UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




**FORM
      10-K**




x ANNUAL
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
      ACT OF 1934


For
      the
      fiscal year ended June 30, 2006


OR


o 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 AvenueNew
                York, New York
            10022(Address
                of principal executive offices)
            (Zip
                Code)





Issuer’s
                telephone number, including area code:
            (917)
                339-7150Securities
                registered pursuant to Section 12(b) of the Act:
            NoneSecurities
                registered pursuant to Section 12(g) of the Act:
            ____





Common
      Stock, par value $.01 per share


(Title
      of
      class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.





Yes o
      No x





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





Yes
o
      No x





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


Indicate
      be check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes x  No
o




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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large accelerated filer o
            Accelerated filer o
            Non-accelerated filer x









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




o
      Yes X No




As
      of
      December 31, 2005, the aggregate market value of the voting stock held by
      non-affiliates of the Registrant was approximately $15,828,000.




As
      of
      October 11, 2006, there were 4,333,487 shares of the Registrant's common stock
      outstanding.




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




This
      document is filed without a report from our registered independent public
      accountants as they have not yet completed their audits as of June 30, 2006
      and
      2005 and for the three years ended June 30, 2006.









1


**PART
      I**





**Special
      Note Regarding Forward-Looking Statements**


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





**Item
      1. Business**





General





MSGI
      Security Solutions, Inc. (“The Company or MSGI”) is a 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.





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 and intelligence
      monitoring in the United States, Europe and the Middle East.





Background





The
      Company was originally incorporated in Nevada in 1919.





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. The following are occurring during the past two years:





2





Date
              Name
                  of Company Acquired
              Service
                  PerformedApril
                  2004
              Acquired
                  51% of Future Developments
                America,
                  Inc.
              Provider
                  of technology-based products and services specializing in
                  application-specific and custom-tailored restricted-access intelligence
                  products, systems and proprietary solutionsAugust
                  2004
              Acquired
                  51% of Innalogic, LLC
              Designs
                  and deploys content-rich software products for a wide range of
                  wireless
                  mobile devices.December
                  2004
              First
                  investment in Excelsa S.p.A.
              Provider
                  of Video Control systems and services for
                  security both for the civilian and military markets.January
                  2005
              Second
                  investment in Excelsa S.p.A.May
                  2005
              Renegotiation
                  of second investment in Excelsa S.p.A.June
                  2005
              Acquired
                  51% interest in AONet
                  International
                    S.r.L.
              Provider
                  of application hosting, data redundancy and
                  disaster recovery servicesJuly
                  2005
              Acquired
                  additional equity in Future Developments America, Inc. bringing
                  total
                  ownership stake to 100% and restructured the business with the
                  founders of
                  such business such that Future Developments America, Inc. became
                  a
                  non-exclusive sales organization and the founders (through “FDL” an entity
                  in which the founders own 100% interest) of such business re-acquired
                  the
                  underlying technology and operating assets.August
                  2005
              Acquired
                  additional equity in Innalogic, LLC bringing total ownership stake
                  to
                  76%April
                  2006
              Forfeited
                51%
                interest in AONet International S.r.L. as a result of default of
                provision
                of the purchase agreement





Capital
      Stock and Certain Recent Financing Transactions





In
      May
      through 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.





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. As of the fiscal year ended June
      30,
      2006 approximately 5,813 shares of Series F Convertible Stock have been
      converted, at the election of the shareholders, to approximately 286,189 shares
      of the Company’s common stock. 4,031 shares of Series F Convertible Preferred
      Stock are outstanding as of June 30, 2006.





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.





3


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. All stock prices, per share and share amounts
      have been retroactively restated to reflect the reverse 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 S.r.L. The fair market value of
      these
      shares, at the time of issuance, is estimated at approximately
      $774,000.




On
      July
      12, 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. The Note requires
      repayment over a three-year term with an 8% interest per annum. Repayment shall
      be made in cash or in registered shares of common stock, or a combination of
      both, at the option of the Company, and payment commences 90 days after each
      closing date and is payable monthly in equal principal installments plus
      interest over the remaining 33 months. Pursuant to an amendment dated September
      21, 2005 the Company has the option to make the monthly payments in registered
      shares of common stock only if the stock price exceeds $4.92 over a specified
      period of time. The Holder has the option to convert all or any part of the
      outstanding principal to common stock if the average daily price, as defined
      in
      the agreement, for the preceding five trading days is greater than the defined
      Initial Market Price of $6.56. The conversion price is $4.92. The agreement
      provides that for any monthly period in which the stock price is greater than
      125% of the initial market price of $6.56, as defined in the agreement, for
      the
      month, the interest rate for that month will be 0%. 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. In January 2006, this Agreement was further amended with a Letter
      Agreement in conjunction with additional short-tem notes the Company entered
      into with the same investors (see below), which allows the Company to meet
      its
      payment obligations under the terms of the Callable Secured Convertible Notes
      for the months of January, February and March 2006 by issuing 22,000 shares
      of
      the Company’s common stock per month, due on the last day of each month. The
      Letter Agreement also allows for the issuance of 9,000 shares of the Company’s
      common stock as a partial payment against the obligation due for the Callable
      Secured Convertible Notes for the month of April 2006. Also, in January 2006,
      the Chief Executive Officer entered into a guarantee and pledge agreement with
      the note holders, whereby, the common stock of MSGI (approximately 190,000
      shares) owned by the Chief Executive Officer was pledged as additional
      collateral for the notes. As of June 30, 2006, the Company issued 75,000 shares
      of its common stock per the terms of the Letter Agreement. Through a combination
      of cash payments ($211,253) and issuance of shares of common stock, the
      principal balance of the $3.0 million of the notes was reduced to $2,574,597
      as
      of June 30, 2006. On June 7, 2006 the Company entered into a waiver agreement
      providing for a payment of $395,450 due July 14, 2006 for debt service due
      from
      April 2006 through July 2006. Such payment was not made on July 14, 2006. In
      connection with the waiver agreement, the Company issued 800,000 warrants to
      the
      note holders. Such warrants were ascribed a fair value, as computed under the
      Black-Scholes model, of $2,224,808 which was recognized as additional interest
      expense. Because of the default of the terms of the notes, the amortization
      of
      all deferred financing costs, beneficial conversion costs and interest were
      accelerated to be recognized by June 30, 2006. As of July 14, 2006 the Company
      is in technical default of the payment terms of the Callable 8% Secured
      Convertible Notes.





During
      December 2005, the Company entered into a short-term note in the amount of
      $250,000. This loan bears interest at a rate of 10% through June 30, 2006 and
      has an annual imputed interest rate of 18.25%. The entire principal and interest
      of $25,000 will be paid in full upon completion of a contemplated future funding
      event. Further, the full amount of interest will be paid to the lender
      regardless of any possible early payment of principal. The total interest due
      under this note has been fully accrued as of June 30, 2006.





During
      January 2006, the Company entered into a short-term note in the amount of
      $300,000. This loan bore interest at a rate of 12%. The annual interest amount
      was due in full even if early payment of principal. The aggregate principal
      and
      interest of $336,000 was paid in full on January 24, 2006.





On
      January 19, 2006, the Company entered into four short-term notes with the same
      lenders that also hold the Callable Secured Convertible Notes. The short-term
      notes have an aggregate principal amount of $500,000. The loans bear interest
      at
      a rate of 20% through April 19, 2006 and have an annual imputed interest rate
      of
      80%. In connection with the above mentioned letter of amendment, the aggregate
      principal and interest of $600,000 was due July 14, 2006. Such payment was
      not
      made. In the event of any defined event of default declared by the lenders
      by
      written notice to the Company, the notes shall become immediately due and
      payable and the Company shall incur a penalty of an additional 15% of the
      amounts due and payable under the notes.





4


During
      the months of February and March 2006, the Company entered into a series of
      promissory notes with various private lenders. The notes closed in a series
      of
      four transactions over the period of February 17, 2006 to March 23, 2006. Gross
      proceeds in the amount of $799,585 were obtained and the notes carry an
      aggregate repayment total of $975,103 (which includes imputed interest of
      $175,518 or 21.95%) which is due and payable upon maturity. The notes carry
      a
      maturity date of February 28, 2007. In addition, warrants for the purchase
      of up
      to 585,062 shares of the Company’s common stock were issued to the individual
      lenders. The Company computed the value of the warrants as $1,645,194 using
      the
      Black-Scholes methodology, which value is being amortized over the term of
      the
      note. The warrants carry an exercise price of $4.50 and a term of 5 years.
      The
      warrants may be exercised 65 days after the date of issuance. Placement fees
      in
      the amount of $73,133 were paid to vFinance Investments, Inc. as placement
      agent. Other closing fees and finders fees of $66,090 were also paid. In
      addition to the placement fees, warrants for the purchase of up to 73,134 shares
      of the Company’s common stock were issued to the placement agent and its
      designees. The agent warrants carry an exercise price of $6.50, a term of 5
      years and may be exercised 65 days after the date of issuance.





During
      the month of June 2006, the company received funding, in the amount of $300,000
      from a certain New York based homeland security firm as an advance in
      contemplation of a further strategic transaction between the two parties. This
      firm is also in the security technology business and it is thought that the
      combined technologies and services would yield a stronger competitive offering
      to potential customers. From July 1, 2006 through October 13, 2006, the Company
      received an additional $700,000 in such advances. There can be no
      assurances that the strategic transactions can or will be completed. The
      advances bear interest at a rate of 8% and amounts to $1,381 for the year ended
      June 30, 2006.





Liquidity




The
      Company has limited capital resources and has incurred significant historical
      losses and negative cash flows from operations. The Company is also in default
      of its debt service payments of its notes payable. The Company believes that
      funds on hand combined with funds that will be available from its various
      operations will not be adequate to finance its operations and capital
      expenditure requirements and enable the Company to meet its financial
      obligations and payments under its callable secured convertible notes and
      promissory notes for the next twelve months. As explained above, the Company
      is
      in the process of consummating certain strategic transactions that may provide
      significant capital for MSGI. There are no assurances that these will be
      consummated. Failure of our operations to generate such sufficient future cash
      flow and failure to consummate our strategic transactions or raise additional
      financing could have a material adverse effect on the Company's ability to
      continue as a going concern and to achieve its business objectives. 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. The company has engaged the investment banking firm of HC
      Wainwright to raise additional capital for our operations.





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.





5


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.




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.




6


We
      also
      are actively marketing our surveillance and data communications products and
      services into various agencies and sectors of the United States military and
      intelligence services. In an article by Professor Peter Raven-Hansen of the
      George Washington Law School in the U.S. State Department’s journal *U.S.
      Foreign Policy Agenda* ,
      the
      author notes that the first step in bringing terrorists to justice is
      surveillance of potential attackers and prime targets. The U.S. Supreme Court
      has ruled that collection of “security intelligence” for use in a terrorism
      investigation is different than collection of evidence of a regular crime,
      partly because it is needed to prevent terrorism. Congress has enacted laws
      permitting independent judges to authorize surveillance for the purpose of
      collecting foreign intelligence in the United States on a lesser showing of
      probable cause than for a regular crime. The agency need only show that there
      is
      probable cause to believe that the target of the surveillance is a foreign
      agent
      or an international terrorist.





Services
      Offered by MSGI’s Operating Subsidiaries





**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
      SafetyWatchTM software. Innalogic-designed networks integrate with a building’s
      existing CCTV system and security infrastructure, thus creating a powerful
      network environment able to accommodate advanced building-wide security
      applications.





Importantly,
      Innalogic’s wireless video applications help clients make the critical upgrade
      of CCTV video security systems from analog to digital technology. Innalogic
      software applications easily integrate with existing systems - camera or
      rich-media networks - and are specially designed to incorporate or integrate
      with new or replacement technologies as they come online.





Currently
      in development is Innalogic SafePassage(tm), an embedded application software
      that installs within firmware at the SOC level and is used secure the
      transmission of IP or packet data in a wireless network environment. Innalogic’s
“Embedded Modular Cryptography Platform” (EMCP) integrates on the application,
      transport, and link layers. Devices, such as PDAs, handheld computers, and
      video
      cameras, using EMCP - EA, can operate with strong encryption in a wireless
      network. EMCP - EA secures wireless data transfer on small devices to support
      real-time wireless network applications like audio and video feeds, financial
      transaction processing, and other types of confidential data
      transmissions.





The
      underlying technology for ECS - SafePassage applies to a wide range of
      functional scenarios.


Scenarios
      include:


-
      Wired
      or Wireless Video Camera Network


-
      Sensor
      Network


-
      Intelligent Appliances


-
      Building Automation and Control





SafePassage
      design modularizes functionality in object oriented software components. These
      components integrate with other Innalogic Embedded products, or may be used
      to
      design an embedded product for a unique customer requirement.




7


Innalogic
      is comprised of product designers, network engineers, senior software engineers,
      interface designers, and cybersecurity specialists with unparalleled depth
      of
      expertise in designing and deploying wireless technologies. Innalogic’s core
      competencies include:





·
            Product
                design


·
            Software
                engineering


·
            Hardware
                integration


·
            Network
                engineering


·
            Interface
                design


·
            System
                integration


·
            Cybersecurity
                engineering





Innalogic
      product designers and engineers collectively bring decades of experience in
      software development, hardware deployment (e.g., video camera networks) and
      systems integration. Of particular significance is our ability to custom-write
      software that bridges the functionality of disparate hardware, software, and
      network systems and technologies.





Software
      Development





Innalogic
      adopts a straightforward and collaborative approach to software product
      development. Based on iterative design and development principles from Extreme
      Programming, Agile Modeling, and Rational Unified Process, Innalogic’s
      methodology allows the client to guide and continually refine our understanding
      of their design requirements as the product development process
      evolves.





An
      Innalogic product “roadmap” is developed for the client. The roadmap is an
      evolutionary tool that reflects precise client requirements - as they change
      over time. The client can guide the direction of the product roadmap by
      specifying key requirements, standards, and recommendations. The system can
      then
      be strategically updated, enhanced and modified to deploy the latest advances
      in
      video and security technology as determined by the client’s evolving functional
      specifications.





Innalogic
      designs, programs, tests and installs customized software applications to ensure
      maximum functionality, usability and client satisfaction.





Clients
      receive a proprietary Software Development Kit (SDK) and application-specific
      APIs that allow the client’s IT leaders to introduce and design new system
      features and functionality as desired.





Network
      Design and Engineering Services





Innalogic’s
      wireless network development and engineering expertise is applied to deliver
      customized solutions for clients’ specific challenges and requirements. Working
      in close concert with the client’s IT leaders and network administrators,
      Innalogic delivers these benefits:





•
      Creation of customized software applications for a client’s video network -
      designed specifically to optimize the network’s intended functionality and
      design requirements. Innalogic’s network software delivers maximum reliability
      and ease-of-use by client personnel utilizing the system.





•
      Customized network applications that allow for maximum control, oversight and
      ongoing administration of individual users in all locations where the network
      is
      deployed.





Network
      “Command Center”





At
      the
      core of Innalogic’s network design and engineering services is the creation of a
      customized network Command Center.





With
      a
      focus on a network’s current functional requirements and future expansion,
      Innalogic develops an elegantly architected Command Center modeled after our
      proprietary SafetyWatchTM software program - which is now being deployed for the
      U.S. Department of Homeland Security. The Command Center is designed to enhance
      the client’s existing network infrastructure, while facilitating the
      introduction of new features and connectivity with other wired and wireless
      devices. Moreover, the Command Center is designed to offer maximum
      scalability.





An
      Innalogic network Command Center delivers these features:





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





8


•
      Integration with existing network infrastructure — The Command Center
      interoperates with other wireless or wired networked digital devices and third-
      party analog CCTV components, such as cameras, monitors, matrixes and
      multiplexors.





•
      Powerful recording search facilities — The Command Center is able to quickly
      analyze thousands of recordings using motion, time and camera search criteria
      -
      thus saving valuable incident search time.





•
Review
      incidents while still recording — Video recordings can be viewed without
      interrupting current recording.





•
Simple
      remote system installation — The Command Center allows for device configuration
      remotely.





•
Secure
      control of viewer access — The Command Center supports and provides
      administrative controls for multiple user levels.





Additionally,
      Innalogic serves as a vital technology partner to the client, supporting all
      related technology (hardware and software) initiatives that arise during the
      course of a network design and engineering engagement.




**Future
      Developments America, Inc.:**




As
      a
      result of our July 1, 2005 amendment to our agreements with the founder’s of
      FDA, the
      technology and intellectual property being developed was transferred to a
      company (“FDL”) controlled by the founders of FDA and we, through our subsidiary
      FDA, are a non-exclusive licensee in the United States of certain products
      developed by FDL and of other products developed by outside organizations.
      We
      also are entitled to receive royalties on certain sales of products to others
      which are marketed by FDL. Some of FDL’s product offerings to be marketed are in
      the development stage at June 30, 2006 and we have not yet generated any revenue
      with respect to those products.




FDL
      markets a broad variety of off-the-shelf and custom surveillance equipment,
      including antennas, audio “bugs”, body cameras, covert and overt color and
      black-and-white cameras, night vision fixed surveillance cameras, power
      supplies, recording devices and related supplies. The firm sells off-the-shelf
      closed circuit television component (“CCTV”) equipment from a broad range of
      high quality manufacturers and has chosen not to commit to "exclusivity" with
      any specific product manufacturer. In this way, although FDA is still able
      to
      offer competitive pricing, they are also free to make suggestions to clients
      who
      request such information on equipment best suited for their specific application
      without being limited by exclusivity parameters.




FDL
      also
      markets a one-of-a-kind Digital Video & Audio Transmitter. The product is a
      two-component, digital, encrypted, spread spectrum video and audio transmitter
      receiver set that represents the latest advancement in deploying digital
      wireless technology for intelligence collection, surveillance and security.
      The
      transmitter/receiver has a multitude of applications to many areas of Federal,
      State and local law enforcement, and to numerous agencies within the U.S.
      Department of Homeland Security.




To
      help
      clients further meet the ongoing challenges of investigation and observation,
      FDL retains a wide range of high-end surveillance systems and equipment
      available for rent, including the latest in many of our custom covert cameras
      (for authorized agencies and organizations only). This often enables agencies,
      organizations and businesses to obtain equipment using operating budgets, and
      reduces the time lag between the need for the equipment and implementation.
      Renting is often optimal for short-term crisis situations, special events or
      seasonal needs, short-term system supplementation, or for evaluation of a system
      prior to purchase. The firm also offers lease or lease-to-purchase options
      for
      its systems.




FDL
      technicians work to ensure compatibility and smooth integration of new equipment
      with existing security operations such as CCTV monitoring and motion detection,
      alarm and card access controls, and communications systems. The firm provides
      customer training, as well as customer-designed check-lists for ease in trouble
      shooting.




As
      well
      as serving as a prime contractor, FDL may sub-contract to other major
      contractors. In accordance with contractor preference, we can sub-contract
      under
      our own name or ghost-contract (work anonymously under our contractor umbrella).
      The FDL 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.




9


FDL
      also
      delivers advisory services focused on the selection, design and deployment
      of
      technology-based surveillance networks and systems. FDL consultants work closely
      with client representatives to deliver solutions related to all aspects of
      security - from architecture and engineering to system enhancements, upgrades
      and expansion. FDL helps clients devise solutions that  meet
      their functional requirements, while maintaining a constant focus on maximizing
      efficiency and minimizing costs. FDL functions as a primary consulting
      contractor, or it can serve as a sub-contractor as part of a broader consulting
      engagement team (with a level of visibility - or anonymity - as required by
      the
      client). FDL also provides broad-based technology and systems integration
      expertise. The firm works with clients to replace, update or enhance their
      existing electronic surveillance systems - while addressing compatibility issues
      and integrating new equipment with existing security systems and installations.
      FDL engineers are conversant with current and emerging trends that impact the
      near-term utility and long-term effectiveness of surveillance equipment and
      systems.




**AONet
      International S.r.L.: (controlled from June 1, 2005 through March 31,
      2006)**





Our
      intent in acquiring a majority interest in AONet was to allow 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. Created in 2004 from the acquisition of the original business assets
      of AONet S.p.A., a company placed in liquidation, AONet International Srl
      (“AONet”) 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.





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.
      VeriSign had 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. By aligning with VeriSign, MSGI believed that it
      would
      enhance its existing legal interception and video surveillance operations in
      Italy and, ultimately, across Europe.





Effective
      March 31, 2006, MSGI defaulted on its required payments to the seller of AONet’s
      majority interest to us. As a result, the Company forfeited its ownership
      interest and we are not contractually entitled to a refund of any of the
      purchase price paid by us. Further, VeriSign has not pursued the development
      of
      the Italian marketplace. As a result, we have impaired all of our assets related
      to these investments and have reclassified the results of AONet as a
      discontinued operation.




**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.





10


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. To date we have provided our technology
      to various private and public sector organizations, both domestically and
      abroad. In come cases we have generated revenues from such deployments, and
      others were trial-basis demonstrations. Our ability to deliver our technology
      to
      customers is hindered by our liquidity and resource issues.




Competition





There
      are
      several companies now deploying wireless video technologies and covert
      surveillance tools. Only a handful, however, are doing so with wireless product
      offerings aimed exclusively at the homeland security and public safety markets.
      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 and
      for
      Innalogic LLC are in New York City . The Company believes that its remaining
      facilities are in good condition and are adequate for its current needs,
      however, to the extent that customer orders become more routine, we may need
      to
      seek additional facilities and resources. The Company has not renewed the lease
      for its headquarters which terminated in June 2006, on a long term basis, but
      instead currently leases the space on a month to month basis. The Company
      intends to relocate its headquarters to smaller facility under a new lease
      arrangement in October 2006.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 2007.
      At
      this time, the Company does not require any manufacturing facilities for its
      operations.





11


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, 2006, the Company and its majority owned subsidiaries employed approximately
      13 persons, of whom 8 were employed on a full-time basis. Of these employees
      3
      were located in Italy. Of these employees, 5 were employed on a consulting
      basis, including the 3 employees in 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.





**Item
      1A. Risk Factors**





**We
      cannot be certain of the Company's ability to continue as a going concern.**





The
      Company has limited capital resources and has incurred significant historical
      losses and negative cash flows from operations. The company is also in default
      of its note payable obligations. The Company believes that funds on hand and
      funds available from its remaining operations are not adequate to finance its
      operations and capital expenditure requirements for the next twelve months.
      The
      Company has recently engaged an investment banker to assist in the private
      placement sale of shares of Common Stock and preferred stock, debt, or other
      combinations thereof. We
      are
      also engaged in discussions with a New York based homeland security firm of
      a
      strategic transaction. This firm has provided us $1 million of advances to
      date.
      There can be no assurances additional funds can be raised, strategic
      transactions consummated and advances do not have to be repaid.In
      addition, the Company has instituted cost reduction measures, including the
      reduction of workforce and corporate overhead. Failure of the operations or
      failure to raise additional financing to generate such sufficient future cash
      flow will have a material adverse effect on the Company's ability to continue
      as
      a going concern and to achieve its business objectives.





**There
      is a risk of dilution from the exercise of existing options and warrants, or
      the
      conversion of outstanding notes and preferred stock, which may lead to potential
      difficulty in obtaining additional equity capital.**





Our
      common stock may become diluted if warrants and options to purchase our common
      stock are exercised, or outstanding convertible notes and preferred stock is
      converted into common stock. These shares, as well as the eligibility for
      additional restricted shares to be sold in the future, either pursuant to future
      registrations under the Securities Act of 1933, as amended, or an exemption
      such
      as Rule 144 under the Securities Act of 1933, as amended, may have a dilutive
      effect on the market for the price of our common stock. The terms upon which
      we
      will be able to obtain additional equity capital could also be adversely
      affected. In addition, the sale of common stock offered by this prospectus,
      or
      merely the possibility that these sales could occur, could have an adverse
      effect on the market price of our common stock.








**We
      compete against entities that have significantly greater name recognition and
      resources than we do, that may be able to respond to changes in customer
      requirements more quickly than we can and that are able to allocate greater
      resources to the marketing of their products.**





The
      security industry is highly competitive and has become more so over the last
      several years as security issues and concerns have become a primary
      consideration at both government and private facilities worldwide. Competition
      is intense among a wide ranging and fragmented group of product and service
      providers, including security equipment manufacturers, providers of integrated
      security systems, systems integrators, consulting firms and engineering and
      design firms and others that provide individual elements of a system, some
      of
      which are larger than us and possess significantly greater name recognition,
      assets, personnel, sales and financial resources. These entities may be able
      to
      respond more quickly to changing market conditions by developing new products
      that meet customer requirements or are otherwise superior to our products and
      may be able to more effectively market their products than we can because of
      the
      financial and personnel resources they possess. We cannot assure investors
      that
      we will be able to distinguish our self in a competitive market. To the extent
      that we are unable to successfully compete against existing and future
      competitors, our business, operating results and financial condition would
      be
      materially and adversely affected.





12





**We
      are dependent on third party suppliers for principal components used in our
      products, and disruptions in supply or significant increases in component costs
      could materially harm our business.**





We
      rely
      on third parties to supply several key components utilized in the manufacture
      and implementation of our products and services. Our reliance on suppliers
      involves certain risks, including a potential inability to obtain an adequate
      supply of required components, price increases, timely delivery and component
      quality. Although to date, we have not experienced any disruption in supplies
      of
      components, we cannot assure you that there will not be a disruption of our
      supplies in the future. Disruption or termination of the supply of these
      components could delay shipments of products and could have a material adverse
      affect on our business, operating results and financial condition.




**Our
      industry is characterized by rapid technological change, evolving industry
      standards and continuous improvements in products and required customer
      specifications. Due to the constant changes in our markets, our future success
      depends on our ability to improve our manufacturing processes, improve existing
      products and develop new products.**





The
      commercialization of new products involves substantial expenditures in research
      and development, production and marketing. We may be unable to successfully
      design or manufacture these new products and may have difficulty penetrating
      new
      markets. Because it is generally not possible to predict the amount of time
      required and the costs involved in achieving certain research, development
      and
      engineering objectives, actual development costs may exceed budgeted amounts
      and
      estimated product development schedules may be extended. Our business may be
      materially and adversely affected if:





·
            we
                are unable to improve our existing products on a timely
                basis;


·
            our
                new products are not introduced on a timely
                basis;


·
            we
                incur budget overruns or delays in our research and development efforts;
                or


·
            our
                new products experience reliability or quality
                problems.





**All
      of our orders and contracts may be cancelled so there is a risk that our backlog
      may not be fulfilled.**





All
      of
      our orders and contracts are subject to cancellation by our customers at any
      time so we cannot be certain that our backlog will be fulfilled. Government
      contracts are often awarded prior to legislative approval of the funding to
      support those contracts. Consequently, the entire amount of orders and contracts
      may never be funded.




**Our
      services and reputation may be adversely affected by product defects or
      inadequate performance.**





Management
      believes that we offer state-of-the art products that are reliable and
      competitively priced. In the event that our products do not perform to
      specifications or are defective in any way, our reputation may be materially
      adversely affected and we may suffer a loss of business and a corresponding
      loss
      in revenues. Our sever liquidity concerns have caused us to not be able to
      fulfill existing orders, which could result in a loss of business and or
      reputation may be adversely affected.




13


**If
      we are unable to retain key executives or hire new qualified personnel, our
      business will be adversely affected.**





We
      rely
      on our officers and key employees and their expertise. The current liquidity
      difficulties experienced by the Company have necessitated that many key
      employees temporarily defer their compensation. The loss of the services of
      any
      of these individuals may materially and adversely affect our ability to pursue
      our current business strategy.




**Our
      relationships with Excelsa may not develop as we have expected, which may cause
      the Company to lose all or a portion of our investment.**





Our
      investments in Excelsa may be jeopardized if we have difficulty in assimilating
      the personnel, operations, technology and software of Excelsa with our current
      subsidiaries. We may learn that the Excelsa business does not complement our
      current operations. In addition, the key personnel of Excelsa may decide to
      leave their respective companies. If we make other types of acquisitions, we
      could have difficulty in integrating the acquired products, services or
      technologies into our operations. These difficulties could disrupt our ongoing
      business, distract our management and employees and increase our
      expenses.




**Our
      investment in an international operation subjects us to risks inherent in doing
      business on an international level that could harm our operating
      results.**





Currently,
      we operate in the U.S. and recently began negotiations for potential business
      relationships with certain international concerns. Because of our limited
      experience with international operations, we are subject to additional risks
      related to our international expansion strategy, including risks related to
      complying with a wide variety of national and local laws, restrictions on the
      import and export of certain technologies and multiple and possibly overlapping
      tax structures. In addition, we may face competition in other countries from
      companies that may have more experience with operations in such countries or
      with international operations generally. Our international expansion plans
      may
      not be successful and we may not be able to compete effectively in other
      countries.








**We
      may face risks associated with potential acquisitions, investments, strategic
      partnerships or other ventures, including whether such transactions can be
      located, completed and the other party integrated with our business on favorable
      terms.**





Although
      the Company continues to devote significant efforts to improving its current
      operations and profitability, the success of the Company's business strategy
      may
      depend upon the acquisition of complimentary businesses. We are in the process
      of formalizing a strategic relationship with a certain New York based homeland
      security firm. No assurances can be made that the Company will be successful
      in
      identifying and acquiring such businesses, or that any such acquisitions or
      strategic relationships, if consummated, will result in operating profits.
      In
      addition, any additional equity financing required in connection with such
      acquisitions may be dilutive to stockholders, and debt financing may impose
      substantial additional restrictions on the Company's ability to operate and
      raise capital. In addition, the negotiation of potential acquisitions may
      require management to divert its time and resources away from the Company's
      operations.





The
      Company periodically evaluates potential acquisition opportunities, particularly
      those that could be material in size and scope. Acquisitions involve a number
      of
      special risks, including:





·
            the
                focus of management's attention on the assimilation of the acquired
                companies and their employees and on the management of expanding
                operations;


·
            the
                incorporation of acquired businesses into the Company's service line
                and
                methodologies;


·
            the
                increasing demands on the Company's operational
                systems;


·
            adverse
                effects on the Company's reported operating
                results;


·
            the
                amortization of acquired intangible assets;
                and


·
            the
                loss of key employees and the difficulty of presenting a unified
                corporate
                image.


·
            financing
                the cost to acquire and ongoing operational
                needs





14


**Exchange
      Rate Fluctuations**





We
      may
      operate in international markets, with customers, manufactures and supplies
      in
      the U.S. and abroad. Most of our pricing is in dollars, but some cost may be
      based on materials or labor cost priced in other currencies. As a result,
      fluctuations in foreign currency exchange rates may adversely affect our
      expenses and results of operations. Fluctuations may adversely affect the
      comparability of period-to-period results. Although we may use hedging
      techniques in the future (which we currently do not use), we may not be able
      to
      eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations
      could have a material adverse impact on our operating results and stock price.
      In addition, future currency losses may be incurred if we or our outsourcing
      partners become subject to exchange control regulations restricting the ability
      to convert local currencies into United States dollars or other currencies.




**We
      may have problems raising money we need in the future.**





We
      will
      require additional capital, especially in light of our most recent acquisitions
      and disposals. We may, from time to time, seek additional funding through public
      or private financing, including debt or equity financing. We cannot assure
      you
      that adequate funding will be available as needed or, if it is available, that
      it will be on acceptable terms. If additional financing is required, the terms
      of the financing may be adverse to the interests of existing stockholders,
      including the possibility of substantially diluting their ownership
      position.




**We
      need to be able to acquire and integrate companies and new product lines
      successfully to implement our growth strategy.**





Our
      growth strategy includes completing acquisitions that expand and complement
      our
      business. If we are unable to make these acquisitions, we may not be able to
      meet or exceed our historical levels of revenue growth and earnings. As a
      result, our stock price may be adversely affected.





We
      may be
      unable to make acquisitions due to, among other reasons, these
      factors:





·
            the
                companies we seek to acquire or invest in may demonstrate valuations
                that
                we deem excessive;


·
            we
                may not be able to identify suitable companies to buy because many
                of the
                companies in the businesses we are evaluating are relatively small
                when
                compared to us;


·
            we
                may not be able to raise funds in the future to finance future
                acquisitions.




Future
      acquisitions only will succeed if we can effectively assess characteristics
      of
      potential target companies or product lines, such as:





·
            financial
                condition and results of
                operations;


·
            attractiveness
                of products;


·
            suitability
                of distribution channels; and


·
            management
                ability.




**We
      cannot assure you that we can identify attractive acquisition candidates or
      negotiate acceptable acquisition terms, and our failure to do so may adversely
      affect our results of operations and our ability to sustain
      growth.**





Completed
      acquisitions may give rise to a number of additional difficulties,
      including:





·
            difficulty
                integrating acquired technologies, operations and personnel with
                the
                existing business;


·
            diversion
                of management attention in connection with both negotiating the
                acquisitions and integrating the
                assets;






15




·
            strain
                on managerial and operational resources as management tries to oversee
                larger operations;


·
            potential
                issuance of securities in connection with the acquisition, which
                issuance
                lessens or dilutes the rights and values of currently outstanding
                securities;


·
            incurrence
                of additional debt;


·
            the
                write-off of in-process research and development of and other development
                costs;


·
            the
                amortization of goodwill and other intangible
                assets;


·
            loss
                of key personnel from acquired
                companies;


·
            failure
                of an acquired business to achieve targeted financial results;
                and


·
            unanticipated
                problems and liabilities of acquired
                companies.




We
      may
      not be able to successfully address these problems. Our future operating results
      will depend to a significant degree on our ability to successfully manage growth
      and integrate acquisitions.




**We
      cannot assure you that we will be successful in developing the Company through
      future acquisitions.**





Our
      ability to enact our growth strategy includes completing future financing or
      funding events. If we are unable to successfully complete such future financing
      or funding events, we may be unable to complete future
      acquisitions.




**The
      requirements of being a public company may strain our resources and distract
      management.**





As
      a
      public company, we are subject to the reporting requirements of the Securities
      Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. These requirements
      may
      place a strain on our systems and resources. The Securities Exchange Act
      requires, among other things, that we file annual, quarterly and current reports
      with respect to our business and financial condition. The Sarbanes-Oxley Act
      requires, among other things, that we maintain effective disclosure controls
      and
      procedures and internal controls for financial reporting. These requirements
      necessitate that the Company have adequate accounting and internal audit
      staffing in order to ensure that compliance is achieved and maintained. The
      Company is required to be in compliance by the period ended June 30, 2008.
      The
      Company does not currently have any dedicated internal audit staff and several
      identified material weaknesses. In order to maintain and improve the
      effectiveness of our disclosure controls and procedures and internal control
      over financial reporting, significant resources and management oversight will
      be
      required. As a result, management’s attention may be diverted from other
      business concerns, which could have a material adverse effect on our business,
      financial condition, results of operations and cash flows. In addition, as
      we
      will need to hire additional accounting and financial staff with appropriate
      public company experience and technical accounting knowledge, or engage
      appropriate consulting services in order to reach and maintain compliance,
      we
      cannot assure you that we will be able to do so in a timely fashion.




**We
      may not have an adequate number of Common or Preferred Shares authorized to
      enable us to complete transactions which may adversely affect our ability to
      grow and develop the Company.**




We
      may
      experience difficulties in securing shareholder approval for an increase in
      the
      number of authorized shares of either or both our Common Stock and Preferred
      Stock. This may affect our ability to be able to consummate future growth
      strategy acquisitions and business relationships.




16


**We
      may experience variations from quarter to quarter in operating results and
      net
      income, which could adversely affect the price of our common
      stock.**





We
      expect
      to experience significant fluctuations in future quarterly operating results.
      Quarterly fluctuations could adversely affect the market price of our common
      stock. Many factors, some of which are beyond our control, may cause future
      quarterly fluctuations, including:





·
            new
                customer contracts which may require us to incur costs in periods
                prior to
                recognizing revenue under those
                contracts;


·
            the
                effect of the change of business mix on profit
                margins;


·
            the
                timing of additional selling, general and administrative expenses
                to
                support new business;


·
            the
                costs and timing of the completion and integration of acquisitions,
                sales
                of assets and investments;


·
            the
                timing of sales of assets;


·
            the
                cyclical elements of our clients'
                industries;


·
            the
                demand for our products and
                services;


·
            the
                market acceptance of new products and
                services;


·
            specific
                economic conditions in the electronic surveillance industry;
                and


·
            general
                economic conditions.




The
      anticipated quarterly fluctuations make predictions concerning our future
      revenues difficult. We believe that period-to-period comparisons of our results
      of operations will not necessarily be meaningful and should not be relied upon
      as indicative of our future performance for any subsequent fiscal quarter or
      for
      a full fiscal year. It also is possible that in some future quarters our
      operating results will be below the expectations of securities analysts and
      investors. In such circumstances, the price of our common stock may decline.








**Because
      our sales tend to be concentrated among a small number of customers, our
      operating results may be subject to substantial fluctuations. Accordingly,
      our
      revenues and operating results for any particular quarter may not be indicative
      of our performance in future quarters, making it difficult for investors to
      evaluate our future prospects based on the results of any one quarter.**





Given
      the
      nature of our customers and products, we receive relatively large orders for
      products from a relatively small number of customers. Consequently, a single
      order from one customer may represent a substantial portion of our sales in
      any
      one period and significant orders by any customer during one period may not
      be
      followed by further orders from the same customer in subsequent periods. Our
      sales and operating results are subject to very substantial periodic variations.
      Since quarterly performance is likely to vary significantly, our results of
      operations for any quarter are not necessarily indicative of the results that
      we
      might achieve for any subsequent period. Accordingly, quarter-to-quarter
      comparisons of our operating results may not be meaningful.








**The
      price of our stock has been volatile.**





The
      market price of our common stock has been, and is likely to continue to be,
      volatile, experiencing wide fluctuations. Such fluctuations may be triggered
      by:





·
            differences
                between our actual or forecasted operating results and the expectations
                of
                securities analysts and investors;


·
            announcements
                regarding our products, services or
                technologies;


·
            announcements
                regarding the products, services or technologies of our
                competitors;


·
            developments
                relating to our patents or proprietary
                rights;


·
            specific
                conditions affecting the electronic surveillance
                industry;






17




·
            sales
                of our common stock into the public
                market;


·
            general
                market conditions; and


·
            other
                factors.




In
      recent
      years the stock market has experienced significant price and volume fluctuations
      which have particularly impacted the market prices of equity securities of
      many
      companies providing Internet-related products and services. Some of these
      fluctuations appear unrelated or disproportionate to the operating performance
      of such companies. Future market movements may adversely affect the market
      price
      of our stock.








**We
      may be unable to protect our intellectual property rights and we may be liable
      for infringing the intellectual property rights of others.**





Our
      success depends in part on our intellectual property rights and our ability
      to
      protect such rights under applicable patent, trademark, copyright and trade
      secret laws. We seek to protect the intellectual property rights underlying
      our
      products and services by filing applications and registrations, as appropriate,
      and through our agreements with our employees, suppliers, customers and
      partners. However, the measures we have adopted to protect our intellectual
      property rights may not prevent infringement or misappropriation of our
      technology or trade secrets. A further risk is introduced by the fact that
      many
      legal standards relating to the validity, enforceability and scope of protection
      of certain proprietary rights in the context of the Internet industry currently
      are not resolved.





We
      license certain components of our products and services from third parties.
      Our
      failure to maintain such licenses, or to find replacement products or services
      in a timely and cost effective manner, may damage our business and results
      of
      operations. Although we believe our products and information systems do not
      infringe upon the proprietary rights of others, there can be no assurance that
      third parties will not assert infringement claims against us. From time to
      time
      we have been, and we expect to continue to be, subject to claims in the ordinary
      course of our business, including claims of our alleged infringement of the
      intellectual property rights of third parties. Any such claims could damage
      our
      business and results of operations by:





·
            subjecting
                us to significant liability for
                damages;


·
            resulting
                in invalidation of our proprietary
                rights;


·
            being
                time-consuming and expensive to defend even if such claims are not
                meritorious; and


·
            resulting
                in the diversion of management time and
                attention.




Even
      if
      we prevail with respect to the claims, litigation could be time-consuming and
      expensive to defend, and could result in the diversion of our time and
      attention. Any claims from third parties also may result in limitations on
      our
      ability to use the intellectual property subject to these claims unless we
      are
      able to enter into agreements with the third parties making such
      claims.





**Our
      ability to maintain our listing on the Nasdaq stock market may be in
      question.**





On
      July
      11, 2006, the Company received a determination from the Listing Qualifications
      Staff of The Nasdaq Stock Market, Inc. indicating that, based upon the Company’s
      non-compliance with Nasdaq Marketplace Rule 4310(c)(2)(B), which requires the
      Company to evidence a minimum of $2,500,000 in stockholders' equity, $35,000,000
      in market value of listed securities, or $500,000 in net income from continuing
      operations for t\he most recently completed fiscal year or two of the three
      most
      recently completed fiscal years, the Company's securities are subject to
      delisting from The Nasdaq Stock Market.





As
      announced on May 26, 2006, the Company timely submitted its plan to evidence
      compliance with the $2.5 million shareholders' equity requirement to the Listing
      Qualifications Staff on June 7, 2006. However, by letter dated July 11, 2006,
      the Nasdaq Staff indicated that it had denied the Company’s request for
      continued listing on The Nasdaq Capital Market. As a result, the Company held
      a
      hearing before the Nasdaq Listing Qualifications Panel, which effectively stayed
      the Nasdaq Staff’s determination to delist the Company’s securities pending
      issuance of a formal determination by the Panel regarding the Company’ request
      for continued listing.





18





**Our
      ability to use our net operating losses may be limited in future periods, which
      would increase our tax liability.**





Under
      Section 382 of the Internal Revenue Code of 1986, utilization of prior net
      operating losses is limited after an ownership change, as defined in Section
      382, to an annual amount equal to the value of the Company’s outstanding stock
      immediately before the date of the ownership change multiplied by the long-term
      tax exempt rate. In the event that a change of control were to happen and in
      the
      event we achieve profitable operations, any significant limitation on the
      utilization of net operating losses would have the effect of increasing our
      tax
      liability and reducing after tax net income and available cash reserves.





**We
      do not intend to pay cash dividends on our Preferred or Common
      Stock.**





We
      do not
      intend to pay any cash dividends on our preferred or common stock for the
      foreseeable future. In addition, we cannot assure you that our operations will
      generate sufficient revenues to enable us to declare or pay cash dividends.
      We
      have not paid cash dividends on any of our capital stock in at least the last
      six years. The Preferred Series F Stock has a stated dividend rate, which,
      since
      dividends have not been declared and paid, increases the liquidation preference
      of such shares. It is anticipated that future earnings, if any, will be used
      to
      finance our future growth.




**Our
      ability to issue "blank check" preferred stock and certain other provisions
      of
      our certificate of incorporation could prevent or delay
      takeovers.**





Our
      restated certificate of incorporation authorizes the issuance of "blank check"
      preferred stock (that is, preferred stock which our board of directors can
      create and issue without prior stockholder approval) with rights senior to
      those
      of our common stock. Furthermore, we have a staggered board of directors. These
      provisions, together with certain provisions of Nevada law limiting the voting
      rights of an acquirer of a controlling interest in a Nevada corporation (such
      as
      ourselves), as well as restrictions on certain business combinations (including
      certain mergers and exchanges), could delay or impede a merger, tender offer
      or
      other transaction resulting in a change in control, even if such a transaction
      would have significant benefits to our stockholders. As a result, these
      provisions could limit the price that certain investors might be willing to
      pay
      in the future for shares of our common stock.




**Management
      has discretion over the use of proceeds.**





Management
      has broad discretion over the use of proceeds from the exercise of options
      and
      warrants. We may use the proceeds in ways that do not improve our operating
      results or the market value of our securities. We have significant flexibility
      as to the timing and the use of the proceeds. You will rely on our judgment
      with
      only limited information about our specific intentions regarding the use of
      proceeds. We may spend most of the net proceeds received from the exercise
      of
      warrants in ways with which you may not agree. If we fail to apply these funds
      effectively, our business, results of operations and financial condition may
      be
      materially and adversely affected.




**Our
      securities may trade below the offering price.**





The
      offering price per share of our securities registered in this Registration
      Statement has been determined through negotiations between the Selling
      Stockholder and the purchasers and does not necessarily relate to any
      established criteria of value. We cannot assure you that the trading price
      of
      our securities will equal or exceed the offering price.




**The
      trading price of our common stock has experienced fluctuation in the past and
      may continue to do so in the future.**





The
      stock
      market in recent years has experienced significant price and volume fluctuations
      that have affected market prices for the stock of technology companies. These
      fluctuations have often been unrelated to or disproportionately affected by
      the
      operating performance of these companies. The market price of our common stock
      could fluctuate significantly after this registration in response to a variety
      of factors, some of which may be beyond our control. These factors may include
      one or more of the following:





·
            quarterly
                operating results falling below or exceeding analysts' or investors'
                expectations in any given period;






19




·
            changes
                in financial estimates or investment recommendations by securities
                analysts following our business;


·
            changes
                in market valuations of, or earnings and other announcements by,
                our
                competitors;


·
            announcements
                by our competitors of new technological innovations, service offerings,
                contracts, acquisitions or strategic
                relationships;


·
            departures
                of key personnel; and


·
            changes
                in business or regulatory
                conditions.




In
      the
      past, following periods of market volatility, stockholders have instituted
      securities class action litigation. If we were to be involved in securities
      litigation, we could incur a substantial cost and experience diversion of
      resources and the attention of management away from our business. We cannot
      predict the future performance of the capital markets in general and the
      technology stocks in particular, and we cannot assure you that the price for
      our
      common stock will not drop significantly subsequent to this offering, whether
      related to our business or to the capital markets generally.




**Our
      investment in AONet International S.r.L. was forfeited.**




**** We
      had
      spent a significant amount of money and management effort in acquiring and
      owning 51% of AONet. We continue to be involved in discussions with the owners
      of AONet, although it is uncertain if any positive outcomes may occur, however,
      this activity may continue to be a significant distraction of management’s
      attention.




**Item
      1B. Unresolved Staff Comments**





None





**Item
      2. Properties**





The
      company is headquartered in New York City 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
      currently 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.




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**





Certain
      legal actions in the normal course of business are pending to which the Company
      is a party. The Company does not expect that the ultimate resolution of any
      other pending legal matters will have a material effect on the financial
      condition, results of operations or cash flows of the Company. There have been
      no changes to the existing status of any litigation issues since the date of
      the
      Company’s last filing.








**Item
      4. Submission of matters to a vote of security holders**





An
      Annual
      Meeting of Shareholders was held on June 28, 2006. Three 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.





20


1.
            A
                vote was held for the uncontested reelection of Mr. Seymour Jones
                as
                Director. The total number of votes cast was 3,269,246 with 3,229,254
                voted in favor and 39,992 withheld. The conclusion was that this
                vote
                passed.


2.
            A
                vote was held for the uncontested reelection of Mr. Joseph Peters
                as
                Director. The total number of votes cast was 3,269,246 with 3,209,899
                voted in favor and 59,347 withheld. The conclusion was that this
                vote
                passed.


3.
            A
                vote was held to amend the Amended and Restated Article of Incorporation
                to increase the number of authorized shares of Common Stock from
                9,375,000
                to 25,000,000 and to increase the number of authorized Preferred
                Stock
                from 18,750 to 50,000. The total number of votes cast was 1,382,095
                with
                995,038 voted in favor, 385,297 voted against and 1,760 abstained.
                There
                were a total of 1,887,151 shares not voted. The conclusion was that
                this
                vote did not pass.





**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”. 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
              
              HighFiscal
                  2006Fourth
                  Quarter
              
              $
              2.52
              
              $
              4.51Third
                  Quarter
              
              
              3.05
              
              
              4.42Second
                  Quarter
              
              
              2.31
              
              
              4.89First
                  Quarter
              
              
              4.54
              
              
              6.61Fiscal
                  2005Fourth
                  Quarter
              
              $
              4.35
              
              $
              8.25Third
                  Quarter
              
              
              5.80
              
              
              10.20Second
                  Quarter
              
              
              5.42
              
              
              9.38First
                  Quarter
              
              
              3.60
              
              
              7.00





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 condensed 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.





As
      of
      June 30, 2006, there were approximately 910 registered holders of record of
      the
      Company’s common stock.





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





**Item
      6. 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, 2006 have been derived from
      the Company’s 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.





21




HistoricalYears
                ended June 30,(In
                thousands, except per share data)2002
            
            
            2003
            
            
            2004
            
            
            2005
                (12)
            
            2006
                (12)CONSOLIDATED
                STATEMENTS OF OPERATIONS DATA:Revenues
                (1)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            631
            
            $
            127Amortization
                and depreciation
            
            $
            41
            
            
            $
            -
            
            
            $
            -
            
            
            $
            120
            
            $
            199Income
                (loss) from operations
            
            $
            (11,059)
            
            (2)
            $
            2,072
            )
            (6)
            $
            (2,335
            )
            
            $
            (6,777
            )
            $
            (8,737
            )Income
                (loss) from continuing operations
            
            $
            (11,075
            )
            
            $
            2,977
            
            
            $
            (2,087
            )
            
            $
            (6,431
            )
            $
            (13,132
            )Gain
                (loss) from discontinued operations (5)
            
            $
            (54,711
            )
            (3)
            $
            (517
            )
            (7)
            $
            (1,224
            )
            
            $
            (325
            )
            $
            (2,038
            )Net
                income (loss)
            
            $
            (65,683
            )
            
            $
            (2,615
            )
            (8)
            $
            (3,311
            )
            
            $
            (6,756
            )
            $
            (15,170
            )Net
                income (loss) available to common stockholders
            
            $
            (66,096
            )
            (4)
            $
            11,356
            
            (9)
            $
            (3,030
            )
            (10)
            $
            (6,872
            )
            $
            (15,348
            )Income
              (loss) per common share-basic and diluted (11) :Continuing
              operations
            
            $
            (7.45
            )
            
            $
            7.39
            
            
            $
            (0.78
            )
            
            $
            (1.90
            )
            $
            (3.43
            )Discontinued
              operations
            
            
            (35.79
            )
            
            
            (0.27
            )
            
            
            (0.53
            )
            
            
            (0.09
            )
            $
            (0.52
            )Cumulative
                effect of change in accounting
            
            
            -
            
            
            
            (2.21
            )
            
            
            -
            
            
            
            -
            
            $
            -$
            (43.24
            )
            
            $
            4.91
            
            
            $
            (1.31
            )
            
            $
            (1.99
            )
            $
            (3.95
            )


Weighted
                average common shares
              outstanding
                - diluted basis
            
            
            1,528
            
            
            
            2,294
            
            
            
            2,316
            
            
            
            3,460
            
            
            3,885OTHER
                DATA:Net
                cash used in continuing operations:
            
            $
            (7,433
            )
            
            $
            (4,409
            )
            
            $
            (2,620
            )
            
            $
            (4,019
            )
            $
            (3,091
            )Net
                cash provided by (used in) investing activities:
            
            $
            74
            
            
            $
            13,420
            
            
            $
            2,449
            
            
            $
            (4,936
            )
            $
            (1,224
            )Net
                cash provided by (used in) financing activities:
            
            $
            (6,027
            )
            
            $
            12,022
            
            
            $
            1,445
            
            
            $
            6,800
            
            $
            3,987Net
                cash provided by (used in) discontinued operations
            
            $
            (56,576
            )
            
            $
            (130
            )
            
            $
            614
            
            
            $
            (266
            )
            $
            (651
            )




Historical
              As
                of June 30,(In
                thousands)CONSOLIDATED
                BALANCE SHEETS DATA:
            
            2002
            
            
            2003
            
            
            2004
            
            
            2005
                (12)
            
            2006
                (12)Cash
                and cash equivalents
            
            $
            3,802
            
            
            $
            661
            
            
            $
            2,549
            
            
            $
            112
            
            $
            -Working
                capital (deficit)
            
            $
            (1,363
            )
            
            $
            (3,789
            )
            
            $
            1,596
            
            
            $
            (1,259
            )
            $
            (8,540
            )Total
                intangible assets
            
            $
            -
            
            
            $
            -
            
            
            $
            490
            
            
            $
            204
            
            $
            108Total
                assets
            
            $
            47,596
            
            
            $
            7,648
            
            
            $
            5,288
            
            
            $
            12,098
            
            $
            4,618Total
                long term debt, net of current portion
            
            $
            176
            
            
            $
            -
            
            
            $
            -
            
            
            $
            887
            
            $
            -Total
                stockholders’ equity (deficit)
            
            $
            1,390
            
            
            $
            3,108
            
            
            $
            2,201
            
            
            $
            4,880
            
            $
            (3,986
            )

















(1)
            All
                prior periods presented have been reclassified and revenue from its
                list
                sales and services product line and AONet operations has been reclassified
                as part of discontinued operations.





(2)
            Loss
                from operations includes an impairment write-down of goodwill of
                $6,500
                and a write-down of abandoned leased property of
                $6,400.





(3)
            Net
                loss includes an extraordinary item of $4,859 for a loss on early
                extinguishments of debt.





(4)
            Net
                loss available to common stockholders includes a deemed dividend
                in the
                amount of $413 in connection with the redemption of preferred
                stock.




22





(5)
            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.





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.





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 $3.3 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.





(6)
            On
                March 21, 2006, the Company forfeited its 51% ownership interest
                in AONet
                International S.r.L. Amounts have been reclassified to discontinued
                operations for the period of our ownership (June 1, 2005 through
                March 31,
                2006).




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





(7)
            In
                December 2002, the Company sold certain assets of the Northeast Operations
                for a loss of $0.2 million





(8)
            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.





(9)
            Net
                gain / (loss) available to common shareholders contains a gain (deemed
                dividend) on redemption of preferred stock of $13.9
                million.





(10)
            Net
                income available to common shareholders includes a gain on redemption
                of
                preferred stock of a discontinued operation of $0.3
                million





(11)
            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 andthe
                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 reverse
                splits and are reflected in this
                document.


(12)
            Unaudited




**Item
      7. Management’s Discussion and Analysis**





Critical
      Accounting Policies





Financial
      Reporting Release No. 60 requires all companies to include a discussion of
      critical accounting policies or methods used in the preparation of financial
      statements. This should be read in conjunction with the financial statements,
      and notes thereto, included in this Form 10-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:




·
            Revenue
                Recognition


·
            Accounts
                Receivable






23




·
            Accounting
                for Income Taxes


·
            Use
                of Estimates


·
            Equity
                based compensation


·
            Investments
                in unconsolidated entities





In
      many
      cases, the accounting treatment of a particular transaction is specifically
      dictated by GAAP and does not require management's judgment in its application.
      There are also areas in which management's judgment in selecting among available
      alternatives would not produce a materially different result. Our senior
      management has reviewed the Company's critical accounting policies and related
      disclosures with our Audit Committee. See Notes to Consolidated Financial
      Statements, which contain additional information regarding our accounting
      policies and other disclosures required by GAAP.





*Revenue
      Recognition:*




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





Revenues
      are reported 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.




*Accounts
      Receivable*




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




*Accounting
      for Income Taxes:*





The
      Company recognizes deferred taxes for differences between the financial
      statement and tax bases of assets and liabilities at currently enacted statutory
      tax rates and laws for the years in which the differences are expected to
      reverse. The Company uses the liability method of accounting for income taxes,
      as set forth in SFAS No. 109, “Accounting for Income Taxes.” Under this method,
      deferred tax assets and liabilities are recognized for the expected future
      tax
      consequences of temporary differences between the carrying amounts and the
      tax
      basis of assets and liabilities and net operating loss carry-forwards, all
      calculated using presently enacted tax rates. The effect on deferred taxes
      of a
      change in tax rates is recognized in income in the period that includes the
      enactment date. Valuation allowances are established when necessary to reduce
      deferred tax assets to the amounts expected to be realized.




*Use
      of Estimates:*




The
      preparation of financial statements in conformity with accounting 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 long lived assets,
      deferred tax valuation allowance, valuation of stock options, warrants and
      debt
      features, fair value of net assets acquired and the allowance for doubtful
      accounts. Actual results could differ from those estimates.





24


*Equity
      Based Compensation:*





We
      adopted Statement of Financial Accounting Standards ("SFAS") No. 123 Revised
      2004, "Share−Based Payment" (“SFAS 123R”) effective July 1, 2005. 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. Our adoption of SFAS 123R impacted our results of operations by
      increasing the non cash compensation expense. The amount of the impact to the
      Company for the year ended June 30, 2006 was approximately $533,000 of
      additional expense that resulted under SFAS 123R as compared to the expense
      that
      would have been recorded under APB 25.





*Investments
      in Non-Consolidated Companies:*





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





An
      investment in non-consolidated companies is considered impaired if the fair
      value of the investment is less than its cost on other than a temporary basis.
      Generally, an impairment is considered other-than-temporary unless (i) the
      Company has the ability and intent to hold an investment for a reasonable period
      of time sufficient for an anticipated recovery of fair value up to (or beyond)
      the cost of the investment; and (ii) evidence indicating that the cost of the
      investment is recoverable within a reasonable period of time outweighs evidence
      to the contrary. If impairment is determined to be other-than-temporary, then
      an
      impairment loss is recognized equal to the difference between the investment’s
      cost and its fair value.





Overview





**To
      facilitate an analysis of MSGI operating results, certain significant events
      should be considered.**





This
      document is filed without a report from our registered independent public
      accountants as they have not yet completed their audits as of June 30, 2006
      and
      2005 and for the three years ended June 30, 2006.





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 $3.3 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.





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. On July 1, 2005, MSGI and its 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. In connection with this transaction, the
      technology and intellectual property associated with this business was
      transferred to FDL (in which we have no ownership interest) and we impaired
      substantially all of our assets related to our investment.





25


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 period
      ended September 30, 2004. 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 may obtain
      up to an additional 25% membership interest in Innalogic, if certain pre-tax
      income targets are not met by certain target dates. On August 31, 2005, the
      limited liability agreement was restructured such that the Company obtained
      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 S.p.A. (“Excelsa”), a corporation organized under the laws of the
      Republic of Italy, 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 5), 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 Excelsa, 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. 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.





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





26


Results
      of Operations Fiscal 2006 Compared to Fiscal 2005





As
      of the
      year ended June 30, 2006 (the “Current Period”), the Company realized revenues
      in the amount of approximately $127,000 from the sales of Innalogic products
      for
      several unique projects. One domestic security organization represented a
      substantial portion of such revenues and revenues to Excelsa represented the
      majority of the remaining 2006 revenues. We expect sales to grow as the
      technology becomes more well-known if we can increase our sales organization.
      All revenues generated by previously owned subsidiaries and AONet during the
      fiscal year ended June 30, 2004 through 2006, have been reclassified to a single
      line presentation of Loss from Discontinued Operations on the Consolidated
      Statement of Operations. Revenues declined from the 2005 (“Prior Period”) levels
      of approximately $631,000 due to the timing of the orders. The Company’s ability
      to secure and fulfill orders was significantly impacted by the lack of resources
      during the Current Period.





Costs
      of
      goods sold of approximately 38,000 in the Current Period and approximately
      $206,000 in the Prior Period consisted primarily of the expenses related to
      acquiring the components required to provide the specific technology
      applications ordered by each individual customer. As a percentage of sales,
      the
      gross profit margin remained relatively consistent. 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 Loss from Discontinued
      Operations on the Consolidated Statement of Operations.





Research
      and development expenses were approximately $180,000 in the Prior Period. The
      Company recognized research and development costs associated with certain
      product development activities in the Future Developments America, Inc
      subsidiary. As a result of our renegotiation of our relationship with the
      founders of FDA at the end of the Prior Period, we do not expect to incur
      research and development costs for that business in the future. However, we
      may
      invest in research and development projects for our other operations.




Salaries
      and benefits of approximately $2.0 million in the Current Period increased
      by
      approximately $0.3 million or 21% over salaries and benefits of approximately
      $1.7 million in the Prior Period. Salaries and benefits increased due to an
      increase in headcount to support the planned expansion of operations in Italy
      and as a result of newly hired corporate personnel. Certain of the employees
      related to the operations in Italy have subsequently been dismissed or their
      involvement reduced.





The
      Company recognized non-cash employee compensatio n
      expenses of approximately $1.5 million in the Current Period compared to expense
      of approximately $1.8 million in the Prior Period. The Prior Period charge
      is
      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. The Current Period charge is the result of the adoption of SFAS No. 123(R)
      and the resultant recognition of expense related to unvested stock
      awards.




The
      Company recognized an expense for the provision for loss on a note receivable
      from the Chief Executive Officer of the Company. The collection of this note
      by
      its October 15, 2006 due date is uncertain. There was no such cost in the Prior
      Period.





Selling,
      general and administrative expenses of approximately $3.8 million in the Current
      Period increased by approximately $1.1 million or 41% over comparable expenses
      of $2.7 million in the Prior Period. The increase is due primarily to the
      expense of approximately $500,000 related to the unsuccessful VeriSign
      relationship, as well as increased travel, marketing, and business development
      expenses in connection with the completion of the recent acquisitions and
      subsequent integration. Professional fees also increased as a result of the
      expansion of our operations.





During
      the Prior Period the Company entered into a Stock Purchase, Earnout and Royalty
      Payment Agreement (the “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 Future Developments America,
      Inc. to MSGI. Previously booked goodwill and other intangibles of $490,000
      and
      $268,000 respectively, associated with the Company’s original investment in FDA
      was deemed impaired as of June 30, 2005 as a result of the transaction.





27


During
      the Current Period, the Company recorded depreciation and amortization expense
      of approximately $200,000 as a result of writing-off certain abandoned fixed
      assets and a full year of depreciation for Innalogic assets, whereas the Company
      had a lesser amount of depreciable or amortizable assets in the Prior
      Period.





Interest
      income of approximately $70,000 represents primarily the interest earned on
      the
      promissory note from the Chief Executive Officer, and earnings from cash
      investments.





Interest
      expense of approximately $4.5 million is primarily due to debt transactions
      entered into during the Current Period and the value of certain equity
      instruments granted to note holders in contemplation of debt defaults and the
      issuances of extensions and waivers. As a result of continued defaults, the
      Company accelerated the amortization of deferred financing costs and other
      interest costs, such that most of said items were fully recognized in interest
      expense at June 30, 2006





During
      the Prior Period the Company recognized a gain on an early termination of a
      lease of a discontinued operation 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 $34,000 in the Current Period
      increased by approximately $22,000 over net provision for income taxes of
      approximately $12,000 from the Prior Period, primarily due to 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
      $13.1
      million in the Current Period increased by $6.7 million over a comparable loss
      of $6.4 in the Prior Period.




The
      loss
      from discontinued operations-AONet represents our share of the results of the
      operations of AONet for the period in which we consolidated their operations
      in
      our financial statements. For the Prior Period, we recognized one month of
      AONet’s operations. The loss on disposal of discontinued operations-AONet
      represents the write-down of the remaining book value of assets and liabilities
      associated with the AONet operations to nil as of April 1, 2006, the date we
      defaulted on the required debt service payment and forfeited our
      ownership.




The
      loss
      from discontinued operations-other of approximately $5,000 in the Current Period
      is the result of a write-off of a facility rent deposit for a former subsidiary.
      The losses from discontinued operations-other of approximately $181,000 in
      the
      Prior Period are primarily the 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.




As
      a
      result of the above, net loss of approximately $15.2 million in the Current
      Period increased by approximately $8.4 million over comparable net loss of
      $6.8
      million in the Prior Period.





In
      the
      Current Period the Company recognized undeclared dividends on preferred stock
      of
      approximately $178,000 as compared to $117,000 in the Prior Period. This
      pertains to the issuance of the Company’s Series F Convertible Preferred Stock.
      The Company is required to pay an annual dividend of 6% on the Preferred Stock,
      payable in shares of the Company’s common stock.




As
      a
      result of the above, net loss attributable to common shareholder of
      approximately $15.3 million in the Current Period increased by approximately
      $8.5 million over comparable net loss of $6.8 million in the Prior
      Period.





Results
      of Operations Fiscal 2005 Compared to Fiscal 2004





As
      of the
      year ended June 30, 2005 (the “Current Period”), the Company realized revenues
      in the amount of approximately $631,000. Sales of Innalogic products for several
      unique projects commenced in fiscal 2005. One domestic security organization
      represented a substantial portion of such sales.





28


Costs
      of
      goods sold of approximately $206,000 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.





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 325% over salaries and benefits of approximately
      $0.4 million 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 Current Period) as well as increased headcount as a result of newly
      hired corporate support personnel.





The
      Company recognized non-cash employee compensatio n
      expenses of approximately $1.8 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 $2.7 million in the Current
      Period increased by approximately $0.9 million or 50% over comparable expenses
      of $1.8 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) during the Current Period and added
      professional fees associated with the expanded businesses.





During
      the Current Period the Company entered into a Stock Purchase, Earnout and
      Royalty Payment Agreement (the “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
      Future Developments America, Inc. to MSGI. Previously booked goodwill and other
      intangibles of $490,000 and $268,000, respectively, 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 a gain on an early termination of
      a
      lease of a discontinued operation of approximately $70,000. The property lease
      for the former subsidiary WiredEmpire, Inc. was terminated and previously booked
      reserves for abandoned properties were reversed against the cash settlement
      paid.





During
      the Current Period, the Company recorded depreciation and amortization expense
      of approximately $120,000 as a result of purchasing fixed assets and acquiring
      for Innalogic and AONet, whereas the Company had no depreciable or amortizable
      assets in the Prior Period.





Interest
      income of approximately $32,000 in the Current Period decreased by approximately
      $88,000 or 73% 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
      expenses in the Prior Period related to balances in notes payable which were
      since repaid.





As
      a
      result of the above, loss from continuing operations item of approximately
      $6.4
      million in the Current Period increased by $4.3 million over a comparable loss
      of $2.1 in the Prior Period.




The
      loss
      from discontinued operations-AONet represents our share of the operations of
      AONet for the period of our ownership of a 51% interest from June 1 through
      June
      30, 2005.




29


The
      loss
      from discontinued operations-other 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 is 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.





Off-Balance
      Sheet Arrangements





Financial
      Reporting Release No. 61, which was recently released by the SEC, requires
      all
      companies to include a discussion to address, among other things, liquidity,
      off-balance sheet arrangements, contractual obligations and commercial
      commitments. The Company currently does not maintain any off-balance sheet
      arrangements.




Liquidityand
      Capital Resources





Historically,
      the Company has funded its operations, capital expenditures and acquisitions
      pri-marily through private placements of equit y
      and
      debt transactions. At June 30, 2006, the Company had no cash and cash
      equivalents and was in default of debt agreements. The Company does not believe
      that existing financing will meet their current working capital and debt service
      requirements.





During
      the month of June 2006, the company received funding, in the amount of $300,000
      from a certain New York based homeland security firm as an advance in
      contemplation of a further strategic transaction between the two parties. From
      July 1, 2006 through October 13, 2006, the Company received an additional
      $700,000 in such advances. There can be no assurances that the strategic
      transactions can or will be completed. The advances bear interest at a rate
      of
      8% and amounts to $1,381 for the year ended June 30, 2006.





The
      Company has engaged the investment banking firm of HC Wainwright to raise
      additional capital for our operations.




The
      Company realized a loss from continuing operations of approximately $13.1
      million in the Current Period. Cash used in operating activities from continuing
      operations was approximately $3.1 million. Net cash used in operating activities
      principally resulted from the loss from continuing operations offset by an
      increase trade accounts payable and accrued liabilities in the Current Period.





In
      the
      Current Period, the Company was provided net cash of approximately $4.3 million
      from the issuance of debt instruments. These instruments bear interest ranging
      from 8% - 30%. Substantially all of these instruments are due within 12 months
      or are already in default. See discussion of debt terms below.





In
      the
      Current Period net cash of approximately $651,000 was used in discontinued
      operations.





30


Our
      contractual obligations are summarized in the table below





**Payments
                Due**
              **(In
                thousands)****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than**
              **1
                year**
            
            **1
                - 3**
              **years**
            
            **4
                - 5**
              **years**
            
            **More
                Than**
              **5
                years**Operating
                leases
            
            1,126
            
            386
            
            720
            
            20
            
            -





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





Future
      minimum rental commitments under all non-cancelable leases, net of
      non-cancelable subleases, as of June 30, 2006 are as follows:




Rent
                  Expense2007
              
              $
              386,0002008
              
              
              240,0002009
              
              
              240,0002010
              
              
              240,000Thereafter
              
              
              20,000$
              1,126,000




Of
      such
      lease commitments, $1,100,000 is for facilities that we no longer occupy and
      the
      cost of which was accrued upon abandonment in fiscal 2002.




*Debt:*





On
      July
      12, 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. The Note requires
      repayment over a three-year term with an 8% interest per annum. Repayment shall
      be made in cash or in registered shares of common stock, or a combination of
      both, at the option of the Company, and payment commences 90 days after each
      closing date and is payable monthly in equal principal installments plus
      interest over the remaining 33 months. Pursuant to an amendment dated September
      21, 2005 the Company has the option to make the monthly payments in registered
      shares of common stock only if the stock price exceeds $4.92 over a specified
      period of time. The Holder has the option to convert all or any part of the
      outstanding principal to common stock if the average daily price, as defined
      in
      the agreement, for the preceding five trading days is greater than the defined
      Initial Market Price of $6.56. The conversion price is $4.92. The agreement
      provides that for any monthly period in which the stock price is greater than
      125% of the initial market price of $6.56, as defined in the agreement, for
      the
      month, the interest rate for that month will be 0%. 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. In January 2006, this Agreement was further amended with a Letter
      Agreement in conjunction with additional short-tem notes the Company entered
      into with the same investors (see below), which allows the Company to meet
      its
      payment obligations under the terms of the Callable Secured Convertible Notes
      for the months of January, February and March 2006 by issuing 22,000 shares
      of
      the Company’s common stock per month, due on the last day of each month. The
      Letter Agreement also allows for the issuance of 9,000 shares of the Company’s
      common stock as a partial payment against the obligation due for the Callable
      Secured Convertible Notes for the month of April 2006. Also, in January 2006,
      the Chief Executive Officer entered into a guarantee and pledge agreement with
      the noteholders, whereby, the common stock of MSGI owned by the Chief Executive
      Officer (Approximately 190,000 shares) was pledged as additional collateral
      for
      the notes. As of June 30, 2006, the Company issued 75,000 shares of its common
      stock per the terms of the Letter Agreement. Through a combination of cash
      payments ($211,253) and issuance of shares of common stock, the principal
      balance of the $3.0 million of the notes was reduced to $2,574,597 as of June
      30, 2006. On June 7, 2006 the Company entered into a waiver agreement providing
      for a payment of $395,450 due July 14, 2006 for debt service due from April
      2006
      through July 2006. Such payment was not made on July 14, 2006. In connection
      with the waiver agreement, the Company issued 800,000 warrants to the note
      holders. Such warrants were ascribed a fair value, as computed under the
      Black-Scholes model, of $2,224,808 which ws recognized as additional interest
      expense. Because of the default of the terms of the notes, the amortization
      of
      all deferred financing costs, beneficial conversion costs and interest were
      accelerated to be recognized by June 30, 2006. As of June 30, 2006 the Company
      is in technical default of the payment terms of the Callable 8% Secured
      Convertible Notes.





31


Other
      Notes Payable :


Other
      Notes payable consist of the following as of June 30, 2006:





December
                  2005 Note Payable
              
              $
              250,000January
                  2006 Note Payable
              
              $
              600,000Notes
                  Payable to vFinance Investment,net
                  of discount of $382,676
              
              $
              592,427Total
              
              $
              1,442,427





During
      December 2005, the Company entered into a short-term note in the amount of
      $250,000. This loan bears interest at a rate of 10% through June 30, 2006 and
      has an annual imputed interest rate of 18.25%. The entire principal and interest
      of $25,000 will be paid in full upon completion of a contemplated future funding
      event. Further, the full amount of interest will be paid to the lender
      regardless of any possible early payment of principal. The total interest due
      under this note has been fully accrued as of June 30, 2006.





During
      January 2006, the Company entered into a short-term note in the amount of
      $300,000. This loan bore interest at a rate of 12%. The annual interest amount
      was due in full even if early payment of principal. The entire principal and
      interest of $336,000 was paid in full on January 24, 2006.





On
      January 19, 2006, the Company entered into four short-term notes with the same
      lenders that also hold the Callable Secured Convertible Notes. The short-term
      notes have an aggregate principal amount of $500,000. The loans bear interest
      at
      a rate of 20% through April 19, 2006 and have an annual imputed interest rate
      of
      80%. In connection with the above mentioned letter of amendment, the aggregate
      principal and interest of $600,000 ws due July 14, 2006. Such payment was not
      made. In the event of any defined event of default declared by the lenders
      by
      written notice to the Company, the notes shall become immediately due and
      payable and the Company shall incur a penalty of an additional 15% of the
      amounts due and payable under the notes.





During
      the months of February and March 2006, the Company entered into a series of
      promissory notes with various private lenders. The notes closed in a series
      of
      four transactions over the period of February 17, 2006 to March 23, 2006. Gross
      proceeds in the amount of $799,585 were obtained and the notes carry an
      aggregate repayment total of $975,103 (which includes imputed interest of
      $175,518 or 21.95%) which is due and payable upon maturity. The notes carry
      a
      maturity date of February 28, 2007. In addition, warrants for the purchase
      of up
      to 585,062 shares of the Company’s common stock were issued to the individual
      lenders. The Company computed the value of the warrants as $1,645,194 using
      the
      Black-Scholes methodology, which value is being amortized over the term of
      the
      note. The warrants carry an exercise price of $4.50 and a term of 5 years.
      The
      warrants may be exercised 65 days after the date of issuance. Placement fees
      in
      the amount of $73,133 were paid to vFinance Investments, Inc. as placement
      agent. Escrow agent fees in the amount of $20,000 were paid to Kreiger &
Prager LLP as escrow agent. Other closing fees in the amount of $6,090 and
      finders fees of $40,000 were also paid. In addition to the placement fees,
      warrants for the purchase of up to 73,134 shares of the Company’s common stock
      were issued to the placement agent and its designees. The agent warrants carry
      an exercise price of $6.50, a term of 5 years and may be exercised 65 days
      after
      the date of issuance.





During
      the month of June 2006, the company received funding, in the amount of $300,000
      from a certain New York based homeland security firm as an advance in
      contemplation of a further strategic transaction between the two parties. From
      July 1, 2006 through October 13, 2006, the Company received an additional
      $700,000 in such advances. There can be no assurances that the strategic
      transactions can or will be completed. The advances bear interest at a rate
      of
      8% and amounts to $1,381 for the year ended June 30, 2006.




*Acquisition
      and disposition of 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.




32




Effective
      March 31, 2006, MSGI defaulted on its required payments to the seller of AONet
      majority interest to us. As a result, the Company forfeited its ownership
      interest. Further, VeriSign has not pursued the development of the Italian
      marketplace. As a result, we have impaired all of our assets related to these
      investments and have reclassified the results of AONet as a discontinued
      operation.





*Preferred
      Stock:*





Series
      F


On
      November 10, 2004 the Company entered into and closed on definitive agreements
      with certain strategic investors for the purchase of 9,375 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 be 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. Purchasers were also be granted
      five
      year warrants to purchase the number of shares of Common Stock equal to 0.50
      multiplied by the number of Series F Convertible Preferred Stock purchased
      multiplied by the 49.23076 conversion rate, at an exercise price equal to 25%
      above the conversion price of the Series F Convertible Preferred Stock. The
      placement agent was granted five year warrants to purchase the number of shares
      of Common Stock equal to 6% of the number of Series F Convertible Preferred
      Stock sold multiplied by the conversion rate of 49.23076, at an exercise price
      equal to the conversion price of the Series F Convertible Preferred Stock.
      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. During fiscal year 2006, 5,813
      of
      the shares of the Series F Convertible Preferred Stock was converted into
      286,189 shares of common stock.




Summary
      of Recent Accounting Pronouncements





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.




33


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





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





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 below the fixed price. There is also and
      additional penalty rate charged for certain debt instruments which are in
      default and, as a result of such defaults, we are currently bearing this
      additional interest.





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





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





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





Reconta
      Ernst & Young S.p.A. audited the financial statements of AONet International
      S.r.L. as of June 30, 2005 and for the one month then ended, and issued their
      report dated October 5, 2005, and which report was unqualified but did contain
      an explanatory paragraph with respect to the uncertainty of AONet International
      S.r.L.’s ability to continue as a going concern. During fiscal year 2006, MSGI
      was informed that Reconta Ernst & Young S.p.A. was resigning from this
      engagement and would not reissue their opinion on the 2005 financial statements
      of AONet International S.r.L.





**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 inconformity
      with generally accepted accounting principles.





Scope
      of
      the Controls Evaluation. The evaluation made by our CEO and principal financial
      officer of our Disclosure Controls and our Internal Controls included a review
      of the controls' objectives and design, the controls' implementation by the
      Company and the effect of the controls on the information generated for use
      in
      this Annual Report. In the course of the Controls Evaluation, we sought to
      identify data errors, control problems or acts of fraud and to confirm that
      appropriate corrective action, including process improvements, were being
      undertaken. This type of evaluation will be done on a quarterly basis so that
      the conclusions concerning controls effectiveness can be reported in our
      Quarterly Reports on Form 10-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
      andcorrections) as conditions warrant.





34


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.





On
      October 13, 2006, our independent registered accounting firm Amper, Politziner
      & Mattia, P.C. ("AP&M"), preliminarily informed us and our Audit
      Committee of the Board of Directors that they had discovered conditions which
      they deemed to be material weaknesses in our internal controls (as defined
      by
      standards established by the Public Company Accounting Oversight Board).
      AP&M noted:




·
            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.


·
            The
                Company could not make the appropriate arrangements to allow the
                financial
                statements of our Italian investment (AONet International S.r.L.)
                to be
                audited on a timely basis.


·
            The
                Company has undertaken several recent business ventures without having
                done sufficient due diligence to be able to fully understand and
                fund the
                financial requirements thereof.


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


·
            There
                are no formal documented closing and reporting calendar and
                checklists.


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


·
            The
                Whistleblower policies should be disseminated to all employees
                worldwide.


·
            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.


·
            Documentation
                of certain transactions was not completed on a timely basis.





It
      is the
      Company's intention to increase the staffing levels of the accounting department
      as the business rebuilding efforts currently undertaken continue and the demands
      on the accounting staff increase.





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





Conclusions.
      Based upon the Controls Evaluation, our CEO and principal financial officer
      have
      each concluded that, given the current lack of resources available to the
      Company, our Disclosure Controls are currently not sufficiently effective to
      ensure that all material information relating to the Company and its
      consolidated subsidiaries is made known to management, including the CEO and
      principal financial officer, particularly during the periods when our periodic
      reports are being prepared and as of the fiscal reporting period ended June
      30,
      2006. Our CEO and principal financial officer also concluded that our Disclosure
      Controls are currently not sufficiently effective to ensure that information
      required to be disclosed in the reports that we file or submit under the
      Exchange Act is accumulated and communicated to our management, including our
      CEO and principal financial officer, to allow timely decisions regarding
      required disclosures. The primary reason for said deficiencies is a current
      and
      temporary lack of adequate resources and personnel. The Company intends to
      take
      action to hire additional staff and develop the adequate policies and procedures
      with said enhanced staff to ensure that adequate Disclosure Controls are in
      place to allow for effective and timely management and reporting.





35


**Item
      9B - Other information**


None





**PART
      III**





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





**Part
      IV**





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


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


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


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 changeof
                  name to All-Comm Media Corporation
                  (f)
 3.4
              By-Laws
                  (a)
 3.5
              Certificate
                  of Amendment of Articles of Incorporation for increasein
                  number of authorized shares to 36,300,000 total
                  (i)
 3.6
              Certificate
                  of Amendment of Articles of Incorporation for change of nameto
                  Marketing Services Group, Inc. (k)
 3.7
              Certificate
                  of Amendment of Articles of Incorporation for increase innumber
                  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 Stockand
                  Qualifications, Limitations and Restrictions Thereof for theSeries
                  D Convertible Preferred Stock (l)
 3.9
              Certificate
                  of Designation, Preferences, and Rights of Series EConvertible
                  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 ofMarketing
                  Services Group, Inc. (r)
 3.11
              Certificate
                  of Amendment of Articles of Incorporation for change of nameto
                  MKTG Services, Inc. (a)
 10.1
              1991
                  Stock Option Plan (d)
 10.2
              Security
                  Agreement between Milberg Factors, Inc. and Metro ServicesGroup,
                  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)
 10.7
              Form
                  of Private Placement Agreement (j)
 10.8
              Purchase
                  agreement dated as of December 24, 1997, by and between theCompany
                  and GE Capital (l)
  36
   10.9
              Stockholders
                  Agreement by and among the Company, GE Capital and certainexisting
                  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 toPreferred
                  Stock Purchase Agreement Between General Electric CapitalCorporation
                  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 MarshallCapital
                  Management, Inc. (q)
 10.17
              Warrant
                  Agreement between Marketing Services Group, Inc. and RCGInternational
                  Investors, LDC. (q)
 10.18
              Registration
                  Rights Agreement by and Among The Company, RCG InternationalInvestors,
                  LDC and Marshall Capital Management, Inc.
                  (q)
 10.19
              Securities
                  Purchase Agreement by and Among The Company, RCG InternationalInvestors,
                  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 CreekTechnology
                  Partners LLC (u)
 10.24
              Standstill
                  Agreement between MKTG Services, Inc. and RCG InternationalInvestors,
                  LDS (u)
 10.25
              Letter
                  Amendment to Standstill Agreement between MKTG Services, Inc. andCastle
                  Creek Technology Partners LLC(v)
 10.26
              Letter
                  Amendment Standstill Agreement between MKTG Services, Inc. and
                  RCGInternational
                  Investors, LDS(v)
 21
              List
                  of Company's subsidiaries (a)
 31.1
              Certifications
                  of the Chief Executive Officer Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002
 31.2
              Certifications
                  of the Chief Accounting Officer Pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002
 32.1
              Certifications
                  of the Chief Executive Officer Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002
 32.2
              Certifications
                  of the Chief Accounting Officer Pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002
  (a)
                Included
                    in the Company's Report on Form 10K- for the fiscal yearended
                    June 30, 2004
  (b)
                Incorporated
                    by reference to the Company's Report on Form 10K- for thefiscal
                    year ended June 30, 2001
  (c)
                Incorporated
                    by reference from the Company's Registration Statement onForm
                    S-4, Registration Statement No.
                    33-45192
  (d)
                Incorporated
                    by reference to the Company's Registration Statement onForm
                    S-8, Registration Statement
                    333-30839
  (e)
                Incorporated
                    herein by reference to the Company's Report on Form 8-Kdated
                    April 25, 1995
  (f)
                Incorporated
                    by reference to the Company's Report on Form 10-K for thefiscal
                    year ended June 30, 1995
  (g)
              Incorporated
                  by reference to the Company's Report on Form 10-Q for thequarter
                  ended March 31, 1996
  (h)
              Incorporated
                  by reference to the Company's Report on Form 8-K datedJune
                  7, 1996
  37
  (i)
              Incorporated
                  by reference to the Company's Report on Form 10-K dated June30,
                  1996
  (j)
                Incorporated
                    by reference to the Company's Report on Form 10-Q for thequarter
                    ended March 31, 1997
  (k)
              Incorporated
                  by reference to the Company's Report on Form 10-KSB for thefiscal
                  year ended June 30, 1997
  (l)
              Incorporated
                  by reference to the Company's Report on Form 8-K datedJanuary
                  13, 1998
  (m)
              Incorporated
                  by reference from the Company's Registration Statement onForm
                  S-4, Registration Statement No.
                  33-85233.
  (n)
              Incorporated
                  by reference to the Company's Report on Form 10-KSB datedJune
                  30, 1998
  (o)
              Incorporated
                  by reference to the Company's Report on Form 8-K datedMay
                  13, 1999
  (p)
              Incorporated
                  by reference to the Company's Report on Form 8-K datedAugust
                  30, 1999
  (q)
              Incorporated
                  by reference to the Company's Report on Form 8-K datedFebruary
                  29, 2000
  (r)
              Incorporated
                  by reference to the Company's Report on Form 8-K/A datedMarch
                  23, 2000
  (s)
              Incorporated
                  by reference to the Company's Report on Form 10-Q datedMay
                  16, 2000
  (t)
              Incorporated
                  by reference to the Company's Report on Form 10-K for thefiscal
                  year ended June 30, 2000
  (u)
              Incorporated
                  by reference to the Company's Report on Form 8-K datedFebruary
                  19, 2002
  (v)
              Incorporated
                  by reference to the Company's Report on Form 8-K datedJuly
                  30, 2002
  (b)
              Reports
                  on Form 8-K.None






38


SIGNATURES





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




MSGI SECURITY SOLUTIONS,
              INC.(Registrant)By:
            /s/ J.
              Jeremy
              BarberaJ.
              Jeremy BarberaChief
              Executive Officer


By:
            /s/ Richard
              J. Mitchell IIIRichard
              J. Mitchell IIIChief
              Accounting Officer and Principle Financial
              Officer






Date:
      October 13, 2006





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





Signature
            
            Title
            
            Date/s/
              J. Jeremy Barbera
            
            Chairman
              of the Board and Chief  ExecutiveOfficer
            
            October
              13, 2006J. Jeremy Barbera
            
            (Principal Executive Officer)/s/
              John T. Gerlach
            
            Director
            
            October
              13, 2006John T. Gerlach/s/
              Seymour Jones
            
            Director
            
            October
              13, 2006Seymour Jones/s/
              Joseph Peters
            
            Director
            
            October
              13, 2006Joseph Peters/s/
              David Stoller
            
            Director
            
            October
              13, 2006David Stoller







39








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





INDEX
      TO
      FINANCIAL STATEMENTS


[Items
      14]





(1)  
                  FINANCIAL STATEMENTS:
              PageReport
                  of Independent Registered Public Accounting Firm
              42Consolidated
                  Balance Sheets as of June 30, 2006 andJune
                      30, 2005 (Unaudited)
              43Consolidated
                  Statements of OperationsYears
                  Ended June 30, 2006 2005 and 2004 (Unaudited)
              44-45Consolidated
                  Statement of Stockholders’ EquityYears
                  Ended June 30, 2006, 2005 and 2004 (Unaudited)
              46-47Consolidated
                  Statements of Cash FlowsYears
                  Ended June 30, 2006, 2005 and 2004 (Unaudited)
              48-49Notes
                  to Consolidated Financial Statements (Unaudited)
              50-73






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





40





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNT** **ING
      FIRM**











PAGE
      INTENTIONALLY LEFT BLANK
















This
      document is filed without a report from our registered independent public
      accountants as they have not yet completed their audits as of June 30, 2006
      and
      2005 and for the three years ended June 30, 2006.







41





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


CONSOLIDATED
      BALANCE SHEETS AS OF JUNE 30,


(Unaudited)





ASSETS
              
              2006
              
              2005Current
                  assets:Cash
                  and cash equivalents
              
              $
              -
              
              $
              112,649Accounts
                  receivable, net of allowances of $115,750 and $0
              
              
              -
              
              
              100,899Inventory
              
              
              50,176
              
              
              34,023Other
                  current assets
              
              
              13,485
              
              
              89,896Total
                  current assets
              
              
              63,661
              
              
              337,467Investments
                  in Excelsa S.p.A.
              
              
              4,066,192
              
              
              4,063,077Property
                  and equipment, net
              
              
              153,041
              
              
              211,943Intangible
                  assets, net
              
              
              108,377
              
              
              204,139Related
                  party note receivable
              
              
              -
              
              
              1,139,687Other
                  assets, principally deferred financing costs, net
              
              
              226,391
              
              
              21,340Net
                  assets of discontinued operations
              
              
              -
              
              
              6,121,142Total
                  assets
              
              $
              4,617,662
              
              $
              12,098,795LIABILITIES
                  AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
                  liabilities:Cash
                  overdraft
              
              
              8,223
              
              
              -Notes
                  payable
              
              
              1,442,427
              
              
              -8%
                  Callable convertible notes payable
              
              
              2,574,597
              
              
              -Advances
                  from strategic partner
              
              
              300,000
              
              
              -Accounts
                  payable-trade
              
              
              1,536,651
              
              
              523,570Accrued
                  expenses and other current liabilities
              
              
              1,694,642
              
              
              889,632Deferred
                  revenues
              
              
              59,332
              
              
              -Current
                  portion of abandoned lease obligation
              
              
              987,348
              
              
              183,221Total
                  current liabilities
              
              
              8,603,220
              
              
              1,596,423Long
                  term portion of abandoned lease obligation
              
              
              -
              
              
              887,349Net
                  liabilities of discontinued operations
              
              
              -
              
              
              4,734,318Total
                  liabilities
              
              
              8,603,220
              
              
              7,218,090Stockholders’
                  equity (deficit):Convertible
                  preferred stock - $.01 par value; 18,750 shares authorized;4,031.55
                  and 9,844.8 shares of Series F issued and outstanding(liquidation
                  preference $1,584,060 and $3,266,535) at June 30, 2006and
                  2005, respectively
              
              
              40
              
              
              98Common
                  stock - $.01 par value; 9,375,000 authorized; 4,210,729
                  and3,849,540
                  shares issued; 4,193,067 and 3,831,878 shares outstandingas
                  of June 30, 2006 and 2005, respectively
              
              
              42,107
              
              
              38,495Additional
                  paid-in capital
              
              
              238,371,269
              
              
              233,344,128Deferred
                  compensation
              
              
              -
              
              
              (1,301,974
              )Accumulated
                  deficit
              
              
              (241,005,352
              )
              
              (225,835,306
              )Accumulated
                  other comprehensive income
              
              
              88
              
              
              28,974Less:
                  17,662 shares of common stock in treasury, at cost
              
              
              (1,393,710
              )
              
              (1,393,710
              )Total
                  stockholders’ equity (deficit)
              
              
              (3,985,558
              )
              
              4,880,705Total
                  liabilities and stockholders’ equity (deficit)
              
              $
              4,617,662
              
              $
              12,098,795


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




42




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


CONSOLIDATED
      STATEMENTS OF OPERATIONS


FOR
      THE
      YEARS ENDED JUNE 30,


(Unaudited)




2006
              
              2005
              
              2004Revenue
              
              $
              76,080
              
              $
              631,480
              
              $
              -Revenue
                  - related party
              
              
              50,750
              
              
              -
              
              
              -Total
                  revenue
              
              
              126,830
              
              
              631,480
              
              
              -Cost
                  of revenue
              
              
              38,322
              
              
              206,230
              
              
              -Gross
                  profit
              
              
              88,508
              
              
              425,250
              
              
              -Operating
                  costs and expenses:Salaries
                  and benefits
              
              
              2,004,453
              
              
              1,663,274
              
              
              409,919Research
                  and development
              
              
              -
              
              
              180,436
              
              
              167,940Non
                  cash compensation
              
              
              1,523,406
              
              
              1,774,062
              
              
              -Provision
                  for loss on note receivable
              
              
              1,209,457
              
              
              -
              
              
              -Selling,
                  general and administrative
              
              
              3,800,702
              
              
              2,706,735
              
              
              1,757,187Gain
                  on termination of lease
              
              
              -
              
              
              (70,300
              )
              
              -Goodwill
                  impairment
              
              
              -
              
              
              490,000
              
              
              -Other
                  asset impairment
              
              
              -
              
              
              267,840
              
              
              -Depreciation
                  and amortization
              
              
              199,318
              
              
              120,015
              
              
              -Total
                  operating costs and expenses
              
              
              8,737,336
              
              
              7,132,062
              
              
              2,335,046Loss
                  from operations
              
              
              (8,648,828
              )
              
              (6,706,812
              )
              
              (2,335,046
              )Other
                  income (expense):Interest
                  income
              
              
              69,770
              
              
              99,081
              
              
              119,566Interest
                  expense
              
              
              (4,518,373
              )
              
              (67,313
              )
              
              (96,641
              )Total
                  other income (expense)
              
              
              (4,448,603
              )
              
              31,768
              
              
              22,925Minority
                  interest in subsidiary
              
              
              -
              
              
              255,517
              
              
              234,483Loss
                  from continuing operationsbefore
                  provision for income taxes
              
              
              (13,097,431
              )
              
              (6,419,527
              )
              
              (2,077,638
              )Provision
                  for income taxes
              
              
              34,150
              
              
              11,900
              
              
              9,780Loss
                  from continuing operations
              
              
              (13,131,581
              )
              
              (6,431,427
              )
              
              (2,087,418
              )Discontinued
                  operations:Loss
                  from discontinued operations-AONet
              
              
              (1,327,952
              )
              
              (143,526
              )
              
              -Loss
                  from disposal of discontinued operations-AONet
              
              
              (705,976
              )
              
              -
              
              
              -Loss
                  from discontinued operations-other
              
              
              (4,537
              )
              
              (181,331
              )
              
              (211,613
              )Loss
                  from disposal of discontinued operations-other
              
              
              -
              
              
              -
              
              
              (1,012,114
              )Loss
                  from discontinued operations
              
              
              (2,038,465
              )
              
              (324,857
              )
              
              (1,223,727
              )Net
                  loss
              
              
              (15,170,046
              )
              
              (6,756,284
              )
              
              (3,311,145
              )Gain
                  on redemption of preferred stock of discontinuedsubsidiary
              
              
              -
              
              
              -
              
              
              280,946Undeclared
                  dividends on preferred stock
              
              
              177,767
              
              
              116,199
              
              
              -Net
                  loss attributable to common stockholders
              
              $
              (15,347,813
              )
              $
              (6,872,483
              )
              $
              (3,030,199
              )







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





43











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


CONSOLIDATED
      STATEMENTS OF OPERATIONS (Continued)


FOR
      THE
      YEARS ENDED JUNE 30,


(Unaudited)





2006
              
              2005
              
              2004Basic
                  loss per share attributable to common stockholders:Continuing
                  operations
              
              $
              (
                  3.43
              )
              $
              (1.90
              )
              $
              (0.78
              )Discontinued
                  operations
              
              
              (0.52
              )
              
              (0.09
              )
              
              (0.53
              )Basic
                  loss per share attributable to common stockholders
              
              $
              (3.95
              )
              $
              (1.99
              )
              $
              (1.31
              )Diluted
                  loss per share attributable to common stockholders:Continuing
                  operations
              
              $
              (3.43
              )
              $
              (1.90
              )
              $
              (0.78
              )Discontinued
                  operations
              
              
              (0.52
              )
              
              (0.09
              )
              
              (0.53
              )Diluted
                  loss per share attributable to common stockholders
              
              $
              (3.95
              )
              $
              (1.99
              )
              $
              (1.31
              )Weighted
                  average common shares outstanding - basic
              
              
              3,884,681
              
              
              3,459,854
              
              
              2,315,784Weighted
                  average common shares outstanding - diluted
              
              
              3,884,681
              
              
              3,459,854
              
              
              2,315,784





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




44





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


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) AND OTHER COMPREHENSIVE INCOME
      (LOSS)


FOR
      THE
      YEARS ENDED JUNE 30, 2006, 2005, AND 2004


(Unaudited)


Additional
              
              
              
              
              Other
              
              Accumulated OtherCommon
                  Stock
              
              
              Preferred
                  Stock
              
              
              Paid-in
              
              
              Deferred
              
              Comprehensive
              
              Comprehensive
              
              Accumulated
              
              Treasury
                  StockShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Compensation
              
              Income(Loss)
              
              Income
                  (Loss)
              
              Deficit
              
              Share
              
              Amount
              
              
              Totals**Balance
                June 30, 2003**
              
              
              **2,202,396**
              
              **$**
              **22,024**
              
              
              **-**
              
              
              **-**
              
              **$**
              **220,247,223**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              **$**
              **(215,767,877**
              **)**
              
              **(17,662**
              **)**
              
              **(1,393,710**
              **)**
              
              **$**
              **3,107,660**Cancellation
                of minority interest inpreferred
                  stock of discontinued subsidiary
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              280,946
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              280,946Shares
                issued upon cashless exerciseof
                  warrants
              
              
              407,790
              
              
              4,078
              
              
              
              
              
              
              
              
              (4,078
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Shares
                issued in connection withprivate
                  placement of common stock, netof
                  stock issuance costs of $84,000
              
              
              450,000
              
              
              4,500
              
              
              
              
              
              
              
              
              1,711,500
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,716,000Options
                used in connection withconsulting
                  fees
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              377,363
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              377,363Adjustment
                of fees associatedwith
                  redemption of Series EPreferred
                  Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              29,756
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              29,756Comprehensive
                loss:Net
                loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (3,311,145
              )
              
              
              
              
              (3,311,145
              )
              
              
              
              
              
              
              
              
              (3,311,145
              )Total
                comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (3,311,145
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -**Balance
                June 30, 2004**
              
              
              **3,060,186**
              
              **$**
              **30,602**
              
              
              **-**
              
              
              **-**
              
              **$**
              **222,642,710**
              
              
              **-**
              
              
              
              
              
              **-**
              
              **$**
              **(219,079,022**
              **)**
              
              **(17,662**
              **)**
              **$**
              **(1,393,710**
              **)**
              
              **$**
              **2,200,580**Shares
                issued in connection withprivate
                  placement of common stocknet
                  of stock issuance costs of $16,000
              
              
              50,000
              
              
              500
              
              
              
              
              
              
              
              
              183,500
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              184,000Shares
                issued in connection withthe
                  acquisition of Innalogic LLC
              
              
              100,000
              
              
              1,000
              
              
              
              
              
              
              
              
              470,772
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              471,772Exercise
                of stock options
              
              
              120,000
              
              
              1,200
              
              
              
              
              
              
              
              
              718,800
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              720,000Shares
                issued in connection with privateplacement
                  of Series F preferred stock,net
                  of issuance costs of $253,182
              
              
              
              
              
              
              
              
              9,844
              
              
              98
              
              
              2,746,720
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,746,818Shares
                  issued in connection with privateplacement
                  of common stock, net ofstock
                  issuance costs of $217,331
              
              
              419,354
              
              
              4,193
              
              
              
              
              
              
              
              
              3,028,476
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,032,669Grant
                of stock options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,840,150
              
              
              (2,840,150
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Amortization
                of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,538,176
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,538,176Shares
                issued in connection with theacquisition
                  of AONet International Srlnet
                  of stock issuance costs of $50,000
              
              
              100,000
              
              
              1,000
              
              
              
              
              
              
              
              
              723,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              724,000Cash
                payment for redemption of equityof
                  Innalogic
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (10,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (10,000
              )Foreign
                currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              28,974
              
              
              28,974
              
              
              
              
              
              
              
              
              
              
              
              
              28,974Net
                loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (6,756,284
              )
              
              
              
              
              (6,756,284
              )
              
              
              
              
              
              
              
              
              (6,756,284
              )Total
                comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (6,727,310
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -**Balance
                June 30, 2005**
              
              
              **3,849,540**
              
              **$**
              **38,495**
              
              
              **9,844**
              
              **$**
              **98**
              
              **$**
              **233,344,128**
              
              
              **(1,301,974**
              **)**
              
              
              
              
              **28,974**
              
              **$**
              **(225,835,306**
              **)**
              
              **(17,662**
              **)**
              **$**
              **(1,393,710**
              **)**
              
              **$**
              **4,880,705**Elimination
                of deferred compensationupon
                  adoption of SFAS 123(R)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,301,974
              )
              
              1,301,974Legal
                fees associated with filing ofa
                  registration statement
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,104
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,104
              )Non-cash
                  compensation expense
                under
                  SFAS 123(R)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,523,406
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,523,406Warrants
                issued to placement agent inNIR
                  Group financing
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              57,054
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              57,054Warrants
                issued to notes holders inNIR
                  Group financing
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,629,600
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,629,600Beneficial
                conversion value of NIRGroup
                  8% convertible notes issued
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,066,377
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,066,377Warrants
                issued to placement agentin
                  vFinance financing
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              612,240
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              612,240Warrants
                issued to note holders invFinance
                  financing
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              176,114
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              176,114Shares
                  of common stock issued to theNIR
                  Group as payment against8%
                  convertible notes
              
              
              75,000
              
              
              750
              
              
              
              
              
              
              
              
              272,232
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              272,982Conversion
                of Preferred Series Fshares
                  to common stock
              
              
              286,189
              
              
              2,862
              
              
              (5,813
              )
              
              (58
              )
              
              (2,804
              )Foreign
                  currency translation
                adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (28,886
              )
              
              (28,886
              )
              
              
              
              
              
              
              
              
              
              
              
              (28,886
              )Net
                loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (15,170,046
              )
              
              
              
              
              (15,170,046
              )
              
              
              
              
              
              
              
              
              (15,170,046
              )Total
                comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (15,198,932
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -**Balance
                June 30, 2006**
              
              
              **4,210,729**
              
              **$**
              **42,107**
              
              
              **4,031**
              
              **$**
              **40**
              
              **$**
              **238,371,269**
              
              
              
              
              
              
              
              $
              **88**
              
              **$**
              **(241,005,352**
              **)**
              
              **(17,662**
              **)**
              **$**
              **(1,393,710**
              **)**
              
              **$**
              **(3,985,558**
              **)**


45


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


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      YEARS ENDED JUNE 30, 2006, 2005, AND 2004


(Unaudited)




2006
              
              2005
              
              2004OPERATING
                  ACTIVITIES:Net
                  loss
              
              $
              (15,170,046
              )
              $
              (6,756,284
              )
              $
              (3,311,145
              )Loss
                  from discontinued operations
              
              
              2,038,465
              
              
              324,856
              
              
              1,223,727Loss
                  from continuing operations
              
              
              (13,131,581
              )
              
              (6,431,428
              )
              
              (2,087,418
              )Adjustments
                  to reconcile net loss to net cash usedin
                  operating activities:Gain
                  on termination of lease
              
              
              -
              
              
              (70,300
              )
              
              -Provision
                  for loss on note receivable-related party
              
              
              1,209,457Provison
                  for doubtful accounts
              
              
              115,750
              
              
              -
              
              
              -Write
                  off of license agreement deposit
              
              
              500,000
              
              
              -
              
              
              -Depreciation
              
              
              103,855
              
              
              36,937
              
              
              -Amortization
              
              
              95,762
              
              
              83,149
              
              
              -Amortization
                  of deferred financing costs
              
              
              482,195
              
              
              -
              
              
              -Non-cash
                  compensation expense
              
              
              1,523,406
              
              
              1,538,176
              
              
              -Non-cash
                  interest expense
              
              
              3,909,510
              
              
              -
              
              
              -Non-cash
                  consulting expense
              
              
              -
              
              
              235,886
              
              
              377,363Goodwill
                  impairment
              
              
              -
              
              
              490,000
              
              
              -Long
                  lived asset impairment
              
              
              -
              
              
              267,840
              
              
              -Minority
                  interest in subsidiary
              
              
              -
              
              
              (255,517
              )
              
              (234,483
              )Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (14,851
              )
              
              (100,899
              )
              
              -Inventory
              
              
              (16,153
              )
              
              (278,978
              )
              
              -Other
                  current assets
              
              
              76,411
              
              
              118,397
              
              
              243,255Other
                  assets
              
              
              (14,605
              )
              
              (5,644
              )
              
              (3,700
              )Deferred
                  revenue
              
              
              59,332
              
              
              -
              
              
              -Accounts
                  payable - trade
              
              
              1,013,081
              
              
              212,148
              
              
              93,091Accrued
                  expenses and other liabilities
              
              
              997,280
              
              
              141,029
              
              
              (1,008,505
              )Net
                  cash used in continuing operations
              
              
              (3,091,151
              )
              
              (4,019,204
              )
              
              (2,620,397
              )Net
                  cash provided by (used in) discontinued operations
              
              
              243,654
              
              
              (309,839
              )
              
              128,190Net
                  cash used in operating activities
              
              
              (2,847,497
              )
              
              (4,329,043
              )
              
              (2,492,207
              )INVESTING
                  ACTIVITIES:Purchase
                  of investment in Excelsa
              
              
              (3,115
              )
              
              (4,063,077
              )
              
              -Cash
                  investment in Innalogic LLC
              
              
              -
              
              
              (51,402
              )
              
              -Purchases
                  of property and equipment
              
              
              (44,953
              )
              
              (266,635
              )
              
              (5,130
              )Deposit
                  on license agreement
              
              
              (500,000
              )
              
              -
              
              
              -Acquisition
                  of AONet, net of cash and note payable
              
              
              -
              
              
              (777,375
              )
              
              -Proceeds
                  from sale of Teleservices, net of fees
              
              
              -
              
              
              225,000
              
              
              2,524,058Increase
                  in related party note receivable
              
              
              (69,770
              )
              
              (19,674
              )
              
              (69,704
              )Net
                  cash provided by (used in) continuing operations
              
              
              (617,838
              )
              
              (4,953,163
              )
              
              2,449,224Net
                  cash provided by (used in) discontinued operations
              
              
              (605,888
              )
              
              16,830
              
              
              747,530Net
                  cash provided by (used in) investing activities
              
              
              (1,223,726
              )
              
              (4,936,333
              )
              
              3,196,754FINANCING
                  ACTIVITIES:Proceeds
                  from the issuance of the 8% convertible notes
              
              
              3,000,000
              
              
              -
              
              
              -Payment
                  of deferred financing costs
              
              
              (439,473
              )
              
              -
              
              
              -Payments
                  of 8% convertible notes
              
              
              (136,364
              )
              
              -
              
              
              -Proceeds
                  from notes payable
              
              
              1,849,585
              
              
              -
              
              
              -Payments
                  of notes payable
              
              
              (300,000
              )
              
              -
              
              
              (201,062
              )Advance
                  from strategic partner
              
              
              300,000
              
              
              -
              
              
              -Proceeds
                  from the issuance of preferred stock, net
              
              
              -
              
              
              2,746,818
              
              
              -Proceeds
                  from issuance of common stock, net
              
              
              -
              
              
              3,816,669
              
              
              1,199,971Proceeds
                  from exercise of stock options
              
              
              -
              
              
              720,000
              
              
              -Proceeds
                  from (repayment of) related party note payable
              
              
              -
              
              
              (500,000
              )
              
              500,000Repurchase
                  of Innalogic minority interest
              
              
              -
              
              
              (10,000
              )
              
              -Costs
                  in connection with registration of stock
              
              
              (5,104
              )
              
              -
              
              
              (54,215
              )Bank
                  overdraft
              
              
              8,223
              
              
              -
              
              
              -Net
                  cash provided by continuing operations
              
              
              4,276,867
              
              
              6,773,487
              
              
              1,444,694Net
                  cash provided by (used in) discontinued operations
              
              
              (289,407
              )
              
              26,966
              
              
              (261,385
              )Net
                  cash provided by financing activities
              
              
              3,987,460
              
              
              6,800,453
              
              
              1,183,309Change
                  in accumulated other comprehensive income
              
              
              (28,886
              )
              
              28,974
              
              
              -Net
                  increase (decrease) in cash and cash equivalents
              
              
              (112,649
              )
              
              (2,435,949
              )
              
              1,887,856Cash
                  and cash equivalents at beginning of year
              
              
              112,649
              
              
              2,548,598
              
              
              660,742Cash
                  and cash equivalents at end of year
              
              $
              -
              
              $
              112,649
              
              $
              2,548,598




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







46




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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




1.
            COMPANY
                OVERVIEW AND LIQUIDITY:




Company
      Overview :




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





On
      April
      10, 2004, the Company acquired 51% of the outstanding shares of common stock
      of
      Future Developments America, Inc. (“FDA”).
      As of July 1, 2005, the Company acquired the remaining 49% of FDA as part of
      a
      restructuring of its investment in this technology (see Note 3.) 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. The Company has not yet sold any FDA
      products.





On
      August
      18, 2004, the Company acquired a 51% interest in Innalogic, LLC. In August
      2005,
      MSGI’s equity ownership stake in Innalogic LLC increased to 76%. Innalogic LLC
      is a wireless software product development firm that works with clients to
      custom-design technology products that meet specific user, functional and
      situational requirements. Innalogic has a recognized core competency in an
      area
      of increasingly vital importance to security: delivering rich-media content
      (video, audio, biometric, sensor data, etc.) to wirelessly enabled mobile
      devices for public-safety and security applications over wireless or wired
      networks. Innalogic has the resources and expertise to design and install
      building-wide wireless networks. The network’s technological foundation is a
      custom-designed network Command Center utilizing Innalogic’s proprietary
      SafetyWatchTM software. Innalogic-designed networks integrate with a building’s
      existing CCTV system and security infrastructure, thus creating a powerful
      network environment able to accommodate advanced building-wide security
      applications. Importantly, Innalogic’s wireless video applications help clients
      make the critical upgrade of CCTV video security systems from analog to digital
      technology. Innalogic software applications easily integrate with existing
      systems - camera or rich-media networks - and are specially designed to
      incorporate or integrate with new or replacement technologies as they come
      online.




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





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





47


Liquidity :





The
      Company has limited capital resources and has incurred significant historical
      losses, negative cash flows from operations and has debt agreements in default,
      all of which raise substantial doubt about the Company’s ability to continue as
      a going concern. The Company believes that funds on hand combined with funds
      that will be available from its various operations will not be adequate to
      finance its operations and capital expenditure requirements and enable the
      Company to meet its financial obligations and payments under its callable
      secured convertible notes and promissory notes for the next twelve months.
      Failure of the 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. A future funding event will
      be
      required in order to meet the obligations for the next twelve months. 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.





The
      company has engaged the investment banking firm of HC Wainwright to raise
      additional capital for our operations.





2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES:




*Principles
      of Consolidation* :





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





*Cash
      and Cash Equivalents:*




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





*Accounts
      receivable*




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





*Deferred
      Financing Costs*





Deferred
      financing costs are amortized over the term of its associated debt instrument.
      If the maturity of the debt is accelerated because of defaults, then the
      amortization is also accelerated to the default date.





*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.




48


*Property,
      Plant and Equipment:*




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




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




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





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





*Goodwill:*





The
      Company follows Statement of Financial Accounting Standards ("SFAS"), No. 142,
      "Goodwill and Other Intangible Assets". Under SFAS 142, the Company does not
      amortize goodwill and tests its goodwill for potential impairment on an annual
      basis using a two-step fair value based test.





The
      first
      step of the 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.





As
      a
      result of the investment in FDA (which gave rise to goodwill of $490,000),
      and
      the subsequent restructuring of our relationship with the founders of FDA on
      July 1, 2005 (see Note 3), such goodwill was deemed impaired as of June 30,
      2005.




*Investments
      in non-consolidated companies:*





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





An
      investment in non-consolidated companies is considered impaired if the fair
      value of the investment is less than its cost on an other than temporary basis.
      Generally, an impairment is considered other-than-temporary unless (i) the
      Company has the ability and intent to hold an investment for a reasonable period
      of time sufficient for an anticipated recovery of fair value up to (or beyond)
      the cost of the investment; and (ii) evidence indicating that the cost of the
      investment is recoverable within a reasonable period of time outweighs evidence
      to the contrary. If impairment is determined to be other-than-temporary, then
      an
      impairment loss is recognized equal to the difference between the investment’s
      cost and its fair value.





*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.





49


The
      Company recorded an asset impairment of $267,840 in the fiscal year ended June
      30, 2005. The Company deemed certain assets (see also goodwill impairment above)
      held by Future Developments America, Inc. (“FDA”) as impaired in connection with
      the MSGI’s restructuring of our relationship with the founders of FDA on July 1,
      2005, 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.





*Cost
      of Revenue:*





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




*Research
      and Development Costs:*





The
      Company recognizes research and development costs associated with certain
      product development activities of FDA. All research and development costs are
      expenses in the period incurred.  Such
      expense was $180,436 and $167,040 for the years ended June 30, 2005 and 2004,
      respectively. There was no such expense in 2006.





*Segment
      Information:*





The
      Company believes it has only one reporting segment from continuing operations,
      the securities technologies segment. The security technologies product and
      service line, which includes Innalogic and FDA is a new and emerging business
      and, as such, has limited revenues to report. The operations of AONet which
      constituted our data center technologies product and service line is now
      reported as discontinued operations (see Note 4).





*Income
      Taxes:*




The
      Company recognizes deferred taxes for differences between the financial
      statement and tax bases of assets and liabilities at currently enacted statutory
      tax rates and laws for the years in which the differences are expected to
      reverse. The Company uses the liability method of accounting for income taxes,
      as set forth in SFAS No. 109, “Accounting for Income Taxes.” Under this method,
      deferred tax assets and liabilities are recognized for the expected future
      tax
      consequences of temporary differences between the carrying amounts and the
      tax
      basis of assets and liabilities and net operating loss carry-forwards, all
      calculated using presently enacted tax rates. The effect on deferred taxes
      of a
      change in tax rates is recognized in income in the period that includes the
      enactment date. Valuation allowances are established when necessary to reduce
      deferred tax assets to the amounts expected to be realized.





*Use
      of Estimates:*




The
      preparation of financial statements in conformity with accounting prin-ciples
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. The most significant estimates and assumptions
      made
      in the preparation of the consolidated financial statements relate to the
      carrying amount of long lived assets, deferred tax valuation allowance,
      valuation of stock options, warrants and debt features, fair value of net assets
      acquired and the allowance for doubtful accounts. Actual results could differ
      from those estimates.





50


*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 shareholders equity.





*Concentration
      of Credit Risk:*





Financial
      instruments that potentially subject the Company to concentration of credit
      risk
      consist primarily accounts receivable.





The
      Company’s services are provided to a variety of customers, generally located in
      the continental United States. Two customers accounted for 91% of revenues
      for
      the year ended June 30, 2006. One customer accounted for 93% of revenues for
      the
      year ended June 30, 2005 and 100% of the accounts receivable balance as of
      June
      30, 2005. No single supplier is considered to be critical to the Company’s
      ongoing business activities.





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





*Earnings
      (Loss) Per Share:*





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 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. The stock split was effective March 9, 2005. The
      effect of the above stock splits 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.





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 450,000, 807,695 and 127,500 shares for the years
      ended June 30, 2006, 2005 and 2004, 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
      2,448,731, 545,645 and 410,000 shares for the years ended June 30, 2006, 2005
      and 2004, respectively were not included in the computation of diluted earnings
      per share as they are anti-dilutive.Convertible preferred stock in the amount
      of
      4,032 and 9,844 shares for the years ended June 30, 2006 and 2005, 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 period presented. There
      was
      no applicable convertible preferred stock at June 30, 2004.





The
      Company adopted EITF No. 04-8 “The Effect of Contingently Convertible
      Instruments on Diluted Earnings per Share” during fiscal 2006. The Company’s 8%
      Convertible Notes are convertible at the option of the holder into shares of
      the
      Company’s Common Stock once the common stock trades above $6.56 per share for a
      specified period of time (a market price trigger). EITF 04-08 requires companies
      with contingently convertible debt instruments to include the dilutive effect
      of
      the contingently convertible debt in the diluted earnings per share calculations
      regardless of whether the market price trigger has been met. The adoption of
      this statement did not have any effect on earnings per share, since the Company
      had losses during the period and the effect of the conversion of the notes
      would
      have an antidilutive effect.





*Employee
      Stock-Based Compensation* :





The
      Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123
      Revised 2004, "Share−Based Payment" (“SFAS 123R”) effective July 1, 2005. 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. Our adoption of SFAS 123R impacted our results of operations
      by increasing the non cash compensation expense. The amount of the impact to
      the
      Company for the year ended June 30, 2006 was approximately $533,000 of
      additional expense that resulted under SFAS 123R as compared to the expense
      that
      would have been recorded under APB 25 (see Note 15).





51


*Summary
      of Recent Accounting Pronouncements:*





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





*Fair
      Value of Financial Instruments:*





The
      carrying amounts of the Company’s financial instruments, including cash, notes
      r eceivable,
      accounts receivable, accounts payable and accrued liabilities, approximate
      fair
      value because of their short maturities. The carrying amount of the Company’s
      notes payable approximates the fair value of such instruments based upon
      management’s best estimate of interest rates that would be available to the
      Company for similar debt obligations at June 30, 2006 and 2005.





*Reclassifications:*




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





3.
            ACQUISITIONS
                OF FUTURE DEVELOPMENTS AMERICA, INC. AND INNALOGIC
                LLC





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 booked 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 the fourth quarter of the 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 with the original founders of FDA. The
      technology and intellectual property that FDA was developing was transferred
      to
      FDL, a company controlled by the original founders of the technology. The
      goodwill amount of $490,000 was deemed impaired as of June 30, 2005. The Company
      is a non-exclusive licensee in the United States of certain products developed
      by the previous founders of FDA’s Company, “FDL”, and of other products
      developed by outside organizations. The Company is also entitled to receive
      royalties on certain sales of products to others which are marketed by FDL.
      The
      Company has not yet generated any revenue with respect to those products.





52


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%.





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
              
              $
              1,000,000Value
                  of Shares issued
              
              
              235,886Value
                  of Finders fees issued in stock
              
              
              235,886Other
                  fees
              
              
              51,368Subtotal
              
              $
              1,523,140Less
                  amount expensed as compensation
              
              
              235,886Total
                  purchase
              
              $
              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. The results of Innalogic LLC were fully
      consolidated into the Company’s results as of August 18, 2004.





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. 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 ,
      thereby
      providing MSGI with a 76% stake in the company .





4.
            TRANSACTIONS
                WITH AONET INTERNATIONAL SRL





Acquisition


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 (paid
      on January 24, 2006) and March 31, 2006 (payment not made and the payment terms
      defaulted- see “disposition” below). 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.





53





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
              
              $
              437,375Note
                  payable to former controlling shareholder
              
              
              917,250Value
                  of Finders fees issued in stock
              
              
              774,000Other
                  fees
              
              
              290,000Total
                  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
              
              $
              878,585Fixed
                  Assets
              
              
              1,962,223Intangible
                  Assets and other long term assets
              
              
              128,589Goodwill
              
              
              3,100,702Subtotal
              
              
              6,070,099Total
                  Liabilities
              
              
              3,651,474Net
                  assets acquired
              
              $
              2,418,625


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





Disposition


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





Net
      asset
      and liabilities of discontinued operations as of June 30, 2005 is as
      follows:




Net
                  Assets:Cash
              
              $
              5,816Accounts
                  receivable, net of allowance
              
              
              737,240Inventory
              
              
              15,758Related
                  party receivable
              
              
              61,456Other
                  current assets
              
              
              148,243Property
                  and equipment, net
              
              
              1,924,247Goodwill
              
              
              3,108,471Intangible
                  assets, net
              
              
              119,600Other
                  assets
              
              
              311Total
                  Assets
              
              $
              6,121,142Net
                  Liabilities:Bank
                  overdrafts - short term borrowings
              
              $
              544,799Accounts
                  payable - trade
              
              
              681,920Accounts
                  payable - related party
              
              
              538,906Accrued
                  liabilities
              
              
              286,090Accrued
                  purchase liabilites
              
              
              917,250Other
                  payables
              
              
              1,163,510Current
                  portion of note payable
              
              
              241,320Long
                  term obligations, net of current portion
              
              
              180,990Other
                  liabilities
              
              
              179,534Total
                  Liabilities
              
              $
              4,734,318
  54


The
      loss
      from discontinued operations of AONet for the nine months ended March 31, 2006
      and for the one month period June 1, 2005 (date of acquisition) to June 30,
      2005. which have been included in loss from discontinued operations-AONet for
      the years ended June 30, 2006 and 2005, is as follows:




For
                  the year ended June 30,2006
              
              2005Revenues
              
              $
              1,806,255
              
              $
              180,466Costs
                  of revenues
              
              
              1,712,278
              
              
              154,431Gross
                  profit
              
              
              93,977
              
              
              26,035Operating
                  costs and expenses
              
              
              1,228,202
              
              
              152,488Other
                  expenses
              
              
              166,180
              
              
              11,859Loss
                  before taxes
              
              
              (1,300,405
              )
              
              (138,312
              )Provision
                  for taxes
              
              
              27,547
              
              
              5,214Net
                  loss from discontinued operations
              
              $
              (1,327,952
              )
              $
              (143,526
              )




The
      loss
      from discontinued operations of AONet from the Company’s financial statement of
      $705,976 reflects the write-off of the remaining assets and liabilities relating
      to this operation as of March 31, 2006, as the Company received no consideration
      in exchange for the forfeiture of its interest in AONet. The Company is
      attempting to negotiate some form of consideration for its forfeiture of its
      interests in AONet, however the outcome of such negotiations are
      uncertain.




5.
            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 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 represent 12.5%
      of
      the issued and outstanding shares of Common Stock of Excelsa on a fully diluted
      basis.




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
      such that MSGI then owned approximately 19.5% of the issued and outstanding
      shares of common stock of Excelsa, which the parties agreed better reflects
      the
      value of Excelsa under US generally accepted accounting principles.





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. At June 30, 2006, the Company
      examined the possibility of an impairment to the investment in Excelsa. The
      Company determined that there was no evidence of an “other than temporary”
decline in value and the Company does not believe that its investment has been
      impaired as of June 30, 2006.





55


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





6.
            NOTES
                PAYABLE:




8%
      Callable Convertible Note :


On
      July
      12, 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. The total was
      received by the Company during the fiscal year 2006. Substantially all of the
      assets of the Company are pledged as collateral to the note holders.





The
      Note
      requires repayment over a three-year term with an 8% interest per annum.
      Repayment shall be made in cash or in registered shares of common stock, or
      a
      combination of both, at the option of the Company, and payment commences 90
      days
      after each closing date and is payable monthly in equal principal installments
      plus interest over the remaining 33 months.





Pursuant
      to an amendment dated September 21, 2005 the Company has the option to make
      the
      monthly payments in registered shares of common stock only if the stock price
      exceeds $4.92 over a specified period of time. Further, the Holder has the
      option to convert all or any part of the outstanding principal to common stock
      if the average daily price, as defined in the agreement, for the preceding
      five
      trading days is greater than the defined Initial Market Price of $6.56. The
      conversion price is $4.92. The agreement provides that for any monthly period
      in
      which the stock price is greater than 125% of the initial market price of $6.56,
      as defined in the agreement, for the month, the interest rate for that month
      will be 0%. The Company granted registration rights to the investors for the
      resale of the shares of common stock underlying the notes and certain warrants
      that were issued in the transaction.





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





The
      Company also issued five−year warrants to the investors for the purchase of up
      to 75,000 shares of the Company's common stock, $0.01 par value, at an exercise
      price of $7.50 per share, which are exercisable at any time. The placement
      agent
      received three−year warrants for the purchase of 12,195 shares of the Company's
      common stock, at an exercise price of $7.50 per share exercisable between the
      period January 12, 2006 and January 11, 2009. The agent warrants were valued
      at
      $57,054 using the Black−Scholes option pricing model and recorded as part of the
      financing costs. In addition, the agent received a fee equal to 7% of the
      aggregate offering, in an amount of $210,000, which was recorded as part of
      the
      financing costs.





Total
      financing cost recorded in connection with the Notes was $357,304. The Company
      recorded a discount to the note payable of $1,471,169, of which $404,792
      represented the discount allocated to the warrants and $1,066,377 represented
      the beneficial conversion feature of the note. The fair value of the warrants
      was determined using a Black−Scholes option pricing model. The discount on the
      note was allocated from the gross proceeds and recorded as additional paid−in
      capital.





In
      January 2006, this Agreement was further amended with a Letter Agreement in
      conjunction with additional short-tem notes the Company entered into with the
      same investors (see below), by which the investors agreed to waive certain
      requirements under the 2005 Notes, as amended, thus allowing the Company to
      issue shares of common stock to the investors in order to satisfy the Company’s
      payment obligations under the terms of the Callable Secured Convertible Notes
      for the months of January, February and March 2006 by issuing 22,000 shares
      of
      the Company’s common stock per month, due on the last day of each month. The
      Letter Agreement also allows for the issuance of 9,000 shares of the Company’s
      common stock as a partial payment against the obligation due for the Callable
      Secured Convertible Notes for the month of April 2006. As of June 30, 2006,
      the
      Company issued 75,000 shares of its common stock per the terms of the Letter
      Agreement. Through a combination of cash payments ($211,253) and issuance of
      shares of common stock, the principal balance of the $3.0 million of the notes
      was reduced to $2,574,597 as of June 30, 2006. Also, in January 2006, the Chief
      Executive Officer entered into a guarantee and pledge agreement with the note
      holders, whereby, the common stock of MSGI owned by the Chief Executive Officer
      (approximately 190,000 shares) was pledged as additional collateral for the
      notes.





On
      June
      7, 2006 the Company entered into a waiver and amendment agreement which modified
      certain payment due date of the notes to provide for a payment of $395,450
      due
      July 14, 2006 for debt service due from April 2006 through July 2006. Such
      payment was not made on July 14, 2006. In consideration for the waiver
      agreement, the Company issued 800,000 warrants to the note holders. Such
      warrants were ascribed a fair value, as computed under the Black-Scholes model,
      of $2,224,808 which was recognized as additional interest expense in June 2006.
      Because of the default of the terms of the notes, the amortization of the
      deferred financing costs, beneficial conversion costs and interest discount
      were
      accelerated to be fully recognized by June 30, 2006. As of July 14, 2006, the
      Company is in technical default of the payment terms of the Callable 8% Secured
      Convertible Notes and the Company is attempting to negotiate revised
      terms.





56


Other
      Notes Payable :


Other
      Notes payable consist of the following as of June 30, 2006:





December
                  2005 Note Payable
              
              $
              250,000January
                  2006 Note Payable
              
              $
              600,000Notes
                  Payable to vFinance Investment,net
                  of discount of $382,676
              
              $
              592,427Total
              
              $
              1,442,427





December
      2005 Note Payable


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





January
      2006 Note Payable


During
      January 2006, the Company entered into a short-term note in the amount of
      $300,000. This loan bore interest at a rate of 12%. The annual interest amount
      of $36,000 was due in full even if early payment of principal. The entire
      principal and interest of $336,000 was paid in full on January 24, 2006.





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





In
      connection with the waiver and amendment executed for the 8% Callable
      Convertible notes above, the same agreement also waived and amended the maturity
      date of these short-term notes to a new maturity date of July 14, 2006. As
      of
      July 14, 2006, the Company is in technical default of the payment terms of
      the
      Callable 8% Secured Convertible Notes and the Company is attempting to negotiate
      revised terms.





vFinance
      note payable


During
      the months of February and March 2006, the Company entered into a series of
      promissory notes with various private lenders. The notes closed in a series
      of
      four transactions over the period of February 17, 2006 to March 23, 2006. Gross
      proceeds in the amount of $799,585 were obtained and the notes carry an
      aggregate repayment total of $975,103 (which includes imputed interest of
      $175,518 or 21.95%) which is due and payable upon maturity. The notes carry
      a
      maturity date of February 28, 2007.





In
      addition, warrants for the purchase of up to 585,062 shares of the Company’s
      common stock were issued to the individual lenders. The warrants carry an
      original exercise price of $6.50 and a term of 5 years. The warrants may be
      exercised 65 days after the date of issuance. The warrant agreement contains
      a
      reprice provision that provides for a change in the exercise price if the
      Company issues more favorable terms to another party, as defined in the
      agreement. Due to the 800,000 warrants issued in connection with the 8% Callable
      Convertible Notes above at an exercise price of $4.50, the exercise price of
      the
      warrants issued with the vFinance note payable were modified to
      $4.50.





The
      vFinance Agreement also contains a registration rights agreement for the
      warrants which contains penalty clauses if the underlying warrant shares are
      not
      registered per terms of the agreement. The agreement calls for a Registration
      Filing Date within 180 days from closing date and a Registration Effective
      Date
      within 90 days from the Registration Filing Date. The agreement provides for
      a
      cash penalty of approximately 1.5% of the value of the notes for each thirty
      day
      period that is exceeded. The Company has recorded a liability of $63,400 at
      June
      30, 2006 to provide for the expected delay in issuing this registration
      statement.




57


Placement
      fees in the amount of $73,133 were paid to vFinance Investments, Inc. as
      placement agent. In addition to the placement fees, warrants for the purchase
      of
      up to 73,134 shares of the Company’s common stock were issued to the placement
      agent and its designees. The agent warrants carry an exercise price of $6.50,
      a
      term of 5 years and may be exercised 65 days after the date of
      issuance. The
      agent warrants were valued at $176,114 using the Black−Scholes option pricing
      model and recorded as part of the financing costs. In addition, a third party
      received a fee equal to 5% of the aggregate offering, in an amount of $40,000,
      which was recorded as part of the financing costs.





Total
      financing cost recorded in connection with the Notes was $315,337 which is
      included in other assets on the balance sheet and is being amortized over the
      term of the Notes. The Company recorded a discount to the note payable of
      $612,240 which represented the discount allocated to the warrants. The fair
      value of the warrants was determined using a Black−Scholes option pricing model.
      The discount on the note was allocated from the gross proceeds and recorded
      as
      additional paid−in capital. The discount is being amortized to interest expense
      over the one−year term of the note. Interest expense for the year ended June 30,
      2006 in connection with this note discount was approximately $229,590. Should
      the notes be paid prior to the payment terms, the amortization of the discount
      will be accelerated.





Advance
      from Strategic partner


During
      the month of June 2006, the Company received funding, in the amount of $300,000
      from a certain New York based homeland security firm as an advance in
      contemplation of a further strategic transaction between the two parties. From
      July 1, 2006 through October 13, 2006, the Company received an additional
      $700,000 in such advances. There can be no assurances that the strategic
      transactions can or will be completed. The advances plus interest are
      immediately repayable if the contemplated transaction does not close. The
      advances bear interest at a rate of 8% and interest expense was $1,381 for
      the
      year ended June 30, 2006.




7.
            DISCONTINUED
                OPERATIONS - OTHER 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 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.





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.





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.




58




8.
            OTHER
                CURRENT ASSETS





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





2006
              
              2005Prepaid
                  legal
              
              $
              -
              
              $
              58,568Prepaid
                  insurance
              
              
              4,735
              
              
              5,004Other
              
              
              8,750
              
              
              26,324Total
              
              $
              13,485
              
              $
              89,896




9.
            PROPERTY,
                PLANT AND EQUIPMENT:




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




2006
              
              2005Machinery,
                  equipment and furniture
              
              $
              207,577
              
              $
              243,973Software
              
              
              4,907
              
              
              4,907Total,
                  at cost
              
              $
              212,484
              
              $
              248,880Less:
                  accumulated depreciation
              
              
              (59,443
              )
              
              (36,937
              )Property,
                  plant & equipment, net
              
              $
              153,041
              
              $
              211,943


Depreciation
      expense was approximately $104,000 and $30,000 for the years ended June 30,
      2006
      and 2005, respectively, including certain direct write offs.





10.
            GOODWILL
                AND OTHER INTANGIBLE ASSETS:




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





In
      connection with the acquisition of Innalogic (Note 3), intangible assets related
      to unpatented technologies totaling $287,288 were acquired.





The
      gross
      carrying amount and accumulated amortization of the Company's intangible assets as
      of
      June 30, 2006 and 2005 are as follows:





June
                30, 2006
            
            June
                30, 2005Amortized
                intangible assetsUnpatented
                technology
            
            $
            287,288
            
            $
            287,288Accumulated
                amortization
            
            
            178,911
            
            
            83,149Net
                book value
            
            $
            108,377
            
            $
            204,139





Amortization
      expense recorded for the years ended June 30, 2006 and 2005 were $95,762 and
      $83,929, respectively. The estimated remaining amortization expense is as
      follows:





Fiscal
                  Year
              
              Amount2007
              
              $
              95,7632008
              
              
              12,614$
              108,377
   59


11.
            ACCRUED
                EXPENSES AND OTHER CURRENT
                LIABILITIES:





Accrued
      expenses as of June 30, 2006 and 2005 consist of the following:




2006
              
              2005Salaries
                  and Benefits
              
              $
              972,336
              
              $
              173,562Accrued
                  audit and tax preparation fees
              
              
              213,040
              
              
              430,453Accrued
                  legal fees
              
              
              58,085
              
              
              85,000Accrued
                  consulting fees
              
              
              126,000
              
              
              2,266Accrued
                  interest
              
              
              60,767
              
              
              -Accrued
                  travel & entertainment
              
              
              118,487
              
              
              -Accrued
                  penalty for stock registration
              
              
              63,400
              
              
              -Accrued
                  taxes
              
              
              17,907
              
              
              23,459Other
              
              
              64,620
              
              
              174,893Total
              
              $
              1,694,642
              
              $
              889,633







12.
            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 15 th .
      The
      Company recognized interest income of $69,770, $69,674 and $69,704 for the
      years
      ended June 30, 2006, 2005 and 2003. As of June 30, 2006, the interest due
      through October 15, 2005 of approximately $162,600 is in arrears. During fiscal
      2005, $50,000 of compensation due to the officer was used to pay the interest
      due on the note. Since collectibility of the note receivable is uncertain,
      the
      Company has provided for the loss of the note receivable during the year ended
      June 30, 2006.





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, 2006 and 2005, approximately
      $260,000 and $216,000 is due to the officer for compensation deferred,
      respectively.





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








13.
            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.





60


Future
      minimum rental commitments under all non-cancelable leases, net of
      non-cancelable subleases, as of June 30, 2006 are as follows:




Rent
                  Expense2007
              
              $
              386,0002008
              
              
              240,0002009
              
              
              240,0002010
              
              
              240,0002011
              
              
              20,000$
              1,126,000




Rent
      expense was approximately $182,000, $146,400 and $72,000 for fiscal years ended
      June 30, 2006, 2005 and 2004, respectively.





In
      fiscal
      year 2002, the Company incurred an estimated loss in connection with the
      abandonment of certain leased office space. At June 30, 2006 and 2005, $987,348
      and $1,070,570 is accrued for this facility. The above rent commitment includes
      $1,100,000 pursuant to this abandoned lease payable in $20,000 monthly
      installments through 2010.




*Contingencies
      and Litigation* :





Certain
      legal actions in the normal course of business are pending to which the Company
      is a party. The Company does not expect that the ultimate resolution of the
      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.




14.
            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 did not file such registration statement within 180
      days,
      the Company would have to issue to the holders additional shares of Series
      F
      Preferred Shares equal to 5% of the number of Reserved Shares issued in the
      private placement, for each 30 day period, following the 180 day period, during
      which such registration statement has not been filed. The registration statement
      was not filed within the initial 180 day period, but was filed within the next
      30 day period. Therefore, the Company issued an additional 468.8 Series F
      Preferred Stock, which is convertible into 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, 2006, the Company had
      $293,964 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 issued to the Series F investors 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.





As
      of
      June 30, 2006 approximately 5,813 shares of Series F Convertible Preferred
      Stock
      have been converted into approximately 286,189 shares of the Company’s common
      stock, at the election of certain holders of the Series F Convertible Preferred
      Stock. These shares of the Company’s common stock have been issued and are
      outstanding as of the year ended June 30, 2006.





61





15.
            COMMON
                STOCK, STOCK OPTIONS, AND WARRANTS:




*Common
      Stock Transactions:*





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





During
      April 2006 through June 2006, approximately 5,813 shares of Series F Convertible
      Preferred Stock have been converted into approximately 286,189 shares of the
      Company’s common stock, at the election of certain holders of the Series F
      Convertible Preferred Stock. During 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. 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 common 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 the Company received
      $600,000 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.





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 resulting in the net issuance of 407,790 shares.





*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.





62


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. 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.




Effective
      July 1, 2005, the Company has adopted SFAS 123R, “Share−Based Payment.” SFAS
      123R replaces SFAS 123 “Accounting for Stock−Based Compensation” and supersedes
      Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock
      Issued to Employees.” SFAS123R requires all share−based payments to employees,
      including grants of employee stock options, to be recognized in the financial
      statement based on their fair values. Under SFAS 123R, the pro forma disclosures
      previously permitted under SFAS 123 are no longer an alternative to financial
      statement recognition.





The
      Company has selected the Black−Scholes method of valuation for share−based
      compensation and has adopted the modified prospective transition method under
      SFAS 123R, which requires that compensation cost be recorded, as earned, for
      all
      unvested stock options outstanding at the beginning of the first quarter of
      adoption of SFAS 123R. As permitted by SFAS 123R, prior periods have not been
      restated. The charge is being recognized in non cash compensation on a
      straight−line basis over the remaining service period after the adoption date
      based on the options’ original estimate of fair value. The Company did not
      record a tax benefit related to the share−based compensation expense since the
      Company has a full valuation allowance against deferred tax assets.





Prior
      to
      the adoption of SFAS 123R, the Company applied the intrinsic−value−based method
      of accounting prescribed by APB 25 and related interpretations, to account
      for
      its fixed−plan stock options to employees. Under this method, compensation cost
      was recorded only if the market price of the underlying stock on the date of
      grant exceeded the exercise price. As permitted by SFAS 123, the Company elected
      to continue to apply the intrinsic−value−based method of accounting described
      above, and adopted only the disclosure requirements of SFAS 123. The
      fair−value−based method used to determine historical pro forma amounts under
      SFAS 123 was similar in most respects to the method used to determine
      stock−based compensation expense under SFAS 123R. However, in its pro forma
      disclosures, the Company accounted for option forfeitures as they occurred,
      rather than based on estimates of future forfeitures.





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





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





63


The
      expense for the year ended June 30, 2006 was $1,523,406. The following table
      illustrates the pro forma effect on the Company’s net loss and net loss per
      share as if the Company had adopted the fair−value−based method of accounting
      for stock−based compensation under SFAS 123 for the years ended June 30, 2005
      and 2004:




Years
                  ended June 302005
              
              2004Net
                  loss available to commonstockholders
                  as reported
              
              $
              (6,872,483
              )
              $
              (3,030,199
              )Stock
                  based employee compensationincluded
                  in reported net loss
              
              
              1,774,062
              
              
              -Subtotal
              
              
              (5,098,421
              )
              
              (3,030,199
              )Stock-based
                  employee compensationexpense
                  determined under the fair valuemethod
                  for all awards
              
              
              2,227,868
              
              
              28,167Pro
                  forma net loss availableto
                  common stockholders
              
              $
              (7,326,289
              )
              $
              (3,058,366
              )Loss
                  per share:Basic
                  loss per share - as reported
              
              $
              (1.99
              )
              $
              (1.31
              )Basic
                  loss per share - pro forma
              
              $
              (2.12
              )
              $
              (1.32
              )Diluted
                  loss per share - as reported
              
              $
              (1.99
              )
              $
              (1.31
              )Diluted
                  loss per share - pro forma
              
              $
              (2.12
              )
              $
              (1.31
              )




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. There were no stock option
      grants during the fiscal year ended June 30, 2006.




2005
              
              2004Risk
                  -free interest rate
              
              4.00%
              
              4.00%Expected
                  option life
              
              Vesting
                  period+ four years
              
              Vesting
                  period + four yearsDividend
                  yield
              
              None
              
              NoneVolatility
              
              152%
                  - 163%
              
              160%Weighted
                  average fair valueOptions
                  issued equal to market value
              
              $
                  6.46
              
              $
                  1.45Options
                  issued below market value
              
              -
              
              $
                  9.22


The
      following summarizes the stock option transactions under the 1999 Plan for
      the
      three years ended June 30, 2006:




Number
              Exercise
                  Price
              Weighted
                  Averageof
                  Shares
              Per
                  Share
              Exercise
                  PriceOutstanding
                  at June 30, 2003
              
              12,722
              $106.50
                  to $279.00
              $175.83Granted
              
              107,500
              $1.50
              $
                  1.50Exercised
              
              --Cancelled
              
              (12,722)
              $106.50
                  to $279.00
              $175.83Outstanding
                  at June 30, 2004
              
              107,500
              $1.50
              $
                  1.50Granted
              
              412,500
              $1.50
                  to $7.00
              $
                  2.63Exercised
              
              --Cancelled
              
              --Outstanding
                  at June 30, 2005
              
              520,000
              $1.50
                  to $7.00
              $
                  2.40Granted
              
              --Exercised
              
              --Cancelled
              
              --Outstanding
                  at June 30, 2006
              
              520,000
              $1.50
                  to $7.00
              $
                  2.40





64





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, 2006:





Number
              Exercise
                  Price
              Weighted
                  Averageof
                  Shares
              Per
                  Share
              Exercise
                  PriceOutstanding
                  at June 30, 2003
              
              6,668
              $124.08
              $124.08Granted
              
              160,000
              $1.50
                  to $6.00
              $
                  5.20Exercised
              
              --Cancelled
              
              (6,668)
              $124.08
              $124.08Outstanding
                  at June 30, 2004
              
              160,000
              $1.50
                  to $6.00
              $
                  5.20Granted
              
              --Exercised
              
              (120,000)
              $6.00
              $
                  6.00Cancelled
              
              --Outstanding
                  at June 30, 2005
              
              40,000
              $1.50
                  to $4.13
              $
                  2.81Granted
              
              --Exercised
              
              --Cancelled
              
              --Outstanding
                  at June 30, 2006
              
              40,000
              $1.50
                  to $4.13
              $
                  2.81




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, 2006:




Number
              Exercise
                  Price
              Weighted
                  Averageof
                  Shares
              Per
                  Share
              Exercise
                  PriceOutstanding
                  at June 30, 2003
              
              25,392
              $48.00
                  to $74.64
              $67.77Granted
              
              --Exercised
              
              --Cancelled
              
              (25,392)
              $48.00
                  to $74.64
              $67.77Outstanding
                  at June 30, 2004, 2005 and 2006
              
              --




65


As
        of
        June 30, 2006, 342,666 options are exercisable. The weighted average exercise
        price of all outstanding options is $2.43 and the weighted average remaining
        contractual life is 7.8 years. At June 30, 2006, 605,122 options were available
        for grant.
 
 The
        following summarizes the warrant transactions for the three years ended June
        30,
        2006:
  Number
              
              Exerciseof
                  Shares
              
              PriceOutstanding
                  at June 30, 2003
              
              
              457,774
              
              
              $.24
                    to $24.00Issued
              
              
              270,000
              
              $
              6.00Exercised
              
              
              (444,584
              )
              
              $.24Cancelled
              
              
              (13,190
              )
              
              $.24
                    to $24.00Outstanding
                  at June 30, 2004
              
              
              270,000
              
              $
              6.00Granted
              
              
              523,340
              
              $
              6.00
                  to 8.25Issued
              
              
              -Cancelled
              
              
              -Outstanding
                  at June 30, 2005
              
              
              793,340
              
              $
              6.00
                  to 8.25Granted
              
              
              1,545,391
              
              $
              4.50
                  to 7.50Issued
              
              
              -Cancelled
              
              
              -Outstanding
                  at June 30, 2006
              
              
              2,338,731
              
              $
              4.50
                  to 8.25
 All
          warrants are currently exercisable.
 As
        of
        June 30, 2006, the Company has 2,338,731 warrants outstanding to purchase
        shares
        of common stock at prices ranging from $4.50 to $8.25. All warrants are
        currently exercisable.
 
 66
 16.
        INCOME TAXES:
  Loss
        before income taxes was from continuing operations was principally from domestic
        operations.
  Income
        tax expense consists of domestic minimum state franchise and income taxes.
 
 Deferred
        tax assets are comprised of the following:
 As
                  of June 30,2006
              
              2005Deferred
                  tax assets:Net
                  operating loss carry-forwards
              
              $
              89,885,123
              
              $
              84,206,738Abandoned lease reserves
              
              
              460,345
              
              
              458,632Compensation
                  on option grants
              
              
              1,555,269
              
              
              897,029Amortization of intangibles
              
              
              (52,090
              )
              
              (87,453
              )Provision for loss on Note receivable
              
              
              519,870
              
              
              -Net basis differences in AONet net assets
              
              
              -
              
              
              795,000Other
              
              
              118,893
              
              
              34,035Total
                  deferred tax assets
              
              
              92,487,410
              
              
              86,303,981Valuation
                  allowance
              
              
              (92,487,410
              )
              
              (86,303,981
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
 
 The
        difference between the Company’s U.S. federal statutory rate of 35%, as well as
        its state and local rate net of federal benefit of 5%, when compared to the
        effective rate is principally the result of no current domestic income tax
        as a
        result of net operating losses and the recording of a full valuation allowance
        against resultant deferred tax assets. The recorded income tax expense reflects
        domestic state income taxes.
 
 The
          Company has a U.S. federal net operating loss carry forward of approximately
          $253,000,000 available, which expires from 2011 through 2023. These loss
          carry
          forwards are subject to annual limitations under Internal Revenue Code
          Section
          382 and some loss carry forwards are subject to SRLY limitations. The Company
          has recognized a full valuation allowance against deferred tax assets because
          it
          is more likely than not that sufficient taxable income will not be generated
          during the carry forward period available under the tax law to utilize
          the
          deferred tax assets. Of these net operating loss carry forwards approximately
          $61,000,000 is the result of deductions related to the exercise of non-qualified
          stock options. The realization of these net operating loss carry forwards
          would
          result in a credit to equity.
  The
        Company has reviewed its deferred tax assets and has determined that the
        entire
        amount of its deferred tax assets should be reserved as the assets are not
        considered to be more likely than not recoverable in the future.
 
 17.
        ABANDONED LEASES OBLIGATION
  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 remaining obligation has been recorded current liabilities.
  67
 
 18.
        EMPLOYEE RETIREMENT SAVINGS 401(k) PLANS:
  The
        Company sponsors a tax deferred retirement savings plan (“401(k) plan”) which
        permits eligible employees to contribute varying percentages of their
        compensation up to the annual limit allowed by the Internal Revenue Service.
  The
        Company currently matches the 50% of the first $3,000 of employee contribution
        up to a maximum of $1,500 per employee. Matching contributions charged to
        expense were approximately $0, $0 and $1,500, for the fiscal years ended
        June
        30, 2006, 2005 and 2004, respectively. There were no employee contributions
        to
        the plan in fiscal 2006 or 2005.
  The
        plan
        also provided for discretionary Company contributions. There were no
        discretionary contributions in fiscal years 2006, 2005 or 2004.
 
 19.
        SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
        ACTIVITIES:
 
 For
        the
        year ended June 30, 2006:
 •
              A
                  discount of $1,471,169 was recorded on the NIR 8% convertible notes,
                  which
                  represents a beneficial conversion feature of the note of $1,066,377
                  and
                  the allocated fair value of the warrants of
                  $404,792.
 •
              In
                  connection with the NIR Group 8% convertible note financing, the
                  company
                  issued 12,195 warrants to the placement agent with a fair market
                  value of
                  $57,054.
 •
              In
                  connection with the NIR Group financing, the company issued 800,000
                  warrants to the note holders with a fair market value of
                  $2,665,568.
 •
              A
                  discount of $612,240 was recorded on the vFinance notes, which
                  represents
                  the allocated fair value of the 585,062 warrants issued in connection
                  with
                  this debt.
 •
              In
                  connection with the vFinance financing, the company issued 73,134
                  warrants
                  to the placement agent and its designees with a fair market value
                  of
                  $176,114
 •
              In
                  connection with the 8% convertible note, the company issued 75,000
                  of its
                  common stock, in lieu of cash payments, with a fair market value
                  of
                  $272,982
 •
              In
                  connection with the adoption of SFAS 123R, deferred compensation
                  expense
                  of $1,301,974 was reversed against additional paid in
                  capital.
 •
              Approximately
                  5,813 shares of preferred stock were converted into 286,189 shares
                  of
                  common stock
 
 For
        the
        year ended June 30, 2005:
 •
              In
                  connection with the AONet acquisition, the Company issued 100,000
                  common
                  shares with a fair value of
                  $774,000.
 •
              The
                  Company had a remaining purchase obligation of $917,250 in connection
                  with
                  the AONet acquisition.
 •
              In
                  connection with the Innalogic acquisition, the Company issued 100,000
                  common shares with a fair value of
                  $471,272.
 •
              The
                  Company recorded deferred compensation expense of $2,840,150 in
                  connection
                  with the issuance of stock options.
  For
        the
        year ended June 30, 2004:
 •
              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.
 •
              The
                  Company issued 150,000 common shares in connection with a stock
                  subscription receivable of
                  $600,000.
 •
              In
                  connection with the sale of the teleservices division, the Company
                  has a
                  note receivable of $300,000.
 •
              In
                  connection with a lawsuit settlement, the Company cancelled shares
                  of
                  preferred stock of a discontinued subsidiary in the amount of
                  $280,946.
 
 68
 20.
        SUBSEQUENT EVENTS:
 During
        the month of June 2006, the company received funding, in the amount of $300,000
        from a certain New York based homeland security firm as a working capital
        injection in contemplation of a further strategic transaction between the
        two
        parties. This firm is also in the security technology business and it is
        thought
        that the combined technologies and services would yield a stronger competitive
        offering to potential customers in the homeland security industry. From July
        1,
        2006 through October 13, 2006, the Company received an additional $XXXX from
        such firm for additional working capital requirements. While the negotiations
        between the two firms are ongoing, there can be no assurance that the strategic
        transaction can or will be completed.
  69
 
 Schedule
        II
  MSGI
        Security Solutions, Inc.
 Valuation
        and Qualifying Accounts
 For
        the Years Ended June 30, 2006, 2005 and 2004(unaudited)
  
 Column
                  A
              Column
                  B
              Column
                  C
              Column
                  D
              
              Column EAdditionsBalance
                  at
              
              Charged
                  To
              Charged
                  ToDescription
              Beginning
              
              Costs
                  and
              Other
              Deductions-
              
              Balance
                  AtOf
                  Period
              
              Expenses
              Accounts-
              Describe
                  (1)
              
              End
                  Of PeriodDescribeAllowance
                  for doubtful accountsFiscal
                  2006
              -
              $
              115,750
              -
              
              
              $115,750Fiscal
                  2005
              -
              
              -
              -
              
              
              -Fiscal
                  2004
              -
              
              -
              -
              
              
              -
 
 
 70