UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




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


EXCHANGE
ACT OF 1934




For the
fiscal year ended June 30, 2010




OR




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




For the
transition period from ______________________
to________________________




Commission
file number 0-16730





MSGI Security Solutions,
Inc.


(Exact
Name of Registrant as Specified in Its Charter)




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





Registrant’s telephone number,
      including area code:
              
              (212)
    605-0245Securities registered pursuant to
      Section 12(b) of the Exchange
Act:
              
              NoneSecurities registered pursuant to
      Section 12(g) of the Exchange Act:




Common
Stock, par value $.01 per share


(Title of
class)




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


Yes o No  x





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


Yes o No  x





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


Yes x No  o





Indicate
by check mark if whether the registrant has submitted electronically and posted
on its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes x No  o





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer  o
              Accelerated
      filer o
              Non
      accelerated filer   o
              Smaller
      reporting company 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





As of
December 30, 2009, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $1,916,000.





As of
October 31, 2010, there were 82,424,371 shares of the Registrant's common stock
outstanding.










TABLE OF
CONTENTS





Part
      IItem
      1.           Description
      of Business
            
            
            Page 3Item
      1A.        Risk
      Factors
            
            
            Page
      8Item
      1B.        Unresolved Staff
      Comments
            
            
            Page
      13Item
      2.           Properties
            
            
            Page
      13Item
      3.           Legal
      Proceedings
            
            
            Page
      13Item
      4.           Submission
      of Matters to a Vote of Security Holders
            
            
            Page
      13Part
      IIItem
      5.           Market
      for Registrant’s Common Equity, Related Stockholder Matters
      andIssuer
      Purchases of Equity Securities
            
            
            Page
      14Item
      6.           Selected
      Financial Data
            
            
            Page
      14Item
      7.           Management’s
      Discussion and Analysis of Financial Condition and
      Resultsof
      Operations
            
            
            Page
      14Item
      7A.        Quantitative and
      Qualitative Disclosures About Market Risk
            
            
            Page
      25Item
      8.           Financial
      Statements and Supplementary Data
            
            
            Page
      26Item
      9.           Changes
      In and Disagreements with Accountants on Accounting andFinancial
      Disclosures
            
            
            Page
      57Item
      9A(T).   Controls and Procedures
            
            
            Page
      57Item
      9B.        Other
      Information
            
            
            Page
      59Part
      IIIItem
      10.         Directors,
      Executive Officers and Corporate Governance
            
            
            Page
      60Item
      11.         Executive
      Compensation
            
            
            Page
      64Item
      12.         Security
      Ownership of Certain Beneficial Owners and Management
      andRelated
      Stockholder Matters
            
            
            Page
      69Item
      13.         Certain
      Relationships and Related Transactions, and Director
      Independence
            
            
            Page
      70Item
      14.         Principal
      Accountant Fees and Services
            
            
            Page
      71Part
      IVItem
      15.         Exhibits
            
            
            Page
      72Signatures
            
            
            Page
      73




2


PART
I





Special Note Regarding
Forward-Looking Statements




Some of
the statements contained in this Annual Report on Form 10-K discuss our plans
and strategies for our business or state other forward-looking statements, as
this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, industry capacity, 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 developing proprietary
solutions for commercial and governmental organizations. The Company is
developing a global combination of innovative emerging businesses that leverage
information and technology. The Company is headquartered in New York City where
it serves the needs of counter-terrorism, public safety, and law enforcement and
is developing new technologies in nanotechnology and alternative energy as a
result of its recently formed relationship with The National Aeronautics and
Space Administration (NASA).





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 and other technologies may be
employed.





At the
current time, the MSGI strategy is focused on the collaboration between the
Company and NASA in an effort to commercialize various revolutionary
technologies developed by NASA in the fields of nanotechnology and alternative
energy. The Company’s initial areas of focus are in the use of chemical sensors
or nano-sensing technology and in the use of nanotechnologies geared towards
scalable alternative energy solutions which may help provide more efficient
operations in yielding lower electricity costs than conventional energy
sources.





Under the
partnership efforts with NASA, the Company plans to form a number of majority
owned subsidiaries, each of which will hold the rights to a specific technology
and each will also serve as a vehicle for investment capital. The Company will
also function as a co-developer capacity with NASA and will collaborate with
several academic institutions including Carnegie Mellon University, Stanford
University and the University of California, Berkley in these
efforts.




3


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 four years:







Date
            
            Name of Company Acquired / Ownership
      Interest
            
            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.January
      2007
            
            Excelsa
      S.p.A. filed for bankruptcy. The investment, originally acquired in
      December 2004, was fully impaired.April
      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.January
      2008 – April 2008
            
            Investments
      in Current Technology Corp. for a total original interest of
      12.6%.
            
            Provider
      of GPS systems and services for security both for the civilian and
      military markets.May
      2009
            
            Surrender
      of a portion of the Investments in Current Technology Corp. bringing total
      interest to approximately 10.6%August
      2009
            
            Incorporated
      wholly-owned subsidiary Nanobeak, Inc.
            
            A
      nanotechnology company focused on carbon based chemical sensing for gas
      and organic vapor detectionSeptember
      2009
            
            Incorporated
      wholly-owned subsidiary Andromeda Energy Inc.
            
            A
      company focused on scalable alternative energy solutions employing NASA
      developed nanotechnology




Industry




The
primary industries in which our companies have historically operated 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. Principal domestic client relationships included the US Secret
Service, US Marshals Service, FBI, CIA and other commercial organizations
including convention centers and major hotels.





The
Company abruptly put the homeland security business on hold as a result of the
breach of contracts between Hyundai, Apro and other enities and the
Company. MSGI has since executed several Space Act Agreements with The
National Aeronautics and Space Administration (“NASA”) forming a partnership
between MSGI and the NASA Ames Research Center for the purpose of technology
transfer and near-term commercialization of NASA inventions.




4




The
Company believes that its new relationship with NASA will serve to broaden its
capacities in the areas of homeland security and public safety as well as
diversify the range of products and services available and, thus, open the
Company to new markets and industries.




Services Offered by MSGI and
its Subsidiaries





Relationship
with The National Aeronautics and Space Administration:





The
Company’s collaborative relationship with NASA was begun in August 2009 with the
execution of a Space Act Agreement (SAA) forming a partnership between MSGI and
the Ames Research Center (ARC) located at Moffet Field in California. The
purpose of this collaboration between MSGI and NASA is to develop new prototype
chemical sensors using NASA’s nano-sensor technology to meet MSGI’s need in
sensor commercialization in security, biomedical and other areas. This sensor
technology platform could potentially be used in efforts such as chemical leak
detection and hazardous material detection. MSGI intends to develop this
technology for commercial applications, homeland security applications, and
medical diagnostic applications for type I diabetes (acetone detection) at first
and possibly other applications in future years. There can be no assurances that
we will be successful in commercializing such applications.





In August
2009, the Company announced the formation of its first subsidiary for NASA based
technology. The subsidiary, named Nanobeak Inc. (Nanobeak) is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection. Some potential space and terrestrial applications for this technology
include cabin air monitoring onboard the Space Shuttle and future spacecraft,
surveillance of global weather, forest fire detection and monitoring, radiation
detection and various other critical capabilities. The commercial applications
of these nanotech chemical sensors relate specifically to efforts in Homeland
Security and defense, medical diagnostics and environmental monitoring and
controls. Nanobeak seeks to offer products in these market sectors beginning in
the current fiscal year ending June 30, 2011, but the timing of such offers may
be affected by unforeseen difficulties in development and commercialization
efforts. In September 2009, the Company announced that it is developing its
first product derived from the NASA nanotechnology, a handheld diagnostic device
designed for medical and environmental testing and detection using breakthroughs
in nanotechnology and chemical sensing. Nanobeak intends to take the handheld
sensor from prototype to commercial production and international distribution.
The US Department of Homeland Security and the US Department of Defense have
already provided more than $5 million in grant money to advance the efforts of
NASA in developing working prototypes.





In
September 2009, the Company announced the formation of its second subsidiary for
NASA based technology. Andromeda Energy Inc. (Andromeda) will be focused on
scalable alternative energy solutions employing NASA developed nanotechnology.
These technologies operate more efficiently than current technologies and
therefore yield significantly lower electricity costs per watt than conventional
energy systems and sources. The Company has already been approached with
potential partnerships in the planned deployment of this new technology,
primarily from various major corporations located in the People’s Republic of
China.





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




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. The Company
has subsequently named Hyundai as a defendant in a legal action taken in the
State of California and currently views any and all contracts and agreements
with Hyundai in breach.





There
have been no business transactions under the Sub-Contract or License agreement
as of June 30, 2010 or to date and the Company currently is not anticipating any
in the near future. This business relationship has now ceased.





In May
2009, the Company engaged legal counsel to represent the Company in potential
legal action against Hyundai and others. Subsequently, the Company filed suit in
United States District Court, Northern District of California naming Hyundai,
among others, as a defendant. The Company seeks restitution for breach of
contract, among other allegations.




5




Apro




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. The contract calls for
gross profit margins estimated to be between 26% and 35% including a profit
sharing arrangement with Apro Media, which will initially take the form of
unregistered MSGI common stock, followed by a combination of stock and cash and
eventually just cash. The Company has subsequently named Apro as a defendant in
a legal action taken in the State of California and currently views any and all
contracts and agreements with Apro in breach.





Per the
terms of the sub-contract agreement with Apro, the Company was to compensate
Apro with 3,000,000 shares of the Company’s common stock when the sub-contract
transactions resulted 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 which such revenues were subsequently reversed. 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 was reflected as a liability in our Consolidated
Balance Sheet at June 30, 2008.  A credit of $62,336 was realized to
the Consolidated Statement of Operations during the year ended June 30, 2009, as
reversal for this accrual, relative to the fact that the Company has initiated
legal action against Apro and, as such, considers the transactions to be null
and void. As such, the remaining shares will not be issued.  The total
expense for the year ended June 30, 2008 related to shares both issued and
issuable to Apro was approximately $1.1 million.





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 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 or to date. 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
were reported on the balance sheet in “Costs of product shipped to customers for
which revenue has not been recognized” and these costs have been fully reserved
and written off as of June 30, 2009.





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
operated both Hyundai and Apro. Under the accelerated terms, the Company
expected 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 expected 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 had $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, as discussed above.  These transactions have
not resulted in the realization of revenues or profits, and the relationships
have effectively ceased.





In May
2009, the Company engaged legal counsel to represent the Company in potential
legal action against Hyundai and others. Subsequently, the Company filed suit in
United States District Court, Northern District of California naming Hyundai,
among others, as a defendant. The Company seeks restitution for breach of
contract, among other allegations.





Innalogic,
LLC:




Innalogic
LLC (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 is an operating subsidiary of MSGI,
which was established in 2004. They are principally focused on the homeland
security and surveillance industry in the United States and
internationally.





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.




6




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
developed the Wireless Video deployment Package known as SAFETY WATCH -
a rapidly deployable, self-contained video surveillance product. It combines
secure short-range broadband wireless networking, complete with state-of-the-art
video cameras, including world- class command center and mobile surveillance
software built upon the foundation of Network-Centric Warfare (NCW) concepts and
adaptive architecture.





During
the year ended June 30, 2010, there were no product sales by the Innalogic
subsidiary.





On April 1, 2007 the Company and
Innalogic, LLC entered into a non-exclusive License Agreement with the CODA
Octopus Group, Inc. (CODA). This agreement allowed for CODA to market the
Innalogic 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 would pay a
20% royalty to MSGI from the sale of the Technology to its customers. CODA
assumed certain development and operational activities of Innalogic through this
relationship.





Currently,
the Company is focusing on new business development and agreements under the
Corporate office of MSGI Security Solutions, Inc.  While the Innalogic
products are still current products of the Company, the Company does not expect
any sales of these products in the immediate future, but there may be long-term
opportunities.




Future
Developments America, Inc. (FDA):




FDA is a
currently inactive, wholly-owned subsidiary of the Company. FDA was founded by
the same individuals who founded and owned Future Developments Limited (FDL), a
Canadian company. As a result of a July 1, 2005 amendment to our agreements with
the founders of FDA, the technology and intellectual property being developed at
the time was transferred to FDL and we, through our subsidiary FDA, became a
non-exclusive licensee in the United States of certain products developed by FDL
and of other products developed by outside organizations. We also became
entitled to receive royalties on U.S domestic sales of certain products by FDL.
No such sales, earning any royalties, have occurred since inception of the
amendment.




Currently,
the Company is focusing on new business development and agreements and, while
the FDL products are still current products of the Company, the Company does not
expect any sales of these products in the near future. There may be some future
long-term opportunities for this currently dormant subsidiary.





MSGI:





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, medical
service providers, and energy service producers and providers. 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, construction
companies, hospitals and clinics, health care service providers and energy
producers and providers. Our ability to deliver our technology to customers may
be hindered by our current liquidity and resource issues.




7




Competition





Our most
recent business development efforts involve the new relationship with NASA.
Because the nanotechnologies to be developed and marketed in conjunction with
NASA are cutting-edge and newly emerging, it is difficult to determine exactly
which other organizations will be our direct competitors in the various
industries and markets in which we shall enter and perform.





In our
historical business operations, there have been several companies 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 has been 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.




Facilities





The
Company leases all of its real property. Facilities for its headquarters are in
New York City. The Company also leases space in San Francisco, California for
use in its developing relationship with The National Aeronautics and Space
Administration. The Company believes that its existing facilities are in good
condition and are adequate for its current needs, however, to the extent that
the burgeoning relationship with NASA, we may need to seek additional facilities
and resources. The Company currently leases the facilities for both its
headquarters in New York City and its California office on a month-to-month
basis, but expects to execute a long-term lease agreement in the near
future.





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 undertaken at the NASA Ames Research Facility.
Under the terms of the two executed Space Act Agreements, MSGI subsidizes the
research and development efforts undertaken by NASA at the Ames Research
Facility.  During the year ended June 30, 2010, the Company realized
expenses of approximately $760,000 for research and development, through its
Nanobeak and Andromeda Energy subsidiaries. An additional amount of
approximately $1.0 million of research and development is required based on the
Company’s agreements with NASA. The Company incurred no such expenses during the
year ended June 30, 2009.





Employees





At June
30, 2010, the Company and its majority owned subsidiaries employed three persons
on a full-time basis. Additionally, the Company employed various organizations
to perform certain investor relations, business development, financing and other
general business practices 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.





Item 1A. Risk
Factors





The
following important factors, among others, could cause our actual operating
results to differ materially from those indicated or suggested by
forward-looking statements made in this Form 10-K or presented elsewhere by
management from time to time.




8




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




The
Company currently has severely limited capital resources and has incurred
significant historical losses and negative cash flows from operations. In the
fiscal year ended June 30, 2010 we incurred a net loss of approximately $13.4
million, had cash outflows from operations of approximately $1.6 million and we
expect to continue to generate significant losses and cash outflows from
operations in the future.  In addition, as of June 30, 2010 we have a
working capital deficit of approximately $26.6 million.  All of our
approximately $15 million of outstanding debt instruments are either past due,
due on demand or due with in the next 12 months, and the Company does not
currently have the resources to pay such instruments. We currently have no
active trade or business that will generate revenues and therefore the Company
will need to raise additional capital to finance its obligations under the NASA
SAA agreements and repay its existing debts. There can be no assurances that the
Company can raise additional funds or such funds will be available on terms
acceptable to the Company. Failure to raise additional funds in the near term
could have a material adverse effect on the Company's ability to continue as a
going concern and to achieve its business objectives.





We
currently have no operating trade or business and may never reach
profitability





In 2009
we ended our relationships with our only customers, Hyundai and Apro, and exited
the security surveillance business.  At that time and through June 30,
2010, we had no business with which to replace the business we
ceased.  Currently our operations consist of an R&D partnership
with NASA in which we are attempting to develop new technologies in which to
commercialize.  To date, we have yet to commercialize any of the
products or technologies that are the subject of our partnership with NASA, nor
are we certain of when or if we will be able to successfully produce a
technology which we could commercialize.  We therefore cannot
guarantee that we will ever develop a functional operating business and even
should we be able to develop and commercialize a product in partnership with
NASA, we cannot guarantee that that product will be profitable.  We
therefore may never reach profitability.





We
may be unable to continue our partnership with NASA





Our
agreements with NASA require that we make substantial payments on a defined
schedule to enable NASA to adequately budget and provide for the research and
development work necessary under our SAA agreements. As of June 30, 2010, we
currently are past due in making scheduled payments under both SAA agreements,
in the amount of approximately $1 million.  To date NASA has
accommodated our inability to make payments on schedule, however, NASA is under
no contractual obligation to continue to do so and in the event that we continue
to be late making scheduled payments, NASA at any point could terminate our SAA
contracts, which would include a termination of our license to any technology
under the SAA agreements and also could entail NASA no longer pursuing any
further business with us.





We
are running out of authorized shares our common stock





We have
authorized capital of 100,000,000 shares of our common stock.  At June
30, 2010 we had 73,674,371 shares issued or issuable. In addition at June 30,
2010 we had consulting agreements outstanding in which we committed to issuing a
further 9,800,000 shares shortly after June 30, 2010.  Because the
Company does not currently have an operating business, we are dependent upon our
common stock and instruments convertible into our common stock to act as our
currency.  We use our common stock and instruments convertible into it
to compensate our consultants, to incentivize our debt holders to act in our
best interest and sometimes to pay our employees.  In the fiscal year
ended June 30, 2010 we issued 37.26 million shares and warrants for a further
1.2 million shares to consultants, issued 9.5 million shares under the Enable
Exchange Agreement and issued approximately 1.6 million shares to entice lenders
to lend to us or to forebear enforcement of default provisions against
us.





Should we
be unable to convince our stockholders to increase our authorized share capital,
we could face significant problems in the upcoming fiscal year retaining and
compensating our consultants, maintaining good working relationships with our
current lenders and obtaining access to financing.  We also have
instruments outstanding, in the form of convertible debt, warrants and options,
which if converted would require us to issue approximately 99 million more
shares which exceeds our current number of authorized shares.  Should
a significant holder(s) of these instruments decide to exercise their
instruments, we may be unable to accommodate them and face significant monetary
penalties for failure to deliver the underlying common shares.




9




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




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






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




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




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




our new
products are not introduced on a timely basis;




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




our new
products experience reliability or quality problems.






The
focus of our key management staff may be diverted by efforts in the legal
actions against Apro, Huyndai and others.




The
Company has recently engaged legal representation and has filed suit against
Apro, Hyundai and certain other entities and individuals in an effort to recover
damages to MSGI resulting from the alleged actions by these companies and
individuals. In this effort,  the management staff may be placed in a
situation where its attention is diverted from development and commercialization
efforts with NASA to the requirements of these legal proceedings.






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




Management
believes that we will offer state-of-the art products that are reliable and
competitively priced. In the event that our products do not perform to
specifications or are defective in any way, our reputation may be materially
adversely affected and we may suffer a loss of business and a corresponding loss
in revenues.






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




We rely
on our officers and key employees and their expertise.  The loss of
the services of any of these individuals may materially and adversely affect our
ability to pursue our current business strategy.






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




Our
collaboration with NASA may be jeopardized if we have difficulty in assimilating
the personnel, operations, technology and software with our newly formed
subsidiaries. In addition, the key personnel of NASA or other potential partners
may decide to leave their respective companies and positions.  If we
make other types of acquisitions, we could have difficulty in integrating the
acquired products, services or technologies into our
operations.  These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses.




10




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




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




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




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




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




the
increasing demands on the Company's operational systems;




adverse
effects on the Company's reported operating results;




the
amortization of acquired intangible assets; and




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






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




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






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




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






We
may have errors in our Form 10-K




The
Company’s review of its internal control over financial reporting identified
material weaknesses. A material weakness is a 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
consolidated financial statements will not be prevented or detected on a timely
basis.




11




The
price of our stock has been volatile.




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




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




announcements
regarding our products, services or technologies;




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




developments
relating to our patents or proprietary rights;




specific
conditions affecting the electronic surveillance industry;




sales of
our common stock into the public market;




general
market conditions; and




other
factors.




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




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




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




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




subjecting
us to significant liability for damages;




resulting
in invalidation of our proprietary rights;




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




resulting
in the diversion of management time and attention.




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




12




There is a limited market for
“penny
stocks”such as our
common stock.


Our
common stock is considered a “penny stock” because, among other things, its
trading price is below $5.00 per share. This designation requires any broker or
dealer selling these securities to disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell our common stock and may
affect the ability of investors to sell their shares. In addition, since our
common stock has been traded on the Over-the-Counter Bulletin Board,
investors may find it difficult to obtain accurate quotations of our common
stock and may experience a lack of buyers to purchase such stock or a lack of
market makers to support the stock price. Being a penny stock also could limit
the liquidity of our common stock and limit the coverage of our stock by
analysts.




Future
sales of our shares could adversely affect its stock price.




As of
October 31, 2010, there were 82,424,371 shares of our common stock outstanding,
of which approximately 75,114,000 shares are freely tradable without restriction
under the Securities Act or are eligible for sale in the public market without
regard to the availability of current public information, volume limitations,
manner of sale restrictions, or notice requirement under Rule 144(k), and does
not include any shares held by or purchased from persons deemed to be our
"affiliates" which are subject to certain resale limitations pursuant to Rule
144 under the Securities Act. The remaining shares of common stock outstanding
are eligible for sale pursuant to rule 144 under the Securities Act. Since June
30, 2010, the Company has issued 8,750,000 shares of common stock, all of which
were issued to a variety of service providers for services rendered or to be
rendered.




Item 1B. Unresolved Staff
Comments





N/A




Item 2.
Properties





The
Company is headquartered in New York City where it leases and maintains
approximately 1,200 square feet of office space, 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 $9,500. The Company also leases approximately 1,000
square feet of space for office use in San Francisco. This lease runs on a
monthly basis with a monthly rent of $3,780.




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.





In May
2009, the Company engaged the law firm of GCA Law Partners LLP, of Mountain
View, California, to represent us in possible action against Hyundai Syscomm
Corp., Apro Media Corp., Hirsch Capital Corp. and other entities and
individuals. Subsequently, the Company filed suit in United States District
Court, Northern District of California, alleging, among other faults, fraud,
breach of contract and unfair business practices. The Company seeks financial
relief and compensation for the alleged actions of the parties named in the
action. The engagement agreement calls for GCA to be compensated for all fees
incurred on a contingent basis, pending outcome of the lawsuit, and, further,
calls for the Company to issue 50,000 shares of common stock of the Company to
each of the two partners managing the legal proceedings.





During
the three month period ended June 30, 2010, GCA Law Partners filed a motion to
be dismissed as counsel for the Company and formally withdrew from the
proceedings. This action was not due to any foreseen difficulties with the
Company’s case against the defendants, but rather was the result of the
Company’s currently inability to remit cash compensation to the firm on a timely
basis. The Company has engaged the assistance of alternative legal counsel and
the case is proceeding.




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





N/A





13




PART
II





Item 5. Market for Common
Equity, Related Stockholder Matters and 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
      2010Fourth
    Quarter
            
            $
            0.06
            
            
            $
            0.13Third
    Quarter
            
            
            0.02
            
            
            
            0.18Second
    Quarter
            
            
            0.04
            
            
            
            0.14First
    Quarter
            
            
            0.02
            
            
            
            0.21Fiscal
      2009Fourth
    Quarter
            
            $
            0.03
            
            
            $
            0.12Third
    Quarter
            
            
            0.03
            
            
            
            0.20Second
    Quarter
            
            
            0.07
            
            
            
            0.26First
    Quarter
            
            
            0.20
            
            
            
            0.54





As of
June 30, 2010, there were approximately 880 registered holders of record of the
Company’s common stock.





The
Company has not paid any cash dividends on any of its capital stock in at least
the last eight 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. Select Financial
Data





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.





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





Critical Accounting
Policies





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





The
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:




·
            Equity
      based compensation





·
            Debt
      instruments and the features / instruments contained
    therein







·
            Derivative
      liabilities





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.





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




14




Equity
Based Compensation:





The
Company follows FASB ASC 718 in accounting for all share-based payments to
employees, directors or others. This Statement requires that the cost resulting
from all share based payment transactions are recognized in the financial
statements of the Company. That cost will be measured based on the fair market
value of the equity or liability instruments issued.





Debt
instruments, and the features/instruments contained therein:





Deferred
financing costs are amortized over the term of its associated debt instrument.
The Company evaluates the terms of the debt instruments to determine if any
embedded derivatives or beneficial conversion features exist. The Company
allocates the aggregate proceeds of the notes payable between the warrants and
the notes based on their relative fair values. The fair value of the warrants is
calculated utilizing the Black-Scholes option-pricing model. The Company is
amortizing the resultant discount or other features over the term of the notes
through its earliest maturity date 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 obtained waivers of the
conversion price and exercise price reset provisions and cross default features
in certain of the Company’s debt and warrant agreements for all of the fiscal
year ended June 30, 2010 and for the first quarter of fiscal 2011





Derivative
liabilites:





Beginning
in July 2009, the Company had convertible debt, accrued interest, contractually
issuable shares, options and warrants that if converted into common stock shares
would exceed the amount of the Company’s authorized common shares.


As a
result, a derivative liability is recorded for the shares issuable which
exceeded the authorized number of common shares





Overview





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





NASA




In August
2009, the Company announced that it had executed two Space Act Agreements with
NASA forming a partnership between MSGI and the Ames Research Center (ARC)
located in Moffet Field, California. The purpose of this collaboration between
MSGI and NASA is to commercialize various revolutionary technologies developed
by NASA in the fields of nanotechnology and alternative energy. The Company’s
initial area of focus is to be on the use of chemical sensors or nano-sensing
technology. These wired and wireless detection systems were first developed
for space exploration in 2007 and 2008 for experiments carried out on the Space
Shuttle Endeavor. The Company intends to form a number of majority owned
subsidiaries, each of which will hold the rights to a specific technology and
also serve as the vehicle for investment capital.





In August
2009, the Company announced that it had formed its first subsidiary for NASA
based technology. This new subsidiary, named Nanobeak Inc., is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection – effectively electronic sniffing. NASA developed these Nano Chemical
Sensors for space missions to increase scientific measurement capabilities with
less mass and lower power requirements. The potential space and terrestrial
applications include cabin air monitoring onboard the Space Shuttle,
surveillance of global weather, forest fire monitoring, radiation detection, and
various other mission critical capabilities. This technology was
developed at the NASA Ames Research Center located in Moffet Field,
California. The commercial applications of these Nano Chemical Sensors relate
specifically to Homeland Security and Defense, Medical Diagnoses, Environmental
Monitoring and Process Control. Nanobeak seeks to offer products in each of
these sectors beginning in the fiscal year ending June 30, 2011, but timing of
these efforts cannot be assured.





In
September 2009, the Company announced that it had formed its second subsidiary
for NASA based technology. The subsidiary is named Andromeda Energy Inc. and it
is a nanotechnology company focused on scalable alternative energy solutions
that operate more efficiently, and therefore yield significantly lower
electricity cost per watt than conventional energy sources. The Company is in
receipt of several expressions of interest for partnerships in the planned
deployment of this new technology from major corporations located in the
People’s Republic of China.




15




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. The Company
has subsequently named Hyundai as a defendant in a legal action taken in the
State of California and currently views any and all contracts and agreements
with Hyundai in breach.





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 was to 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. The contract called for
gross profit margins estimated to be between 26% and 35% including a profit
sharing arrangement with Apro Media, which will initially take the form of
unregistered MSGI common stock, followed by a combination of stock and cash and
eventually just cash. The Company has subsequently named Apro as a defendant in
a legal action taken in the State of California and currently views any and all
contracts and agreements with Apro in breach.





Stock
Compensation





During
the year ended June 30, 2010, the Company entered into several business
development, investor relations and consulting and advisory agreements with
separate service providers. Under the terms of these agreements, the Company has
committed to issue shares of common stock in lieu of cash in consideration for
the services provided and to be provided by these individual firms. As June 30,
2010, the Company has issued approximately 37.7 million shares of common stock
in lieu of various categories of cash compensation for services rendered and to
be rendered by the firms. Such services include, but are not be limited to,
investor relations, identification of potential providers of equity or hybrid
financing, the identification of strategic or joint-venture and licensing
partners, the identification of merger and/or acquisition candidates, the
provision of general business advice, the overview of governmental procurement
programs, the preparation of disclosure, marketing and promotional
materials.





Major recent financing
transactions





In July
2009, the Company executed a NASA Funding Promissory Note in the amount of
$240,004 with a lender who also holds a promissory note from December 2007. The
new promissory note was executed in order to enable the Company to meet its
obligations under a certain Space Act Agreement, which had been entered
into with The National Aeronautics and Space Administration. The note bears
interest at 25% and matured on August 30, 2009. In addition, the Company was
obligated to issue 500,000 shares of common stock to the lender as additional
consideration to enter into the note agreement. The shares were issued to the
lender in September 2009. As of the date of this filing, the principal balance
and accrued interest has not yet been paid to the lender. Although the note is
technically in default as of the date of this filing, the lender has made no
formal claim of default and the Company is currently in negotiations with the
lender for extension of the terms.





In March
2010, the Company entered into a series of 10% convertible promissory notes for
an aggregate of $650,000. Closing costs of approximately $81,000 were paid from
the proceeds, providing a net of approximately $569,000. These notes carry a
maturity life of one year from the date of issuance.





In June
2010, the Company entered into a series of 10% convertible promissory notes for
an aggregate of $300,000. Closing costs of approximately $10,000 were paid from
the proceeds, providing a net of approximately $290,000. These notes carry a
maturity life of one year from the date of issuance.





During
2010 and 2009, the Company received net proceeds of approximately $674,000 and
$167,000 of advances from a certain corporate officer, which have no stated
interest rate or maturity date.





Results of Operations Fiscal
2010 Compared to Fiscal 2009





For the
year ended June 30, 2010 (the Current Period), the Company realized no
revenues.




16




For the
year ended June 30, 2009 (the Prior Period), the Company realized revenues in
the amount of $282,000 which was generated from providing consulting
services.





Costs of
goods sold of approximately $4.1 million in the Prior Period were the result of
the Company recording a reserve for potential loss in recognition of potential
recovery issues surrounding costs associated with product shipped to customers
during the fiscal year ended Jun 30, 2008 for which revenue has not yet been
recognized due to recognition criteria on the transactions having not been met.
There were no such costs realized during the Current Period.





Research
and development expenses of approximately $760,000 were incurred during the
Current Period. These expenses were paid to NASA as reimbursement for research
and development costs incurred by NASA under certain Space Act Agreements, which
have been executed with the Company. There were no such costs in the Prior
Period.




Salaries
and benefits of approximately $694,000 in the Current Period decreased by
approximately $406,000 from salaries and benefits of approximately $1.1 million
in the Prior Period. Salaries and benefits decreased primarily due to one-time
adjustments to accruals of additional payroll taxes, penalties and interest
booked in the Prior Period by the Company, which were not realized during the
Current Period.





Selling,
general and administrative expenses of approximately $3.9 million in the Current
Period increased by approximately $2.5 million from comparable expenses of $1.4
million in the Prior Period. The increase is due primarily to the cost of shares
and warrants issued to various consultants for services, which resulted in an
increase in consulting expenses of approximately $2.8 million versus the Prior
Period, offset by decreases in other various expenses such as rent and travel
related costs.





During
the Current Period, the Company recorded depreciation and amortization expense
of approximately $13,000, which


was in
line with comparable expenses of approximately 15,000 in the Prior
Period.





Interest
expense of approximately $9.2 million in the Current Period increased by
approximately $6.5 million from interest expense of approximately $2.7 million
in the Prior Period. This increase is due primarily to an increase in non-cash
interest expenses derived from the amortization of certain debt discounts as
well as from interest accrued on new debt instruments issued during the current
period.





During
the Current Period, the Company realized a loss on the investment in Current
Technology Corp. of approximately $1.2 million. As of June 30, 2010, the Company
owns 15 million shares of the common stock of Current Technology, which
represents approximately 10.6% ownership of its outstanding common
stock.  During the fiscal year ended June 30, 2010, the Company
determined that the fall in the value based on the trading price of the stock of
Current Technology was an other-than-temporary impairment in the value of its
investment. The Company recorded an impairment of $1.2 million to reduce its
investment to the trading price of Current Technology as of June 30,
2010.




During
the Current Period, the Company realized a gain on change in certain derivative
liabilities of approximately $2.4 million. This gain represents an adjustment to
the derivative liability related to the number of common stock shares, which
would exceed the authorized number of common stock shares, if convertible debt
and equity instruments were exercised and converted into common stock, based on
fair value calculated by Black-Scholes as of June 30, 2010.





During
the Prior Period, the Company recognized expenses for adjustments to the fair
market value of certain put options of $150,000. These expenses represent the
adjustment to the fair market value of the put options as of August 22, 2008 on
which date the put options were redeemed and subsequently
cancelled.  As such, there were no such expenses in the Current
Period.





During
the Prior Period, the Company recognized a gain on the securities exchange
agreement of $1.7 million. This gain is the result of the redemption and
subsequent cancellation of all put options, Series H Preferred Stock and certain
related warrants held by Enable on August 22, 2008 and the related issuance by
us of the new $4 million convertible note, a $1 million cash payment and the
issuance of 20 million warrants for shares of common stock of Current Technology
Corporation. There was no such gain recognized in the Current
Period.





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.




17




The
Company has not filed income tax returns or payroll tax returns for three and
four years, respectively.





As a
result of the above, net loss attributable to common stockholders of
approximately $13.4 million in the Current Period increased by approximately
$5.4 million over comparable net loss of $8.0 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, 2010, the Company had approximately $161,000 in
cash and no accounts receivable. The Company believes that funds on hand
combined with funds that will be available from its various operations will not
be adequate to finance its operations and enable the Company to meet its
financial obligations and payments under its convertible notes and promissory
notes for the next twelve months. All of our promissory notes and other notes
payable are currently either past due or due within the next 12
months.  There are no assurances that any further capital raising
transactions will be consummated. Although certain transactions have been
successfully closed in the past, 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




Analysis
of cash flows during fiscal years ended June 30, 2010 and 2009:





The
Company realized a net loss of approximately $13.4 and $8.0 million in the
Current Period and Prior Period, respectively. The net loss includes
approximately $11.8 million and $6.7 million of non-cash charges to our
statement of operations in the Current and Prior Periods,
respectively.  Cash used in operating activities was approximately
$1.6 and $1.3 million in the Current Period and Prior Period,
respectively.   In the Current Period, our significant cash
expenses were approximately $500,000 under the NASA SAA Agreements, $200,000 for
rent, $100,000 for travel and entertainment most of which was incurred in
attempting to raise additional equity and debt financing and another $800,000 in
general and administrative costs ranging from consultants, to lawyers to
insurance and other costs.  As of June 30, 2010, we currently owe
approximately $1 million under the NASA SAA Agreements.





Because
of the fact that we had very limited cash resources, we utilized our stock as
our currency in the fiscal year ended June 30, 2010, issuing 32.6 million shares
to consultants, 9.5 million shares to Enable under a warrant exchange agreement
and a further 1.6 million shares to lenders and others as inducement to lend us
additional funds and to forego enforcement of certain provisions relating to
cross default and resets of conversion and or exercise prices.  We
expect to continue to use our stock as our currency as we have a limited ability
to raise new capital until such time as we can demonstrate that we can build a
viable new business from our relationship with NASA.




During
the Current Period, the Company realized net cash of approximately $1.8 million
from financing activities related primarily from proceeds from convertible
promissory notes and advances from a certain corporate officer.  In
the Prior Period, the Company realized net cash of approximately $1.4 million
from financing activities, gained from proceeds received from convertible notes
payable, advances from a certain corporate officer and proceeds from the release
of restricted cash accounts.




18




Leases: The Company currently
leases various office spaces under month-to-month leases. There are currently no
equipment leases. The Company incurs all costs of insurance, maintenance and
utilities.





Financing activities - Debt and
Advances:




Debt
obligations are summarized as follows:




Instrument
            
            Maturity
            
            Face
      Amount
            
            Coupon
      Interest Rate
            
            Carrying
      Amount at June 30, 2010, net of discount
            
            Carrying
      Amount at June 30, 2009, net of discount6%
      Notes
            
            Dec.
      13, 2009*
            
            
            1,000,000
            
            15%
            
            $
            1,000,000
            
            $         45,9406%
      April Notes
            
            April
      4, 2010*
            
            
            1,000,000
            
            15%
            
            
            1,000,000
            
            11,6308%
      Debentures
            
            May
      21, 2010*
            
            
            4,000,000
            
            18%
            
            
            4,000,000
            
            19,8918%
      Notes
            
            May
      21, 2010*
            
            
            4,000,000
            
            18%
            
            
            4,000,000
            
            4,000,00010%
      March Notes
            
            March
      31, 2011
            
            
            650,000
            
            10%
            
            
            3,036
            
            --10%
      June Notes
            
            June
      30, 2011
            
            
            300,000
            
            10%
            
            
            500
            
            --Term
      notes short-term
            
            December
      31, 2009*
            
            
            420,000
            
            18%
            
            
            420,000
            
            400,000Term
      note short-term
            
            February
      28, 2009*
            
            
            960,000
            
            18%
            
            
            960,000
            
            960,000Term
      note short-term
            
            March
      31, 2009*
            
            
            1,500,000
            
            18%
            
            
            1,500,000
            
            1,500,000Term
      notes short-term
            
            June
      17, 2009*
            
            
            250,000
            
            18%
            
            
            250,000
            
            250,000Term
      notes – short terms
            
            August
      21, 2009
            
            
            240,004
            
            30%
      for loan term + 3% per month
            
            
            240,004
            
            --Short
      term borrowings from Apro Media Corp
            
            N/A
            
            
            200,000
            
            N/A
            
            
            206,950
            
            206,950Short
      term borrowings from Current Technologies Corp.
            
            N/A
            
            
            70,000
            
            N/A
            
            
            40,000
            
            70,000Short
      term borrowings from officer of the Company
            
            N/A
            
            
            840,518
            
            N/A
            
            
            840,518
            
            167,062Short
      term borrowings from others
            
            N/A
            
            
            60,000
            
            N/A
            
            
            60,000
            
            60,000$
            15,490,522
            
            
            
            $
            14,521,008
            
            $7,691,473







*
            These
      notes are due on demand.




As of
June 30, 2010, the Company has the following debt commitments
outstanding:





Callable Secured Convertible
Note financing





March 10 %
Notes




On March
23, 2010, the Company entered into a private placement with individual
institutional investors and issued secured convertible promissory notes in the
aggregate principal amount of $650,000 (the March Notes) and stock purchase
warrants exercisable over a five year period for up to 6,500,000 shares of
common stock.


The March
Notes have a maturity date of March 23, 2011 and will accrue interest at a rate
of 10% per annum, compounded annually. Payments of principal under the March
Notes are not due until the maturity date and interest is due on a quarterly
basis, however the Investors can convert the principal amount of the March Notes
into common stock of the Company, provided certain conditions are met, and each
conversion is subject to certain volume limitations. The conversion price of the
10% March Notes is $0.10 per share yielding an aggregate total of possible
shares to be issued as a result of conversion of 7,150,000 shares. The exercise
price of the Warrants is $0.15 per share.




19




The March
Notes and warrants contain reset provisions, such that should the Company issue
any common share or instrument convertible into any common share at a price
lower than the conversion or exercise then in effect than the exercise price and
conversion price reset to that lower price.





The
Company has also entered into a security agreement (the “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 Notes and
Warrants.





In
addition, the Company entered into an additional investment rights agreement
(the “Additional Investment Right”), which grant each of the Investors the right
to purchase additional principal amounts of secured convertible promissory notes
equal to the principal amounts purchased in this original transaction. These
rights are in effect for a period of up to 180 days after the date of closing of
this original transaction.  One of the Investors received a due
diligence fee comprised of 5 year warrants exercisable for 500,000 shares of
common stock at an exercise price of $0.01 per share. Associated closing costs,
legal fees and various reimbursable expenses totaling approximately $81,000 are
included in deferred financing costs and will be amortized over the one-year
term of the notes.





Total
interest expense, including debt discount amortization, for the twelve months
ended June 30, 2010 and 2009 in connection with these notes was approximately
$21,000 and $0, respectively.




June 10%
Notes




On June
30, 2010, under the Additional Investments Right agreement, the company issued
additional secured convertible promissory notes in the aggregate principal
amount of $300,000 (the June Notes) and stock purchase warrants exercisable over
a five year period for up to 3,000,000 shares of common stock.





The June
Notes have a maturity date of June 30, 2011 and will accrue interest at a rate
of 10% per annum, compounded annually. Payments of principal under the June
Notes are not due until the maturity date and interest is due on a quarterly
basis, however the Investors can convert the principal amount of the March Notes
into common stock of the Company, provided certain conditions are met, and each
conversion is subject to certain volume limitations. The conversion price of the
10% March Notes is $0.07 per share yielding an aggregate total of possible
shares to be issued as a result of conversion of 4,714,285 shares. The exercise
price of the Warrants is $0.10 per share.





The June
Notes and warrants contain reset provisions, such that should the Company issue
any common share or instrument convertible into any common share at a price
lower than the conversion or exercise then in effect than the exercise price and
conversion price reset to that lower price.





Total
interest expense, including debt discount amortization, for the twelve months
ended June 30, 2010 and 2009 in connection with these notes was approximately
$600 and $0, 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), of which $4,000,000 is currently outstanding
with the remaining principal balance having been converted into shares of common
stock during fiscal 2008.





The 8%
Debentures have a maturity date of May 21, 2010 and, although technically in
default, no such default has been formally claimed by the current holders of the
Debentures. The Debentures currently accrue interest at a default rate of 15%
per annum and they accrued interest at a rate of 8% per annum through to
the date of maturity. Payments of principal and accrued interest under the
Debentures are not due until the maturity date. The conversion price of the 8%
Debentures is currently at $0.25. It is expected that the shares will be issued
to the holders sometime during the third quarter of fiscal year 2011 ending on
March 31, 2011, pending approval for an increase to the number of authorized
shares of common stock by a vote of the shareholders of the
Company.





On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these Debentures. The conversion price
of the Debentures was reduced from $0.50 to $0.25.




20





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.





The
holders agreed to waive certain provisions in the debentures and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the debentures and warrants, respectively, to reset
based on future equity issuances.  The waivers covered the entire year
ended June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 8% Debentures principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.





Total
interest expense, including debt discount amortization, for the twelve months
ended June 30, 2010 and 2009 in connection with this note was approximately $4.4
million and $594,000, respectively.





8% Notes




On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, an existing institutional investor of MSGI.  In
connection with that Agreement, MSGI entered into an 8% convertible note in the
aggregate principal amount of $4,000,000 (the 8% Notes).





The 8%
Notes have a maturity date of May 21, 2010 and are currently technically in
default, although no such default has been formally claimed by the current
holders. The notes accrued interest at a rate of 8% per annum through to the
maturity date and shall accrue interest at the default rate of 15% per annum
thereafter. The conversion price of the 8% Notes is currently at $0.25. It is
expected that the shares will be issued to the holders sometime during the third
quarter of fiscal year 2011 ending on March 31, 2011, pending approval for an
increase to the number of authorized shares of common stock by a vote of the
shareholders of the Company.





The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances.  The waivers covered the entire year ended
June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 8% Notes principal and accrued interest
with the intent to convert the value of the debt into a series of investments in
various MSGI operating subsidiaries, primarily those subsidiaries related to the
NASA technologies.





Total
interest expense, including debt discount amortization, for the twelve months
ended June 30, 2010 and 2009 in connection with this note was approximately
$327,000 and $274,000, respectively.





6% December
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, of which $1,000,000 is
currently outstanding with the remaining principal balance having been converted
into shares of common stock during fiscal 2008. There were no conversions during
fiscal 2010 fiscal 2009.





The 6%
Notes have a single balloon payment of $1,000,000, which was due on the maturity
date of December 13, 2009 and accrued interest at a rate of 6% per annum. The 6%
Notes are currently earning a default interest rate of 15% per annum. The
conversion price of the 6% Notes is currently at $0.25. It is expected that the
shares will be issued to the holders sometime during the third quarter of fiscal
year 2011 ending on March 31, 2011, pending approval for an increase to the
number of authorized shares of common stock by a vote of the shareholders of the
Company.





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




21




On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these Notes. The conversion price of the
Notes was reduced from $0.50 to $0.25.





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 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.


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.





The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances.  The waivers covered the entire year ended
June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 6% Notes principal and accrued interest
with the intent to convert the value of the debt into a series of investments in
various MSGI operating subsidiaries, primarily those subsidiaries related to the
NASA technologies.





Total interest expense, including debt
discount amortization, for
the twelve months ended
June 30, 2010 and 2009 in
connection with this note was approximately $1,088,000 and $166,000,
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 6% April Notes
have a single balloon payment of $1.0 million which was due on the maturity date
of April 4, 2010. These notes accrued interest at a rate of 6% per annum through
the maturity date. Although the notes are technically in default as of April 4,
2010, no such default has been formally claimed by the current holders. The
notes currently earn interest at the default rate of 15% per annum.





The
conversion price of the 6% April Notes is currently at $0.25. It is expected
that the shares will be issued to the holders sometime during the third quarter
of fiscal year 2011 ending on March 31, 2011, pending approval for an increase
to the number of authorized shares of common stock by a vote of the shareholders
of the Company.





As a
result of a 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 a
variable conversion rate noted above to a fixed rate of $0.50.


On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these April Notes. The conversion price
of the April Notes was reduced from $0.50 to $0.25.





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.





The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances.  The waivers covered the entire year ended
June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 6% April Notes principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.




22




Total
interest expense, including debt discount amortization, for the nine months
ended June 30, 2010 and 2009 in connection with this note was approximately
$1,092,000 and $124,000, respectively.





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.
During February 2010, one of the lenders extended an additional $20,000 to the
Company with this amount being added to the already then outstanding balance of
one of the existing notes. These notes were not repaid on this date and the
terms were amended at several different dates to extend them to maturity dates
of February 28, 2009, March 31, 2009, and December 31, 2009. While the notes
payable are technically in default at this time, neither of the lenders have
claimed default on the notes.





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.





Between
April 30, 2008 and April 1, 2009, the Company executed a series of Amendments to
the Term Notes, which extended the payment terms for the term notes through
February 28, 2009 for one lender, March 31, 2009 for one lender, and December
31, 2009 for the remaining two lenders.  Due to the default event,
commencing on April 15, 2008, the interest rate is now at the default interest
rate of 18%.  Also, two of the holders now have the right to convert
the note at a rate of $0.51 per share, and the other two holders have the right
to convert the note at a rate of $0.25 per share.





In
addition, the terms of certain 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.  These
warrants were subsequently cancelled with the October 2008 addendum and replaced
with other warrants and stock issued.  In addition, there were 520,000
shares of common stock issued in fiscal 2008 in connection with these
addendums.





During
the three months ended September 30, 2008, a total of 715,283 additional
warrants were issued to the note holders, all with an exercise price of
$0.50.  These warrants were subsequently cancelled with the October
2008 addendum, as noted below.  In addition, other group lenders
received shares of common stock of the Company instead of warrants under 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, which aggregated 1,000,000 warrants issued under those 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 issued 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 $0.50, between the date
of the agreement and December 31, 2008.





Effective
January 1, 2009, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
issued new warrants and additional shares of common stock and extended the
maturity date to March 31, 2009. The Company issued an additional 204,420 shares
of common stock and warrants to purchase an additional 204,420 shares of common
stock, at an exercise price of the greater of $0.50 or market value on the date
of grant. Effective February 1, 2009, the Company entered into an additional
addendum agreement with the fourth lender with regard to its held Note, which
issued 400,000 shares of common stock to the lender and extended the maturity
date of this Note to February 28, 2009.  Effective April 1, 2009, the
Company entered into additional addendum agreements with two out of four lenders
with regard to their respectively held Notes, which issued new warrants and
additional shares of common stock and extended the maturity date to December 31,
2009.  The Company issued an additional 221,195 shares of common stock
and warrants to purchase an additional 221,195 shares of common stock, at an
exercise price of the greater of $0.25 or market value on the date of the grant
for the period April 1, 2009 through June 30, 2009.




23




During
the twelve months ended June 30, 2010, the Company issued 92,400 warrants at an
exercise price of $0.25 and 92,400 shares of common stock.  The stock
was determined to have a fair value of $7,707, based upon the fair market value
of the common stock on each date issued.  The warrants were determined
to have a value of $6,953. The warrants were fair valued, at each warrant
issuance, using the Black-Scholes model.





In
February 2010, the exercise price of 326,486 of the previously issued warrants
was further reduced from $0.25 per shares to $0.15 per share as an incentive for
one of the lenders to provide the Company with an additional $20,000 in
cash.





During
March 2010, the holders certain of these convertible promissory notes
provided the Company with letters of agreement that the various notes shall be
extinguished and that the principal balances of these notes of approximately
$1.9 million, plus any and all accrued interest thereon, would be converted into
shares of common stock of the Company at an exchange rate of $0.20 per
share.  Further, it was agreed that these shares will be locked up and
will not be eligible for trading until at least December 31, 2010. As of June
30, 2010, the exchange shares have not been issued to the lenders by the Company
and the notes will remain reported as debt until such time as said shares are
issued. It is expected that the shares will be issued to the lenders sometime
during the third quarter of fiscal year 2011 ending on March 31, 2011, pending
approval for an increase to the number of authorized shares of common stock by a
vote of the shareholders of the Company.




10% Convertible Term Notes
payable




On March
16, 2009, the Company entered into three convertible promissory notes with
Enable which provided the Company with gross proceeds of $250,000. The notes
bear interest at a rate of 10% annually and are convertible into shares of
common stock of the Company at a conversion rate of $0.25 per share. The notes
had a maturity date of June 17, 2009.  As an inducement to Enable to
enter into the Convertible Term Notes, the Company entered into a Warrant
Exchange Agreement with Enable. The remaining terms of the 10% notes carry the
same provisions as the 8% Debentures. Due to the default event, commencing on
June 17, 2009, the interest rate is now at the default rate of
18%.  While the notes are technically in default at June 30, 2010, the
lender has made no claim of default.





The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances.  The waivers covered the entire year ended
June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 10% Notes principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.





25% Convertible Term Notes
payable




In July
2009, the Company executed a NASA Funding Promissory Note in the amount of
$240,004 with a lender who also holds a promissory note from December 2007. The
new promissory note was executed in order to enable the Company to meet its
obligations under a certain Space Act Agreement, which had been entered into
with The National Aeronautics and Space Administration. The note bears interest
at 25% and matured on August 30, 2009. In addition, the Company issued 500,000
shares of common stock to the lender as additional consideration to enter into
the note agreement. The shares were issued to the lender in September 2009. As
of June 30, 2010, and through the date of this filing, the principal balance and
accrued interest has not yet been paid to the lender. Although the note is
technically in default as of the date of this filing, the lender has not made
any claim of default.




Advances





During
the twelve months ended June 30, 2010, the Company received net funding in the
amount of approximately $678,000 from a certain corporate officer. During the
year ended June 30, 2009, the Company received net funding in the amount of
approximately $162,000 from this same corporate officer.  As of June
30, 2010, the total net amount received from the officer is approximately
$841,000. There is no interest expense associated with this advanced funding and
this is to be repaid upon the closing of any adequately successful funding event
or upon the collection of the Apro Media related accounts receivable, which has
not yet occurred. It is also noted by the Company that this certain corporate
officer is owed approximately $697,000 in back due compensation as of the twelve
months ended June 30, 2010.





Summary of Recent Accounting
Pronouncements





See
summary of our recent accounting pronouncements in the footnotes to our
financial statements elsewhere in this document.




24


Item 7A. Quantitative and
Qualitative Disclosures About Market Risk





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information required under this item.




25




Item 8. Financial Statements
and Supplementary Data




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Stockholders
 of
MSGI Security Solutions, Inc.
 
 We have
audited the accompanying consolidated balance sheets of MSGI Security Solutions,
Inc. as of June 30, 2010 and 2009, and the related consolidated statements of
operations, stockholders’ deficit and cash flows for the years then ended. MSGI
Security Solutions, Inc.’s management is responsible for these financial
statements.  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 also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, 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 financial statements referred to above present fairly, in all
material respects, the financial position of MSGI Security Solutions, Inc as of
June 30, 2010 and 2009, and the results of its operations and its cash flows for
each of the years then ended in conformity with accounting principles generally
accepted in the United States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
and negative cash flows from operations, and has a substantial amount of notes
payable due on demand or within the next twelve months and has very limited
capital resources, 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/
      L J Soldinger Associates, LLCL J
      Soldinger Associates, LLCDeer
      Park, IllinoisNovember
      15, 2010


26





MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS AS OF JUNE 30,





2010
            
            
            2009ASSETSCurrent
      assets:Cash
            
            $
            160,656
            
            
            $
            689Other
      current assets, principally deferred financing costs, net
            
            
            244,400
            
            
            
            -Total
      current assets
            
            
            405,056
            
            
            
            689Investment
      in Current Technology Corporation
            
            
            300,000
            
            
            
            1,500,000Property
      and equipment, net
            
            
            19,419
            
            
            
            32,299Deposits
      on technology licenses
            
            
            -
            
            
            
            175,000Other
      assets, principally long term deposits
            
            
            17,755
            
            
            
            338,223Total
      assets
            
            $
            742,230
            
            
            $
            2,046,211LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable - trade
            
            $
            1,206,719
            
            
            $
            1,313,059Derivative
      liability for excess shares
            
            
            3,170,374
            
            
            
            -Liability
      for RFMon settlement
            
            
            1,430,333
            
            
            
            1,430,333Accrued
      expenses and other current liabilities
            
            
            6,664,938
            
            
            
            4,664,192Advances
      from strategic partners
            
            
            246,950
            
            
            
            276,950Advances
      from corporate officer
            
            
            840,518
            
            
            
            167,062Other
      advances
            
            
            60,000
            
            
            
            60,000Convertible
      term notes payable
            
            
            3,120,004
            
            
            
            2,860,00010%
      Convertible promissory note payable
            
            
            250,000
            
            
            
            250,0006%
      Callable convertible notes payable, net of discount of $1,942,430 in
      2009
            
            
            2,000,000
            
            
            
            57,5708%
      Callable convertible notes payable net of discount of $3,980,109 in
      2009
            
            
            8,000,000
            
            
            
            4,019,89110%
      Callable convertible notes payable, net of discount of $946,464 in
      2010
            
            
            3,536
            
            
            
            -Total
      current liabilities
            
            
            26,993,372
            
            
            
            15,099,057Commitments
      and contingenciesStockholders’
      equity (deficit):Common
      stock - $.01 par value; 100,000,000 authorized; 73,692,033 and 24,932,967
      shares issued; 73,674,371 and 24,915,305 shares outstanding as of June 30,
      2010 and 2009, respectively
            
            
            736,919
            
            
            
            249,329Additional
      paid-in capital
            
            
            271,743,167
            
            
            
            272,057,383Accumulated
      deficit
            
            
            (297,337,518
            )
            
            
            (283,965,848
            )Less:
      17,662 shares of common stock in treasury, at cost
            
            
            (1,393,710
            )
            
            
            (1,393,710
            )Total
      stockholders’ equity (deficit)
            
            
            (26,251,142
            )
            
            
            (13,052,846
            )Total
      liabilities and stockholders’ equity (deficit)
            
            $
            742,230
            
            
            $
            2,046,211





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




27




MSGI SECURITY SOLUTIONS, INC. AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
YEARS ENDED JUNE 30,





2010
            
            
            2009RevenueConsulting
      fee revenue
            
            $
            -
            
            
            $
            282,000Total
      revenue
            
            
            -
            
            
            
            282,000Cost
      of revenue / products sold, including write down of $4,066,646 in
      2009
            
            
            -
            
            
            
            4,066,646Gross
      loss
            
            
            (-
            )
            
            
            (3,784,646
            )Operating
      costs and expenses:Salaries
      and benefits
            
            
            693,967
            
            
            
            1,121,734Research
      and development
            
            
            760,004
            
            
            
            -Selling,
      general and administrative (including non-cash credit of $(62,336) in 2009
      for shares to be issued toApro Media
            
            
            3,861,666
            
            
            
            1,392,832Depreciation
      and amortization
            
            
            12,880
            
            
            
            14,760Total
      operating costs and expenses
            
            
            5,328,517
            
            
            
            2,529,326Loss
      from operations
            
            
            (5,328,517
            )
            
            
            (6,313,972
            )Other
      income (expense):Interest
      income
            
            
            -
            
            
            
            13,124Interest
      expense
            
            
            (9,242,483
            )
            
            
            (2,707,501
            )Loss
      on investment in Current Technology Corp.
            
            
            (1,200,000
            )
            
            
            -Gain
      on change in derivative liability
            
            
            2,412,506
            
            
            
            -Miscellaneous
      income
            
            
            10,824
            
            
            
            -Non-cash
      expense for revaluation of put options to fair value
            
            
            -
            
            
            
            (150,000
            )Non-cash
      loss on debt guarantee
            
            
            -
            
            
            
            (500,000
            )Gain
      on put options
            
            
            -
            
            
            
            1,700,000Total
      other income (expense)
            
            
            (8,019,153
            )
            
            
            (1,644,377
            )Net
      loss from before provision for income taxes
            
            
            (13,347,670
            )
            
            
            (7,958,349
            )Provision
      for income taxes
            
            
            24,000
            
            
            
            16,657Net
      loss attributable to common stockholders
            
            
            (13,371,670
            )
            
            
            (7,975,006
            )Basic
      and diluted loss per share attributable to common
    stockholders
            
            $
            (0.27
            )
            
            $
            (0.34
            )Weighted
      average common shares outstanding basic and diluted
            
            
            50,421,250
            
            
            
            23,665,256




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




28




MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT


FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009





Common
      Stock
              
              
              Additional
                Preferred
      Stock
              
              
              Paid-in
              
              
              Accumulated
              
              
              Treasury
      StockShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              Shares
              
              
              Amount
              
              
              TotalsBalance
      June 30, 2008
              
              
              22,348,781
              
              
              $
              223,487
              
              
              
              5,000,000
              
              
              $
              50,000
              
              
              $
              271,243,011
              
              
              $
              (275,990,842
              )
              
              
              (17,662
              )
              
              $
              (1,393,710
              )
              
              $
              (5,868,054
              )Exchange
      of preferred stock for debt in Securities Exchange
    Agreement
              
              
              
              
              
              
              
              
              
              
              (5,000,000
              )
              
              
              (50,000
              )
              
              
              50,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              —Issuance
      of shares of common stock under Securities Exchange
    Agreement
              
              
              500,000
              
              
              
              5,000
              
              
              
              
              
              
              
              
              
              
              
              35,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              40,000Non
      cash compensation expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              221,478
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              221,478Issuance
      of shares of common stock to Officer as a bonus
              
              
              100,000
              
              
              
              1,000
              
              
              
              
              
              
              
              
              
              
              
              62,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              63,000Issuance
      of shares of common stock under Addendum to term notes
    payable
              
              
              1,984,186
              
              
              
              19,842
              
              
              
              
              
              
              
              
              
              
              
              400,907
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              420,749Fair
      value of warrants issued under Addendum to term notes
    payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              44,987
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              44,987Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,975,006
              )
              
              
              
              
              
              
              
              
              
              
              (7,975,006
              )Balance
      June 30, 2009
              
              
              24,932,967
              
              
              $
              249,329
              
              
              
              —
              
              
              
              —
              
              
              $
              272,057,383
              
              
              $
              (283,965,848
              )
              
              
              (17,662
              )
              
              $
              (1,393,710
              )
              
              $
              (13,052,846
              )Exchange
      of shares of common stock for warrants in Exchange
    Agreement
              
              
              9,500,000
              
              
              
              95,000
              
              
              
              
              
              
              
              
              
              
              
              1,090,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,185,000Non-cash
      compensation expenses
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,573
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,573Issuance
      of shares under terms of various consulting and services
      agreements
              
              
              37,666,666
              
              
              
              376,666
              
              
              
              
              
              
              
              
              
              
              
              2,827,384
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,204,050Issuance
      of shares for debt guarantee
              
              
              1,000,000
              
              
              
              10,000
              
              
              
              
              
              
              
              
              
              
              
              160,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              170,000Issuance
      of shares under terms of a certain loan agreement
              
              
              500,000
              
              
              
              5,000
              
              
              
              
              
              
              
              
              
              
              
              15,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              20,000Issuance
      of shares under addendum to term notes payable
              
              
              92,400
              
              
              
              924
              
              
              
              
              
              
              
              
              
              
              
              6,783
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,707Fair
      value of warrants issued to placement agents in March 2010
      financing
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              79,219
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              79,219Discount
      on convertible notes issued in March and June 2010
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              950,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              950,000Fair
      value of warrants issued to consultants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              128,752
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              128,752Fair
      value of warrants issued under terms of addendum to term notes
      payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,953
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,953Derivative
      value of shares of common stock committed in excess of authorized
      total
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,582,880
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,582,880
              )Net
      loss for the twelve months ended June 30, 2010
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (13,371,670
              )
              
              
              
              
              
              
              
              
              
              
              (13,371,670
              )Balance
      June 30, 2010
              
              
              73,692,033
              
              
              $
              736,919
              
              
              
              —
              
              
              
              —
              
              
              $
              271,743,167
              
              
              $
              (297,337,518
              )
              
              
              (17,662
              )
              
              $
              (1,393,710
              )
              
              $
              (26,251,142
              )





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




29




MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED JUNE 30,




2010
              
              
              2009OPERATING
      ACTIVITIES:Net
      loss
              
              $
              (13,371,670
              )
              
              $
              (7,975,006
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Gain
      on securities exchange agreement
              
              
              -
              
              
              
              (1,700,000
              )Depreciation
              
              
              12,880
              
              
              
              14,760Loss
      on impairment of investment
              
              
              1,200,000
              
              
              
              -Amortization
      of deferred financing costs
              
              
              348,361
              
              
              
              581,538Amortization
      of debt discounts
              
              
              5,947,861
              
              
              
              867,980Non-cash
      compensation expense
              
              
              4,573
              
              
              
              233,278Non-cash
      expense for revaluation of put options
              
              
              -
              
              
              
              150,000Non-cash
      loss on guarantee of debt
              
              
              -
              
              
              
              500,000Non-cash
      expense (credit) for shares to be issued to Apro Media
              
              
              -
              
              
              
              (62,336
              )Non-cash
      value of shares issued to lenders
              
              
              996,702
              
              
              
              -Non-cash
      value of warrants issued in financings
              
              
              86,172
              
              
              
              -Non-cash
      value of shares issued for services
              
              
              3,204,050
              
              
              
              -Non-cash
      value of warrants issued for services
              
              
              128,752
              
              
              
              -Gain
      on change in derivative liability
              
              
              (2,412,506
              )
              
              
              -Reserve
      on deferred costs of products shipped
              
              
              -
              
              
              
              4,066,646Changes
      in assets and liabilities:Accounts
      receivable
              
              
              -
              
              
              
              128,000Other
      current assets
              
              
              (37,500
              )
              
              
              -Other
      assets
              
              
              110,176
              
              
              
              (5,755
              )Accounts
      payable - trade
              
              
              (109,340
              )
              
              
              150,921Accrued
      expenses and other liabilities
              
              
              2,288,746
              
              
              
              1,737,140Net
      cash used in operating activities
              
              
              (1,602,743
              )
              
              
              (1,312,834
              )INVESTING
      ACTIVITIES:Deposits
      on technology contracts
              
              
              -
              
              
              
              (175,000
              )Purchases
      of property and equipment
              
              
              -
              
              
              
              (16,113
              )Net
      cash provided by (used in) investing activities
              
              
              -
              
              
              
              (191,113
              )FINANCING
      ACTIVITIES:Proceeds
      from convertible promissory notes
              
              
              1,210,004
              
              
              
              250,000Closing
      costs paid from proceeds of notes
              
              
              (90,750
              )
              
              
              -Cash
      advances from strategic partners, officers and others
              
              
              643,456
              
              
              
              304,012Restricted
      Cash proceeds (deposits)
              
              
              -
              
              
              
              1,800,000Cash
      paid from restricted cash in securities exchange agreement
              
              
              -
              
              
              
              (1,000,000
              )Net
      cash provided by financing activities
              
              
              1,762,710
              
              
              
              1,354,012Net
      increase in cash and cash equivalents
              
              
              159,967
              
              
              
              (149,935
              )Cash
      and cash equivalents at beginning of year
              
              
              689
              
              
              
              150,624Cash
      and cash equivalents at end of year
              
              $
              160,656
              
              
              $
              689





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





30




MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





1.  LIQUIDITY
AND COMPANY OVERVIEW:





Company
Overview:





MSGI
Security Solutions, Inc. (MSGI, we, us or the Company) is developing proprietary
solutions for commercial and governmental organizations. The Company is
developing a global combination of innovative emerging businesses that leverage
information and technology. The Company is headquartered in New York City where
it will be able to serve the needs of counter-terrorism, public safety, and law
enforcement.





At the
current time, the MSGI strategy is focused on the collaboration between the
Company and NASA in an effort to commercialize various revolutionary
technologies developed by NASA in the fields of nanotechnology and alternative
energy. The Company’s initial areas of focus are in the use of chemical sensors
or nano-sensing technology and in the use of nanotechnologies geared towards
scalable alternative energy solutions which may help provide more efficient
operations in yielding lower electricity costs than conventional energy
sources.





Under the
partnership efforts with NASA, the Company plans to form a number of majority
owned subsidiaries, each of which will hold the rights to a specific technology
and each will also serve as a vehicle for investment capital. The Company will
also function as a co-developer capacity with NASA and will collaborate with
several academic institutions including Carnegie Mellon University, Stanford
University and the University of California, Berkley in these
efforts.





In August
2009, the Company announced the formation of its first subsidiary for NASA based
technology. The subsidiary, named Nanobeak Inc. (Nanobeak) is a nanotechnology
company focused on carbon based chemical sending for gas and organic vapor
detection. Some potential space and terrestrial applications for this technology
include cabin air monitoring onboard the Space Shuttle and future spacecraft,
surveillance of global weather, forest fire detection and monitoring, radiation
detection and various other critical capabilities. The commercial applications
of these nanotech chemical sensors relate specifically to efforts in Homeland
Security and defense, medical diagnostics and environmental monitoring and
controls. Nanobeak seeks to offer products in each of these market sectors
beginning in the current fiscal year ending June 30, 2011, but the timing of
these efforts can not be assured.





In
September 2009, the Company announced the formation of its second subsidiary for
NASA based technology. Andromeda Energy Inc. (Andromeda) will be focused on
scalable alternative energy solutions employing NASA developed nanotechnology.
These technologies operate more efficiently than current technologies and
therefore yield significantly lower electricity costs per watt than conventional
energy systems and sources.





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 no current
revenues. At June 30, 2010, the Company had approximately $161,000 in cash and
no accounts receivable. The Company believes that funds on hand will not be
adequate to finance its operations and enable the Company to meet its financial
obligations and payments under its convertible notes and promissory notes for
the next twelve months. All of our promissory notes and other notes payable are
currently either past due or due within the next 12 months.  There are
no assurances that any further capital raising transactions will be consummated.
Although certain transactions have been successfully closed in the past, 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. There are no assurances the Company will receive the necessary
funding or generate revenue necessary to fund operations. If we are unable to
obtain additional funds, or if the funds cannot be obtained on terms favorable
to us, we will be required to delay, scale back or eliminate our plans to
continue to develop and expand our operations or in the extreme situation, cease
operations altogether.




31




Summary
of significant recent financing transactions:





During
2010 and 2009, the Company received net proceeds of approximately $674,000 and
$167,000 of advances from a certain corporate officer, which have no stated
interest rate or maturity date.





In July
2009, the Company executed a NASA Funding Promissory Note in the amount of
$240,004 with a lender who also holds a promissory note from December 2007. The
new promissory note was executed in order to enable the Company to meet its
obligations under a certain Space Act Agreement, which had been entered into
with The National Aeronautics and Space Administration. The note bears interest
at 25% and matures on August 30, 2009. In addition, the Company is obligated to
issue 500,000 shares of common stock to the lender as additional consideration
to enter into the note agreement. The shares were issued to the lender in
September 2009. As of the date of this filing, the principal balance and accrued
interest has not yet been paid to the lender. Although the note is technically
in default as of the date of this filing, the lender has not made any claim of
default and the Company is currently in negotiations with the lender for an
extension to the terms of the note. There can be no assurance that the Company
will be successful in securing any extension to the note.





During March 2010, the Company entered
into a series of 10% convertible promissory notes for an aggregate of $650,000.
Closing costs of approximately $81,000 were paid from the proceeds, providing a
net of approximately $569,000. These notes carry a maturity life of one year
from the date of issuance.





During
March 2010, certain convertible notes and debentures previously held by the
Enable Capital Group, with a principal balance of approximately $10.3 million
plus accrued interest, were to be acquired by Madison and Wall Investments, LLC
who, in conjunction with the proposed acquisition of debt, provided the Company
with a letter of agreement to convert the debt into shares of preferred or
common stock and extinguish the debt. The agreement also called for all said
shares to be locked up from trading until at least December 31, 2010. As of June
30, 2010, the acquisition had not been formally closed and the shares of
preferred or common stock had not been issued and the various debt instruments
remain reported as debt in the financial statements. It is expected that the
various convertible notes and debentures will be acquired by an independent
third party and that the shares will be issued to the acquirer sometime prior to
or during the third quarter of fiscal year 2011 ending on March 31, 2011,
pending approval for an increase to the number of authorized shares of common
stock by a vote of the shareholders of the Company.





During
the three months ended March 31, 2010, the holders of certain convertible
promissory notes provided the Company with letters of agreement that the various
notes shall be extinguished and that the principal balances of these notes of
approximately $1.9 million, plus any and all accrued interest thereon, would be
converted into shares of common stock of the Company at an exchange rate of
$0.20 per share.  Further, it was agreed that these shares will be
locked up and will not be eligible for trading until at least December 31, 2010.
As of June 30, 2010, the exchange shares have not been issued to the lenders by
the Company and the notes will remain reported as debt until such time as said
shares are issued. It is expected that the shares will be issued to the lenders
sometime prior to the end of the third quarter of fiscal year 2011, ending on
March 31, 2011, pending approval for an increase to the number of authorized
shares of common stock by a vote of the shareholders of the
Company.





During June 2010, the Company entered
into a series of 10% convertible promissory notes for an aggregate of $300,000.
Closing costs of approximately $10,000 were paid from the proceeds, providing a
net of approximately $290,000. These notes carry a maturity life of one year
from the date of issuance.





32





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.





Revenue
Recognition:





The
Company accounts for revenue recognition in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Codification 605, (ASC 605), 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) collectability of the sales price is
reasonably assured.  Since the Company had a limited number of revenue
transactions, that were each unique to each customer, the Company reviewed each
transaction to determine that all revenue criteria were met.





The
Company had no reported revenues for the year ended June 30, 2010. Our revenues
for the year ended June 30, 2009 were derived from consulting services provided
to third parties.





The
Company had certain shipments of products to various customers during fiscal
2008 in the aggregate of approximately $6.5 million that were not recognized as
revenue in fiscal 2008, 2009, 2010, or to date, due to certain revenue
recognition criteria not being met in these periods, related to the assurance of
collectibility among other factors. These transactions will only be recognized
as revenue in the period in which all the revenue recognition criteria, as noted
above, have been fully met. Inventory costs, as noted in the paragraph below,
related to these transactions for which revenue has not been recognized, but
have been fully reserved and expensed to the statement of operations as costs of
good sold during the year ended June 30, 2009





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





As of
June 30, 2009, the Company capitalized approximately $5.4 million in product
costs for goods that were shipped to customers during fiscal 2008 but for which
revenue has not yet been recognized in either fiscal 2008, 2009 or to date. The
Company has also recorded a full reserve against these product costs in the
aggregate amount of approximately $5.4 million, of which $4.1 million was
recorded during the year ended June 30, 2009. This reserve estimates the
potential costs that may be unrecoverable. The Company has filed legal action
against various parties involved (see Note 15) in the business operations and
any payment forthcoming through court action or potential settlement will be
recognized as income upon receipt of payment.  However, there can be
no assurances that this will occur.





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, 2009 and 2010, the Company has fully allowed for accounts
receivable from CODA in the amount of $60,000.





Deferred Financing and other
debt-related Costs:





Deferred
financing costs are amortized over the term of the associated debt instruments.
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 FASB ASC 470-20
“Debt with Conversion and Other Options.” 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 did contain embedded derivatives at June 30, 2009 (see Notes 7 and
8).




33




Property
and Equipment:




Property
and equipment are stated at cost, less accumulated depreciation. 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





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:




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.





Research
and Development Costs:





The
Company recognizes research and development costs associated with certain
product development activities. The costs are expensed as incurred. The Company
recorded research and development expenses of $760,004 during the year ended
June 30, 2010 for costs associated with nanotechnology and product development
under the Company’s agreements with NASA.No such costs were
incurred during the year ended June 30, 2009. An additional amount of
approximately $1.0 million of research and development expenses are estimated to
be incurred in the future, based on the company’s agreements with
NASA.





34




Cost of Revenue / Product
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. In addition, reserves against
costs of product shipped to customers for which revenue has not been recognized
are also included in these expenses.





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 FASB ASC 740 “Income Taxes.” As prescribed by FASB
ASC 740, 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 has established a full valuation allowance due to the uncertainty of
recognizing future income.





On July 1, 2007, the Company adopted
the provisions of FASB ASC 740-10. FASB ASC 740-10 prescribes recognition
criteria and a related measurement model for uncertain tax positions taken or
expected to be taken in income tax returns. FASB ASC 740-10 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. There is no liability related
to unrecognized tax benefits at June 30, 2010 and 2009.





The
Company has not yet filed appropriate state or federal income tax returns for
the fiscal years ended June 30, 2008, 2009 and 2010.





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 and derivative liability, 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 is not currently providing goods or services to any clients and has no
reported revenues for the year ended June 30, 2010. During the year ended June
30, 2009, the Company provided consulting services to one client and all
revenues recognized during the year were derived from this one client. Further,
our relationship with Apro Media and Hyundai is considered to be terminated at
this time, and the new relationship with NASA is considered to be critical to
the Company’s ongoing business activities.





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.





Earnings
(Loss) Per Share:





In
accordance with FASB ASC 260, “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. Diluted earnings per share in 2010 and 2009 excluded 99,679,989
and 71,443,417 potentially issuable shares, respectively, from the conversion of
outstanding convertible debt and accrued interest, options and
warrants.




35




Summary of Recent Accounting
Pronouncements





In
January 2010, the FASB issued new guidance regarding improving disclosures about
fair value measurements. The guidance requires new disclosures related to
transfers in and out of Level 1 and Level 2 as well as activity in Level 3 fair
value measurements. The guidance also provides clarification to existing
disclosures. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Our
effective date for the new disclosures and clarifications was the quarter ending
March 31, 2010. Our effective date for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements is January 1, 2011. When effective, we will comply with the
disclosure provisions of this new guidance.





In
January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary. This amendment to Topic 810 clarifies, but does not change, the
scope of current US GAAP. It clarifies the decrease in ownership provisions of
Subtopic 810- 10 and removes the potential conflict between guidance in that
Subtopic and asset de-recognition and gain or loss recognition guidance that may
exist in other US GAAP.  The update was effective for the quarter
ended March 31, 2010 and did not have an effect on the financial position,
results of operations or cash flows of the Company.




In June
2009, the Financial Accounting Standards Board (FASB) issued its final Statement
of Financial Accounting Standards (SFAS) No. 160 – The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162.SFAS No. 168 made the
FASB Accounting Standards Codification (the Codification or ASC) the single
source of U.S. GAAP.  This did not change the accounting rules the
Company needs to follow – it merely codified them.




In
October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update
addressed the accounting for multiple-deliverable arrangements to enable vendors
to account for products or services (deliverables) separately rather than a
combined unit and will be separated in more circumstances that under existing US
GAAP. This amendment has eliminated the residual method of allocation. Effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is permitted.
The Company does not expect the provisions of ASU 2009-13 to have a material
effect on the financial position, results of operations or cash flows of the
Company.





In
October 2009, the accounting standard regarding multiple deliverable
arrangements was updated to require the use of the relative selling price method
when allocating revenue in these types of arrangements. This method allows
a vendor to use its best estimate of selling price if neither vendor specific
objective evidence nor third party evidence of selling price exists when
evaluating multiple deliverable arrangements. This standard update must be
adopted no later than January 1, 2011 and may be adopted prospectively for
revenue arrangements entered into or materially modified after the date of
adoption or retrospectively for all revenue arrangements for all periods
presented. We are currently evaluating the impact this standard update will have
on our consolidated financial statements.





In
September 2009, the accounting standard regarding arrangements that include
software elements was updated to require tangible products that contain software
and non-software elements that work together to deliver the products essential
functionality to be evaluated under the accounting standard regarding multiple
deliverable arrangements. This standard update must be adopted no later than
January 1, 2011 and may be adopted prospectively for revenue arrangements
entered into or materially modified after the date of adoption or
retrospectively for all revenue arrangements for all periods presented. We are
currently evaluating the impact this new standard update will have on our
consolidated financial statements.





3.  SECURITIES
EXCHANGE TRANSACTIONS





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 retired 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, which had a fair value of $6,700,000 on August
22, 2008. In exchange for the retirement and/or redemption of the above
securities, MSGI issued Enable an 8% Secured Convertible Debenture (the 8%
Debentures) 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 was 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.  The net effect of this transaction resulted in a gain
of $1,700,000, recognized during the year ended June 30, 2009.




36




On March
16, 2009, the Company entered into a Warrant Exchange Agreement with Enable.
Under this agreement Enable was granted the right to exchange all warrants held
into 10,000,000 shares of common stock of the Company, provided, however, that
at no time shall any Holder beneficially own more than the Beneficial Ownership
Limitation of 9.99% of the Common Stock issued and outstanding from time to
time. The original warrants carry exercise prices ranging from $0.50 to $2.50
and represent a total of 10,142,852 shares available to purchase. A non-cash
interest expense of approximately $700,000 representing the fair market value of
the committed shares was recognized, and a corresponding accrued liability was
booked by the Company as of March 31, 2009. This accrued liability was adjusted
to market value at the end of each subsequent reporting period until all of the
warrants were exchanged. 500,000 shares of common stock were issued under this
exchange agreement as of June 30, 2009 and 9,500,000 remained to be
issued.  The June 30, 2009 liability was adjusted to $285,000 by the
Company to adjust to the fair market value of these shares at a market price of
$0.03 per shares at June 30, 2009. As of June 30, 2010, all 10,000,000 shares
have been issued to Enable. Non-cash expenses totaling $900,000 were realized
related to these shares issued during the year ended June 30, 2010.





4.
DEPOSITS ON TECHNOLOGY CONTRACTS





During
the twelve month period ended June 30, 2009, the Company expended $175,000 as
non-refundable deposits with NASA for the rights to license technologies from
the agency. On August 10, 2009, the Company announced that it had entered into a
long-term relationship with NASA and intends to bring such technologies to
commercial markets. The $175,000 in deposits on technology licenses was expensed
as research and development during the fiscal year ended June 30,
2010.





5.
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
BusinessCorporation
Act. The agreement
providedfor the Company
to purchase from Current Technology a total of 25.0 millionshares of its common
stock, and common stock purchase warrants exercisable for 25.0million 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
wereimmediately
exercisable at an exercise price of $.15 per share andtheyexpire 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 adeclaration of
stock dividends, a recapitalization resulting in stock splits or combinations or
exchange of such shares. Of the 25.0 million shares of common stock and
25.0 million common stock purchase warrants, the Company acquired 20.0 million
of each. The Company
recorded the investment onthecost method of
accounting.





On
February 9, 2009, Mr. J. Jeremy Barbera, Chief Executive Officer and Chairman of
MSGI entered into a 90-day bridge loan agreement with a lender yielding net
proceeds of $240,000. Certain personal assets of Mr. Barbera were used as senior
collateral. The Company also provided a full guarantee and certain Company
assets were used as junior collateral. The Board of Directors of the Company
approved the transaction during a meeting held on February 6, 2009. The net
proceeds of the bridge loan were advanced by Mr. Barbera, to the Company, to be
used primarily for a new business venture with NASA on behalf of the Company as
well as to meet short-term working capital requirements of the Company. The
Company has given no consideration to Mr. Barbera for this personal guarantee of
the bridge loan. During the three months ended June 30, 2009, the lender made
claim of default on the loan by Mr. Barbera. As a result, pursuant
to the junior guarantee provided by the Company, we surrendered 5,000,000
shares of common stock of our holdings in Current Technology Corporation at a
carrying value of $500,000 during the year ended June 30, 2009. The Company has
no further guarantee obligations under the bridge loan agreement. Upon delivery
of the committed assets from the Company, the lender provided Mr. Barbera with
extended terms for the payment of the principal and accrued interest. The
Company has determined that there is no liability required as of June 30, 2009
or 2010, as the committed assets have been provided to the lender and there is
no longer a standing guarantee by the Company.




37




Pursuant
to the original share purchase transaction, the Company held warrants to
purchase 20,000,000 additional shares of common stock of Current Technology
Corporation with an exercise price of $0.15 per share.  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 warrants to purchase 20,000,000 additional
shares of common stock of Current Technology were assigned to the purchasers of
the Series H Preferred Stock.





As of
June 30, 2010, the Company owns 15 million shares of the common stock of Current
Technology, which represents approximately 10.6% ownership of its outstanding
common stock.  During the fiscal year ended June 30, 2010, the Company
determined that the fall in the value of the stock of Current Technology was an
other-than-temporary impairment in the value of its investment.  The
Company based its analysis on the fact that Current Technology has been unable
to file current reports with the Securities and Exchange Commission since
November 2009, had a going concern opinion based in large part on significant
losses from operations and insufficient funds available to continue
operating.  The Company recorded an impairment of $1.2 million to
reduce its investment to the trading price of Current Technology as of June 30,
2010.





6.
LIABILITY FOR PAYMENT DUE TO RFMON





As of
June 30, 2010, the Company had capitalized and fully reserved for approximately
$5.4 million in product costs for goods that were shipped to customers during
the year ended June 30, 2008. No revenue was recognized in the prior period or
to date. Of the capitalized costs, approximately $1.4 million was included in
trade accounts payable due to RFMon and $20,000 was included as a deferred
license fee. These costs have been reclassified into a separate liability
account as of June 30, 2010, as it is expected by the Company that the liability
will not be paid to the party until the settlement of legal action that the
Company has filed against various parties involved in the prior business
operations. Assuming a favorable outcome of such legal action, the separate
liability will be extinguished and a credit for the previously expensed costs
will be realized.





7.
DERIVATIVE LIABILITY FOR EXCESS SHARES





Beginning
in July 2009, the Company had convertible debt, accrued interest, contractually
issuable shares, options and warrants that, if converted into common stock
shares,  would exceed the amount of the Company’s authorized common
shares.  From July 2009 through June 30, 2010 the Company continued to
issue new shares of its common stock and new instruments convertible or
exercisable into shares of its common stock.  At each period of time
that one of these instruments was issued, the amount of common shares which
potentially exceeded the Company’s issuable shares above its authorized common
shares increased.  As of June 30, 2010, the Company had 73,354,351
shares of common stock issuable upon exercise or conversion in excess of its
authorized capital.





The
Company used a Black Scholes model with the following range of assumptions to
value the derivative liability that resulted from these shares issuable in
excess of its authorized share capital at inception of the
liability:





Low
            
            
            HighUnderlying
      stock price:
            
            $
            0.04
            
            
            $
            0.18Exercise/conversion
      price:
            
            $
            0.10
            
            
            $
            0.51Term
      until expiration:
            
            1
      year
            
            
            1
      yearDividend
      yield:
            
            
            0.00
            %
            
            
            0.00
            %Risk
      free rate:
            
            
            0.32
            %
            
            
            0.49
            %Volatility:
            
            
            212
            %
            
            
            296
            %




The
cumulative total of the liability and corresponding reduction in additional
paid-in capital recorded at each inception was $5,582,880.




38




In
accordance with the guidance on accounting for embedded derivatives, the Company
used a Black Scholes model with the following range of assumptions to value the
derivative liability that resulted from these shares issuable in excess of its
authorized share capital at June 30, 2010:





Low
            
            
            HighUnderlying
      stock price:
            
            $
            0.08
            
            
            $
            0.08Exercise/conversion
      price:
            
            $
            0.10
            
            
            $
            0.20Term
      until expiration:
            
            1
      year
            
            
            1
      yearDividend
      yield:
            
            
            0.00
            %
            
            
            0.00
            %Risk
      free rate:
            
            
            0.32
            %
            
            
            0.32
            %Volatility:
            
            
            212
            %
            
            
            212
            %





At June
30, 2010, the resulting liability from the 73,354,351 excess shares was
$3,170,374.  The change in the liability from inception to June 30,
2010 of $2,412,506 was recorded in the line item “gain on change in derivative
liability” in the statement of operations.





As a
result of recording the derivative liability for the shares issuable which
exceeded the authorized number of common stock shares, the Company did not
record additional derivative liabilities for certain reset provisions in the
March 2010 and June 2010 convertible note agreements and detachable warrants
issued in connection with those note agreements (see Note 8).





8. 10%
CALLABLE CONVERTIBLE NOTES PAYABLE





The 10%
Callable Convertible Notes Payable consist of the following as of June 30,
2010:





Instrument
            
            
            Maturity
            
            
            Face
      Amount
            
            
            Discount
            
            
            Carrying
      Amount at June 30, 2010,
              net
      of discount
            
            
            Carrying
      Amount at June 30, 2009, net of discount10%
      Notes
            
            
            March
      23, 2011
            
            
            $
            650,000
            
            
            $
            646,964
            
            
            $
            3,036
            
            
            $
            -10%
      Notes
            
            
            June
      30, 2011
            
            
            
            300,000
            
            
            
            299,500
            
            
            
            500
            
            
            
            -Total
            
            
            
            
            
            $
            950,000
            
            
            $
            946,464
            
            
            $
            3,536
            
            
            $
            -




March 10 %
Notes





On March
23, 2010, the Company entered into a private placement with individual
institutional investors and issued secured convertible promissory notes in the
aggregate principal amount of $650,000 (the March Notes) and stock purchase
warrants exercisable over a five year period for up to 6,500,000 shares of
common stock.


The March
Notes have a maturity date of March 23, 2011 and will accrue interest at a rate
of 10% per annum, compounded annually. Payments of principal under the March
Notes are not due until the maturity date and interest is due on a quarterly
basis, however the Investors can convert the principal amount of the March Notes
into common stock of the Company, provided certain conditions are met, and each
conversion is subject to certain volume limitations. The conversion price of the
10% March Notes is $0.10 per share yielding an aggregate total of possible
shares to be issued as a result of conversion of 7,150,000 shares. The exercise
price of the Warrants is $0.15 per share.





The
Company has also entered into a security agreement (the “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 Notes and
Warrants.





In
addition, the Company entered into an additional investment rights agreement
(the “Additional Investment Right”), which grant each of the Investors the right
to purchase additional principal amounts of secured convertible promissory notes
equal to the principal amounts purchased in this original transaction. These
rights are in effect for a period of up to 180 days after the date of closing of
this original transaction.  One of the Investors received a due
diligence fee comprised of 5 year warrants exercisable for 500,000 shares of
common stock at an exercise price of $0.01 per share. Associated closing costs,
legal fees and various reimbursable expenses totaling approximately $81,000 are
included in deferred financing costs and will be amortized over the one-year
term of the notes.




39




The March
Notes and warrants contain reset provisions, such that should the Company issue
any common share or instrument convertible into any common share at a price
lower than the conversion or exercise then in effect than the exercise price and
conversion price reset to that lower price.





Total
interest expense, including debt discount amortization, for the twelve months
ended June 30, 2010 and 2009 in connection with these notes was approximately
$21,000 and $0, respectively.





June 10%
Notes





On June
30, 2010, under the Additional Investments Right agreement, the company issued
additional secured convertible promissory notes in the aggregate principal
amount of $300,000 (the June Notes) and stock purchase warrants exercisable over
a five year period for up to 3,000,000 shares of common stock.





The June
Notes have a maturity date of June 30, 2011 and will accrue interest at a rate
of 10% per annum, compounded annually. Payments of principal under the June
Notes are not due until the maturity date and interest is due on a quarterly
basis, however the Investors can convert the principal amount of the March Notes
into common stock of the Company, provided certain conditions are met, and each
conversion is subject to certain volume limitations. The conversion price of the
10% March Notes is $0.07 per share yielding an aggregate total of possible
shares to be issued as a result of conversion of 4,714,285 shares. The exercise
price of the Warrants is $0.10 per share.





The June
Notes and warrants contain reset provisions, such that should the Company issue
any common share or instrument convertible into any common share at a price
lower than the conversion or exercise then in effect than the exercise price and
conversion price reset to that lower price.





Total
interest expense, including debt discount amortization, for the twelve months
ended June 30, 2010 and 2009 in connection with these notes was approximately
$600 and $0, respectively.





9. 8%
CALLABLE CONVERTIBLE NOTES PAYABLE





The 8%
Callable Convertible Notes Payable consist of the following as of June 30,
2010:





Instrument
            
            
            Maturity
            
            
            Face
      Amount
            
            
            Discount
            
            
            Carrying
      Amount at June 30, 2010
              net
      of discount
            
            
            Carrying
      Amount at June 30, 2009, net of discount8%
      Debentures
            
            
            May
      21, 2010
            
            
            $
            4,000,000
            
            
            $
            --
            
            
            $
            4,000,000
            
            
            $
            19,8918%
      Notes
            
            
            May
      21, 2010
            
            
            
            4,000,000
            
            
            
            --
            
            
            
            4,000,000
            
            
            
            4,000,000Total
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            8,000,000
            
            
            $
            4,019,000





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), of which $4,000,000 is currently outstanding
with the remaining principal balance having been converted into shares of common
stock during fiscal 2008.





The 8%
Debentures have a maturity date of May 21, 2010 and, although technically in
default, no such default has been formally claimed by the current holders of the
Debentures. The Debentures currently accrue interest at a default rate of 15%
per annum and they accrued interest at a rate of 8% per annum through to the
date of maturity. Payments of principal and accrued interest under the
Debentures are not due until the maturity date. The conversion price of the 8%
Debentures is currently at $0.25. It is expected that the shares will be issued
to the holders sometime during the third quarter of fiscal year 2011 ending on
March 31, 2011, pending approval for an increase to the number of authorized
shares of common stock by a vote of the shareholders of the
Company.




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 was amortized to
interest expense over the three-year maturity date. On March 16, 2009, the
Company entered into certain convertible promissory notes, which effected the
anti-dilution provision of these Debentures. The conversion price of the
Debentures was reduced from $0.50 to $0.25. No additional beneficial conversion
expense was recorded related to the conversion price change due to the
immaterial effect of this adjustment to the financial results of the Company as
of June 30, 2010.





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.





The
holders agreed to waive certain provisions in the debentures and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the debentures and warrants, respectively, to reset
based on future equity issuances.  The waivers covered the entire year
ended June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 8% Debentures principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.





Total
interest expense, including debt discount amortization, for the twelve months
ended June 30, 2010 and 2009 in connection with this note was approximately $4.4
million and $594,000, respectively.





8% Notes




On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, an existing institutional investor of MSGI.  In
connection with that Agreement, MSGI entered into an 8% convertible note in the
aggregate principal amount of $4,000,000 (the 8% Notes).





The 8%
Notes have a maturity date of May 21, 2010 and are currently technically in
default, although no such default has been formally claimed by the current
holders. The notes accrued interest at a rate of 8% per annum through to the
maturity date and shall accrue interest at the default rate of 15% per annum
thereafter. Payments of principal and interest under the Notes are not due until
the maturity date. The conversion price of the 8% Notes is currently at $0.25.
It is expected that the shares will be issued to the holders sometime during the
third quarter of fiscal year 2011 ending on March 31, 2011, pending approval for
an increase to the number of authorized shares of common stock by a vote of the
shareholders of the Company.





The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances.  The waivers covered the entire year ended
June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 8% Notes principal and accrued interest
with the intent to convert the value of the debt into a series of investments in
various MSGI operating subsidiaries, primarily those subsidiaries related to the
NASA technologies.





Total
interest expense, including debt discount amortization, for the twelve months
ended June 30, 2010 and 2009 in connection with this note was approximately
$327,000 and $274,000, respectively.




41




10.   6%
CALLABLE CONVERTIBLE NOTES PAYABLE




The 6%
Callable Convertible Notes Payable consist of the following as of June 30,
2010:





Instrument
            
            
            Maturity
            
            
            Face
      Amount
            
            
            Discount
            
            
            Carrying
              Amount
      at June
              30,
      2010,
              net
      of discount
            
            
            Carrying
      Amount at June 30,
              2009,
      net of discount6%
      Notes
            
            
            December
      13, 2009
            
            
            $
            1,000,000
            
            
            $
            -
            
            
            $
            1,000,000
            
            
            $
            45,9406%
      April Notes
            
            
            April
      4, 2010
            
            
            
            1,000,000
            
            
            
            -
            
            
            
            1,000,000
            
            
            
            11,630Total
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,000,000
            
            
            $
            57,570





6% December
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, of which $1,000,000 is
currently outstanding with the remaining principal balance having been converted
into shares of common stock during fiscal 2008. There were no conversions during
fiscal 2010 fiscal 2009.





The 6%
Notes have a single balloon payment of $1,000,000, which was due on the maturity
date of December 13, 2009 and accrued interest at a rate of 6% per annum. The 6%
Notes are currently earning a default interest rate of 15% per annum. The
conversion price of the 6% Notes is currently at $0.25. It is expected that the
shares will be issued to the holders sometime during the third quarter of fiscal
year 2011 ending on March 31, 2011, pending approval for an increase to the
number of authorized shares of common stock by a vote of the shareholders of the
Company.





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





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 $1 million in
proceeds received. Therefore, the total discount was limited to $1 million. The
Company amortized this discount over the term of the 6% Notes through December
2009. On March 16, 2009, the Company entered into certain convertible promissory
notes, which effected the anti-dilution provision of these Notes. The conversion
price of the Notes was reduced from $0.50 to $0.25. No additional beneficial
conversion expense was recorded related to the conversion price change due to
the immaterial effect of this adjustment to the financial results of the
Company.





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.




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 was amortized over the remaining term of the note.




42




The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances.  The waivers covered the entire year ended
June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 6% Notes principal and accrued interest
with the intent to convert the value of the debt into a series of investments in
various MSGI operating subsidiaries, primarily those subsidiaries related to the
NASA technologies.





Total interest expense, including debt
discount amortization, for
the twelve months ended June 30, 2010 and 2009 in connection with
this note was
approximately $1,088,000 and $166,000, 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 6% April Notes
have a single balloon payment of $1.0 million which was due on the maturity
date of April 4, 2010. These notes accrued interest at a rate of 6% per annum
through the maturity date. Although the notes are technically in default as of
April 4, 2010, no such default has been formally claimed by the current holders.
The notes currently earn interest at the default rate of 15% per
annum.





As a
result of a 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 a
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.


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 amortized this discount to interest expense over the remaining term
of the 6% April Notes through April 2010. On March 16, 2009, the Company entered
into certain convertible promissory notes, which effected the anti-dilution
provision of these April Notes. The conversion price of the April Notes was
reduced from $0.50 to $0.25. No additional beneficial conversion expense was
recorded related to the conversion price change due to the immaterial effect of
this adjustment to the financial results of the Company.





It is
expected that the shares will be issued to the holders sometime during the third
quarter of fiscal year 2011 ending on March 31, 2011, pending approval for an
increase to the number of authorized shares of common stock by a vote of the
shareholders of the Company.





The
payment obligation under the April Notes may accelerate if payments under the
April Notes are not made when due or upon the occurrence of other defaults
described in the April Notes. This potential acceleration has not taken place,
although the April Notes are technically in default.





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.





The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances.  The waivers covered the entire year ended
June 30, 2010 and the Company obtained a further waiver through October 1,
2010.




43




On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 6% April Notes principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.





Total
interest expense, including debt discount amortization, for the year ended June
30, 2010 and 2009 in connection with this note was approximately $1,092,000 and
$124,000, respectively.





11.  OTHER
NOTES PAYABLE AND ADVANCES





Other
Notes Payable consists of the following as of June 30, 2010:





Instrument
            
            
            Maturity
            
            Face
      Amount
            
            
            Discount
            
            
            Carrying
      Amount at June 30, 2010, net of discount
            
            
            Carrying
              Amount
      at June
              30,
      2009,
              net
      of discountConvertible
      Term Notes – short term
            
            
            February
      28, 2009
            
            $
            960,000
            
            
            $
            -
            
            
            $
            960,000
            
            
            $
            960,000Convertible
      Term Notes – short term
            
            
            March
      31, 2009
            
            
            1,500,000
            
            
            
            -
            
            
            
            1,500,000
            
            
            
            1,500,000Convertible
      Term Notes – short term
            
            
            December
      31, 2009
            
            
            420,000
            
            
            
            -
            
            
            
            420,000
            
            
            
            400,00010%
      Convertible Term Notes – short term
            
            
            June
      17, 2009
            
            
            250,000
            
            
            
            -
            
            
            
            250,000
            
            
            
            250,00025
      % ConvertibleTerm
      Notes –short
      term
            
            
            August
      31, 2009
            
            
            240,004
            
            
            
            -
            
            
            
            240,004
            
            
            
            -Total
            
            
            
            
            
            
            
            
            
            -
            
            
            $
            3,370,004
            
            
            $
            3,110,000




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.
During February 2010, one of the lenders extended an additional $20,000 to the
Company with this amount being added to the already then outstanding balance of
one of the existing notes. These notes were not repaid on this date and the
terms were amended at several different dates to extend them to maturity dates
of February 28, 2009, March 31, 2009, and December 31, 2009. While the notes
payable are technically in default at this time, neither of the lenders have
claimed default on the notes.





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, which was fully amortized in fiscal 2008.





Between
April 30, 2008 and April 1, 2009, the Company executed a series of Amendments to
the Term Notes, which extended the payment terms for the term notes through
February 28, 2009 for one lender, March 31, 2009 for one lender, and December
31, 2009 for the remaining two lenders.  Due to the default event,
commencing on April 15, 2008, the interest rate is now at the default interest
rate of 18%.  Also, two of the holders now have the right to convert
the note at a rate of $0.51 per share, and the other two holders have the right
to convert the note at a rate of $0.25 per share.




44




In
addition, the terms of certain 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 were 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.  These
warrants were subsequently cancelled with the October 2008 addendum and replaced
with other warrants and stock issued.  In addition, there were 520,000
shares of common stock issued in fiscal 2008 in connection with these
addendums.





During
the three months ended September 30, 2008, a total of 715,283 additional
warrants were issued to the note holders, all with an exercise price of
$0.50.  These warrants were subsequently cancelled with the October
2008 addendum, as noted below.  In addition, other group lenders
received shares of common stock of the Company instead of warrants under 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, which aggregated 1,000,000 warrants issued under those 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 issued 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 $0.50, between the date
of the agreement and December 31, 2008.





Effective
January 1, 2009, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
issued new warrants and additional shares of common stock and extended the
maturity date to March 31, 2009. The Company issued an additional 204,420 shares
of common stock and warrants to purchase an additional 204,420 shares of common
stock, at an exercise price of the greater of $0.50 or market value on the date
of grant. Effective February 1, 2009, the Company entered into an additional
addendum agreement with the fourth lender with regard to its held Note, which
issued 400,000 shares of common stock to the lender and extended the maturity
date of this Note to February 28, 2009.  Effective April 1, 2009, the
Company entered into additional addendum agreements with two out of four lenders
with regard to their respectively held Notes, which issued new warrants and
additional shares of common stock and extended the maturity date to December 31,
2009.  The Company issued an additional 221,195 shares of common stock
and warrants to purchase an additional 221,195 shares of common stock, at an
exercise price of the greater of $0.25 or market value on the date of the grant
for the period April 1, 2009 through June 30, 2009.





During
the twelve months ended June 30, 2010, the Company issued 92,400 warrants at an
exercise price of $0.25 and 92,400 shares of common stock.  The stock
was determined to have a fair value of $7,707, based upon the fair market value
of the common stock on each date issued.  The warrants were determined
to have a value of $6,953. The warrants were fair valued, at each warrant
issuance, using the Black-Scholes model.  The warrant and stock values
were recorded as additional interest expense on the note during the twelve
months ended June 30, 2010.





In
February 2010, the exercise price of 326,486 of the previously issued warrants
was further reduced from $0.25 per shares to $0.15 per share as an incentive for
one of the lenders to provide the Company with an additional $20,000 in cash.
The effect of this change in exercise price to the fair value of the warrants
was deemed immaterial and no associated adjustment was booked during the fiscal
year ended June 30, 2010.





45





The
following assumptions were used in the Black-Scholes model for the warrants for
the twelve months ended June 30, 2010:





Expected
      term (years)
            
            
            3Dividend
      yield
            
            
            0%Expected
      volatility
            
            
            215%
      - 235%Risk-Free
      interest rate
            
            
            1.23%-1.70%Weighted
      average fair value
            
            
            $0.06





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 options are not traded and do not have
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 SEC 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.





During
March 2010, the holders certain of these convertible promissory notes
provided the Company with letters of agreement that the various notes shall be
extinguished and that the principal balances of these notes of approximately
$1.9 million, plus any and all accrued interest thereon, would be converted into
shares of common stock of the Company at an exchange rate of $0.20 per
share.  Further, it was agreed that these shares will be locked up and
will not be eligible for trading until at least December 31, 2010. As of June
30, 2010, the exchange shares have not been issued to the lenders by the Company
and the notes will remain reported as debt until such time as said shares are
issued. It is expected that the shares will be issued to the lenders sometime
during the third quarter of fiscal year 2011 ending on March 31, 2011, pending
approval for an increase to the number of authorized shares of common stock by a
vote of the shareholders of the Company.





10% Convertible Term Notes
payable





On March
16, 2009, the Company entered into three convertible promissory notes with
Enable which provided the Company with gross proceeds of $250,000. The notes
bear interest at a rate of 10% annually and are convertible into shares of
common stock of the Company at a conversion rate of $0.25 per share. The notes
had a maturity date of June 17, 2009.  As an inducement to Enable to
enter into the Convertible Term Notes, the Company entered into a Warrant
Exchange Agreement with Enable. The remaining terms of the 10% notes carry the
same provisions as the 8% Debentures. Due to the default event, commencing on
June 17, 2009, the interest rate is now at the default rate of
18%.  While the notes are technically in default at June 30, 2010, the
lender has made no claim of default.





The note
holders agreed to waive certain provisions in the notes and warrants,
specifically those pertaining to cross default and the ability of the conversion
price and exercise price of the notes and warrants, respectively, to reset based
on future equity issuances.  The waivers covered the entire year ended
June 30, 2010 and the Company obtained a further waiver through October 1,
2010.





On
October 18, 2010, the Company announced that it had entered into a strategic
Partnership with Attonbitus Development Inc. As part of this relationship,
Attonbitus agreed to purchase all of the 10% Notes principal and accrued
interest with the intent to convert the value of the debt into a series of
investments in various MSGI operating subsidiaries, primarily those subsidiaries
related to the NASA technologies.





25% Convertible Term Notes
payable





In July
2009, the Company executed a NASA Funding Promissory Note in the amount of
$240,004 with a lender who also holds a promissory note from December 2007. The
new promissory note was executed in order to enable the Company to meet its
obligations under a certain Space Act Agreement, which had been entered
into with The National Aeronautics and Space Administration. The note bears
interest at 25% and matured on August 30, 2009. In addition, the Company issued
500,000 shares of common stock to the lender as additional consideration to
enter into the note agreement. The shares were issued to the lender in September
2009. As of June 30, 2010, and through the date of this filing, the principal
balance and accrued interest has not yet been paid to the lender. Although the
note is technically in default as of the date of this filing, the lender has not
made any claim of default.




46




Advances





During
the twelve months ended June 30, 2010, the Company received net funding in the
amount of approximately $674,000 from a certain corporate officer. During the
year ended June 30, 2009, the Company received net funding in the amount of
approximately $167,000 from this same corporate officer.  As of June
30, 2010, the total net amount received from the officer is approximately
$841,000. There is no interest expense associated with this advanced funding and
this is to be repaid upon the closing of any adequately successful funding event
or upon the collection of the Apro Media related accounts receivable, which has
not yet occurred. It is also noted by the Company that this certain corporate
officer is owed approximately $697,000 in gross wages (including prior period
wages totaling approximately $197,000) as of the twelve months ended June 30,
2010.





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. During the year ended June 30, 2009, the Company
received an additional $6,950 from Apro Media, bringing the aggregate to
$206,950. 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 has not yet occurred.





During
the year ended June 30, 2009, the Company received funding in the amount of
approximately $70,000 from Current Technology Corp. During the year ended June
30, 2010, $30,000 of the advance was repaid. There is no interest expense
associated with this advanced funding and this is to be repaid upon
collection of the Apro Media related accounts receivable, which has not yet
occurred.





During
the year ended June 30, 2009, the Company received funding in the amount of
approximately $60,000 from certain third parties. There is no interest expense
associated with these advanced fundings and they are to be repaid upon
collection of the Apro Media related accounts receivable, which has not yet
occurred.





These
advances have no stated maturity dates and are considered payable on demand. The
Company has not imputed interest on the above advances since it would not be
material.





12.
COMMON STOCK, STOCK OPTIONS AND WARRANTS





Common
Stock Transactions:





During
the fiscal year ended June 30, 2010, the Company issued 48,759,066 shares of
common stock. Of these shares, 9,500,000 shares were issued to a certain lender
under a Warrant Exchange Agreement, 92,400 shares were issued to a lender in
connection with addendum to certain December 2007 convertible terms notes and
37,666,666 were issued to various parties in order to pay for consulting
services and legal fees provided and 1,500,000 shares were issued in connection
with certain financing transactions during the fiscal year ended June 30,
2010.





During
the fiscal year ended June 30, 2009, the Company issued 2,584,186 shares of
common stock. Of these shares, 100,000 were issued to a certain corporate
officer under an award granted to the officer by the Board of Directors in May
2007 resulting in an expense of $63,000 based upon the fair value of the stock
on the date of issuance, 500,000


shares
were issued to a certain lender under a Warrant Exchange Agreement (see Note 3).
The remaining 1,984,186 shares were issued to various lenders in connection with
addendum to the December 2007 convertible terms notes.





Stock
Options:





The
Company maintained 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.  As of June 30, 2010 the 1999 plan is
closed and no further options may be issued under its terms. The 1999 Plan was
administered by the compensation committee of the Board of Directors, which had
the authority to determine which officers and key employees of the Company will
be granted options, the option price and vesting of the options. Of the
1,125,120 shares qualified under the 1999 Plan, 985,000 were issued prior to its
expiration. In no event shall an option expire more than ten years after the
date of grant.




47




The
Company accounts for employee stock-based compensation under FASB ASC 718,
“Compensation – Stock Compensation,” 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,
2010 and 2009 was approximately $5,000 and $221,000, respectively The non-cash
compensation expense is included in salaries and benefits as a component of
operating costs on the consolidated statements of operations.  As of
June 30, 2010, all stock options have been vested and all related stock based
compensation expenses have been recognized.





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 years ended June 30, 2010 or 2009.




The
following summarizes the stock options outstanding under the 1999
Plan:





Number
              of
      Shares
            
            
            Exercise
      Price
              Per
      Share
            
            
            Weighted
      Average
              Exercise
      PriceOutstanding
      at June 30, 2007, 2008, 2009 and 2010
            
            
            985,000
            
            
            $
            1.40
      to $7.00
            
            
            $
            1.94





The
aggregate intrinsic value of these stock options outstanding at June 30, 2007
was $4,650.  There was no such value at June 30, 2010, 2009 or
2008.





In
addition to the 1999 Plan, the Company has option agreements with current
directors of the Company. The following summarizes stock options outstanding as
of June 30, 2010.  There were no transactions for the three years
ended June 30, 2010:





Number
              of
      Shares
            
            
            Exercise
      Price
              Per
      Share
            
            
            Weighted
      Average
              Exercise
      Price
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at June 30, 2007, 2008, 2009 and 2010
            
            
            40,000
            
            
            $
            1.50
      to $4.13
            
            
            $
            2.81
            
            
            $
            100




The
aggregate intrinsic value of these stock options outstanding at June 30, 2007
was $100.  There was no such value at June 30, 2010, 2009 or
2008.





As of
June 30, 2010, 1,025,000 options are exercisable, with no aggregate intrinsic
value and a weighted average contractual life of 6.1 years.  The
weighted average exercise price of all outstanding options is $1.98 and the
weighted average remaining contractual life is 5.1 years. At June 30, 2010,
there are no further options available for grant.





Warrants:





The
following summarizes the warrant transactions for the two years ended June 30,
2010:





Number
              of
      Shares
            
            
            Exercise
              PriceOutstanding
      at June 30, 2008
            
            
            20,698,442
            
            
            
            $0.50
      to $8.25Granted
            
            
            1,770,898
            
            
            
            $0.25
      to $0.50Exercised
      / Exchanged
            
            
            (5,232,066
            )
            
            
            $1.00Cancelled
      / Expired
            
            
            (1,012,195
            )
            
            
            $0.50
      to $7.50Outstanding
      at June 30, 2009
            
            
            16,225,079
            
            
            
            $0.25
      to $8.25Granted
            
            
            12,242,400
            
            
            
            $0.01
      to $0.25Exercised
      / Exchanged
            
            
            (9,635,709
            )
            
            
            $1.00Cancelled
      / Expired
            
            
            (2,618,165
            )
            
            
            $1.00
      to $8.25Outstanding
      at June 30, 2010
            
            
            16,213,605
            
            
            
            $0.01
      to $2.00




48




All
warrants are currently exercisable.





As of
June 30, 2010, the Company has 16,213,605 of warrants outstanding for the
purchase shares of common stock at prices ranging from $0.05 to $2.00, all of
which are currently exercisable. The major transactions involving the warrants
for the current period are below:





During
the year ended June 30, 2010, the Company issued 92,400 five-year warrants to a
certain lender in relationship to an addendum agreement. These warrants carry an
exercise price of $0.25. A fair market value of approximately $7,000 for these
warrants was calculated using the Black-Scholes method and was recorded as
interest expense in the year ended June 30, 2010.





During
the year ended June 30, 2010, the Company issued 2,150,000 five-year warrants to
certain consultants for services provided with an additional warrant for 100,000
shares to be issued after June 30, 2010. These warrants carry an exercise price
of $0.05. A fair market value of approximately $129,000 for these warrants was
calculated using the Black-Scholes method and was recorded as consulting expense
in the year ended June 30, 2010.





During
the year ended June 30, 2010, the Company issued 10,000,000 five-year warrants
to certain lenders and placement agents in connection to the March and June 10%
Notes. These warrants carry an exercise price of $0.01 - $0.11. A fair market
value of approximately $79,000 for 500,000 of these warrants was calculated
using the Black-Scholes method and was recorded as interest expense in the year
ended June 30, 2010.  The fair market value for the remainder of these
warrants was allocated to the proceeds of the transactions in the process of
calculating a beneficial conversion feature discount on the value of the March
and June 10% Notes.





As of
June 30, 2009, the Company has 16,225,079 of warrants outstanding for the
purchase shares of common stock at prices ranging from $0.25 to $8.25, all of
which are currently exercisable. The major transactions involving the warrants
for the current period are below:





During
the year ended June 30, 2009, the Company issued 1,770,898 five-year warrants to
certain lenders in relationship to the addendum agreements (see Note 8). These
warrants carry an exercise price of $0.25 to $0.50. A fair market value of
approximately $420,749 for these warrants was calculated using the Black-Scholes
method and was recorded as interest expense in the year ended June 30,
2009.





During
the year ended June 30, 2009, the Company terminated the 715,283 warrants issued
during the three months ended September 30, 2008, as well as 284,717 warrants
issued during the fiscal year ended June 30, 2008 and, in their place, issued
630,000 new warrants as well as shares of common stock. A fair market value of
$100,073 for these new warrants was calculated using the Black-Scholes method
and was expensed to interest expense in the year ended June 30, 2009, which was
offset by the expense previously recorded for the terminated warrants, in the
amount of $278,000.





In
connection with the August 2008 Securities Exchange Agreement (see Note 3),
Enable Growth Partners agreed to cancel the 4,500,00 warrants it received in the
January 2008 Series H convertible preferred stock transaction (see Note
17).





On March
16, 2009, the Company entered into a Warrant Exchange Agreement with Enable.
Under this agreement Enable has been granted the right to exchange all warrants
held into 10,000,000 shares of common stock of the Company, provided, however,
that at no time shall any Holder beneficially own more than the Beneficial
Ownership Limitation of 9.99% of the Common Stock issued and outstanding from
time to time. The original warrants carry exercise prices ranging from $0.50 to
$2.50 and represent a total of 10,142,852 shares available to purchase. The
Company issued 500,000 shares of common stock under the Warrant Exchange
Agreement during the year ended June 30, 2009. This issuance of shares resulted
in an exchange of approximately 507,143 of the 10,142,852 outstanding warrants.
At of June 30, 2009 $285,000 remained accrued in the accompanying consolidated
balance sheet, representing the remaining 9,500,000 shares of common stock to be
issued under this agreement. The Company issued the remaining 9,500,000 shares
of common stock under the Warrant Exchange Agreement during the year ended June
30, 2010. This issuance of shares resulted in an exchange cancellation of
approximately 9,635,709 of the 10,142,852 outstanding warrants.




49




13.  PROPERTY
AND EQUIPMENT:




Property
and equipment at June 30, consist of:





2010
            
            
            2009Machinery,
      equipment and furniture
            
            $
            86,794
            
            
            $
            86,794Less:
      accumulated depreciation
            
            
            (67,375
            )
            
            
            (54,495
            )Property,
      plant & equipment, net
            
            $
            19,419
            
            
            $
            32,299




Depreciation
expense was approximately $13,000 and $15,000 for the years ended June 30, 2010
and 2009, respectively.





14.   ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES:





Accrued
expenses as of June 30, 2010 and 2009 consist of the
following:





2010
            
            
            2009Salaries
      and benefits
            
            $
            947,706
            
            
            $
            397,558Payroll
      taxes and penalties
            
            
            1,543,477
            
            
            
            1,489,450Warrant
      exchange liability
            
            
            -
            
            
            
            285,000Audit
      and tax preparation fees
            
            
            264,755
            
            
            
            214,755Interest
            
            
            3,686,914
            
            
            
            1,953,706Taxes
            
            
            66,907
            
            
            
            42,907Board
      fees
            
            
            104,000
            
            
            
            80,000Rent
            
            
            23,314
            
            
            
            97,910Other
            
            
            27,865
            
            
            
            120,906Total
            
            $
            6,664,938
            
            
            $
            4,664,192




The
Company has not filed or paid payroll taxes from September 2006 to
date.





15.
CERTAIN KEY RELATIONSHIPS





Relationship with The
National Aeronautics and Space Administration (NASA)





The
Company’s collaborative relationship with NASA was begun in August 2009 with the
execution of a Space Act Agreement (SAA) forming a partnership between MSGI and
the Ames Research Center (ARC) located at Moffet Field in California. The
purpose of this collaboration between MSGI and NASA is to develop new prototype
chemical sensors using NASA’s nano-sensor technology to meet MSGI’s need in
sensor commercialization in security, biomedical and other areas. This sensor
technology platform could potentially be used in efforts such as chemical leak
detection and hazardous material detection. MSGI intends to develop this
technology for commercial applications, homeland security applications, and
medical diagnostic applications for type I diabetes (acetone detection) at first
and possibly other applications in future years. There can be no assurances that
we will be successful in commercializing such applications.





In August
2009, the Company announced the formation of its first subsidiary for NASA based
technology. The subsidiary, named Nanobeak Inc. (Nanobeak) is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection. Some potential space and terrestrial applications for this technology
include cabin air monitoring onboard the Space Shuttle and future spacecraft,
surveillance of global weather, forest fire detection and monitoring, radiation
detection and various other critical capabilities. The commercial applications
of these nanotech chemical sensors relate specifically to efforts in
Homeland Security and defense, medical diagnostics and environmental monitoring
and controls. Nanobeak seeks to offer products in these market sectors beginning
in the current fiscal year ending June 30, 2011, but the timing of such offers
may be affected by unforeseen difficulties in development and commercialization
efforts. In September 2009, the Company announced that it is developing its
first product derived from the NASA nanotechnology, a handheld diagnostic device
designed for medical and environmental testing and detection using breakthroughs
in nanotechnology and chemical sensing. Nanobeak intends to take the handheld
sensor from prototype to commercial production and international distribution.
The United States Department of Defense DTRA Agency also agreed to provide
additional grant money to the NASA and MSGI chemical sensing initiatives during
2010 and 2011.




50




In
September 2009, the Company announced the formation of its second subsidiary for
NASA based technology. Andromeda Energy Inc. (Andromeda) will be focused on
scalable alternative energy solutions employing NASA developed nanotechnology.
These technologies operate more efficiently than current technologies and
therefore yield significantly lower electricity costs per watt than conventional
energy systems and sources.





Former Relationship with
Hyundai Syscomm Corp.





Beginning
September 11, 2006, the Company entered into several Agreements with Hyundai
Syscomm Corp. (Hyundai). The Company had executed a License Agreement, a
Subscription Agreement and a Sub-Contract with Hyundai and in prior periods
received in consideration a one-time $500,000 fee for the License and the
Company issued 865,000 shares of the Company's common stock to Hyundai, in
connection with all the agreements.





The
initial term of the Sub-Contracting Agreement was three years, with subsequent
automatic one-year renewals unless the Sub-Contracting Agreement was 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 was to 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 was subject to the sub-contracting agreement
between Hyundai and the Company dated October 25, 2006.  No
transactions under this agreement have occurred as of and through June 30, 2010
or to date and therefore there have been no warrants vested under this
agreement. As such, the various agreements with Hyundai are deemed by the
company to be null and void as of June 30, 2010. In May 2009, the Company
engaged the law firm of GCA Law Partners LLP of Mountain View, California to
represent the Company in legal action against Hyundai Syscomm Corp, as well as
several other Korean entities and individuals, for alleged breach of contract.
During the three month period ended June 30, 2010, GCA Law Partners filed a
motion to be dismissed as counsel for the Company and formally withdrew from the
proceedings. This action was not due to any foreseen difficulties with the
Company’s case against the defendants, but rather was the result of the
Company’s currently inability to remit cash compensation to the firm on a timely
basis. The Company has engaged the assistance of alternative legal counsel and
the case is proceeding.





Former 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 would 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.  In
accordance with the Agreement, MSGI was to establish and operate a 24/7/365
customer support facility in the Northeastern United States. Apro was to 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 called for gross profit margins estimated to be between 26%
and 35% including a profit sharing arrangement with Apro Media, which would
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 were met over the seven years, Apro
Media would have eventually acquired 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 was not to constitute revenue under the Hyundai warrant to acquire
common stock of MSGI.




51




Per the
terms of the sub-contract agreement with Apro, the Company was 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.
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. As discussed below, such revenue is never
expected to be recognized by the Company, and therefore this accrual has been
reversed out during the year ended June 30, 2009.  The expense
(income) was included in selling, general and administrative
expenses.





For the
year ended 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,
2009, 2010 or to date.  In addition inventory costs related to these
transactions had been reported on the balance sheet in Costs of product shipped
to customers for which revenue had not been recognized as of June 30, 2008 and
these costs have been fully reserved and written off as of December 31,
2008.





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 representing Hyundai Syscomm and Apro Media. Under the
accelerated terms, MSGI would endeavor to build up to a platform with the
potential to generate approximately $100 million in expected annual gross
revenue supporting several of the largest commercial businesses in Korea (see
Daewoo sub-contract below).  Based upon its commitment to expand MSGI
to a potential run rate of $100 million in annual gross revenue, Hirsch Capital
would have the right to earn shares of MSGI as indicated under the Apro
sub-contracting and distribution agreement referenced above. There have not yet
been any business transactions under this new contract, and the Company
considers the contract to be null and void.





In May
2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View,
California to represent the Company in legal action against Apro Media
Corporation, as well as several other Korean entities and individuals, for
alleged breach of contract. As such, the sub-contract with Apro is deemed by the
Company to be null and void as of June 30, 2010. During the three month period
ended June 30, 2010, GCA Law Partners filed a motion to be dismissed as counsel
for the Company and formally withdrew from the proceedings. This action was not
due to any foreseen difficulties with the Company’s case against the defendants,
but rather was the result of the Company’s currently inability to remit cash
compensation to the firm on a timely basis. The Company has engaged the
assistance of alternative legal counsel and the case is proceeding.





FormerDaewoo / Hankook
relationships





On
September 17, 2008, the Company executed a 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 contract,
MSGI would subcontract to Hankook the right to manufacture certain Hi-definition
display systems, which would be supplied to Daewoo for its existing customers.
MSGI had similarly entered into an agreement to supply Daewoo with these
products based upon Daewoo specifications from its customers. There have not yet
been any business transactions under this contract. As such, the contract
with Hankook and Daewoo is deemed by the Company to be null and void as of June
30, 2010.





In May
2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View,
California to represent the Company in legal action against Hankook
Semiconductor, as well as several other Korean entities and individuals, for
alleged breach of contract. During the three month period ended June 30, 2010,
GCA Law Partners filed a motion to be dismissed as counsel for the Company and
formally withdrew from the proceedings. This action was not due to any foreseen
difficulties with the Company’s case against the defendants, but rather was the
result of the Company’s currently inability to remit cash compensation to the
firm on a timely basis. The Company has engaged the assistance of alternative
legal counsel and the case is proceeding.





52




16.   COMMITMENTS
AND CONTINGENCIES:




Operating
Leases:





The
Company leases certain office space in New York, New York and in San Francisco,
California. All of the Company’s current leases are on a “month to month” basis
and are cancelable.  The Company incurs all costs of insurance,
maintenance and utilities.





Rent
expense for such space was approximately $185,000 and $283,000 for fiscal years
ended June 30, 2010 and 2009, respectively, and was rented from officers at the
Company.





The
Company recorded research and development expenses of $760,004 during the year
ended June 30, 2010 for costs associated with nanotechnology and product
development under the Company’s agreements with NASA.An additional amount of
approximately $1.0 million of research and development expenses are estimated to
be incurred in the future, based on the company’s agreements with
NASA.





Contingencies
and Litigation:





Certain
legal actions in the normal course of business are pending to which the Company
is a party. Certain ongoing matters relate to vendors seeking to get paid
amounts owed by us, which amounts are included in trade accounts payable or are
fully accrued as of June 30, 2010. 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.





In May
2009, the Company engaged the law firm of GCA Law Partners LLP, of Mountain
View, California, to represent us in a legal action against Hyundai Syscomm
Corp., Apro Media Corp., Hirsch Capital Corp. and other entities and
individuals. Subsequently, the Company filed suit in United States District
Court, Northern District of California, alleging, among other faults, fraud,
breach of contract and unfair business practices. The Company seeks financial
relief and compensation for the alleged actions of the parties named in the
action. The engagement agreement calls for GCA to be compensated for all fees
incurred on a contingent basis, pending outcome of the lawsuit, and, further,
calls for the Company to issue 50,000 shares of common stock of the Company to
each of the two partners managing the legal proceedings. The shares were issued
to the attorneys in September 2009.





During
the three month period ended June 30, 2010, GCA Law Partners filed a motion to
be dismissed as counsel for the Company and formally withdrew from the
proceedings. This action was not due to any foreseen difficulties with the
Company’s case against the defendants, but rather was the result of the
Company’s currently inability to remit cash compensation to the firm on a timely
basis. The Company has engaged the assistance of alternative legal counsel and
the case is proceeding.




Tax
Returns
 
 The
Company has not filed payroll tax returns since 2006.
 
 The
Company has not filed income tax returns since fiscal year ended June 30,
2007.
 
 When the
Company obtains sufficient funding it plan to rectify this
situation.


17.
SERIES H CONVERTIBLE PREFERRED STOCK AND PUT OPTION





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.





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.




53




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 was designated as restricted cash to be held in a secured Blocked
Control Account in order to collateralize the put option agreement and this
account was available to be drawn upon by a Buyer exercising its rights under
the put option agreement.





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 August 22, 2008 was $6,700,000, such that an aggregate loss of $1.7 million
has been recognized since inception. Fair value for the put options was
calculated using the following assumptions as of August 22, 2008:





August
      22, 2008Expected
      term (years)
            
            
            1.80Expected
      put option price
            
            $
            1.60Dividend
      yield
            
            
            0
            %Expected
      volatility
            
            
            153
            %Risk-free
      interest rate
            
            
            2.420
            %Put
      option fair value per share
            
            $
            1.34





On August
22, 2008, the Company entered into a Securities Exchange Agreement (see Note 3)
with the holders of the Series H Convertible Preferred Shares and Put Options.
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. Therefore, as of June 30, 2009, there are no shares of
the Series H Preferred Stock outstanding, as well as there is no liability
related to the put option.





54





18.   INCOME
TAXES:





Deferred
tax assets are comprised of the following:


As
      of June 30,2010
              
              
              2009Deferred
      tax assets:Net
      operating loss carry-forwards
              
              $
              47,407,000
              
              
              $
              43,869,000Compensation
      on option grants
              
              
              1,563,000
              
              
              
              1,563,000Amortization
      of intangibles
              
              
              -
              
              
              
              974,000Capital
      loss carryfoward
              
              
              2,763,000
              
              
              
              2,763,000Other
              
              
              3,865,000
              
              
              
              577,000Total
      deferred tax assets
              
              
              55,598,000
              
              
              
              49,746,000Deferred
      tax liabilities:Other
      gains
              
              
              (965,000
              )
              
              
              -Discount
      on convertible notes
              
              
              -
              
              
              
              (2,369,000
              )Total
      deferred tax liabilities
              
              
              (965,000
              )
              
              
              (2,369,000
              )Valuation
      allowance
              
              
              (54,633,000
              )
              
              
              (43,377,000
              )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. 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.





The
Company has an estimated U.S. federal net operating loss carry forward of
approximately $114,000,000 available, which expires from 2012 through 2030.
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 last year for which the Company has filed its US
Federal and state income tax returns is 2007.  The periods subject to
examination for the Company’s tax returns are for the years 2003 to
2007.  Until the Company files its 2008 and 2009 income tax returns,
the statute of limitations covering those tax years does not begin.




55




The
Company believes that there is no significant financial statement impact as a
result of FIN 48 for the year ended June 30, 2010. During the fiscal year ended
June 30, 2010, the estimated US Federal net operating loss carryforwards more
than likely became subject to IRC section 382 limitations due to the significant
change in ownership the Company experienced during the year.  Should
the Company perform the required study and determine that it is subject to the
limitations under IRC section 382, the ability of the Company to utilize its US
Federal net operating loss carryforwards could become severely restricted and
could result in the Company becoming unable to utilize a significant portion of
those net operating loss carryforwards in future periods in which it might
generate taxable income.





19.   EMPLOYEE
RETIREMENT SAVINGS 401(k) PLANS:




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





The
Company formerly matched 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, 2010
or 2009. The plan also provided for discretionary Company contributions. There
were no discretionary contributions in fiscal years 2010 or 2009. This 401(k)
plan is currently dormant and the remaining employees of the Company no longer
participate in the plan. It is the intention of the Company to terminate this
plan during the current fiscal year ending June 30, 2011 and initial steps in
that regard have been undertaken with the plan management company, The Gellar
Group.





20.  NON-CASH
DISCLOSURES NOT DESCRIBED ELESEWHERE





At June
30, 2009 the Company had accrued $285,000 for the value of future shares to
issued under the Enable Exchange agreement (see Note 3).  That
liability was satisfied in the current fiscal year through the issuance of the
remaining 9,500,000 shares to Enable under the agreement.





During
the current year ended June 30, 2010 the Company recorded a reduction in its
additional paid-in capital of $5,582,880 for the value of derivative liability
created by the Company issuing instruments convertible or exercisable into
shares of its common stock in excess of its authorized capital (see Note
7).





In March
and June 2010, the Company entered into a series of secured convertible
promissory note financing transactions that raised gross proceeds of $950,000
(see Note 8).  In connection with those offerings, the Company issued
convertible promissory notes and warrants that resulted in essentially 100% of
the proceeds of the offering being allocated to the beneficial conversion
features and warrants, which resulted in the Company recording a discount to the
notes of approximately $950,000.  In addition, as part of the March
offering, the Company issued warrants to acquire 500,000 shares of the Company’s
common stock.  The Company valued that warrant at $79,219 and recorded
that amount as deferred loan fees.





In
connection with the July 31, 2009 convertible note offering, in which the
Company raised gross proceeds of $240,004 (see Note 11), the Company issued to
the lender 500,000 shares as an inducement to make the loan.  The
value of the shares at the time of the offering was $20,000 and was recorded as
a discount to the convertible note.




56




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





N/A





Item 9A(T).
Controls and Procedures





Disclosure
Controls and Procedures





(a) EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





Based on
their evaluation as of the end of the period covered by this Annual Report on
Form 10-K, our Chief Executive Officer and Chief Accounting Officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) are not effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms and to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.





Management’s
Report on Internal Control over Financial Reporting





This
company’s management is responsible for establishing and maintaining internal
controls over financial reporting and disclosure controls. Internal Control Over
Financial Reporting is a process designed by, or under the supervision of, the
Company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the issuer’s board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:





1.
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      issuer;2.
            Provide
      reasonable assurance that transactions are recorded as necessary
      to  permit preparation of financial statements in accordance
      with generally accepted accounting principles, and that receipts and
      expenditures of the issuer are being made only in accordance with
      authorizations of management and directors of the registrant;
      and





3.
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the issuer’s assets that
      could have a material effect on the financial
  statements.





Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in reports filed under the Securities Exchange Act of 1934, as
amended, is appropriately recorded, processed, summarized and reported within
the specified time periods.





Our Chief
Executive Officer and Chief Accounting 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 deficiency, or 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 consolidated financial
statements will not be prevented or detected on a timely basis.




Based on
its evaluation and due to the material weaknesses noted, our management
concluded that our internal controls over financial reporting was not effective
as of June 30, 2010.





The
Company’s assessment identified certain material weaknesses which are set forth
below:




·
            The
      Company currently has insufficient resources and an insufficient level of
      monitoring and oversight, which may restrict the Company's ability to
      gather, analyze and report information relative to the financial
      statements in a timely manner, including insufficient documentation and
      review of the selection and application of generally accepted accounting
      principles to significant non-routine transactions. In addition, the
      limited size of the accounting department makes it impractical to achieve
      an optimum segregation of duties.





·
            A
      lack of formal cash flow forecasts, business plans, and organizational
      structure documents to guide the employees in critical decision-making
      processes.


57


·
              Ineffective
      controls over accounts payable
processing
 
 ·
              Ineffective
      controls over contract
administration


·
            Ineffective
      procedures to appropriately account for and report on related party
      transactions.





·
            Ineffective
      documentation of certain transactions not completed on a timely
      basis.





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





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





·
            Payroll
      and income tax filings have not been made
  timely.





·
            There
      is insufficient supervision and review by our corporate management,
      particularly relating to complex transactions requiring to equity and debt
      instruments.





·
            There
      is a lack of formal process and timeline for closing the books and records
      at the end of each reporting
period.





·
            There
      are limited processes and limited or no documentation in place for the
      identification and assessment of internal and external risks that would
      influence the success or failure of the achievement of entity-wide and
      activity-level objectives.




·
            An
      officer of the Company has been utilizing his personal bank account to pay
      for Company expenses. These expenses are recorded via journal entry by the
      Company as a liability to the officer. Adequate documentation to support
      the business purpose of the expenses was not available for many of the
      amounts.  In addition, the officer of the Company has been
      utilizing the Company’s bank account to pay personal expenses. The amounts
      paid are applied against the Company’s liability to the
      officer.






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 the Company to provide only management’s report
herein.




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 also retained a third party consulting
services to assist in developing and maintaining adequate internal control over
financial reporting during the fiscal year ended June 30,
2008.  However, due to the Company’s cash flow constraints and changes
in the business requirements from the change in key relationships and lack of
internal resources, the continued assistance from this consulting firm and the
timing of implementing the adequate policies and procedures, as determined to be
required, has not yet been determined. The Company cannot predict when it will
be able to appropriately address such weaknesses.




58




There
were no significant changes in our internal controls over financial reporting
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting in the fiscal quarter ending June
30, 2010.





Item 9B. Other
Information




None





59




PART
III





Item 10. Directors, Executive
Officers and Corporate Governance





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
            
            
            53
            
            Chief
      Executive Officer and Chairman of the Board of Directors and Chief
      Executive Officer
            
            1996Richard
      J. Mitchell, III
            
            
            51
            
            Chief
      Accounting Officer, Treasurer and SecretaryLt.
      Gen. James A. Abrahamson
            
            
            77
            
            Vice
      Chairman of the Board of Directors
            
            2010Joseph
      C. Peters
            
            
            53
            
            President
      and Director
            
            2004John
      T. Gerlach
            
            
            78
            
            Director
            
            1997Seymour
      Jones
            
            
            79
            
            Director
            
            1996David
      C. Stoller
            
            
            60
            
            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.





Lieutenant
General James A. Abrahamson, (retired USAF) has been Vice- Chairman of the MSGI
Board of Directors since his appointment in 2010. From 1992 to 1995, Lt.
Gen. Abrahamson served as Chairman of the Oracle Corporation. Prior to holding
his Chairmanship at Oracle, he held the position of Executive Vice President for
Corporate Development, and then President of the Transportation Sector, for
Hughes Aircraft Company as well as a member of the Hughes Aircraft Company Board
of Directors. While on active duty in the Air Force, Lt. Gen. Abrahamson
became one of the military's most experienced program directors. He led the
Strategic Defense Initiative (President Reagan's "Star Wars" Program) from April
1984 until he retired from the Air Force in January 1989, at the rank of
Lieutenant General. He also directed the development of the F-16 Multi-National
Fighter and served as the NASA Associate Administrator for Space Flight,
managing NASA's Space Shuttle from its second flight through 10 safe and
successful missions. Lt. Gen. Abrahamson currently serves as Chairman and
Chief Executive Officer of StratCom, LLC; SkySpectrum, LLC; and Sky Sentry, LLC.
Each of these companies is associated with the development of airships for civil
and military applications. He also serves as Chairman of the Board of GeoEye
(NASDAQ: GEOY) and Chairman of the Board of Global Relief Technologies. Lt.
Gen. Abrahamson earned a Bachelor of Science degree in Aeronautical Engineering
from the Massachusetts Institute of Technology and a Master of Science degree in
the same field through the Air Force Institute of Technology program at the
University of Oklahoma. He completed Squadron Officer School in 1958, Air
Command and Staff College in 1966, the Air Force Test Pilot School in 1967, and
the Industrial College of the Armed Forces in 1973. He served in the Air Force
as a Test Pilot, Fighter Pilot, and Program Manager for 33 years, prior to
moving to senior positions in civil industry.




60




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.




61




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.




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, 2010, 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, 2010.





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."




62




Compensation
Committee





The
members of the Compensation Committee during fiscal year 2009 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 2010
and 2009. 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
years ended June 30, 2010 and 2009.





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 2010 fiscal year.




63


Item 11. Executive
Compensation





The
following table provides certain information concerning compensation of the
Company's Chief Executive Officer and any other executive officer of the Company
who received compensation in excess of $100,000 during the fiscal year ended
June 30, 2010 (the "Named Executive Officers"):




SUMMARY
COMPENSATION TABLE





Name
      and Principal
              
              Fiscal
      Year Ended
                June
      30,
              
              Annual
                Salary
              
              Annual
      Bonus
              
              Stock
                Awards
              
              
              Option
                Awards
              
              Non-Equity
      Incentive Compensation
              
              Non-qualified
      Deferred Compensation
              
              All
      Other Compensation
              
              TotalPositionJ.
      Jeremy Barbera (1)
              
              2010
              
              $
              500,000
              
              —
              
              $
              —
              
              
              $
              —
              
              —
              
              —
              
              —
              
              $
              500,000Chairman
      of the Board and Chief Executive Officer
              
              2009
              
              
              501,923
              
              —
              
              
              8,000
              (3)
              
              
              92,950
              (4)
              —
              
              —
              
              —
              
              
              602,873Richard
      J. Mitchell III (2)
              
              2010
              
              
              125,000
              
              —
              
              —
              
              
              
              4,573
              (5)
              —
              
              —
              
              —
              
              
              129,573Chief
      Accounting Officer  Treasurer and Secretary
              
              2009
              
              
              125,481
              
              —
              
              —
              
              
              
              35,590
              (5)
              —
              
              —
              
              —
              
              
              161,071
 
 
 (1)
              As
      a result of limited cash availability during the fiscal year ended June
      30, 2010, Mr. Barbera has been paid only $1,505 of the annual salary
      accrued and reported for the
year.





(2)
            As
      a result of limited cash availability during the fiscal year ended June
      30, 2010, Mr. Mitchell has been paid only $32,590 of the annual salary
      accrued and reported for the year.




64




(3)
            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,
      the second issuance of 100,000 shares was earned on May 7, 2008 and the
      third issuance of 100,000 shares was earned on May 7, 2009. 100,000 shares
      authorized were issued at a value of $0.08 per share for an expense of
      $8,000 during the year ended June 30, 2009. The final 100,000 have not yet
      been issued and an accrued liability of $8,000 for the fair market value
      of these shares has been realized as of June 30,
  2010





(4)
              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 followingassumptionsapplied;
      dividend yield of zero, expected volatility of 142.3%, risk—free interest
      rate of 4.75% and an expected lifeof6
      years. The expense is being amortized over a period of 1.5 years, which is
      the vesting term of the
options.





(5)
            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.





STOCK
OPTION GRANTS





The
Company maintained 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.  As of June 30, 2010 the 1999 plan is
closed and no further options may be issued under its terms. The 1999 Plan was
administered by the compensation committee of the Board of Directors, which had
the authority to determine which officers and key employees of the Company will
be granted options, the option price and vesting of the options. Of the
1,125,120 shares qualified under the 1999 Plan, 985,000 were issued prior to its
expiration. In no event shall an option expire more than ten years after the
date of grant.




65




There
were no options granted in the fiscal years 2010 or 2009.





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 2009:




Option
      Awards
              
              Stock
      AwardsName
              
              Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
              
              
              Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
              
              
              Equity
      Incentive Plan Awards Number of Securites Underlying Unexercised Unearned
      Options (#)
              
              
              Option
      Exercise Price ($)
              
              Option
      Expiration Date
              
              Number
      of Shares or Units of Stock That Have Not Vested (#)
              
              
              Market
      Value of Shares or Units of Stock That Have Not Vested ($)
              
              
              Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested ($)
              
              
              Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights That Have Not Vested ($)J.
      Barbera
              
              
              100,000
              (1)
              
              
              —
              
              
              
              —
              
              
              
              1.50
              
              3/24/14
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —200,000
              (2)
              
              
              —
              
              
              
              —
              
              
              
              1.50
              
              3/24/14
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —200,000
              (3)
              
              
              —
              
              
              
              —
              
              
              
              1.50
              
              6/29/17
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —R.
      Mitchell
              
              
              10,000
              (4)
              
              
              —
              
              
              
              —
              
              
              
              1.50
              
              3/24/14
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —25,000
              (5)
              
              
              —
              
              
              
              —
              
              
              
              1.40
              
              5/07/17
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —50,000
              (6)
              
              
              —
              
              
              
              —
              
              
              
              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.




66




(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
      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.




(5)
            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.




(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.




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 holders 1999 Stock Option Plan
      (1)
              
              
              985,000
              
              
              $
              1.94
              
              
              
              —Executive
      Options (1)
              
              
              40,000
              
              
              $
              2.81
              
              
              
              —Equity
      compensation plans not approved by security holders
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              
              1,025,000
              
              
              $
              1.97
              
              
              
              —





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
Directors agreed to waive the annual option grant for the fiscal years ended
June 30, 2008 and 2009.




67





The
following table sets forth certain information regarding all compensation earned
by directors for the


Company’s
2010 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
              
              $
              9,000
              (1)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              9,000S.
      Jones
              
              $
              7,500
              (1)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              7,500D.
      Stoller
              
              $
              7,500
              (1)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              7,500





(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.





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 formerly held an employment agreement which was 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 was 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
was terminated without cause (as defined in the agreement), then the Company was
to 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 is currently without an executed
employment agreement, but continues his employment under the terms comparable to
the pervious agreement.





Mr.
Barbera has agreed in his prior 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.




68




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 not set by terms of an employment agreement, but is
comparable to his prior effective emplyment agreement and is maintained at such
level as 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




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





Common
Stock – Five Percent Holders





As of the
date of this filing, there are no known shareholders holding a percentage equal
to or greater than 5% of the outstanding shares of common stock of the
Company.





Common
Stock – Management





The
following table sets forth, as of September 30, 2010, 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
      of Class
              
              Name
      and Address of Beneficial Owner
              
              Beneficial
      Ownership (1)
              
              
              Percent
      of ClassCommon
              
              J.
      Jeremy Barbera (2)
                575
      Madison Ave
                New
      York, NY 10022
              
              
              1,300,000
              
              
              
              1.58
              %Common
              
              Seymour
      Jones (3)
                575
      Madison Ave
                New
      York, NY 10022
              
              
              144,221
              
              
              
              *Common
              
              John
      Gerlach (4)
                575
      Madison Ave
                New
      York, NY 10022
              
              
              145,395
              
              
              
              *Common
              
              David
      Stoller (5)
                575
      Madison Ave
                New
      York, NY 10022
              
              
              101,250
              
              
              
              *Common
              
              Joseph
      Peters (6)
                575
      Madison Ave
                New
      York, NY 10022
              
              
              327,400
              
              
              
              *Common
              
              Richard
      Mitchell (7)
                575
      Madison Ave
                New
      York, NY 10022
              
              
              169,200
              
              
              
              *All
      Directors and Named Executive Officers reported as a group
              
              
              
              
              2,187,
      466
              
              
              
              2.65
              %







*
            Less than
    1%




69


(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, all are exercisable at September 30,
      2010.


(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, all are exercisable at September 30,
      2010.


(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, all are exercisable at September 30,
      2010.


(5)
              Includes
      (i) 31,250 shares issued to director as compensation and (ii) 70,000
      options to purchase shares of common stock, all are exercisable at
      September 30, 2010.


(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, all are exercisable at September 30,
      2010.


(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, all are exercisable at
      September 30, 2010.








Item 13. Certain
Relationships and Related Transactions, and
Director Independence





On
February 9, 2009, Mr. J. Jeremy Barbera, Chief Executive Officer and Chairman of
MSGI entered into a 90-day bridge loan agreement with a lender yielding net
proceeds of $240,000. Certain personal assets of Mr. Barbera were used as senior
collateral. The Company also provided a full guarantee and certain Company
assets were used as junior collateral. The Board of Directors of the Company
approved the transaction during a meeting held on February 6, 2009. The net
proceeds of the bridge loan were advanced by Mr. Barbera to the Company to be
used primarily for a new business venture with NASA on behalf of the Company as
well as to meet short-term working capital requirements of the Company. The
Company has given no consideration to Mr. Barbera for this personal guarantee of
the bridge loan. During the period ended June 30, 2009, the lender made claim of
default on the loan by Mr. Barbera. As a result, the Company forfeited the
assets committed as junior collateral. Mr. Barbera also forfeited certain
personal assets. Upon delivery of the committed assets from the Company, the
lender provided Mr. Barbera with extended terms for the payment of the principal
and accrued interest. The Company has determined that there is no liability
required as of June 30, 2010, as the committed assets have been provided to the
lender and there is no longer a standing guarantee by the Company.




70




Item
14.  Principle Accountant Fees and Services





On August
19, 2010, the Company terminated the services of Amper, Politziner & Mattia,
LLP (AP&M) as the Company’s Independent Registered Public Accounting Firm.
As AP&M, the firm served as the Company’s Independent Registered Public
Accounting Firm for each of the fiscal years ended June 30, 2003, 2004, 2005,
2006, 2007, 2008, and 2009, and for the first, second and third quarters of the
fiscal year ended June 30, 2010. The decision to terminate the services of
AP&M was approved by the Audit Committee of the Company’s Board of
Directors.





On August
19, 2010, the Company, with the approval of the Audit Committee, engaged L J
Soldinger Associates LLC (“LJSA”) as the Company’s new independent
accountants.





The
aggregate fees billed by LJSA and AP&M as independent accountants, for
professional services rendered to MSGI Security Solutions, Inc during the fiscal
years ended June 30, 2010 and 2009 were comprised of the following:





Fiscal
      Year 2010
              
              
              Fiscal
      Year 2009Audit
      Fees
              
              $
              80,000
              
              
              $
              110,800Tax
      Fees
              
              
              —
              
              
              
              —All
      other Fees
              
              
              —
              
              
              
              —Total
      Fees
              
              $
              80,000
              
              
              $
              110,800





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.





The
Company's Audit Committee pre-approves all services provided by L J Soldinger
Associates and Amper, Politziner & Mattia, LLP




71




Part IV





Item 15.
Exhibits




21
                  
                  List
      of Company's subsidiaries23.1
                  
                  Consent
      of L J Soldinger Associates31.1
                  
                  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




72




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)Date:
      November 15, 2010
              By:
              /s/ J. Jeremy
      BarberaJ.
      Jeremy BarberaChief
      Executive OfficerBy:
              /s/ Richard J. Mitchell,
      IIIRichard
      J. Mitchell IIIChief
      Accounting Officer and Principle Financial
  Officer




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
      15, 2010J.
      Jeremy Barbera
              
              Officer
      (Principal Executive Officer)/s/
      James A. Abrahamson
              
              Vice
      Chairman of the Board of Directors
              
              November
      15, 2010James
      A. Abrahamson/s/
      John T. Gerlach
              
              Director
              
              November
      15, 2010John
      T. Gerlach/s/
      Seymour Jones
              
              Director
              
              November
      15, 2010Seymour
      Jones/s/
      Joseph Peters
              
              Director
              
              November
      15, 2010Joseph
      Peters/s/
      David Stoller
              
              Director
              
              November
      15, 2010David
      Stoller




73