate such sufficient future cash flow could have a
material adverse effect on the Company's ability to continue as a going concern
and to achieve its business objectives. Our auditors have included a going
concern uncertainty paragraph in their financial statements, as has the auditors
of our AONet subsidiary. 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.


                                        7
<PAGE>

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 the emergency situation. 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".

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.


                                        8
<PAGE>

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 2007.

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

The Company's two majority-owned operating businesses, Innalogic, LLC
("Innalogic") and AONet International, S.r.L. ("AONet"), along with Excelsa
S.p.A., a minority owned investment and Future Developments America, Inc.
("FDA"), are leading providers of technology-based products and services to law
enforcement agencies throughout North America and Europe. The services offered
by the Company's various subsidiaries are described below.

Future Developments America, Inc.:

As a result of our July 1, 2005 amendment to our agreements with the founder's
of FDA, we are a non-exclusive licensee in the United States of certain products
developed by FDA and of other products developed by outside organizations. We
also are entitled to receive royalties on certain sales of products to others
which are marketed by FDA. Some of FDA's product offerings to be marketed are in
the development stage at June 30, 2005.

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 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.


                                        9
<PAGE>

FDA 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, FDA 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.

FDA 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.

As well as serving as a prime contractor, FDA may sub-contract to other major
contractors. In accord with contractor preference, we can sub-contract under our
own name or ghost-contract (work anonymously under our contractor umbrella). The
FDA team's reputation for skill and integrity will enable us to successfully
sub-contract our services to other video security equipment providers to enable
them to offer value-added or enhanced services. Their long-standing
relationships with our partners, contractors and alliances, developed during 19
years of industry experience, are a further testimony to our reputation.

FDA also delivers advisory services focused on the selection, design and
deployment of technology-based surveillance networks and systems. FDA
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. FDA helps clients devise solutions that
meet their functional requirements, while maintaining a constant focus on
maximizing efficiency and minimizing costs. FDA 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). FDA 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. FDA engineers are conversant with current and emerging trends
that impact the near-term utility and long-term effectiveness of surveillance
equipment and systems.

Innalogic, LLC:

Innalogic LLC 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.

Innalogic has the resources and expertise to design and install building-wide
wireless networks. The goal: to establish a highly secure (e.g., encrypted)
network environment able to capture and route wireless video and sensor data for
enhanced security and tenant services. The network's technological foundation is
a custom-designed network Command Center utilizing Innalogic's proprietary
SafetyWatch(TM) 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.


                                       10
<PAGE>

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.

Currently in development is Innalogic SafePassge(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:

o     Product design

o     Software engineering

o     Hardware integration

o     Network engineering

o     Interface design

o     System integration

o     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.


                                       11
<PAGE>

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.

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:

o 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.

o 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 SafetyWatch(TM) 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:

o Local or remote management -- The Command Center enables centralized remote
monitoring and coordinated recording across multiple sites, regardless of
geographical location.

o 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.

o 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.

o Review incidents while still recording -- Video recordings can be viewed
without interrupting current recording.


                                       12
<PAGE>

o Simple remote system installation -- The Command Center allows for device
configuration remotely.

o 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.

AONet International Srl.:

Created in 2004 from the acquisition of the original business assets of AONet
SpA, a company placed in liquidation, AONet International Srl is focused
primarily on providing outsourcing of data services and business continuity, the
management of technology assets and company networks, disaster recovery and
security systems. It is located in Milan, Italy.

The company's target market is that of mid-sized European organizations and
corporations that require network based solutions. In specific situations AONet
will also undertake to provide services to the operating divisions, subsidiaries
and departments of large organizations.

AONet's strength lies in its specialist team of professionals, all of whom are
highly qualified specialists who use best practice methodology to ensure optimum
service for its clients; its state of the art technological infrastructure,
including its data center, one of the most advanced in Italy; its operating
control center with video wall, which permits AONet to monitor and proactively
manage in real time, every part of the infrastructure, both centrally and
remotely, with 24x7 service; and its offering of several applications that can
be run through the data center, including video surveillance, digital data
interception and mass distribution communications.

The growth in business seen by AONet International since its founding has
allowed the company to increase its affairs both by deepening its relationship
with historical clients and by extending its interests to encompass the
opportunities inherent in cross-selling the products and services of other MSGI
subsidiaries and affiliates.

In June 2005, MSGI announced that it had formed a business agreement with
VeriSign, Inc., the leading provider of intelligent infrastructure services for
the Internet and telecommunications networks, to launch advanced services using
the VeriSign NetDiscovery Service. The agreement is aimed at the estimated $1
billion legal interception and homeland security market in Italy. The VeriSign
and MSGI agreement effectively represents the market launch of the VeriSign
NetDiscovery Service in Italy. VeriSign has agreed to align with MSGI as its
representative in Italy, where MSGI will operate the VeriSign NetDiscovery
Service infrastructure in a data center operated by AONet. Financial terms and
future MSGI payment obligations are under discussion.

The VeriSign NetDiscovery Service in Italy will support end-to-end legal
interception solutions addressing the government regulations and judicial
requirements for advanced technologies such as VoIP, push to talk, and wireless
packet data. In the United States, the VeriSign NetDiscovery Service assists
telecommunications service providers in ensuring compliance with real-time legal
interception requirements under the Communications Assistance for Law
Enforcement Act (CALEA) through a managed service model, significantly
minimizing the capital and operational expenditure. VeriSign also assists
providers in responding to requests for delivery of subscriber information and
historical billing/call detail records. This business relationship represents a
major corporate growth initiative for MSGI. By aligning with VeriSign, MSGI will
strongly enhance its existing legal interception and video surveillance
operations in Italy and, ultimately, across Europe. Specifically, the AONet data
center will 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. It is expected that the first order under
this distribution agreement will commence during October 2005. In addition,
AONet International has signed accords with other third parties, such as
Interweb, for the promotion and delivery of complementary products and services.


                                       13
<PAGE>

AONet International will also seek to grow through the acquisition of other
companies which possess complementary products or services.

Its business model of providing services under long term hosting agreements
permits AONet International to calculate contractual backlog of revenues.
Currently, customer hosting agreements expire at various dates through 2007.
There are no assurances that these contractual backlog revenues will actually be
realized by AONet and current agreements may be terminated for reasons beyond
the control of AONet.

Excelsa S.p.A.:

Excelsa S.p.A. ("Excelsa") is an Italian leading company in the area of Video
Control for security both for the civilian and military segments. Excelsa is
also the first company to offer this service over IP. Excelsa was founded in
2000 by a group of entrepreneurs and a technical staff from Italy's Liguria
region. The new born company soon became well known for the development of
innovative technologies and in a short time acquired a significant share of the
market.

In 2003, with the creation of the Real Time Security (RTS) Division, Excelsa
became a Business Service Provider (BSP) for Telecom Italia, the leading
telecommunications company in Italy. RTS provides video surveillance systems and
services that enable remote, centralized monitoring of locations of interest to
the user, as well as image storage in secure Internet Data Centers and alarm
management.

Through the Public Security Division, Excelsa distributes products and services
specifically designed for the Italian Police department, devices for recording
telephone calls and for transferring data, as well as audio/video/fax
interception equipment.

Excelsa safeguards its position as a high-tech company through the Core
Technology Development group. The group's aim is to support the long-term
aspects of existing product development and identify new product areas for the
future. It also nurtures the technical expertise for emerging technologies and
applications.

Excelsa's mission is to provide security, prevention and control in public and
private areas through the development of advanced video surveillance systems and
the identification of new solutions and services.

Excelsa's Real Time Security platform achieved success in this rejuvenated
sector by offering solutions that are unique for the high level of technology
applied, as well as for their reliability and flexibility and their ability to
be easily configured to meet specific needs.

Excelsa's video solutions can be implemented by integrating existing analog
video systems with the new network video system, allowing access to all of the
functionality and benefits offered by digital technology.

Excelsa Audio Logger 2.5 is a system designed to provide a full featured and
easy to use tool for intelligence over telephony communications.

MSGI currently holds a 19.5% interest in Excelsa on a fully diluted basis.

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.


                                       14
<PAGE>

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.
Indeed, it is difficult to identify direct competitors to 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, R&D service capabilities, advanced
encryption technologies, and focus on the homeland security and public safety
markets are significant competitive advantages over these listed companies.

Facilities

The Company leases all of its real property. Facilities for its headquarters are
in New York, NY and its sales and service offices are located in Washington, DC
and Milan, Italy. The Company believes that its facilities are in good condition
and are adequate for its current needs. The domestic facilities leases terminate
in June and October 2006. The lease for our facility in Milan expires in 2010.
The Company believes such space is readily available at commercially reasonable
rates and terms. The Company also believes that its technological resources are
all adequate for its needs through fiscal 2006. At this time, the Company does
not require any manufacturing facilities for its operations.

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.

Employees

At June 30, 2005, the Company and its majority owned subsidiaries employed
approximately 67 persons, of whom 64 were employed on a full-time basis. Of
these employees 50 were located in Milan Italy. 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, although Italian businesses are required to provide employees certain
statutory benefits, including severance type arrangements.


                                       15
<PAGE>

Item 2. Properties

The Company and certain subsidiaries lease facilities for office space
summarized as follows and in Note 15 of Notes to the Company's consolidated
financial statements included in this Form 10-K. The company is headquartered in
New York, NY where it maintains approximately 4,540 feet of office space in two
locations. We lease approximately 1,840 square feet which is equipped to fully
meet the needs of our corporate finance office. The current lease runs through
June 2006 with a monthly rent of $13,000. Our majority owned subsidiary,
Innalogic LLC., currently leases approximately 2,700 square feet of office space
in New York, NY. The current lease runs through October 2005 with a monthly rent
of $5,400. Innalogic LLC has executed a new lease for the property which will
run through October 2006 with a monthly rent of $6,500. Our majority owned
subsidiary, AONet International S.r.L., currently leases approximately 31,000
square feet of office space in Milan, Italy. The current leases run through
April 2010 and January 2011 with a monthly rent of approximately $16,000. AONet
International S.r.L. holds an option to renew the leases for an additional 6
year term at the end of the current lease term.

                   Location                             Square Feet

              New York, New York                            4,540
              Milan, Italy                                 31,000

In addition, the Company is currently leasing approximately 29,400 square feet
in New York, which is not being currently utilized. Accordingly, the Company has
provided for the future estimated cost of this lease at the time of abandonment
in fiscal 2002.

Item 3. Legal Proceedings

In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of Media Services
Group, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among other
things, violations of Section 12(2) of the Securities Act of 1933, Section 10(b)
of the Securities Act of 1934 and Rule 10(b)(5) promulgated thereunder, and
various provisions of Alabama state law and common law, arising from Red
Mountain's acquisition of WiredEmpire Preferred Series A stock in a private
placement. Red Mountain invested $225,000 in WiredEmpire's preferred stock and
it seeks that amount, attorney's fees and punitive damages. In December 2003,
the action was settled, and stipulations of dismissal with prejudice were filed.

In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MSGI, MSGI and WiredEmpire, Inc. The plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising from the plaintiffs' acquisition of
WiredEmpire Preferred Series A stock in a private placement. The plaintiffs
invested approximately $1,650,000 in WiredEmpire's preferred stock and they were
seeking that amount, attorney's fees and punitive damages. On February 8, 2002,
the defendants filed a petition to remove the action to federal court on the
grounds of diversity of citizenship. In December 2003, action was settled, and
stipulations of dismissal with prejudice were filed. The plaintiffs received the
value of their investments back and the settlement was covered, in its entirety,
by insurance. As a result of the settlement of the two above actions, the
Company reversed reserves of approximately $760,860 that had been accrued in
connection with such lawsuits for the year ended June 30, 2004.

In June 2002, the Company entered into a tolling agreement with various
claimants who acquired WiredEmpire Preferred Series A stock in a private
placement. The agreement states that the passage of time from June 15, 2002
through August 31, 2002 shall not be counted toward the limit as set out by any
applicable statute of limitations. In addition, the claimants agreed that none
of them would initiate or file a legal action against Mr. Barbera, MSGI or
WiredEmpire prior to the termination of the agreement. The claimants invested
approximately $1,200,000 in WiredEmpire's preferred stock. In January 2003, a
lawsuit was filed in Alabama, Circuit Court for Jefferson County by certain
plaintiffs involved in the Agreement. The action was filed against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of MSGI, MSGI and
WiredEmpire, Inc. The plaintiffs' complaint alleges among other things
violations of state securities laws and breach of fiduciary duty. This lawsuit
was settled during fiscal year 2003 and was fully covered by the Company's
insurance.


                                       16
<PAGE>

In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of 1934
was commenced against General Electric Capital Corporation ("GECC") by Mark
Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of MSGI
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. On April 29, 2002, the court
approved a settlement of a payment by GECC to MSGI of $1,250,000, net of
attorney fees plus reimbursement of mailing costs. In July 2002, the court
ruling became final and the Company received and recorded the net settlement
payment of $965,486 plus reimbursement of mailing costs.

In addition to the above, certain other 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 other 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

An Annual Meeting of Shareholders was held on February 7, 2005. Four matters
were voted upon at the Annual Meeting of Shareholders. Votes were solicited via
proxies pursuant to Regulation 14 under the Securities Act of 1934.

1.    A vote was held for the approval of an amendment to the Amended and
      Restated Articles of Incorporation of the Company to change the name of
      the Company to MSGI Security Solutions, Inc. The total number of votes
      cast was 1,571,846 with 1,568,905 voted in favor, 2,480 voted against and
      461 abstaining.

2.    A vote was held for the uncontested reelection of Mr. John Gerlach as
      Director. The total number of votes cast was 1,571,846 with 1,549,971
      voted in favor and 21,875 withheld.

3.    A vote was held for an amendment to the 1999 Stock Option Plan increasing
      the number of authorized shares from 62,560 to 562,560. The total number
      of votes cast was 1,000,786 with 803,324 voted in favor, 187,698 voted
      against and 9,764 abstaining. A total of 571,060 votes were not cast. The
      total number of shares available in the 1999 Stock Option Plan was
      subsequently adjusted to 1,125,120 as a result of the forward 2 for 1
      stock split.

4.    A vote was held for the approval of the issuance of 20,000 options to
      purchase common stock outside of the 1999 Stock Option Plan. The total
      number of votes cast was 1,000,786 with 972,415 voted in favor, 21,798
      voted against and 6,555 abstaining. A total of 571,060 votes were not
      cast. The number of approved options was subsequently adjusted to 40,000
      as a result of the forward 2 for 1 stock split.


                                       17
<PAGE>

                                     PART II

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

The common stock of the Company trades on the NASDAQ Small Cap Market under the
symbol "MSGI." Prior to December 29, 2003, the Company traded under the symbol
"MKTG". Prior to July 30, 2001, the Company traded under the symbol "MSGI." 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:

                                          Low                    High
Fiscal 2005
                   Fourth Quarter        $4.35                 $ 8.25
                   Third Quarter          5.80                  10.20
                   Second Quarter         5.42                   9.38
                   First Quarter          3.60                   7.00
Fiscal 2004
                   Fourth Quarter        $1.80                 $ 7.38
                   Third Quarter          1.44                   2.74
                   Second Quarter          .65                   4.49
                   First Quarter           .62                    .92

On February 7, 2005, the Board of Directors approved a two-for-one forward split
of the common stock. Par value of the common stock remained $.01 per share and
the number of authorized shares of common stock remained at 9,375,000 shares.
The stock split was effective March 9, 2005. The effect of the stock split has
been reflected in the balance sheets and in all share and per share data in the
accompanying consolidated financial statements and Notes to Financial
Statements. Stockholders' equity accounts have been retroactively adjusted to
reflect the reclassification of an amount equal to the par value of the increase
in issued common shares from common stock account to paid-in-capital.

On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. The stock split was effective January 27, 2003. Par
value of the common stock remained $.01 per share and the number of authorized
shares of common stock was reduced to 9,375,000 shares. The effect of the stock
split has been reflected in the balance sheets and in all share and per share
data in the accompanying consolidated financial statements and Notes to
Financial Statements. Stockholders' equity accounts have been retroactively
adjusted to reflect the reclassification of an amount equal to the par value of
the decrease in issued common shares from common stock account to
paid-in-capital.

In January 2003, the Company redeemed the outstanding shares of certain
preferred stock for a cash payment of approximately $6.0 million and the
issuance of 181,302 shares of common stock valued at approximately $.2 million.
The carrying value of the preferred stock was approximately $20.2 million which
included a beneficial conversion feature of approximately $10.3 million. The
transaction resulted in a gain on redemption of approximately $14.0 million and
is reflected in net income (loss) attributable to common stockholders for the
period ended June 30, 2003.

As of June 30, 2005, there were approximately 1100 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.


                                       18
<PAGE>

Item 6. Selected Financial Data

The selected historical consolidated financial data for the Company presented
below as of and for the five fiscal years ended June 30, 2005 have been derived
from the Company's audited consolidated financial statements. This financial
information should be read in conjunction with management's discussion and
analysis (Item 7) and the notes to the Company's consolidated financial
statements (Item 8). Due to the evolving nature of our business, the information
presented below may not be indicative of future financial condition or results
of operations.

<TABLE>
<CAPTION>
                                                                                 Historical
                                                                             Years ended June 30,
                                                                            ----------------------
                                                                    (In thousands, except per share data)

                                                  2001           2002 (8)       2003 (9)        2004 (10)       2005
                                                  ----           ----           ----            ----            ----
<S>                                             <C>            <C>            <C>             <C>             <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

Revenues (4)                                    $     --       $     --       $     --        $     --        $    811
Amortization and depreciation                   $     --       $     41       $     --        $     --        $    150

Income (loss) from operations                   $ (6,189)      $(11,059)(5)   $ 2,072 (11)    $ (2,335)       $ (6,904)
Income (loss) from continuing operations        $(13,087)(1)   $(11,075)      $  2,977        $ (2,087)       $ (6,575)

(Loss) gain from discontinued operations        $(52,696)(2)   $(54,711)(6)   $   (517)(12)   $ (1,224)       $   (181)

Net income (loss)                               $(65,839)      $(65,683)      $ (2,615)(13)   $ (3,311)       $ (6,756)

Net income (loss) available to common
stockholders                                    $(66,492)(3)   $(66,096)(7)   $ 11,356(14)    $ (3,030)(15)   $ (6,872)

Income (loss) per diluted share (16) :
    Continuing operations                       $ (10.91)      $  (7.45)      $   7.39        $  (0.78)       $  (1.94)
    Discontinued operations                     $ (28.52)      $ (35.79)      $  (0.23)       $  (0.53)       $  (0.05)
    Cumulative effect of change in accounting     (10.57)            --          (2.21)             --              --
                                                --------       --------       --------        --------        --------
                                                $ (50.00)      $ (43.24)      $   4.95        $  (1.31)       $  (1.99)

    Weighted average common shares
          Outstanding  - diluted                   1,330          1,528          2,294           2,316           3,460

OTHER DATA:

Net cash used in operating activities:          $ (7,148)      $ (7,433)      $ (4,409)       $ (2,620)       $ (4,086)
Net cash (used in) provided by investing
  activities:                                   $   (173)      $     74       $ 13,420        $  2,449        $ (4,936)
Net cash provided by (used in) financing
  activities:                                   $ 17,609       $ (6,027)      $(12,022)       $  1,445        $  6,800
Net cash (used in) provided by discontinued
  operations                                    $(19,222)      $(56,576)      $   (130)       $    614        $   (237)
</TABLE>

<TABLE>
<CAPTION>
                                                                     Historical
                                                                   As of June 30,
                                                                  (In thousands)
CONSOLIDATED BALANCE SHEETS DATA:                2001        2002        2003        2004       2005
                                                 ----        ----        ----        ----       ----
<S>                                            <C>         <C>         <C>         <C>        <C>
Cash and cash equivalents                      $    175    $  3,802    $    661    $  2,549   $    118
Working capital (deficit)                      $   (735)   $ (1,363)   $ (3,789)   $  1,596   $ (4,664)
Total intangible assets                        $     --    $     --    $     --    $    490   $  3,432
Total assets                                   $ 98,041    $ 47,596    $  7,648    $  5,288   $ 12,098

Total long term debt, net of current portion   $  4,787    $    176    $     --    $     --   $    181

Total stockholders' equity                     $ 68,778    $  1,390    $  3,108    $  2,201   $  4,880
</TABLE>


                                       19
<PAGE>

(1)   Loss from operations includes a write-down of Internet investments of
      $7,578 and expenses associated with settlement of litigation of $1,298.

(2)   In January 2001, the company sold certain assets of WiredEmpire for a gain
      of $1,252.

(3)   Net loss available to common stockholders includes a cumulative effect of
      a change in accounting of $14,064 in connection with the adoption of EITF
      00-27.

(4)   Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No.
      101, "Revenue Recognition in Financial Statements," ("SAB 101") was
      implemented in fourth quarter 2001. SAB 101 provides guidance on applying
      generally accepted accounting principles to revenue recognition in
      financial statements. The Company's policies for revenue recognition are
      consistent with the views expressed within SAB 101. See Note 2,
      "Significant Accounting Policies," for a description of the Company's
      policies for revenue recognition. The adoption of SAB 101 did not have a
      material effect on the Company's consolidated financial position, cash
      flows, or results of operations. Although net income was not materially
      affected, the adoption did have an impact on the amount of revenue
      recorded as the revenue associated with the Company's list sales and
      services product line (considered discontinued operations as of fiscal
      2002-2004) are now required to be shown net of certain costs. The Company
      believes this presentation is consistent with the guidance in Emerging
      Issues Task Force ("EITF") 99-19, "Reporting Revenue Gross as a Principal
      Versus Net as an Agent." All prior periods presented have been restated
      and subsequently all such revenue from its list sales and services product
      line has been reclassified as part of discontinued operations.

(5)   Loss from operations includes an impairment write-down of goodwill of
      $6,500 and a write-down of abandoned leased property of $6,400.

(6)   Net loss includes an extraordinary item of $4,859 for a loss on early
      extinguishments of debt.

(7)   Net loss available to common stockholders includes a deemed dividend in
      the amount of $413 in connection with the redemption of preferred stock.

(8)   Effective July 31, 2001, the Company sold Grizzard Communications Group,
      Inc. The results of operations for Grizzard are no longer included in the
      Company's results from the date of sale. Amounts have been reclassified to
      discontinued operations.

(9)   In December 2002, the Company completed the sale of substantially all of
      the assets related to its direct list sales and database services and
      website development and design business held by certain of its wholly
      owned subsidiaries (the "Northeast Operations") to Automation Research,
      Inc. for approximately $10.4 million in cash plus the assumption of all
      directly related liabilities. The results of the operations are no longer
      included in the company's results from the date of sale. Amounts have been
      reclassified to discontinued operations.

(10)  In March 2004, the Company completed the sale of substantially all of the
      assets relating to its telemarketing and teleservices business held by its
      wholly owned subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices") to
      SD&A Teleservices, Inc. ("SDA"), a wholly owned subsidiary of the Robert
      W. Woodruff Arts Center, Inc. for approximately $2.8 million in cash plus
      the assumption of certain directly related liabilities, subject to a final
      working capital adjustment. The results of the operations are no longer
      included in the company's results from the date of sale. Amounts have been
      reclassified to discontinued operations.

(11)  Income from operations includes a gain on termination of lease of $3.9
      million.

(12)  In December 2002, the Company sold certain assets of the Northeast
      Operations for a loss of $0.2 million

(13)  Net loss includes a gain from settlement of lawsuit of $1.0 million and a
      loss from a cumulative effect of change in accounting of $5.1 million in
      connection with the adoption of SFAS No. 142 for its former list sales and
      database marketing and website development and design business.

(14)  Net gain / (loss) available to common shareholders contains a gain (deemed
      dividend) on redemption of preferred stock of $13.9 million.

(15)  Net income available to common shareholders includes a gain on redemption
      of preferred stock of a discontinued operation of $0.3 million

(16)  On February 7, 2005, the Board of Directors approved a two-for-one forward
      split of the common stock. Par value of the common stock remains $.01 per
      share. The stock split was effective March 9, 2005. On January 22, 2003,
      the Board of Directors approved an eight-for-one reverse split of the
      common stock. Par value of the common stock remains $.01 per share and the
      number of authorized shares of common stock is reduced to 9,375,000. The
      stock split was effective January 27, 2003. During September 2001 the
      Board of Directors approved a six-for-one reverse split of the common
      stock. Par value of the common stock remains $.01 per share. The stock
      split was effective October 15, 2001. All stock prices, per share and
      share amounts have been retroactively restated to reflect the forward and
      reverse splits and are reflected in this document.


                                       20
<PAGE>

The following is a summary of the quarterly operations for the years ended June
30, 2004 and 2005.

<TABLE>
<CAPTION>
                                                                                Historical
                                                                           Quarter ended June 30,
                                                                   (In thousands, except per share data)
                                                                                 (unaudited)

                                                      9/30/2003 (2)   12/31/2003 (2)     3/31/2004 (2)   6/30/2004 (2)
                                                      -------------   --------------     -------------   -------------
<S>                                                     <C>             <C>                <C>             <C>
Revenues (1)                                            $      --       $      --          $      --       $      --
Loss from operations                                    $    (278)      $    (505)         $    (353)      $  (1,199)
Net income (loss)                                       $     130       $      71          $  (2,549)      $    (963)
Net income (loss) available to common stockholders      $     130       $     352(3)       $  (2,549)      $    (963)
Basic loss per share (6) :
     Continuing operations                              $   (0.13)      $   (0.10)         $   (0.17)      $   (0.41)
     Discontinued operations                                 0.19            0.26              (1.00)             --

                                                        ------------------------------------------------------------
Basic loss per share                                    $    0.06       $    0.16          $   (1.17)      $   (0.41)
                                                        ============================================================

Diluted loss per share (6):
     Continuing operations                              $   (0.11)      $   (0.08)         $   (0.17)      $   (0.41)
     Discontinued operations                                 0.17            0.22              (1.00)             --
                                                        ------------------------------------------------------------
Diluted loss per share                                  $    0.06       $    0.14          $   (1.17)      $   (0.41)
                                                        ============================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                              Historical
                                                                        Quarter ended June 30,
                                                                 (In thousands, except per share data)
                                                                               (unaudited)

                                                        9/30/2004      12/31/2004       3/31/2005       6/30/2005
                                                        ---------      ----------       ---------       ---------
<S>                                                     <C>             <C>             <C>             <C>
Revenues                                                $     150       $      --       $     347       $     315
Loss from operations                                    $    (873)      $  (1,142)      $  (2,203)      $  (2,686)
Net income (loss)                                       $    (775)      $  (1,049)      $  (2,214)      $  (2,718)
Net income (loss) available to common stockholders      $    (775)      $  (1,049)      $(2,283) (4)    $(2,765) (5)
Basic and diluted loss per share(6):
     Continuing operations                              $   (0.24)      $   (0.32)      $   (0.61)      $   (0.77)
     Discontinued operations                                (0.01)             --              --           (0.04)
                                                        ---------------------------------------------------------

Basic and diluted loss per share                        $   (0.25)      $   (0.32)      $   (0.61)      $   (0.81)
                                                        =========================================================
</TABLE>

(1)   Prior periods presented have been restated in accordance with SAB 104. See
      Note 2, "Significant Accounting Policies," of the Company's consolidated
      financial statements included in this Form 10-K. Subsequently, the amounts
      were reclassified for all periods into discontinued operations.

(2)   In March 2004, the Company completed the sale of substantially all of the
      assets relating to its telemarketing and teleservices business held by its
      wholly owned subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices') to
      SD&A Teleservices, Inc. ('SDA'), a wholly owned subsidiary of the Robert
      W. Woodruff Arts Center, Inc. for approximately $2.8 million in cash plus
      the assumption of certain directly related liabilities, subject to a final
      working capital adjustment. The results of the operations are no longer
      included on the Company's results from the date of sale. Amounts have been
      reclassified to discontinued operations.

(3)   Includes a gain from the redemption of preferred stock of a discontinued
      subsidiary of $0.3 million.

(4)   Includes an expense for undeclared dividends on preferred stock of
      $70,000.

(5)   Includes an expense for undeclared dividends on preferred stock of
      $46,000.

(6)   On February 7, 2005, the Board of Directors approved a two-for-one split
      of the common stock. Par value of the common stock remains $.01 per share.
      The stock split was effective March 9, 2005. All stock prices, per share
      and share amounts have been retroactively restated to reflect the split.


                                       21
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

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-K. 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:

o     Revenue Recognition

o     Accounts Receivable

o     Goodwill and Intangible Assets

o     Long Lived Assets

o     Accounting for Income Taxes

o     Use of Estimates

o     Equity based compensation

o     Investments

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 for the operations of the various subsidiaries of MSGI
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.

FDA currently does not have any revenue transactions. Innalogic recognizes sales
of its product upon shipment if the above criteria have been met.

Revenue from AONet is mainly service based, consisting principally of specific
technical projects and maintenance activities and is either project specific or
of a long-term service (e.g., one year) relationship in nature. Short-term
projects are generally recognized at the end of the contract when the amounts
are billed and the customer has accepted the delivered service.


                                       22
<PAGE>

Other significant contractual arrangements for AONet relate to the maintenance
of data backup for customers on a periodic basis. The contractual terms for
these types of services varies based on the amount of data space required by the
customer and how often the activity occurs. These types of services, including
maintenance services, are such that the customer is billed monthly for the
service and revenue recognized in the month in which the service is provided.
There are certain customers for which several months may be invoiced in advance
of providing the service. In those cases, the revenue is deferred until the
services have been rendered.

Certain AONet contracts contain penalty clauses, such that if a customer breaks
the agreement prior to its termination, the Company is eligible to bill a
termination fee to the customer. Revenue on these billings is not recognized
until the amounts are collected, as it is not generally considered probable at
the time of billing that the full amount will be collected. Contracts do not
have upfront or non-refundable payment features.

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, 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.

Goodwill and Intangible Assets:

Effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS
142, the Company ceased amortization of goodwill and tests its goodwill on an
annual basis using a two-step fair value based test.

The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, the second step of the goodwill impairment test must be
performed to measure the amount of the impairment loss, if any. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142 effective July 1, 2002. The impairment charge has
been booked by the Company in accordance with SFAS No. 142 transition provisions
as a cumulative effect of a change in accounting principle for the year ended
June 30, 2003. In connection with the sale of the telemarketing and teleservices
business (See Note 5), the remaining goodwill relating to the telemarketing and
teleservices business of approximately $2.3 million was included in loss from
discontinued operations for the year ended June 30, 2004.


                                       23
<PAGE>

The Company recognized an impairment charge of approximately $0.5 million during
the year ended June 30, 2005. The Company determined the entire value of the
goodwill recorded in connection with the Future Developments America, Inc. (FDA)
acquisition was impaired based upon an evaluation of the fair value of FDA in
connection with MSGI's purchase of the remaining 49% minority interest equity in
FDA on July 1, 2005.

As a result of our purchase of 51% of the equity of AONet International Srl,
goodwill in the amount of approximately $3.1 million was recorded, representing
the excess of the purchase price over the fair value of net assets acquired. No
minority interest was recorded in connection with such transaction, as the
historical cost basis of the net assets of AONet prior to the acquisition was
negative and the minority investor has no continuing funding obligation.

Long-Lived Assets:

Such assets are amortized over their estimated useful life.

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 an 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.

The Company recorded an asset impairment of $267,840 in the fiscal year ended
June 30, 2005. The Company deemed certain assets held by Future Developments
America, Inc. ("FDA") as impaired in connection with the MSGI's purchase of the
remaining 49% minority interest equity in FDA on July 1, 2005 and based on the
analysis of expected future cash flows which was lower than the carrying amount
of such assets.

Accounting for Income Taxes:

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. AONet files a
separate tax return in Italy on an annual basis.

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

Equity Based Compensation:

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


                                       24
<PAGE>

The Company has elected the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to
non-employees are accounted for under the provisions of SFAS 123 and Emerging
Issues Task Force ("EITF") No. 96-18 "Accounting for Equity Instruments that are
issued to other than employees for Acquiring, or in Conjunction with Selling
Goods or Services". Under SFAS No. 123, the cost is measured at fair value of
the consideration received or the fair value of the equity instrument, whichever
is more readily measurable.

Investments:

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 is considered impaired if the fair value of the investment is less
than its cost. 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.

In December 2002, the Company completed the sale of substantially all of the
assets relating to its direct list sales and database services and website
development and design business held by certain of its wholly owned subsidiaries
(the "Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly
owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash
plus the assumption of all directly related liabilities. The Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments plus
any additional expenses incurred.

In March 2004, the Company completed the sale of substantially all of the assets
relating to its telemarketing and teleservices business held by its wholly owned
subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices") to SD&A Teleservices,
Inc. ("SDA"), a wholly owned subsidiary of the Robert W. Woodruff Arts Center,
Inc. for approximately $2.8 million in cash plus the assumption of certain
directly related liabilities, subject to a final working capital adjustment
based on net tangible assets as of the date of sale. The Company recognized a
loss on disposal of discontinued operations of approximately $.9 million in the
year ended June 30, 2004. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments plus
any additional expenses incurred.


                                       25
<PAGE>

On April 10, 2004, the Company completed its purchase of 51% of the outstanding
shares of the common stock of Future Developments America, Inc. ("FDA"), for an
aggregate purchase price of $1.0 million, pursuant to a definitive agreement
entered into as of April 10, 2004. Further subject to the terms and conditions
of the Stock Purchase Agreement, the Company was entitled to an additional 25%
beneficial ownership of FDA, if certain pre-tax income targets were not met by
certain target dates as set forth in the Stock Purchase Agreement. On July 1,
2005, MSGI and it's subsidiary FDA entered into a Stock Purchase, Earnout and
Royalty Payment Agreement (the "Agreement") with Future Developments, Ltd.
("FDL"), Darren Labas and Jamie Labas, to acquire the remaining 49% of the
issued and outstanding shares of Future Developments America, Inc. held by
Darren and Jamie Labas, not held by the Company. This transaction gives 100%
ownership of all issued and outstanding shares of Future Developments America,
Inc. to MSGI.

On August 18, 2004, the Company completed an acquisition of a 51% membership
interest in Innalogic, LLC, for an aggregate capital contribution of $1,000,000,
pursuant to definitive agreements entered into as of August 18, 2004. Further,
subject to the terms and conditions of an Investment Agreement, the Company
issued an aggregate of 50,000 unregistered shares of its common stock to
Innalogic. These shares were subsequently distributed to the founding members of
Innalogic and were recorded as non-cash compensation in the amount of $235,886
in the year ended June 30, 2005. The Company also issued 50,000 unregistered
shares of common stock to certain advisors as compensation for services rendered
in connection with the completion of this transaction. As set forth in
Innalogic's Amended and Restated Limited Liability Company Agreement, the
Company would obtain an additional 25% membership interest in Innalogic, if
certain pre-tax income targets were not met by certain target dates. On August
31, 2005, the limited liability agreement was restructured such that the Company
now holds a 76% ownership interest in Innalogic LLC.

On December 1, 2004, the Company entered into a Subscription Agreement with
Excelsa S.p.A. ("Excelsa"), a corporation organized under the laws of the
Republic of Italy, to acquire 66,632 shares of common stock of Excelsa, par
value of 1.0 Euro per share, representing 4.5% of the issued and outstanding
shares of common stock of Excelsa on a fully diluted basis. MSGI acquired the
Common Stock for an aggregate purchase price of $1,751,319, including
approximately $84,000 of acquisition costs.

On January 3, 2005, the Company entered into an additional Subscription
Agreement with Excelsa to acquire an additional 135,381 shares of common stock
of Excelsa, par value of 1.0 Euro per share, for a purchase price of
approximately $2.0 million dollars, representing 8.4% of the issued and
outstanding shares of common stock of Excelsa on a fully diluted basis. The
shares acquired, in the aggregate with the original shares acquired in December
2004 (Note 4), represent 12.5% of the issued and outstanding shares of Common
Stock of Excelsa on a fully diluted basis. Excelsa has represented to the
Company that it will not solicit, initiate, consider, encourage or accept any
other proposals or offers from any person relating to any acquisition or
purchase of all or any portion of the capital stock or assets of Excelsa or any
of its subsidiaries nor will it enter into any merger, consolidation, business
combination, recapitalization, reorganization or other extraordinary business
transaction involving or related to Excelsa or any of its subsidiaries for the
period from the date of execution of the subscription agreement through December
31, 2005.

On May 16, 2005, the Company entered into a Restructuring and Subscription
Agreement with Excelsa 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 262,500 shares of Excelsa common stock at no additional
consideration by MSGI. After giving effect to such issuance, and together with
the 66,632 shares of Excelsa common stock already owned by MSGI, MSGI owns
approximately 19.5 percent 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. Excelsa and the signatory
stockholders have agreed to anti-dilution protection of MSGI's equity stake,
such that MSGI will continue to own no less than 19.5 percent of Excelsa's
issued and outstanding shares of common stock through December 31, 2005. The
Restructuring and Subscription Agreement provides that a portion of the purchase
price paid by MSGI to Excelsa pursuant to the Second Subscription Agreement be
used as consideration for Excelsa's agreement to issue the 262,500 shares, such
that no additional consideration will be due to Excelsa for those shares, and
that the Second Subscription Agreement be terminated effective as of the date of
actual issuance of those shares. 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.


                                       26
<PAGE>

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 has been paid to date (100,000 Euro on May 17, 2005, 250,000 Euro on June
1, 2005 and 250,000 on October 2, 2005) and the remainder is 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. In addition,
the remaining minority stakeholder granted to MSGI the option to acquire their
interest in AONet for a purchase price equal to the lesser of (a) 2.3 times
EBITDA of AONet for the fiscal 2006 year (calculated on a US GAAP basis) or (b)
1,200,000 Euros. If MSGI does not exercise this option, then the current
minority investor can acquire a 2% interest in AONet from MSGI for a price to be
determined. The acquisition agreement between MSGI and the prior controlling
shareholders contained representations and warranty clauses that allow, among
other things, for a reduction of the purchase price based upon a referred equity
date.

Results of Operations Fiscal 2005 Compared to Fiscal 2004

The following financial information relating to fiscal years ended June 30, 2005
continuing operations by business segment provides a framework for our
discussion of the results of operations. Note that the Data Center Technologies
segment represents 100% of the results of operations of AONet International Srl
for the one month period ended June 30, 2005 since the date of our acquisition
of such business. The security technologies segment represents our domestic
operations - Innalogic LLC and FDA.
<TABLE>
<CAPTION>
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
                                          Security           Data Center              Corporate and Other   Total
                                          Technologies       Technologies
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
<S>                                       <C>                <C>                      <C>                   <C>
Fiscal 2005
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
Net Revenue from external customers
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
   United States                          $    631,480       $            --                       --       $    631,480
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
   Italy                                            --               180,465                       --       $    180,465
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
Total revenues                            $    631,480       $       180,465                                $    811,945
----------------------------------------- ------------------ ------------------------ --------------------- -----------------

----------------------------------------- ------------------ ------------------------ --------------------- -----------------
Gross Profit                              $    425,250       $        26,035                                $    451,285
----------------------------------------- ------------------ ------------------------ --------------------- -----------------

----------------------------------------- ------------------ ------------------------ --------------------- -----------------
Selling, general, administrative          $  3,212,533       $       122,819          $     3,869,814       $  7,205,166
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
Depreciation and amortization             $    113,616       $        29,668          $         6,399       $    149,683
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
Loss from operations                      $ (2,900,899)      $      (126,452)         $    (3,876,213)      $ (6,903,564)
----------------------------------------- ------------------ ------------------------ --------------------- -----------------

----------------------------------------- ------------------ ------------------------ --------------------- -----------------
Segment assets                            $    624,612       $     6,140,034          $     5,334,149       $ 12,098,795
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
Capital expenditures                      $    214,092                    --          $        35,713       $   249,805
----------------------------------------- ------------------ ------------------------ --------------------- -----------------
</TABLE>

As of the year ended June 30, 2005 (the "Current Period"), the Company realized
revenues in the amount of approximately $812,000. Sales of Innalogic products
for several unique projects commenced in fiscal 2005. One domestic security
organization represented a substantial portion of such sales. We expect sales to
continue to grow as the technology becomes more well-known and our sales
organization increases. Revenues from the data center operations are relatively
stable monthly fees. We will be attempting to increase such revenues in fiscal
2006 by improving our sales organization and through the development of
relationships such as the Verisign NetDiscovery Service. All revenues generated
by previously owned subsidiaries during the fiscal year ended June 30, 2004,
(the "Prior Period"), have been reclassified to a single line presentation of
Gain or Loss from Discontinued Operations on the Consolidated Statement of
Operations.


                                       27
<PAGE>

Costs of goods sold of approximately $361,000 in the Current Period consisted
primarily of the expenses related to acquiring the components required to
provide the specific technology applications ordered by each individual
customer, and also includes direct costs related to the provision of services,
including allocations of direct and indirect labor costs, facility rental, and
utilities for the AONet subsidiary. All costs of goods sold recognized by
previously owned subsidiaries during the fiscal year ended June 30, 2004, (the
"Prior Period"), have been reclassified to a single line presentation of Gain or
Loss from Discontinued Operations on the Consolidated Statement of Operations.

Research and development expenses of approximately $180,000 in the Current
Period increased by approximately $12,000 or 7% over research and development
expenses of approximately $168,000 in the Prior Period. The Company recognized
research and development costs associated with certain product development
activates in its Future Developments America, Inc subsidiary. As a result of our
renegotiation of our relationship with the founders of FDA, we do not expect to
incur research and development costs for that business in the future. We may
invest in research and development projects for our other operations.

Salaries and benefits of approximately $1.7 million in the Current Period
increased by approximately $1.3 million or 317% over salaries and benefits of
approximately $410,000 in the Prior Period. Salaries and benefits increased due
to an increase in headcount as a result of acquisitions of new majority owned
operations (approximately $700,000 at Innalogic for the ten months of operations
in this period and $71,000 for AONet for the one month of operations in this
period) as well as increased headcount as a result of newly hired corporate
support personnel.

The Company recognized non-cash employee compensation expenses of approximately
$1.7 million in the Current Period with no comparable expense in the Prior
Period primarily in recognition of the fair market value of stock options
granted to certain employees and directors granted at an exercise price below
market value at the measurement date as accounted for under Accounting
Principles Board No. 25.

Selling, general and administrative expenses of approximately $2.8 million in
the Current Period increased by approximately $1.4 million or 100% over
comparable expenses of $1.4 million in the Prior Period. The increase is due
primarily to the acquisition of new operations (approximately $470,000 at
Innalogic for the ten months of operations in this period and $52,000 for AONet
for the one month of operations in this period) during the Current Period, and
increased travel, marketing and business development in connection with the
completion of the recent acquisitions and subsequent integration. Professional
fees and insurances also increased as a result of the expansion of our
operations.

During the Current Period the Company recognized a goodwill impairment charge of
$490,000 as a result of entering into a Stock Purchase, Earnout and Royalty
Payment Agreement on July 1, 2005 with Future Developments, Ltd. ("FDL"), Darren
Labas and Jamie Labas, to acquire the remaining 49% of the issued and
outstanding shares of Future Developments America, Inc. ("FDA") held by Darren
and Jamie Labas, not held by the Company. This transaction gives 100% ownership
of all issued and outstanding shares of FDA to MSGI. Previously booked goodwill
associated with the Company's original investment in FDA was deemed impaired as
of June 30, 2005 as a result of the transaction.

During the Current Period the Company recognized an other asset impairment
charge of approximately $268,000 as a result of entering into the same Stock
Purchase, Earnout and Royalty Payment Agreement on July 1, 2005 with Future
Developments, Ltd., referred to above. Subject to the terms and conditions of
the Agreement, ownership of certain fixed assets and component parts inventory
on the balance sheet of FDA is transferred to FDL as part of the purchase price.
Previously inventory and fixed asset balances associated on the balance sheet of
FDA were deemed impaired as of June 30, 2005 as a result of the transaction.

During the Current Period, the Company recorded depreciation and amortization
expense of approximately $150,000 as a result of purchasing fixed assets and
acquiring for Innalogic and AONet, whereas the Company had substantially no
depreciable or amortizable assets in the Prior Period.


                                       28
<PAGE>

Interest income of approximately $99,000 in the Current Period decreased by
approximately $21,000 or 18% over interest income of approximately $120,000 in
the Prior Period. Net interest income decreased primarily due to a decrease in
average cash balances during the Current Period.

Interest expense of approximately $79,000 million in the Current Period
decreased by approximately $18,000 or 19% over interest expense of approximately
$97,000 in the Prior Period. Interest expenses decreased primarily due to
decreased balances in notes payable and in a decrease in imputed interest
expenses on payments made for an abandoned property lease. This was partially
offset by interest on debt acquired as a result of the acquisition of AONet.

During the Current Period the Company recognized a gain on an early termination
of a lease of approximately $70,000. The property lease was terminated and
previously booked reserves for abandoned properties were reversed against the
cash settlement paid.

The net provision for income taxes of approximately $17,000 in the Current
Period increased by approximately $7,000 over net provision for income taxes of
approximately $10,000 from the Prior Period, primarily due to an Italian income
tax on AONet's results of operations. In addition, the Company records
provisions for 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
$6.6 million in the Current Period increased by $4.5 million over a comparable
loss of $2.1 in the Prior Period.

The loss from discontinued operations of approximately $181,000 in the Current
Period are the primarily result of trailing expenses related to the sale of MKTG
Teleservices, Inc. Of this loss, approximately $75,000 is due to the negotiation
of an early payment to MSGI of a note receivable by the purchaser of MKTG
Teleservices and approximately $59,000 is due to a transfer fee for certain
operational software licenses. The loss from discontinued operations in the
Prior Period are the results of loss incurred during the respective periods from
MKTG Teleservices, Inc. and the Northeast Operations which have been sold.

In connection with the sale of MKTG Teleservices, Inc., the Company realized a
loss on disposal of discontinued operations of approximately $1.0 million in the
Prior Period. The loss primarily results from the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments.

As a result of the above, net loss of approximately $6.8 million in the Current
Period increased by approximately $3.5 million over comparable net loss of $3.3
million in the Prior Period.

In the Current Period the Company recognized undeclared dividends on preferred
stock of approximately $116,000. 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.

In the Prior Period the Company recognized a gain on redemption of preferred
stock of a discontinued operation of approximately $281,000 and is reflected in
net income/(loss) attributable to common stockholders during the Prior Period.

As a result of the above, net loss attributable to common shareholder of
approximately $6.9 million in the Current Period increased by approximately $3.9
million over comparable net loss of $3.0 million in the Prior Period.


                                       29
<PAGE>

Results of Operations Fiscal 2004 Compared to Fiscal 2003

As of the year ended June 30, 2004 (the "Current Period"), there were no revenue
generating operations remaining within MSGI as a result of the sale of
substantially all of the assets related to its telemarketing and telesales
business held by its wholly owned subsidiary, MKTG Teleservices, Inc. Future
Developments America, Inc., the sole subsidiary of MSGI as of June 30, 2004, is
a new and emerging business and, as such, has generated no revenues as of June
30, 2004. All revenues generated by previously owned subsidiaries during the
fiscal year ended June 30, 2003, (the "Prior Period"), have been reclassified to
a single line presentation of Gain or Loss from Discontinued Operations on the
Consolidated Statement of Operations.

The Company recognized research and development expenses of approximately
$168,000 during the Current Period. The Company recognizes research and
development costs associated with certain product development activates in its
Future Developments America, Inc subsidiary. There were no associated research
and development expenses in the Prior Period.

Salaries and benefits of approximately $410,000 in the Current Period decreased
by approximately $333,000 or 45% over salaries and benefits of approximately
$743,000 in the Prior Period. Salaries and benefits decreased due to decreased
headcount in certain areas of the Company. In connection with a reduction in the
workforce during the Prior Period, corporate head count was reduced from seven
to three. In February 2003, certain compensation arrangements were modified. The
Chief Executive Officer voluntarily forgave part of his base compensation to
effect a reduction of approximately 30% to $350,000. The chief Executive Officer
has also deferred payment of all of his base compensation for the fourth quarter
of the Current Period. The Chief Accounting Officer also forgave part of her
base compensation to effect a reduction of approximately 30% and $125,000 per
year and in addition, due to medical reasons resigned as Chief Accounting
Officer of the Company in March 2003. The Chief Executive Officer assumed the
duties as the Chief Accounting Officer until such a replacement was elected in
December 2003.

Selling, general and administrative expenses of approximately $1.4 million in
the Current Period increased by approximately $0.3 million or 27% over
comparable expenses of $1.1 million in the Prior Period. Of the increase,
approximately $0.1 million is attributable to increases in travel expenses
incurred as a result of the requirements of the Company's recent merger and
acquisition activities. The remainder of the increase is due primarily to
increases in consulting and investor relations related expenses.

During the Current Period the Company recognized a consulting expense on option
grants of approximately $377,000 related to the issuing of 120,000 options to a
third party for consulting fees, which were vested immediately. There were no
such expenses in the Prior Period.

Gain on termination of lease of approximately $3.1 million in the Prior Period
was a result of the Company successfully negotiating a termination of a lease
for an abandoned lease property. The agreement required an up front payment of
approximately $.3 million and the Company is obligated to pay approximately
$60,000 per month until the landlord has completed certain leasehold
improvements for a new tenant, which were completed in July 2003, and then the
Company is obligated to pay $20,000 per month until August 2010. The gain on
lease termination represents a change in estimate representing the difference
between the Company's present value of its new future obligations and the entire
obligation that remained on the books under the original lease obligation as a
result of the abandonment. The remaining obligation has been recorded in accrued
expenses and other current liabilities and other liabilities.

During the Prior Period, the Company recognized a gain on a settlement of a
lawsuit. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act
of 1934 was commenced against General Electric Capital Corporation ("GECC") by
Mark Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of Company
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a $1.3
million payment to be made to the Company by GECC and for GECC to reimburse the
Company for the reasonable cost of mailing a notice to stockholders up to
$30,000. On April 29, 2002, the court approved the settlement for approximately
$1.3 million, net of attorney fees plus reimbursement of mailing costs. In July
2002, the court ruling became final and the Company received and recorded the
net settlement payment of approximately $965,000 plus reimbursement of mailing
costs.


                                       30
<PAGE>

Interest income of approximately $120,000 in the Current Period decreased by
approximately $61,000 or 34% over interest income of approximately $181,000 in
the Prior Period. Net interest income decreased primarily due to the a decrease
in average cash balances during the Current Period.

Interest expense of approximately $97,000 in the Current Period decreased by
approximately $97,000 or 50% over interest expense of approximately $194,000 in
the Prior Period. Interest expenses decreased primarily due to decreased
balances in notes payable.

The net provision for income taxes of approximately $10,000 in the Current
Period decreased by approximately $38,000 over net provision for income taxes of
approximately $48,000 from the Prior Period. In addition, the Company records
provisions for 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 $2.1 million
in the Current Period increased by $5.1 million over comparable income of $3.0
in the Prior Period.

The loss from discontinued operations of approximately $212,000 and $296,000 in
the Current and Prior Periods, respectively, are the results of loss incurred
during the respective periods from MKTG Teleservices, Inc. and the Northeast
Operations which have been sold.

In connection with the sale of MKTG Teleservices, Inc., the Company realized a
loss on disposal of discontinued operations of approximately $1.0 million in the
year ended June 30, 2004. The loss primarily results from the difference in the
net book value of assets and liabilities as of the date of the sale as compared
to the net consideration received after settlement of purchase price
adjustments.

In connection with the sale of the Northeast Operations, the Company realized a
loss on disposal of discontinued operations of approximately $.2 million in the
year ended June 30, 2003. The loss primarily results from the difference in the
net book value of assets and liabilities as of the date of the sale as compared
to the net consideration received after settlement of purchase price
adjustments.

As of December 31, 2002, the Company completed the transition requirements under
SFAS No. 142. There is no impairment for its telemarketing unit. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142 for its list sales and database marketing and
website development and design business. The impairment charge has been booked
by the Company in accordance with SFAS 142 transition provisions as a cumulative
effect of change in accounting for the year ended June 30, 2003.

As a result of the above, net loss of approximately $3.3 million in the Current
Period increased by approximately $0.7 million over comparable net loss of $2.6
million in the Prior Period.

In the Current Period the Company recognized a gain on redemption of preferred
stock of a discontinued operation of approximately $281,000 and is reflected in
net income/(loss) attributable to common stockholders.

In the Prior Period the Company recognized a gain on redemption of preferred
stock of approximately $14.0 million and is reflected in net income/(loss)
attributable to common stockholders. The gain is a result of the difference
between the consideration paid for redemption of a cash payment of approximately
$6.0 million and the issuance of 181,302 shares of common stock valued at
approximately $.2 million and the carrying value of the preferred stock which
was approximately $20.2 million which included a beneficial conversion feature
of approximately $10.3 million.


                                       31
<PAGE>

As a result of the above, net loss attributable to common shareholder of
approximately $3.0 million in the Current Period increased by approximately
$14.4 million over comparable net income of approximately $11.4 million in the
Prior Period.

Capital Resources and Liquidity

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.

Historically, the Company has funded its operations, capital expenditures and
acquisitions primarily through private placements of equity and debt
transactions, and its credit facilities. At June 30, 2005, the Company had cash
and cash equivalents of $118,465. As of June 30, 2005, our auditors have
included a going concern uncertainty paragraph in their reports for both the
consolidated company and AONet International Srl on a stand alone basis. This
was based upon the recurring losses, insufficient revenue base and significant
volume of liabilities at such time. In July, 2005, the Company completed and
closed on a $3 million Private Placement with a NY-based investor group. The
Company believes that this financing, combined with funds on hand and projected
sales will meet their current working capital requirements and enable the
Company to meet interest and debt obligations including those of the Callable
Secured Notes and payments due to acquire our interest in AONet for the next
twelve months. A significant amount of funds have been invested in new and
emerging companies, and we believe it will require an integration period before
their operations generate sufficient cash flows to pay their obligations. The
AONet facility was principally acquired as a base of operations and data center
for the Company's newly established legal interception business; and the
financial benefit of this activity is expected to occur in the beginning of
2006.

The Company realized a loss from continuing operations of approximately $6.6
million in the Current Period. Cash used in operating activities from continuing
operations was approximately $4.1 million. Net cash used in operating activities
principally resulted from the loss from continuing operations in addition to
increases in accounts receivables and inventories offset by an increase trade
accounts payable and accrued liabilities in the Current Period, resulting from
the growth of the business and cash flow constraints. The Company realized a
loss from continuing operations of approximately $2.1 million in the Prior
Period. Cash used in operating activities from continuing operations was
approximately $2.6 million in the Prior Period. Net cash used in operating
activities principally resulted from the loss from continuing operations in
addition to decreases in accrued liabilities offset by an increase trade
accounts payable and decrease to other current assets in the Current Period.

In the Current Period, net cash of approximately $4.9 million was used investing
activities consisting primarily of the purchase of an investment in Excelsa of
$4.1 million, the cash used in the acquisition of AONet of approximately $.8
million and purchases of property and equipment of 250,000. In the Prior Period,
net cash of approximately $2.4 million was provided by investing activities
consisting primarily of the proceeds from the sale of MKTG Teleservices, Inc.

In the Current Period, net cash of approximately $6.8 million was provided by
financing activities. Net cash provided by financing activities consisted
primarily of proceeds from the issuance of Convertible Preferred Series F stock
of $2.7 million and the issuance of common stock of $3.8 million. In the Prior
Period, net cash of approximately $1.4 million was provided by financing
activities, consisting primarily of proceeds from the issuance of common stock
and a short-term related party note payable.

In the Current Period net cash of approximately $237,000 was used in
discontinued operations. In the Prior Period, net cash of $0.6 million was
provided by discontinued operations.

Our contractual obligations are summarized in the table below


                                       32
<PAGE>

<TABLE>
<CAPTION>
                                                                      Payments Due
                                                                     (In thousands)
                                           ----------------------------------------------------------------------
Contractual Obligations                     Total       Less than        1 - 3          4 - 5        More Than
                                                         1 year          years          years         5 years
------------------------------------------------------ ------------ ---------------- ------------- --------------
<S>                                         <C>            <C>           <C>              <C>            <C>
Operating leases (1)                        2,519          674           1,390            455            --
Purchase obligations for AONet
 acquisition - related party                  917          917              --             --            --
Long-term debt                                422          242             180             --            --
</TABLE>

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

Of such lease commitments, $1.2 million is for facilities that we no longer
occupy and the cost of which was accrued upon abandonment in fiscal 2002.

Debt:

In March 2004, in connection with the sale of the MKTG Teleservices, Inc.
operations, the Company repaid approximately $.2 million balance of one credit
facility and terminated the relationship with the credit provider. The Company's
domestic operations no longer has any debt related to credit facilities on its
balance sheet as of June 30, 2005.

The Company's majority owned subsidiary, AONet, is completely financed with
short-term debt from Italian banks. The Company has bank overdraft protection
with a local Italian bank. This overdraft protection allows the Company to pay
vendors or other creditors even if funds on hand are insufficient. The interest
rate associated with this financing mechanism was approximately 6% at June 30,
2005. (See Note 10). At June 30, 2005, AONet had overdrafts of approximately
$545,000 from a total availability of approximately $679,000. A portion of these
facilities are guaranteed by the former majority shareholder and/or managing
director of AONet. On September 30, 2005, AONet paid approximately $168,000 of
overdue withholding taxes relating to 2004 by increasing its overdraft facility
with the bank for the same amount. The new bank debt is due within one year.


                                       33
<PAGE>

The Company is required to withhold income taxes from direct employees' payroll
and remit these amounts to the applicable governmental entity. The Company is
also required to pay social security taxes, as well as withhold and remit the
employee portion of these taxes to the government. As of June 30, 2005, AONet
had not paid any amounts to these such governmental agencies since April of
2004, aggregating approximately $860,000. The accrued amounts also include
approximately $0.1 million of penalties and interest, assessed based on the
applicable rates used by the governmental entities for late payments. AONet has
approached the Italian Social Security department to discuss the fact that
payments of employee withholdings are in arrears. No final determinations
related to a possible payment plan or settlement has been reached, therefore,
the full amount of the taxes withheld and the related interest and penalties
have been recorded. (See Note 11)

During June of 2005, AONet, through its affiliate Nexo, exercised an option
agreement with a third party and purchased the data center for approximately
$422,300. The data center has been recorded in these financial statements of
AONet at its cost of approximately $422,300 and a corresponding note payable has
been booked. (See Note 14)

On June 1, 2005, the Company entered into a Stock Purchase Agreement to acquire
equity ownership interests in AONet, a 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 (see Note 3). The purchase price for the 51% stake was 1,100,000
Euro (of which 350,000 Euro has been paid through June 30,2005 and the remainder
is payable in three equal installments of 250,000 Euro due on each of September
30 (paid October 2, 2005) and 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. In addition, the remaining
minority stakeholder granted to MSGI the option to acquire their interest in
AONet for a purchase price equal to the lesser of (a) 2.3 times EBITDA of AONet
for the fiscal 2006 year (calculated on a US GAAP basis) or (b) 1,200,000 Euros.
If MSGI does not exercise this option, then the current minority investor can
acquire a 2% interest in AONet from MSGI for a price to be determined. The
acquisition agreement between MSGI and the prior controlling shareholders
contained representations and warranty clauses that allow, among other things,
for a reduction of the purchase price based upon a referred equity date.

Preferred Stock:

Series E
On February 24, 2000 the Company sold an aggregate of 30,000 shares of Series E
Convertible Preferred Stock, par value $.01 ("Series E Preferred Stock"), and
warrants to acquire 61,296 shares of common stock for proceeds of approximately
$29.5 million, net of approximately $0.5 million of placement fees and expenses.
The preferred stock was convertible into cash or shares of common stock on
February 18, 2004 at the option of the Company. The preferred stock provided for
liquidation preference under certain circumstances and accordingly had been
classified in the mezzanine section of the balance sheet. The preferred stock
had no dividend requirements.

After adjustment for the reverse stock split in Fiscal 2003 and a forward stock
split in Fiscal 2005, the Series E Preferred Stock was convertible at any time
at $587.35 per share, subject to reset on August 18, 2000 if the market price of
the Company's common stock was lower and subject to certain anti-dilution
adjustments. On August 18, 2000, the conversion price was reset to $293.76 per
share, the market price on that date as adjusted for the reverse stock split. As
a result of the issuance of a certain warrant, certain antidilultive provisions
of the Company's Series E preferred stock were triggered. The conversion price
of such shares was reset to a fixed price of $9.3840 based on an amount equal to
the average closing bid price of the Company's common stock for ten consecutive
trading days beginning on the first trading day of the exercise period of the
aforementioned warrant. No further adjustments were made to the conversion price
other than for stock splits, stock dividends or other organic changes. The
warrant was exercisable for a period of two years at an exercise price of
$685.224, subject to certain anti-dilution adjustments. The fair value of the
warrant of $15,936,103, as determined by the Black Scholes option pricing model,
was recorded as additional paid in capital and a corresponding decrease to
preferred stock. The warrant expired in February 2002.


                                       34
<PAGE>

On February 19, 2002, the Company entered into standstill agreements, as
amended, with the Series E preferred shareholders in order for the Company to
continue to discuss with multiple parties regarding the possibility of either
restructuring or refinancing the remainder of the preferred stock. The Company's
commitments as a result of the standstill agreements included a partial
redemption of 5,000 of the Series E preferred shares for $5.0 million, thereby
reducing the number of Series E preferred shares to 23,201 at June 30, 2002. The
value of the preferred stock was initially recorded at a discount allocating a
portion of the proceeds to a warrant. The redemption of such preferred shares
for $5.0 million, less the carrying value of the preferred shares, including the
beneficial conversion feature previously recorded to equity on the balance
sheet, resulted in a deemed dividend of $0.4 million which was recorded to
additional paid-in and included in the calculation of net loss attributable to
common stockholders for the year ended June 30, 2002.

In February 2002, the Company recognized a loss on the redemption of preferred
stock of approximately $.4 million reflected in net loss attributable to common
stockholders. The loss is the result of the difference between the consideration
paid for redemption of the preferred stock for $5.0 million cash and the
carrying value of the preferred stock of $4.6 million which included a
beneficial conversion feature of approximately $2.4 million.

The preferred shareholders converted 1,799 shares of preferred stock to 225,966
shares of common stock for the year ended June 30, 2002.

On October 2, 2002, the common stockholders ratified the issuance of the Series
E preferred stock and approved the stockholders right to convert such preferred
stock to common stock beyond the previous 19.99% limitation. Subsequently, the
preferred shareholders converted 149 shares of Series E preferred into 159,534
shares of common stock.

In January 2003, the Company redeemed the outstanding shares of the preferred
stock for a cash payment of approximately $6.0 million and the issuance of
362,604 shares of common stock valued at approximately $.2 million. The carrying
value of the preferred stock was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million. The transaction
resulted in a gain on redemption of approximately $14.0 million and is reflected
in net income attributable to common stockholders for the year ended June 30,
2003. As of June 30, 2003, all Series E preferred stock had been converted or
redeemed.

Series F
On November 10, 2004 the Company entered into and closed on definitive
agreements with certain strategic investors for the purchase of 9,376 shares of
Series F Convertible Preferred Stock at $320.00 per share for gross proceeds of
approximately $3 million. On an as converted basis, the Series F Convertible
Preferred Stock in this transaction equates to approximately 461,580 shares of
Common Stock at a price of $6.50 per share. In connection with the issuance of
the preferred stock, five year warrants were issued to the investors to purchase
approximately 230,797 shares of Common stock at an exercise price of $8.125 per
share. Also, in connection with the issuance of the preferred stock, warrants
were issued to the placement agent to purchase approximately 27,695 shares of
Common Stock at an exercise price of $6.50. The Company will pay an annual
dividend of 6% on the Preferred Stock, payable in shares of the Company's common
stock. There are no reset provisions or anti-dilution provisions associated with
this Series F Convertible Preferred Stock.

On June 6, 2005, the Company filed a registration statement on Form S-3 in order
to register the shares of the Company's common stock underlying the Series F
Convertible Preferred Stock. As a result of filing the registration statement
later than 180 days past the November 10, 2004 closing date of the definitive
agreements for the purchase of the Series F Convertible Preferred Stock, per the
terms of definitive agreements the Company issued approximately 469 additional
shares of Series F Convertible Preferred Stock as a penalty. These additional
shares carry all rights of the original shares issued. The registration
statement became effective on July 21, 2005.


                                       35
<PAGE>

8% Convertible Debt:

On July 13, 2005, MSGI closed a Callable Secured Convertible Note financing of
$3 million with a New York based institutional investor. The instrument requires
repayment over 36 months with a maximum of 8% interest per annum. Repayment
shall be in cash or in registered shares of common stock. The monthly
amortization shall commence 90 days after closing according to a 33-month
amortization schedule. At the Investor's option, the note may be repaid upon the
issuance of common stock at the conversion price; otherwise all payments must be
in cash. The Conversion price shall be equal to 75% of the initial market price,
which was $6.56. The interest rate resets to zero for any monthly period in
which the stock price is greater than 125% of the initial market price. 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 Company received $2 million in gross proceeds
upon closing, and received an additional $500,000 upon filing of the
registration statement relating to this offering, and $500,000 upon the
effectiveness of such registration statement. The Company also issued 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 exercise price of $7.50 per share. The placement
agent received warrants for the purchase of 12,195 shares of the Company's
common stock, at an exercise price of $7.50 per share and a fee equal to 7% of
the aggregate offering. The Company has not yet calculated the effect of the
beneficial conversion feature of this instrument.

Discontinued Operations:

In February 2001, the Company entered into a strategic partnership agreement
(the "Agreement") with Paris based Firstream. Firstream paid the Company $3.0
million and in April 2001 received 3.0 million restricted shares of common
stock, plus a two-year warrant for 800,000 shares priced at $1.50 per share. The
warrant was exercisable over a two year period. The warrant was valued at $.9
million as determined by the Black-Scholes option pricing model and was recorded
to equity. In accordance with the Agreement, the Company recorded proceeds of
$1.8 million; net of fees and expenses, as equity and $1.0 million was
designated as deferred revenue to provide for new initiatives. As part of the
strategic partnership, the Company was to launch several new Firstream products
and services in the areas of wireless communications, online music and consumer
marketing programs for early adopters of new products. The remaining balance was
$.8 million at June 30, 2002. In July 2002, the Company received a letter from
Firstream canceling the strategic partnership agreement and requesting payment
of the remaining $.8 million, which had been categorized as a liability at June
30, 2002. The Company settled with Firstream during fiscal year 2003 for
approximately $.2 million and the remaining liability was sold as part of the
Northeast operations sale. There was no remaining liability as of June 30, 2003.

In December 2002, the Company completed the sale of substantially all of the
assets relating to its direct list sales and database services and website
development and design business held by certain of its wholly owned subsidiaries
(the "Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly
owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash
plus the assumption of all directly related liabilities. As such, the operations
and cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations. Accordingly, the statement of operations and cash flows for the year
ending June 30, 2003 has been reclassed into a one-line presentation and is
included in Loss from Discontinued Operations and Net Cash Used by Discontinued
Operations.

In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments plus
any additional expenses incurred. There was no tax impact on this loss.


                                       36
<PAGE>

In March 2004, the Company completed the sale of substantially all of the assets
relating to its telemarketing and teleservices business held by its wholly owned
subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices") to SD&A Teleservices,
Inc. ("SDA"), a wholly owned subsidiary of the Robert W. Woodruff Arts Center,
Inc. for approximately $2.5 million in cash and a note receivable for $0.3
million (See Note 9) plus the assumption of certain directly related
liabilities. As such, the operations and cash flows of MKTG Teleservices have
been eliminated from ongoing operations and the Company no longer has continuing
involvement in the operations.

In connection with the sale of MKTG Teleservices, the Company recognized a loss
on disposal of discontinued operations of approximately $1.0 million in the year
ended June 30, 2004. The loss represents the difference in the net book value of
assets and liabilities as of the date of the sale as compared to the net
consideration received after settlement of purchase price adjustments plus any
additional expenses incurred, and a tax impact of approximately $35,000.

In September 2000 the Company offered to exchange the WiredEmpire preferred
shares for MSGI common shares. During the fiscal year end June 30, 2001, the
Company exchanged 82,084 shares of unregistered MSGI common stock for
WiredEmpire preferred stock. The exchange resulted in a gain of $13,410,273,
which was recorded through equity and is included in net loss attributable to
common stockholders and earnings per share - discontinued operations for the
year ended June 30, 2001. As of June 30, 2003, 48,000 shares of WiredEmpire
preferred stock have not been exchanged and this is reported as minority
interest in preferred stock of discontinued subsidiary as $280,946 at June 30,
2003. The shares were subsequently returned to MSGI and forfeited during the
fiscal period ended June 30, 2004. This is reported as a gain on the redemption
of preferred stock of a discontinued subsidiary as of June 30, 2004.

Summary of Recent Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations
- an Interpretation of FASB Statement No. 143" ("FIN 47"). This Interpretation
clarifies that the term conditional asset retirement obligation as used in FASB
Statement No. 143, "Accounting for Asset Retirement Obligations," refers to a
legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not
be within the control of the entity. The obligation to perform the asset
retirement activity is unconditional even though uncertainty exists about the
timing and (or) method of settlement. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. This
Interpretation also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. This
Interpretation is effective no later than the end of fiscal years ending after
December 15, 2005. We do not expect the adoption will have a material effect on
our financial position or results of operations.


                                       37
<PAGE>

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an amendment of APB Opinion No. 29" ("SFAS 153"). This statement addresses the
measurement of exchanges of nonmonetary assets. It eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in
APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it
with an exception for exchanges that do not have commercial substance. This
statement specifies that a nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. We do not expect the adoption
of SFAS 153 to have an impact on our financial condition or results of
operations.

In May 2005, the FASB issued FASB Statement 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. The provisions of SFAS 154
require, unless impracticable, retrospective application to prior periods'
financial statements of (1) all voluntary changes in accounting principles and
(2) changes required by a new accounting pronouncement, if a specific transition
is not provided. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate, which requires prospective
application of the new method. SFAS 154 is effective for all accounting changes
made in fiscal years beginning after December 15, 2005.

In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 151, which revised ARB No. 43, relating to inventory costs. This
revision is to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material or "spoilage". This
statement requires that these items be recognized as a current period charge
regardless of whether they meet the criterion specified in ARB No. 43. In
addition, this Statement requires the allocation of fixed production overheads
to the costs of conversion be based on normal capacity of the production
facilities. This Statement is effective for the fiscal years beginning after
June 15, 2005. Earlier application is permitted for inventory costs incurred
during fiscal years beginning after the date of issuance of this Statement.
Management believes that this Statement will have no impact on the financial
statements of the Company once adopted.

In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 Revised 2004, "Share-Based Payment". 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. SFAS 123(R)
is effective at the beginning of the first annual reporting that ends after June
15, 2005. This Statement will be effective for the Company's first quarter of
the fiscal year ended June 30, 2006.

Item 7 (a).  Quantative and Qualitative Disclosure about Market Risk

As of June 30, 2005, MSGI has liabilities due, through its Italian subsidiary
AONet, to various vendors and creditors which are payable in Euros. There may be
a risk to MSGI associated with volatility of currency exchange rates over time.
MSGI has obtained certain debt instruments bearing fixed interest rates. There
may be risk associated with the interest rates applied to these debt
instruments, should the rates drop significantly above/ below the fixed price.

Item 8 - Financial Statements and Supplementary Data


                                       38
<PAGE>

The Consolidated Financial Statements required by this Item 8 are set forth as
indicated in the index following Item 14(a)(1).

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

None.

Item 9 (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-K, 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 in
conformity 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-Q and Annual Report on Form 10-K. 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 referred to as "reportable conditions"; these are control issues that could
have a significant adverse effect on the ability to record, process, summarize
and report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. 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.


                                       39
<PAGE>

On October 12, 2005, our independent registered accounting firm Amper,
Politziner & Mattia, P.C. ("AP&M"), informed us and our Audit Committee of the
Board of Directors that in connection with their review of our financial results
for the fiscal year ended June 30, 2005, AP&M 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:

o     a lack of sufficient resources and an insufficient level of monitoring and
      oversight, which may restrict 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.

o     the limited size of the accounting department makes it impracticable to
      achieve an optimum separation of duties,especially with the Company's
      continued growth and the increased demands of public reporting
      information.

o     There are no formal documented closing and reporting calendar and
      checklists

o     There are no uniform policies with respect to the accounting policies
      utilized by all subsidiaries

o     The Whistleblower policies should be disseminated to all employees
      worldwide

o     There are no formal cash flow forecasts, business plans, and
      organizational structure documents to guide the employees in critical
      decision-making processes, especially as the company continues its growth
      and expansion overseas

Reconta Ernst & Young, auditors of the operations of AONet International Srl
indicated numerous material weaknesses in the internal controls of such
operations summarized as follows: a lack of sufficient resources and an
insufficient level of monitoring and oversight, which may restrict the
subsidiary'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 routine and non-routine transactions;
insufficient identification and documentation of related party transactions;
insufficient controls to monitor the timely and proper payment of taxes and
other bills.

In addition, the limited size of the accounting department makes it
impracticable to achieve an optimum separation of duties, especially with the
Company's continued growth and the increased demands of public reporting
information. The impact of the above condition was relevant to the current
period only and did not affect the results of this period or any prior periods.

It is the Company's intention to increase the staffing levels of the accounting
department as the rebuilding efforts currently undertaken continue and the
demands on the accounting staff increase. The Company has already installed an
American finance director at the AONet facility in Milan and is currently
recruiting additional support staff for the Corporate finance department in New
York.

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, except for the acquisition of
AONet International Srl on June 1, 2005, which operation had not been accustom
to the requirements of a formal internal control structure .


                                       40
<PAGE>

Conclusions. Based upon the Controls Evaluation, our CEO and principal financial
officer have each concluded that, our Disclosure Controls are effective to
ensure that 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, 2005. Our
CEO and principal financial officer also concluded that our Disclosure Controls
are 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.

PART III

Item 10 - Executive Officers and Directors of the Registrant

The Company's executive officers and directors and their positions with MSGI are
as follows:


Name                          Age         Position
---------------------------   ---         ----------------------------------
J. Jeremy Barbera              48         Chairman of the Board of Directors
                                          and Chief Executive Officer

Richard J. Mitchell III        46         Chief Accounting Officer
Joseph C. Peters               48         President and Director
John T. Gerlach                73         Director
Seymour Jones                  74         Director
David C. Stoller               55         Director

Mr. Barbera has been Chairman of the Board and Chief Executive Officer since
April 1997, and has served as Director and Officer since October 1996 when the
Company acquired an operating business which he founded in 1987. Mr. Barbera
pioneered the practice of database marketing for the live entertainment industry
in the 1980's, achieving nearly one-hundred percent market share in New York.
Under his leadership, MSGI originated the business of web-based ticketing in
1995 for Lincoln Center. In 1996, the company developed www.telecharge.com, the
first online ticketing system for the Broadway market. MSGI became the dominant
services provider in nearly every major entertainment market in the country.
Their principal areas of concentration also included financial services,
fundraising and publishing. Prior to founding MSGI Direct, Mr. Barbera was a
research scientist based at NASA/Goddard Space Flight Center, working on such
missions as Pioneer Venus and the Global Atmospheric Research Program. Mr.
Barbera has more than 20 years of experience in the areas of technology,
marketing and database management services. Mr. Barbera is a Physicist educated
at New York University, and MIT.

Mr. Mitchell has been the Company's Chief Accounting Officer since December
2003. Mr. Mitchell has been with the Company since May of 1999, when the former
CMG Direct Corp. was acquired from CMGi, Inc. Mr. Mitchell has since served in a
variety of positions for MSGI, including VP, Finance and Controller of CMG
Direct Corp., VP, Finance for MKTG Services, Inc. and Senior V.P. and General
Manager of MKTG Services Boston, Inc. Prior to joining the MSGI team, Mr.
Mitchell served as a senior financial consultant to CMGi. During his tenure with
CMGi, he participated on the Lycos IPO team, assisting in preparing Lycos for
it's highly successful initial offering in April 1996. As a consultant to CMGi,
Mr. Mitchell was also involved in corporate accounting and finance, including
involvement in the formation of companies such as Navisite and Engage
Technologies. In addition, Mr. Mitchell participated in the mergers and
acquisition team of SalesLink, a wholly owned subsidiary of CMGi, where he
assisted in the post-acquisition financial reporting systems migration and
financial management of Pacific Link, a fulfillment operation located in Newark,
CA. Mr. Mitchell performed a variety of financial management and accounting
functions for Wheelabrator Technologies Inc., a $1.5 billion environmental
services company, from 1987 through 1994. Those responsibilities included
Northeast Regional Controller for the Wheelabrator Clean Water Corp. division,
Corporate Director of Internal Audit and Corporate Accounting Manager. Mr.
Mitchell graduated from the University of Lowell, Lowell, Massachusetts with a
Bachelor of Science degree in Accounting and a minor in Management Information
Systems.


                                       41
<PAGE>

Mr. Peters has served as a Director of the Company since April 2004. Mr. Peters
served President George W. Bush as the Assistant Deputy Director for State and
Local Affairs of the White House's Drug Policy Office. There his duties included
supervision of the country's High Intensity Drug Trafficking Area (HIDTA)
Program. Mr. Peters also served as the Drug Policy Office Liaison to the White
House Office of Homeland Security. He also served the White House during the
Clinton Administration, with responsibility to direct the nation's 26 HIDTAs,
and managed an annual budget in excess of $250 million. Mr. Peters began his
career as a State prosecutor when he joined the Pennsylvania Attorney General's
office in 1983. He later served as a Chief Deputy Attorney General of the
Organized Crime Section, and in 1989 was named the first Executive Deputy
Attorney General of the newly created Drug Law Division. Currently, Mr. Peters
consults to national and international law enforcement organizations on
narco-terrorism and related intelligence and prosecution issues. Mr. Peters
recently was honored as a Life Member of the Pennsylvania Chiefs of Police
Association. He is an associate member of the Pennsylvania District Attorney's
Association, and a member of the International Association of Chiefs of Police,
where he sits on their Terrorism Committee.

Mr. Gerlach has served as a Director of the Company since December 1997. Mr.
Gerlach is Chairman of the Audit Committee and a member of the Compensation
Committee of the Board of Directors. He is currently Senior Executive Professor
of the graduate business program and Associate Professor of Finance at Sacred
Heart University in Fairfield, Connecticut. Previously, Mr. Gerlach was a
Director in the corporate finance department at Bear Stearns, with
responsibility for mergers and financial restructuring projects, President and
Chief Operating Officer of Horn & Hardart, where he oversaw restaurant and mail
order divisions, and Founder and President of Consumer Growth Capital, a venture
capital firm. Mr. Gerlach also serves as a director for Uno Restaurant Co., SAFE
Inc., Cycergie (a French company), Akona Corporation, and the Board of Regents
at St. John's University in Collegeville, Minnesota. He is a member of the
advisory board for Drexel University's College of Business & Administration.

Mr. Jones has served as a Director of the Company since June 1996, and is a
member of both the Audit and Compensation Committees. Mr. Jones has been
Professor of Accounting at New York University since September 1993. From April
1974 to September 1995, Mr. Jones was a senior partner of the accounting firm of
PricewaterhouseCoopers LLP. In addition to 40-plus years of accounting
experience, Mr. Jones has more than ten years of experience as an arbitrator and
an expert witness, particularly in the areas of fraud, mergers and acquisitions,
and accounting matters. Mr. Jones also functions as a consultant to Milberg
Factors and CHF Industries, and serves as a director for Reliance Bank.

Mr. Stoller has served as a Director of the Company since March 2004, and is a
member of the Audit Committee. He has been involved in public and private
finance for the last 20 years. Mr. Stoller began his professional career as an
attorney, and became partner and co-head of global finance for Milbank, Tweed,
Hadley & McCloy, LLP, where he helped build one of the world's largest and most
successful practices, participating personally in financings totaling more than
$4 billion. In 1992, Mr. Stoller joined Charterhouse Group International, a
large New York City-based private equity firm, as chairman of its Environmental
Capital Group. In 1993, Mr. Stoller, through the Charterhouse Environmental
Group, launched American Disposal Services, an integrated waste management
company that ultimately acquired and consolidated, with $34 million in equity
capital, more than 70 waste management companies. In 1998, Mr. Stoller left
Charterhouse to launch Americana Financial Services, raising over $25 million in
private equity capital. Mr. Stoller currently heads TransLoad America LLC, which
is principally in the business of transloading and transporting waste materials
by rail. Mr. Stoller holds a B.A. from the University of Pennsylvania, an M.A.
from the Graduate Faculty of the New School for Social Research, and a J.D. from
Fordham University School of Law. He is also a graduate of the Harvard Business
School Advanced Management Program.


                                       42
<PAGE>

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, file reports of ownership
on Forms 3, 4 and 5 with the Commission and the NASDAQ Market. Officers,
directors and greater than ten percent stockholders are required by the
Commission's regulations to furnish the Company with copies of all Forms 3, 4
and 5 they file.

Based solely on the Company's review of the copies of such forms it has received
and written representations from certain reporting persons that they were not
required to file reports on Form 5 for the fiscal year ended June 30, 2005, the
Company believes that all its officers, directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during the fiscal year ended June 30, 2005.

Audit Committee

The Company's Board of Directors has established a standing audit committee,
which is currently comprised of the following directors: Mr. Seymour Jones, Mr.
John T. Gerlach and Mr. David C. Stoller. All members of the audit committee are
non-employee directors and satisfy the current standards with respect to
independence, financial expertise and experience established by rules of The
Nasdaq Stock Market, Inc. Our Board of Directors has determined that Mr. Seymour
Jones meets the Securities and Exchange Commission's definition of "audit
committee financial expert."

Code of Ethics

The Company has adopted a written Code of Ethics and Business Conduct, which
complies with the requirements for a code of ethics pursuant to Item 406(b) of
Regulation S-K under the Securities Exchange Act of 1934, that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, and persons performing similar functions. A copy of the
Code of Ethics and Business Conduct will be provided, without charge, to any
shareholder who sends a written request to the Chief Accounting Officer of MSGI
at 575 Madison Avenue, New York, NY 10022. Any substantive amendments to the
code and any grant of a waiver from a provision of the code requiring disclosure
under applicable SEC rules will be disclosed in a report on Form 8-K.

 Item 11 - Executive Compensation:

The following table provides certain information concerning compensation of the
Company's Chief Executive Officer and any other executive officer of the Company
who received compensation in excess of $100,000 during the fiscal year ended
June 30, 2005 (the "Named Executive Officers"):


                                       43
<PAGE>

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                   Fiscal                                                       Securities
                                    Year                                          Other         Underlying
                                    Ended         Annual        Annual           Annual          Options/
Name and Principal                June 30,      Salary ($)       Bonus        Compensation       SARs (#)
------------------                --------      ----------       -----        ------------       --------
<S>                                 <C>          <C>            <C>                 <C>              <C>
Position

J. Jeremy Barbera (1)               2005         350,000            --                  --           --
   Chairman of the                  2004         348,514            --              10,000 (2)       --
   Board  and                       2003         442,305        75,000 (3)              --           --
   Chief Executive Officer

Joseph Peters
       President and Director       2005         120,000            --              25,000 (4)       --
</TABLE>

----------
(1)   In February 2003, Mr. Barbera voluntarily forgave a portion of his
      compensation to effect a reduction of approximately 30% to $350,000.
      Beginning in January 2005, Mr. Barbera elected to defer his compensation
      for the third and fourth quarters of the fiscal year ended June 30, 2005
      until further notice. The deferred compensation totaled $173,654. Mr.
      Barbera elected to employ $50,000 of his deferred compensation as an
      offset against interest owed on a related party note payable to MSGI. The
      balance of Mr. Barbera's deferred compensation at June 30, 2005 was
      approximately $123,654.

(2)   In connection with the successful private placement sale of 25,000 shares
      of the Company's Common Stock, Mr. Barbera was awarded a $10,000 finder's
      fee.

(3)   In connection with the successful sale of the Company's northeast
      operations, Mr. Barbera was awarded a bonus in the amount of $75,000.

(4)   Mr. Peters was paid a $25,000 signing bonus at the time of his hire as
      President of MSGI in December 2004.

STOCK OPTION GRANTS

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.

As of June 30, 2004, the Board of Directors had agreed to issue 322,500 options
beyond the number available in the 1999 plan, subject to approval of an increase
to the plan by a future vote of shareholders. The Company approved 342,500
options to purchase shares of common stock at an exercise price of $1.50 and
20,000 options to purchase shares of common stock at an exercise price of
$4.125. An annual meeting of shareholders of MSGI was held on February 7, 2005
where a proposal by the Company's Board of Directors to increase the number
options available under the 1999 plan by 1,000,000 was approved by a vote of the
shareholders. Upon shareholder approval, the 362,500 stock options were granted
on February 7, 2005, at which the market price of the stock was $9.48. Due to
the difference in market and exercise price, the Company recorded a deferred
compensation expense at the date of grant of approximately $2.8 million, which
is being amortized over the related service period. For the period ended June
30, 2005, the Company realized non-cash employee compensation expense related to
the stock options granted of approximately $1.5 million.


                                       44
<PAGE>

<TABLE>
<CAPTION>
                                                     OPTIONS GRANTED IN THE LAST FISCAL YEAR
                                                                Individual Grant
                         -------------------------------------------------------------------------------------------------

                              Number of              % of Total Options/
                              Securities                 SARs Granted to          Exercise or
                         Underlying Options/           Employees in Fiscal         Base Price      Expiration     Grant
                            SARs Granted (#)                 Year                ($ per share)        Date      Date Value
                         ------------------            ----------------          -------------     ----------   ----------
<S>                           <C>                              <C>                     <C>             <C>         <C>
J. Jeremy Barbera   (1)       225,000                          55%                     $1.50           03/14       $9.48
Richard J. Mitchell (2)         7,500                           2%                     $1.50           03/14       $9.48
John T. Gerlach     (3)        45,000                          11%                     $1.50           03/14       $9.48
Seymour Jones       (4)        45,000                          11%                     $1.50           03/14       $9.48
Joseph C. Peters    (5)        80,000                          19%                     $7.00           03/15       $7.00
Jaime Brieva        (6)        10,000                           2%                     $4.45           07/14       $4.45

--------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Mr. Barbera's options are exercisable as follows: 75,000 on February 7,
      2005, 30,000 on March 24, 2005, 60,000 on March 24, 2006 and 60,000 on
      March 24, 2007

(2)   Mr. Mitchell's options are exercisable as follows: 1,500 on March 24,
      2005, 3,000 on March 24, 2006 and 3,000 on March 24, 2007

(3)   Mr. Gerlach's options are exercisable as follows: 9,000 on March 24, 2005,
      18,000 on March 24, 2006 and 18,000 on March 24, 2007

(4)   Mr. Jones' options are exercisable as follows: 9,000 on March 24, 2005,
      18,000 on March 24, 2006 and 18,000 on March 24, 2007

(5)   Mr. Peters' options are exercisable as follows: 26,666 on March 1, 2006,
      26,667 on March 1, 2007 and 26,667 on March 1, 2008

(6)   Mr. Brieva's options are exercisable as follows: 2,000 on July 16, 2005,
      4,000 on July 16, 2006 and 4,000 on July 16, 2007


                                       45
<PAGE>

AGGREGATE OPTIONS EXERCISED IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

The following table sets forth information regarding the number and value of
securities underlying unexercised stock options held by the Named Executive
Officers as of June 30, 2005.

<TABLE>
<CAPTION>
                                                            Number of Securities           Value of unexercised
                                                           Underlying Unexercised          In-the-Money Options/
                          Number of                        Options/SARs at Fiscal           SARs at Fiscal Year
                         Securities          Value              Year End (#)                      End ($)
                        Exercised (#)    Realized ($)     Exercisable/Unexercisable      Exercisable/Unexercisable
                        ------------     -----------      ------------------------       -------------------------
<S>                         <C>              <C>               <C>                           <C>
J. Jeremy Barbera           --               --                140,000/160,000               848,400/969,600
Joseph C. Peters            --               --                  4,000/96,000                 24,240/581,760

------------------------------------------------------------------------------------------------------------------
</TABLE>

COMPENSATION OF DIRECTORS

Beginning in October 2003, directors who are not employees of the Company
receive an annual retainer fee of $5,000, $1,000 for each Board Meeting
attended, $500 for each standing committee meeting attended and $500 for each
standing committee meeting for the Chairman of such Committee. Prior thereto,
directors who were not employees of the Company received an annual retainer fee
of $15,000. Fees for attending meetings and committee meetings remained the
same. Such Directors will also be reimbursed for their reasonable expenses for
attending board and committee meetings, and will receive an annual grant of
options on June 30 of each year to acquire 10,000 shares of common stock for
each fiscal year of service, at an exercise price equal to the fair market value
on the date of grant. Any Director who is also an employee of the Company is not
entitled to any compensation or reimbursement of expenses for serving as a
Director of the Company or a member of any committee thereof. The Directors
agreed to waive the annual option grant for the fiscal years ended June 30,
2003, 2004 and 2005.


EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

The Company had entered into employment agreements with each of its Named
Executive Officers.

Mr. Barbera was appointed to the position of Chairman of the Board, Chief
Executive Officer and President of the Company by the Board, effective March 31,
1997. Mr. Barbera had previously also served as President and CEO of MSGI Direct
Mr. Barbera entered into a new employment agreement effective January 1, 2000.
The agreement provides for a three year term expiring December 31, 2002 (the
"Employment Term"). The base salary during the employment term is $500,000 for
the first year and an amount not less than $500,000 for the remaining two years.
Mr. Barbera is eligible to receive bonuses equal to 100% of the base salary each
year at the determination of the Compensation Committee of the Board of
Directors of the Company, based on earnings and other targeted criteria. The
$500,000 annual salary for Mr. Barbera under his employment agreement reflected
a raise from $350,000. Notwithstanding, Mr. Barbera forgave this increase for
the period January 2000 through December 2000. In March 2002, Mr. Barbera agreed
to decrease his annual salary to $450,000. In December 2003, Mr. Barbera agreed
to further decrease his annual salary to $350,000. The Employment Agreement was
automatically renewed for up to an additional three years and will now expire on
December 31, 2005. On May 27, 1997, Mr. Barbera was granted options to acquire
166,667 shares of Common Stock of the Company; 55,556 exercisable at $15.75 per
share, 55,556 exercisable at $18.00 per share and 55,556 exercisable at $21.00
per share. One third of the options in each tranche vest immediately and one
third of each tranche will become available on each of the next two anniversary
dates. On June 30, 2000, Mr. Barbera was granted options to acquire 137,500
shares of Common Stock of the Company at $26.625 per share; 68,750 exercisable
on December 31, 2000; 34,375 exercisable on December 31, 2001 and 2002. All of
these options have been forfeited by Mr. Barbera and are no longer outstanding.
In March 2004, Mr. Barbera was granted stock options to purchase 75,000 shares
of Common Stock of the company at $1.50 per share. 25,000 options vested on
September 24, 2004. 10,000 options vested on March 24, 2005. 20,000 options vest
on March 24, 2006. 20,000 options vest on March 24, 2007. On February 7, 2005,
upon approval of an increase of the number of options available under the 1999
Plan by a vote of shareholders, Mr. Barbera was granted stock options to
purchase 225,000 shares of Common Stock of the company at $1.50 per share.
75,000 options vested on February 7, 2005. 30,000 options vested on March 24,
2005. 60,000 options vest on March 24, 2006. 60,000 options vest on March 24,
2007. If Mr. Barbera is terminated without cause (as defined in the agreement),
then the Company shall pay him a lump sum payment equal to 2.99 times the
compensation paid during the preceding 12 months and all outstanding stock
options shall fully vest and become immediately exercisable.


                                       46
<PAGE>

Mr. Barbera has agreed in his employment agreement (i) not to compete with the
Company or its subsidiaries, or to be associated with any other similar business
during the employment term, except that he may own up to 5% of the outstanding
common stock of certain corporations, as described more fully in the employment
agreement, and (ii) upon termination of employment with the Company and its
subsidiaries, not to solicit or encourage certain clients of the Company or its
subsidiaries to cease doing business with the Company and its subsidiaries and
not to do business with any other similar business for a period of three years
from the date of such termination.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee during fiscal year 2005 were Seymour
Jones, Joseph Peters, and John Gerlach. Mr. Gerlach was Chairman of the
Committee. There were no compensation interlocks.

Mr. Gerlach and Mr. Jones served as members of the Compensation Committee of the
Company's Board of Directors during all of fiscal year 2005. None of such
persons is an officer or employee, or former officer or employee of the Company
or any of its subsidiaries.

No interlocking relationships exist between the member of the Company's Board of
Directors or Compensation Committee and the Board of Directors or Compensation
Committee of any other Company, nor has any such relationship existed in the
past.

Item 12 - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

<TABLE>
<CAPTION>
                                  Number of securities                                 Number of Securities
                                    to be issued upon          Weighted-average         remaining available
                                      exercise of             exercise price of        for future issuances
                                  outstanding options,       outstanding options,          under equity
Plan Category                      warrants and rights        warrants and rights       compensation plans
-------------                      -------------------        -------------------       --------------------
<S>                                     <C>                         <C>                      <C>
Equity compensation plans
approved by security holders
       1999 Stock Option Plan (1)       520,000                     $2.40                    605,122
       Executive Options      (1)        40,000                     $2.81                         --

Equity compensation plans not
approved by security holders
       Warrants                         793,340                     $7.29                         --

------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   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. As of June 30, 2004,
      the Board of Directors had agreed to issue 322,500 options beyond the
      number available in the 1999 plan, subject to approval of an increase to
      the plan by a future vote of shareholders. The Company approved 342,500
      options to purchase shares of common stock at an exercise price of $1.50
      and 20,000 options to purchase shares of common stock at an exercise price
      of $4.125. An annual meeting of shareholders of MSGI was held on February
      7, 2005 where a proposal by the Company's Board of Directors to increase
      the number options available under the 1999 plan by 1,000,000 was approved
      by a vote of the shareholders. Upon shareholder approval, the 362,500
      stock options were granted on February 7, 2005, at which the market price
      of the stock was $9.48. Due to the difference in market and exercise
      price, the Company recorded a deferred compensation expense at the date of
      grant of approximately $2.8 million, which is being amortized over the
      related service period. For the period ended June 30, 2005, the Company
      realized non-cash employee compensation expense related to the stock
      options granted of approximately $1.5 million.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of September 30, 2005 by: (i) each Director and
each of the Named Executive Officers; (ii) all executive officers and Directors
of the Company as a group; and (iii) each person known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock.


                                       47
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Amount and Nature of
                                                                                        Common Stock
                                                                                     Beneficially Owned
                                                                                    ---------------------
Name of Beneficial Holder (1)                                                        Number       Percent
-----------------------------------------                                            ------       -------
Directors and Named Executive Officers:
<S>                                                                                  <C>          <C>
J. Jeremy Barbera................................................................    200,000       5.22%
Seymour Jones....................................................................      5,292           *
John Gerlach.....................................................................      2,600           *
David C. Stoller.................................................................        --            *
Joseph C. Peters.................................................................      7,600           *
All Directors and Executive Officers as a group (6 persons)......................    215,492       5.62%

5% Stockholders:
Yewdale Ltd .....................................................................    400,000      10.44%
</TABLE>

----------------
*     Less than 1%

(1)   Unless otherwise indicated in these footnotes, each stockholder has sole
      voting and investment power with respect to the shares beneficially owned.
      All share amounts reflect beneficial ownership determined pursuant to Rule
      13d-3 under the Exchange Act. All information with respect to beneficial
      ownership has been furnished by the respective Director, executive officer
      or stockholder, as the case may be. Except as otherwise noted, each person
      has an address in care of the Company.

Item 13 - Certain Relationships and Related Transactions

Transactions with Mr. Barbera: During the year ended June 30, 2002, the Company
advanced $1,000,000 pursuant to a promissory note receivable to Mr. Barbera 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 Mr. Barbera and is being amortized as interest
income over the term of the note using the straight-line method. The note
receivable is collateralized by current and future holdings of MSGI common stock
owned by the officer and bears interest at prime. Interest is due and payable
yearly on October 15th. The Company recognized interest income of $69,674 for
the year ended June 30, 2005. As of June 30, 2005, the interest due on October
15, 2004 of approximately $162,600 is in arrears. The note was entered into as
an inducement to the continued employment of Mr. Barbera and to provide
additional security in the event of a change in control. Accordingly, the note
will be forgiven in the event of a change in control.

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, 2005 and 2004 were comprised of the
following:

                              Fiscal Year    Fiscal Year
                                 2005           2004
                               --------       --------
Audit Fees                     $262,200       $139,500
Tax Fees                         40,000         55,000
All other Fees                       --             --
                               --------       --------
Total Fees                     $302,200       $194,500
                               ========       ========


                                       48
<PAGE>

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.

Part IV

Item 15 - Exhibits and Financial Statement Schedules

(a)(1) Financial statements - see "Index to Financial Statements" on page 28.

(2)   Financial statement schedules - see "Index to Financial Statements" on
      page 28.

2.1   Agreement and Plan of Merger By and Among MKTG Services, Inc., GCG Merger
      Corp., and Grizzard Advertising, Inc. (m)

2.2   Stock Purchase Agreement by and between Omnicom Group Inc. and MKTG
      Services, Inc.

(3)   Exhibits:

3.1   Amended and Restated Articles of Incorporation (c)

3.2   Certificate of Amendment to the Amended and Restated Articles of
      Incorporation of the Company (b)

3.3   Certificate of Amendment to the Articles of Incorporation for change of
      name to All-Comm Media Corporation (f)

3.4   By-Laws (a)

3.5   Certificate of Amendment of Articles of Incorporation for increase in
      number of authorized shares to 36,300,000 total (i)

3.6   Certificate of Amendment of Articles of Incorporation for change of name
      to Marketing Services Group, Inc. (k)

3.7   Certificate of Amendment of Articles of Incorporation for increase in
      number of authorized shares to 75,150,000 total (n)

3.8   The Amended Certificate of Designation, Preferences and Relative,
      Participating and Optional and Other Special Rights of Preferred Stock and
      Qualifications, Limitations and Restrictions Thereof for the Series D
      Convertible Preferred Stock (l)

3.9   Certificate of Designation, Preferences, and Rights of Series E
      Convertible Preferred Stock of Marketing Services Group, Inc. (q)

3.10  Certificate of Amendment to Certificate of Designation, Preferences, and
      Rights of Series E Convertible Preferred Stock of Marketing Services
      Group, Inc. (r)

3.11  Certificate of Amendment of Articles of Incorporation for change of name
      to MKTG Services, Inc. (a)

10.1  1991 Stock Option Plan (d)

10.2  Security Agreement between Milberg Factors, Inc. and Metro Services Group,
      Inc. (j)

10.3  Security Agreement between Milberg Factors, Inc. and Stephen Dunn &
      Associates, Inc. (k)

10.4  J. Jeremy Barbera Employment Agreement (t)

10.5  Rudy Howard Employment Agreement (t)

10.6   Stephen Killeen Employment Agreement (t)


                                       49
<PAGE>

10.7  Form of Private Placement Agreement (j)

10.8  Purchase agreement dated as of December 24, 1997, by and between the
      Company and GE Capital (l)

10.9  Stockholders Agreement by and among the Company, GE Capital and certain
      existing stockholders of the Company, dated as of December 24, 1997 (l)

10.10 Registration Rights Agreement by and among the Company and GE Capital,
      dated as of December 24, 1997 (l)

10.11 Warrant, dated as of December 24, 1997, to purchase shares of Common Stock
      of the Company (l)

10.12 First Amendment to Preferred Stock Purchase Agreement Between General
      Electric Capital Corporation and Marketing Services Group, Inc. (o)

10.13 Promissory note (o)

10.14 Warrant Agreement (o)

10.15 Second Amendment (p)

10.16 Warrant Agreement between Marketing Services Group, Inc. and Marshall
      Capital Management, Inc. (q)

10.17 Warrant Agreement between Marketing Services Group, Inc. and RCG
      International Investors, LDC. (q)

10.18 Registration Rights Agreement by and Among The Company, RCG International
      Investors, LDC and Marshall Capital Management, Inc. (q)

10.19 Securities Purchase Agreement by and Among The Company, RCG International
      Investors, LDC and Marshall Capital Management, Inc. (q)

10.20 Credit Agreement Among Grizzard Communications, Inc. and Paribas (s)

10.21 Firstream Letter Agreement (b)

10.22 Steven Killeen Termination Agreement (b)

10.23 Standstill Agreement between MKTG Services, Inc. and Castle Creek
      Technology Partners LLC (u)

10.24 Standstill Agreement between MKTG Services, Inc. and RCG International
      Investors LDS (u)

10.25 Letter Amendment to Standstill Agreement between MKTG Services, Inc. and
      Castle Creek Technology Partners LLC(v)

10.26 Letter Amendment Standstill Agreement between MKTG Services, Inc. and RCG
      International Investors, LDS(v)

21    List of Company's subsidiaries (a)

22.1  Consent of Amper, Politziner & Mattia P.C. (a)

23.1  Consent of Reconta Ernst & Young S.p.A. (a)

24    Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002(a)

(a)   Included herein in the Company's Report on Form 10-K for the fiscal year
      ended June 30, 2005

(b)     Incorporated by reference to the Company's Report on Form 10-K for the
        fiscal year ended June 30, 2001

(c)     Incorporated by reference from the Company's Registration Statement on
        Form S-4, Registration Statement No. 33-45192

(d)     Incorporated by reference to the Company's Registration Statement on
        Form S-8, Registration Statement 333-30839

(e)     Incorporated herein by reference to the Company's Report on Form 8-K
        dated April 25, 1995

(f)     Incorporated by reference to the Company's Report on Form 10-K for the
        fiscal year ended June 30, 1995


                                       50
<PAGE>

(g)     Incorporated by reference to the Company's Report on Form 10-Q for the
        quarter ended March 31, 1996

(h)     Incorporated by reference to the Company's Report on Form 8-K dated June
        7, 1996

(i)     Incorporated by reference to the Company's Report on Form 10-K dated
        June 30, 1996

(j)     Incorporated by reference to the Company's Report on Form 10-Q for the
        quarter ended March 31, 1997

(k)     Incorporated by reference to the Company's Report on Form 10-KSB for the
        fiscal year ended June 30, 1997
(l)     Incorporated by reference to the Company's Report on Form 8-K dated
        January 13, 1998

(m)     Incorporated by reference from the Company's Registration Statement on
        Form S-4, Registration Statement No. 33-85233.

(n)     Incorporated by reference to the Company's Report on Form 10-KSB dated
        June 30, 1998

(o)     Incorporated by reference to the Company's Report on Form 8-K dated May
        13, 1999

(p)     Incorporated by reference to the Company's Report on Form 8-K dated
        August 30, 1999

(q)     Incorporated by reference to the Company's Report on Form 8-K dated
        February 29, 2000

(r)     Incorporated by reference to the Company's Report on Form 8-K/A dated
        March 23, 2000
(s)     Incorporated by reference to the Company's Report on Form 10-Q dated May
        16, 2000

(t)     Incorporated by reference to the Company's Report on Form 10-K for the
        fiscal year ended June 30, 2000

(u)     Incorporated by reference to the Company's Report on Form 8-K dated
        February 19, 2002

(v)     Incorporated by reference to the Company's Report on Form 8-K dated July
        30, 2002


                                       51
<PAGE>

                                   SIGNATURES

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

                          MSGI SECURITY SOLUTIONS, INC.
                                  (Registrant)


                                        By: /s/ J. Jeremy Barbera
                                           ------------------------
                                           J. Jeremy Barbera
                                           Chief Executive Officer


                                        By: /s/ Richard J. Mitchell III
                                           ----------------------------
                                           Richard J. Mitchell III
                                           Chief Accounting Officer
                                           and Principle Financial Officer
Date:  October 28, 2005

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.

<TABLE>
Signature                            Title                                              Date
------------------------------       -------------------------------------------        --------------------
<S>                                  <C>                                                <C>
/s/ J. Jeremy Barbera                Chairman of the Board and Chief Executive          October 28, 2005
------------------------------        Officer (Principal Executive Officer)
J. Jeremy Barbera


/s/ John T. Gerlach                  Director                                           October 28, 2005
------------------------------
John T. Gerlach


/s/ Seymour Jones                    Director                                           October 28, 2005
------------------------------
Seymour Jones


/s/  Joseph Peters                   Director                                           October 28, 2005
------------------------------
Joseph Peters


/s/  David Stoller                    Director                                           October 28, 2005
------------------------------
David Stoller
</TABLE>


                                       52
<PAGE>

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

                          INDEX TO FINANCIAL STATEMENTS
                                   [Items 15]

   (1)   FINANCIAL STATEMENTS:                                            Page
         Report of Independent Registered Public Accounting Firm            54

         Report of Independent Registered Public Accounting Firm
         for AONet International S.r.l.                                     55

         Consolidated Balance Sheets as of June 30, 2005 and
             June 30, 2004                                                  56

         Consolidated Statements of Operations
             Years Ended June 30, 2005, 2004 and 2003                      57-58

         Consolidated Statements of Stockholders' Equity
             Years Ended June 30, 2005, 2004 and 2003                      59-60

         Consolidated Statements of Cash Flows
             Years Ended June 30, 2005, 2004 and 2003                       61

         Notes to Consolidated Financial Statements                       62-86

Financial Statement Schedule

         Schedule II - Valuation and Qualifying Accounts                    87

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

                                       53
<PAGE>

             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. (formerly Media Services Group, Inc.) and subsidiaries as of
June 30, 2005 and 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 2005. 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 did not audit the financial
statements of AONet International S.r.l. (an entity in which the Company
acquired a 51% ownership on June 1, 2005), as of June 30, 2005 and for the
one-month then ended, which statements reflect total assets constituting 14
percent of the consolidated assets of the Company as of June 30, 2005 and which
statements reflect total revenues of 22 percent of consolidated revenue of the
Company for the year ended June 30, 2005. Those financial statements have been
audited by other auditors whose report has been furnished to us; insofar as our
opinion on the consolidated financial statements relates to data included for
AONet International S.r.l., it is based solely on their report.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditor provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditor, 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, 2005 and 2004, and the results of its operations and
its cash flows for each of the three fiscal years ended June 30, 2005 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, and has a significant deficit in
working capital, 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.

In connection with our audits of the consolidated financial statements referred
to above, we audited the financial schedule listed under Item 15. In our
opinion, the financial schedule, when considered in relation to the financial
statements taken as a whole, presents fairly, in all material respects, the
information stated therein.

As discussed in Note 2 to the consolidated financial statements, during the year
ended June 30, 2003 the Company changed its method of accounting for goodwill in
accordance with the adoption of Statement of Financial Accounting Standards No.
142 "Goodwill and other intangible assets."


/s/ Amper, Politziner & Mattia P.C.
-----------------------------------
October 12, 2005
Edison, New Jersey


                                       54
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of
MSGI Security Solutions, Inc

We have audited the accompanying consolidated balance sheet of AONet
International S.r.l. as of June 30, 2005, and the related statement of
operations, quotaholders' deficit, and cash flows for the one month ended June
30, 2005. 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 audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate 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 also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AONet
International S.r.l. as of June 30, 2005, and the consolidated results of its
operations and its cash flows for the one month ended June 30, 2005, in
conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that AONet
International S.r.l. will continue as a going concern. As more fully described
in Note 1, the Company has recurring operating losses and has a working capital
deficiency. These conditions raise substantial doubt about the Company's 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 to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.


/s/ Reconta Ernst & Young S.p.A.
--------------------------------

Milan, Italy
October 7, 2005


                                       55
<PAGE>

                 MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
            CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2005 AND 2004

<TABLE>
<CAPTION>
ASSETS                                                                                2005              2004
------                                                                                ----              ----
<S>                                                                              <C>               <C>
Current assets:
    Cash and cash equivalents                                                    $     118,465     $   2,548,598
    Accounts receivable, net of allowances of $215,700                                 838,139                --
    Accounts receivable - related party in Italy                                        61,456                --
    Stock subscription receivable                                                           --           600,000
    Inventory                                                                           49,781                --
    Other current assets                                                               238,139           208,293
                                                                                 -------------     -------------
      Total current assets                                                           1,305,980         3,356,891
Investments in Excelsa S.p.A                                                         4,063,077                --
Property and equipment, net                                                          2,136,190             5,130
Goodwill                                                                             3,108,471           490,000
Intangible assets, net                                                                 323,739                --
Note receivable                                                                             --           300,000
Related party note receivable                                                        1,139,687         1,120,013
Other assets                                                                            21,651            15,700
                                                                                 -------------     -------------
        Total assets                                                             $  12,098,795     $   5,287,734
                                                                                 =============     =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Bank overdraft                                                               $     544,799     $          --
    Accounts payable-trade                                                           1,205,490           381,722
    Accounts payable-related party in Italy                                            538,906                --
    Accrued expenses and other current liabilities                                   3,439,704           748,603
    Note payable - shareholder                                                              --           500,000
    Net liabilities of discontinued operations                                              --           130,742
    Current portion of long-term obligations                                           241,320                --
                                                                                 -------------     -------------
        Total current liabilities                                                    5,970,219         1,761,067

Long-term debt, net of current portion                                                 180,990                --
Other liabilities                                                                    1,066,881         1,070,570
                                                                                 -------------     -------------
        Total liabilities                                                            7,218,090         2,831,637
                                                                                 -------------     -------------

Minority interest in subsidiary                                                             --           255,517

Stockholders' equity:
      Convertible preferred stock - $.01 par value; 18,750 shares authorized;
          9,844.8 shares of Series F issued and outstanding (liquidation
          preference $3,266,535) at June 30, 2005                                           98                --
    Common stock - $.01 par value; 9,375,000 authorized; 3,849,540 and
        3,060,186 shares issued; 3,831,878 and 3,042,524 shares outstanding
            as of June 30, 2005 and 2004, respectively                                  38,495            30,602
    Additional paid-in capital                                                     233,344,128       222,642,710
      Deferred compensation                                                         (1,301,974)               --
      Accumulated deficit                                                         (225,835,306)     (219,079,022)
      Accumulated other comprehensive income                                            28,974                --
Less:  17,662 shares of common stock in treasury, at cost                           (1,393,710)       (1,393,710)
                                                                                 -------------     -------------
        Total stockholders' equity                                                   4,880,705         2,200,580
                                                                                 -------------     -------------
        Total liabilities and stockholders' equity                               $  12,098,795     $   5,287,734
                                                                                 =============     =============
</TABLE>

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


                                       56
<PAGE>

                 MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003

<TABLE>
<CAPTION>
                                                             2005            2004             2003
                                                             ----            ----             ----
<S>                                                      <C>             <C>             <C>
Revenues                                                 $   811,945     $        --     $         --

Cost of revenue                                              360,660              --               --
                                                         -----------     -----------     ------------
Gross profit                                                 451,285              --               --

Operating costs and expenses:
    Salaries and benefits                                  1,734,301         409,919          743,359
    Research and development                                 180,436         167,940               --
    Non cash compensation                                  1,774,062              --               --
    Selling, general and administrative                    2,758,527       1,379,824        1,090,292
    Consulting expense on options grants                          --         377,363               --
    Gain on termination of lease                             (70,300)             --       (3,905,387)
    Goodwill impairment                                      490,000              --               --
    Other asset impairment                                   267,840              --               --
    Depreciation and amortization                            149,683              --               --
                                                         -----------     -----------     ------------
       Total operating costs and expenses                  7,284,549       2,335,046       (2,071,736)
                                                         -----------     -----------     ------------
Income (loss) from operations                             (6,833,264)     (2,335,046)       2,071,736
                                                         -----------     -----------     ------------
Other income (expense):
    Gain on legal settlement                                      --              --          965,486

    Interest income                                           99,081         119,566          181,087
    Interest expense                                         (79,173)        (96,641)        (194,017)
                                                         -----------     -----------     ------------
       Total other income                                     19,908          22,925          952,556

Minority interest in subsidiary                              255,517         234,483               --
                                                         -----------     -----------     ------------
Income (loss) from continuing operations
         before provision for income taxes                (6,557,839)     (2,077,638)       3,024,292
    Provision for income taxes                                17,114           9,780           47,589
                                                         -----------     -----------     ------------
    Income (loss) from continuing operations              (6,574,953)     (2,087,418)       2,976,703

Discontinued operations:
       Loss from discontinued operations                    (181,331)       (211,613)        (296,138)
       Loss from disposal of discontinued operations              --      (1,012,114)        (220,396)
                                                         -----------     -----------     ------------
    Loss from discontinued operations                       (181,331)     (1,223,727)        (516,534)
                                                         -----------     -----------     ------------
Cumulative effect of change in accounting principle               --              --       (5,075,000)
                                                         -----------     -----------     ------------
Net loss                                                  (6,756,284)     (3,311,145)      (2,614,831)
                                                         -----------     -----------     ------------
Gain on redemption of preferred stock                             --              --       13,970,813
Gain on redemption of preferred stock of discontinued
    subsidiary                                                    --         280,946               --

Undeclared dividends on preferred stock                     (116,199)             --               --
                                                         -----------     -----------     ------------
Net income (loss) attributable to common stockholders    $(6,872,483)    $(3,030,199)    $ 11,355,982
                                                         ===========     ===========     ============
</TABLE>

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

                                       57
<PAGE>

                 MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
                FOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003

<TABLE>
<CAPTION>
                                                                          2005            2004            2003
                                                                          ----            ----            ----
<S>                                                                   <C>             <C>             <C>
           Basic earnings (loss) per share:
               Continuing operations                                  $     (1.94)    $     (0.78)    $      8.67
               Discontinued operations                                      (0.05)          (0.53)          (0.27)
               Cumulative effect of change in accounting principle             --              --           (2.59)
                                                                      -----------     -----------     -----------
           Basic earnings (loss) per share                            $     (1.99)    $     (1.31)    $      5.81
                                                                      ===========     ===========     ===========
           Diluted earnings (loss) per share:
               Continuing operations                                  $     (1.94)    $     (0.78)    $      7.39
               Discontinued operations                                      (0.05)          (0.53)          (0.23)
               Cumulative effect of change in accounting principle             --              --           (2.21)
                                                                      -----------     -----------     -----------
           Diluted earnings (loss) per share                          $     (1.99)    $     (1.31)    $      4.95
                                                                      ===========     ===========     ===========

Weighted average common shares outstanding - basic                      3,459,854       2,315,784       1,954,172
                                                                      ===========     ===========     ===========
Weighted average common shares outstanding - diluted                    3,459,854       2,315,784       2,293,886
                                                                      ===========     ===========     ===========
</TABLE>

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


                                       58
<PAGE>

                 MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003

<TABLE>
<CAPTION>
                                                                                                   Additional
                                                    Common Stock             Preferred Stock        Paid-in           Deferred
                                                Shares       Amount        Shares       Amount       Capital         Compensation
                                               -----------------------------------------------------------------------------------
<S>                                            <C>          <C>              <C>      <C>          <C>                  <C>
Balance June 30, 2002                          1,680,258    $  16,803           --           --    $ 229,890,786                --
                                               ===================================================================================

Shares issued upon conversion
   of Series E Preferred Stock                   159,534        1,595                                    501,758
Comprehensive loss:
  Redemption of Series E
   Preferred Stock                               362,604        3,626                                (10,145,321)
  Net  loss

  Total comprehensive income
----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2003                          2,202,396    $  22,024           --           --    $ 220,247,223                --
==================================================================================================================================

Cancellation of minority interest in
   preferred stock of discontinued
   subsidiary                                                                                            280,946
Shares issued upon cashless exercise
    of warrants                                  407,790        4,078                                     (4,078)
Shares issued in connection with
   private placement of common stock, net
   of stock issuance costs of $84,000            450,000        4,500                                  1,711,500
Options used in connection with
    consulting  fees                                                                                     377,363
Adjustment of fees associated
   with redemption of Series E
   Preferred Stock                                                                                        29,756
Comprehensive loss:
  Net loss
  Total comprehensive loss
----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004                          3,060,186    $  30,602           --           --    $ 222,642,710                --
----------------------------------------------------------------------------------------------------------------------------------

  Shares issued in connection with
    private placement of common stock
    net of stock issuance costs of $16,000        50,000          500                                    183,500                 x
  Shares issued in connection with
     the acquisition of Innalogic LLC            100,000        1,000                                    470,772
  Exercise of stock options                      120,000        1,200                                    718,800
  Shares issued in connection with private
     placement of Series F preferred stock,
     net of issuance costs of $253,182                                       9,844           98        2,746,720
  Shares issued in connection with private
     placement of common stock, net of
     stock issuance costs of $ 217,331           419,354        4,193                                  3,028,476
  Grant of stock
    options                                                                                            2,840,150        (2,840,150)
  Amortization of deferred
     compensation                                                                                                        1,538,176
  Shares issued in connection with the
    acquisition of AONet International Srl
    net of stock issuance costs of $50,000       100,000        1,000                                    723,000
  Cash payment for redemption of equity
     of Innalogic                                                                                        (10,000)
Comprehensive Loss
  Foreign currency translation
    adjustment
  Net loss
  Total comprehensive loss
----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2005                          3,849,540    $  38,495        9,844    $      98    $ 233,344,128        (1,301,974)
==================================================================================================================================
</TABLE>

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


                                       59
<PAGE>

                 MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003

<TABLE>
<CAPTION>
                                                             Accumulated
                                                  Other         Other
                                              Comprehensive  Comprehensive      Accumulated      Treasury Stock
                                               Income(Loss)  Income / (Loss)      Deficit       Share        Amount       Totals
                                              -------------------------------------------------------------------------------------
<S>                                           <C>                <C>          <C>               <C>        <C>          <C>
Balance June 30, 2002                                   --           --       $ (227,123,859)   (17,662)  $(1,393,710)  $ 1,390,020
                                              =====================================================================================

Shares issued upon conversion
   of  Series E Preferred Stock                                                                                             503,353
Comprehensive loss:
  Redemption of Series E
   Preferred Stock                             $13,970,813                        13,970,813                              3,829,118
  Net loss

                                                (2,614,831)                       (2,614,831)                            (2,614,831)
                                               -----------
  Total comprehensive income                   $11,355,982                                                                       --
                                               ===========
-----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2003                                   --                    $ (215,767,877)   (17,662)   (1,393,710)  $ 3,107,660
===================================================================================================================================

Cancellation of minority interest in
   preferred stock of discontinued
   subsidiary                                                                                                               280,946
Shares issued  upon cashless exercise
    of warrants                                                                                                                  --
Shares issued in connection with
   private placement of common stock, net
   of stock issuance costs of $84,000                                                                                     1,716,000
Options used in connection with
    consulting  fees                                                                                                        377,363
Adjustment of fees associated
   with redemption of Series E
   Preferred Stock                                                                                                           29,756
Comprehensive loss:
  Net loss                                     $(3,311,145)                       (3,311,145)                            (3,311,145)
                                               -----------
  Total comprehensive loss                     $(3,311,145)
                                               ===========
-----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004                                   --           --       $ (219,079,022)   (17,662)  $(1,393,710)  $ 2,200,580
-----------------------------------------------------------------------------------------------------------------------------------

  Shares issued in connection with
    private placement of common stock
    net of stock issuance costs of $16,000                                                                                  184,000
  Shares issued in connection with
     the acquisition of Innalogic LLC                                                                                       471,772
  Exercise of stock options                                                                                                 720,000
  Shares issued in connection with private
     placement of Series F preferred stock,
     net of issuance costs of $253,182                                                                                    2,746,818
  Shares issued in connection with private
     placement of common stock, net of
     stock issuance costs of $ 217,331                                                                                    3,032,669
  Grant of stock
     options                                                                                                                     --
  Amortization of deferred
        compensation                                                                                                      1,538,176
  Shares issued in connection with the
    acquisition of AONet International Srl
    net of stock issuance costs of $50,000                                                                                  724,000
  Cash payment for redemption of equity
     of Innalogic                                                                                                           (10,000)
  Comprehensive Loss
     Foreign currency translation
       adjustment                              $    28,974       28,974                                                      28,974
     Net loss                                   (6,756,284)                       (6,756,284)                            (6,756,284)
                                               -----------
  Total comprehensive loss                     $(6,727,310)
                                               ===========
-----------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2005                                   --       28,974       $ (225,835,306)   (17,662)  $(1,393,710)  $ 4,880,705
===================================================================================================================================
</TABLE>


                                       60
<PAGE>

                   MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 2005, 2004, AND 2003

<TABLE>
<CAPTION>
                                                                      2005            2004             2003
                                                                      ----            ----             ----
<S>                                                                <C>             <C>             <C>
OPERATING ACTIVITIES:
    Net loss                                                       $(6,756,284)    $(3,311,145)    $ (2,614,831)
    Loss from discontinued operations                                  181,331       1,223,727          516,534
    Cumulative effect of change in accounting principle                     --              --        5,075,000
                                                                   -----------     -----------     ------------
    Income (loss) from continuing operations                        (6,574,953)     (2,087,418)       2,976,703
    Adjustments to reconcile net income (loss) to net cash used
      in operating activities:
        Gain on termination of lease                                   (70,300)             --       (3,905,387)
        Depreciation                                                    65,754              --               --
        Amortization                                                    83,929              --               --
        Non-cash compensation expense                                1,538,176              --               --
        Non-cash consulting expense                                    235,886         377,363               --
        Goodwill impairment                                            490,000              --               --
        Asset impairment                                               267,840              --               --
        Minority interest in subsidiary                               (255,517)       (234,483)              --
    Changes in assets and liabilities:
        Accounts receivable                                           (167,706)             --               --
        Inventory                                                     (294,736)             --               --
        Other current assets                                           116,851         243,255          (53,121)
        Other assets                                                    (5,531)         (3,700)         311,629
        Trade accounts payable                                         201,550          93,091         (458,777)
        Accounts payable - related party                                40,089              --               --
        Accrued expenses and other liabilities                         242,518      (1,008,505)      (3,280,359)
                                                                   -----------     -----------     ------------
    Net cash used in operating activities                           (4,086,150)     (2,620,397)      (4,409,312)
                                                                   -----------     -----------     ------------
INVESTING ACTIVITIES:
     Purchase of investment in Excelsa                              (4,063,077)             --               --
     Cash investment in Innalogic LLC                                  (51,402)             --               --
     Purchases of property and equipment                              (249,805)         (5,130)              --
     Acquisition of AONet, net of cash and note payable               (777,375)             --               --
     Increase in restricted cash                                            --              --        4,945,874
     Proceeds from sale of Northeast Operations, net of fees                --              --        8,546,182
     Proceeds from sale of Teleservices, net of fees                   225,000       2,524,058               --
     Increase in related party note receivable                         (19,674)        (69,704)         (71,775)
                                                                   -----------     -----------     ------------
      Net cash provided by investing activities                     (4,936,333)      2,449,224       13,420,281
                                                                   -----------     -----------     ------------

FINANCING ACTIVITIES:
     Proceeds from the issuance of preferred stock, net              2,746,818              --               --
     Proceeds from issuance of common stock, net                     3,816,669       1,199,971               --
     Proceeds from exercise of stock options                           720,000              --               --
     Redemption of preferred stock                                          --              --       (6,021,840)
     Expenditures from private placement of preferred shares                --          29,785          (29,753)
     Expenditures from private placement of common shares                   --         (84,000)              --
     Repayments on proceeds from credit facilities                          --              --       (1,158,417)
     Proceeds from (repayment of) related party note payable          (500,000)        500,000               --
     Repurchase of Innalogic minority interest                         (10,000)             --               --
     Net borrowings on bank overdraft facilities - Italy                32,702              --               --
     Payment of notes payable                                           (5,740)             --               --
     Repayments of long-term debt                                           --        (201,062)      (4,812,595)
                                                                   -----------     -----------     ------------
     Net cash provided by/(used in) financing activities             6,800,449       1,444,694      (12,022,605)
                                                                   -----------     -----------     ------------
Change in accumulated other comprehensive income                        28,974              --               --
Net cash from /(used in) discontinued operations                      (237,073)        614,335         (129,840)
                                                                   -----------     -----------     ------------
Net increase (decrease) in cash and cash equivalents                (2,430,133)      1,887,856       (3,141,476)
    Cash and cash equivalents at beginning of year                   2,548,598         660,742        3,802,218
                                                                   -----------     -----------     ------------
Cash and cash equivalents at end of year                           $   118,465     $ 2,548,598     $    660,742
                                                                   ===========     ===========     ============
</TABLE>

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


                                       61
<PAGE>

                 MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. COMPANY OVERVIEW AND PRINCIPLES OF CONSOLIDATION:

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 and the media sector.
Substantially all of the Company's business activity is conducted with customers
located within the United States and Italy.

On April 10, 2004, the Company acquired 51% of the outstanding shares of common
stock of Future Developments America, Inc. 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 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. FDA 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.

On August 18, 2004, the Company acquired a 51% interest in Innalogic, LLC.
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
SafetyWatch(TM) 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 June 1, 2005, the Company acquired a 51% interest in the equity ownership
interests in AONet International S.r.l. Created in 2004 from the acquisition of
the original business assets of AONet SpA, a company placed in liquidation,
AONet International Srl is focused primarily on providing outsourcing of data
services and business continuity, the management of technology assets and
company networks, disaster recovery and security system through its state of the
art technological infrastructure, including its data center, with 24x7 service;
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 will 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. It is expected that the first order under this distribution
agreement will commence during October 2005. In addition, AONet International
has signed accords with other third parties, such as Interweb, for the promotion
and delivery of complementary products and services.


                                       62
<PAGE>

Effective February 8, 2005, the Company changed its legal name from Media
Services Group, Inc. to MSGI Security Solutions, Inc.

Liquidity:

The Company has limited capital resources and has incurred significant
historical losses, negative working capital and negative cash flows from
operations. The Company believes that funds on hand combined with funds that
will be available from its various operations should be adequate to finance its
operations and capital expenditure requirements and enable the Company to meet
its financial obligations including obligations for the purchase of its
interests in AONet and payments under its callable secured convertible notes for
the next twelve months. Failure of the new operation to generate such sufficient
future cash flow could have a material adverse effect on the Company's ability
to continue as a going concern and to achieve its business objectives. 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.

On July 13, 2005, MSGI closed a Callable Secured Convertible Note financing of
$3 million with a New York based institutional investor. The Company received $2
million in gross proceeds upon closing, and received an additional $500,000 upon
filing of the registration statement relating to this financing transaction, and
$500,000 upon the effectiveness of the registration statement (see Note 23).

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
Note 3). Operations of any subsidiaries sold during the year are presented as
discontinued operations (See Note 5). Investments 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

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.

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:


                                       63
<PAGE>

Furniture and fixtures.................                 3 to 7 years
Computer equipment and software........                 3 to 5 years
Data center equipment..................                      7 years
Machinery..............................                      6 years
Leasehold 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.

Goodwill:

The Company follows Statement of Financial Accounting Standards
("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS 142, the
Company ceased amortization of goodwill and tests its goodwill on an annual
basis using a two-step fair value based test.

The Company recognized an impairment charge of approximately $5.1 million in
connection with the adoption of SFAS No. 142 effective July 1, 2002. The
impairment charge has been booked by the Company in accordance with SFAS No. 142
transition provisions as a cumulative effect of a change in accounting principle
for the year ended June 30, 2003. In connection with the sale of the
telemarketing and teleservices business (See Note 5), the remaining goodwill
relating to the telemarketing and teleservices business of approximately $2.3
million was included in loss from discontinued operations for the year ended
June 30, 2004.

The Company recognized an impairment charge of approximately $0.5 million during
the year ended June 30, 2005. The Company determined the entire value of the
goodwill recorded in connection with the Future Developments America, Inc.
("FDA") acquisition was impaired based upon an evaluation of the fair value of
FDA in connection with MSGI's purchase of the remaining 49% minority interest
equity in FDA on July 1, 2005.

As a result of our purchase of 51% of the equity of AONet International Srl,
goodwill in the amount of approximately $3.1 million was recorded, representing
the excess of the purchase price over the fair value of net assets acquired. No
minority interest was recorded in connection with such transaction, as the
historical cost basis of the net assets of AONet prior to the acquisition was
negative.

Investments:

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.


                                       64
<PAGE>

An investment is considered impaired if the fair value of the investment is less
than its cost. 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.

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.

The Company recorded an asset impairment of $267,840 in the fiscal year ended
June 30, 2005. The Company deemed certain assets held by Future Developments
America, Inc. ("FDA") as impaired in connection with MSGI's purchase of the
remaining 49% minority interest equity in FDA on July 1, 2005 and based on the
analysis of expected future cash flows which was lower than the carrying amount
of such assets.

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 for the operations of the various subsidiaries of MSGI
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.

FDA currently does not have any revenue transactions. Innalogic recognizes sales
of its product upon shipment if the above criteria have been met.

Revenue from AONet is mainly service based, consisting principally of specific
technical projects and maintenance activities and is either project specific or
of a long-term service (e.g., one year) relationship in nature. Short-term
projects are generally recognized at the end of the contract when the amounts
are billed and the customer has accepted the delivered service.

Other significant contractual arrangements for AONet relate to the maintenance
of data backup for customers on a periodic basis. The contractual terms for
these types of services varies based on the amount of data space required by the
customer and how often the activity occurs. These types of services, including
maintenance services, are such that the customer is billed monthly for the
service and revenue recognized in the month in which the service is provided.
There are certain customers for which several months may be invoiced in advance
of providing the service. In those cases, the revenue is deferred until the
services have been rendered.

Certain AONet contracts contain penalty clauses, such that if a customer breaks
the agreement prior to its termination, the Company is eligible to bill a
termination fee to the customer. Revenue on these billings is not recognized
until the amounts are collected, as it is not generally considered probable at
the time of billing that the full amount will be collected. Contracts do not
have upfront or non-refundable payment features.


                                       65
<PAGE>

Cost of Revenue:

Innalogic costs of revenue is primarily the expenses related to acquiring the
components required to provide the specific technology applications ordered by
each individual customer.

AONet cost of revenue includes all direct costs related to the provision of
services, including allocations of direct and indirect labor costs, facility
rental, and utilities. A significant component of these costs is related to
telephone charges, as the Company transmits significant amounts of data over
telecommunication lines.

Research and Development Costs:

The Company recognizes research and development costs associated with certain
product development activates in its Future Developments America, Inc.
subsidiary. All research and development costs are expensed in the period
incurred. Such expense was $180,436 and $167,940 for the years ended June 30,
2005 and 2004. There was no such expense in 2003.

Income Taxes:

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. AONet files a
separate tax return in Italy on an annual basis.

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 goodwill and intangible assets, deferred tax valuation
allowance, valuation of stock options, fair value of net assets acquired and the
allowance for doubtful accounts. Actual results could differ from those
estimates.

Foreign Currency Transactions:

Assets and liabilities of our European subsidiary, whose functional currency is
the Euro, are translated at the prevailing rate at the balance sheet date and
revenues and expenses are translated at the average exchange rates prevailing
during the period. Gains and losses are recognized in other income as incurred.
Unrealized gains or losses are reported as accumulated other comprehensive
income within stockholders equity.

Concentration of Credit Risk:

Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and accounts
receivable. A significant portion of cash balances is maintained with one
financial institution and may, at time, exceed federally insurable amounts. In
addition, the Company's European subsidiary maintains cash in a foreign bank
account, of which the amount was approximately $5,800 at June 30, 2005. The
Company has no financial instruments with off-balance-sheet risk of accounting
loss.


                                       66
<PAGE>

The Company's services are provided to a variety of customers, generally located
in the continental United States and the northern area of Italy. The Company
maintains a reserve for potential credit losses based on an analysis of the
customers aging of receivables, financial risk profile and ongoing customer
contact. One customer accounted for 73% of revenues for the year ended June 30,
2005 and 12% of the accounts receivable balance as of June 30, 2005. Sales to
this customer for the year ended June 30, 2005 were approximately $592,400.
There were no major customers in fiscal 2004. No single supplier is considered
to be critical to the Company's ongoing business activities.

Earnings (Loss) Per Share:

On January 22, 2003, the Board of Directors approved an eight-for-one reverse
split of the common stock. The stock split was effective January 27, 2003. Par
value of the common stock remained $.01 per share and the number of authorized
shares of common stock was reduced to 9,375,000 shares. On February 7, 2005, the
Board of Directors approved a two-for-one split of the common stock of the
Company on a "two-for-one" basis. Par value of the common stock remains $.01 per
share and the number of authorized shares of common stock remains at 9,375,000
shares. The stock split was effective March 9, 2005. The effect of the above
stock splits have been reflected in the balance sheets and in all share and per
share data in the accompanying consolidated financial statements and Notes to
Financial Statements. Stockholders' equity accounts have been retroactively
adjusted to reflect the reclassification of an amount equal to the par value of
the increase in issued common shares from the common stock account to
paid-in-capital.

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 807,695, 127,500 and 45,552 shares for the years
ended June 30, 2005, 2004 and 2003, 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
545,645 and 410,000 for the years ended June 30, 2005 and 2004 were not included
in the computation of diluted earnings per share as they are anti-dilutive.

Convertible preferred stock in the amount of 9,844 shares for the year ended
June 30, 2005 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.
There were no applicable convertible preferred stock at June 30, 2004 and 2003.

Calculated on the treasury stock method, the diluted earnings per share
calculation include an additional 339,714 net potentially dilutive securities
for the year ended June 30, 2003.

Employee Stock-Based Compensation:

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

The Company has elected the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Stock based awards to
non-employees are accounted for under the provisions of SFAS 123 and Emerging
Issues Task Force ("EITF") No. 96-18 "Accounting for Equity Instruments that are
issued to other than employees for Acquiring, or in Conjunction with Selling
Goods or Services". Under SFAS No. 123, the cost is measured at fair value of
the consideration received or the fair value of the equity instrument, whichever
is more readily measurable.


                                       67
<PAGE>

In accordance with FASB Statement No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure", the effect on net income and earnings
per share if the company had applied the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock Based Compensation", to
stock-based employee compensation is as follows:

<TABLE>
<CAPTION>
                                                              Years ended June 30,
                                                   ----------------------------------------------
                                                       2005             2004             2003
                                                       ----             ----             ----
<S>                                                <C>              <C>              <C>
Net income (loss) available to common
  stockholders as reported                         $ (6,872,483)    $ (3,030,199)    $ 11,355,982
Add: Stock-based employee compensation
  included in reported net income (loss)              1,774,062               --               --
                                                   ------------     ------------     ------------
Subtotal                                             (5,098,421)      (3,030,199)      11,355,982

Less: Stock-based employee compensation
expense determined under the fair value
method for all awards                                 2,227,868           28,167          910,753
                                                   ------------     ------------     ------------

Pro forma net income (loss) available
 to common stockholders                            $ (7,326,289)    $ (3,058,366)    $ 10,445,229
                                                   ============     ============     ============

Earnings (loss) per share:
Basic earnings (loss) per share - as reported      $      (1.99)    $      (1.31)    $       5.81
                                                   ============     ============     ============
Basic earnings (loss) per share - pro forma        $      (2.12)    $      (1.32)    $       5.35
                                                   ============     ============     ============

Diluted earnings (loss) per share - as reported    $      (1.99)    $      (1.31)    $       4.95
                                                   ============     ============     ============
Diluted earning (loss) per share - pro forma       $      (2.12)    $      (1.32)    $       4.56
                                                   ============     ============     ============
</TABLE>

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 years ended June 30, 2005 and 2004. No options were granted in
2003.

<TABLE>
<CAPTION>
                                                  2005                                           2004
<S>                                     <C>                                           <C>
Risk-free interest rate                           4.00%                                          4.00%
Expected option life                    Vesting  period+ four years                   Vesting life + four years
Dividend yield                                     None                                           None

Volatility                                     152% - 163%                                         160%

Weighted average fair value
   Options issued equal to market value          $ 6.46                                          $ 1.45
   Options issued below market value             $ 9.22
</TABLE>

Comprehensive Income:

SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes
standards for the reporting and display of comprehensive income and its
components. The Company has accumulated other comprehensive income of
approximately $29,000 as of June 30, 2005, which consists of foreign currency
translation adjustments.


                                       68
<PAGE>

Summary of Recent Accounting Pronouncements:

In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 151, which revised ARB No. 43, relating to inventory costs. This
revision is to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material or "spoilage". This
statement requires that these items be recognized as a current period charge
regardless of whether they meet the criterion specified in ARB No. 43. In
addition, this Statement requires the allocation of fixed production overheads
to the costs of conversion be based on normal capacity of the production
facilities. This Statement is effective for the fiscal years beginning after
June 15, 2005. Management believes that this Statement will have no impact on
the financial statements of the Company once adopted.

In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29 "Accounting
for Nonmonetary Transactions", is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in that Opinion, however, included certain exceptions to
that principle. This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as result
of the exchange. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
believe that the adoption of this Statement will materially effect its financial
position or results of operations.


In May 2005, the FASB issued FASB Statement 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. The provisions of SFAS 154
require, unless impracticable, retrospective application to prior periods'
financial statements of (1) all voluntary changes in accounting principles and
(2) changes required by a new accounting pronouncement, if a specific transition
is not provided. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate, which requires prospective
application of the new method. SFAS 154 is effective for all accounting changes
made in fiscal years beginning after December 15, 2005.


In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 Revised 2004, "Share-Based Payment". 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. SFAS 123(R)
is effective at the beginning of the first annual reporting that ends after June
15, 2005. This Statement will be effective for the Company's first quarter of
the fiscal year ended June 30, 2006. Management believes it will have an impact
due to the Company's use of options as employee incentives, but has not yet
determined the impact.

In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations
- an Interpretation of FASB Statement No. 143" ("FIN 47"). This Interpretation
clarifies that the term conditional asset retirement obligation as used in FASB
Statement No. 143, "Accounting for Asset Retirement Obligations," refers to a
legal obligation to perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that may or may not
be within the control of the entity. The obligation to perform the asset
retirement activity is unconditional even though uncertainty exists about the
timing and (or) method of settlement. Accordingly, an entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. This
Interpretation also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. This
Interpretation is effective no later than the end of fiscal years ending after
December 15, 2005. We do not expect the adoption will have a material effect on
our financial position or results of operations.


                                       69
<PAGE>

Fair Value of Financial Instruments:

The carrying amounts of the Company's financial instruments, including cash,
notes receivable, accounts receivable, prepaid expenses, accounts payable and
accrued liabilities, approximate fair value because of their short maturities.
The carrying amount of the Company's long-term liabilities 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, 2005 and 2004. The Company's AONet subsidiary has third party debt to
the bank for short-term over draft facilities, which are principally secured by
the underlying accounts receivable, and $0.4 million for the purchase of certain
data center assets from third parties, of which $180,990 is in long-term
liabilities.

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

3. ACQUISITIONS

Future Developments America, Inc.


On April 10, 2004, MSGI Security Solutions, Inc. (the "Company") completed its
purchase of 51% of the outstanding shares of the common stock of Future
Developments America, Inc. ("FDA"), for an aggregate purchase price of $1.0
million in cash, pursuant to a definitive agreement entered into as of April 10,
2004. FDA was a new company and, as such, had no assets or liabilities at the
date of the stock purchase by MSGI Security Solutions, Inc. There were no
identifiable intangible assets associated with FDA at the date of the
transaction. Of the $1.0 million purchase price, $490,000 was identified and
recorded as goodwill as of June 30, 2004, to recognize the minority interest
owner's equity in the $1.0 million capital contribution. As a result of FDA
having no historical operations and corresponding financial results, there is no
relevant unaudited pro forma data. The 51% of the results of FDA were included
in the Company's results from April 10, 2004, and during fiscal year ended June
30,2005 the Company began to record 100% of the results of FDA (as the minority
interest account became fully exhausted).


As of July 1, 2005, MSGI acquired the remaining 49% interest in FDA pursuant to
a negotiation of the Purchase Agreement (see Note 23) and the goodwill amount of
$490,000 was deemed impaired as of June 30, 2005 (see Note 2).

Innalogic LLC

On August 18, 2004, the Company completed an acquisition of a 51% membership
interest in Innalogic, LLC, for an aggregate capital contribution of $1.0
million in cash, pursuant to definitive agreements entered into as of August 18,
2004. Further, subject to the terms and conditions of an Investment Agreement,
the Company issued an aggregate of 50,000 unregistered shares of its common
stock to Innalogic. These shares were subsequently distributed to the founding
members of Innalogic and were recorded as non-cash compensation in the fair
value amount of $235,886 in the year ended June 30, 2005. The Company also
issued 50,000 unregistered shares of common stock to certain advisors as
compensation for services rendered in connection with the completion of this
transaction with a fair value of $235,886. In May 2005, Innalogic acquired the
equity interest of one of the members for $10,000 and as a result MSGI's
membership interest increased to 55.33%. As set forth in Innalogic's Amended and
Restated Limited Liability Company Agreement, the Company may obtain up to an
additional 25% membership interest in Innalogic, if certain pre-tax income
targets are not met by certain target dates. As of August 31, 2005, Innalogic
did not meet such targets and as a result, MSGI's membership interest was
increased to 76%.


                                       70
<PAGE>

Innalogic LLC was a new and emerging company and, as such, had no assets or
liabilities at the date of acquisition of the membership interest by MSGI. A
formal valuation of Innalogic LLC, performed by an independent valuation
counselor, identified certain intangible assets associated with Innalogic at the
time of the purchase transaction. As a result of Innalogic LLC having no
historical operations and corresponding financial results, there is no relevant
unaudited pro forma data.

The following is a summary of the allocation of the purchase price for the 51%
membership interest in Innalogic LLC:

Purchase price paid in cash                                           $1,000,000
Value of Shares issued                                                   235,886
Value of Finders fees issued in stock                                    235,886
Other fees                                                                51,368
                                                                      ----------
        Subtotal                                                      $1,523,140
Less amount expensed as compensation                                     235,886
                                                                      ----------
Total purchase price                                                  $1,287,254
                                                                      ==========

There was no minority interest recognized in connection with this transaction.
The purchase price was allocated between cash in the amount of $1.0 million and
Intangible Assets of $287,254 (see Note 2). The results of Innalogic LLC were
fully consolidated into the Company's results as of August 18, 2004.

AONet International Srl
On June 1, 2005, the Company entered into a Stock Purchase Agreement to acquire
equity ownership interests in AONet International Srl ("AONet"), a 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 350,000 Euro has been paid through June
30,,2005 and the remainder is payable in three equal installments of 250,000
Euro due on each of September 30 (paid October 2, 2005) and 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.
In addition, the remaining minority stakeholder granted to MSGI the option to
acquire their interest in AONet for a purchase price equal to the lesser of (a)
2.3 times EBITDA of AONet for the fiscal 2006 year (calculated on a US GAAP
basis) or (b) 1,200,000 Euros. If MSGI does not exercise this option, then the
current minority investor can acquire a 2% interest in AONet from MSGI for a
price to be determined. The acquisition agreement between MSGI and the prior
controlling shareholders contained representations and warranty clauses that
allow, among other things, for a reduction of the purchase price based upon a
referred equity date.

The following is a summary of the allocation of the purchase price for the 51%
membership interest in AONet:

Purchase price paid in cash at closing                                $  437,375
Note payable to former controlling shareholder                           917,250
Value of finders fees issued in stock                                    774,000
Other fees                                                               290,000
                                                                      ----------
Total purchase price                                                  $2,418,625
                                                                      ==========

There was no minority interest recognized in connection with this transaction as
AONet had a negative book value on the date of the transaction, and the minority
shareholders had no future funding obligations. The purchase price was allocated
to assets and liabilities at fair value and in part based upon an independent
appraisal of AONet's long lived assets, summarized as follows:

Current assets                                                        $  878,585
Fixed assets                                                           1,962,223
Intangible assets and other long term assets                             128,589
Goodwill                                                               3,100,702
                                                                      ----------
Subtotal
                                                                       6,070,099
Total Liabilities                                                      3,651,474
                                                                      ----------
Net assets acquired                                                   $2,418,625
                                                                      ==========


                                       63
<PAGE>

The results of AONet were fully consolidated into the Company's results as of
June 1, 2005.

The accompanying consolidated financial statements do not include any revenues
or expenses related to the acquisition on or prior to June 1, 2005, the closing
date. Following are the Company's unaudited pro-forma results for the year ended
June 30, 2005 and 2004, assuming the acquisition had occurred on July 1, 2004.

                                                       Year Ended June 30,
                                                       2005            2004
                                                    (unaudited)     (unaudited)

Net revenues                                        $ 3,245,398     $ 2,146,815
Net loss attributable to common stockholders        $(8,289,799)    $(4,142,724)
Basic and diluted loss per share                    $     (2.40)    $     (1.71)
Shares used in calculating basic and diluted
  loss per share                                      3,459,854       2,415,784

These unaudited pro-forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the acquisition occurred on July 1, 2004, nor
to be indicative of future results of operations.

4. INVESTMENTS

On December 1, 2004, the Company entered into a Subscription Agreement with
Excelsa S.p.A. ("Excelsa"), a corporation organized under the laws of the
Republic of Italy, to acquire 66,632 shares of common stock of Excelsa, par
value of 1.0 Euro per share, representing 4.5% of the issued and outstanding
shares of common stock of Excelsa on a fully diluted basis. MSGI acquired the
Common Stock for an aggregate purchase price of $1,751,319, including
approximately $84,000 of acquisition costs.

On January 3, 2005, the Company entered into an additional Subscription
Agreement with Excelsa to acquire an additional 135,381 shares of common stock
of Excelsa, par value of 1.0 Euro per share, for an aggregate purchase price of
$2,311,758, including approximately $248,000 of acquisition costs, representing
8.4% of the issued and outstanding shares of common stock of Excelsa on a fully
diluted basis. The shares acquired, in the aggregate with the original shares
acquired in December 2004 represent 12.5% of the issued and outstanding shares
of Common Stock of Excelsa on a fully diluted basis. Excelsa has represented to
the Company that it will not solicit, initiate, consider, encourage or accept
any other proposals or offers from any person relating to any acquisition or
purchase of all or any portion of the capital stock or assets of Excelsa or any
of its subsidiaries nor will it enter into any merger, consolidation, business
combination, recapitalization, reorganization or other extraordinary business
transaction involving or related to Excelsa or any of its subsidiaries for the
period from the date of execution of the subscription agreement through December
31, 2005.

On May 16, 2005, the Company entered into a Restructuring and Subscription
Agreement with Excelsa and stockholders of Excelsa (other than MSGI) owning in
the aggregate more than 51% of Excelsa's issued and outstanding common stock, to
acquire 262,500 shares of Excelsa common stock for no additional consideration.
After giving effect to such issuance, MSGI owns 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. Excelsa and the signatory stockholders have agreed to
anti-dilution protection of MSGI's equity stake, such that MSGI will continue to
own no less than 19.5% of Excelsa's issued and outstanding shares of common
stock through December 31, 2005. The Restructuring and Subscription Agreement
provides that a portion of the purchase price paid by MSGI to Excelsa pursuant
to the Second Subscription Agreement be used as consideration for Excelsa's
agreement to issue the 262,500 shares, such that no additional consideration
will be due to Excelsa for those shares, and that the Second Subscription
Agreement be terminated effective as of the date of actual issuance of those
shares. 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. The Company does
not believe its investment has been impaired as of June 30, 2005.


                                       71
<PAGE>

5. DISCONTINUED OPERATIONS

In March 2004, the Company completed the sale of substantially all of the assets
relating to its telemarketing and teleservices business held by its wholly owned
subsidiary, MKTG Teleservices, Inc., ("MKTG Teleservices") to SD&A Teleservices,
Inc. ("SDA"), a wholly owned subsidiary of the Robert W. Woodruff Arts Center,
Inc. for approximately $2.5 million in cash and a note receivable for $0.3
million (See Note 9) plus the assumption of certain directly related
liabilities. As such, the operations and cash flows of MKTG Teleservices have
been eliminated from ongoing operations and the Company no longer has continuing
involvement in the operations.

In connection with the sale of MKTG Teleservices, the Company recognized a loss
on disposal of discontinued operations of approximately $1.0 million in the year
ended June 30, 2004. The loss represents the difference in the net book value of
assets and liabilities as of the date of the sale as compared to the net
consideration received after settlement of purchase price adjustments plus any
additional expenses incurred, and a tax impact of approximately $35,000.

In December 2002, the Company completed the sale of substantially all of the
assets relating to its direct list sales and database services and website
development and design business held by certain of its wholly owned subsidiaries
(the "Northeast Operations") to Automation Research, Inc. ("ARI"), a wholly
owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash
plus the assumption of all directly related liabilities. As such, the operations
and cash flows of the Northeast Operations have been eliminated from ongoing
operations and the Company no longer has continuing involvement in the
operations.

In connection with the sale of the Northeast Operations, the Company recognized
a loss on disposal of discontinued operations of approximately $.2 million in
the year ended June 30, 2003. The loss represents the difference in the net book
value of assets and liabilities as of the date of the sale as compared to the
net consideration received after settlement of purchase price adjustments plus
any additional expenses incurred. There was no tax impact on this loss.

Accordingly, the statement of operations and cash flows for the periods ended
June 30, 2004 and 2003 have been reclassified into a one-line presentation and
the operations of the above subsidiaries are included in loss from discontinued
operations and net cash used by discontinued operations. In addition, the assets
and liabilities of MKTG Teleservices have been segregated and presented in Net
Assets of Discontinued Operations and Net Liabilities of Discontinued Operations
as of June 30, 2004 and consists of $130,742 for the final purchase price
adjustment payable on the sale of the telemarketing and teleservices division.


                                       72
<PAGE>

Revenue recognized for the years ended June 30, 2004 and 2003 relating to the
discontinued operations, which is included in Loss from Discontinued Operations,
was approximately $9.5 million and $23.4 million, respectively. In connection
with the disposal of the discontinued operations, the Company no longer provides
services for the list sales and services, database marketing, website
development design, marketing communication services and telemarketing and
teleservices product lines.

In September 2000, the Company offered to exchange the preferred shares of its
subsidiary WiredEmpire for MSGI common shares. As of June 30, 2003, 48,000
shares of WiredEmpire preferred stock had not been exchanged. These shares were
returned as part of a legal settlement reached during the fiscal year ended June
30, 2004 and, as a result, a gain on the redemption of preferred stock was
recorded in the amount of $280,946.

6. OTHER CURRENT ASSETS

Other current assets as of June 30, 2005 and 2004 consist of the following:

                                                            2005          2004
                                                          --------      --------
Prepaid legal                                             $ 58,568      $135,008
Prepaid insurance                                           14,095        27,813
Prepaid rent                                                17,000            --
VAT receivable                                              16,000            --
Prepaid consulting contract - related party                103,700            --
Other                                                       28,776        45,472
                                                          --------      --------
                Total                                     $238,139      $208,293
                                                          ========      ========

7. PROPERTY, PLANT AND EQUIPMENT:

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

                                         2005          2004
                                      -----------     ------

Machinery, equipment and furniture    $   543,770     $5,130
Data center                             1,380,983         --
Software                                    4,979         --
Leasehold improvements                    374,238         --
                                      -----------     ------
      Total, at cost                  $ 2,303,970      5,130
Less: accumulated depreciation           (167,780)        --
                                      -----------     ------
Property, plant & equipment, net      $ 2,136,190     $5,130
                                      ===========     ======

Depreciation expense was $65,754 for the year ended June 30, 2005. There was no
depreciation expense in 2004.


                                       73
<PAGE>

8. GOODWILL AND OTHER INTANGIBLE ASSETS:

As a result of the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill effective July 1, 2002. Identifiable intangible assets
are amortized under the straight-line method over the period of expected benefit
of five years. During fiscal year 2003, the Company recharacterized acquired
workforce of approximately $51,000, which is no longer defined as an intangible
asset under SFAS No. 141. In addition, the Company recharacterized
non-contractual customer relationships of approximately $.8 million, which do
not meet the separability criterion under SFAS No. 141.

During 2003, the Company recognized an impairment charge of approximately $5.1
million in connection with the adoption of SFAS No. 142 relating to the list
sales and services and database marketing and web site development and design
reporting units. The impairment charge has been booked by the Company in
accordance with SFAS 142 transition provisions as a cumulative effect of change
in accounting principle for the year ended June 30, 2003.

In 2004, the Company sold the telemarketing operations and wrote off the
goodwill related to this reporting unit (see Note 5). During 2004, the Company
acquired a new reporting unit representing the security and surveillance segment
resulting from its acquisition of FDA.

In connection with the acquisition of Innalogic (see Note 3), intangible assets
related to unpatented technologies totaling $287,288 were acquired. In
connection with the AONet acquisition (see Note 3), goodwill of $3,108,471 and
intangible assets of $120,380, consisting of a favorable lease and trade name,
were recorded.

The following table sets forth the components of goodwill, net as of June 30,
2005 and 2004:


                                      2005            2004
                                  -----------     -----------
Goodwill, beginning balance       $   490,000     $ 2,277,220
Impairment losses                    (490,000)             --
Sale of reporting unit                     --      (2,277,220)
Acquisition of reporting units      3,108,471         490,000
                                  -----------     -----------
Goodwill, ending balance          $ 3,108,471     $   490,000
                                  ===========     ===========

The gross carrying amount and accumulated amortization of the Company's
intangible assets as of June 30, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                         June 30, 2005                     June 30, 2004
                                Gross Carrying    Accumulated     Gross Carrying    Accumulated
                                    Amount        Amortization        Amount        Amortization
<S>                              <C>              <C>              <C>              <C>
Amortized intangible assets
    Unpatented technology        $     287,288    $      83,149    $          --    $          --
     Favorable lease                    56,136              780               --               --
Unamortized intangible assets
     Trade name                         64,244
                                 ----------------------------------------------------------------
Totals                           $     407,668    $      83,929    $          --    $          --
                                 ================================================================
</TABLE>

Amortization expense recorded for the year ended June 30, 2005 was $83,929. The
estimated remaining amortization expense for the five succeeding years is as
follows:

Fiscal Year                   Amount

2006                     $   105,100
2007                         105,100
2008                          22,000
2009                           9,400
2010                           9,400



                                       74
<PAGE>

9. NOTE RECEIVABLE

On March 31, 2004, the Company received a Holdback Promissory Note (the "Note)
from SD&A Teleservices, Inc. as called for in the terms of the Asset Purchase
Agreement, dated March 31, 2004, for the sale of the MKTG Teleservices, Inc.
operations (see Note 5). This note was in the principle amount of $300,000,
together with accrued interest at the rate of two percent (2%) per annum. An
early payment of the principle balance, in the amount of $225,000 was negotiated
and settled during May 2005, and the remaining $75,000 related to set-off costs
and discount on early redemption was reported in loss from discontinued
operations.

10. SHORT TERM BORROWINGS:

The Company's majority owned subsidiary, AOnet, is completely financed with
short-term debt from Italian banks denominated in Euros. The Company has bank
overdraft protection with a local Italian bank. This overdraft protection allows
the Company to pay vendors or other creditors even if funds on hand are
insufficient. The interest rate associated with this financing mechanism was
approximately 6% at June 30, 2005. At June 30, 2005, AONet borrowed $544,799
under such facilities. The total facilities available to the Company as of June
30, 2005 were as follows:

<TABLE>
<CAPTION>
                                                       Weighted Average   Credit Available
Lines of Credit                 Total Credit Facility    Interest Rate    at June 30, 2005
<S>                                    <C>                   <C>               <C>
Advance on accounts receivable         $512,800              5.80%             $ 74,800
Overdraft facility                      126,700              7.25%               20,500
Unsecured financing                      39,800              6.00%                9,700
                                       --------              ----              --------

      Total                            $679,300                                $105,000
                                       ========              ====              ========
</TABLE>

The managing director of AONet (previously the controlling shareholder) has
personally guaranteed the unsecured financing line of $39,800 and the former
majority shareholder has personally guaranteed approximately $585,000 of the
credit facilities.

11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

Accrued expenses as of June 30, 2005 and 2004 consist of the following:
<TABLE>
<CAPTION>
                                                                2005            2004
                                                             ----------      ----------
<S>                                                          <C>             <C>
Salaries and benefits                                        $  386,292      $   86,348
Abandoned lease reserves                                        183,221         419,670
Remaining purchase liability due to
   shareholder of AONet (see Note 3)                            917,250              --
Accrued acquisition costs related to AONet  acquisition         340,000              --
  Accrued legal fees                                             48,085          83,085
  Accrued audit  fees                                           175,453          82,942
  Accrued taxes                                               1,163,510          27,000
  Other                                                         225,893          49,558
                                                             ----------      ----------
               Total                                         $3,439,704      $  748,603
                                                             ==========      ==========
</TABLE>


                                       75
<PAGE>

Included in accrued taxes as of June 30, 2005 is approximately $860,000 related
to AONet payroll taxes. AONet had not paid any payroll or social security tax
amounts withheld and due to governmental agencies since April of 2004. The
accrued amounts also include approximately $100,000 of penalties and interest,
assessed based on the applicable rates used by the governmental entities for
late payments. AONet has approached the Italian Social Security department to
discuss the fact that payments of employee withholdings are in arrears. No final
determinations related to a possible payment plan or settlement has been
reached, therefore, the full amount of the taxes withheld and the related
interest and penalties have been recorded.

12. OTHER LIABILITIES

Other liabilities as of June 30, 2005 and 2004 consist of the following:

                                             2005            2004
                                          ----------      ----------

           Termination indemnity
            liabilities                   $  179,532      $       --
            Abandoned lease reserves         887,349       1,070,570
                                          ----------      ----------
            Total other liabilities       $1,066,881      $1,070,570
                                          ==========      ==========

Liability for termination indemnities relates to the employees of AONet in
Italy. In accordance with Italian severance pay statutes, an employee benefit is
accrued for service to date and is payable immediately upon separation. The
termination indemnity is calculated in accordance with local, civil and labor
laws based on each employee's length of service, employment category and
remuneration. The termination liability is adjusted annually by a cost-of-living
index provided by the Italian Government. There is no vesting period or funding
requirement associated with the liability. The liability recorded in the balance
sheet is the amount that the AONet employees would be entitled to immediately
upon separation. The related charge to earnings was approximately $5,000 for the
one month of operations consolidated at June 30, 2005.

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 is collateralized by current
and future holdings of MSGI common stock owned by the officer and bears interest
at prime. Interest is due and payable yearly on October 15th. The Company
recognized interest income of $69,674, $69,704 and $56,075 for the years ended
June 30, 2005, 2004 and 2003. As of June 30, 2005, the interest due through
October 15, 2004 of approximately $162,600 is in arrears. The note will be
forgiven in the event of a change in control.

During June 2004, an officer provided $500,000 of working capital to the Company
under a short-term arrangement. The funds were repaid to the officer during July
2004. In July 2005, the officer provided $100,000 of working capital to the
Company that was repaid within that same month. At June 30, 2005, approximately
$200,000 is due to the officer for compensation deferred. During fiscal 2005,
$50,000 of compensation due to the officer was used to pay the interest due on
the note.


                                       76
<PAGE>

Related Party - AONet

At June 30, 2005 and for the one month then ended, AONet had the following
related party transactions:

Accounts receivable - related party consists of $61,456 due from a minority
shareholder for software services provided. Accounts payable - related party
consists of a payable to the same minority shareholder in the amount of $100,100
for reimbursement of telecommunications charges and $177,400 remaining liability
balance on the purchase of the operating division during 2004, (prior to MSGI's
acquisition date),$226,500 due to a Company related to a minority shareholder
for a compensation agreement and $35,000 due to two minority shareholders by way
of a trust for 2005 compensation. The Company had expenses of approximately
$25,400, mainly for compensation to the above parties for the one month ended
June 30, 2005.

14. NOTE PAYABLE:

During June of 2005, AONet, through Nexo a minority shareholder of AONet,
exercised an option and purchased the data center assets for approximately
$422,300, which is included in net assets acquired from AONet (see Note 3) The
note is payable in scheduled installment payments through December 20, 2008 and
is non-interest bearing. As part of the purchase agreement, Nexo, a minority
shareholder, is required by December 20, 2005 to give a guarantee of
approximately $181,000 in the form of an insurance policy.

The approximate aggregate amount of all long-term debt maturities for the year
ending June 30, 2005, is as follows:

                   2006   $241,320
                   2007     60,330
                   2008     60,330
                   2009     60,330
                          --------
                           422,310

Less current maturities    241,320
                          --------
                          $180,990
                          ========

15. COMMITMENTS AND CONTINGENCIES:

Operating Leases:

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

Future minimum rental commitments under all non-cancelable leases as of June 30,
2005 are as follows:



                                   2006    $ 673,600
                                   2007      476,300
                                   2008      456,800
                                   2009      456,800
                                   2010      435,100
                             Thereafter       20,000
                                          ----------
                                          $2,518,600
                                          ==========


                                       77
<PAGE>

Rent expense was approximately $257,000, $72,000, and $62,000 for fiscal years
ended June 30, 2005, 2004 and 2003, respectively.

In fiscal year 2002, the Company incurred an estimated loss in connection with
the abandonment of certain leased office space, which is recorded in accrued
expenses and other current liabilities and other liabilities. (see Notes 11 and
12). The above rent commitment includes $1,220,000 pursuant to this abandoned
lease payable in $20,000 monthly installments through 2010 (see Note 19).

Contingencies and Litigation:

In December 2000, an action was filed by Red Mountain, LLP in the United States
Court for the Northern District of Alabama, Southern Division against J. Jeremy
Barbera, Chairman of the Board and Chief Executive Officer of Media Services
Group, Inc. (MSGI Security Solutions, Inc), and WiredEmpire, Inc. Red Mountains'
complaint alleges, among other things, violations of Section 12(2) of the
Securities Act of 1933, Section 10(b)of the Securities Act of 1934 and Rule
10(b)(5) promulgated thereunder, and various provisions of Alabama state law and
common law, arising from Red Mountain's acquisition of WiredEmpire Preferred
Series A stock in a private placement. Red Mountain invested $225,000 in
WiredEmpire's preferred stock and it seeks that amount, attorney's fees and
punitive damages. In December 2003, the action was settled, and stipulations of
dismissal with prejudice have been filed. As a result of the settlement of the
two actions, the Company reversed reserves of approximately $760,860 that had
been accrued in connection with such lawsuits for the period ended June 30,
2004.

In 1999 a lawsuit under Section 16(b) of the Securities Exchange Act of 1934 was
commenced against General Electric Capital Corporation ("GECC") by Mark Levy,
derivatively on behalf of the Company, to recover short swing profits allegedly
obtained by GECC in connection with the purchase and sale of MSGI securities. On
April 29, 2002, the court approved the settlement for $1,250,000, net of
attorney fees plus reimbursement of mailing costs. In July 2002, the court
ruling became final and the Company received and recorded the net settlement
payment of $965,486 plus reimbursement of mailing costs. The net settlement has
been recorded as a gain from settlement of lawsuit and is included in the
statement of operations for the year ended June 30, 2003.

In addition to the above, certain other 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 above matters and other pending legal
matters will have a material effect on the financial condition, results of
operations or cash flows of the Company.



                                       78
<PAGE>

16. PREFERRED STOCK:

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 is 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 does not file such registration statement within 180
days, the Company shall 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 has issued an additional 468.8 Series F
Preferred Stock, which is convertible in approximately 23,079 shares of common
stock. The holders of Series F Preferred Stock are 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 June 30, 2005, the Company had
$116,199 of undeclared but accumulated dividends. There are no reset provisions
or anti-dilution provisions associated with the Series F Convertible Preferred
Stock. In the event of liquidation, holders of this stock are entitled to
receive the stated value plus the amount of any accrued and unpaid dividends at
that date. Preferred stockholders are entitled to common stockholder voting
rights in an amount equal to the common stock equivalent of the preferred shares
as if converted. The warrants are exercisable for a period of five years at an
exercise price of $8.125 per share. Placement fees and expenses associated with
the issuance of the Series F Preferred Stock were approximately $253,200. In
addition, the Company issued warrants to placement agents to acquire 27,695
shares of common stock at an exercise price of $6.50, exercisable for a period
of five years.

In January 2003, the Company redeemed the remaining outstanding shares of the
Series E Convertible Preferred Stock for a cash payment of approximately $6.0
million and the issuance of 362,604 shares of common stock valued at
approximately $.2 million. The carrying value of the preferred stock was
approximately $20.2 million, which included a beneficial conversion feature of
approximately $10.3 million. The transaction resulted in a gain on redemption of
approximately $14.0 million and is reflected in net income attributable to
common stockholders for the year ended June 30, 2003.

17. COMMON STOCK, STOCK OPTIONS, AND WARRANTS:

Common Stock Transactions:

During June 2005, the Company issued 100,000 shares of common stock to a certain
placement agent in connection with the acquisition of AONet International Srl
(See Note 3). The fair market value of these shares, at the time of issuance, is
approximately $774,000.

During December 2004 the Company entered into a private placement offering to
certain strategic investors for the sale of 419,354 shares of the Company's
Common Stock at $7.75 per share generating gross proceeds of approximately $3.25
million. In connection with the offering, the Company issued warrants to
purchase 209,686 shares of commons stock at an exercise price per share of $8.25
exercisable for a five-year period. The investors have "piggyback" registration
rights with respect to the shares of common stock and common stock issuable upon
the exercise of the warrants. Placement fees and expenses associated with this
offering were approximately $215,700. In addition, the Company issued warrants
to placement agents to acquire 25,162 shares of common stock at an exercise
price per share equal to $7.75 excercisable for a period of five years.

In August 2004, the Company issued 50,000 shares of common stock in connection
with our acquisition of Innalogic LLC, as well as 50,000 shares of common stock
to certain advisors as compensation expense for services in connection with this
transaction (see Note 3).

In May 2004, the Company commenced a private placement offering (the "stock
agreement") to sell 500,000 shares of its common stock at a price of $4.00 per
share. As of June 30, 2004, the Company had sold 450,000 shares. As of June 30,
2004, the Company had received gross proceeds of $1.2 million and had recorded a
stock subscription receivable of $600,000 for stock subscriptions prior to June
30, 2004 for which payment was received in July 2004. Costs of $60,000 incurred
relating to the placement have been offset against the proceeds and are
reflected as a direct reduction of equity. The remaining 50,000 shares offered
were sold in July 2004 for gross proceeds of $200,000. Subject to the terms of
the Stock Agreement entered into in May 2004, the Company committed to issue
warrants for the purchase of up to 300,000 shares of the Company's common stock
at a price of $6.00 per share under a three-year term. As of June 30, 2005, the
Company has issued warrants for the purchase of 300,000 shares of common stock,
of which 270,000 was issued as of June 30, 2004.


                                       79
<PAGE>

In April 2004, the Company issued 407,790 shares of its common stock to General
Electric Capital Corporation ("GECC") pursuant to the exercise of a warrant to
purchase common stock of MSGI (the "Warrant") issued to GECC in December 1997.
The Warrant originally authorized a purchase of 10,670,000 shares of common
stock. The number of shares of common stock subject to the original Warrant were
adjusted from 10,670,000 to 444,584 in order to reflect the effect of two
reverse stock splits and one forward split. GECC elected to exercise the
purchase under the terms of a cashless transaction as in accordance with Section
2 of the Warrant. GECC forfeited and returned the right to purchase 36,794
shares of common stock under the terms of Section 2 of the Warrant.

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.

As of June 30, 2004, the Board of Directors had agreed to issue 322,500 options
beyond the number available in the 1999 plan, subject to approval of an increase
to the plan by a future vote of shareholders. The Company approved 342,500
options to purchase shares of common stock at an exercise price of $1.50 and
20,000 options to purchase shares of common stock at an exercise price of
$4.125. An annual meeting of shareholders of MSGI was held on February 7, 2005
where a proposal by the Company's Board of Directors to increase the number
options available under the 1999 plan by 1,000,000 was approved by a vote of the
shareholders. Upon shareholder approval, the 362,500 stock options were granted
on February 7, 2005, at which the market price of the stock was $9.48. Due to
the difference in market and exercise price, the Company recorded a deferred
compensation expense at the date of grant of approximately $2.8 million, which
is being amortized over the related service period. For the period ended June
30, 2005, the Company realized non-cash employee compensation expense related to
the stock options granted of approximately $1.5 million. The fair value of each
stock option is estimated on the date of grant using the Black-Scholes
option-pricing model. Pro forma compensation cost for stock options under SFAS
No. 123 is recognized over the service period. Previously recognized pro forma
compensation cost is not to be reversed if a vested employee option expires
unexercised. The Company stops recognizing pro forma compensation cost when an
option is fully vested.

The following summarizes the stock option transactions under the 1999 Plan for
the three years ended June 30, 2005:

<TABLE>
<CAPTION>
                                    Number        Exercise Price     Weighted Average
                                  of Shares         Per Share         Exercise Price
<S>                                <C>           <C>                     <C>
Outstanding at June 30, 2002        68,262       $106.50 to $279.00      $136.83
                                   =======
Granted                                 --
Exercised                               --
Cancelled                          (55,540)      $106.50 to $279.00      $123.28
                                   -------
Outstanding at June 30, 2003        12,722       $106.50 to $279.00      $175.83
                                   =======

Granted                            107,500              $1.50            $  1.50
Exercised                               --
Cancelled                          (12,722)      $106.50 to $279.00      $175.83
                                   -------
Outstanding at June 30, 2004       107,500              $1.50            $  1.50
                                   =======

Granted                            412,500           $1.50 to $7.00      $  2.63
Exercised                               --
Cancelled                               --
                                   -------
Outstanding at June 30, 2005       520,000           $1.50 to $7.00      $  2.40
                                   =======
</TABLE>


                                       80
<PAGE>

In addition to the 1999 Plan, the Company has option agreements with current
directors of the Company and certain third parties. The following summarizes
transactions for the three years ended June 30, 2005:

<TABLE>
<CAPTION>
                                    Number        Exercise Price  Weighted Average
                                  of Shares         Per Share       Exercise Price
<S>                                <C>            <C>                  <C>
Outstanding at June 30, 2002        73,340            $124.08          $124.08
                                  ========
Granted                                 --
Exercised                               --
Cancelled                          (66,672)           $124.08          $124.08
                                  --------
Outstanding at June 30, 2003         6,668            $124.08          $124.08
                                  ========
      Granted                      160,000        $1.50 to $6.00       $  5.20
Exercised                               --
Cancelled                           (6,668)           $124.08          $124.08
                                  --------
Outstanding at June 30, 2004       160,000        $1.50 to $6.00       $  5.20
                                  ========

     Granted                            --
Exercised                         (120,000)           $6.00            $  6.00
                                  ========
Cancelled                               --
                                  --------
Outstanding at June 30, 2005        40,000        $1.50 to $4.13       $  2.81
                                  ========
</TABLE>

The non-qualified stock option plan (the 1991 Plan) has expired and therefore
there are no options available to grant under this plan. The following
summarizes the stock option transactions under the 1991 Plan for the three years
ended June 30, 2005:


<TABLE>
<CAPTION>
                                                 Number         Exercise Price    Weighted  Average
                                                of Shares         Per Share         Exercise Price
<S>                                               <C>          <C>                      <C>
   Outstanding at June 30, 2002                   40,532       $48.00 to $74.64         $74.70
                                                 =======

   Granted                                            --
   Exercised                                          --
   Cancelled                                     (15,140)      $48.00 to $74.64         $86.32
                                                 -------
   Outstanding at June 30, 2003                   25,392       $48.00 to $74.64         $67.77
                                                 =======

   Granted                                            --
   Exercised                                          --
   Cancelled                                     (25,392)      $48.00 to $74.64         $67.77
                                                 -------
    Outstanding at June 30, 2004 and 2005             --
                                                 =======
</TABLE>


                                       81
<PAGE>

As of June 30, 2005, 174,000 options are exercisable. The weighted average
exercise price of all outstanding options is $2.43 and the weighted average
remaining contractual life is 8.8 years. At June 30, 2005, 605,122 options were
available for grant.

As of June 30, 2005, the Company has 793,340 warrants outstanding to purchase
shares of common stock at prices ranging from $6.00 to $8.25. All warrants are
currently exercisable.

18. INCOME TAXES:

Income (loss) before income taxes was from the following sources:

                                     For the years ended June 30,
                                        2005              2004
                                        ----              ----
                      Domestic      $(6,600,859)      $(3,301,365)
                      Italy           $(138,311)               --
                                    -----------       -----------

                      Total         $(6,739,170)      $(3,301,365)
                                    ===========       ===========

Income tax expense consists of the following:

                                              For the years ended
                                                    June 30,
                                                 2005        2004
                                                 ----        ----
                       Federal - Domestic      $    --      $   --
                       State - Domestic         11,900       9,780
                       State - Italy             5,214          --
                                               -------      ------

                       Total                   $17,114      $9,780
                                               =======      ======

Deferred tax assets are comprised of the following:

                                                        As of June 30,
                                                    2005             2004
                                                    ----             ----
                                                ------------     ------------
Deferred tax assets:

     Net basis differences in AONet net assets      $795,000     $         --
     Net operating loss carry-forwards            84,206,738       82,330,753
     Abandoned lease reserves                        458,632          563,871

     Compensation on option grants                   897,029          897,029
     Amortization of intangibles                     (87,453)              --

     Other                                            34,035           77,807
                                                ------------     ------------

         Total deferred tax assets                86,303,981       83,869,460
Valuation allowance                              (86,303,981)     (83,869,460)
                                                ------------     ------------
Net deferred tax assets                         $         --     $         --
                                                ============     ============


                                       82
<PAGE>

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 and the IRAP tax in Italy (see below).

The Company has a U.S. federal net operating loss carry forward of approximately
$241,000,000 available, which expires from 2011 through 2022. 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
$61,400,000 is the result of deductions related to the exercise of non-qualified
stock options. The realization of these net operating loss carry forwards would
result in a credit to equity.

Italy

In 2005, the Italian statutory tax rate was 37.25%, comprised of 33% national
corporate income tax ("IRES") and a 4.25% Regional Tax on Productive Activities
("IRAP"). IRAP is computed on a taxable income base which is higher than the
pre-tax income reported in the statements of operations due to the effect of
adding back significant items, such as labor costs, interest and allowance for
uncollectible accounts, to the taxable base.

Under the Italian tax system, operating losses are carried forward five years,
and any overpayments that may have been made can be credited against future
amounts due.

In 2004, as part of the establishment and contribution of net assets to the
Company, for local statutory purposes "goodwill" was created in that, for
Italian tax purposes, the "notarized" value was used to value the business for
tax purposes. Therefore in the local tax return an asset, representing the
notarized value, has been established. This amount has no relation to the amount
that is required to be paid or the agreed upon fair value. The contribution has
been treated on an historical basis in the accompanying financial statements.
The goodwill in the local tax return is deductible over 10 years for Italian tax
law purposes.

The most significant item for purposes of corporate income tax for the AONet is
the effect of IRAP, which accounts for virtually all of the taxable income
effect in 2005, due to the fact that, as reported above, the taxable base is
significantly different than pre-tax income (loss). AONet expects to continue to
have a cash income tax liability in the future. AONet has (euro)101,000 of gross
net operating losses accumulated as of December 31, 2004 (the last filing of the
tax return), which begin to expire in 2009.

The 2003 and 2004 tax years are open to review and inspections by the Italian
tax authorities pursuant to the applicable laws.

19. GAIN ON TERMINATION OF LEASE

In December 2002, the Company terminated a lease for abandoned property. The
lease termination agreement required an up front payment of $.3 million and the
Company is obligated to pay approximately $60,000 per month until the landlord
has completed certain leasehold improvements for a new tenant, which was
completed as of July 2003, and then the Company is obligated to pay $20,000 per
month until August 2010. The Company was released from all other obligations
under the lease. The gain on lease termination represents a change in estimate
representing the difference between the Company's present value of its future
obligations and the entire obligation that remained on the books under the
original lease obligation. The remaining obligation has been recorded in accrued
expenses and other current liabilities and other liabilities, and amounted to
$1,070,057 and $1,490,240 at June 20, 2005 and 2004, respectively.

In July 2004, the Company successfully negotiated an early termination of a
lease for a certain abandoned property. The agreement resulted in a gain on
early termination of $70,300.


                                       83
<PAGE>

20. 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. Matching contributions
charged to expense were approximately $0, $1,500 and $7,200, for the fiscal
years ended June 30, 2005, 2004 and 2003, respectively. There were no employee
contributions to the plan in fiscal 2005.

The Company also provided for discretionary Company contributions. There were no
discretionary contributions in fiscal years 2005, 2004 or 2003.

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

For the year ended June 30, 2005:

o     In connection with the AONet acquisition, the Company issued 100,000
      common shares with a fair value of $774,000.

o     The Company has a remaining purchase obligation of $917,250 in connection
      with the AONet acquisition.

o     In connection with the Innalogic acquisition, the Company issued 100,000
      common shares with a fair value of $471,272.

o     The Company recorded deferred compensation expense of $2,840,150 in
      connection with the issuance of stock options.

o     AONet acquired the data center from a third party by agreeing to pay
      $422,310 through 2008.

For the year ended June 30, 2004:

o     The Company issued 407,790 common shares in relation to the exercise of
      warrants held by General Electric Capital Corporation during the year
      ended June 30, 2004.

o     The Company issued 150,000 common shares in connection with a stock
      subscription receivable of $600,000.

o     In connection with the sale of the teleservices division, the Company has
      a note receivable of $300,000.

o     In connection with a lawsuit settlement, the Company cancelled shares of
      preferred stock of a discontinued subsidiary in the amount of $280,946.

For the year ended June 30, 2003:

o     The preferred shareholders converted 149 shares of preferred Series E
      stock to 159,534 shares of common stock during the year ended June 30,
      2003.

o     In connection with the redemption of the preferred Series E stock, the
      preferred shareholders converted 2,751 shares of preferred Series E stock
      to 362,604 shares of common stock during the year ended June 30, 2003. In
      addition, the Company recognized a gain on redemption of preferred stock
      of $13,970,813.

Supplemental disclosures of cash flow data:

                                     2005          2004          2003
                                    -------      --------      --------
Cash paid during the year for:
    Interest                        $79,173      $156,769      $234,164
    Income tax paid                 $18,320       $17,995        $8,119


                                       84
<PAGE>

22. SEGMENT INFORMATION:

In accordance with SFAS No. 131, 'Disclosures about Segments of an Enterprise
and Related Information' segment information is being reported consistent with
the Company's method of internal reporting. The Company believes it has two
reporting segments. The Company has two product and services line (security
technologies and data center technologies).The security technologies product and
services line, which includes Innalogic and FDA is a new and emerging business
and, as such, has limited revenue earnings to report. The data center
technologies product and services line, which includes AONet, is a new business
emerging from an historical bankruptcy and, as such, has limited revenue
earnings to report. The segment follows the same accounting policies as outlined
in Note 2.

Financial information relating to fiscal years ended June 30, 2005 continuing
operations by business segment follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                     Security         Data Center  Corporate and Other         Total
                                                  Technologies       Technologies
-------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>               <C>                  <C>
Fiscal 2005
-------------------------------------------------------------------------------------------------------------------------
Net Revenue from external customers
-------------------------------------------------------------------------------------------------------------------------
   United States                                    $   631,480       $        --                --          $    631,480
-------------------------------------------------------------------------------------------------------------------------
   Italy                                                180,465                --       $   180,465
-------------------------------------------------------------------------------------------------------------------------
Total revenues                                      $   631,480       $   180,465                --          $    811,945
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
Gross Profit                                        $   425,250       $    26,035                --          $    451,285
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
Selling, general, administrative                    $ 3,212,533       $   122,819       $ 3,869,814          $  7,205,166
-------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization                       $   113,616       $    29,668       $     6,399          $    149,683
-------------------------------------------------------------------------------------------------------------------------
Loss from operations                                ($2,900,899)      ($  126,452)      ($3,876,213)         ($ 6,903,564)
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
Segment assets                                      $   624,612       $ 6,140,034       $ 5,334,149(1)       $ 12,098,795
-------------------------------------------------------------------------------------------------------------------------
Capital expenditures                                $   214,092                --       $    35,713          $    249,805
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

There were no revenues in fiscal 2004 or 2003 from continuing operations. The
majority of the Company's continuing operations activity in fiscal 2004 and 2003
was from Corporate, therefore detail by segment is not presented.

(1)   Principally the investment in Excelsa S.p.A. and other related party note
      receivable.

23. SUBSEQUENT EVENTS:

On July 1, 2005, MSGI and it's subsidiary Future Developments America, Inc.
("FDA") entered into a Stock Purchase, Earnout and Royalty Payment Agreement
(the "Agreement") with Future Developments, Ltd. ("FDL"), Darren Labas and Jamie
Labas, to acquire the remaining 49% of the issued and outstanding shares of
Future Developments America, Inc. held by Darren and Jamie Labas, not held by
the Company. This transaction gives 100% ownership of all issued and outstanding
shares of Future Developments America, Inc. to MSGI. The Agreement calls for a
purchase price by virtue of an earn out payment of 15% of gross sales of any FDL
products, less direct costs associated with such products, for sales of such
products by either MSGI or FDA. The earn out payments are capped at a maximum
payment of $1,000,000. Further subject to the terms and conditions of the
Agreement, ownership of certain fixed assets and component parts inventory on
the balance sheet of FDA is transferred to FDL as part of the purchase price.
The Agreement also calls for royalty payments to be made by FDL to MSGI/FDA in
the amount of 5% of net sales made to any government sector law enforcement,
security or intelligence based customer in the United States for any and all
sales of a certain transmitter product only made directly by FDL or through any
subsidiary, affiliate, distributor, dealer or agent of FDL for a period of 18
months from the date of execution of the Agreement.


                                       85
<PAGE>

On July 13, 2005, MSGI closed a Callable Secured Convertible Note financing of
$3 million with a New York based institutional investor. The instrument requires
repayment over 36 months with a maximum of 8% interest per annum. Repayment
shall be in cash or in registered shares of common stock. The monthly
amortization shall commence 90 days after closing according to a 33-month
amortization schedule. At the Investor's option, the note may be repaid upon the
issuance of common stock at the conversion price; otherwise all payments must be
in cash. The Conversion price shall be equal to 75% of the initial market price,
of $6.56. The interest rate resets to zero for any monthly period in which the
stock price is greater than 125% of the initial market price. 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 Company received $2 million in gross proceeds upon closing, and
will receive an additional $500,000 upon filing of the registration statement
relating to this offering, and $500,000 upon the effectiveness of such
registration statement. The Company also issued 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 exercise price of $7.50 per share. The placement agent received
warrants for the purchase of 12,195 shares of the Company's common stock, at an
exercise price of $7.50 per share and a fee equal to 7% of the aggregate
offering. The Company has not yet calculated the effect of the beneficial
conversion feature of this instrument.

On August 1, 2005, MSGI filed a registration statement on Form S-3 in order to
register the shares of the Company's common stock underlying the Callable
Secured Convertible Note financing. The registration statement became effective
on September 12, 2005.

On August 31, 2005 MSGI acquired an additional percentage of Innalogic LLC
thereby providing MSGI with a 76% stake in the company. Pursuant to a ratchet
provision included in the Amended and Restated Limited Liability Company
Agreement, dated August 18, 2004 between MSGI and the Innalogic LLC Members,
MSGI was entitled to receive an additional stake in the LLC with no additional
consideration effective August 31, 2005.

On September 30, 2005, AONet paid approximately $168,000 of overdue withholding
taxes relating to 2004 by increasing its overdraft facility with the bank for
the same amount. The new bank debt is due within one year.

On June 13, 2005, MSGI entered into a business agreement with VeriSign, Inc. to
launch advanced services using the VeriSign NetDiscovery Service. The VeriSign
and MSGI agreement effectively represents the market launch of the VeriSign
NetDiscovery Service in Italy. Under the terms of the agreement, VeriSign has
agreed to align with MSGI as its representative in Italy, where MSGI will
operate the VeriSign NetDiscovery Service infrastructure in a data center
operated by MSGI's AONet International subsidiary. The VeriSign NetDiscovery
Service in Italy will support end-to-end legal interception solutions addressing
the government regulations and judicial requirements for advanced technologies
such as VoIP, push to talk, and wireless packet data. Financial terms and future
MSGI payment obligations are under discussion.


                                       86
<PAGE>

                                   Schedule II

                          MSGI Security Solutions, Inc.
                    Valuation and Qualifying Accounts
            For the Years Ended June 30, 2005, 2004 and 2003

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Column A        Column B           Column C            Column D        Column E
--------------------------------------------------------------------------------

                                                    Additions
                                             -----------------------
                                    Balance at      Charged To    Charged To
Description                         Beginning        Costs and       Other     Deductions-    Balance At
                                    Of Period        Expenses      Accounts-   Describe (1)  End Of Period

----------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                  <C>          <C>          <C>         <C>
Allowance for doubtful accounts

Fiscal 2005                          215,750(2)           --           --           --          215,750

Fiscal 2004                               --              --           --           --               --

Fiscal 2003                               --              --           --           --               --

</TABLE>

------------------
(1)   Represents accounts written off during the period.

(2)   A portion represents allowance for doubtful account balance on the opening
      balance sheets for acquisitions made during the year.


                                       87