UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549


**FORM
      10-KSB**





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


EXCHANGE
      ACT OF 1934





For
      the
      fiscal year ended June 30, 2008





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)
      339-7150





Securities
      registered pursuant to Section 12(b) of the Exchange Act:




None





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





Common
      Stock, par value $.01 per share


(Title
      of
      class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      Section 15(d) of the Exchange 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.





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





Yes x No o





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





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





Yes o No x





The
      issuer’s revenues for its most recent fiscal year were: $4,044,560.





As
      of
      October 31, 2008, the aggregate market value of the voting stock held by
      non-affiliates of the Registrant was approximately $3,279,446.





As
      of
      October 31, 2008, there were 23,427,690 shares of the Registrant's common stock
      outstanding.





Transitional
      Small Business Disclosure Format: Yes o No x








TABLE
      OF CONTENTS





Part
                IItem
                1. Description of Business
            Page 3
                - 11Item
                2. Description of Property
            Page
                12Item
                3. Legal Proceedings
            Page
                12Item
                4. Submission of Matters to a Vote of Security Holders
            Page
                12Part
                IIItem
                5. Market for Common Equity, Related Stockholder Matters and Small
                Business Issuer Purchases of Equity Securities
            Page
                12Item
                6. Management’s Discussion and Analysis or Plan of
                Operations
            Page
                13 - 22Item
                7. Financial Statements
            Page
                23 - 55Item
                8. Changes in and Disagreements With Accountants on Accounting and
                Financial Disclosures
            Page 56Item
                8A Controls and Procedures
            Page 
                56Item
                8A(T) Controls and Procedures
            Page 
                56Item
                8B Other Information
            Page 
                57Part
                IIIItem
                9. Directors, Executive Officers, Promoters, Control Persons and
                Corporate
                Governance; Compliance with Section 16(a) of the Exchange
                Act
            Page 58Item
                10. Executive Compensation
            Page 61Item
                11. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            Page 66Item
                12. Certain Relationships and Related Transactions, and Director
                Independence
            Page 67Item
                13. Exhibits
            Page
                69 - 71Item
                14. Principal Accountant Fees and Services
            Page
                71




2





**PART
      I**





**Special
      Note Regarding Forward-Looking Statements**





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





**Item
      1. Description of Business**





General





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. The Company is headquartered in New York
      City where it serves the needs of counter-terrorism, public safety, and law
      enforcement in the United States, Europe, the Middle East and Asia.





The
      Company’s Strategy





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





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





MSGI
      also
      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 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 of its interests in such
      operations.





Background





The
      Company was originally incorporated in Nevada in 1919.





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


3


Date
              
              Name
                  of Company Acquired
              
              Service
                  PerformedJuly
                  2005
              
              Acquired
                  additional equity in Future Developments America, Inc. bringing
                  total
                  ownership from 51% 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.
              
              Provider
                  of technology-based products and services specializing in
                  application-specific and custom-tailored restricted-access intelligence
                  products, systems and proprietary solutionsAugust
                  2005
              
              Acquired
                  additional equity in Innalogic, LLC bringing total ownership stake
                  to
                  84%
              
              Designs
                  and deploys content-rich software products for a wide range of
                  wireless
                  mobile devices.April
                  1, 2006
              
              Forfeited
                  51% interest in AONet International S.r.L. as a result of default
                  of
                  provision of the purchase agreement. Results were reclassified
                  to a
                  discontinued operation. Investment was originally acquired in June
                  2005January
                  2007
              
              Excelsa
                  S.p.A. filed for bankruptcy. The investment, originally acquired
                  in
                  December 2004, was fully impaired.April
                  1, 2007
              
              Entered
                  into a license agreement with CODA Octopus, Inc. (CODA) where by
                  MSGI will
                  receive a royalty on sales of products by CODA using the Innalogic
                  proprietary technology. In connection with such transaction, CODA
                  assumed
                  certain development and operational responsibilities of the Innalogic
                  technologies.January
                  2008 – April 2008
              
              Investments
                  in Current Technology Corp. for a total interest of 15.3%.
              
              Provider
                  of GPS systems and services for security both for the civilian
                  and
                  military markets.





Liquidity





The
      Company has limited capital resources, has incurred significant historical
      losses and negative cash flows from operations and has limited current revenues.
      The Company believes that funds on hand combined with funds that will be
      available from its various operations may not be adequate to finance its
      operations and capital expenditure requirements and enable the Company to meet
      its financial obligations and payments under its convertible notes and
      promissory notes for the next twelve months. Further, there is uncertainty
      as to
      timing, volume and profitability of transactions that may arise from our
      relationship with Hyundai Syscomm Corp (Hyundai), Apro Media Corp (Apro) and
      others. Further, there can be no assurance as to the timing of when or if we
      will receive amounts due to us for products shipped to customers prior to June
      30, 2008. There are no assurances that any further capital raising transactions
      will be consummated. Although certain transactions have been successfully
      closed, failure of our operations to generate sufficient future cash flow and
      failure to consummate our strategic transactions or raise additional financing
      could have a material adverse effect on the Company's ability to continue as
      a
      going concern and to achieve its business objectives. These conditions raise
      substantial doubt about the Company’s ability to continue as a going concern.
      The accompanying financial statements do not include any adjustments relating
      to
      the recoverability of the carrying amount of recorded assets or the amount
      of
      liabilities that might result should the Company be unable to continue as a
      going concern.


4





We
      have
      recently financed (and refinanced) our operations with several debt issuances.
      Notes payable at June 30, 2008 and 2007 are summarized as follows:




Instrument
            
            Maturity
            
            Face Amount
            
            Coupon Interest
              Rate
            
            Carrying Amount
              at June 30, 2008,
              net of discount
            
            Carrying Amount
              at June 30, 2007,
              net of discountNotes
                Payable
            
            Demand
            
            $
            500,000
            
            
            N/A
            
            $
            -
            
            $
            600,0008%
                Notes
            
            Dec.
                13, 2009
            
            
            2,572,414
            
            
            8
            %
            
            -
            
            
            1,427,4116%
                Notes
            
            Dec.
                13, 2009
            
            
            1,000,000
            
            
            6
            %
            
            100
            
            
            361,1116%
                April Notes
            
            April
                4, 2010
            
            
            1,000,000
            
            
            6
            %
            
            55
            
            
            83,3348%
                Debentures
            
            May
                21, 2010
            
            
            4,000,000
            
            
            8
            %
            
            62
            
            
            185,185Advance
                from Apro
            
            N/A
            
            
            200,000
            
            
            N/A
            
            
            200,000
            
            
            -Term
                notes short-term
            
            December 31,
              2008 and
              September 30,
              2008
            
            
            2,860,000
            
            
            18
            %
            
            2,860,000
            
            
            -


During
      the year ended June 30, 2008, the Company closed on two financing transactions.
      See description of the accounting implication of certain features of these
      notes
      in the Notes to the Consolidated Financial Statements.





Term
      Notes




In
      December 2007, the Company entered into the Term Notes for gross proceeds of
      $2,860,000, which proceeds were used to purchase inventory. The Term Notes
      had
      an original maturity date of April 15, 2008 and a variable interest rate of
      prime plus two percent. In connection with the Term Notes, the Company issued
      five-year warrants to purchase 100,000 shares of common stock of the Company
      at
      an exercise price of $1.38 per share.





The
      Company was unable to repay these Term Notes at the original maturity date
      and
      have entered into several subsequent amendments with the Term Note holders.
      The
      current maturity date of three out of four of these Term Notes is December
      31,
      2008. The current maturity date of the fourth note is September 30, 2008. The
      company is currently involved in discussions regarding a revision to the
      maturity date of this fourth Term Note. Effective April 15, 2008, the interest
      rate on these notes was increased to the default interest rate of 18% and the
      notes become convertible at a conversion rate of $0.51.





As
      part
      of the amendments to these Term Notes, the Company agreed to issue certain
      warrants and shares of common stock of the Company. As of June 30, 2008, the
      Company issued the note holders 520,000 shares of common stock and warrants
      to
      purchase 284,717 shares of common stock. The warrants are five-year warrants
      and
      33,218 warrants have an exercise price of $0.60 with the remaining having an
      exercise price of $0.50. Subsequent to June 30, 2008 and through September
      30,
      2008, the Company has issued these note holders an additional 528,571 shares
      of
      common stock and warrants to purchase 715,283 shares of common stock as
      consideration for additional amendments to this note. Effective October 1,
      2008,
      the Company entered into new addendum agreements with three of the four lenders,
      which terminated all previously issued warrants and issued new warrants and
      additional shares of common stock in their place. At execution of the addendums,
      the Company issued 378,000 shares of common stock and warrants to purchase
      an
      additional 378,000 shares of common stock at an exercise price of $0.50. The
      Company shall issue up to an additional 252,000 shares of common stock and
      warrants to purchase an additional 252,000 shares of common stock, at an
      exercise price of the greater of $0.50 or market value on the date of grant,
      should these Term Notes remaining outstanding until December 31, 2008. The
      Company is in discussions with the fourth lender for a new addendum to the
      Term
      Note.





Series
      H
      Preferred Stock and Put Options




In
      January 2008, the Company entered into a Preferred Stock Agreement which
      provided the Company with gross proceeds of $5,000,000, of which a portion
      was
      used to make a significant investment in Current Technology Corp. The Company
      issued 5,000,000 shares of Series H Convertible Preferred Stock with a
      conversion rate of $1.00 per share, five-year warrants to purchase 5,000,000
      shares of common stock of the Company with an exercise price of $2.50, and
      a
      five-year Put Option Agreement for up to 5 million common shares. Of the
      $5,000,000 received, $1,800,000 was put in a restricted cash account to
      guarantee the Put Option Agreement. See Note 13 in the Notes to the Consolidated
      Financial Statements for details of this transaction.





During
      the year ended June 30, 2008, the Company also had several conversions of
      outstanding notes, which reduced the outstanding debt during the year. Following
      is the reduction in the face amount of the notes that occurred during fiscal
      2008:


5





The
      8%
      Callable Secured Convertible Notes (8% Notes) that were originally issued in
      July 2005, were fully converted in an amount of $2,572,414.





The
      6%
      Callable Secured Convertible Notes (6% Notes) that were originally issued in
      December 2006, were partially converted in an amount of $1,000,000. The
      remaining $1,000,000 of this note remains outstanding.





In
      connection with the transactions for the 8% Notes and the 6% Notes, $600,000
      of
      Promissory Notes payable, which includes the $500,000 face amount and $100,000
      of interest, was cancelled and forgiven by the Note Holders.





The
      8%
      Convertible Debentures (8% Debentures) issued May 2007 was partially converted
      in an amount of $1,000,000. The remaining $4,000,000 of this note remains
      outstanding.





In
      connection with the converted notes above, all interest accrued on those notes
      was also converted into shares. In total, the Company issued 10,111,129 shares
      of common stock in connection with the conversions above of principal and
      interest.





Advance
      from Apro Media





During
      the year ended June 30, 2008, the Company received funding in the amount of
      $200,000 from Apro Media. These funds were advanced to the Company against
      expected collections of accounts receivable generated under the Apro
      sub-contract. There is no interest expense associated with this advanced funding
      and this is to be repaid to Apro upon collection of the related accounts
      receivable.





Industry





*Overview.*





The
      primary industries in which our companies operate are homeland security and
      international public safety. In the United States and abroad, homeland security
      and public safety are not purely separate areas, but rather law enforcement,
      fire departments, civil defense organizations and medical response teams are
      a
      crucial segment of any crisis situation, and work together with multiple
      government agencies to manage and resolve emergency situations. The Company
      believes its products and services work throughout the chain of threat
      prevention, detection, dissuasion, management and resolution to expedite the
      collection and dissemination of data in a secure fashion to field agents and
      decision-makers.





*Industry
      Growth.*





The
      primary industries in which our companies operate are commercial security,
      homeland security, law enforcement and public safety. The market for homeland
      security and safety technologies has been rapidly growing since the terrorist
      attacks occurred in the eastern United States in September 2001.





The
      “critical infrastructure” of the United States that could be subject to attack
      or a non-terrorist crisis (fire, earthquake, flooding) is absolutely enormous.
      According to the Environmental Protection Agency (“EPA”) and the U.S. General
      Accounting Office (“GAO”), there are more than 120 chemical plants within the
      United States that could each potentially expose more than one million people
      if
      an attack on the facility caused chemicals to be released, and there are more
      than 66,000 chemical plants nationwide. There are more than 5,800 hospitals,
      2,800 power plants, 5,000 public airports, 300 coastal and inland ports, 104
      commercial nuclear power plants, 600 natural gas processing facilities, 153
      oil
      refineries, 7,500 bulk petrochemical terminals, 80,000 dams, 3,000
      government-owned facilities and sites, and 460 “key asset” skyscrapers in the
      country, along with more than 250,000 sites owned by firms that are considered
      part of the “defense industrial base”.





The
      U.S.
      Department of Homeland Security (the “DHS”) has identified multiple end users of
      surveillance collection and data transmission technologies, including state
      and
      local governments, border and transportation security (for border entry points,
      transportation hubs, and shipping facilities), critical infrastructure
      protection, various military agencies and the U.S. Coast Guard, and the United
      States Secret Service.


6





All
      of
      this surveillance and interoperability improvement activity is expected to
      come
      at a significant cost. The DHS has estimated that reaching an accelerated goal
      of communications interoperability will require a major investment of *several
      billion dollars* over the
      next decade. There are several funding resources at all levels to assist in
      the
      development and acquisition of interoperable communications technologies, but
      the federal government is the primary source. There are multiple federal grant
      programs, including the Homeland Security grants, Urban Area Security
      Initiative, the Office for Community Oriented Policing Services (“COPS”) within
      the Department of Justice (“DOJ”), FEMA interoperable communications grants,
      Assistance to Firefighters grants, DOJ Local Law Enforcement Block Grants,
      and
      National Urban Search and Rescue Grants. The COPS program alone was authorized
      by Congress to administer the Interoperable Communications Technology Program
      beginning in 2003. More than $66 million in grants have been awarded by COPS
      to
      first responders for communications equipment, training and technical
      assistance. The fiscal year 2005 budget for DHS has allocated approximately
      $3.6
      billion in grants for first-responders, $37 million in additional funds to
      help
      build out the Homeland Security Operations Center (the nerve center for homeland
      security information and incident management across the United States) and
      FEMA
      incident-management capabilities, and $3.6 billion to the Office for Domestic
      Preparedness. Approximately $474 million has been earmarked for the
“Intelligence and Warning” segment of the National Strategy Mission Area for
      Homeland Security, which aggregates all non-military spending across the entire
      federal budget for that segment, $8.8 billion has been earmarked for the
“Emergency Preparedness and Response” segment, and $3.4 billion has been
      allocated for “Defending Against Catastrophic Threats”. Roughly $16.6 billion is
      reserved for security, enforcement, and investigational activity by the Bureau
      of Customs and Border Protection, Transportation Security Administration, the
      Coast Guard and the Secret Service. More than $5.5 billion in federal grants
      for
      first-responders from previous fiscal years remains available for distribution.
      The Urban Area Security Initiative Grants, given out by DHS to large local
      municipalities for security equipment, training and assistance, have been
      proposed to rise from $727 million in fiscal year 2004 to $1.45 billion in
      fiscal year 2005.





Beyond
      interoperability of communications between agencies, our products also offer
      significant advancements for surveillance and data collection and dissemination
      within law enforcement and fire department agencies for civilian crimes, fires
      and other incidents. For law enforcement, because of the many factors that
      arise
      in situations involving police and private citizens, surveillance technology
      that transmits information to field officers, commanders, and to a repository
      has significant advantages over relying on eyewitness surveillance. We believe
      that recording of video and audio can be very valuable for investigations and
      prosecution.





A
      RAND
      Corporation survey of law enforcement agencies in the United States in 2000
      found a significant proportion of the respondents lacked even the most basic
      surveillance technologies. Approximately 59% of local departments and 33% of
      state police departments did not use fixed-site video surveillance, while only
      3% of local departments and 7% of state departments reported widespread use
      of
      this technology. Some of the larger cities, such as New York City and Baltimore,
      have quite comprehensive fixed video surveillance in highly trafficked public
      areas, such as Times Square and Central Park. Almost 70% of local departments
      and 27% of state police departments did not use any sort of mobile video
      surveillance cameras, which would be used in a stakeout, hostage or other field
      incident. The primary reason cited for not acquiring this equipment was cost.
      Law enforcement agencies are widely expected to improve the quality of their
      surveillance data collection and dissemination technologies over the coming
      years. Even before the 2001 attacks, a 1998 study by the Rocky Mountain Region
      of the National Law Enforcement and Corrections Technology Center estimated
      that
      the use of digital communications systems would nearly double, rising to 25%
      of
      all police departments in the country by the end of calendar year 2007.





The
      RAND
      Corporation updated the survey in 2005. The new study was based on responses
      RAND received to a survey from officials in 208 state and local law enforcement
      agencies around the nation.




The
      survey found law enforcement agencies in highly populated counties are generally
      more concerned about terrorist attacks, and so do more to prepare for them
      than
      agencies in less populated counties.




For
      example, about 16 percent of state law enforcement agencies and about 8 percent
      of local law enforcement agencies in populous counties assessed the likelihood
      of terrorist attacks involving biological weapons within the next five years
      as
      being high. In contrast, only about 1 percent of law enforcement agencies in
      small counties said they faced a relatively high likelihood of a terrorist
      attack involving a biological weapon





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.




7


Services
      Offered by MSGI and its Operating Subsidiaries





**Relationships
      with Hyundai Syscomm Corp. and Apro Media Corp.:**





Hyundai




The
      Company’s relationship with Hyundai Syscomm Corp. (Hyundai) began in September
      2006 when the Company entered into a License Agreement with Hyundai in
      consideration of a one-time $500,000 fee. Under the agreement, MSGI granted
      to
      Hyundai a non-exclusive worldwide perpetual unlimited source, development and
      support license, for the use of the technology developed and owned by MSGI’s
      majority-owned subsidiary, Innalogic, LLC.





In
      October 2006, the Company entered into a Subscription Agreement with Hyundai
      for
      the issuance of 900,000 shares of the Company's common stock, in connection
      with
      the receipt of the $500,000 received for the License Agreement above, subject
      to
      certain terms and conditions set forth in the Subscription Agreement. The
      Company issued 865,000 shares of common stock at the initial closing of the
      transaction, and the remaining 35,000 shares of common stock remain to be
      issued.





In
      October 2006, the Company also entered into a Sub-Contracting Agreement with
      Hyundai. The Sub-Contracting Agreement allows for MSGI and its affiliates to
      participate in contracts that Hyundai and/or its affiliates now have or may
      obtain hereafter, where the Company's products and/or services for encrypted
      wired or wireless surveillance systems or perimeter security would enhance
      the
      value of the contract(s) to Hyundai or its affiliates. The initial term of
      the
      Sub-Contracting Agreement is three years, with subsequent automatic one-year
      renewals unless the Sub-Contracting Agreement is terminated by either party
      under the terms allowed by the Agreement.





On
      February 7, 2007, the Company issued to Hyundai a warrant to purchase up to
      a
      maximum of 24,000,000 shares of common stock in exchange for a maximum of
      $80,000,000 in revenue, which was expected to be realized by the Company over
      a
      maximum period of four years. The vesting of the Warrant will take place
      quarterly over the four-year period based on 300,000 vesting shares for every
      $1,000,000 in revenue realized by the Company. The revenue is subject to the
      sub-contracting agreement between Hyundai and the Company noted above.





There
      have been no business transactions under the Sub-Contract or License agreement
      as of June 30, 2008 or to date and the Company currently is not anticipating
      any
      in the near future.





Apro




On
      May
      10, 2007, the Company entered into an exclusive sub-contract and distribution
      agreement with Apro Media Corp. (Apro or Apro Media) for at least $105 million
      of expected sub-contracting business over seven years to provide commercial
      security services to a Fortune 100 defense contractor. Under the terms of
      contract, MSGI acquires components from Korea and delivers fully integrated
      security solutions at an average expected level of $15 million per year for
      the
      length of the seven-year engagement.  MSGI is to establish and operate a
      24/7/365 customer support facility in the Northeastern United States. Apro
      will
      provide MSGI with a web-based interface to streamline the ordering process
      and
      create an opportunity for other commercial security clients to be acquired
      and
      serviced by MSGI. The contract calls for gross profit margins estimated to
      be
      between 26% and 35% including a profit sharing arrangement with Apro Media,
      which will initially take the form of unregistered MSGI common stock, followed
      by a combination of stock and cash and eventually just cash. In the aggregate,
      assuming all the revenue targets are met over the next seven years, Apro Media
      would eventually acquire approximately 15.75 million shares of MSGI common
      stock. MSGI was referred to Apro Media by Hyundai as part of a general expansion
      into the Asian security market, however revenue under the Apro contract does
      not
      constitute revenue under the existing Hyundai agreements to acquire common
      stock
      of MSGI. The contract required working capital of at least $5 million due to
      considerable upfront expenses including a $2.5 million payment by MSGI to Apro
      Media, which was made on May 31, 2007, for the proprietary system development
      requirements of a Fortune 100 client and the formation of a staffed production
      and customer service facility and warehouse.





Per
      the
      terms of the sub-contract agreement with Apro, the Company is to compensate
      Apro
      with 3,000,000 shares of the Company’s common stock when the sub-contract
      transactions result in $10.0 million of GAAP recognized revenue for the Company.
      During the year ended June 30, 2008 the Company recognized approximately $3.8
      million in revenues resulting from activities under the sub-contract agreement.
      In December 2007, the Company elected to issue 1,000,000 shares of common stock
      to Apro pursuant to this agreement. The Company computed a fair value for a
      pro
      rata share of the remaining shares to be issued under that agreement, which
      was
      $62,336 at June 30, 2008 and has been reflected as a liability in our
      consolidated balance sheet. The total expense for the year ended June 30, 2008
      related to shares both issued and issuable to Apro was approximately $1.1
      million. This liability will be re-measured at each period end, until all shares
      are issued.




8


The
      Company had additional shipments and corresponding billings to clients in the
      aggregate of approximately $1.6 million resulting from activities under the
      Apro
      sub-contract agreement during the fiscal year ended June 30, 2008. These
      shipments have not been reported as revenue during the fiscal year ended June
      30, 2008 due to issues surrounding collectibility of payment and other factors
      and therefore, these transactions did not meet the criteria for revenue
      recognition as of June 30, 2008. In addition, the billings have been reversed
      and are not reflected as of June 30, 2008. These shipments will be recognized
      as
      revenue when and if the payments are received, and therefore all the revenue
      recognition criteria is fully met. Inventory costs related to these transactions
      have been reported on the balance sheet in Costs of product shipped to customers
      for which revenue has not been recognized.





In
      addition, the Company had additional shipments and corresponding billings to
      clients of approximately $4.9 million during the year ended June 30, 2008,
      that
      was not directly attributable to the Apro sub-contract, but was as a result
      of
      direct and indirect referrals from Apro and entities related to Apro. These
      shipments will also be recognized as revenue, as well as billings reflected
      as
      an asset, when and if the payments are received. Inventory costs related to
      these transactions have been reported on the balance sheet in Costs of product
      shipped to customers for which revenue has not been recognized.





Subsequent
      to the year ended June 30, 2008, the Company negotiated an acceleration to
      the
      sub-contract agreements with Hirsch Capital Corp., the private equity firm
      operating both Hyundai and Apro. Under the accelerated terms, the Company
      expects to increase its business with Apro by supporting several of the largest
      commercial businesses in Korea with products and services. The Company also
      expects that this renewed relationship will bring additional sales to a certain
      Fortune 100 defense contractor as well. As part of this business expansion,
      the
      Company expects to become the beneficiary of various technology transfers
      including, but not limited to, Hi-Definition video surveillance systems,
      Hi-Definition digital video recording devices and emerging RFID technology.
      The
      Company has $400,000 of product shipments to Hirsch Group, LLLP, an affiliate
      of
      this private equity firm, as well as has shipped an additional $4,000,000 of
      product under agreements and referrals from Hirsch Group, LLLP during fiscal
      2008. However, none of these shipments have been reported as revenue in fiscal
      2008, as discussed above.





**Innalogic,
      LLC:**





Innalogic
      LLC (Innalogic) is a wireless software product development firm that works
      with
      clients - such as the U.S. Department of Homeland Security - to custom-design
      technology products that meet specific user, functional and situational
      requirements.





Innalogic
      has a recognized core competency in an area of increasingly vital importance
      to
      security, delivering rich-media content (video, audio, biometric, sensor data,
      etc.) to wirelessly enabled mobile devices for public safety and security
      applications over wireless or wired networks.





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





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





Innalogic
      SafePassage(tm), is an embedded application software that installs within
      firmware at the SOC level and is used to 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.




9


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.





During
      the year ended June 30, 2008, there were no product sales by the Innalogic
      subsidiary. There was $77,895 of product sales from Innalogic during the year
      ended June 30, 2007. During each of the years ended June 30, 2008 and 2007,
      the
      Company recognized $100,000 of referral fee revenue from CODA, in connection
      with the above License Agreement with CODA. As of June 30, 2008, $60,000 of
      the
      fiscal 2008 referral fee remains uncollected and the Company has a full reserve
      for this balance in allowance for doubtful accounts.





Currently,
      the Company is focusing on the business agreements under the Corporate office
      of
      MSGI Security Systems, Inc. While the Innalogic products are still current
      products of the Company, the Company does not expect any future sales of these
      products in the near future, but plans to continue with these products in the
      long term.





**Future
      Developments America, Inc. (FDA):**





As
      a
      result of our July 1, 2005 amendment to our agreements with the founder’s of
      FDA, the technology and intellectual property being developed was transferred
      to
      a company (FDL) controlled by the founders of FDA and we, through our subsidiary
      FDA, are a non-exclusive licensee in the United States of certain products
      developed by FDL and of other products developed by outside organizations.
      We
      also are entitled to receive royalties on sales of certain products by FDL.
      Some
      of FDL’s product offerings to be marketed are in the development stage at June
      30, 2008, 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.





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. We have generated revenues from
      such deployments, while some deployments were trial-basis demonstrations. Our
      ability to deliver our technology to customers is hindered by our liquidity
      and
      resource issues.


10





Further,
      all of our customers in fiscal 2008 have been referred to us by Apro, either
      directly or indirectly through affiliated companies such as Hirsch Group, LLLP.
      Hirsch Group, LLLP is related to other entities that have a minority ownership
      interest in both Apro and Hyundai, which gives them an indirect ownership
      interest in MSGI. Certain of these sales are under the terms of the Apro sub
      contract agreement, which obligates the Company to issue equity securities
      upon
      meeting certain revenue targets as defined within those agreements.





Competition





There
      are
      several companies now deploying wireless video technologies and covert
      surveillance tools. Only a handful, however, are doing so with wireless product
      offerings aimed exclusively at the homeland security and public safety markets.
      It is difficult to identify direct competitors of the Company in terms of the
      Company’s core competencies and basic market positioning. The competitors that
      come closest to mirroring the Company’s business model are Gans & Pugh
      Associates, Inc., a developer of wireless systems that employ traditional radio
      frequency technologies; Verint Systems, Inc., a provider of analytic
      software-based solutions for video security which competes against the Company
      in one of its service areas - assessing network-based security relative to
      Internet and data transmissions from multiple communications networks; and
      Vistascape, a provider of a security data management solution that integrates
      the monitoring and management of security hardware and software products. The
      Company believes its combination of product development, proprietary Open Media
      Delivery Platform rich-media delivery system, advanced encryption technologies,
      and focus on the homeland security and public safety markets are significant
      competitive advantages.





Facilities





The
      Company leases all of its real property. Facilities for its headquarters are
      in
      New York City and its testing and assembly operations to support the Hyundai
      and
      Apro contracts are in a facility 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 currently leases
      the facilities for its headquarters on a month to month basis, but expects
      to
      execute a long term lease agreement in the near future. The Company believes
      that its technological resources are all adequate for its needs through fiscal
      2009. Beginning during the quarter ending December 31, 2008, the Company will
      be
      sharing a testing and production facility located in California. This facility
      is currently operated by Apro Media Corp. Costs for the shared facility will
      be
      determined on an allocated basis.





Intellectual
      Property Rights





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





Research
      and Development





The
      Company recognizes research and development costs associated with certain
      product development activities. The Company realized expenses of $88,200 during
      the fiscal year ended June 30, 2008 for costs associated with development of
      RFID technologies. During
      the fiscal year ended June 30, 2007, the Company incurred expenses in the amount
      of $2.5 million for costs related to the sub-contracting agreement entered
      into
      by the Company with Apro Media for the development of the technologies between
      the two companies.


11





Employees





At
      June
      30, 2008, the Company and its majority owned subsidiaries employed approximately
      four persons on a full-time basis. Additionally, three individuals were engaged
      on a consulting basis. We intend to hire additional personnel as the development
      of our business makes such action appropriate. Our employees are not represented
      by a labor union or other collectively bargained agreement. Beginning during
      the
      quarter ending December 31, 2008, the Company will be sharing personnel at
      a
      testing and production facility located in California. This shared facility,
      and
      its personnel, is currently operated by Apro Media Corp. Costs for these
      personnel will be determined on an allocated basis.





**Item
      2. Description of Property**





The
      Company is headquartered in New York City where it maintains approximately
      2,200
      square feet of office and production space in two locations. We lease
      approximately 1,200 square feet, which is equipped to fully meet the needs
      of
      our corporate finance office. This lease runs on a month to month basis with
      a
      monthly rent of $13,500. The Company also leases approximately 1,000 square
      feet
      of space for testing and assembly facilities in New York. This lease runs on
      a
      monthly basis with a monthly rent of $7,000. Beginning during the quarter ending
      December 31, 2008, the Company will be sharing a testing and production facility
      located in California. This facility is currently operated by Apro Media Corp.
      Costs for the shared facility will be determined on an allocated
      basis.





**Item
      3. Legal Proceedings**





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





**Item
      4. Submission of Matters to a Vote of Security Holders**





N/A





**PART
      II**





**Item
      5. Market for Common Equity, Related Stockholder Matters and Small Business
      Issuer Purchases of Equity Securities**





The
      Company’s stock is traded on the “over the counter bulletin board” (OTC:BB)
      under the symbol “MSGI.OB”. The following table reflects the high and low sales
      prices for the Company’s common stock for the fiscal quarters indicated, as
      furnished by the OTC:BB:


Low
              
              HighFiscal
                  2008Fourth
                  Quarter
              
              $
              0.17
              
              $
              0.75Third
                  Quarter
              
              
              0.60
              
              
              1.05Second
                  Quarter
              
              
              0.86
              
              
              1.89First
                  Quarter
              
              
              0.47
              
              
              1.64Fiscal
                  2007Fourth
                  Quarter
              
              $
              0.85
              
              $
              2.74Third
                  Quarter
              
              
              0.63
              
              
              1.29Second
                  Quarter
              
              
              0.62
              
              
              1.95First
                  Quarter
              
              
              0.71
              
              
              2.70




As
      of
      June 30, 2008, there were approximately 917 registered holders of record of
      the
      Company’s common stock.


12





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





**Item
      6. Management’s Discussion and Analysis or Plan of Operations**





Critical
      Accounting Policies





Financial
      Reporting Release No. 60 requires all companies to include a discussion of
      critical accounting policies or methods used in the preparation of financial
      statements. This should be read in conjunction with the financial statements,
      and notes thereto, included in this Form 10-KSB. The following is a brief
      description of the more significant accounting policies and methods used by
      the
      Company.





The
      Company's consolidated financial statements are prepared in accordance with
      accounting principles generally accepted in the United States (GAAP). The
      preparation of consolidated financial statements in accordance with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from those
      estimates. The Company believes that the estimates, judgments and assumptions
      upon which the Company relies are reasonable based upon information available
      to
      us at the time that these estimates, judgments and assumptions are made. To
      the
      extent there are material differences between these estimates, judgments or
      assumptions and actual results, our financial statements will be affected.
      The
      significant accounting policies that the Company believes are the most critical
      to aid in fully understanding and evaluating our reported financial results
      include the following:




·
            Revenue
                Recognition·
            Costs
                of Product Shipped to Customers for which revenue has not been
                recognized·
            Accounts
                Receivable and Allowance for Doubtful Accounts·
            Accounting
                for Income Taxes·
            Use
                of Estimates·
            Equity
                based compensation·
            Debt
                instruments and the features / instruments contained
                therein·
            Investments
                in non-consolidated entities





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





*Revenue
      Recognition:*





The
      Company accounts for revenue recognition in accordance with Staff Accounting
      Bulletin No. 104, (SAB 104), which provides guidance on the recognition,
      presentation and disclosure of revenue in financial statements. Revenues are
      reported upon the completion of a transaction that meets the following criteria:
      (1) persuasive evidence of an arrangement exists; (2) delivery of our services
      has occurred; (3) our price to our customer is fixed or determinable; and (4)
      collectibility of the sales price is reasonably assured. Since the Company
      has a
      limited number of revenue transactions, that are each unique to each customer,
      the Company reviews each transaction to determine that all revenue criteria
      are
      met.


13





The
      majority of our revenues are derived from the shipment of product, without
      installation or maintenance requirements by us, and accordingly revenue is
      recognized upon shipment, when the above criteria have been met. Revenue for
      maintenance contracts are deferred and recognized over the term of the
      maintenance period. There was no deferred revenue as of June 30,
      2008.





The
      Company had certain shipments to various customers during fiscal 2008 in the
      aggregate of approximately $6.5 million that were not recognized as revenue
      in
      fiscal 2008 due to certain revenue recognition criteria not being met as of
      June
      30, 2008, related to the assurance of collectibility among other factors. These
      transactions will be recognized as revenue in the period in which all the
      revenue recognition criteria, as noted above, has been fully met. Therefore,
      there is no revenue or related accounts receivable recorded for these
      transactions in 2008. Inventory costs related to these transactions for which
      revenue has not been recognized are reported on the balance sheet in Costs
      of
      product shipped to customers for which revenue has not been
      recognized.





*Costs
      of product shipped to customers for which revenue has not been
      recognized*




As
      of
      June 30, 2008, the Company has capitalized the expense recognition of
      approximately $5.4 million in product costs for goods that were shipped to
      customers as of June 30, 2008 but for which revenue has not yet been recognized.
      The Company has also recorded a reserve against these product costs in the
      amount of approximately $1.4 million. This reserve estimates the potential
      costs
      that may be unrecoverable. The remaining product costs will be recognized as
      costs of goods sold by the Company at such time as the associated revenues
      are
      recognized upon completion of all the revenue recognition criteria, which is
      expected to be upon receipt of payment from the customers, or when product
      is
      returned or these product costs are considered unrealizable and are written
      off.





*Accounts
      Receivable and Allowance for Doubtful Accounts:*





The
      Company extends credit to its customers in the ordinary course of business.
      Accounts are reported net of an allowance for uncollectible accounts. Bad debts
      are provided on the allowance method based on historical experience and
      management’s evaluation of outstanding accounts receivable. In assessing
      collectibility the Company considers factors such as historical collections,
      a
      customer’s credit worthiness, 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 asset and 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.





The
      Company follows the provisions of Financial Standards Accounting Board
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
      interpretation of SFAS 109” (FIN 48). FIN 48 provides recognition criteria and a
      related measurement model for uncertain tax positions taken or expected to
      be
      taken in income tax returns. FIN 48 requires that a position taken or expected
      to be taken in a tax return be recognized in the financial statements when
      it is
      more likely than not that the position would be sustained upon examination
      by
      tax authorities. Tax positions that meet the more likely than not threshold
      are
      then measured using a probability weighted approach recognizing the largest
      amount of tax benefit that is greater than 50% likely of being realized upon
      ultimate settlement. The adoption did not have an effect on the consolidated
      financial statements and there is no liability related to unrecognized tax
      benefits at June 30, 2008.




14


*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 and the allowance for doubtful accounts. Actual results could differ
      from those estimates.





*Equity
      Based Compensation:*





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





*Debt
      instruments, and the features/instruments contained therein:*





Deferred
      financing costs are amortized over the term of its associated debt instrument.
      The Company evaluates the terms of the debt instruments to determine if any
      embedded derivatives or beneficial conversion features exist. The Company
      allocates the aggregate proceeds of the notes payable between the warrants
      and
      the notes based on their relative fair values in accordance with Accounting
      Principles Board No. 14 (“APB 14”), “Accounting for Convertible Debt and Debt
      Issued with Stock Purchase Warrants”. The fair value of the warrants is
      calculated utilizing the Black-Scholes option-pricing model. The Company is
      amortizing the resultant discount or other features over the term of the notes
      through its earliest maturity date using the effective interest method. Under
      this method, the interest expense recognized each period will increase
      significantly as the instrument approaches its maturity date. If the maturity
      of
      the debt is accelerated because of defaults or conversions, then the
      amortization is accelerated. The Company’s debt instruments do not contain any
      embedded derivatives at June 30, 2008.





*Investments
      in Non-Consolidated Entities:*





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 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.





Overview





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





Hyundai




In
      September and October of 2006, the Company entered into various agreements
      with
      Hyundai Syscomm Corp, a California Corporation, (“Hyundai”). Under the License
      Agreement and the Subscription agreement, the Company provided for the sale
      of
      900,000 shares of the Company’s common stock upon receipt of a $500,000 fee
      under the License Agreement. The three-year Sub -Contracting Agreement with
      Hyundai allows for MSGI and its affiliates to participate in contracts that
      Hyundai and/or its affiliates now have or may obtain hereafter, where the
      Company’s products and/or services for encrypted wired or wireless surveillance
      systems or perimeter security would enhance the value of the contract(s) to
      Hyundai or its affiliates. There have been no business transactions under the
      Sub-Contract or License agreements to date.


15





Apro
      Media




On
      May
      10, 2007, the Company entered into an exclusive sub-contract and distribution
      agreement with Apro Media Corp. for at least $105 million of expected
      sub-contracting business over seven years to provide commercial security
      services to a Fortune 100 defense contractor and/or other customers. Under
      the terms of the contract, MSGI will acquire components from Korea and deliver
      fully integrated security solutions at an average expected level of $15 million
      per year for the length of the seven-year engagement.  MSGI is to establish
      and operate a 24/7/365 customer support facility in the Northeastern United
      States. Apro will provide MSGI with a web-based interface to streamline the
      ordering process and create an opportunity for other commercial security clients
      to be acquired and serviced by MSGI. The contract calls for gross profit margins
      estimated to be between 26% and 35% including a profit sharing arrangement
      with
      Apro Media, which will initially take the form of unregistered MSGI common
      stock, followed by a combination of stock and cash and eventually just cash.





CODA




On
      April
      1, 2007 the Company entered into a non-exclusive license agreement with CODA
      Octopus, Inc. (CODA) whereby the Company will receive a royalty on sales of
      products using the Innalogic proprietary technology. In connection with such
      transaction, CODA assumed certain development and operations responsibilities
      of
      the Innalogic entity.





Major
      financing transactions




On
      December 13, 2007, the Company entered into four short-term notes with private
      institutional lenders. These promissory notes provided proceeds totaling $2.86
      million to the Company. The proceeds of these notes were used to purchase
      inventory to fulfill the contract referred to us by Apro.





On
      January 10, 2008, the Company issued (i) 5,000,000 shares of the Company’s
      Series H Convertible Preferred Stock (ii) a Put Option agreement and (iii)
      warrants exercisable for 5,000,000 shares of Common Stock at an exercise price
      of $2.50 per share. The Buyers paid a total of $5,000,000 for securities issued
      in the Preferred Stock Transaction. From the Total Purchase Price, $2,000,000
      was used to purchase the securities of Current Technology and $1,800,000 was
      placed in a restricted cash account to be used as collateral for the Company’s
      obligations under the Put Option Agreement.





On
      January 10, 2008, the Company entered into a Subscription Investment Agreement
      with Current Technology Corporation, a corporation formed under the laws of
      the
      Canada Business Corporation Act. Under this agreement, at June 30, 2008, the
      Company has invested a total of $2 million and owns 20 million shares of the
      common stock of Current Technology, which represents approximately 15% ownership
      of their outstanding common stock. In addition, the Company held warrants to
      purchase 20 million additional shares of common stock. As of June 30, 2008,
      the
      Company has an option to invest an additional $500,000 under the original
      agreement terms. Subsequent to year end, the 20 million warrants were assigned
      to a third party as part of a Securities Exchange Agreement involving the
      Company’s Preferred Stock.





As
      a
      result of the certain conversion transactions of a portion of the 8% and 6%
      Callable Secured Convertible Notes, anti-dilution provisions of the remaining
      outstanding convertible notes were triggered. The conversion price of all the
      remaining convertible Notes was reduced to $0.50 per share. In addition, certain
      warrants had their exercise price reduced to $0.50. As a result of these
      transactions, there was additional beneficial conversion charges recognized
      to
      interest expense, as well as certain charges to record an additional discount
      to
      these notes with an offsetting charge to additional paid in capital. See Notes
      5
      and 6 to the Consolidated Financial Statements.





Results
      of Operations Fiscal 2008 Compared to Fiscal 2007




As
      of the
      year ended June 30, 2008 (the Current Period), the Company realized revenues
      in
      the amount of approximately $3.8 million from the sales of products through
      our
      relationship with Apro Media Corp., a $100,000 royalty fee / referral fee income
      generated from the CODA Octopus Group, Inc., and $128,000 for consulting
      services. To date, our product sales have been relatively large shipments of
      components to a relatively small number of customers, with each product sale
      invoice ranging from $350,000 to $2,000,000. The Company had additional
      shipments and corresponding billings to various customers in the aggregate
      of
      approximately $6.5 million, which have not been recognized as revenues in fiscal
      2008 as a result of issues surrounding collectibility. In addition, the billings
      have been reversed and are not reflected as of June 30, 2008. Of these
      shipments, approximately $1.6 million were from shipments of products through
      our relationship with Apro and approximately $4.9 million were from shipments
      to
      other customers referred to us by Apro. These additional shipments will be
      recognized as revenues by the Company when and if payment is received from
      the
      customers and collectibility is thus assured. We expect revenues to increase
      in
      the future through our relationship with Apro as well as from other pending
      business relationships.


16





As
      of the
      year ended June 30, 2007 (the Prior Period), the Company realized revenues
      in
      the amount of approximately $78,000 from the sales of Innalogic products and
      for
      a $100,000 royalty fee / referral fee income generated from CODA.





Costs
      of
      goods sold of approximately $4.2 million in the Current Period and approximately
      $50,000 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. The Company classified as
      an
      asset approximately $5.4 million in costs associated with the product shipped
      during the Current Period due to the revenue recognition criteria on these
      transactions have not been met. The Company recorded a reserve for potential
      loss of approximately $1.4 million in recognition of potential recovery issues
      for certain of such transactions, which is included in costs of goods sold
      for
      the Current Period. The Company had a negative gross profit margin of (3%)
      for
      the Current Period. The gross profit realized on individual commercial sales
      averaged 26% for transactions for product shipments, with the revenue for the
      referral and consulting fee raising the overall gross profit to the 30%. This
      was offset with the reserve against the product costs, which created the
      negative gross margin since there was no revenue recognized in fiscal 2008
      against these transactions. The remaining product costs will be recognized
      as
      costs of goods sold as the revenues associated with the shipments are recognized
      in future periods, product is returned or these product costs are considered
      unrealizable and are written off.





Research
      and development expenses were approximately $88,000 in the Current Period and
      related to the development of RFID technologies. Such costs were approximately
      $2.5 million in the Prior Period and were associated with executing the
      sub-contract relationship with Apro. These Prior Period expenses represented
      the
      costs associated with development of technologies specifically for a particular
      Fortune 100 client, which resulted in product shipments in fiscal 2008.





Salaries
      and benefits of approximately $2.3 million in the Current Period increased
      by
      approximately $0.2 million or 8% from salaries and benefits of approximately
      $2.1 million in the Prior Period. Salaries and benefits increased even though
      overall headcount decreased due to accruals of additional payroll taxes,
      penalties and interest that are expected to be incurred by the Company as a
      result of non-timely payment of payroll related taxes to various
      jurisdictions.




Selling,
      general and administrative expenses of approximately $4.5 million in the Current
      Period increased by approximately $1.6 million or 55% over comparable expenses
      of $2.9 million in the Prior Period. The increase is due primarily to the value
      of shares issued and to be issued to Apro in connection with the Company’s
      sub-contract agreement, which resulted in an expense of $1,052,336. Additional
      expense increases were related to travel, investor relations and consulting
      fees. Travel expenses increased by approximately $71,000 as a result of travel
      related to the Apro and Hyundai relationships. Investor relations expenses
      increased by approximately $516,000, which was mainly attributable to the fair
      value of stock and warrants issued to these firms. Consulting fees increased
      by
      approximately $207,000 primarily as a result of Sarbanes-Oxley compliance
      consulting services provided to the Company.





During
      the Current Period, the Company recorded depreciation and amortization expense
      of approximately $27,000 compared to expenses of approximately $132,000 in
      the
      Prior Period. Most of the long-lived assets of the Company were fully amortized
      during the Prior Period.





During
      the Prior Period, the Company recorded a loss from impairment on the investment
      in Excelsa of approximately $1.7 million. As of the year ended June 30, 2007,
      this investment has been fully impaired. There was no such loss in the Current
      Period.





During
      the Prior Period, the Company recorded a loss from the issuance of shares of
      its
      common stock (settlement of liability) to CODA Octopus Group, Inc. as
      repayment of advances and operating expenses paid by CODA on behalf of
      Innalogic, totaling approximately $812,000, representing the excess fair value
      of the shares issued as compared to the obligations due CODA. There was no
      such
      loss in the Current Period.





During
      the Current Period, the Company realized a non-cash expense of approximately
      $1.6 million for the change in fair value of outstanding put option agreements
      issued in connection with the Convertible Preferred Series H shares. The expense
      is the result of marking the instrument to estimated fair value and will be
      impacted by changes in the quoted value of the Company’s stock. The Put Option
      Agreement was terminated during the first quarter of fiscal 2009 as part of
      a
      Securities Exchange Agreement. There was no such expense in the Prior
      Period.


17





Interest
      expense of approximately $11.6 million in the Current Period is primarily due
      to
      debt transactions entered into during the Current Period, the effect of certain
      reprice transactions during the year other debt instruments and the adjustments
      to the values of certain equity instruments granted to note holders. Interest
      expense was approximately $2.3 million in the Prior Period. The non-cash
      component of interest expense was approximately $9.8 million in the Current
      Period as compared to $1.6 million in the Prior Period. The cash portion of
      interest expense increased as a result of additional borrowings as well as
      certain increases in interest rates to a higher default rate on certain
      instruments.





Our
      provision for income taxes is minimal and primarily due to state and local
      taxes
      incurred on taxable income or equity at the operating subsidiary level, which
      cannot be offset by losses incurred at the parent company level or other
      operating subsidiaries. The Company has recognized a full valuation allowance
      against the deferred tax assets because it is more likely than not that
      sufficient taxable income will not be generated during the carry forward period
      to utilize the deferred tax assets.





As
      a
      result of the above, the Company incurred a net loss of approximately $20.2
      million in the Current Period, which increased by $7.8 million over a comparable
      loss of $12.4 in the Prior Period.





In
      the
      Prior Period the Company recognized undeclared dividends on preferred stock
      of
      approximately $15,000. 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.
      This obligation, although not yet declared by the Board of Directors of the
      Company, still exists although all of the shares of Series F preferred stock
      has
      been converted to common stock.





As
      a
      result of the above, net loss attributable to common stockholders of
      approximately $20.2 million in the Current Period increased by approximately
      $7.8 million from comparable net loss of $12.4 million in the Prior
      Period.





Off-Balance
      Sheet Arrangements





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





Liquidity
      and Capital Resources





Historically,
      the Company has funded its operations, capital expenditures and acquisitions
      primarily through private placements of equity and debt transactions. The
      Company currently has limited capital resources, has incurred significant
      historical losses and negative cash flows from operations and has limited
      current revenues. At June 30, 2008, the Company had approximately $0.2 million
      in cash and $1.8 million in restricted cash as well as approximately $0.1
      million in accounts receivable. The Company believes that funds on hand combined
      with funds that will be available from its various operations may not be
      adequate to finance its operations and capital expenditure requirements and
      enable the Company to meet its financial obligations and payments under its
      convertible notes and promissory notes for the next twelve months. Further,
      there is uncertainty as to timing, volume and profitability of transactions
      that
      may arise from our relationship with Hyundai, Apro and others. Further, there
      can be no assurance as to the timing of when we will receive amounts due to
      us
      for products shipped to customers prior to June 30, 2008. There are no
      assurances that any further capital raising transactions will be consummated.
      Although certain transactions have been successfully closed, failure of our
      operations to generate sufficient future cash flow and failure to consummate
      our
      strategic transactions or raise additional financing could have a material
      adverse effect on the Company's ability to continue as a going concern and
      to
      achieve its business objectives. These conditions raise substantial doubt about
      the Company’s ability to continue as a going concern. The accompanying financial
      statements do not include any adjustments relating to the recoverability of
      the
      carrying amount of recorded assets or the amount of liabilities that might
      result should the Company be unable to continue as a going concern.





The
      transactions described below were entered into after June 30, 2008, and will
      impact our liquidity:





On
      August
      22, 2008, the Company entered into an Exchange Agreement with Enable Growth
      Partners, LP (Enable), an existing institutional investor of MSGI and as of
      that
      date, holder of 100% of MSGI’s Series H Convertible Preferred Stock pursuant to
      which MSGI shall retire all outstanding shares of the Series H Preferred,
      warrants issued in connection with the preferred stock, exercisable for
      5,000,000 shares of common stock of MSGI and put options exercisable for
      5,000,000 shares of common stock of MSGI. Enable recently acquired the Series
      H
      Preferred, Warrants and Options pursuant to a private transaction with third
      parties.




18


In
      exchange for the retirement and/or redemption of the above securities, MSGI
      issued Enable an 8% Secured Convertible Debenture due May 21, 2010 in the
      principal amount of $4,000,000, a $1,000,000 cash redemption payment and
      transferred to Enable warrants to purchase up to, in the aggregate, 20,000,000
      shares of the common stock of Current Technology Corporation. The Redemption
      Payment was paid by MSGI from the proceeds of the restricted cash accounts
      maintained in connection with the original issuance of the Series H Preferred
      Stock. The balance of the funds held in the restricted cash accounts of $800,000
      has been released to MSGI for working capital purposes.





In
      connection with the Securities Exchange Agreement and the Debenture, MSGI and
      its subsidiaries entered into a Security Agreement and a Subsidiary Guarantee
      Agreement, whereby MSGI and the subsidiaries granted Enable a first priority
      security interest in certain property of MSGI and each of the subsidiaries.





Effective
      October 1, 2008, the Company entered into addendum agreements to certain term
      notes payable with three out of four lenders, which terminated all warrants
      to
      purchase common stock issued under previous addendum agreements and, in their
      place, issued new warrants and additional shares of common stock. At execution
      of the addendums, the Company issued 378,000 shares of common stock and warrants
      to purchase an additional 378,000 shares of common stock at a price of $0.50.
      The Company shall issue up to an additional 252,000 shares of common stock
      and
      warrants to purchase an additional 252,000 shares of common stock, at an
      exercise price of the greater of $0.50 or market value on the date of grant,
      should these Notes remaining outstanding until December 31, 2008. The Company
      is
      currently involved in discussions with the fourth lender with regard to a new
      addendum to the fourth Note, which has a current maturity date of September
      30,
      2008.





Analysis
      of cash flows during fiscal years ended June 30, 2008 and 2007:





The
      Company realized a net loss of approximately $20.2 and $12.4 million in the
      Current Period and Prior Period, respectively. The net loss includes
      approximately $13.4 million and $5.3 million of non-cash charges to our
      statement of operations in the Current and Prior Periods, respectively. Cash
      used in operating activities from continuing operations was approximately $6.3
      and $6.1 million in the Current Period and Prior Period, respectively. Net
      cash
      used in operating activities in the Current Period principally resulted from
      the
      loss from continuing operations, plus increases in Costs of product shipped
      to
      customers for which revenue has not been recognized of $4.0 million, and offset
      by a decrease inventory and an increase in accrued liabilities. We believe
      the
      inability of our clients to process our invoices will result in the delay of
      receipts on such invoices until the second quarter of fiscal 2009. As a result,
      we have continued to stretch payments to our vendors, have not filed or paid
      payroll taxes and have had to renegotiate several debt obligations.





In
      the
      Current Period, the Company used net cash of approximately $2.0 million in
      investing activities related to our investment in Current Technology. The
      Company was provided approximately $6.0 million from the issuance of certain
      debt and equity instruments.





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 yearsNotes
                Payable [1]
            
            $
            3,311
            
            
            3,311
            
            
            -
            
            
            -
            
            
            -8% Callable convertible Notes payable and interest [1]
            
            
            4,962
            
            
            -
            
            
            4,962
            
            
            -
            
            
            -6%
                Callable convertible Notes payable and interest [1]
            
            
            2,361
            
            
            -
            
            
            2,361
            
            
            -
            
            
            -





[1]
      Represents balloon payment at maturity plus interest over term of note due
      at
      maturity





*Leases* :
      The
      Company currently leases various office space and equipment under non-cancelable
      short-term leases which are all less than 1 year. The Company incurs all costs
      of insurance, maintenance and utilities.


19





*Debt
      and Advances to Strategic Partners:*





Debt
      obligations are summarized as follows:


Instrument
              
              Maturity
              
              Face Amount
              
              Coupon
                Interest
                Rate
              
              Carrying
                Amount at
                June 30,
                2008, net of
                discount
              
              Carrying
                Amount at
                June 30,
                2007, net of
                discount8%
                  Notes
              
              
              Dec.
                  13,2009
              
              $
              2,572,414
              
              
              8
              %
              
              -
              
              
              1,427,4118%
                  Debentures
              
              
              May
                  21,2010
              
              
              4,000,000
              
              
              8
              %
              
              62
              
              
              185,1856%
                  Notes
              
              
              Dec.
                  13,2009
              
              
              1,000,000
              
              
              6
              %
              
              100
              
              
              361,1116%
                  April Notes
              
              
              April
                  4,2010
              
              
              1,000,000
              
              
              6
              %
              
              55
              
              
              83,334Notes
                  Payable
              
              
              Demand
              
              
              500,000
              
              
              N/A
              
              
              -
              
              
              600,000Term
                  Notes short-term
              
              
              December
                31, 2008
                and
                September
                30, 2008
              
              
              2,860,000
              
              
              18
              %
              
              2,860,000
              
              
              -Advances
                  from Apro Media
              
              
              N/A
              
              
              200,000
              
              
              N/A
              
              
              200,000
              
              
              -




As
      of
      June 30, 2008, the Company has the following debt commitments
      outstanding:





Callable
      Secured Convertible Note financing





8%
      Debentures





On
      May
      21, 2007, MSGI entered into a private placement with several institutional
      investors and issued 8% convertible debentures in the aggregate principal amount
      of $5,000,000 (the 8% Debentures) and warrants for the purchase of up to
      1,785,713 of common stock, exercisable over a five year period at an exercise
      price of $2.00. The 8% Debentures have a maturity date of May 21, 2010 and
      accrue interest at a rate of 8% per annum. Payments of principal and interest
      under the Debentures are not due until the maturity date. The investors can
      convert the principal amount of the 8% Debentures into common stock of the
      Company, provided certain conditions are met, and each conversion is subject
      to
      certain volume limitations, at a conversion price of $0.50. During the year
      ended June 30, 2008, one of the institutional investors executed conversions
      of
      $1 million of principal and related accrued interest of its 8% Debentures into
      shares of common stock of the Company. Therefore, at June 30, 2008, only a
      $4
      million principal balance of this debt remains outstanding.





6%
      Notes





On
      December 13, 2006, MSGI issued $2,000,000 aggregate principal amount of Callable
      Secured Convertible Notes (the 6% Notes) and stock purchase warrants exercisable
      for 3,000,000 shares of common stock in a private placement for an aggregate
      offering price of $2,000,000. The 6% Notes have a single balloon payment due
      on
      the maturity date of December 13, 2009 and will accrue interest at a rate of
      6%
      per annum. The Investors can convert the principal amount of the 6% Notes into
      common stock of the Company at a conversion rate of $0.50, provided certain
      conditions are met, and each conversion is subject to certain volume
      limitations. During fiscal 2008, certain note holders fully converted $1 million
      of principal and related accrued interest. Therefore, as of June 30, 2008,
      only
      $1 million of principal balance of this debt remains
      outstanding.


20





6%
      April Notes





On
      April
      5, 2007 MSGI issued $1.0 million aggregate principal amount of callable secured
      convertible notes (the 6% April Notes) and stock purchase warrants exercisable
      for 1,500,000 shares of common stock in a private placement for an aggregate
      offering price of $1.0 million. The 6% April Notes have a single balloon payment
      of $1.0 million due on the maturity date of April 5, 2010 and will accrue
      interest at a rate of 6% per annum. The Investors can convert the principal
      amount of the 6% April Notes into common stock of the Company at a conversion
      rate of $0.50, provided certain conditions are met, and each conversion is
      subject to certain volume limitations.





Convertible
      Term Notes





On
      December 13, 2007, the Company entered into four short-term notes. These
      promissory notes provided proceeds totaling $2.86 million to the Company. The
      initial maturity date of these notes was April 15, 2008, which the Company
      did
      not meet. The Company has entered into several amendments with these note
      holders and the current maturity date is December 31, 2008, except for one
      note
      which has a September 30, 2008 maturity date.





The
      notes
      initially had a variable interest rate of the prime rate plus two percent and
      since April 15, 2008 are at a default interest rate of 18% until repayment
      occurs. As of April 15, 2008, these notes are convertible at a conversion rate
      of $0.51 per share, subject to limitations in the agreement.





As
      part
      of the amendments on these notes entered into to date, the Company has issued
      certain shares of common stock of MSGI and certain warrants to purchase shares
      of common stock at MSGI at an exercise price of $0.50.




Advance
      from Apro Media





During
      the year ended June 30, 2008, the Company received funding in the amount of
      $200,000 from Apro Media. These funds were advanced to the Company against
      expected collections of accounts receivable generated under the Apro
      sub-contract agreement. There is no interest expense associated with this
      advanced funding and this is to be repaid to Apro upon collection of the related
      accounts receivable, which is currently expected to be collected during the
      second quarter of fiscal 2009.





*Preferred
      Stock:*





Series
      F:





The
      holders of Series F Preferred Stock were entitled to receive cumulative
      dividends at the rate of six percent (6%) payable in additional shares of common
      stock of the Company, based on the average closing price per share of the
      Company's common stock for the ten (10) consecutive trading days prior to the
      payment of any dividend. As of December 31, 2006, all of the outstanding shares
      of Series F Preferred Stock were converted into shares of common stock however
      the Company had $305,024 of undeclared but accumulated dividends at June 30,
      2008 and 2007. These undeclared dividends may be paid to the former holders
      of
      Series F Preferred Stock in additional shares of the Company’s common stock, at
      the election of the Company, and as declared by the Board of Directors. Such
      payment is expected to be made by the Company during the fiscal year ended
      June
      30, 2009.





Series
      H and Put Option Agreement:





On
      January 10, 2008, the Company entered into a Preferred Stock Agreement
      Transaction with certain institutional investors, which consisted of a Series
      H
      Preferred Stock, warrants and a put option agreement. The Company received
      proceeds of $5 million, of which a portion was used to make a significant
      investment in Current Technology Corporation.





The
      Company issued 5,000,000 shares of the Series H Convertible Preferred Stock.
      The
      preferred stock is not entitled to any dividends. The preferred stock is
      convertible at the holder’s election into common stock at a conversion rate of
      $1.00 per share, subject to certain limitations.





The
      Company also issued warrants to purchase 5,000,000 shares of common stock at
      an
      exercise price of $2.50 per share. The Warrants are immediately exercisable
      and
      provide for a cashless exercise option for the period while each share of Common
      Stock issuable upon exercise of the Warrants is not registered for resale with
      the SEC. The Warrants expire five years following the date of
      issuance.


21





Concurrently,
      the Company entered into the five-year Put Option Agreement with the buyers
      pursuant to which the buyers may compel the Company to purchase up to 5 million
      common shares (or equivalent preferred shares) at an initial put price per
      share
      of $1.20 which is in effect beginning July 10, 2008 through January 10, 2009.
      The Buyers cannot exercise the options under the Put Option agreement until
      July
      10, 2008. The Put Price may be paid by the Company in shares of Common Stock
      or
      at the Company’s election in cash or in a combination of cash and Common Stock.
      However, there are certain limitations and restrictions within the agreement
      that may limit the Company’s option to pay the shares in Common Stock and may at
      that point require cash payment.





As
      part
      of the $5 million in proceeds received for this Securities Purchase Agreement,
      $1,800,000 is designated as restricted cash in order to collateralize the put
      option agreement.





On
      August
      22, 2008, the Company entered into a Securities Exchange Agreement with Enable
      Growth Partners LP (Enable), an existing institutional investor of MSGI and
      holder of 100% of MSGI’s Series H Convertible Preferred Stock pursuant to which
      MSGI retired all outstanding shares of the Series H Preferred, warrants issued
      in connection with this agreement exercisable for 5,000,000 shares of common
      stock of MSGI and the put options exercisable for 5,000,000 shares of Common
      Stock. Enable Growth Partners recently acquired the Series H Preferred, Warrants
      and Put Options pursuant to a private transaction with third
      parties.




In
      exchange for the retirement and/or redemption of the Series H Preferred,
      Warrants and Put Options, pursuant to the Securities Exchange Agreement with
      Enable, MSGI issued Enable an 8% Secured Convertible Debenture due May 21,
      2010
      in the principal amount of $4,000,000, a $1,000,000 cash redemption payment
      and
      transferred to Enable warrants to purchase up to, in the aggregate, 20,000,000
      shares of the common stock of Current Technology Corporation. The redemption
      payment was paid by MSGI from the proceeds of the restricted cash accounts
      maintained in connection with the original issuance of the Series H Preferred
      Stock. The balance of the funds held in the restricted cash accounts of $800,000
      has been released to MSGI for working capital purposes.





Summary
      of Recent Accounting Pronouncements





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




22


**Item
      7 Financial Statements**





**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors and Stockholders


MSGI
      Security Solutions, Inc.





We
      have
      audited the accompanying consolidated balance sheets of MSGI Security Solutions,
      Inc. and subsidiaries as of June 30, 2008 and 2007, and the related consolidated
      statements of operations, stockholders’ equity (deficit), and cash flows for the
      years ended June 30, 2008 and 2007. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of MSGI Security Solutions,
      Inc. and subsidiaries as of June 30, 2008 and 2007, and the results of its
      operations and its cash flows for the fiscal years ended June 30, 2008 and
      2007,
      in conformity with accounting principles generally accepted in the United
      States.





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





/s/
      Amper, Politziner & Mattia, LLP





November
      13, 2008


Edison,
      New Jersey


23


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


CONSOLIDATED
      BALANCE SHEETS AS OF JUNE 30,





2008
            
            2007ASSETSCurrent
                assets:Cash
            
            $
            150,624
            
            $
            2,463,691Restricted
                cash
            
            
            1,800,000
            
            
            -Accounts
                receivable, net of allowance of $60,000
            
            
            128,000
            
            
            -Inventory
            
            
            -
            
            
            1,061,800Costs
                of product shipped to customers for which revenue has not been recognized
                (See Note 2)
            
            
            4,066,646
            
            
            -Other
                current assets
            
            
            -
            
            
            9,250Total
                current assets
            
            
            6,145,270
            
            
            3,534,741Investment
                in Current Technology Corporation (See Note 4)
            
            
            2,000,000
            
            
            -Property
                and equipment, net
            
            
            30,946
            
            
            19,553Intangible
                assets, net
            
            
            -
            
            
            12,613Other
                assets, principally deferred financing costs, net
            
            
            894,006
            
            
            1,311,787Total
                assets
            
            $
            9,070,222
            
            $
            4,878,694LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
                liabilities:Accounts
                payable-trade
            
            $
            2,572,471
            
            $
            1,582,379Convertible
                term notes payable
            
            
            2,860,000
            
            
            -Accrued
                expenses and other current liabilities
            
            
            2,755,588
            
            
            1,667,495Advances
                from strategic partner – Apro
            
            
            200,000
            
            
            -Accrued
                liability for put options (see Note 13)
            
            
            6,550,000
            
            
            -Total
                current liabilities
            
            
            14,938,059
            
            
            3,249,874Notes
                payable, net of current portion
            
            
            -
            
            
            600,0008%
                Callable convertible notes payable-net of discount of $3,999,938
                and
                $5,959,362, respectively
            
            
            62
            
            
            1,612,5966%
                Callable convertible notes payable-net of discount of $1,999,845
                and
                $2,555,555, respectively
            
            
            155
            
            
            444,445Total
                long-term liabilities
            
            
            217
            
            
            2,657,041Commitments
                and contingenciesStockholders’
                equity (deficit):Convertible
                preferred stock - $.01 par value; 5,000,000 shares of Series H issued
                and
                outstanding at June 30, 2008 and no shares at June 30,
                2007
            
            
            50,000
            
            
            -Common
                stock - $.01 par value; 100,000,000 authorized; 22,348,781 and 10,325,687
                shares issued; 22,331,119 and 10,308,025 shares outstanding as of
                June 30,
                2008 and 2007, respectively
            
            
            223,487
            
            
            103,257Additional
                paid-in capital
            
            
            271,243,011
            
            
            256,074,720Accumulated
                deficit
            
            
            (275,990,842
            )
            
            (255,812,488
            )Less:
                17,662 shares of common stock in treasury, at cost
            
            
            (1,393,710
            )
            
            (1,393,710
            )Total
                stockholders’ equity (deficit)
            
            
            (5,868,054
            )
            
            (1,028,221
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            9,070,222
            
            $
            4,878,694





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


24


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


CONSOLIDATED
      STATEMENTS OF OPERATIONS


FOR
      THE
      YEARS ENDED JUNE 30,




2008
            
            2007RevenuesProduct
                revenue - Apro subcontract
            
            $
            3,816,560
            
            $
            -Product
                revenues
            
            
            -
            
            
            77,895Referral
                fee revenue
            
            
            100,000
            
            
            100,000Consulting
                fee revenue
            
            
            128,000
            
            
            -Total
                revenue
            
            
            4,044,560
            
            
            177,895Cost
                of goods sold
            
            
            4,194,327
            
            
            49,886Gross
                profit
            
            
            (149,767
            )
            
            128,009Operating
              costs and expenses:Salaries,
                benefits and payroll taxes
            
            
            2,307,067
            
            
            2,127,453Research
                and development – (Apro Media in 2007)
            
            
            88,200
            
            
            2,500,000Selling,
                general and administrative (including non-cash expense for shares
                to be
                issued to Apro Media of $1,052,336 in 2008)
            
            
            4,471,929
            
            
            2,882,459Impairment
                on investment in Excelsa S.p.A.
            
            
            -
            
            
            1,650,000Depreciation
                and amortization
            
            
            26,953
            
            
            131,819Total
                operating costs and expenses
            
            
            6,894,149
            
            
            9,291,731Loss
                from operations
            
            
            (7,043,916
            )
            
            (9,163,722
            )Other
                income (expense):Interest
                income
            
            
            5,861
            
            
            617Interest
                expense
            
            
            (11,584,299
            )
            
            (2,332,957
            )Non-cash
                  expense for revaluation of put options to fair value
            
            
            (1,550,000
            )
            
            -Registration
                penalties
            
            
            -
            
            
            (74,000
            )Loss
                on issuance of shares to strategic partner-CODA
            
            
            -
            
            
            (811,918
            )Total
                other expense
            
            
            (13,128,438
            )
            
            (3,218,258
            )Net
                loss before provision for income taxes
            
            
            (20,172,354
            )
            
            (12,381,980
            )Provision
                for income taxes
            
            
            6,000
            
            
            8,964Net
                loss
            
            
            (20,178,354
            )
            
            (12,390,944
            )Undeclared
                dividends on preferred stock
            
            
            -
            
            
            15,168Net
                loss attributable to common stockholders
            
            $
            (20,178,354
            )
            $
            (12,406,112
            )Basic
                and diluted loss per share attributable to common
                stockholders
            
            $
            (1.19
            )
            $
            (1.96
            )Weighted
                average common shares outstanding – basic and diluted
            
            
            17,016,261
            
            
            6,328,467





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


25


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


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR
      THE
      YEARS ENDED JUNE 30, 2008 AND 2007


AdditionalCommon Stock
              
              Preferred Stock
              
              Paid-in
              
              Accumulated
              
              Treasury StockShares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Deficit
              
              Shares
              
              Amount
              
              Totals**Balance
                  June 30, 2006**
              
              
              **4,210,729**
              ****
              **$**
              **42,107**
              ****
              ****
              **4,031**
              ****
              **$**
              **40**
              ****
              **$**
              **238,371,269**
              ****
              **$**
              **(243,421,456**
              **)**
              ****
              **(17,662**
              **)**
              **$**
              **(1,393,710**
              **)**
              **$**
              **(6,401,750**
              **)**Non-cash
                  compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              486,302
              
              
              
              
              
              
              
              
              
              
              
              486,302Conversion
                  of Series F Convertible Preferred Stock
              
              
              198,470
              
              
              1,985
              
              
              (4,031
              )
              
              (40
              )
              
              (1,945
              )
              
              
              
              
              
              
              
              
              
              
              -Issuance
                  of Series G Convertible Preferred Stock
              
              
              
              
              
              
              
              
              138
              
              
              1
              
              
              2,758,236
              
              
              
              
              
              
              
              
              
              
              
              2,758,237Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (88
              )
              
              
              
              
              
              
              
              (88
              )Issuance
                  of common stock to corporate officers as a bonus
              
              
              125,000
              
              
              1,250
              
              
              
              
              
              
              
              
              269,750
              
              
              
              
              
              
              
              
              
              
              
              271,000Adjustment
                  to fair value of warrants issued to lenders and placement
                  agents
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              533,271
              
              
              
              
              
              
              
              
              
              
              
              533,271Issuance
                  of common stock to Anyuser, Inc. (a Hyundai designee)
              
              
              865,000
              
              
              8,650
              
              
              
              
              
              
              
              
              471,350
              
              
              
              
              
              
              
              
              
              
              
              480,000Issuance
                  of common stock for Conversion of Series G Convertible Preferred
                  Stock
              
              
              2,758,400
              
              
              27,584
              
              
              (138
              )
              
              (1
              )
              
              (27,583
              )
              
              
              
              
              
              
              
              
              
              
              -Issuance
                  of common stock to lender for repayment of notes
              
              
              1,318,088
              
              
              13,181
              
              
              
              
              
              
              
              
              1,173,100
              
              
              
              
              
              
              
              
              
              
              
              1,186,281Issuance
                  of common stock to strategic partner-CODA
              
              
              850,000
              
              
              8,500
              
              
              
              
              
              
              
              
              1,734,000
              
              
              
              
              
              
              
              
              
              
              
              1,742,500Fair
                  value of warrants issued to placement agents
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              732,734
              
              
              
              
              
              
              
              
              
              
              
              732,734Fair
                  value of warrants issued to lender for settlement of Note
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              215,319
              
              
              
              
              
              
              
              
              
              
              
              215,319Fair
                  value of warrants Issued to vendor for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              423,352
              
              
              
              
              
              
              
              
              
              
              
              423,352Beneficial
                  conversion discount on 2005 8% convertible notes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              935,565
              
              
              
              
              
              
              
              
              
              
              
              935,565Beneficial
                  conversion discount on 6% convertible notes issued December
                  2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,000,000
              
              
              
              
              
              
              
              
              
              
              
              2,000,000Beneficial
                  conversion discount on 6% convertible notes issued April
                  2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,000,000
              
              
              
              
              
              
              
              
              
              
              
              1,000,000Beneficial
                  conversion discount on 8% Convertible notes issued May
                  2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,000,000
              
              
              
              
              
              
              
              
              
              
              
              5,000,000Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (12,390,944
              )
              
              
              
              
              
              
              
              (12,390,944
              )**Balance
                  June 30, 2007**
              
              
              **10,325,687**
              
              **$**
              **103,257**
              
              
              **-**
              
              **$**
              **-**
              
              **$**
              **256,074,720**
              
              **$**
              **(255,812,488**
              **)**
              ****
              **(17,662**
              **)**
              **$**
              **(1,393,710**
              **)**
              **$**
              **(1,028,221**
              **)**Issuance
                  of convertible preferred Series H shares (see Note 13)
              
              
              
              
              
              
              
              
              5,000,000
              
              
              50,000
              
              
              (50,000
              )
              
              
              
              
              
              
              
              
              
              
              -Non-cash
                  compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              485,570
              
              
              
              
              
              
              
              
              
              
              
              485,570Issuance
                  of shares of common stock to members of the Board of
                  Directors
              
              
              91,965
              
              
              920
              
              
              
              
              
              
              
              
              192,209
              
              
              
              
              
              
              
              
              
              
              
              193,129Issuance
                  of shares of common stock to investor relations firms
              
              
              300,000
              
              
              3,000
              
              
              
              
              
              
              
              
              201,000
              
              
              
              
              
              
              
              
              
              
              
              204,0008%
                  and 6% convertible debt and accrued interest converted to shares
                  of common
                  stock
              
              
              10,111,129
              
              
              101,110
              
              
              
              
              
              
              
              
              6,599,177
              
              
              
              
              
              
              
              
              
              
              
              6,700,287Issuance
                  of shares of common stock to Apro Media Corp. pursuant to subcontract
                  agreement
              
              
              1,000,000
              
              
              10,000
              
              
              
              
              
              
              
              
              980,000
              
              
              
              
              
              
              
              
              
              
              
              990,000
  26
 AdditionalCommon Stock
                
                Preferred Stock
                
                Paid-in
                
                Accumulated
                
                Treasury StockShares
                
                Amount
                
                Shares
                
                Amount
                
                Capital
                
                Deficit
                
                Shares
                
                Amount
                
                TotalsCharge
                    related to modification to exercise price of warrants previously
                    issued
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,969,008
                
                
                
                
                
                
                
                
                
                
                
                4,969,008Debt
                    discount for warrants issued in connection with December 2007
                    notes
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                80,208
                
                
                
                
                
                
                
                
                
                
                
                80,208Fair
                    value of warrants issued to investor relations firms for services
                    rendered
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                332,421
                
                
                
                
                
                
                
                
                
                
                
                332,421Additional
                    debt discount recorded in connection with reset of conversion
                    price under
                    anti-dilution provisions of convertible debt
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,077,993
                
                
                
                
                
                
                
                
                
                
                
                1,077,993Fair
                    value of warrants issued under Addendums to term notes
                    payable
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                83,105
                
                
                
                
                
                
                
                
                
                
                
                83,105Issuance
                    of shares of common stock under Addendum to term notes
                    payable
                
                
                520,000
                
                
                5,200
                
                
                
                
                
                
                
                
                217,600
                
                
                
                
                
                
                
                
                
                
                
                222,800Net
                    Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (20,178,354
                )
                
                
                
                
                
                
                
                (20,178,354
                )**Balance
                    June 30, 2008**
                
                
                **22,348,781**
                
                **$**
                **223,487**
                
                
                **5,000,000**
                
                **$**
                **50,000**
                
                **$**
                **271,243,011**
                
                **$**
                **(275,990,842**
                **)**
                
                **(17,622**
                **)**
                **$**
                **(1,393,710**
                **)**
                **$**
                **(5,868,054**
                **)**
 The
          accompanying notes are an integral part of these Consolidated Financial
          Statements.
  27


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


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


FOR
      THE
      YEARS ENDED JUNE 30,





2008
            
            2007OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (20,178,354
            )
            $
            (12,390,944
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Provision
                for doubtful accounts – CODA
            
            
            60,000
            
            
            -Depreciation
            
            
            14,340
            
            
            36,056Amortization
            
            
            12,613
            
            
            95,764Amortization
                of deferred financing costs
            
            
            774,869
            
            
            334,549Non-cash
                compensation expense
            
            
            516,153
            
            
            757,302Non-cash
                expense for put option revaluation to fair value
            
            
            1,550,000
            
            
            -Non-cash
                interest expense
            
            
            9,763,795
            
            
            1,648,383Non-cash
                expense for shares to be issued to Apro Media
            
            
            1,052,336
            
            
            -Impairment
                on investment in Excelsa
            
            
            -
            
            
            1,650,000Loss
                on issuance of shares to strategic partner – CODA
            
            
            -
            
            
            811,918Non-cash
                expense for shares and warrants issued for services
            
            
            536,421
            
            
            423,352Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (188,000
            )
            
            -Inventory
            
            
            1,061,800
            
            
            (1,053,143
            )Costs
                of product shipped to customers for which revenue \ has not been
                reocgnized
            
            
            (4,066,646
            )
            
            -Other
                current assets
            
            
            9,250
            
            
            4,235Other
                assets
            
            
            (24,304
            )
            
            (63,893
            )Deferred
                revenue
            
            
            -
            
            
            (2,000
            )Accounts
                payable - trade
            
            
            990,092
            
            
            402,253Accrued
                expenses and other liabilities
            
            
            1,798,301
            
            
            1,281,652Net
                cash used in operating activities
            
            
            (6,317,334
            )
            
            (6,064,516
            )INVESTING
                ACTIVITIES:Investment
                in Current Technology Corporation
            
            
            (2,000,000
            )
            
            -Purchases
                of property and equipment
            
            
            (25,733
            )
            
            (5,715
            )Net
                cash used in investing activities
            
            
            (2,025,733
            )
            
            (5,715
            )FINANCING
                ACTIVITIES:Proceeds
                from issuance of convertible term notes
            
            
            2,860,000
            
            
            -Proceeds
                from issuance of Series H Preferred Stock and Put Options
            
            
            5,000,000
            
            
            -Funding
                of Restricted cash for Put Options
            
            
            (1,800,000
            )
            
            -Financing
                costs related to Preferred stock and Put Options
            
            
            (230,000
            )
            
            -Advance
                received from Apro Media
            
            
            200,000
            
            
            -Proceeds
                from the issuance of the 8% convertible notes
            
            
            -
            
            
            5,000,000Payment
                of deferred financing costs
            
            
            -
            
            
            (440,000
            )Proceeds
                from issuance of 6% convertible notes
            
            
            -
            
            
            3,000,000Deferred
                financing costs related to issuance of 6% convertible
                notes
            
            
            -
            
            
            (243,715
            )Amounts
                received from Hyundai Syscomm
            
            
            -
            
            
            500,000Advance
                from strategic partner - CODA
            
            
            -
            
            
            959,474Payments
                made to strategic partner - CODA
            
            
            -
            
            
            (233,526
            )Bank
                overdraft
            
            
            -
            
            
            (8,223
            )Net
                cash provided by financing activities
            
            
            6,030,000
            
            
            8,534,010Change
                in accumulated other comprehensive income
            
            
            -
            
            
            (88
            )Net
                increase (decrease) in cash
            
            
            (2,313,067
            )
            
            2,463,691Cash
                at beginning of year
            
            
            2,463,691
            
            
            -Cash
                at end of year
            
            $
            150,624
            
            $
            2,463,691Supplemental
                disclosure of cash paid:Interest
            
            $
            20,326
            
            $
            34,600Taxes
            
            $
            -
            
            $
            -





See
      Note
      17 for further supplemental cash flow information.


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


28


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





1.
            LIQUIDITY,
                RESTATEMENT AND COMPANY OVERVIEW:




Liquidity :





The
      Company has limited capital resources, has incurred significant historical
      losses and negative cash flows from operations and has limited current revenues.
      At June 30, 2008, the Company had approximately $0.2 million in cash and $1.8
      million in restricted cash as well as approximately $0.1 million in accounts
      receivable. The Company had additional shipments during fiscal 2008 to various
      customers in the amount of approximately $6.5 million, which have not been
      recognized as revenue or accounts receivable as of June 30, 2008 due to certain
      revenue recognition criteria not being met as of June 30, 2008 related to the
      assurance of collectibility. Collections of these billings have been delayed
      due
      to negotiations and arrangements required as a result of these new
      relationships, which has resulted in the Company stretching payments to vendors,
      taxing authorities and lenders. The Company believes that funds on hand combined
      with funds that will be available from its various operations may not be
      adequate to finance its operations and capital expenditure requirements and
      enable the Company to meet its financial obligations and payments under its
      convertible notes and promissory notes for the next twelve months. Further,
      there is uncertainty as to timing, volume and profitability of transactions
      that
      may arise from our relationship with Hyundai Syscomm Corporation (Hyundai)
      and
      Apro Media Corporation (Apro or Apro Media) (see Note 3), as well as our
      recently announced relationships with Hirsch Group, LLLP and others. Further,
      there can be no assurance as to the timing of when we will receive amounts
      due
      to us for products shipped to customers prior to June 30, 2008. There
      are
      no assurances that any further capital raising transactions will be consummated.
      Although certain transactions have been successfully closed, failure of our
      operations to generate sufficient future cash flow and failure to consummate
      our
      strategic transactions or raise additional financing could have a material
      adverse effect on the Company's ability to continue as a going concern and
      to
      achieve its business objectives. These conditions raise substantial doubt about
      the Company’s ability to continue as a going concern. The accompanying
      consolidated 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.





Restatement
      of Prior Quarter:




During
      the three month period ended March 31, 2008, the Company recognized and reported
      approximately $4.0 million in revenues and corresponding accounts receivable,
      as
      well as related costs of products sold of approximately $3.3 million. These
      revenues and associated costs of products sold were derived solely from the
      Company’s relationships with Hyundai Syscomm Corp, Apro Media Corp. and Hirsch
      Capital Corp. Since that time, the Company has experienced difficulties in
      collection of the corresponding accounts receivable. The Company has
      subsequently determined that these shipments and related billings did not meet
      all the criteria for GAAP revenue recognition at March
      31, 2008 due to collectibility not being reasonably assured among other factors.
      Therefore, in retrospect, this represented an error as these revenues should
      not
      have been recognized in the quarter ended March 31, 2008 or in fiscal 2008,
      thus
      requiring the reversal of the revenue as well as the related accounts
      receivable. The Company will recognize these revenues when and if the payments
      are received and collection is thus assured.





The
      Company has also determined that it is appropriate to recognize as an asset
      the
      related costs of products sold, net of an estimated reserve for potential loss,
      until such time as the revenue is recognized, product is returned or these
      product costs are considered unrealizable and are written off. Costs related
      to
      these transactions have been capitalized in the amount of $3.3 million for
      the
      three months ended March 31, 2008. The Company has reduced these capitalized
      costs with a reserve for potential loss in the amount of $0.8 million for the
      three months ended March 31, 2008 to estimate the potential cost that may be
      unrecoverable. This reserve was recorded in cost of goods sold.




29


In
      connection with the reduction in revenue, we reversed commission expense
      included in selling, general and administrative expenses related to shares
      to be
      issued to Apro Media, since these shares are issued only in connection with
      the
      recognition of the revenue.





The
      effects of restating the financial statements as of March 31, 2008, on a
      pro-forma basis, are as follows:





Restatement
            
            As RevisedAs Reported
            
            Adjustment
            
            and RestatedFor the
                Three Months Ended March 31, 2008Total
                revenues
            
            $
            4,025,600
            
            $
            (4,025,600
            )
            $
            -Cost
                of product sold
            
            
            3,291,645
            
            
            (2,468,734
            )
            
            822,911Gross
                profit
            
            
            733,955
            
            
            (1,556,866
            )
            
            (822,911
            )Total
                operating costs
            
            
            1,925,160
            
            
            (365,760
            )
            
            1,559,400Loss
                from operations
            
            
            (1,191,205
            )
            
            (1,191,106
            )
            
            (2,382,311
            )Net
                loss
            
            
            (2,797,272
            )
            
            (1,191,106
            )
            
            (3,988,378
            )Weighted
                average shares outstanding
            
            
            19,475,358
            
            
            -
            
            
            19,475,358Basic
                and diluted loss per share attributable to common
                stockholders
            
            
            (0.14
            )
            
            (0.06
            )
            
            (0.20
            )For
                the Nine Months Ended March 31, 2008Total
                revenues
            
            $
            7,942,160
            
            $
            (4,025,600
            )
            $
            3,916,560Cost
                of product sold
            
            
            6,135,972
            
            
            (2,468,734
            )
            
            3,667,238Gross
                profit
            
            
            1,806,188
            
            
            (1,556,866
            )
            
            249,322Total
                operating costs
            
            
            5,188,633
            
            
            (365,760
            )
            
            4,822,873Loss
                from operations
            
            
            (3,382,445
            )
            
            (1,191,106
            )
            
            (4,573,551
            )Net
                loss
            
            
            (14,925,232
            )
            
            (1,191,106
            )
            
            (16,116,338
            )Weighted
                average shares outstanding
            
            
            15,829,699
            
            
            
            
            
            15,829,699Basic
                and diluted loss per share attributable to common
                stockholders
            
            
            (0.94
            )
            
            (0.08
            )
            
            (1.02
            )As
                of March 31, 2008Accounts
                receivable
            
            $
            4,025,600
            
            $
            (4,025,600
            )
            $
            -Costs
                of product shipped to customers for which revenue has not been
                recognized
            
            
            -
            
            
            2,468,734
            
            
            2,468,734Total
                assets
            
            
            10,109,015
            
            
            (1,556,866
            )
            
            8,552,149Accrued
                expenses and other liabilities
            
            
            1,819,340
            
            
            (365,760
            )
            
            1,453,580Total
                current liabilities
            
            
            11,545,663
            
            
            (365,760
            )
            
            11,179,903





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. A majority of the Company’s business
      activity is conducted with customers located within the United States. During
      the fiscal year ended June 30, 2008, 91% of the Company’s revenues were derived
      from sales to domestic customers and 9% of the revenues were derived from sales
      to foreign entities in the United Kingdom. Substantially all of our revenues
      have been generated from certain key relationships (see Note 3), many of which
      are from companies that have a direct or indirect investment interest in
      MSGI.




30


Subsidiaries




MSGI
      has
      an 84% ownership in Innalogic,
      LLC (Innalogic). Innalogic is a wireless software product development firm
      that
      works with clients to custom-design technology products that meet specific
      user,
      functional and situational requirements. Innalogic has a recognized core
      competency in an area of increasingly vital importance to security: delivering
      rich-media content (video, audio, biometric, sensor data, etc.) to wirelessly
      enabled mobile devices for public-safety and security applications over wireless
      or wired networks. Innalogic has the resources and expertise to design and
      install building-wide wireless networks. The network’s technological foundation
      is a custom-designed network Command Center utilizing Innalogic’s proprietary
      SafetyWatchTM software. Innalogic-designed networks integrate with a building’s
      existing CCTV system and security infrastructure, thus creating a powerful
      network environment able to accommodate advanced building-wide security
      applications. Importantly, Innalogic’s wireless video applications help clients
      make the critical upgrade of CCTV video security systems from analog to digital
      technology. Innalogic software applications easily integrate with existing
      systems – camera or rich-media networks – and are specially designed to
      incorporate or integrate with new or replacement technologies as they come
      online. On April 1, 2007, Innalogic executed a non-exclusive licensing agreement
      with the CODA Octopus Group, Inc. (CODA) whereby CODA assumed certain
      development and operational responsibilities and has the right to market the
      Innalogic proprietary technology to its client base in return for a royalty
      payment of 20% of all revenues earned from the sale of Innalogic technologies
      (See Note 3).




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




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. The Company believes it has only one reporting
      segment, the securities technologies segment.





*Revenue
      Recognition:*




The
      Company accounts for revenue recognition in accordance with Staff Accounting
      Bulletin No. 104, (SAB 104), which provides guidance on the recognition,
      presentation and disclosure of revenue in financial statements. Revenues are
      reported upon the completion of a transaction that meets the following criteria
      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.





The
      majority of our revenues are derived from the shipment of product, without
      installation or maintenance requirements by us, and accordingly revenue is
      recognized upon shipment, when the above criteria have been met. Revenue for
      maintenance contracts are deferred and recognized over the term of the
      maintenance period. There was no deferred revenue as of June 30,
      2008.





During
      the year ended June 30, 2008, the Company recognized product revenue in
      connection with our contract with Apro (see Note 3) in the amount of
      approximately $3.8 million. During each of the years ended June 30, 2008 and
      2007, MSGI recognized $100,000 from CODA for licensing royalty fees (see Note
      3).




The
      Company had certain shipments to various customers during fiscal 2008 in the
      aggregate of approximately $6.5 million that were not recognized as revenue
      in
      fiscal 2008 due to certain revenue recognition criteria not being met as of
      June
      30, 2008, related to the assurance of collectibility among other factors. These
      transactions will be recognized as revenue in the period in which all the
      revenue recognition criteria, as noted above, has been fully met. Therefore,
      there is no revenue or related accounts receivable recorded for these
      transactions in 2008. Inventory costs related to these transactions for which
      revenue has not been recognized are reported on the balance sheet in Costs
      of
      product shipped to customers for which revenue has not been
      recognized.


31


*Costs
      of product shipped to customers for which revenue has not been
      recognized*




As
      of
      June 30, 2008, the Company has capitalized the expense recognition of
      approximately $5.4 million in product costs for goods that were shipped to
      customers as of June 30, 2008 but for which revenue has not yet been recognized.
      The Company has also recorded a reserve against these product costs in the
      amount of approximately $1.4 million. This reserve estimates the potential
      costs
      that may be unrecoverable. The remaining product costs will be recognized as
      costs of goods sold by the Company at such time as the associated revenues
      are
      recognized upon completion of all the revenue recognition criteria, which is
      expected to be upon receipt of payment from the customers, or when product
      is
      returned or these product costs are considered unrealizable and are written
      off.





*Cash
      and Cash Equivalents:*





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





*Accounts
      receivable and allowance for doubtful accounts:*





The
      Company extends credit to its customers in the ordinary course of business.
      Accounts are reported net of an allowance for uncollectible accounts. Bad debts
      are provided on the allowance method based on historical experience and
      management’s evaluation of outstanding accounts receivable. In assessing
      collectibility, the Company considers factors such as historical collections,
      a
      customer’s credit worthiness, age of the receivable balance both individually
      and in the aggregate, and general economic conditions that may affect a
      customer’s ability to pay. The Company does not require collateral from
      customers nor are customers required to make up-front payments for goods and
      services. At June 30, 2008, the Company recorded an allowance for doubtful
      accounts of $60,000 for accounts receivable from CODA (See Note 3).





*Deferred
      Financing and other debt-related Costs:*





Deferred
      financing costs are amortized over the term of its associated debt instrument.
      The Company evaluates the terms of the debt instruments to determine if any
      embedded derivatives or beneficial conversion features exist. The Company
      allocates the aggregate proceeds of the notes payable between the warrants
      and
      the notes based on their relative fair values in accordance with Accounting
      Principle Board No. 14 (APB 14), “Accounting for Convertible Debt and Debt
      Issued with Stock Purchase Warrants.” The fair value of the warrants issued to
      note holders or placement agents are calculated utilizing the Black-Scholes
      option-pricing model. The Company is amortizing the resultant discount or other
      features over the term of the notes through its earliest maturity date using
      the
      effective interest method. Under this method, the interest expense recognized
      each period will increase significantly as the instrument approaches its
      maturity date. If the maturity of the debt is accelerated because of defaults
      or
      conversions, then the amortization is accelerated. The Company’s debt
      instruments do not contain any embedded derivatives at June 30,
      2008.





*Inventories*




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




*Property,
      Plant and Equipment:*




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




Furniture
                and fixtures
            3
                to 7 yearsComputer
                equipment and software
            3
                to 5 yearsMachinery
                and equipment
            6
                years




32





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





*Investments
      in non-consolidated companies:*





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





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





*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.





*Cost
      of Goods Sold:*





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





*Research
      and Development Costs:*





The
      Company recognizes research and development costs associated with certain
      product development activities. The Company realized expenses of $88,200 during
      the year ended June 30, 2008 for costs associated with development of RFID
      technologies. The Company realized expenses of $2.5 million during the year
      ended June 30, 2007 as a result of a payment made to Apro Media for costs
      associated with technological development expenses incurred in the process
      of
      securing a business relationship with and subsequent purchase order from a
      certain Fortune 100 client.





*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 asset and 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.


33





On
      July
      1, 2007, the Company adopted the provisions of Financial Standards Accounting
      Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
      interpretation of SFAS 109” (FIN 48). FIN 48 provides recognition criteria and a
      related measurement model for uncertain tax positions taken or expected to
      be
      taken in income tax returns. FIN 48 requires that a position taken or expected
      to be taken in a tax return be recognized in the financial statements when
      it is
      more likely than not that the position would be sustained upon examination
      by
      tax authorities. Tax positions that meet the more likely than not threshold
      are
      then measured using a probability weighted approach recognizing the largest
      amount of tax benefit that is greater than 50% likely of being realized upon
      ultimate settlement. The adoption did not have an effect on the consolidated
      financial statements and there is no liability related to unrecognized tax
      benefits at June 30, 2008.





*Use
      of Estimates:*




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





*Concentration
      of Credit Risk:*





Major
      Customers




The
      Company’s services are currently provided to a variety of customers, primarily
      located in the continental United States. Three customers accounted for 86%
      of
      revenues for the year ended June 30, 2008, of which none were in accounts
      receivable at June 30, 2008. One customer accounted for 56% of revenues for
      the
      year ended June 30, 2007. Our relationship with Apro Media and Hyundai is
      considered to be critical to the Company’s ongoing business activities.
      Approximately 94% of revenue for the year ended June 30, 2008 was a result
      of
      our sub-contract agreement with Apro.





Major
      Supplier




The
      Company purchased 100% of its products from one supplier for the year ended
      June
      30, 2008. This supplier relationship was obtained in connection with our Apro
      sub-contract. While this supplier is important to the Company’s operations,
      there are comparable products available from alternate suppliers that minimize
      this risk.





Cash
      concentration




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


34





*Earnings
      (Loss) Per Share:*





In
      accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share is
      calculated based on the weighted average number of shares of common stock
      outstanding during the reporting period. Diluted earnings per share gives effect
      to all potentially dilutive common shares that were outstanding during the
      reporting period; however such potentially dilutive common shares are excluded
      from the calculation of earnings (loss) per share if their effect would be
      anti-dilutive. Stock options and warrants with exercise prices below average
      market price in the amount of 8,027,569 and 6,608,196 shares, and preferred
      stock convertible into 5,000,000 and 0 shares for the years ended June 30,
      2008
      and 2007, 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 13,695,873 and 3,753,390 shares for the
      years ended June 30, 2008 and 2007, respectively were not included in the
      computation of diluted earnings per share as they are anti-dilutive. These
      amounts do not include any securities issuable under the Hyundai and Apro
      agreements, as such amounts are considered “contingently issuable,” and do not
      include any securities under the convertible debt or put option agreement as
      the
      impact would be anti-dilutive.





*Employee
      Stock-Based Compensation* :





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





*Fair
      Value of Financial Instruments:*





The
      Company adopted Statement of Financial Accounting Standards No. 157 (SFAS 157),
      “Fair Value Measurements” in the first quarter of the year ended June 30, 2007.
      Adoption of SFAS 157 did not have a significant impact to our financial
      statements. The carrying amounts of the Company’s financial instruments,
      including cash, restricted cash, 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,
      2008
      and 2007. The accrued liability for put options is marked to fair value each
      reporting period.





*Summary
      of Recent Accounting Pronouncements:*





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




35


3.
            CERTAIN
                KEY RELATIONSHIPS





Relationship
      with Hyundai Syscomm Corp.





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





On
      October 19, 2006, the Company entered into a Subscription Agreement with Hyundai
      for the issuance of 900,000 shares of the Company's common stock. Subject to
      the
      terms and conditions set forth in the Subscription Agreement, the Company agreed
      to issue up to 900,000 shares of common stock contingent upon the Company's
      receipt of $500,000 received in connection with a certain License Agreement,
      dated September 11, 2006 (see above), and execution of a certain then pending
      Sub-Contracting Agreement (see below). Under the terms and conditions set forth
      in the Subscription Agreement, Hyundai agreed that the Company shall not be
      required to issue, or reserve for issuance at any time in accordance with Nasdaq
      rule 4350(i), in the aggregate, Common Stock equal to more than 19.99% of the
      Company's common stock outstanding (on a pre-transaction basis). Therefore
      the
      Company issued 865,000 shares of common stock at the initial closing of the
      transaction, and the remaining 35,000 shares of common stock were to be issued
      when and if: (a) the holders of a majority of the shares of common stock
      outstanding vote in favor of Hyundai owning more than19.99% of the Company's
      common stock outstanding; or (b) additional issuances of common stock by the
      Company permit such issuance in accordance with Nasdaq rule 4350(i). As of
      the
      date of submission of this report, the Company is obligated to issue the
      remaining 35,000 shares of common stock to Hyundai, per the terms of the
      Subscription Agreement.





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





On
      February 7, 2007, the Company issued to Hyundai a warrant to purchase up to
      a
      maximum of 24,000,000 shares of common stock in exchange for a maximum of
      $80,000,000 in revenue, which was expected to be realized by the Company over
      a
      maximum period of four years. The vesting of the Warrant will take place
      quarterly over the four-year period based on 300,000 shares for every $1,000,000
      in revenue realized by the Company from contracts referred to us by Hyundai.
      The
      revenue is subject to the sub-contracting agreement between Hyundai and the
      Company dated October 25, 2006. Additionally, when issued, the shares underlying
      the warrant were to be authorized through an increase in the total of authorized
      capital stock of the Company to be approved by the stockholders. The warrant
      could not begin to vest until these underlying shares were authorized. Such
      approval was obtained at the Special Meeting of the Stockholders on March 6,
      2007. No transactions under this agreement have occurred as of June 30, 2008
      or
      to date.


36





Relationship
      with Apro Media Corporation





On
      May
      10, 2007, the Company entered into an exclusive sub-contract and distribution
      agreement with Apro Media Corp. (Apro or Apro Media) for at least $105 million
      of expected sub-contracting business over seven years to provide commercial
      security services to a Fortune 100 defense contractor and/or other customers.
      Under the terms of contract, MSGI will acquire components from Korea and deliver
      fully integrated security solutions at an average expected level of $15 million
      per year for the length of the seven-year engagement. MSGI is to establish
      and
      operate a 24/7/365 customer support facility in the Northeastern United States.
      Apro will provide MSGI with a web-based interface to streamline the ordering
      process and create an opportunity for other commercial security clients to
      be
      acquired and serviced by MSGI. The contract calls for gross profit margins
      estimated to be between 26% and 35% including a profit sharing arrangement
      with
      Apro Media, which will initially take the form of unregistered MSGI common
      stock, followed by a combination of stock and cash and eventually just cash.
      In
      the aggregate, assuming all the stated revenue targets are met over the next
      seven years, Apro Media would eventually acquire approximately 15.75 million
      shares of MSGI common stock. MSGI was referred to Apro Media by Hyundai as
      part
      of a general expansion into the Asian security market, however revenue under
      the
      Apro contract does not constitute revenue under the existing Hyundai warrant
      to
      acquire common stock of MSGI. The contract required working capital of at least
      $5 million due to considerable upfront expenses including a $2.5 million payment
      by MSGI to Apro Media, which was made on May 31, 2007, for the proprietary
      system development requirements of the Fortune 100 client and the formation
      of a
      staffed production and customer service facility and warehouse.





Per
      the
      terms of the sub-contract agreement with Apro, the Company is to compensate
      Apro
      with 3,000,000 shares of the Company’s common stock when the sub-contract
      transactions result in $10.0 million of GAAP recognized revenue for the Company.
      During the year ended June 30, 2008, the Company recognized approximately $3.8
      million in revenues resulting from activities under the sub-contract agreement.
      In December 2007, the Company elected to issue 1,000,000 shares of common stock
      to Apro under that agreement. The Company computed a fair value for a pro rata
      share of the remaining shares to be issued under that agreement, which was
      $62,336 at June 30, 2008 and has been reflected as a liability in our
      consolidated balance sheet. The total expense for the year ended June 30, 2008
      related to shares both issued and issuable to Apro was $1,052,336, which is
      included in selling, general and administrative expenses. This liability will
      be
      re-measured at each period end, until all shares are issued.





As
      of
      June 30, 2008, the Company had shipped product to various customers in the
      aggregate of approximately $1.6 million under the Apro sub-contract agreement.
      These shipments have not been recognized as revenue in fiscal 2008. In addition
      inventory costs related to these transactions have been reported on the balance
      sheet in Costs of product shipped to customers for which revenue has not been
      recognized. See Notes 1 and 2 for further details.





Subsequent
      to the fiscal year ended June 30, 2008, the Company entered into an additional
      sub-contract agreement from a referral that falls with the terms of the Apro
      subcontract agreement. See Note 18 – Subsequent events.





Relationship
      with CODA Octopus Group





On
      April
      1, 2007, the Company entered into a non-exclusive license agreement with CODA
      Octopus, Inc. (CODA) whereby the Company will receive a referral fee on sales
      of
      products using the Innalogic proprietary technology. In connection with such
      transaction, CODA assumed certain development and operations responsibilities
      of
      the Innalogic entity. The Company recognized $100,000 in revenues during each
      of
      the years ended June 30, 2008 and 2007 under this arrangement.




37


4.
            INVESTMENTS





Current
      Technology Corporation





On
      January 10, 2008, the Company entered into a Subscription Investment Agreement
      with Current Technology Corporation, a corporation formed under the laws of
      the
      Canada Business Corporation Act. The agreement provides for the Company to
      purchase from Current Technology a total of 25,000,000 shares of its common
      stock, and common stock purchase warrants exercisable for 25,000,000 million
      shares of its common stock, for an aggregate purchase price of $2,500,000.
      Payment of the $2,500,000 was to be made in five installments of $500,000
      between January 4, 2008 and April 15, 2008. The common stock purchase warrants
      are immediately exercisable at an exercise price of $.15 per share and expire
      on
      January 9, 2013. The warrants contain anti-dilution and adjustment provisions,
      which allow for adjustment to the exercise price and/or the number of shares
      should there be a change in the number of outstanding shares of common stock
      through a declaration of stock dividends, a recapitalization resulting in stock
      splits or combinations or exchange of such shares.





At
      June
      30, 2008, the Company has paid $2 million for the investment and owns 20 million
      shares of the common stock of Current Technology, which represents approximately
      15% ownership of their outstanding common stock. In addition, the Company holds
      20 million warrants to purchase additional shares of common stock. The
      Company recorded the investment on a cost method of accounting. As of June
      30,
      2008, the Company has an option to invest an additional $500,000 under the
      original agreement terms above.





In
      addition, as part of this investment transaction, Current Technology will
      outsource 25% of its business to MSGI through Celevoke, Inc. (an entity in
      which
      Current Technology holds a 51% ownership interest). No transactions between
      MSGI
      and Celevoke have occurred during 2008 or 2007.





In
      August
      2008, MSGI entered into a Securities Exchange Agreement with holders of the
      Company’s Series H Preferred stock and other instruments. In connection with
      this exchange, the 20 million warrants to purchase additional shares of common
      stock of Current Technology were assigned to the parties to this agreement.
      See
      Note 18 – Subsequent events.





Excelsa
      S.p.A.




During
      the year ended June 30, 2007, the Company fully impaired its investment in
      Excelsa S.p.A., a corporation organized under the law of the Republic of Italy,
      and recognized a loss on the investment of $1,650,000.





5.
      8%
      CALLABLE CONVERTIBLE NOTES PAYABLE




The
      8%
      Callable Convertible Notes Payable consist of the following as of June 30,
      2008:





Instrument
            
            Maturity
            
            Face Amount
            
            Discount
            
            Carrying Amount at
              June 30, 2008,
              net of discount8%
                Debentures
            
            May
              21, 2010
            
            $
            4,000,000
            
            $
            3,999,938
            
            $
            628%
                Notes
            
            Fully
                converted as of October 2007
            
            
            
            
            -Total
            
            
            
            
            
            
            
            
            
            
            $
            62





8%
      Notes




On
      July
      12, 2005, MSGI closed a Callable Secured Convertible Note financing of $3
      million with a New York based institutional investor (the 8% Notes), which
      were
      last amended December 13, 2006. Substantially all of the assets of the Company
      were pledged as collateral to the note holders. The 8% Notes were due, principal
      and interest, in a single balloon payment on the maturity date of December
      13,
      2009. The 8% Notes had a conversion price of 75% of the average closing price
      of
      the Company’s common stock, with a minimum conversion price of $0.50 per share.
      As noted below, all of these 8% Notes were fully converted into common stock
      during the year ended June 30, 2008.


38






In
      fiscal
      2006, the Company recorded a discount to the note payable of $1,396,735, of
      which $64,697 represented the discount allocated to the warrants and $1,332,038
      represented the beneficial conversion feature of the note. The fair value of
      the
      warrants was determined using a Black-Scholes option pricing model. The discount
      was being amortized to interest expense over the three-year maturity
      date.





During
      the months of July and August 2007, the holders of the 8% Notes elected to
      convert certain amounts of principal into shares of common stock of the Company
      under the provisions of the 8% Notes. In four separate conversion transactions,
      the holders converted approximately $810,000 in note principal into an aggregate
      total of 1,257,532 shares of common stock of the Company. As a result of these
      conversion transactions, a portion of the amortization of the discount on the
      8%
      Notes was accelerated by approximately $348,000 for the year ended June 30,
      2008.





On
      October 3, 2007, the remaining 8% Notes outstanding were purchased by certain
      third-party institutional investors, from the original note holders. The Company
      did not receive any cash as a result of these transactions and was not a party
      to the transaction. These institutional investors submitted notification to
      the
      Company on October 3, 2007 to fully convert the Notes into shares of the
      Company’s common stock. The remaining note balance of $1,762,414 as well as
      interest expense of $547,500 was converted into an aggregate of 4,619,828 shares
      of the Company’s common stock. The remaining discount of $707,192 on these notes
      was accelerated and fully accreted upon conversion. In addition, as part of
      the
      conversion transaction, the Company allowed the note holders to convert at
      a
      rate of $0.50, which was lower than the stated conversion price under the note
      agreement. Therefore, in connection with this lower conversion rate, the Company
      recognized an additional beneficial conversion charge on the principal and
      interest converted of approximately $1,124,900 upon conversion, which is
      reflected in interest expense. Total interest expense, including debt discount
      amortization, for the year ended June 30, 2008 and 2007 in connection with
      this
      note was approximately $2,572,000 and $457,900, respectively.





8%
      Debentures




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





The
      8%
      Debentures have a maturity date of May 21, 2010 and accrue interest at a rate
      of
      8% per annum. Payments of principal under the Debentures are not due until
      the
      maturity date. Interest is payable quarterly in cash, although all remaining
      investors have allowed the Company to defer their interest payment until the
      maturity date. The investors can convert the principal amount of the 8%
      Debentures into common stock of the Company, provided certain conditions are
      met, and each conversion is subject to certain volume limitations. The original
      conversion price of the 8% Debentures was $1.40.





The
      Company allocated the aggregate proceeds of the 8% Debentures between the
      warrants and the Debentures based on their fair value and calculated a
      beneficial conversion feature and warrant discount in an amount in excess of
      the
      $5 million in proceeds received. Therefore, the total discount was limited
      to $5
      million. The discount on the Debentures was allocated from the gross proceeds
      and recorded as additional paid-in capital. The discount is being amortized
      to
      interest expense over the three-year maturity date. Should the 8% Debentures
      be
      converted or paid prior to the payment terms, the amortization of the discount
      will be accelerated.





The
      8%
      Debentures and the Warrants have anti-dilution protections. The Company has
      also
      entered into a Security Agreement with the investors in connection with the
      closing, which grants security interests in certain assets of the Company and
      the Company’s subsidiaries to the investors to secure the Company’s obligations
      under the 8% Debentures and Warrants.





As
      a
      result of the conversion transaction of the Callable Secured Convertible 8%
      Notes above and the 6% Notes below, anti-dilution provisions of the 8%
      Debentures were triggered in October 2007. The conversion price of the 8%
      Debentures was reduced from $1.40 to $0.50. As a result, the Company recognized
      an additional beneficial conversion discount of approximately $601,800 which
      was
      recorded as a discount to the note and allocated to additional paid in capital.
      This additional discount will be amortized over the remaining term of the note.
      Total interest expense, including debt discount amortization, for the year
      ended
      June 30, 2008 and 2007 in connection with this note was approximately $1,825,800
      and $230,100, respectively.




39




In
      addition, the exercise price of the related Warrants issued to the lenders
      was
      reduced from $2.00 to $0.50 per share due to anti-dilution provisions triggered
      and the number of warrants was increased from 1,785,713 to 7,142,852. The change
      in exercise price and number of shares resulted in an additional charge to
      interest expense of $4,969,008 in the year ended June 30, 2008.





During
      the year ended June 30, 2008, one of the institutional investors converted
      the
      principal amount of its 8% Debentures into shares of common stock of the
      Company. These conversions resulted in the issuance of 2,153,597 shares of
      common stock of the Company and a reduction in the principal balance and
      corresponding acceleration of debt discount of $1.0 million. As part of this
      conversion, the Company allowed these investors to convert accrued interest
      of
      $76,798 into stock at the $0.50 conversion rate instead of paying the interest
      in cash. Therefore, the Company recorded an additional interest expense charge
      of $36,017 representing the additional value of stock provided for the interest
      payment.





6.
      6%
      CALLABLE CONVERTIBLE NOTES PAYABLE




The
      6%
      Callable Convertible Notes Payable consist of the following as of June 30,
      2008:





Instrument
            
            Maturity
            
            Face Amount
            
            Discount
            
            Carrying
              Amount at June
              30, 2008,
              net of discount6%
                Notes
            
            
            December 13, 2009
            
            $
            1,000,000
            
            $
            999,900
            
            $
            1006%
                April Notes
            
            
            April
                4, 2010
            
            
            1,000,000
            
            
            999,945
            
            
            55Total
            
            
            
            
            
            
            
            
            
            
            $
            155





6%
      Notes




On
      December 13, 2006, pursuant to a Securities Purchase Agreement between the
      Company and several institutional investors, MSGI issued $2,000,000 aggregate
      principal amount of Callable Secured Convertible Notes (the 6% Notes) and stock
      purchase warrants exercisable for 3,000,000 shares of common stock in a private
      placement for an aggregate offering price of $2,000,000.





The
      6%
      Notes have a single balloon payment of $2,000,000 due on the maturity date
      of
      December 13, 2009 and will accrue interest at a rate of 6% per annum. The
      Investors can convert the principal amount of the 6% Notes into common stock
      of
      the Company, provided certain conditions are met, and each conversion is subject
      to certain volume limitations. The original conversion price of the 6% Notes
      is
      75% of the average closing prices of the Company’s common stock, with a minimum
      conversion price of $0.50 per share. The payment obligation under the Notes
      accelerate if payments under the Notes are not made when due or upon the
      occurrence of other defaults described in the Notes. The warrants are
      exercisable through December 2013. The exercise price of the warrants is $1.00
      per share.





The
      6%
      Notes and the warrants have anti-dilution protections. The Company has also
      entered into a Security Agreement and an Intellectual Property Security
      Agreement with the Investors in connection with the closing, which grants
      security interests in certain assets of the Company and the Company’s
      subsidiaries to the Investors to secure the Company’s obligations under the 6%
      Notes and warrants.





40




The
      Company allocated the aggregate proceeds of the 6% Notes between the warrants
      and the Notes based on their fair values and calculated a beneficial conversion
      feature and warrant discount in an amount in excess of the $2 million in
      proceeds received. Therefore, the total discount was limited to $2 million.
      The
      Company is amortizing this discount over the remaining term of the 6% Notes
      through December 2009. Should the 6% Notes be converted or paid prior to the
      payment terms, the amortization of the discount will be
      accelerated.





On
      October 3, 2007, a $1.0 million portion of the Notes outstanding were purchased
      by certain third-party institutional investors, from the original note holders.
      The Company did not receive any cash as a result of these transactions and
      was
      not a party to the transaction. These institutional investors converted $1.0
      million of the note balance as well as interest expense of $40,086 into an
      aggregate of 2,080,172 shares of the Company’s common stock. In connection with
      the conversion, the discount was accelerated for the related portion of the
      note
      in an amount of $736,111. In addition, as part of the conversion transaction,
      the Company allowed the note holders to convert at a rate of $0.50, which was
      lower than the stated conversion price under the note agreement. Therefore,
      in
      connection with this lower conversion rate, the Company recognized an additional
      beneficial conversion charge on the principal and interest converted of
      approximately $299,200 upon conversion, which is reflected in interest expense
      for the year ended June 30, 2008.





As
      a
      result of the conversion transaction of the Callable Secured Convertible 8%
      Notes above and the 6% Notes converted, anti-dilution provisions of the
      remaining 6% Notes were triggered. The conversion price of the remaining 6%
      Notes was reduced from the variable conversion rate noted above to a fixed
      rate
      of $0.50. As a result, the Company recognized an additional beneficial
      conversion discount of approximately $263,900 which was recorded as a discount
      to the note and allocated to additional paid in capital. This additional
      discount will be amortized over the remaining term of the note. Interest
      expense, including the accelerated discount, was $978,026 and $426,536 for
      the
      year ended June 30, 2008 and 2007, respectively.





6%
      April
      Notes




On
      April
      5, 2007, pursuant to a Securities Purchase Agreement between the Company and
      several institutional investors, MSGI issued $1.0 million aggregate principal
      amount of Callable Secured Convertible Notes (the 6% April Notes) and stock
      purchase warrants exercisable for 1,500,000 shares of common stock in a private
      placement for an aggregate offering price of $1.0 million. The warrants have
      an
      exercise price of $1.00 and are exercisable for a term of 7 years.





The
      6%
      April Notes have a single balloon payment of $1.0 million due on the maturity
      date of April 4, 2010 and will accrue interest at a rate of 6% per annum. The
      Investors can convert the principal amount of the 6% April Notes into common
      stock of the Company, provided certain conditions are met, and each conversion
      is subject to certain volume limitations. The original conversion price of
      the
      6% April Notes was 75% of the average of closing prices of the Company’s common
      stock, with a minimum conversion price of $0.50 per share. The Company allocated
      the aggregate proceeds of the 6% April Notes between the warrants and the Notes
      based on their fair values and calculated a beneficial conversion feature and
      warrant discount in an amount in excess of the $1 million in proceeds received.
      Therefore, the total discount was limited to $1 million. The Company is
      amortizing this discount to interest expense over the remaining term of the
      6%
      April Notes through April 2010. Should the 6% April Notes be converted or paid
      prior to the payment terms, the amortization of the discount will be
      accelerated.





The
      payment obligation under the Notes may accelerate if payments under the Notes
      are not made when due or upon the occurrence of other defaults described in
      the
      Notes.





The
      6%
      April Notes and the warrants have anti-dilution protections. The Company has
      also entered into a Security Agreement and an Intellectual Property Security
      Agreement with the Investors in connection with the closing, which grants
      security interests in certain assets of the Company and the Company’s
      subsidiaries to the Investors to secure the Company’s obligations under the 6%
      April Notes and warrants.





41




As
      a
      result of the conversion transaction of the Callable Secured Convertible 8%
      Notes and the 6% Notes converted above, anti-dilution provisions of the April
      6%
      Notes were triggered. The conversion price of the April 6% Notes was reduced
      from the variable conversion rate noted above to a fixed rate of $0.50. As
      a
      result, the Company recognized an additional beneficial conversion discount
      of
      approximately $166,700, which was recorded as a discount to the note and
      allocated to additional paid in capital. This additional discount will be
      amortized over the remaining term of the note. Interest expense, including
      the
      debt discount, was $143,553 and $97,634 for the year ended June 30, 2008 and
      2007, respectively.





7.
      OTHER
      NOTES PAYABLE AND ADVANCES




Other
      Notes Payable consist of the following as of June 30, 2008:





Instrument
            
            Maturity
            
            Face
                Amount
            
            Discount
            
            Carrying
              Amount at June
              30, 2008,
              net of discountConvertible
                Term Notes – short term
            
            
            September 30, 2008
            
            $
            960,000
            
            $
            -
            
            $
            960,000Convertible
                Term Notes – short term
            
            
            December 31, 2008
            
            
            1,900,000
            
            
            -
            
            
            1,900,000Total
            
            
            
            
            
            
            
            
            
            
            $
            2,860,000





Convertible
      Term Notes payable





On
      December 13, 2007, the Company entered into four short-term notes with private
      institutional lenders. These promissory notes provided proceeds totaling $2.86
      million to the Company. The proceeds of these notes were used to purchase
      inventory. The notes carry a variable rate of interest based on the prime rate
      plus two percent. These notes had an original maturity date of April 15, 2008.
      These notes were not repaid on this date and the terms were amended at several
      different dates to extend them to their current maturity date of December 31,
      2008, except for one note which has a maturity date of September 30, 2008.
      See
      the discussion below.





Warrants
      to purchase up to an aggregate of 100,000 shares of common stock of the Company
      were issued to the lenders in conjunction with these notes. The warrants have
      a
      term of 5 years and carry an exercise price of $1.38 per share. The Company
      allocated the aggregate proceeds of the term notes payable between the warrants
      and the Notes based on their fair values, which resulted in a discount of
      $80,208. Interest expense, including the debt discount, was $272,047 for the
      year ended June 30, 2008.





Between
      April 30, 2008 and August 31, 2008, the Company executed a series of Amendments
      to the Term Notes, which extended the payment terms for the term notes through
      September 30, 2008. Due to the default event, commencing on April 15, 2008,
      the
      interest rate is now at the default interest rate of 18%. Also, the holders
      now
      have the right to convert the note at a rate of $0.51 per share.





In
      addition, the terms of the Amendments to the Loan Agreements called for the
      Company to issue five-year warrants to purchase shares of common stock of the
      Company to certain group lenders each week beginning May 1, 2008 and continuing
      for each week that the principal balance of the term notes remains outstanding.
      These warrants are to be issued with an exercise price set at the greater of
      market value on the date of issuance or $0.50 per share. As of June 30, 2008,
      a
      total of 284,717 warrants were issued to the note holders, 33,218 warrants
      with
      an exercise price at $0.60 per share and the remaining at an exercise price
      of
      $0.50 per share. The warrants were fair valued, at each warrant issuance, using
      the Black Scholes model and were determined to have a fair value of $83,105,
      which was recorded as additional interest expense on the note during the year
      ended June 30, 2008. The following assumptions were used in the Black-Scholes
      model for the warrants for the year ended June 30, 2008:





Expected
                term (years)
            
            
            3Dividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            129% - 135
            %Risk-Free
                interest rate
            
            
            2.47% - 3.35
            %Weighted
                average fair value
            
            $
            0.29




42




In
      addition, other group lenders received shares of common stock of the Company
      instead of warrants under the Amendments. During the year ended June 30, 2008,
      a
      total of 520,000 shares of common stock were issued, which were determined
      to
      have a fair value of approximately $222,800 based upon the fair market value
      of
      the common stock on each date issued. This was reflected as an additional charge
      to interest expense for the year ended June 30, 2008





Subsequent
      to the year ended June 30, 2008 and through September 30, 2008, the Company
      had
      issued approximately 715,283 additional warrants and 528,571 shares of common
      stock to these note holders under the terms of the Amendments .





Effective
      October 1, 2008, the Company entered into additional addendum agreements with
      three out of four lenders with regard to their respectively held Notes, which
      terminated all warrants to purchase common stock issued under previous addendum
      agreements and, in their place, issued new warrants and additional shares of
      common stock. At execution of the addendums, the Company issued 378,000 shares
      of common stock and warrants to purchase an additional 378,000 shares of common
      stock at an exercise price of $0.50. The Company shall issue up to an additional
      252,000 shares of common stock and warrants to purchase an additional 252,000
      shares of common stock, at an exercise price of the greater of $0.50 or market
      value on the date of grant, should these Notes remaining outstanding until
      December 31, 2008. The Company is currently involved in discussions with the
      fourth lender regarding a new addendum to its Note, which currently had a
      maturity date of September 30, 2008.





Advances
      from Strategic Partner - Apro Media





During
      the year ended June 30, 2008, the Company received funding in the amount of
      $200,000 from Apro Media. These funds were advanced to the Company against
      expected collections of accounts receivable generated under the Apro
      sub-contract agreement. There is no interest expense associated with this
      advanced funding and this is to be repaid to Apro upon collection of the related
      accounts receivable.





Advance
      from Strategic Partner - CODA





During
      the year ended June 30, 2007, the Company received funding, in the amount of
      approximately $722,000 from CODA as an advance in contemplation of a further
      strategic transaction between the two parties. CODA has also paid directly,
      in
      support of our subsidiary Innalogic LLC, certain operating expenses in the
      amount of approximately $537,000. During the year ended June 30, 2007, the
      Company repaid to CODA $234,000 of the $537,000 paid on our behalf. The net
      of
      these transactions brought the aggregate total due to this firm to approximately
      $1.0 million at March 31, 2007. The advances bore interest at a rate of 8%
      and
      interest expense was $36,552 for the year ended June 30, 2007.





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





43




On
      May
      16, 2007 the Company issued 850,000 unregistered common shares to CODA as full
      and final payment and a release of all financial obligations resulting from
      advances made by CODA to the Company and/or Innalogic. This resulted in a charge
      to the statement of operations for the year ended June 30, 2007, of $811,918
      as
      the share value exceeded the net obligations on the date of the
      transaction.





During
      each of the years ended June 30, 2008 and 2007, the Company earned a $100,000
      fee from CODA resulting from contract referrals we provided them.





Promissory
      Notes Payable





On
      January 19, 2006, the Company entered into four short-term notes with the same
      lenders that also held the 8% Callable Convertible Notes (see Note 5). These
      promissory notes provided proceeds totaling $500,000 to the Company. The notes
      were originally due and payable on April 19, 2006 in the aggregate total of
      $600,000, including imputed interest of $100,000 at an annual imputed interest
      rate of 80%. Amendments executed through December 13, 2006 changed the maturity
      date of the promissory notes to provide for a balloon payment on December 13,
      2009. On October 3, 2007, these Promissory Notes were forgiven and cancelled
      by
      the Note holders in connection with the same transaction where certain
      third-party institutional investors purchased certain 8% Notes and 6% Notes
      from
      these Note holders. While the Company was not party to this transaction
      directly, the Company had agreed to modify the conversion rate on the
      convertible debt to $0.50 in exchange for the forgiveness of these promissory
      notes. Therefore, the $600,000 forgiven was recorded as a reduction of interest
      expense to offset the various charges in interest expense connected with the
      change in conversion price and other related expenses connected to the
      convertible 6% and 8% Notes.





8.
      PROPERTY, PLANT AND EQUIPMENT:




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





2008
            
            2007Machinery,
                equipment and furniture
            
            $
            70,681
            
            $
            44,948Total,
                at cost
            
            
            70,681
            
            
            44,948Less:
                accumulated depreciation
            
            
            (39,735
            )
            
            (25,395
            )Property,
                plant & equipment, net
            
            $
            30,946
            
            $
            19,553





Depreciation
      expense was approximately $14,000 and $36,000 for the years ended June 30,
      2008
      and 2007, respectively.





9.
      INTANGIBLE ASSETS:




In
      connection with the acquisition of Innalogic, intangible assets related to
      unpatented technologies totaling $287,288 were acquired and was amortized over
      the period of expected benefit of five years.





The
      gross
      carrying amount and accumulated amortization of the Company's intangible assets
      as of June 30, 2008 and 2007 are as follows:





2008
            
            2007Amortized
                intangible assetsUnpatented
                technology
            
            $
            287,288
            
            $
            287,288Accumulated
                amortization
            
            
            (287,288
            )
            
            (274,675
            )Net
                book value
            
            $
            -
            
            $
            12,613




44




Amortization
      expense recorded for each of the years ended June 30, 2008 and 2007 was
      approximately $13,000 and $96,000, respectively.





10.
      ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:





Accrued
      expenses as of June 30, 2008 and 2007 consist of the following:





2008
            
            2007Salaries
                and benefits
            
            $
            136,487
            
            $
            125,428Payroll
                taxes and penalties
            
            
            1,341,746
            
            
            355,862Fair
                value of shares to be issued to Apro
            
            
            62,336
            
            
            -Audit
                and tax preparation fees
            
            
            280,352
            
            
            247,090Legal
                fees
            
            
            -
            
            
            26,500Interest
            
            
            716,857
            
            
            365,802Travel
                & entertainment
            
            
            -
            
            
            16,669Penalty
                for stock registration
            
            
            -
            
            
            74,000Taxes
            
            
            32,907
            
            
            26,907Board
                fees
            
            
            52,996
            
            
            205,125Settlement
                on usage fees
            
            
            -
            
            
            150,000Other
            
            
            131,907
            
            
            74,112Total
            
            $
            2,755,588
            
            $
            1,667,495





The
      Company has not filed or paid payroll taxes during fiscal 2007 or
      2008.





11.
      RELATED PARTY TRANSACTIONS:




See
      Notes
      3 and 7 for a description of transactions with Hyundai Syscomm, Apro Media
      and
      CODA Octopus.





In
      fiscal
      2008, the Company had product revenue of $3.8 million that was a result of
      the
      relationship with Apro Media and the related sub contract agreement with this
      Company.





In
      fiscal
      2008, the Company shipped $400,000 of product to Hirsch Group, LLLP and shipped
      $4 million of product to customers through referrals from Hirsch Group and
      sub
      contract agreements Hirsch Group is a party to. None of these transactions
      have
      been recognized as revenue in fiscal 2008 (see Note 1). Hirsch Group, LLLP
      has
      an affiliation with Hirsch Capital Corp. Hirsch Capital Corp. has an ownership
      interest in Apro Media and Hyundai Syscomm, and therefore has an indirect
      ownership interest in MSGI. None of the sales related to Hirsch Group fall
      under
      the terms of the Apro or Hyundai sub contract agreements and therefore neither
      of these companies had any earnings under those sub contract agreements for
      these transactions.





12.
      COMMITMENTS AND CONTINGENCIES:





*Operating
      Leases* :





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





Future
      minimum rental commitments under all leases as of June 30, 2008 is approximately
      $20,400 for the year ended June 30, 2009. Rent expense was approximately
      $214,000 and $199,600 for fiscal years ended June 30, 2008 and 2007,
      respectively.




45





*Contingencies
      and Litigation* :





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





13.
      PREFERRED STOCK:




Series
      H Convertible Preferred Shares and Put Options




On
      January 10, 2008, the Company entered into a Preferred Stock Agreement
      Transaction with certain institutional investors (the Buyers), which consisted
      of a Series H Preferred Stock, warrants and a put option agreement. The Company
      received proceeds of $5 million, of which a portion was used to make a
      significant investment in Current Technology Corporation (see Note
      4).





The
      Company issued 5,000,000 shares of the Series H Convertible Preferred Stock,
      par
      value $0.01 per share. The preferred stock shall rank on a pari passu basis
      with
      the holders of the common stock in event of a liquidation, therefore there
      is no
      liquidation preference to the preferred stockholders. The preferred stock is
      not
      entitled to any dividends. The preferred stock is convertible at the holder’s
      election into common stock at a conversion rate of $1.00 per share.





The
      Company also issued warrants to purchase 5,000,000 shares of common stock at
      an
      exercise price of $2.50 per share. The Warrants are immediately exercisable
      and
      provide for a cashless exercise option for the period while each share of Common
      Stock issuable upon exercise of the Warrants is not registered for resale with
      the SEC or such registration statement is not available for resale. The Warrants
      expire five years following the date of issuance.





The
      conversion price of the preferred stock and the warrant exercise price are
      both
      subject to an anti-dilution adjustment in the event that the Company issues
      or
      is deemed to have issued certain securities at a price lower than the applicable
      conversion or exercise price. Conversion of the preferred stock and exercise
      of
      the warrant is limited if the holder would beneficially own in excess of 4.99%
      of the shares of common stock outstanding.





Concurrently,
      the Company entered into the five-year Put Option Agreement with the Buyers
      pursuant to which the Buyers may compel the Company to purchase up to 5 million
      common shares (or equivalent preferred shares) at an initial put price per
      share
      of $1.20 which is in effect beginning July 10, 2008 through January 10, 2009.
      At
      each January anniversary date of the agreement, the put price increases $0.20
      over the prior year put price until the put price is $2.00 in the last year
      of
      the put option agreement. The Buyers cannot exercise the options under the
      Put
      Option agreement until July 10, 2008. The Buyers are initially limited to a
      Maximum Eligible Amount, as defined in the agreement, of shares that can be
      put
      which is initially 1/6 of the total 5 million shares, which increases by 1/6
      on
      each monthly anniversary. The put option agreement also contains a put
      termination price which is initially set at $2.00 for the period of July 10,
      2008 through January 10, 2009 and then increases by approximately $0.33 for
      each
      anniversary year of the contract until it reaches $3.33 at the end of the
      contract. There are also certain other limitations, as defined within the
      agreement.





The
      Put
      Price may be paid by the Company in shares of Common Stock or at the Company’s
      election in cash or in a combination of cash and Common Stock. However, there
      are certain limitations and restrictions within the agreement that may limit
      the
      Company’s option to pay the shares in Common Stock and may at that point require
      cash payment. Payments made in common stock are based upon 75% of the weighted
      average stock price as defined in the agreement.





As
      part
      of the $5 million in proceeds received for this Securities Purchase Agreement,
      $1,800,000 is being designated as restricted cash to be held in a secured
      Blocked Control Account in order to collateralize the put option agreement
      and
      this account may be drawn upon by a Buyer exercising its rights under the put
      option agreement.




46





The
      put
      option agreement was accounted for as a liability under guidance from SFAS
      150,
“Accounting for Certain Hybrid Financial Instruments with Characteristics of
      both Liabilities and Equity.” The Company had to allocate the proceeds between
      the put option and the preferred stock, and determined that the entire proceeds
      should be first allocated to the liability instrument. The initial fair value
      calculated at January 10, 2008 for the put option agreement was $5,800,000.
      The
      liability is adjusted to fair value for each reporting period and the fair
      value
      at June 30, 2008 was $6,550,000. The entire $5,000,000 in proceeds was allocated
      to the put option agreement and the additional increase in fair value of
      $1,550,000 through June 30, 2008 was recorded as an expense for the year ended
      June 30, 2008. Fair value for the put options was calculated using the following
      assumptions as of January 10, 2008 and June 30, 2008:





January 10, 2008
            
            June 30, 2008Expected
                term (years)
            
            
            2.50
            
            
            2.00Expected
                put option price
            
            $
            1.60
            
            $
            1.60Dividend
                yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            135
            %
            
            153
            %Risk-free
                interest rate
            
            
            2.725
            %
            
            2.630
            %Put
                option fair value per share
            
            $
            1.16
            
            $
            1.31





If
      the
      buyers were to put the entire 5,000,000 common shares at the end of the
      five-year term of the put option agreement, at the put option price of $2.00
      per
      share, the maximum amount the Company would need to pay in cash would be $10
      million. If this same amount were to be paid entirely in stock, the maximum
      amount of shares that would be payable, based upon 75% of the June 30, 2008
      market price would be approximately 31,007,800 shares.





Midtown
      Partners & Co. LLC was engaged by the Company as its placement agent for the
      Preferred Stock Transaction and received cash compensation of $160,000. The
      placement agent fee was recorded as a deferred financing cost and is being
      amortized over the five year term of the put options.





On
      August
      22, 2008, the Company entered into an Securities Exchange Agreement with the
      holders of the Series H Convertible Preferred Shares and Put Options. See Note
      18 - Subsequent Events. The effect of this transaction was to fully cancel
      and
      redeem the Series H Preferred Stock, certain warrants and the Put Option
      agreements in exchange for other securities issued.




Series
      F:





The
      holders of Series F Preferred Stock were entitled to receive cumulative
      dividends at the rate of six percent (6%) payable in additional shares of common
      stock of the Company, based on the average closing price per share of the
      Company's common stock for the ten (10) consecutive trading days prior to the
      payment of any dividend. As of December 31, 2006, all of the outstanding shares
      of Series F Preferred Stock have been converted into shares of common stock
      however the Company had $305,024 of undeclared but accumulated dividends at
      June
      30, 2007. These undeclared dividends may be paid to the former holders of Series
      F Preferred Stock in additional shares of the Company’s common stock, at the
      election of the Company, and as declared by the Board of Directors.




47




14.
      COMMON STOCK, STOCK OPTIONS, AND WARRANTS:




*Common
      Stock Transactions:*




During
      the period of February 2008 through June 2008, the Company issued 2,153,597
      shares of common stock to an institutional investor as a result of the
      conversion of principal and interest related to the 8% convertible debentures.
      These conversions resulted in a reduction of principal in the amount of
      $1,000,000 and the reduction of accrued interest in the amount of
      $76,798.





During
      the months of May and June 2008, the company issued 520,000 shares of common
      stock to a certain lender in connection with an addendum to the December 2007
      convertible term notes.





During
      the months of July, August and October 2007, the holders of the 8% Notes and
      $1,000,000 of the December 2006 6% Notes elected to convert all remaining
      amounts of principal and accrued interest into shares of common stock of the
      Company under the provisions of the notes. (see Notes 5 and 6). In connection
      with the conversion, the Company issued 7,957,532 shares of common stock.





During
      March 2008, the Company issued 300,000 shares of common stock to an investor
      relations firm. The Company recorded an expense of $204,000 based on the fair
      value of the stock on the date of issuance.





During
      the year ended June 30, 2008, the Company issued 91,965 shares to members of
      our
      Board of Directors for payment of amounts owed for services. The Company
      recorded an expense of $193,129 based on the fair value of the stock on date
      of
      issuance in fiscal 2008.





Per
      the
      terms of the sub-contract agreement with Apro, the Company is to compensate
      Apro
      with 3,000,000 shares of the Company’s common stock when the sub-contract
      transactions result in $10.0 million of GAAP recognized revenue for the Company.
      During the year ended June 30, 2008 the Company recognized approximately $3.8
      million in revenues resulting from activities under the sub-contract agreement.
      In December 2007, the Company issued 1,000,000 shares of common stock to Apro
      for that agreement. The Company computed a fair value for a pro rata share
      of
      the remaining shares to be issued under that agreement, which was $62,336 at
      June 30, 2008 and reflected as a liability. The total expense for the year
      ended
      June 30, 2008 related to shares both issued and issuable to Apro was $1,052,336.
      This liability will be re-measured at each period end, until all shares are
      issued.





During
      May 2007, the Company issued 100,000 shares of common stock to an officer of
      the
      Company as a bonus, resulting in a non-cash compensation charge of $210,000.
      In
      addition, the Company approved the issuance of 100,000 shares of common stock
      to
      the officer at the end of one year and an additional 100,000 shares of common
      stock to the officer at the end of two years. The Company has accounted for
      this
      additional stock as a liability, under SFAS 123R, in the amount of $68,083
      and
      $37,500 as of June 30, 2008 and 2007, respectively. Compensation expense for
      these additional shares was approximately $30,500 and $37,500 for the years
      ended June 30, 2008 and 2007, respectively.





During
      the period of January through March 2007, the Company issued 2,758,400 shares
      of
      common stock from the conversion of 150 shares of Series G preferred stock.
      At
      June 30, 2007, no shares of the Series G Preferred stock remained
      outstanding.





During
      the year ended June 30, 2007, 4,031 shares of Series F Preferred Stock was
      converted to 198,470 shares of common stock. At June 30, 2007, no shares of
      the
      Series F Preferred stock remained outstanding.





In
      March,
      2007, the Company issued 1,318,088 shares of common stock in connection with
      the
      settlement of promissory notes issued to vFinance. This resulted in the full
      elimination of this debt of approximately $989,000. In connection with this
      transaction, additional interest expense of $197,700 was recognized in fiscal
      2007.




48




During
        October 2006, the Company issued 865,000 shares of common stock to a designee
        of
        Hyundai Syscomm Corp. See Note 3 for full details of transaction.
 
 During
        July 2006, the Company issued 25,000 shares of common stock to an officer
        as a
        bonus, resulting in a non-cash compensation expense of $61,000 in fiscal
        2007.
  During
        fiscal 2007, the Company issued 850,000 shares to CODA as payment of amounts
        due
        (See Note 7). In connection with this transaction, CODA assumed certain
        development and operational obligations of Innalogic, and entered into license
        agreement for the Innalogic technology. The Company recognized a loss of
        $811,918 on the transaction, representing the excess fair value of the shares
        issued as compared to the obligations due CODA during fiscal 2007.
  *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 1999 Plan is administered by the compensation committee
        of
        the Board of Directors which has the authority to determine which officers
        and
        key employees of the Company will be granted options, the option price and
        vesting of the options. In no event shall an option expire more than ten
        years
        after the date of grant.
 
 The
        Company accounts for employee stock-based compensation under SFAS 123R,
“Share-Based Payment”, which requires all share−based payments to employees,
        including grants of employee stock options, to be recognized in the financial
        statement at their fair values. The expense is being recognized on a
        straight−line basis over the vesting period of the options. 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.
 
 The
        stock
        based compensation expense related to stock options for the years ended June
        30,
        2008 and 2007 was approximately $486,000, each year. The non-cash compensation
        expense is included in salaries and benefits as a component of operating
        costs
        on the statements of operations. As of June 30, 2008, non-vested compensation
        cost that has not yet been recognized was approximately $226,000, which is
        expected to be recognized over a weighted average period of approximately
        0.5
        years.
  The
        fair
        value of each stock option is estimated on the date of grant using the
        Black-Scholes option pricing model. There were no stock option grants during
        the
        fiscal year ended June 30, 2008. The following assumptions were used for
        grants
        for fiscal year ended June 30, 2007.
 
 2007Expected
                  term (years)
              
              
              6.00Dividend
                  yield
              
              
              NoneExpected
                  Volatility
              
              
              140%
                  - 142
              %Risk-free
                  interest rate
              
              
              4.75
              %Forfeiture
                  rate
              
              
              0
              %Weighted
                  average fair valueOptions
                  issued equal to market value
              
              $
              1.39Options
                  issued below market value
              
              $
              1.98
 
 Expected
        volatility is based solely on historical volatility of our common stock over
        the
        period commensurate with the expected term of the stock options. We rely
        solely
        on historical volatility because our traded options do not have sufficient
        trading activity to allow us to incorporate the mean historical implied
        volatility from traded options into our estimate of future volatility. The
        expected term calculation for stock options is based on the “simplified” method
        described in Staff Accounting Bulletin No. 107, Share−Based Payment. The
        risk−free interest rate is based on the U.S. Treasury yield in effect at the
        time of grant for an instrument with a maturity that is commensurate with
        the
        expected term of the stock options. The dividend yield of zero is based on
        the
        fact that we have never paid cash dividends on our common stock, and we have
        no
        present intention to pay cash dividends. The forfeiture rate is estimated
        at 0%
        for options granted to directors and officers.
  49
  The
        following summarizes the stock option transactions under the 1999 Plan for
        the
        two years ended June 30, 2008:
 
 AggregateNumber
              
              Exercise Price
              
              Weighted Average
              
              Intrinsicof Shares
              
              Per Share
              
              Exercise Price
              
              ValueOutstanding
                  at June 30, 2006
              
              
              520,000
              
              $
              1.50
                  to $7.00
              
              $
              2.40
              
              $
              466,550Granted
              
              
              475,000
              
              $
              1.40
                  to $1.50
              
              $
              1.49
              
              $
              2,500Exercised
              
              
              —Cancelled
              
              
              10,000
              
              $
              4.45
              
              $
              4.45Outstanding
                  at June 30, 2007
              
              
              985,000
              
              $
              1.40
                  to $7.00
              
              $
              1.94
              
              
              4,650Granted
              
              
              —Exercised
              
              
              —Cancelled
              
              
              —Outstanding
                  at June 30, 2008
              
              
              985,000
              
              $
              1.40
                  to $7.00
              
              $
              1.94
              
              $
              -0-
 
 In
        addition to the 1999 Plan, the Company has option agreements with current
        directors of the Company. The following summarizes transactions for the two
        years ended June 30, 2008:
 
 Number
              
              Exercise Price
              
              Weighted Average
              
              Aggregateof Shares
              
              Per Share
              
              Exercise Price
              
              IntrinsicOutstanding
                  at June 30, 2006
              
              
              40,000
              
              $
              1.50
                  to $4.13
              
              $
              2.81
              
              $
              21,700Granted
              
              
              —Exercised
              
              
              —Cancelled
              
              
              —Outstanding
                  at June 30, 2007
              
              
              40,000
              
              $
              1.50
                  to $4.13
              
              $
              2.81
              
              $
              100Granted
              
              
              —Exercised
              
              
              —Cancelled
              
              
              —Outstanding
                  at June 30, 2008
              
              
              40,000
              
              $
              1.50
                  to $4.13
              
              $
              2.81
              
              $
              -0-
  50
  As
        of
        June 30, 2008, 858,329 options are exercisable, with no aggregate intrinsic
        value and a weighted average contractual life of 7.0 years. The weighted
        average
        exercise price of all outstanding options is $1.98 and the weighted average
        remaining contractual life is 7.0 years. At June 30, 2008, 140,122 options
        were
        available for grant.
 
 Warrants:
 The
        following summarizes the warrant transactions for the two years ended June
        30,
        2008:
 
 Number
              
              Exerciseof Shares
              
              PriceOutstanding at June
                  30, 2006
              
              
              2,338,731
              
              $
              1.00
                  to $8.25Granted
              
              
              7,317,855
              
              $
              1.00
                  to $2.00Exercised
              
              
              -Cancelled/
                  Expired
              
              
              270,000
              
              $
              6.00Outstanding
                  at June 30, 2007
              
              
              9,386,586
              
              $
              1.00
                  to $8.25Granted
              
              
              11,341,856
              
              $
              0.50
                  to $2.50Exercised
              
              
              -Cancelled/
                  Expired
              
              
              30,000
              
              $
              6.00Outstanding
                  at June 30, 2008
              
              
              20,698,442
              
              $
              0.50
                  to $8.25
 
 All
        warrants are currently exercisable.
 
 Warrants
        issued for various transactions during fiscal 2008 were fair valued, at each
        warrant issuance, using the Black Scholes model. The following range of key
        assumptions were used in the Black-Scholes model for the warrants granted
        for
        the year ended June 30, 2008:
 
 Expected
                  term (years)
              
              
              2.50
                  - 3Dividend
                  yield
              
              
              0
              %Expected
                  volatility
              
              
              128%
                  - 136
              %Risk-Free
                  interest rate
              
              
              1.8%
                  - 3.4
              %Weighted
                  average fair value
              
              $
              0.29
                  - $0.82
  In
        January 2008, the Company issued 5,000,000 five-year warrants with an exercise
        price of $2.50 in connection with the issuance of the Series H convertible
        preferred stock. (See Note 13).
 
 In
        February 2008, 600,000 five-year warrants with an exercise price of $0.50
        were
        issued to former investor relations firms as partial compensation for services
        performed. A fair market value of $332,421 for these warrants was calculated
        using the Black-Scholes method and was expensed to investor relations expenses
        during fiscal 2008.
 
 On
        May
        10, 2007, the Company entered into an agreement with Apro Media, which provides
        for the issuance of up to 12,750,000 warrants to purchase shares of common
        stock
        in exchange for a maximum of $90,000,000 in revenue, which is to be realized
        by
        the Company over a maximum period of seven years. The vesting of the warrant
        will take place based on 300,000 shares for every $1 million in revenue realized
        by the Company. Such warrants are considered contingent and are not reflected
        above, and therefore, the Company will not recognize the accounting impact
        of
        these warrants until the vesting event occurs. As of June 30, 2008, no expense
        has been recognized as none of the contingencies have been met for the warrant
        based upon the revenue levels to date. However, certain contingencies for
        issuance of common stock of MSGI have been recognized as of June 30, 2008
        (see
        Note 3).
  51
  On
        February 7, 2007, the Company issued to Hyundai Syscomm Corp. a warrant to
        purchase a maximum of 24,000,000 shares of common stock in exchange for a
        maximum of $80,000,000 in revenue, which was to be realized by the Company
        over
        a maximum period of four years. The vesting of the warrant will take place
        quarterly over the four−year period based on 300,000 shares for every $1 million
        in revenue realized by the Company. The revenue is subject to the
        sub−contracting agreement between Hyundai and the Company dated October 25, 2006
        (See Note 3). Such warrants are considered contingent and are not reflected
        above, and therefore, the Company will not recognize the accounting impact
        of
        these warrants until the vesting event occurs. As of June 30, 2008, no expense
        has been recognized.
 
 In
        December 2006, the Company adjusted the exercise price of certain previously
        issued warrants to certain lenders and placement agents. This adjustment
        was
        mandated by certain anti−dilution and exercise price protection provisions in
        the previously issued warrants agreements. The Company used the Black-Scholes
        model to value the modification and recorded an expense of $250,000 in fiscal
        2007.
 
 15.
        INCOME TAXES:
 
 Loss
        before income taxes was from continuing operations and 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 30,2008
              
              2007Deferred
                  tax assets:Net
                  operating loss carry-forwards
              
              $
              40,676,558
              
              $
              42,959,480Compensation
                  on option grants
              
              
              1,318,503
              
              
              1,109,708Amortization
                  of intangibles
              
              
              974,138
              
              
              94,776Capital
                  loss carryfoward
              
              
              2,762,739
              
              
              2,762,739Other
              
              
              576,726
              
              
              119,471Total
                  deferred tax assets
              
              
              46,308,664
              
              
              47,046,174Deferred
                  tax liabilities:Discount
                  on convertible notes
              
              
              (2,579,907
              )
              
              (3,661,414
              )Total
                  deferred tax liabilities
              
              
              (2,579,907
              )
              
              (3,661,414
              )Valuation
                  allowance
              
              
              (43,728,757
              )
              
              (43,384,760
              )Net
                  deferred tax assets
              
              $
              -
              
              $
              -
 
 The
        difference between the Company’s U.S. federal statutory rate of 34%, 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 which reduces the benefit by 16%. In
        addition, the expected benefit is reduced 19% by non-deductible interest
        related
        to the convertible debt and 3% by other non-deductible expenses.  The
        recorded income tax expense reflects domestic state income
        taxes.
  52
  The
        Company has a U.S. federal net operating loss carry forward of approximately
        $105,000,000 available, which expires from 2012 through 2028. 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 the net operating loss carry forwards approximately
        $61,000,000 is the result of deductions related to the exercise of non-qualified
        stock options in previous years. The realization of the 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.
 
 On
        July
        1, 2007, the Company adopted the provisions of Financial Standards Accounting
        Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
        interpretation of SFAS 109” (FIN 48). FIN 48 provides recognition criteria and a
        related measurement model for uncertain tax positions taken or expected to
        be
        taken in income tax returns. FIN 48 requires that a position taken or expected
        to be taken in a tax return be recognized in the financial statements when
        it is
        more likely than not that the position would be sustained upon examination
        by
        tax authorities. Tax positions that meet the more likely than not threshold
        are
        then measured using a probability weighted approach recognizing the largest
        amount of tax benefit that is greater than 50% likely of being realized upon
        ultimate settlement.
 
 The
        Company believes that there is no significant financial statement impact
        as a
        result of FIN 48 for the year ended June 30, 2008. No financial statement
        benefit has been taken for the Company’s net operating loss carryforwards, so
        while no study related to Internal Revenue Code Section 382 has been performed
        with regard to the MSGI’s net operating losses, there would be no financial
        statement impact regardless of the results of such a study. A formal Section
        382
        study will be undertaken when the Company expects to begin utilizing its
        net
        operating losses.
 
 16.
        EMPLOYEE RETIREMENT SAVINGS 401(k) PLANS:
 The
        Company sponsors a tax deferred retirement savings plan (401(k) plan) which
        permits eligible employees to contribute varying percentages of their
        compensation up to the annual limit allowed by the Internal Revenue
        Service.
 
 The
        Company currently matches the 50% of the first $3,000 of employee contribution
        up to a maximum of $1,500 per employee. There were no employee contributions
        to
        the plan or matching contributions made during the fiscal years ended June
        30,
        2008 or 2007. The plan also provided for discretionary Company contributions.
        There were no discretionary contributions in fiscal years 2008 or 2007.
 
 17.
        SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
        ACTIVITIES:
 
 For
        the
        year ended June 30, 2008:
 
 ·
              Conversion
                  of $4,571,958 in convertible debt principal and $667,198 of interest
                  into
                  10,111,129 shares of common stock.
 
 ·
              Issuance
                  of 1,000,000 shares of common stock to Apro Media Corp pursuant
                  to
                  sub-contractor agreement, with a fair value of
                  $990,000.
 
 ·
              Issuance
                  of 91,965 shares of common stock to members of the Board of Directors
                  as
                  payment for services, with a fair value of
                  $193,129.
  53
 
 ·
              Additional
                  debt discount of $1,032,408 related to anti-dilution provision
                  of
                  conversion feature option on Notes.
 
 ·
              Deferred
                  financing fees and warrant discount related to new term debt, with
                  a value
                  of $182,992
 
 For
        the
        year ended June 30, 2007:
 ·
              Liabilities
                  in the amount of $2,758,237 were paid with approximately 150 shares
                  of
                  Series G Preferred Stock.
 
 ·
              Approximately
                  150 shares of Series G preferred stock was converted into 2,758,400
                  shares
                  of common stock. Approximately 4,031 shares of Series F preferred
                  stock
                  was converted into 198,470 shares of common
                  stock.
 
 ·
              The
                  Company recorded an aggregate discount of $9,396,735 in connection
                  with
                  the 8% and 6% Convertible Notes payable, which represents the beneficial
                  conversion feature and allocation of fair value of the
                  warrants.
 
 ·
              In
                  connection with the 8% and 6% Convertible Notes financings, the
                  Company
                  issued 732,142 warrants to the placement agents with a fair market
                  value
                  of $732,734.
 
 ·
              The
                  Company issued 1,318,088 shares of common stock in payment of the
                  vFinance
                  Notes payable in the amount of $988,568 for principal and interest.
                  This
                  transaction resulted in an additional $197,713 of interest expense
                  which
                  represented the excess fair value of the common shares over the
                  debt
                  payment due.
 
 ·
              Certain
                  warrants issued to vFinance were repriced to an exercise price
                  of $1.00
                  due to anti-dilution provisions and as a result of the issuance
                  of the 6%
                  Convertible Notes. This resulted in an additional discount to the
                  debt of
                  $249,933 as well as additional financing charges of
                  $35,739.
 
 18.
        SUBSEQUENT EVENTS:
 
 Securities
        Exchange Agreement
 On
        August
        22, 2008, the Company entered into a Securities Exchange Agreement with Enable
        Growth Partners, LP (Enable), an existing institutional investor of MSGI
        and as
        of that date, holder of 100% of MSGI’s Series H Convertible Preferred Stock
        pursuant to which MSGI shall retire all outstanding shares of the Series
        H
        Preferred Stock, 5,000,000 warrants issued in connection with the preferred
        stock, exercisable for shares of common stock of MSGI and put options
        exercisable for 5,000,000 shares of Common Stock (see Note 13) . Enable recently
        acquired the Series H Preferred Stock, Warrants and Put Options pursuant
        to a
        private transaction with third parties.
  In
        exchange for the retirement and/or redemption of the above securities, MSGI
        issued Enable an 8% Secured Convertible Debenture due May 21, 2010 in the
        principal amount of $4,000,000, a $1,000,000 cash redemption payment and
        transferred to Enable warrants to purchase up to, in the aggregate, 20,000,000
        shares of the common stock of Current Technology Corporation. The redemption
        payment was paid by MSGI from the proceeds of the restricted cash accounts
        maintained in connection with the original issuance of the Series H Preferred
        Stock. The balance of the funds held in the restricted cash accounts of $800,000
        has been released to MSGI for working capital purposes. The Company has not
        yet
        determined any gain or loss in connection with this
        transaction.
  In
        connection with the Securities Exchange Agreement and the Debenture, MSGI
        and
        its subsidiaries entered into a Security Agreement and a Subsidiary Guarantee
        Agreement, whereby MSGI and the subsidiaries granted Enable a first priority
        security interest in certain property of MSGI and each of the Subsidiaries.
  54


Convertible
      Notes Payable





Subsequent
      to June 30, 2008, the Company executed a series of Amendments to the Term Notes
      (see Note 7), which currently extend the notes to a maturity date of December
      31, 2008 on three out of four of the Notes. The maturity date of the fourth
      note
      is currently September 30, 2008. The Company is currently in discussions with
      the fourth lender regarding a new addendum to its Note which would revise the
      maturity date to December 31, 2008. Certain amendments called for the Company
      to
      issue five-year warrants to purchase shares of common stock of the Company
      to
      certain group lenders each week and continuing for each week that the principal
      balance of the term notes remains outstanding. These warrants are to be issued
      with an exercise price set at the greater of market value on the date of
      issuance or $0.50 per share. In addition, other group lenders received shares
      of
      common stock of the Company instead of warrants under the Amendments.





Subsequent
      to the year ended June 30, 2008 and through September 30, 2008, the Company
      has
      issued approximately 378,000 additional warrants and 906,571 shares of common
      stock to these note holders under the terms of the Addendums.





An
      additional amendment effective October 1, 2008 terminated all warrants to
      purchase common stock issued under previous addendum agreements and, in their
      place, issued new warrants and additional shares of common stock. At execution
      of the October addendums, the Company issued 378,000 shares of common stock
      and
      warrants to purchase an additional 378,000 shares of common stock at an exercise
      price of $0.50. The Company shall issue up to an additional 252,000 shares
      of
      common stock and warrants to purchase an additional 252,000 shares of common
      stock, at
      an
      exercise price of the greater of $0.50 or market value on the date of
      grant, should
      these Notes remaining outstanding until December 31, 2008





Apro
      sub-contract agreement





On
      August
      22, 2008 MSGI negotiated an acceleration of both its sub-contracting agreements
      with Hyundai and Apro, through Hirsch Capital Corp, the San Francisco based
      private equity firm operating Hyundai Syscomm and Apro Media. Under the
      accelerated terms, MSGI would build up to a platform expecting to generate
      approximately $100 million in expected annual gross revenue supporting several
      of the largest commercial businesses in Korea (see Daewoo sub-contract below).
      As part of this expansion MSGI will become the beneficiary of various technology
      transfers. These new assets are expected to include Hi-Definition Video
      Surveillance systems, Hi-Definition DVR systems and emerging RFID Technology.
      Based upon the binding commitment to expand MSGI to a run rate of $100 million
      in annual gross revenue, Hirsch Capital will have the right to earn shares
      of
      MSGI as indicated under the Apro sub-contracting and distribution agreement
      referenced above.





Daewoo
      /
      Hankook relationships





On
      September 17, 2008, the Company executed a new contract with Hankook
      Semiconductor, a division of Samsung Electronics, to manufacture and supply
      advanced technology displays and other electronic products for commercial
      security purposes for Daewoo International. Under the terms of the new contract,
      MSGI will subcontract to Hankook the right to manufacture certain Hi-definition
      display systems, which will be supplied to Daewoo for its existing customers.
      MSGI has similarly entered into an agreement to supply Daewoo with these
      products based upon Daewoo specifications from its customers. Under the terms
      of
      this new agreement, the company is anticipating annual gross revenue of
      approximately $100 million, as previously disclosed in the company’s August 22,
      2008 announcement above, related to the Apro sub-contract agreement. There
      have
      not yet been any business transactions under this new contract, and there can
      be
      no assurances that this level of revenues can be attained.


55





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





Not
      applicable.





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





**Disclosure
      Controls and Procedures**





An
      evaluation of the effectiveness of our disclosure controls and procedures (as
      defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
      1934) was carried out by us under the supervision and with the participation
      of
      our chief executive officer (CEO), and our principal financial officer. Based
      upon that evaluation, they concluded that as of June 30, 2008, our disclosure
      controls and procedures were not effective to ensure (i) that information we
      are
      required to disclose in reports that we file or submit under the Securities
      Exchange Act of 1934 is recorded, processed, summarized and reported within
      the
      time periods specified in the SEC’s rules and forms and (ii) that such
      information is accumulated and communicated to management in order to allow
      timely decisions regarding required disclosure.





On
      November 12, 2008, our independent registered public accounting firm Amper,
      Politziner & Mattia, LLP (AP&M), informed us and our Audit Committee of
      the Board of Directors that they had discovered conditions which they deemed
      to
      be material weaknesses in our internal controls (as defined by standards
      established by the Public Company Accounting Oversight Board) summarized as
      follows:





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





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





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





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





·
            Documentation
                (and retention thereof) of certain transactions was not completed
                and
                analyzed on a timely basis, including related party transactions
                and
                revenue recognition transactions. Further, the Company should undertake
                a
                more diligent process of understanding specific business relationships
                and
                milestones required in each transaction with its referral partners
                and
                customers to reduce the potential impact of delays in payment and
                improper
                recognition of revenue.





·
            The
                Company has not filed or paid amounts due under its payroll and other
                non-income tax returns and other reporting requirements for the past
                several years. Further, the Company has made informal, inconsistent
                and
                periodic payments to its officers.





·
            The
                Company does not have a procedure to ensure the timely issuance of
                equity
                securities upon Board or contractual approval.





·
            Material
                weaknesses identified in the past have not been
                remediated.


56





**Management’s
      Report on Internal Control over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting as defined in Rule13a-15(f) of the Securities
      Exchange Act of 1934. Our internal control system was designed to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial reporting and the preparation of financial statements
      for external purposes, in accordance with generally accepted accounting
      principles. Because of its inherent limitations, internal control over financial
      reporting may not prevent or detect misstatements. Also, projections of any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or that the
      degree of compliance with the policies or procedures may deteriorate.





Our
      chief
      executive officer and principal financial officer conducted an evaluation of
      the
      effectiveness of internal control over financial reporting using the criteria
      set forth by the Committee of Sponsoring Organizations of the Treadway
      Commission in Internal Control - Integrated Framework. As a result of this
      assessment, management identified material weaknesses in internal control over
      financial reporting.





A
      material weakness is a control deficiency, or a combination of deficiencies,
      in
      internal control over financial reporting such that there is a reasonable
      possibility that a material misstatement of our annual or interim financial
      statements will not be prevented or detected on a timely basis.





Management
      has identified several material weaknesses, which are included in the list
      above
      of material weaknesses reported by our independent registered public accounting
      firm.





Based
      on
      its evaluation and due to the material weaknesses noted above, our management
      concluded that our internal control over financial reporting was not effective
      as of June 30, 2008.





This
      Annual Report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permit us to provide only management’s report in this Annual
      Report.





Remediation
      of Material Weaknesses




The
      Company intends to take action to hire additional staff, implement stronger
      financial reporting systems and software and develop the adequate policies
      and
      procedures with said enhanced staff to ensure all noted material weaknesses
      are
      addressed and resolved. The Company has also retained a third party consulting
      services to assist in developing and maintaining adequate internal control
      over
      financial reporting. However, due to the Company’s cash flow constraints, the
      timing of implementing the above has not yet been determined.





**Changes
      in Internal Control Over Financial Reporting**





During
      our last fiscal quarter of 2008, there was no change in our internal control
      over financial reporting that has materially affected, or is reasonably likely
      to materially affect, our internal control over financial
      reporting.





**Item
      8B – Other Information**





None


57





**PART
      III**




Item
      9 –
Directors, Executive Officers, Promoters, Control Persons and Corporate
      Governance: Compliance With Section


16(a)
      of
      the Exchange Act




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





Name
            
            Age
            
            Positions
                and Offices, if any, Held
            
            Director
                SinceJ.
                Jeremy Barbera
            
            51
            
            Chairman
                of the Board of Directors
              and
                Chief Executive Officer
            
            1996Richard
                J. Mitchell, III
            
            49
            
            Chief
                Accounting Officer, Treasurer
              and
                SecretaryJoseph
                C. Peters
            
            51
            
            President
                and Director
            
            2004John
                T. Gerlach
            
            76
            
            Director
            
            1997Seymour
                Jones
            
            77
            
            Director
            
            1996David
                C. Stoller
            
            58
            
            Director
            
            2004





Mr.
      Barbera has been Chairman of the Board and Chief Executive Officer of the
      Company and its predecessor businesses since April 1997, and has served as
      Director and officer since October 1996 when MSGI Direct was acquired in an
      exchange of stock. He founded MSGI Direct in 1987, which was twice named to
      the
      Inc. 500 list of the fastest growing private companies in America. Mr. Barbera
      pioneered the practice of database marketing for the live entertainment industry
      in the 1980’s, achieving nearly one hundred percent market share in New York.
      Under his leadership, MSGI originated the business of web-based ticketing in
      1995 and became the dominant services provider in every major entertainment
      market in North America. Their principal areas of concentration also included:
      financial services, fundraising and publishing .
      MSGI
      was named one of the 50 fastest growing public companies in both 2001 and 2002
      by Crains New York Business. In April 2004, Mr. Barbera completed the
      divestiture of the legacy businesses and re-birthed the company in the homeland
      security industry as MSGI Security Solutions, Inc. Prior to founding MSGI
      Direct, Mr. Barbera was a research scientist based at NASA/Goddard Space Flight
      Center, working on such groundbreaking missions as Pioneer Venus and the Global
      Atmospheric Research Program. Mr. Barbera has more than 20 years of experience
      in the areas of technology, marketing and database management services. Mr.
      Barbera is a Physicist educated at New York University and the Massachusetts
      Institute of Technology.





Mr.
      Mitchell has been the Company's Chief Accounting Officer and Treasurer since
      December 2003. Mr. Mitchell was appointed as Secretary by the Board of Directors
      of the Company in December 2006. Mr. Mitchell has been with the Company since
      May of 1999, when the former CMG Direct Corp. was acquired from CMGi, Inc.
      Mr.
      Mitchell has since served in a variety of positions for MSGI, including VP,
      Finance and Controller of CMG Direct Corp., VP, Finance for MKTG Services,
      Inc.
      and Senior V.P. and General Manager of MKTG Services Boston, Inc. Prior to
      joining the MSGI team, Mr. Mitchell served as a senior financial consultant
      to
      CMGi. During his tenure with CMGi, he participated on the Lycos IPO team,
      assisting in preparing Lycos for it's highly successful initial offering in
      April 1996. As a consultant to CMGi, Mr. Mitchell was also involved in corporate
      accounting and finance, including involvement in the formation of companies
      such
      as Navisite and Engage Technologies. In addition, Mr. Mitchell participated
      in
      the mergers and acquisition team of SalesLink, a wholly owned subsidiary of
      CMGi,where he assisted in the post-acquisition financial reporting systems
      migration and financial management of Pacific Link, a fulfillment operation
      located in Newark, CA. Mr. Mitchell performed a variety of financial management
      and accounting functions for Wheelabrator Technologies Inc., a $1.5 billion
      environmental services company, from 1987 through 1994. Those responsibilities
      included Northeast Regional Controller for the Wheelabrator Clean Water Corp.
      division, Corporate Director of Internal Audit and Corporate Accounting Manager.
      Mr. Mitchell graduated from the University of Massachusetts at Lowell with
      a
      Bachelor of Science degree in Accounting.


58




Mr.
      Peters has served as President of the Company since November 2004 and has served
      as a Director of the Company since April 2004. Mr. Peters served President
      George W. Bush as the Assistant Deputy Director for State and Local Affairs
      of
      the White House's Drug Policy Office - commonly referred to as the Drug Czar's
      Office. There his duties included supervision of the country's High Intensity
      Drug Trafficking Area (HIDTA) Program. Mr. Peters also served as the Drug Czar's
      Liaison to the White House Office of Homeland Security and Governor Tom Ridge.
      Previously, Mr. Peters joined the Clinton White House, to direct the country's
      26 HIDTA's, with an annual budget of a quarter billion dollars. Mr. Peters
      also
      represented the White House with police, prosecutors, governors, mayors and
      many
      non-governmental organizations. Mr. Peters began his career as a State
      prosecutor when he joined the Pennsylvania Attorney General's office in 1983.
      He
      later served as a Chief Deputy Attorney General of the Organized Crime Section,
      and in 1989 was named the first Executive Deputy Attorney General of the newly
      created Drug Law Division. In that capacity, Mr. Peters oversaw the activities
      of 56 operational drug task forces throughout the State, involving approximately
      760 local police departments with 4,500 law enforcement officers. Mr. Peters
      consults to national and international law enforcement organizations on
      narco-terrorism and related intelligence and prosecution issues. He is an
      associate member of the Pennsylvania District Attorney's Association and a
      member of the International Association of Chiefs of Police, where he sits
      on
      their Terrorism Committee. Mr. Peters has devoted his entire career to public
      service.




Mr.
      Gerlach has been a Director of
      the
      Company since December 1997. Mr. Gerlach is Chairman of the M&A Committee
      and a member of the Audit and Compensation Committees of the Board of Directors.
      He is currently Senior Executive Professor with the graduate business program
      and Associate Professor of Finance at Sacred Heart University in Fairfield,
      CT.
      Previously, Mr. Gerlach was a Director in Bear Stearns' corporate finance
      department, with responsibility for mergers and financial restructuring
      projects, President and Chief Operating Officer of Horn & Hardart and
      Founder and President of Consumer Growth Capital. Mr. Gerlach also serves as
      a
      director for Uno Restaurant Co., SAFE Inc., Cycergie (a French company), Akona
      Corp., and the Board of Regents at St. John's University in Collegeville, MN.
      Mr. Gerlach is also a member of an advisory board for Drexel University’s
      College of Business & Administration.




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




Mr.
      Stoller has served as a Director of the Company since March 2004, and is a
      member of the Audit Committee. Mr. Stoller has been involved in public and
      private finance for the last 20 years. Mr. Stoller began his professional career
      as an attorney. He was partner and co-head of global finance for Milbank, Tweed,
      Hadley & McCloy, LLP where he helped build one of the world's largest and
      most successful finance practices, participating personally in financings
      totaling more than $4 billion. At the end of 1992, Mr. Stoller joined
      Charterhouse Group International, a large New York City-based private equity
      firm, as chairman of its Environmental Capital Group. In 1993, Mr. Stoller,
      through the Charterhouse Environmental Group, launched American Disposal
      Services, an integrated waste management company that ultimately acquired and
      consolidated, with $34 million in equity capital, more than 70 waste management
      companies, located principally in the Midwest. American Disposal had a
      successful initial public offering in July 1996, and shortly afterward, Mr.
      Stoller, still chairman, became a general partner at Charterhouse and actively
      participated in raising $1 billion for Charterhouse's third private equity
      fund.
      American Disposal was sold in 1998 to Allied Waste for a price exceeding $1.3
      billion. In August of 1998, Mr. Stoller left Charterhouse to launch Americana
      Financial Services, raising over $25 million in private equity capital.
      Americana (now the American Wholesale Insurance Group) is currently one of
      the
      top five largest private wholesale insurance brokerages in the United States.
      In
      2002, Mr. Stoller launched TransLoad America LLC, which is principally in the
      business of transloading and transporting waste materials by rail, with an
      initial focus on the northeastern section of the United States. Mr. Stoller
      holds a B.A. from the University of Pennsylvania, an M.A. from the Graduate
      Faculty of the New School for Social Research, and a J.D. from Fordham
      University School of Law. He is also a graduate of the Harvard Business School
      Advanced Management Program.




Relationships
      and Interests in Proposals; Involvement in Certain Legal
      Proceedings




There
      are
      no family relationships among any of the directors or executive officers of
      MSGI
      Security Solutions, Inc. and no arrangements or understandings exist between
      any
      director or nominee and any other person pursuant to which such director or
      nominee was or is to be selected at the Company’s next annual meeting of
      stockholders. No director or officer is party to any corporate relevant legal
      proceeding.


59


Section
      16(A) Beneficial Ownership Reporting Compliance




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





Based
      solely on the Company's review of the copies of such forms it has received and
      written representations from certain reporting persons that they were not
      required to file reports on Form 5 for the fiscal year ended June 30, 2008,
      the
      Company believes that all its officers, directors and greater than ten percent
      beneficial owners complied with all filing requirements applicable to them
      with
      respect to transactions during the fiscal year ended June 30, 2008.





Code
      of
      Ethics





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





Board
      of
      Directors and Committee Information





The
      Board
      of Directors of MSGI Security Solutions, Inc. currently has two standing
      committees, the Audit Committee and the Compensation Committee. As described
      below, the entire Board of Directors acts with respect to nomination and
      corporate governance matters.





Audit
      Committee





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





Compensation
      Committee





The
      members of the Compensation Committee during fiscal year 2007 were Mr. Seymour
      Jones, Mr. Joseph Peters, and Mr. John Gerlach. Mr. Gerlach is Chairman of
      the
      Committee. Mr. Gerlach and Mr. Jones served as members of the Compensation
      Committee of the Company's Board of Directors during all of fiscal years 2006
      and 2007. Mr. Peters served as a member of the committee in fiscal year 2007.
      Mr. Peters was also an officer and employee of the Company during the fiscal
      year ended June 30, 2007.





Nomination
      Matters





The
      Board
      of Directors does not currently have a nominating committee or a committee
      performing similar functions. Given the size of the Company and the historic
      lack of director nominations by stockholders, the Board has determined that
      no
      such committee is necessary. Similarly, although the Company’s By-laws contain
      procedures for stockholder nominations, the Board has determined that adoption
      of a formal policy regarding the consideration of director candidates
      recommended by stockholders is not required. The Company intends to review
      periodically both whether a more formal policy regarding stockholder nominations
      should be adopted and whether a nominating committee should be established.
      Until such time as a nominating committee is established, the full Board, which
      includes two directors employed by the Company and therefore not “independent”
under applicable standards, will participate in the consideration of candidates.
      The Board does not utilize a nominating committee charter when performing the
      functions of such committee. The procedures for stockholder nominations and
      the
      desired qualifications of candidates, among other nominations matters, did
      not
      change during the 2008 fiscal year.


60





**Item
      10 - Executive Compensation:**





The
      following table provides certain information concerning compensation of the
      Company's Chief Executive Officer and any other executive officer of the Company
      who received compensation in excess of $100,000 during the fiscal year ended
      June 30, 2008 (the "Named Executive Officers"):





SUMMARY
      COMPENSATION TABLE





FiscalYear
            
            
            
            
            
            
            
            
            
            Non-Equity
            
            Non-qualifiedEnded
            
            Annual
            
            Annual
            
            Stock
            
            Option
            
            Incentive
            
            Deferred
            
            All OtherName and Principal
            
            June 30,
            
            Salary
            
            Bonus
            
            Awards
            
            Awards
            
            Compensation
            
            Compensation
            
            Compensation
            
            TotalPositionJ.
                Jeremy Barbera (1)
            
            
            2008
            
            $
            497,200
            
            
            —
            
            $
            30,600
            (4)
            $
            185,900
            (5)
            
            —
            
            
            —
            
            
            —
            
            $
            713,700Chairman
                of the Board and Chief Executive Officer
            
            
            2007
            
            
            387,500
            
            
            —
            
            
            247,500
            (4)
            
            188,800
            (5)
            
            —
            
            
            —
            
            
            1,162,600
            (9)
            
            1,986,400Joseph
                Peters (2)
            
            
            2008
            
            
            75,000
            
            
            —
            
            
            —
            
            
            86,300
            (7)
            
            —
            
            
            —
            
            
            —
            
            
            161,300President
                and Director
            
            
            2007
            
            
            100,000
            
            
            —
            
            
            61,000
            (6)
            
            119,600
            (7)
            
            —
            
            
            —
            
            
            —
            
            
            280,600Richard
                J. Mitchell III (3)
            
            
            2008
            
            
            125,000
            
            
            —
            
            
            —
            
            
            74,000
            (8)
            
            —
            
            
            —
            
            
            —
            
            
            199,000Chief
                Accounting Officer Treasurer and Secretary
            
            
            2007
            
            
            125,000
            
            
            —
            
            
            —
            
            
            14,500
            (8)
            
            —
            
            
            —
            
            
            25,000
            (10)
            
            164,500





(1)
      In
      February 2003, Mr. Barbera voluntarily forgave a portion of his compensation
      to
      effect a reduction of approximately 30% to $350,000. Beginning in January 2005,
      Mr. Barbera elected to defer a portion of his compensation for the third and
      fourth quarters of the fiscal year ended June 30, 2005 until further notice.
      During the fiscal year ended June 30, 2006, Mr. Barbera deferred an additional
      $92,038 of his compensation. The deferred compensation totaled approximately
      $215,692 at June 30, 2006. The deferred compensation was paid during fiscal
      year
      ended June 30, 2007 through the issuance of convertible preferred series G
      stock
      to Mr. Barbera. Mr. Barbera elected to return his compensation level to the
      contractual obligation of $500,000 annually on April 1, 2007.




(2)
      During the fiscal year ended June 30, 2006, Mr. Peters deferred approximately
      $82,400 of his salary. This deferred salary was paid to Mr. Peters during the
      fiscal year ended June 30, 2007 by issuance of shares of convertible preferred
      series G stock. The salary of Mr. Peters has been reduced to $100,000 annually
      as of December 1, 2006 and has been further reduced to $75,000 annually as
      of
      July 1, 2007.





(3)
      During the fiscal year ended June 30, 2006, Mr. Mitchell deferred approximately
      $61,100 of his salary. This deferred salary was paid to Mr. Mitchell during
      the
      fiscal year ended June 30, 2007 through the issuance of shares of convertible
      preferred series G stock.


61





(4)
      On
      May 7, 2007, the Board of Directors voted unanimously to authorize the issuance
      of 300,000 shares of the Company’s common stock to Mr. Barbera as an incentive
      to retain the services of Mr. Barbera. The shares are to be issued in three
      equal installments of 100,000 shares each over a period of three years. The
      first issuance of 100,000 shares occurred on May 7, 2007 and the second issuance
      of 100,000 shares occurred on May 7, 2008. The shares are valued at each
      reporting period at the current market price for shares earned to date and
      once
      issued, the stock is valued at the current market price on the date of issuance.
      For fiscal 2007, there were 100,000 shares issued at a value of $2.10 per share
      and the remaining 200,000 shares not issued were valued at $1.50 for the portion
      of shares earned at June 30, 2007, resulting in an expense in fiscal 2007 of
      $247,500. For fiscal 2008, there were 100,000 shares issued at a value of $0.63
      per share and the remaining 100,000 shares not issued were valued at $0.43
      for
      the portion of shares earned at June 30, 2008, resulting in an expense in fiscal
      2008 of $30,600. The remaining 100,000 shares authorized will be issued to
      Mr.
      Barbera on May 7, 2009.





(5)
      Represents options to purchase 200,000 shares of the Company’s common stock at
      an exercise price of $1.50 per share. Options were issued on June 29, 2007
      and
      expire 10 years from the date of issuance. The dollar amount presented
      represents the expense each year as recognized under SFAS 123R. The overall
      fair
      value of these shares was $278,000 which is based on a fair value of $1.39
      per
      share. This fair value was estimated using the Black-Scholes option pricing
      model with the following assumptions
      applied; dividend yield of zero, expected volatility of 142.3%, risk-free
      interest rate of 4.75% and an expected life of
      6
      years. The expense is being amortized over a period of 1.5 years, which is
      the
      vesting term of the options. None of these options were exercisable at June
      30,
      2007. Options
      to purchase 150,000 shares of the Company’s common stock at an exercise price of
      $1.50 per share. Options were issued on February 7, 2005. The fair value of
      these shares were $9.25 per share.





(6)
      In
      July 2007, the Board of Directors voted unanimously to authorize the issuance
      of
      25,000 shares of the Company’s common stock to Mr. Peters as an incentive to
      retain the services of Mr. Peters. These shares were issued to Mr. Peters on
      July 5, 2007. The shares were valued at the current market price of $2.44
      resulting in an aggregate value of $61,000.





(7)
      Represents the expense for each fiscal year under SFAS 123R for options
      currently vesting for Mr. Peters. Includes options to purchase 50,000 shares
      of
      the Company’s common stock at an exercise price of $1.50 per share. Options were
      issued on June 29, 2007 and expire 10 years from the date of issuance. The
      overall fair value of these shares was $69,500 which is based on a fair value
      of
      $1.39 per share that was estimated using the Black Scholes option pricing model.
      These options vest over 1.5 years. Also includes options to purchase 80,000
      shares of the Company’s common stock at an exercise price of $7.00 per share.
      Options were issued on March 1, 2005 and expire 10 years for the date of
      issuance. The overall fair value of these shares was approximately $538,200
      which is based on a fair value of $6.73 per share that was estimated using
      the
      Black Scholes option pricing model. These options vest over three years and
      were
      fully vested in fiscal 2008.





(8)
      Represents options to purchase 25,000 shares of the Company’s common stock at
      $1.40 per share, 50,000 shares at $1.50 per share and 7,500 shares at $1.50
      per
      share. Options were issued on May 7, 2007, June 29, 2007 and February 7, 2005,
      respectively, and expire 10 years from the dates of issuance. The dollar amount
      presented represents the expense for each fiscal year under SFAS 123R for
      options currently vesting. The fair value of the May 7 grant was estimated
      using
      the Black-Scholes option pricing model with the following assumptions applied;
      dividend yield of zero, expected volatility of 140.9%, risk-free interest rate
      of 4.75% and an expected life of 6 years. The fair value of the June 29 grant
      was estimated using the Black-Scholes option pricing model with the following
      assumptions applied; dividend yield of zero, expected volatility of 142.3%,
      risk-free interest rate of 4.75% and an expected life of 6 years.





(9)
      Represents the principal value of $1,000,000 of a note payable to the Company
      plus accrued interest of $162,600, which was forgiven by unanimous vote of
      the
      Board of Directors during the fiscal year ended June 30, 2007.





(10)
      On
      May 7, 2007, the Board of Directors voted unanimously to authorize the payment
      of a one-time bonus of $25,000 to Mr. Mitchell as an incentive to retain the
      services of Mr. Mitchell. This bonus was paid by the Company on May 18,
      2007.





STOCK
      OPTION GRANTS





The
      Company maintains a qualified stock option plan (the "1999 Plan") for the
      issuance of up to 1,125,120 shares of common stock under qualified and
      non-qualified stock options. The 1999 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.





There
      were no options granted in the fiscal year 2008. There were 475,000 options
      granted during the fiscal year ended June 30, 2007.


62





Outstanding
      Equity Awards at Fiscal Year End





The
      following table sets forth certain information regarding unexercised options,
      unvested stock and equity incentive plan awards for each Named Executive Officer
      outstanding as of the end of the Company’s fiscal year 2008:





Option Awards
            
            Stock AwardsName
            
            Number of
            
            Number of
            
            Equity
            
            Option
            
            Option
            
            Number of
            
            Market
            
            Equity
            
            EquitySecurities
            
            Securities
            
            Incentive
            
            Exercise
            
            Expiration
            
            Shares
            
            Value of
            
            Incentive
            
            IncentiveUnderlying
            
            Underlying
            
            Plan
            
            Price
            
            Date
            
            or Units
            
            Shares or
            
            Plan Awards:
            
            PlanUnexercised
            
            Unexercised
            
            Awards
            
            ($)
            
            
            
            of Stock
            
            Units of
            
            Number of
            
            Awards:Options (#)
            
            Options (#)
            
            Number of
            
            
            
            
            
            That Have
            
            Stock That
            
            Unearned
            
            Market orExercisable
            
            Unexercisable
            
            Securites
            
            
            
            
            
            Not Vested
            
            Have Not
            
            Shares,
            
            Payout ValueUnderlying
            
            
            
            
            
            (#)
            
            Vested
            
            Units or
            
            of UnearnedUnexercised
            
            
            
            
            
            
            
            ($)
            
            Other Rights
            
            Shares, UnitsUnearned
            
            
            
            
            
            
            
            
            
            That Have
            
            or OtherOptions (#)
            
            
            
            
            
            
            
            
            
            Not Vested
            
            Have Not($)
            
            Rights ThatVested ($)J.
                Barbera
            
            
            100,000
            (1)
            
            —
            
            
            —
            
            
            1.50
            
            
            3/24/14
            
            
            —
            
            
            —
            
            
            —
            
            
            —200,000
            (2)
            
            —
            
            
            —
            
            
            1.50
            
            
            3/24/14
            
            
            —
            
            
            —
            
            
            —
            
            
            —133,333
            (3)
            
            66,667
            (3)
            
            —
            
            
            1.50
            
            
            6/29/17
            
            
            100,000
            (10)
            
            43,000
            (11)
            
            —
            
            
            —J.
                Peters
            
            
            20,000
            (4)
            
            —
            
            
            —
            
            
            4.13
            
            
            4/03/14
            
            
            —
            
            
            —
            
            
            —
            
            
            —80,000
            (5)
            
            —
            
            
            —
            
            
            7.00
            
            
            3/1/15
            
            
            —
            
            
            —
            
            
            —
            
            
            —33,333
            (6)
            
            16,667
            (6)
            
            —
            
            
            1.50
            
            
            6/29/17
            
            
            —
            
            
            —
            
            
            —
            
            
            —R.
                Mitchell
            
            
            10,000
            (7)
            
            —
            
            
            —
            
            
            1.50
            
            
            3/24/14
            
            
            —
            
            
            —
            
            
            —
            
            
            —8,333
            (8)
            
            16,667
            (8)
            
            —
            
            
            1.40
            
            
            5/07/17
            
            
            —
            
            
            —
            
            
            —
            
            
            —33,333
            (9)
            
            16,667
            (9)
            
            —
            
            
            1.50
            
            
            6/29/17
            
            
            —
            
            
            —
            
            
            —
            
            
            —





(1)
            Represents
                grant of options to purchase 100,000 shares of common stock at $1.50
                per
                share, vested immediately, with a term of 10
                years.


(2)
            Represents
                a grant of options to purchase 200,000 shares of common stock at
                $1.50 per
                share, vested over three years on each anniversary date of the grant,
                with
                a term of 10 years.


(3)
            Represents
                a grant of 200,000 options to purchase common stock at $1.50 per
                shares,
                vested equally over 18 months, with a term of 10
                years.


(4)
            Represents
                grant of options to purchase 20,000 shares of common stock at $4.13
                per
                share, vested over three years on each anniversary date with a term
                of 10
                years.


(5)
            Represents
                grant of options to purchase 80,000 shares of common stock at $7.00
                per
                share, vested over three years on each anniversary date with a term
                of 10
                years.


(6)
            Represents
                a grant of 50,000 options to purchase common stock at $1.50 per shares,
                vested equally over 18 months, with a term of 10
                years


(7)
            Represents
                a grant of 10,000 options to purchase common stock at $1.50 per shares,
                vested over three years on each anniversary date with a term of 10
                years.


(8)
            Represents
                a grant of 25,000 options to purchase common stock at $1.40 per shares,
                vested over three years on each anniversary date of the grant, with
                a term
                of 10 years.


(9)
            Represents
                a grant of 50,000 options to purchase common stock at $1.50 per shares,
                vested equally over 18 months, with a term of 10
                years.


(10)
            Represents
                remaining shares to be issued from a grant of 300,000 shares total,
                authorized by unanimous vote of the Board of Directors on May 7,
                2007, to
                be issued in equal installments of 100,000 on each of the follow
                two
                anniversary dates of the grant.


(11)
            Represents
                the fair value of the remaining 100,000 shares to be issued at the
                closing
                price of $0.43 on June 30,
                2008.


63




Equity
      Compensation Plan Information





Plan
                Category
            
            Number of securities
              to be issued upon
              exercise of
              outstanding options,
              warrants and rights
            
            Weighted-average
              exercise price of
              outstanding options,
              warrants and rights
            
            Number of Securities
              remaining available
              for future issuances
              under equity
              compensation plansEquity
                compensation plans approved by security holders1999
                Stock Option Plan (1)
            
            
            985,000
            
            $
            1.94
            
            
            140,122Executive
                Options (1)
            
            
            40,000
            
            $
            2.81
            
            
            —Equity
                compensation plans not approved by security holders
            
            
            —
            
            
            —
            
            
            —Total
            
            
            1,025,000
            
            $
            1.97
            
            
            140,122





(1)
            The
                Company maintains a qualified stock option plan (the "1999 Plan")
                for the
                issuance of up to 1,125,120 shares of common stock under qualified
                and
                non-qualified stock options. The plan is administered by the compensation
                committee of the Board of Directors which has the authority to determine
                which officers and key employees of the Company will be granted options,
                the option price and vesting of the options.





COMPENSATION
      OF DIRECTORS





Beginning
      in October 2003, directors who are not employees of the Company receive an
      annual retainer fee of $5,000, $1,000 for each Board Meeting attended, $500
      for
      each standing committee meeting attended and $500 for each standing committee
      meeting for the Chairman of such Committee. Such Directors will also be
      reimbursed for their reasonable expenses for attending board and committee
      meetings, and will receive an annual grant of options on June 30 of each year
      to
      acquire 10,000 shares of common stock for each fiscal year of service, at an
      exercise price equal to the fair market value on the date of grant. Any Director
      who is also an employee of the Company is not entitled to any compensation
      or
      reimbursement of expenses for serving as a Director of the Company or a member
      of any committee thereof. The Directors agreed to waive the annual option grant
      for the fiscal years ended June 30, 2003, 2004, 2005 and 2006. The annual
      options grants previously waived were issued on June 29, 2007.





The
      following table sets forth certain information regarding all compensation earned
      by directors for the Company’s
      2008 fiscal year.





Name
            
            Fees Earned
              or Paid in
              Cash
              ($)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($)
            
            Non-Equity
              Incentive Plan
              Compensation
              ($)
            
            Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
            
            All Other
              Compensation
              ($)
            
            Total
              ($)J.
                Gerlach
            
            $
            15,000
            (1)
            
            —
            
            $
            46,500
            (2)
            
            —
            
            
            —
            
            
            —
            
            $
            61,500S.
                Jones
            
            $
            13,000
            (1)
            
            —
            
            
            46,500
            (2)
            
            —
            
            
            —
            
            
            —
            
            $
            59,500D.
                Stoller
            
            $
            13,000
            (1)
            
            —
            
            
            46,500
            (2)
            
            —
            
            
            —
            
            
            —
            
            $
            59,500




64


(1)
            Represents
                compensation of an annual retainer fee of $5,000, $1,000 for each
                Board
                Meeting attended, $500 for each standing committee meeting attended
                and
                $500 for each standing committee meeting for the Chairman of such
                Committee.


(2)
            Represents
                the expense for the fiscal year under SFAS 123R for options currently
                vesting. Includes options to purchase 50,000 shares of the Company’s
                common stock at an exercise price of $1.50 per share. Options were
                issued
                on June 29, 2007 and expire 10 years from the date of issuance. The
                overall fair value of these shares was $69,500 which is based on
                a fair
                value of $1.39 per share that was estimated using the Black Scholes
                option
                pricing model. These options vest over 1.5
                years.





Employment
      Contracts and Termination of Employment





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





Mr.
      Barbera was appointed to the position of Chairman of the Board, Chief Executive
      Officer and President of the Company by the Board, effective March 31, 1997.
      Mr.
      Barbera had previously also served as President and CEO of MSGI Direct. Mr.
      Barbera current employment agreement is effective January 1, 2005 for a
      three-year-term expiring December 31, 2008. The base salary during the
      employment term is $500,000 for the first year and an amount not less than
      $500,000 for the remaining two years. Mr. Barbera is eligible to receive bonuses
      equal to 100% of the base salary each year at the determination of the
      Compensation Committee of the Board of Directors of the Company, based on
      earnings and other targeted criteria. Mr. Barbera reduced his salary to $350,000
      from January 1, 2005 through March 2007. In April 2007, Mr. Barbera’s annual
      salary was returned to the contractually obligated level of $500,000. On June
      29, 2007, Mr. Barbera was granted stock options to purchase 200,000 shares
      of
      Common Stock of the company at $1.50 per share. These options vest in equal
      installments over an 18 month period beginning one month from the date of
      issuance. If Mr. Barbera is terminated without cause (as defined in the
      agreement), then the Company shall pay him a lump sum payment equal to 2.99
      times the compensation paid during the preceding 12 months and all outstanding
      stock options shall fully vest and become immediately exercisable.





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





COMPENSATION
      POLICIES FOR EXECUTIVE OFFICERS





The
      Compensation Committee desires to set compensation at levels through
      arrangements that will attract and retain managerial talent desired by us,
      reward employees for past contributions and motivate managerial efforts
      consistent with corporate growth, strategic progress and the creation of
      stockholder value. The Compensation Committee believes that a mix of salary,
      incentive bonus and stock options will achieve those objectives.





RELATIONSHIP
      OF PERFORMANCE TO EXECUTIVE COMPENSATION





The
      base
      salary of Mr. Barbera is set by terms of his employment agreement, which was
      negotiated to attract and retain him. The Compensation Committee believes this
      salary is competitive and represents a fair estimate of the value of the
      services rendered by Mr. Barbera.





Respectively
      submitted,


COMPENSATION
      COMMITTEE


John
      T.
      Gerlach




65


**Item
      11. Security Ownership of Certain Beneficial Owners, Management and Related
      Stockholder Matters and Change in Control Arrangements**





Common
      Stock - Five Percent Holders





The
      following tab le sets forth, as of September 30, 2008, certain information
      with
      respect to any person, including any group, who is known to the Company to
      be
      the beneficial owner of more than 5% of the common stock of the
      Company.





Title
                of
              Class
            
            Name and Address of
              Beneficial Owner
            
            Amount and Nature of
              Beneficial Owner (1)
            
            Percent of
              ClassCommon
            
            
            LC
                Capital Master Fund
            
            
            1,700,000
            
            
            7.41
            %Common
            
            
            Leon
                Frenkel
            
            
            1,695,000
            
            
            7.39
            %






(1)
      Unless otherwise indicated, each of the persons named in the table has sole
      voting and investment power with respect to the shares set forth opposite such
      person’s name. With respect to each person or group, percentages are calculated
      based on the number of shares beneficially owned, including shares that may
      be
      acquired by such person or group within 60 days of September 30, 2008
      upon the exercise of stock options, warrants or other purchase rights, but
      not
      the exercise of options, warrants or other purchase rights held by any other
      person.





Common
      Stock - Management





The
      following table sets forth, as of September 30, 2008, certain information
      certain information concerning the ownership of the Company’s common stock of
      each (i) director, (ii) nominee, (iii) executive officers and former executive
      officers named in the Summary Compensation Table and referred to as the “Named
      Executive Officers,” and (iv) all current directors and executive officers of
      the Company as a group.




Title
              Class
            
            Name and Address of
              Beneficial Owner
            
            Beneficial Ownership of (1)
            
            Percent of
              ClassCommon
            
            
            J.
                Jeremy Barbera (2)
            
            
            1,300,000
            
            
            5.7
            %575
                Madison AveNew
                York, NY 10022Common
            
            
            Seymour
                Jones (3)
            
            
            144,221
            
            
            *575
                Madison AveNew
                York, NY 10022Common
            
            
            John
                Gerlach (4)
            
            
            145,395
            
            
            *575
                Madison AveNew
                York, NY 10022Common
            
            
            David
                Stoller (5)
            
            
            101,250
            
            
            *575
                Madison AveNew
                York, NY 10022Common
            
            
            Joseph
                Peters (6)
            
            
            327,400
            
            
            1.4
            %575
                Madison AveNew
                York, NY 10022Common
            
            
            Richard
                Mitchell (7)
            
            
            169,200
            
            
            *575
                Madison AveNew
                York, NY 10022All
                Directors and Named Executive Officers reported as a group
            
            2,187,466
            
            
            9.5
            %




66


* Less
      than
      1%





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


(2)
            Includes
                (i) 415,000 issued upon conversion of Series G Convertible Preferred
                Shares, (ii) 200,000 issued as retention incentive, (iii) 185,000
                shares
                previously owned and purchased on the open market and (iv) 500,000
                options
                to purchase shares of common stock. With respect to the options to
                purchase shares of common stock, 466,666 are exercisable at September
                30,
                2008.


(3)
            Includes
                (i) 5,292 shares previously owned and purchased on the open market,
                (ii)
                28,929 shares issued to director as compensation and (ii) 110,000
                options
                to purchase shares of common stock. With respect to the options to
                purchase shares of common stock, 101,667 are exercisable at September
                30,
                2008.


(4)
            Includes
                (i) 3,609 shares previously owned and purchased on the open market
                (ii)
                31,786 shares issued to director as compensation and (iii) 110,000
                options
                to purchase shares of common stock. With respect to the options to
                purchase shares of common stock, 101,667 are exercisable at September
                30,
                2008.


(5)
            Includes
                (i) 31,250 shares issued to director as compensation and (ii) 70,000
                options to purchase shares of common stock, 61,667 are exercisable
                at
                September 30, 2008.


(6)
            Includes
                (i) 143,000 issued upon conversion of Series G Convertible Preferred
                Shares, (ii) 25,000 issued as retention incentive, (iii) 9,400 shares
                previously owned and purchased on the open market and (iv) 150,000
                options
                to purchase shares of common stock. With respect to the options to
                purchase shares of common stock, 141,667 are exercisable at September
                30,
                2008.


(7)
            Includes
                (i) 84,200 issued upon conversion of Series G Convertible Preferred
                Shares
                and (ii) 85,000 options to purchase shares of common stock. With
                respect
                to the options to purchase shares of common stock, 60,000 are exercisable
                at September 30, 2008.





**Item
      12 - Certain Relationships and Related Transactions, and Director
      Independence**





Transactions
      with Mr. Barbera, Chief Executive Officer and Chairman of the Board of
      Directors: During the year ended June 30, 2002, the Company advanced $1,000,000
      pursuant to a promissory note receivable to Mr. Barbera due and payable to
      the
      Company at maturity, October 15, 2006. The note was entered into as an
      inducement to the continued employment of Mr. Barbera and to provide additional
      security in the event of a change in control. Accordingly, the note will be
      forgiven in the event of a change in control. As of June 30, 2006, interest
      due
      of approximately $162,600 was in arrears. Since collectibility of the note
      receivable was uncertain, the Company had provided for the loss of the note
      receivable during the year ended June 30, 2006. The
      collection of this note by its October 15, 2006 due date did not occur. The
      Board of Directors of the Company subsequently elected to forgive such note
      receivable at that point during fiscal 2007.





**Relationships
      with Hyundai Syscomm Corp. and Apro Media Corp. :**





Hyundai


The
      Company’s relationship with Hyundai Syscomm Corp. (Hyundai) began in September
      2006 when the Company entered into a License Agreement with Hyundai in
      consideration of a one-time $500,000 fee. Under the agreement, MSGI granted
      to
      Hyundai a non-exclusive worldwide perpetual unlimited source, development and
      support license, for the use of the technology developed and owned by MSGI’s
      majority-owned subsidiary, Innalogic, LLC.





In
      October 2006, the Company entered into a Subscription Agreement with Hyundai
      for
      the issuance of 900,000 shares of the Company's common stock, in connection
      with
      the receipt of the $500,000 received for the License Agreement above, subject
      to
      certain terms and conditions set forth in the Subscription Agreement. The
      Company issued 865,000 shares of common stock at the initial closing of the
      transaction, and the remaining 35,000 shares of common stock remain to be
      issued.


67


In
      October 2006, the Company also entered into a Sub-Contracting Agreement with
      Hyundai. The Sub-Contracting Agreement allows for MSGI and its affiliates to
      participate in contracts that Hyundai and/or its affiliates now have or may
      obtain hereafter, where the Company's products and/or services for encrypted
      wired or wireless surveillance systems or perimeter security would enhance
      the
      value of the contract(s) to Hyundai or its affiliates. The initial term of
      the
      Sub-Contracting Agreement is three years, with subsequent automatic one-year
      renewals unless the Sub-Contracting Agreement is terminated by either party
      under the terms allowed by the Agreement.





On
      February 7, 2007, the Company issued to Hyundai a warrant to purchase up to
      a
      maximum of 24,000,000 shares of common stock in exchange for a maximum of
      $80,000,000 in revenue, which was expected to be realized by the Company over
      a
      maximum period of four years. The vesting of the Warrant will take place
      quarterly over the four-year period based on 300,000 vesting shares for every
      $1,000,000 in revenue realized by the Company. The revenue is subject to the
      sub-contracting agreement between Hyundai and the Company noted above.





There
      have been no business transactions under the Sub-Contract or License agreement
      as of June 30, 2008 or to date and the Company currently is not anticipating
      any
      in the near future.





Apro


On
      May
      10, 2007, the Company entered into an exclusive sub-contract and distribution
      agreement with Apro Media Corp. (Apro or “Apro Media”) for at least $105 million
      of expected sub-contracting business over seven years to provide commercial
      security services to a Fortune 100 defense contractor. Under the terms of
      contract, MSGI acquires components from Korea and delivers fully integrated
      security solutions at an average expected level of $15 million per year for
      the
      length of the seven-year engagement.  MSGI is to establish and operate a
      24/7/365 customer support facility in the Northeastern United States. Apro
      will
      provide MSGI with a web-based interface to streamline the ordering process
      and
      create an opportunity for other commercial security clients to be acquired
      and
      serviced by MSGI. The contract calls for gross profit margins estimated to
      be
      between 26% and 35% including a profit sharing arrangement with Apro Media,
      which will initially take the form of unregistered MSGI common stock, followed
      by a combination of stock and cash and eventually just cash. In the aggregate,
      assuming all the revenue targets are met over the next seven years, Apro Media
      would eventually acquire approximately 15.75 million shares of MSGI common
      stock. MSGI was referred to Apro Media by Hyundai as part of a general expansion
      into the Asian security market, however revenue under the Apro contract does
      not
      constitute revenue under the existing Hyundai agreements to acquire common
      stock
      of MSGI. The contract required working capital of at least $5 million due to
      considerable upfront expenses including a $2.5 million payment by MSGI to Apro
      Media, which was made on May 31, 2007, for the proprietary system development
      requirements of a Fortune 100 client and the formation of a staffed production
      and customer service facility and warehouse.





Per
      the
      terms of the sub-contract agreement with Apro, the Company is to compensate
      Apro
      with 3,000,000 shares of the Company’s common stock when the sub-contract
      transactions result in $10.0 million of GAAP recognized revenue for the Company.
      During the year ended June 30, 2008 the Company recognized approximately $3.8
      million in revenues resulting from activities under the sub-contract agreement.
      In December 2007, the Company elected to issue 1,000,000 shares of common stock
      to Apro pursuant to this agreement. The Company computed a fair value for a
      pro
      rata share of the remaining shares to be issued under that agreement, which
      was
      $62,336 at June 30, 2008 and has been reflected as a liability in our
      consolidated balance sheet. The total expense for the year ended June 30, 2008
      related to shares both issued and issuable to Apro was approximately $1.0
      million. This liability will be re-measured at each period end, until all shares
      are issued.





The
      Company had additional shipments and corresponding billings to clients in the
      aggregate of approximately $1.6 million resulting from activities under the
      Apro
      sub-contract agreement during the fiscal year ended June 30, 2008. These
      shipments have not been reported as revenue during the fiscal year ended June
      30, 2008 due to issues surrounding collectibility of payment and other factors
      and therefore, these transactions did not meet the criteria for revenue
      recognition as of June 30, 2008. In addition, the billings have been reversed
      and are not reflected as of June 30, 2008. These shipments will be recognized
      as
      revenue if the payments are received, and therefore all the revenue recognition
      criteria is fully met. Inventory costs related to these transactions have been
      reported on the balance sheet in Costs of product shipped to customers for
      which
      revenue has not been recognized.


68


In
      addition, the Company had additional shipments and corresponding billings to
      clients of approximately $4.9 million during the year ended June 30, 2008,
      that
      was not directly attributable to the Apro sub-contract, but was as a result
      of
      direct and indirect referrals from Apro and entities related to Apro. These
      shipments will also be recognized as revenue, as well as billings reflected
      as
      an asset, if the payments are received. Inventory costs related to these
      transactions have been reported on the balance sheet in Costs of product shipped
      to customers for which revenue has not been recognized.





Subsequent
      to the year ended June 30, 2008, the Company negotiated an acceleration to
      the
      sub-contract agreements with Hirsch Capital Corp., the private equity firm
      operating both Hyundai and Apro. Under the accelerated terms, the Company
      expects to increase its business with Apro by supporting several of the largest
      commercial businesses in Korea with products and services. The Company also
      expects that this renewed relationship will bring additional sales to a certain
      Fortune 100 defense contractor as well. As part of this business expansion,
      the
      Company expects to become the beneficiary of various technology transfers
      including, but not limited to, Hi-Definition video surveillance systems,
      Hi-Definition digital video recording devices and emerging RFID technology.
      There was no revenue report under this contract in fiscal 2008.





**Relationship
      with Coda Octopus Group, Inc.:**




On
      April
      1, 2007 the Company, through its majority-owned subsidiary Innalogic, entered
      into a non-exclusive License Agreement with the Coda Octopus Group, Inc.. This
      agreement allows for CODA to market the Innalogic, LLC “SafetyWatch” technology
      to its client base, sub-license the Technology to its customers and
      distributors, use the Technology for the purposes of demonstration to potential
      customers, sub-licensors and/or distributors and to further develop the source
      code of the Technology as it sees fit. In return, CODA will pay a 20% royalty
      to
      MSGI from the sale of the Technology to its customers, and further CODA has
      assumed certain development and operational activities of Innalogic in
      connection with this transaction. During 2007, the Company issued 850,000
      unregistered common shares to CODA as payment of amounts due to CODA for
      advancing funds to us.





The
      Company has recognized $100,000 in revenues during each of the years ended
      June
      30, 2008 and 2007 as a result of this license agreement.





**Item
      13. Exhibits**





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





(3)
      Exhibits:





2.1
            
            Amended
                and Restated Limited Liability Company Agreement, dated as of August
                18,
                2004, Incorporated by reference to Exhibit No. 2.1of the Company's
                Current
                Report on Form 8-K, filed September 2, 20042.2
            
            Investment
                Agreement, dated as of August 18, 2004, Incorporated by reference
                to
                Exhibit No. 2.2 of the Company's Current Report on Form 8-K, filed
                September 2,2.3
            
            Subscription
                Agreement, dated December 1, 2004, Incorporated by reference to Exhibit
                No. 2.1 of the Company's Current Report on Form 8-K, filed December
                7,
                20042.4
            
            Subscription
                Agreement, dated January 3, 2005, Incorporated by reference to Exhibit
                No.
                2.1 of the Company's Current Report on Form 8-K, filed January 7,
                20052.5
            
            Restructuring
                and Subscription Agreement, dated as of May 16, 2005, Incorporated
                by
                reference to Exhibit No 2.1 of the Company's Current Report on Form
                8-K,
                filed May 20, 20052.6
            
            Stock
                Purchase Agreement, dated as of June 1, 2005, Incorporated by reference
                to
                Exhibit No. 2.1 of theCompany's
                Current Report on Form 8-K, filed June 7, 20052.7
            
            Stock
                Purchase Agreement dated as of July 1, 2005, Incorporated by reference
                to
                Exhibit No. 2.1 of the Company's Current Report on Form 8-K, filed
                July 7,
                20053.1
            
            Amended
                and Restated Articles of Incorporation, incorporated herein by reference
                to the Company's Report on Form 8-K dated April 25,
                19953.2
            
            Certificate
                of Amendment to the Amended and Restated Articles of Incorporation
                of the
                Company, incorporated by reference to the Company's Report on Form
                10K-
                for the fiscal year ended June 30,
                2001




69





3.3
            
            Certificate
                of Amendment to the Articles of Incorporation for change of name
                to
                All-Comm Media Corporation, incorporated by reference to the Company's
                Report on Form 10-K for the fiscal year ended June 30,
                19953.4
            
            By-Laws,
                included in the Company's Report on Form 10K- for the fiscal year
                ended
                June 30, 20043.5
            
            Certificate
                of Amendment of Articles of Incorporation for increase in number
                of
                authorized shares to 36,300,000 total, incorporated by reference
                to the
                Company's Report on Form 10-K dated June 30, 19963.6
            
            Certificate
                of Amendment of Articles of Incorporation for change of name to Marketing
                Services Group, Inc., incorporated by reference to the Company's
                Report on
                Form 10-KSB for the fiscal year ended June 30, 19973.7
            
            Certificate
                of Amendment of Articles of Incorporation for increase in number
                of
                authorized shares to 75,150,000 total, incorporated by reference
                to the
                Company's Report on Form 10-KSB dated June 30, 19983.8
            
            Certificate
                of Amendment of Articles of Incorporation for change of name to MKTG
                Services, included in the Company's Report on Form 10K- for the fiscal
                year ended June 30, 20044.1
            
            Form
                of Subscription Agreement, Incorporated by reference to Exhibit No.
                4.1 of
                the Company's Current Report on Form 8-K, filed January 5,
                20054.2
            
            Form
                of Subscription Agreement, Incorporated by reference to Exhibit No.
                4.1 of
                the Company's Current Report on Form 8-K, filed November 16,
                20044.3
            
            Form
                of Investors' Warrant, Incorporated by reference to Exhibit No. 4.2
                of the
                Company's Current Report on Form 8-K, filed November 16,
                20044.4
            
            Form
                of Investors’ Warrant, Incorporated by reference to Exhibit No. 4.2 of the
                Company's Current Report on Form 8-K, filed January 5,
                20054.5
            
            Form
                of Agent's Warrant, Incorporated by reference to Exhibit No. 4.3
                of the
                Company's Current Report on Form 8-K, filed November 16,
                20044.6
            
            Form
                of Agent’s Warrant, Incorporated by reference to Exhibit No. 4.3 of the
                Company's Current Report on Form 8-K, filed January 5,
                20054.7
            
            Form
                of Securities Purchase Agreement, Incorporated by reference to Exhibit
                No.
                4.1 of the Company's Current Report on Form 8-K, filed July 9,
                20054.8
            
            Form
                of Callable Secured Convertible Note, Incorporated by reference to
                Exhibit
                No. 4.2 of the Company's Current Report on Form 8-K, filed September
                9,
                20054.9
            
            Form
                of Securities Purchase Warrant, Incorporated by reference to Exhibit
                No.
                4.3 of the Company's Current Report on Form 8-K, filed August 9,
                20054.10
            
            Registration
                Rights Agreement, Incorporated by reference to Exhibit No. 4.4 of
                the
                Company's Current Report on Form 8-K, filed August 9,
                20054.11
            
            Security
                Agreement, Incorporated by reference to Exhibit No. 4.5 of the Company's
                Current Report on Form 8-K, filed August 31, 20054.12
            
            Form
                of Agent's Warrant, Incorporated by reference to Exhibit No. 4.6
                of the
                Company's Current Report on Form 8-K, filed August 31,
                20054.13
            
            Form
                of Agreement to Issue Additional Company Interests, Incorporated
                by
                reference to Exhibit No. 4.1 of the Company's Current Report on Form
                8-K,
                filed September 7, 20054.14
            
            Form
                of Stock Purchase Warrant, Incorporated by reference to Exhibit No.
                4.1 of
                the Company's Current Report on Form 8-K filed July 7,
                20064.15
            
            Form
                of Subscription Agreement, Incorporated by reference to Exhibit No.
                4.1 of
                the Company's Current Report on Form 8-K filed October 25,
                20064.16
            
            Form
                of Sub-Contracting Agreement, Incorporated by reference to Exhibit
                No. 4.1
                of the Company's Current Report on Form 8-K, filed October 31,
                20064.17
            
            Form
                of Callable Secured Convertible Note, Incorporated by reference to
                Exhibit
                No. 4.1 of the Company's Current Report on Form 8-K, filed December
                18,
                20064.18
            
            Form
                of Stock Purchase Warrant, Incorporated by reference to Exhibit No.
                4.2 of
                the Company's Current Report on Form 8-K, filed December 18,
                200610.1
            
            J.
                Jeremy Barbera Employment Agreement, incorporated by reference to
                the
                Company's Report on Form 10-K for the fiscal year ended June 30,
                200010.2
            
            Form
                of Bridge Loan Agreement, Incorporated by reference to Exhibit No.
                10.1 of
                the Company's Current Report on Form 8-K, filed February 27,
                200610.3
            
            Form
                of Promissory Note, Incorporated by reference to Exhibit No. 10.2
                of the
                Company's Current Report on Form 8-K, filed February 27,
                2006




70





10.4
            
            Form
                of Warrant, Incorporated by reference to Exhibit No. 10.3 of the
                Company's
                Current Report on Form 8-K, filed February 27, 200610.5
            
            Form
                of Registration Rights Agreement, Incorporated by reference to Exhibit
                No.
                10.4 of the Company's Current Report on Form 8-K, filed February
                27,
                200610.7
            
            Securities
                Purchase Agreement, dated December 13, 2006, by and among MSGI Security
                Solutions, Inc. and each of the Purchasers set forth on the signature
                pages thereto, Incorporated by reference to Exhibit No. 10.1 of the
                Company's Current Report on Form 8-K, filed December 18,
                200610.8
            
            Registration
                Rights Agreement, dated December 13, 2006 by and among MSGI Security
                Solutions, Inc. and each of the undersigned, Incorporated by reference
                to
                Exhibit No. 10.2 of the Company's Current Report on Form 8-K, filed
                December 18, 200610.9
            
            Security
                Agreement, dated as of December 13, 2006 by and among MSGI Security
                Solutions, Inc., certain subsidiaries of MSGI and the secured parties
                which are signatories thereto, Incorporated by reference to Exhibit
                No.
                10.3 of the Company's Current Report on Form 8-K, filed December
                18,
                200610.10
            
            Intellectual
                Property Agreement, dated as of December 13, 2006 by and among MSGI
                Security Solutions, Inc., certain subsidiaries of MSGI and the secured
                parties which are signatories thereto, Incorporated by reference
                to
                Exhibit No. 10.4 of the Company's Current Report on Form 8-K, filed
                December 18, 200610.5
            
            Letter
                Agreement, dated December 13, 2006 by and among MSGI Security Solutions,
                Inc. and the parties thereto, Incorporated by reference to Exhibit
                No.
                10.5 of the Company's Current Report on Form 8-K, filed December
                18,
                200621
            
            List
                of Company's subsidiaries23.1
            
            Consent
                of Amper, Politziner & Mattia, LLP31.1
            
            Certifications
                of the Chief Executive Officer Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            
            Certifications
                of the Chief Accounting Officer Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            
            Certifications
                of the Chief Executive Officer Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.2
            
            Certifications
                of the Chief Accounting Officer Pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002





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





The
      aggregate fees billed by Amper, Politziner & Mattia, LLP independent
      accountants, for professional services rendered to MSGI Security Solutions,
      Inc
      during the fiscal years ended June 30, 2008 and 2007 were comprised of the
      following:





Fiscal Year
            
            Fiscal Year2008
            
            2007Audit
                Fees
            
            $
            289,400
            
            $
            281,200Tax
                Fees
            
            
            3,225
            
            
            30,900All
                other Fees
            
            
            —
            
            
            —Total
                Fees
            
            $
            292,625
            
            $
            312,100





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





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





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


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**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 OfficerBy:
            /s/
                Richard J. Michell, IIIRichard
                J. Mitchell IIIChief
                Accounting Officer and Principle Financial
                Officer





Date:
      November 14, 2008





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





Signature
            
            Title
            
            Date/s/
                J. Jeremy Barbera
            
            Chairman
                of the Board and Chief Executive
            
            November
                14, 2008J.
                Jeremy Barbera
            
            Officer
                (Principal Executive Officer)/s/
                John T. Gerlach
            
            Director
            
            November
                14, 2008John
                T. Gerlach/s/
                Seymour Jones
            
            Director
            
            November
                14, 2008Seymour
                Jones/s/
                Joseph Peters
            
            Director
            
            November
                14, 2008Joseph
                Peters/s/
                David Stoller
            
            Director
            
            November
                14, 2008David
                Stoller




72