UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 1998

                                       OR

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

 For the transition period from _________________to___________________

                         Commission file number 0-16730

                          MARKETING SERVICES GROUP,INC.
                          -----------------------------
                 (Name of small business issuer in its charter)

           Nevada                                   88-0085608
           ------                                   ----------
(State or other jurisdiction of                  (I.R.S. Employer
 incorporation or organization)                   Identification No.)



333 Seventh Avenue, 20th Floor
      New York, New York                              10001
      ------------------                              -----
(Address of principal executive offices)            (Zip Code)

Issuer's telephone number, including area code:               (212) 594-7688
Securities registered pursuant to Section 12(b) of the Act:    None
Securities registered pursuant to Section 12(g) of the Act:    None
                       
                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of class)

Check  whether  the Issuer  (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 __

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [ ] 

The issuer's revenues for its fiscal year ended June 30,  1998 are  $51,174,063.
  
As of  September  18,  1998,  the aggregate  market value  of the  voting  stock
held by  non-affiliates  of the Registrant was approximately  $23,985,441.

As of September 18, 1998, there were 13,103,305  shares  of the  Registrant's 
common  stock  outstanding. 

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

Transitional Small Business Disclosure Format (check one): Yes __  No X

<PAGE>

                                 PART I


Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Certain  statements  in this  Annual  Report on Form 10-KSB  under the  captions
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations," "Business" and elsewhere in this Report constitute "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995 (the "Reform Act"). Such  forward-looking  statements  involve known and
unknown  risks,  uncertainties  and other  factors  which  may cause the  actual
results,  performance or achievements of the Company,  or industry results to be
materially  different  from any  future  results,  performance  or  achievements
expressed or implied by such forward-looking  statements.  Such factors include,
among others, the following: general economic and business conditions;  industry
capacity;  direct  marketing and other  industry  trends;  demographic  changes;
competition; the loss of any significant customers; changes in business strategy
or development  plans;  availability  and successful  integration of acquisition
candidates;   availability,   terms  and  deployment  of  capital;  advances  in
technology; year 2000 issues; retention of clients not under long-term contract;
quality  of   management;   business   abilities   and  judgment  of  personnel;
availability of qualified personnel;  changes in, or the failure to comply with,
government regulations; and technology, telecommunication and postal costs.

Item 1 - Business
-----------------

General
-------

Marketing   Services   Group,   Inc.  (the  "Company"  or  "MSGI")  through  its
subsidiaries   provides  direct   marketing  and  database   marketing,   custom
telemarketing/telefundraising,  media planning and buying, online consulting and
commerce,  Web  design,  interactive  fulfillment,  and other  direct  marketing
services to a diverse  group of nearly  1,000  clients  located  throughout  the
United  States and  Canada.  These  services  include  customer  and market data
analysis,  database  creation  and  analysis,  data  warehousing,   merge/purge,
predictive behavioral modeling, list processing,  brokerage and management, data
enhancement,  other direct marketing information  services,  Web site design and
hosting,  on-line  ticketing,  product  warehousing and fulfillment,  and custom
outbound  telemarketing/telefundraising   services.  The  Company  believes  its
expertise in applying these marketing  tools  increases the  productivity of its
clients' marketing expenditures.

The Company's  services  have enabled it to become a leading  provider of direct
marketing services to nonprofit and commercial  businesses throughout the United
States and Canada.  The Company's  nonprofit  clients include:  Art Institute of
Chicago,  Chicago Symphony  Orchestra,  Kennedy Center,  Lincoln Center,  Nature
Conservancy,  New York  Philharmonic,  Paralyzed  Veterans of  America,  Planned
Parenthood  Affiliates,  Shubert  Organization,  Sierra Club and numerous public
broadcasting stations. The Company's commercial clients include: Avery Dennison,
Cisco Systems,  Citicorp,  General Electric Capital,  Gymboree,  LIVENT, Madison
Square  Garden,  MBNA America,  TOSCO/Unocal,  Walt Disney  Company and numerous
business publishing clients including Crains  Communications.  The Company seeks
to become an integral  part of its  clients'  marketing  programs  and to foster
long-term   client    relationships    thereby   providing   recurring   revenue
opportunities.

<PAGE>

The Company's Strategy
----------------------

MSGI's  strategy to enhance its position as a  value-added  premium  provider of
marketing services is to:

    Increase  revenues by expanding the range of marketing  services offered and
    by selling additional services to existing clients;

    Deepen market  penetration in new industries and market  segments as
    well as those currently served by the Company;

    Develop existing and creating new proprietary  database software and
    database management applications; and

    Pursue  strategic  acquisitions,  joint ventures and marketing  alliances to
    expand marketing services offered and industries served.

Other  than as  described  in this  Annual  Report on Form  10-KSB  (this  "Form
10-KSB") the Company has no agreements to acquire any companies and there can be
no assurance that the Company will be able to acquire such companies.

Background
----------

The Company was originally  incorporated in Nevada in 1919. The current business
of MSGI,  previously  known as All-Comm Media  Corporation  and prior to that as
Sports-Tech,  Inc.,  arose out of a 1995 merger and  concurrent  acquisition  of
Stephen  Dunn  &  Associates,   Inc.  ("SD&A"),  a  leading   telemarketing  and
telefundraising  company specializing in direct marketing services for the arts,
educational and other institutional tax-exempt organizations.

SD&A was formed in 1983.  Clients of SD&A include many of the larger  performing
arts and cultural institutions,  such as major symphonies,  theatres and musical
arts companies,  along with public  broadcasting  stations,  advocacy groups and
educational  institutions.  SD&A's  clients  include  over  150 of the  nation's
leading institutions and universities. SD&A has its headquarters in Los Angeles,
California,  where it manages  telemarketing/telefundraising  services which are
conducted  both on-site at  client-provided  facilities  and also at its calling
center in Berkeley, California.

Effective  October 1, 1996, the Company acquired Metro Direct,  Inc.  ("Metro").
Metro was formed in 1987.  Clients  include many of the same performing arts and
cultural  institutions,  public  broadcasting,  advocacy  groups and educational
institutions as SD&A, as well as a variety of commercial organizations. Metro is
headquartered  in New York City, with satellite  offices in Michigan,  Illinois,
California, Georgia and Texas.

Metro develops and markets a variety of database and direct  marketing  products
and services to a wide range of commercial clients and nonprofit  organizations.
Metro vertically  integrates the three elements needed for most direct marketing
campaigns;  strategy, information and technology. Most of their account managers
came from the client side and that  experience  has resulted in very high client
retention rates.  Services  include:  Consulting and campaign  strategy,  market
penetration mapping, database marketing, demographic/psychographic data overlay,
Carrier Route coding, CASS/PAVE certification,  list brokerage, sub-minimum list
rentals,   response  analysis,   merge/purge,   predictive  modeling,   response
enhancement modeling,  telemarketing lead generation,  telephone appendage, list
maintenance,  data entry,  label  generation  and laser  letters.  

<PAGE>

The  Company's  shares  are traded on the NASDAQ  Small Cap  MarketSM  under the
symbol  "MSGI".  The Company's  principal  executive  offices are located at 333
Seventh Avenue,  20th Floor,  New York, NY 10001.  Its telephone number is (212)
594-7688. 

Developments During Fiscal 1998
-------------------------------

Pegasus Internet, Inc. ("Pegasus"):

Pegasus was formed in 1994 and was  acquired by the  Company  effective  July 1,
1997.  Pegasus  provides a full suite of Internet  services,  including  content
development  and  planning,   marketing   strategy,   on-line  ticketing  system
development,  technical site hosting, graphic design,  multimedia production and
electronic commerce.

The  acquisition  was  accounted  for using the purchase  method of  accounting.
Accordingly,  the operating  results of Pegasus are included in the consolidated
results of operations of the Company starting July 1, 1997.

Media Marketplace, Inc. ("MMI"):

Effective  December 1, 1997,  MSGI acquired  Media  Marketplace,  Inc. and Media
Marketplace Media Division,  Inc.  (collectively "MMI"). MMI was founded in 1973
and specializes in providing list management,  list brokerage and media planning
services to national  publishing and fundraising clients in the direct marketing
industry,  including magazines,  continuity clubs, membership groups and catalog
buyers.

As the MMI  acquisition was accounted for as a purchase,  its operating  results
are  included  in the  Company's  consolidated  results of  operations  starting
December 1, 1997.

Formation of Metro Fulfillment, Inc. ("MFI"):

In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a new operating
subsidiary.  MFI  provides  clients  with  services  such  as  online  commerce,
real-time  database  management,  inbound/  outbound  customer  service,  custom
packaging,  assembling,  product warehousing,  shipping,  payment processing and
retail distribution.

Capital Stock and Financing Transactions
----------------------------------------

Issuance of Redeemable Convertible Preferred Stock:

On December 24, 1997, the Company and General Electric Capital  Corporation ("GE
Capital") entered into a purchase agreement (the "Purchase Agreement") providing
for the  purchase  by GE  Capital of (i)  50,000  shares of Series D  redeemable
convertible  preferred  stock,  par value  $0.01 per  share,  (the  "Convertible
Preferred  Stock"),  and (ii)  warrants to purchase up to  10,670,000  shares of
Common  Stock  (the  "Warrants"),   all  for  an  aggregate  purchase  price  of
$15,000,000.  The  Convertible  Preferred  Stock is  convertible  into shares of
Common Stock at a conversion rate,  subject to antidilution  adjustments.  As of
June 30, 1998, the conversion  rate was  approximately  89.02,  resulting in the
beneficial  ownership by GE Capital of 4,451,117  shares of Common Stock.  On an
as-converted basis, the Convertible Preferred Stock represents approximately 24%
of the  issued  and  outstanding  shares  of  Common  Stock.  The  Warrants  are
exercisable in November 2001 and are subject to reduction or cancellation  based
on the Company's  meeting  certain  financial goals set forth in the Warrants or
upon occurrence of a qualified secondary offering, as defined.

The  Company  recorded  the  Convertible   Preferred  Stock  at  a  discount  of
approximately  $1,362,000,  to  reflect an  allocation  of the  proceeds  to the
estimated  value of the warrants and is being amortized into dividends using the
"interest method" over the redemption period. In addition,  the Company recorded
a non-cash,  non-recurring 

<PAGE>

dividend of approximately  $3,200,000  representing  the difference  between the
conversion price of the Convertible Preferred Stock and the fair market value of
the common stock as of the date of the agreement.

The  Convertible  Preferred  Stock is convertible at the option of the holder at
any time and at the option of the  Company  (a) at any time the  current  market
price,  as defined,  equals or exceeds $8.75 per share,  subject to adjustments,
for at least 20 days during a period of 30 consecutive business days or (b) upon
the occurrence of a qualified secondary offering, as defined.

Dividends are cumulative  and accrue at the rate of 6% per annum,  adjusted upon
event of default. The Convertible Preferred Stock is mandatorily  redeemable for
$300 per share,  if not previously  converted,  on the sixth  anniversary of the
original  issue date and is  redeemable  at the  option of the  holder  upon the
occurrence  of an organic  change in the  Company,  as  defined in the  Purchase
Agreement.

The  Purchase  Agreement  contains,  among other  provisions,  requirements  for
maintaining certain minimum tangible net worth, as defined,  and other financial
ratios and restrictions on payment of dividends.

Change in Authorized Shares:

On April 3, 1998,  the  stockholders  voted to increase the number of authorized
common  shares  from  36,250,000  to  75,000,000,  and the number of  authorized
preferred shares from 50,000 to 150,000,  to facilitate the Company's  corporate
strategy and growth plans.

The Direct Marketing Industry
-----------------------------

Overview - Direct  marketing  is  used  for  a  variety  of  purposes  including
lead-generation  and prospecting for new customers,  enhancing existing customer
relationships,  exploring  the  potential  for new  products  and  services  and
establishing new products.  Unlike traditional mass marketing,  aimed at a broad
audience and focused on creating  image and general brand or product  awareness,
successful  direct  marketing   requires  the  identification  and  analysis  of
customers  and  purchasing  patterns.  Such patterns  enable  businesses to more
easily  identify  and  create a  customized  message  aimed at a highly  defined
audience.  Previous direct marketing  activity  consisted  principally of direct
mail,  but  now  has  expanded  into  the  use  of  multiple  mediums  including
telemarketing,  print,  television,  radio, video, CD-ROM, on-line services, the
Internet and a variety of other interactive marketing formats.

The  success of a direct  marketing  program is the  result of the  analysis  of
customer   information   and  related   marketing  data.   Database   management
capabilities   allow  for  the  creation  of  customer   lists  with   specific,
identifiable attributes.  Direct marketers use these lists to customize messages
and marketing  programs to generate new customers whose purchasing  patterns can
be  statistically  analyzed to isolate key  determinants.  In turn, this enables
direct marketers to continually evaluate and adjust their marketing programs, to
measure  customer  response  rates in  order  to  assess  returns  on  marketing
expenditures, and to increase the effectiveness of such marketing programs.

Database  management  covers a range of services,  including  general  marketing
consultation,  execution of marketing  programs and the creation and development
of customer  databases  and sales  tracking  and data  analysis  software.  Data
analysis software consolidates and analyzes customer profile information to find
common  characteristics  among buyers of certain  products.  The results of such
tracking  and  analysis  are used to  define  and  match  customer  and  product
attributes from millions of available database files for future direct marketing
applications.  The  process  is one of  continual  refinement,  as the number of
points of contact with customers  increases,  together with the proliferation of
mediums available to reach customers.

Telemarketing/telefundraising  projects generally require significant amounts of
customer  information  supplied  by the client or third  party  sources.  Custom
telemarketing/telefundraising  programs  seek  to  maximize  a  client's  direct
marketing  results by  utilizing  appropriate  databases to  communicate  with a
specific audience.  This  customization is 
<PAGE>

often  achieved  through  sophisticated  and  comprehensive  data analysis which
identifies   psychographic,   cultural  and  behavioral   patterns  in  specific
geographic markets.

Industry  Growth - The use of direct  marketing has increased  over the last few
years due in part to the relative cost efficiency of direct  marketing  compared
to mass  marketing,  as well as the rapid  development of more powerful and more
cost-effective  information technology and data capture capabilities.  According
to industry  sources,  over the next decade,  demographic  shifts and changes in
lifestyle,  combined with new marketing  mediums,  are expected to create higher
demand  by  businesses  for  marketing   information  and  services  to  provide
businesses  with direct access to their  customers and a more efficient means of
targeting  specific audiences and developing  long-term customer  relationships.
According to a study commissioned by the Direct Marketing  Association  ("DMA"),
expenditures  for direct  marketing  services in 1997 reached $153 billion.  The
study estimated that annual direct marketing  advertising  expenditures may grow
to $205 billion by the year 2001, including $84.4 billion on telemarketing.

Corporate  marketing  departments often lack the technical  expertise to create,
manage and control highly technical aspects of the direct marketing process.  As
a result,  the  Company  believes  that there is a growing  trend  among  direct
marketers to outsource direct marketing programs.

Industry  Consolidation - The direct marketing industry is extremely fragmented.
According to industry sources,  there are almost 11,000 direct marketing service
and database service  businesses in the United States. The Company believes that
most of such  businesses are small,  specialized  companies  which offer limited
services.  However,  industry  consolidation has increased in the last few years
resulting in a greater number of large companies  providing  services similar to
those provided by the Company. See "Competition." The Company believes that much
of this  consolidation  is due to: (i) economies of scale in hardware,  software
and  other  marketing  resources;  (ii)  cross-selling  of  services;  and (iii)
coordinating  various components of direct marketing and media programs within a
single,  reliable  environment.  The Company believes these trends are likely to
continue due in part to client demand for more cost-effective service to perform
increasingly complex functions.

Services
--------

The Company's operating  businesses provide  comprehensive  database management,
Internet marketing, custom telemarketing/telefundraising,  fulfillment and other
direct  marketing  services.  The principal  advantages  of customized  services
include: (i) the ability to expand and adapt a database to the client's changing
business  needs;  (ii) the ability to have services  operate on a flexible basis
consistent with the client's goals;  and (iii) the integration with other direct
marketing,  Internet,  database management and list processing functions,  which
are necessary to keep a given  database  current.  Some services  offered by the
Company are described below.

Contribution  to total  revenue for the two most recent  fiscal years by type of
service is as follows:

                                     Fiscal  Year  Ended June 30,
                                     ----------------------------
                                            1998      1997
                                            ----      ----
Marketing and Internet services              67%       34%
Telemarketing and telefundraising            32%       66%
Fulfillment                                   1%         -

Marketing Services
------------------

Database Management  Services - The Company's database management services begin
with database  creation and  development,  which include the planning stages and
analytical  processes  to review all of the client's  customer  and  operational
files.   Utilizing  both  proprietary  and  commercial  software,   the  Company
consolidates all of the separate  information and relationships  across multiple
files and converts the client's raw information into a consolidated format. Once
the client's customer data is consolidated and the database created, the data is
enhanced using a wide

<PAGE>

selection of demographic,  geographic, census and lifestyle information for over
95 million  households  and 153 million  individuals  to identify  patterns  and
probabilities of behavior.  The Company licenses this information from a variety
of leading data compilers.

The combination of each client's  proprietary customer information with external
data files provides a customized  profile of a client's customer base,  enabling
the client,  through the use of the  Company's  behavior  modeling  and analysis
services,  to design a direct marketing  program for its customers.  Through the
development  of a scoring  model,  the  client  can  segment  its  database  and
determine  its best  customers  and  prospects in each  marketplace.  The entire
process results in a customized direct marketing program that can be targeted to
distinct  audiences  with a high  propensity  to buy the  client's  products  or
services.  Because of the  dynamic  nature and  complexity  of these  databases,
clients  frequently  request  that the Company  update such  databases  with the
results of recent marketing  programs and  periodically  perform list processing
services as part of the client's ongoing direct marketing efforts.

Data  Processing - The Company's  primary data  processing  service is to manage
from the  Company's  data  center,  all or a  portion  of a  client's  marketing
information  processing  needs.  After  migrating  a  client's  raw  data to the
Company's data center, the Company's technology allows the client to continue to
request and access all available information from remote sites. The database can
also be verified  for  accuracy  and overlaid  with  external  data  elements to
further identify specific consumer behavior.

Other  data  processing   services  provided  include  migration  (takeover  and
turnover)  support for  database  maintenance  or  creation,  merge/purge,  data
overlay  and postal  qualification.  The Company  also offers  on-line and batch
processing capacity, technical support, and data back-up and recovery.

List  Services - List  processing  includes the  preparation  and  generation of
comprehensive  name  and  address  lists  which  are  used in  direct  marketing
promotions.  The  Company's  state-of-the-art  data  center in New York City and
large  volume  processing  capabilities  allow  the  Company  to meet  the  list
processing  needs of its clients through its advanced list  processing  software
applications,  list  brokerage  and  list  management  operations.  The  Company
customizes list processing solutions by utilizing a variety of licensed software
products  and  services,  such  as  Address  Conversion  and  Reformat,  Address
Standardization  and Enhanced  Merge/Purge,  in addition to services provided by
third parties,  including;  National Change of Address (NCOA), Delivery Sequence
File and Locatable Address  Conversion  System.  Other licensed products include
databases used for  suppressions  such as the DMA Mail  Preference  File and the
American Correctional Association Prison Suppress File.

The Company also offers an array of list acquisition  techniques.  Approximately
12,000  lists are  available  for  rental in the list  industry.  The  Company's
account managers, many of whom are recruited from existing Company accounts, use
their  industry  experience  as  well  as  sophisticated  computer  profiles  to
recommend  particular  lists for  customer  acquisition  campaigns.  The Company
acquires  hundreds of  millions of records  annually  for  customer  acquisition
campaigns. The Company also manages several hundred lists for rental purposes on
behalf of list owners.

Database Product  Development - To further leverage its database  management and
list processing  services,  the Company has participated in the development of a
new  product  using  client/server  technology.  The  product  is  a  scaleable,
three-tiered   client/server   data  warehouse  system  that  provides  desktop,
real-time decision support and marketing analysis to a non-technical  user. This
application  is an intuitive,  graphical  user  interface  tool that offers both
flexibility and the ability to access and analyze large customer files exceeding
100 million records. The incorporation of third-party  software,  relational and
multidimensional  database  technology in an open system environment is intended
to allow the Company's  clients to take advantage of the latest  developments in
high-speed computing, utilizing both single and multi-processor hardware.

Market  Analysis  - The  Company's  market  research  services  include  problem
conceptualization,  program design,  data gathering and results analysis.  These
services are conducted through telephone, mail and focus groups. Through the

<PAGE>

use of data capture  technology,  the Company is also able to obtain data from a
statistically  predictable  sample of market survey  contacts.  The Company then
tabulates and analyzes fielded data using multi-variate  statistical techniques,
and produces detailed reports to answer clients' marketing questions and suggest
further marketing opportunities.

Direct  Mail  Support  Services - The  Company's  direct mail  support  services
include    preparing   and   coordinating    database    services   and   custom
telemarketing/telefundraising   services  for  use  in  addressing  and  mailing
materials  to current and  potential  customers.  The Company  obtains  name and
address  data from clients and other  external  sources,  processes  the data to
eliminate   duplicates,   corrects  errors,   sorts  for  postal  discounts  and
electronically  prepares the data for other vendors who will address pre-printed
materials.

Media  Planning  and Buying - The  Company's  Media  Division is a  multifaceted
direct  response  media  broker  specializing  in  direct  advertising  such as:
Traditional  print  advertising;   Cooperative  direct  mail  programs;   Sunday
supplements; card decks and more.

Internet  Services - The Company provides a full suite of Internet services such
as content planning to market  strategy,  from technical site hosting to graphic
design and multimedia  production.  The Company has developed Web sites from the
perspective  of both  client and  presence  provider,  resulting  in an intimate
knowledge  of the  issues  encountered  by both  entities  in a Web  development
project.   From  the  initial  planning   sessions  and   identification  of  an
organization's  promotional objectives to the live cutover of the finished site,
the Company takes a proactive  role in ensuring the most  efficient  development
process  for the  client  and the most  rewarding  experience  for their  online
clientele.  Once  the  site  is  up  and  running,  Company  provides  technical
maintenance and ongoing consulting to keep Web resource current, technologically
up-to-date  and  graphically  ahead of the curve.  The Company  generates  usage
reports, complete with optional analysis and feedback features.

In addition, the Company offers Internet fulfillment, which allows a customer to
order products and services directly via the Internet. The Company's interactive
customer  service  provides for on-line  follow-up on the status of orders.  Our
on-line  inventory  management  system  provides  the  customer  with  real-time
information from any location at any time.

Custom Telemarketing/Telefundraising Services
---------------------------------------------

Custom  telemarketing/telefundraising  services  are  designed  according to the
client's  existing  database and any other  databases  which may be purchased or
rented  on  behalf  of the  client  to  create a  direct  marketing  program  or
fundraising campaign to achieve specific objectives. After designing the program
according to the marketing information derived from the database analysis, it is
conceptualized in terms of the message content of the offer or solicitation, and
an assessment is made of other supporting elements,  such as the use of a direct
mail letter campaign.

Typically,  a campaign is designed in  collaboration  with a client,  tested for
accuracy  and  responsiveness  and  adjusted  accordingly,  after which the full
campaign is  commenced.  The full campaign  runs for a mutually  agreed  period,
which can be shortened or extended depending on the results achieved.

An  important  feature of the custom  telemarketing/telefundraising  campaign is
that it can be implemented  either on-site at a  client-provided  facility or at
the Company's  calling  center in Berkeley,  California.  On-site  campaigns are
generally  based  on  what  is  called  a  "relationship"  or  "affinity"  sale.
Telemarketing  campaigns  often require  multiple calls whereby a caller must be
knowledgeable  about the  organization  and the subject  matter and will seek to
engage  a  prospect   selected  from  the  client's   database  in  an  extended
conversation  which  serves to: (i) gather  information;  (ii) convey the offer,
describe its merits and cost, and solicit gifts or donations; and (iii) conclude
with a purchase, donation or pledge.  Telefundraising from the Company's calling
center usually involves  campaigns that do not use the multiple call format, but
instead use computer  driven  predictive  dialing  systems which are designed to
maximize

<PAGE>

the usage  rate for all  telephones  as the system  works  through  the  calling
database.

Fulfillment Services
--------------------

The  Company  offers  its  clients   contract   packaging  and  direct  response
fulfillment.  These services  include product  warehousing and shipping,  custom
packaging,  assembly and labeling,  inbound/outbound  customer service,  payment
processing, retail and end user distribution,  package design and Internet based
fulfillment solutions.  Customer services representatives are trained to provide
customer  support during regular working hours and the Company's  automated call
center application is accessible 24 hours a day, 365 days of the year.

Marketing and Sales
-------------------

The Company's  marketing  strategy is to offer customized  solutions to clients'
database management,  Internet,  telemarketing/telefundraising,  fulfillment and
other direct  marketing  requirements.  Historically,  the  Company's  operating
businesses  have acquired new clients and marketed  their  services by attending
trade shows,  advertising in industry  publications,  responding to requests for
proposals,  pursuing client referrals and cross-selling to existing clients. The
Company  targets  those  companies  that have a high  probability  of generating
recurring  revenues  because of their ongoing direct marketing needs, as well as
companies  which have large customer bases that can benefit from targeted direct
marketing     database    and     fulfillment     services    and     customized
telemarketing/telefundraising services.

The Company markets its marketing  services  through a sales force consisting of
both  salaried  and  commissioned  sales  persons.  In some  instances,  account
representatives,  will  coordinate  a client's  database  management,  Internet,
custom telemarketing/telefundraising,  fulfillment and/or other direct marketing
needs to identify cross-selling opportunities.

Account  representatives  are  responsible  for keeping  existing and  potential
clients informed of the results of recent marketing  campaigns,  industry trends
and new developments in the Company's technical database  resources.  Often, the
Company  develops  an initial  pilot  program  for new or  potential  clients to
demonstrate the  effectiveness  of its services.  Access to data captured during
such pilot  programs  allows the Company and its clients to identify  previously
unrecognized  target market  opportunities and to modify or enhance the client's
marketing effort on the basis of such information.  Additionally, the Company is
able to provide  its clients  with  current  updates on the  progress of ongoing
direct marketing programs.

Pricing for direct  marketing  services is dependent  upon the complexity of the
services required.  In general,  the Company  establishes pricing for clients by
detailing a broad range of service options and quotation  proposals for specific
components of a direct marketing program.  These quotes are based in part on the
volume of records to be  processed,  complexity  of  assembly,  and the level of
customization required.  Additionally, if the level of up-front customization is
high,  the  Company  charges  a  one-time  development  fee.  Pricing  for  data
processing services is dependent upon the anticipated range of computer resource
consumption.  Typically,  clients are charged a flat or stepped-up rate for data
processing services provided under multi-year contracts. If the processing time,
data  storage,  retrieval  requirements  and output  volume  exceed the budgeted
amounts, the client may be subject to an additional charge.  Minimum charges and
early  termination   charges  are  typically  included  in  contracts  or  other
arrangements between the Company and the client.

On-site telemarketing and telefundraising fees are generally based on a mutually
agreed  percentage of amounts received by the Company's clients from a campaign.
Off-site fees are typically based on a mutually agreed amount per contact with a
potential donor.

Fulfillment  fees are based on materials and shipping  requirements,  as well as
complexity  of product  assemblage.  Customer  service fees are charged on a per
call basis.

<PAGE>

Client Base
-----------

The Company  believes  that its large and  diversified  client base is a primary
asset which contributes to stability and the opportunity for growth in revenues.
The Company has  approximately  1,000 clients who utilize its various  marketing
services.  These  clients  are  comprised  of leading  commercial  business  and
nonprofit  institutions  in  the  publishing,  entertainment  marketing,  public
broadcasting,  retail,  financial services (including credit card, home mortgage
and  home  equity  services),  education,  travel  and  leisure  and  healthcare
industries. No single client accounted for more than 5% of such total revenue in
fiscal 1998.

Competition
-----------

The direct  marketing  services  industry is highly  competitive and fragmented,
with no single  dominant  competitor.  The Company  competes with companies that
have more extensive  financial,  marketing and other resources and substantially
greater assets than those of the Company,  thereby  enabling such competitors to
have an advantage in obtaining client contracts where sizable asset purchases or
investments  are required.  The Company also  competes  with  in-house  database
management,  telemarketing/telefundraising and direct mail operations of certain
of its clients or potential clients.

Competition  is based on quality  and  reliability  of  products  and  services,
technological  expertise,  historical experience,  ability to develop customized
solutions  for  clients,  technological  capabilities  and  price.  The  Company
believes that it competes  favorably,  especially in the arts and entertainment,
publishing,  financial services and fundraising sectors. The Company's principal
competitors in the database  management  services field are: Acxiom Corporation,
Dimac Corporation,  Direct Marketing Technology,  Fair-Isaac,  Inc., Harte-Hanks
Communications, Inc. and May & Speh, Inc. The Company's principal competitors in
the  custom   telemarketing/telefundraising  field  are  Arts  Marketing,  Inc.,
Ruffalo,  Cody & Associates  and The Share Group.  Principal  competitors in the
fulfillment  industry  are  Guthy  Renker,  Promotional  Distribution  Services,
Fosdick, Tylie Jones and National Fulfillment. There are relatively low barriers
to entering the Internet  marketing  services  industry.  The current  market is
highly  competitive  and the  Company  anticipates  that  new  competitors  will
continue to enter the market.

Technological Resources and Facilities
--------------------------------------

The Company maintains a state-of-the-art outbound  telemarketing/telefundraising
calling center in Berkeley,  California.  The Berkeley  calling center increases
the  efficiency  of its  outbound  calling  by using a  computerized  predictive
dialing  system  supported by a UNIX-based  call  processing  server  system and
networked  computers.  The predictive dialing system,  using relational database
software, supports 72 outbound telemarketers and maximizes calling efficiency by
reducing the time between calls for each calling station and reducing the number
of calls connected to wrong numbers,  answering machines and electronic devices.
The system provides on-line real time reporting of caller  efficiency and client
program  efficiency  as well as flexible  and  sophisticated  reports  analyzing
caller  sales  results and client  program  results  against  Company and client
selected parameters. The Berkeley calling center has the capacity to serve up to
15 separate  clients or projects  simultaneously  and can produce  27,000  valid
contacts per week  (1,400,000 per year) or 3,400 calling hours per week (176,800
per year) on a single shift basis. A valid contact occurs when the caller speaks
with the intended person and receives a "yes," "no" or "will consider" response.
The existing  platform can be expanded to  accommodate  100  predictive  dialing
stations with a single shift capacity of approximately  1,900,000 valid contacts
per year.

The Company leases all of its real property: facilities for its headquarters are
in New York City;  its sales and  service  offices are located in New York City;
Newtown, Pennsylvania;  Valencia and Los Angeles, California; its data center is
located in New York City;  and its  telemarketing  calling  center in  Berkeley,
California.  To accommodate its rapid growth, the Company is currently expanding
its data center and administrative offices in New York.

<PAGE>

The  Company's  administrative  office  for  its   telemarketing/telefundraising
operations  in Los  Angeles is located in office  space  leased  from the former
owner of SD&A,  which lease the Company  believes is on terms no less  favorable
than those that would be available from independent  third parties.  The Company
believes that all of its  facilities  are in good condition and are adequate for
its current needs through  fiscal 1999,  except for potential  additional  space
which may be required for product  warehousing.  The Company believes such space
is readily  available at commercially  reasonable  rates and terms.  The Company
also believes that its technological resources, including the mainframe computer
and other data processing and data storage computers and electronic machinery at
its data center in New York City, as well as its related  operating,  processing
and  database  software,  are all adequate  for its needs  through  fiscal 1999.
Nevertheless,  the  Company  intends  to  expand  its  technological  resources,
including  computer  systems,  software,  telemarketing  equipment and technical
support.  Any such  expansion  may require the leasing of  additional  operating
office space.

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.

Government Regulation and Privacy Issues
----------------------------------------

The telemarketing industry has become subject to an increasing amount of federal
and state regulation during the past five years. The federal Telephone  Consumer
Protection Act of 1991 (the "TCPA") limits the hours during which  telemarketers
may  call  consumers  and  prohibits  the  use of  automated  telephone  dialing
equipment to call  certain  telephone  numbers.  The federal  Telemarketing  and
Consumer  Fraud  and  Abuse  Prevention  Act  of  1994  (the  "TCFAPA")  broadly
authorizes  the  Federal  Trade  Commission  (the  "FTC")  to issue  regulations
prohibiting   misrepresentations   in   telemarketing   sales.   The  FTC's  new
telemarketing  sales  rules  prohibit  misrepresentations  of the  cost,  terms,
restrictions,  performance  or  duration  of  products  or  services  offered by
telephone  solicitation,  prohibit a  telemarketer  from calling a consumer when
that  consumer  has  instructed  the  telemarketer  not to  contact  him or her,
prohibit a  telemarketer  from calling prior to 8:00 a.m. or after 9:00 p.m. and
specifically  address other  perceived  telemarketing  abuses in the offering of
prizes and the sale of business opportunities or investments. Violation of these
rules may result in injunctive  relief,  monetary  penalties or  disgorgement of
profits and can give rise to private actions for damages.

While the FTC's new rules  have not caused  the  Company to alter its  operating
procedures,  additional  federal or state  consumer-oriented  legislation  could
limit  the   telemarketing   activities   of  the  Company  or  its  clients  or
significantly increase the Company's costs of regulatory compliance.

Several of the  industries  which the Company  intends to serve,  including  the
financial services, and healthcare industries, are subject to varying degrees of
government  regulation.  Although compliance with these regulations is generally
the responsibility of the Company's  clients,  the Company could be subject to a
variety of enforcement or private  actions for its failure or the failure of its
clients to comply with such regulations.

<PAGE>

In  addition,  the  growth of  information  and  communications  technology  has
produced a proliferation of information of various types and has raised many new
issues  concerning the privacy of such  information.  Congress and various state
legislatures have considered legislation which would restrict access to, and the
use of, credit and other personal information for direct marketing purposes. The
direct marketing services industry,  including the Company,  could be negatively
impacted in the event any of these or similar types of legislation are enacted.

Currently the Company trains its service  representatives and other personnel to
comply with the  regulations of the TCPA, the TCFAPA and the FTC and the Company
believes that it is in  compliance  with all such  regulations,  in all material
respects.

The Year 2000
-------------

The Company has taken actions to make its systems,  products and  infrastructure
Year  2000  compliant.  With  respect  to  the  database  marketing  subsidiary,
databases  maintained  for  clients  include  a four  digit  year  code  and one
subsequently  not exposed to year 2000 issues.  The Company is also beginning to
inquire as to the status of its key  suppliers  and vendors  with respect to the
Year 2000. The Company believes it is taking the necessary steps to resolve Year
2000 issues;  however,  there can be no assurance  that a failure to resolve any
such issue would not have a material  adverse effect on the Company.  Management
believes,  based on  available  information,  that it will be able to manage its
total Year 2000 transition  without any material  adverse effect on its business
operations, products or financial prospects.

Employees
---------

At September  1, 1998,  the Company  employed  1,265  persons,  of whom 284 were
employed on a full-time  basis.  None of the Company's  employees are covered by
collective  bargaining  agreements  and the Company  believes that its relations
with its employees are good.

Executive Officers and Directors of the Registrant and Significant Employees
----------------------------------------------------------------------------

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

Name                    Age                   Position
----                    ---                   --------
J. Jeremy Barbera        42    Chairman  of  the  Board  of  Directors,
                                  Chief Executive   Officer,   President
                                  and  Chief Operating Officer

Cindy H. Hill            29    Chief Financial Officer

Scott Anderson           41    Vice President, Finance

Alan I. Annex            36    Director and Secretary

James Brown              33    Director

S. James Coppersmith     65    Director

John T. Gerlach          65    Director

Seymour Jones            67    Director

Michael E. Pralle        42    Director

C. Anthony Wainwright    65    Director

Robert M. Budlow         37    Vice  President of MSGI and  President of Metro
                                  Direct

Janet Sautkulis          42    Chief Operating Officer, Metro Direct

Krista Mooradian         32    President, SD&A

<PAGE>

Thomas Scheir            45    Chief Operating Officer, SD&A

Stephen M. Reustle       43    President and Chief  Executive  Office,
                                  Media Marketplace, Inc.

Brian Coughlan           30    President, Pegasus Internet, Inc.

Mr.  Barbera  has been  Chairman,  Chief  Executive  and  Operating  Officer and
President of the Company since April 1997 and was a Director and Vice  President
of the Company  from  October  1996 to April 1997.  He has been Chief  Executive
Officer of Metro since its formation in 1987.  Mr. Barbera has eighteen years of
experience in data management  services,  and over twenty years of experience in
the  entertainment  marketing area.

Ms. Hill has been Chief Financial Officer of the Company since June 1, 1998, and
was Corporate Controller of the Company from January to May 1998. Prior thereto,
she was a manager in the Business Assurance Division of Coopers & Lybrand,  LLP,
where she was  employed  for the  previous  six years.  Ms.  Hill is a Certified
Public Accountant.

Mr.  Anderson has been Vice  President,  Finance  since June 1, 1998,  Treasurer
since  May 1997  and was  Chief  Financial  Officer  from May 1996 to May  1998,
Controller from May 1995 to May 1996 and a Director of the Company from May 1996
to  August  1996.  Prior  thereto,  from  December  1994 to April  1995,  he was
associated with the accounting  firm of Coopers & Lybrand L.L.P.  and, from 1998
to 1994,  he was manager in the  assurance  department  of an  affiliate  of the
accounting  firm of Deloitte & Touche LLP.  Mr.  Anderson is a Certified  Public
Accountant.

Mr. Annex has been a Director and  Secretary of the Company  since May 1997.  He
has been a partner  in the law firm of Camhy  Karlinsky  & Stein LLP since  July
1995,  where he practices  corporate and securities law. Camhy Karlinsky & Stein
LLP is the Company's  legal counsel.  From July 1994 to June 1995, Mr. Annex was
Of Counsel to said firm.  Prior thereto he was associated  with Proskauer  Rose,
LLP. Mr. Annex is also a director of Pacific Coast Apparel, Inc.

Mr. Brown has been a Director of the Company since  February  1998. Mr. Brown is
currently  Vice  President and Industry  Leader in GE Capital's  Equity  Capital
Group, where he is responsible for making strategic private equity  investments.
From 1994 to 1995,  Mr. Brown joined Lehman  Brothers in its Corporate  Planning
area to restructure  the firm.  From 1992 to 1994, Mr. Brown was with Bain & Co.
where he  consulted  with  Fortune 500  clients on  strategic,  operational  and
financial issues. Prior thereto, he was an analyst for CBS and AC Nielsen.

Mr.  Coppersmith  has been a Director  of the  Company  since June 1996.  He was
Chairman of the Board of Trustees of Boston's  Emerson  College  from 1994 until
his term expired in December 1997. Until his retirement in 1994, Mr. Coppersmith
held various senior executive  positions with Metromedia  Broadcasting  where he
managed its  television  operations  in Los  Angeles,  New York,  and Boston and
served as President and General  Manager of Boston's  WCVB-TV,  an ABC affiliate
owned by The Hearst  Corporation.  Mr. Coppersmith also serves as a director for
B.J.'s Wholesale Club, Sun America Asset Management Corporation,  Uno Restaurant
Corp., Kushner-Locke, Inc., and The Boston Stock Exchange.

Mr.Gerlach  has been a  Director  of the  Company  since  December  1997.  He is
presently  Director of the graduate business program and an associate  professor
of finance at Sacred Heart University in Fairfield, CT. Previously,  Mr. Gerlach
was an Associate  Director in Bear Stearns' corporate finance  department,  with
responsibility  for  mergers  and  financial   restructuring  projects;  he  was
President and Chief Operating Officer of Horn & Hardart,  supervising restaurant
and mail order  subsidiaries,  including Hanover Direct;  and he was the Founder
and President of Consumer  Growth  Capital,  a venture capital firm. Mr. Gerlach
also serves as a director for Uno Restaurant  Co.; SAFE Inc.; LB USA (subsidiary
of a French company); Akona Corp.; the Board of Regents at St. John's University
in  Collegeville,  MN; and is a member of an  advisory  board for the College of
Business & Administration at Drexel University.

<PAGE>

Mr. Jones has been a Director of the Company  since June 1996.  Since  September
1995, Mr. Jones has been a professor of accounting at New York University. Prior
thereto,  from April 1974 to September  1995,  Mr. Jones was a senior partner of
the accounting firm of Coopers & Lybrand,  L.L.P. Mr. Jones has over 35 years of
accounting  experience  and over ten years of experience as an arbitrator and as
an expert witness, particularly in the area of mergers and acquisitions.

Mr.  Pralle has been a Director of the  Company  since May 1998.  Mr.  Pralle is
currently   the  President  of  GE  Capital's   Equity   Capital   Group,   with
responsibility  for making common equity,  convertible  preferred stock and debt
investments  in private  and public  companies  in the US,  Europe and Asia.  He
joined GE Capital in 1989 and,  prior to his current  appointment  in 1996,  was
most recently President, GE Capital Asia Pacific. Before joining GE Capital, Mr.
Pralle  spent six years  with  management  consultants,  McKinsey & Co. in their
London and Hong Kong offices.

Mr. Wainwright has been a Director of the Company since August 1996 and was also
a Director  of the  Company  from the  acquisition  of SD&A until May 1996.  Mr.
Wainwright  is currently  Vice  Chairman of the  advertising  agency  McKinney &
Silver and was  Chairman and Chief  Executive  Officer of the  advertising  firm
Harris Drury Cohen,  Inc.,  from 1995 to 1996. From 1994 to 1995, he served as a
senior executive with Cordient PLC's Compton Partners, a unit of the advertising
firm Saatchi & Saatchi  World  Advertising,  and, from 1989 to 1994, as Chairman
and Chief Executive Officer of Campbell Mithun Esty, a unit of Saatchi & Saatchi
in  New  York.   Mr.   Wainwright   also  serves  as  a  director  of  Caribiner
International,  Gibson  Greetings,  Inc.,  Del  Webb  Corporation  and  American
Woodmark Corporation.

Mr.  Budlow  has been Vice  President  of the  Company  since  October  1996 and
President  of Metro since April  1997.  Prior  thereto,  he was  Executive  Vice
President and Chief  Operating  Officer of Metro since 1990. He has twelve years
of experience in database management  services and subscription,  membership and
donor renewal programs.

Ms.  Sautkulis  serves  as  Chief  Operating  Officer  of Metro  Direct,  having
previously  served as Executive Vice  President.  Prior to joining Metro Direct,
she held  various  positions  at Jetson  Direct Mail and Belth  Associates.  Ms.
Sautkulis  has more than twenty years  experience in database  management,  list
brokerage  and  lettershop  services  specializing  in the  business-to-business
sector.

Ms.  Mooradian has been  President of SD&A since 1997.  For the past five years,
she has held various positions of increasing responsibility within SD&A

Mr.  Scheir has been Vice  President and Chief  Operating  Officer of SD&A since
September  1996.  Prior  thereto,  from  1990 to  September  1996,  he was Chief
Financial  Officer of SD&A, and from 1983 to 1990, he served as Business Manager
of SD&A.

Mr. Reustle has been President and Chief Executive Officer of MMI since December
1997,  Managing  Partner from June 1980 to December  1997 and Vice  President of
Finance from 1978 to 1980.  Prior thereto,  Mr.  Reustle was a Certified  Public
Accountant at Arthur Andersen LLP, where he was employed from 1976 to 1978.

Mr.  Coughlan has been  President of Pegasus  Internet  since June 1998.  Having
previously served as Creative Director,  he brings over ten years of interactive
design and project management experience to Pegasus.

<PAGE>

Item 2 - Properties
-------------------

The Company and its subsidiaries lease facilities for office and warehouse space
summarized  as  follows  and  in  Note  9 of  Notes  to  Consolidated  Financial
Statements.

        Location                        Square Feet
        --------                        -----------
        Patterson, New York                     250
        Venice, California                    5,500
        Berkley, California                   6,600
        Newtown, Pennsylvania                10,270
        New York, New York                   20,000
        Valencia, California                 36,000


Item 3 - Legal Proceedings
--------------------------

The Company has been party to certain legal  proceedings in the ordinary  course
of its business. The outcome of these legal proceedings are not expected to have
a material adverse effect on the consolidated financial condition,  liquidity or
expectations of the Company, based on the Company's current understanding of the
relevant facts and law.


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

On April 3, 1998, the Company held an annual meeting of  stockholders to vote on
election of directors,  ratification  of  independent  auditors and increases in
authorized shares of the Company's common and preferred stock. Of the 17,534,674
shares of the Company's common stock, par value $.01 per share, ("Common Stock")
entitled to vote at the meeting,  holders of  15,834,716  shares were present in
person or were represented by proxy at the meeting.  Of the 50,000 shares of the
Company's  preferred  stock,  par  value  $.01 per  share,  ("Preferred  Stock")
entitled to vote at the meeting, all were represented.

The  directors  elected at the  meeting  and the  results of the voting  were as
follows:
                                 For           Against
                                 ---           -------
General nominees:
Alan I. Annex                 15,622,625       212,091
J. Jeremy Barbera             15,623,350       211,366
S. James Coppersmith          15,622,625       212,091
John T. Gerlach               15,591,925       242,791
Seymour Jones                 15,620,625       214,091
C. Anthony Wainwright         15,622,625       212,091

Preferred nominee:
James Brown                       50,000             0

The above  represented  all of the  directors  of the  Company on April 3, 1998.
There were no abstentions or broker non-votes on the election of directors.

The  shares  voted  regarding  the  Board  of  Directors'  proposal  to amend to
Company's  Amended and Restated Articles of Incorporation to increase the number
of shares of Common Stock  authorized  for issuance  from  36,250,000  shares to
75,000,000 were as follows:

           For                              15,211,407
           Against                             580,292
           Abstentions                          43,017
           Broker non-votes                          0
<PAGE>

The  shares  voted  regarding  the Board of  Directors'  proposal  to select the
accounting firm of Coopers and Lybrand, LLP, to serve as independent auditors of
the Company were as follows:

           For                              15,748,777
           Against                              47,682
           Abstain                              38,257
           Broker non-votes                          0

The  shares  voted  regarding  the  Board of  Directors'  proposal  to amend the
Company's  Amended and Restated Articles of Incorporation to increase the number
of shares of  Preferred  Stock  authorized  for issuance  from 50,000  shares to
150,000 shares were as follows:

           For                              10,452,521
           Against                             607,963
           Abstain                             168,250
           Broker non-votes                  4,605,982



                                 PART II

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

The common stock of the Company  trades on the NASDAQ  Small-Cap  MarketSM under
the symbol  "MSGI".  Prior to July 1997 it traded under the symbol  "ALCM".  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 NASD:

                                     Common Stock
                         Low Sales Price      High Sales Price
                         ---------------      ----------------
        Fiscal 1998
           Fourth Quarter       $3.00                 $4.19
           Third Quarter         3.50                  5.56
           Second Quarter        3.88                  5.50
           First Quarter         2.75                  5.25
        Fiscal 1997
           Fourth Quarter       $1.69                 $3.56
           Third Quarter         2.00                  5.25
           Second Quarter        3.19                  5.63
           First Quarter         4.63                  6.13

As of June 30, 1998, there were  approximately 800 registered  holders of record
of the Company's  common stock.  (This number does not include  investors  whose
accounts are maintained by securities  firms in "street  name".)

The Company has not paid any cash  dividends  on any of its capital  stock in at
least the last five 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.

<PAGE>

Item 6 - Management's Discussion and Analysis
---------------------------------------------

Introduction :
--------------

This discussion  summarizes the significant  factors affecting the consolidated
operating results,  financial condition and liquidity/cash  flows of the Company
for the two year period ended June 30, 1998.  This should be read in conjunction
with the  financial  statements,  and notes  thereto,  included  in this  Annual
Report.

From April 25, 1995 through September 30, 1996, the Company operated as a direct
marketing  services  provider with its initial  concentration as a telemarketing
and  telefundraising  company that specialized in direct marketing  services for
the arts, educational and other cultural organizations.  As more fully described
in Note 3 to the consolidated  financial  statements included herein,  effective
October 1, 1996 the Company purchased 100% of the stock of Metro Services Group,
Inc., subsequently renamed Metro Direct ("Metro"). This acquisition is reflected
in the consolidated financial statements using the purchase method of accounting
starting October 1, 1996. Metro develops and markets information-based  services
used  primarily in direct  marketing by a variety of commercial  and  tax-exempt
organizations.

As more  fully  described  in Note 3 to the  consolidated  financial  statements
included  herein,  effective  December 1, 1997, the Company  acquired all of the
outstanding capital stock of Media Marketplace, Inc. and Media Marketplace Media
Division,  Inc.  (collectively  "MMI").  The  results of  operations  of MMI are
reflected in the consolidated  financial statements using the purchase method of
accounting  from the date of  acquisition.  MMI provides list  management,  list
brokerage and media planning services.

As more  fully  described  in Note 3 to the  consolidated  financial  statements
included  herein,  effective  July 1,  1997,  the  Company  acquired  all of the
outstanding common shares of Pegasus Internet, Inc. ("Pegasus").  The results of
operations of Pegasus are  reflected in the  consolidated  financial  statements
using the purchase method of accounting  from the date of  acquisition.  Pegasus
provides Internet  services,  including web site planning and development,  site
hosting,  on-line ticketing,  system development,  graphic design and electronic
commerce.

In May 1998, the Company formed Metro Fulfillment, Inc. ("MFI"), a new operating
subsidiary   providing   online   commerce,   real-time   database   management,
inbound/outbound  customer  service,  custom  packaging,   assembling,   product
warehousing, shipping, payment processing and retail distribution.

Results of Operations Fiscal 1998 Compared to Fiscal 1997
---------------------------------------------------------

Revenues  of $51.2  million for the year ended June 30,  1998  ("Fiscal  1998")
increased by $27.1 million over revenues of $24.1 million  during the year ended
June 30,  1997  ("Fiscal  1997").  Of the  increase,  $22.4  million  was due to
acquisitions and start-up  operations during Fiscal 1998.  Revenues from on-site
telemarketing and  telefundraising  campaigns  increased $0.9 million from $12.9
million in Fiscal  1997 to $13.8 in Fiscal  1998 offset by a decrease in calling
center revenues of $0.3 million.  Revenues from marketing services totaled $12.2
million and $8.2  million in Fiscal 1998 and Fiscal  1997,  respectively,  or an
increase of $4.0 million.  The increase was  principally due to the inclusion of
twelve  months of operations in the current year versus nine months in the prior
year, combined with continued sales growth.

Salaries and benefits of $19.2 million in Fiscal 1998 increased by $4.2 million
over salaries and benefits of $15.0 million in Fiscal 1997,  principally  due to
the inclusion of $2.4 million from  acquisitions and start-up  operations during
Fiscal 1998.  Salaries and benefits from telemarketing  activities  increased by
$0.4 million or 3%,  consistent with its overall increase in revenues.  Salaries
and benefits from marketing services  activities  increased by $1.4 million from
$1.8 million in Fiscal 1997 to $3.2  million in Fiscal  1998.  This was due to a
full year of

<PAGE>

expenses  in Fiscal  1998,  against  nine months in Fiscal  1997,  as well as an
increase in head count to manage current and anticipated future growth.

Direct costs of $26.8  million in Fiscal 1998  increased  by $21.2  million over
direct  costs  of  $5.6  million  in  Fiscal  1997.  $19.2  of the  increase  is
principally due to acquisitions  during Fiscal 1998.  Direct costs for marketing
services increased by $2.0 million  principally due to the inclusion of the full
year of  expenses in the current  year,  as well as an increase in revenue.  The
Company's direct costs consist  principally of commissions paid to use marketing
lists.

Selling,  general and  administrative  expenses  of $4.3  million in Fiscal 1998
increased  by $0.7 million  over  comparable  expenses of $3.6 million in Fiscal
1997.  Acquisitions and start-up  operations  accounted for $0.7 million of such
expenses.  Administrative  expenses  for  marketing  services  increased by $0.2
million, principally due to the inclusion of the full year of expenses in Fiscal
1998. Corporate administration decreased by $0.2 generally due to cost reduction
measures  implemented upon the change in the Company's  management at the end of
Fiscal 1997.

In Fiscal  1997,  the  Company  incurred  a  non-recurring,  non-cash  charge of
$1,650,000 to  compensation  expense  relating to options  granted to two former
principal  executive  officers.  Such charge was  incurred  because the exercise
price of each such  option,  which was based upon the market price of the common
stock on May 30, 1996 (the date which the Company  intended as the effective day
of the grant)  rather than the market  price on  September  26, 1996 (the actual
effective  date of the  grant),  was lower than the  market  price of the common
stock on September 26, 1996.

Restructuring costs of $1.0 million were incurred in Fiscal 1997, as the Company
effected certain corporate  restructuring  steps,  including  reducing corporate
staff and related  corporate  office  expenses,  as well as making two executive
management changes.

Depreciation  and  amortization of $1.5 million in Fiscal 1998 increased by $0.5
million  over  comparable  expenses  of $1.0  million  in  Fiscal  1997.  Of the
increase,  $0.4 million is due to acquisitions and start-up  operations  entered
into during Fiscal 1998. The remaining increase was principally due to inclusion
of a full year of expenses for marketing services.

Discounts on warrant  exercises  of $113,000  were  incurred in Fiscal 1997.  To
reduce the overhang associated with the existence of such warrants and to obtain
working capital subsequent to the withdrawal of its proposed underwritten public
offering,  the Company accepted offers from certain  warrant-holders to exercise
their warrants for shares of Common Stock at discounted exercise prices. For the
warrants  which  arose  from  a  previous  financing  transaction,  the  Company
recognized the dates of acceptances as new measurement  dates and,  accordingly,
recorded the non-cash charges to reflect the market value of the discounts.

Withdrawn  public  offering costs of $1.2 million were recorded in Fiscal 1997.
In October 1996,  the Company filed a  registration  statement on Form SB-2 with
the  Securities  and  Exchange  Commission  relating to an  underwritten  public
offering  of 2.1 million  shares.  In February  1996 the  Company  withdrew  the
registration statement and costs incurred in the process were expensed.

Interest  expense and other,  net, of  $186,000  in Fiscal  1998  decreased  by
$215,000  over expenses of $401,000 in Fiscal 1997.  Such expenses  decreased by
$407,000  principally  due to  conversions  of  convertible  securities and debt
repayments,  interest  income  earned on invested  surplus cash and interest and
other miscellaneous  income provided by certain acquisitions during Fiscal 1998.
These changes were offset by increased interest expense at certain  subsidiaries
of  $192,000  due to a change  in  borrowing  relationship  in  August  1997 and
increase in current

<PAGE>

year  borrowings  on lines of credit for  working  capital  to support  internal
growth.

The provision  for income taxes of $15,000 in Fiscal 1998  decreased by $94,000
over the provision of $109,000 in Fiscal 1997.  During Fiscal 1998,  the Company
determined that it qualified to file as a combined entity in a certain state for
the fiscal years  beginning  July 1, 1996.  The Company had  estimated its state
income tax for such state on a  stand-alone  basis for each  subsidiary  for the
year ended June 30,  1997.  The impact on the  current  year for this  change in
estimate  resulted in a benefit of  approximately  $70,000.  The Company records
provisions for state and local taxes incurred on taxable income at the operating
subsidiary  level,  which can not be offset by  losses  incurred  at the  parent
company level.

Capital Resources and Liquidity:

Historically,  the Company has funded its operations,  capital expenditures and
acquisitions primarily through cash flow from operations,  private placements of
common and preferred  stock,  and its credit  facilities.  At June 30, 1998, the
Company had cash and cash equivalents of $6,234,981 and accounts  receivable net
of allowances of $15,865,905.

The Company  generated  losses from operations of $579,807 in the current period
and  used  net  cash in  operating  activities  of  $1,886,489.  The  usage  was
principally  due to  final  payments  made  on the  Company's  withdrawn  public
offering liabilities and an increase in accounts receivable.

In the current period, net cash of $7,281,393 was used in investing  activities.
The Company paid $5,691,172 as part of the purchase price for the acquisition of
MMI and $277,692 as part of the purchase  price for the  acquisition of Pegasus,
net of cash  acquired.  Purchases  of property and  equipment  of $287,529  were
principally comprised of computer equipment.  The Company intends to continue to
invest in technology and telecommunications hardware and software.

In the current period,  financing activities provided  $12,473,851.  On December
24, 1997,  the Company sold 50,000  shares of  convertible  preferred  stock for
$15,000,000,  less  $1,101,719 of placement fees and related  costs.  During the
period,  a subsidiary  entered into a two-year  renewable credit facility with a
lender  for a  line  of  credit  commitment  of up to a  maximum  of  $2,000,000
collateralized by its accounts  receivable.  In August, the subsidiary drew upon
the  facility  to fully pay down the  outstanding  balance  of  $746,000  on its
previous  bank line and the  $104,000  remaining  on its bank note.  At June 30,
1998, the Company had amounts  outstanding of $2,522,306 on its lines of credit.
The Company had  approximately  $980,000  available on its lines of credit as of
June 30, 1998.

During the current period the Company repaid $2,291,666 of its acquisition debt,
comprised  of  $900,000 to the former  principals  of Metro,  $1,241,666  to the
former principal of SD&A and $150,000 to the former principal of MMI.

The Company believes that funds on hand, funds available from its operations and
from its unused  lines of credit,  should be adequate to finance its  operations
and capital  expenditure  requirements,  and enable the Company to meet interest
and debt  obligations,  for the next  twelve  months.  In  conjunction  with the
Company's acquisition and growth strategy,  additional financing may be required
to complete any such acquisitions and to meet potential  contingent  acquisition
payments.

The Year 2000
-------------

The Company has taken actions to make its systems,  products and  infrastructure
Year  2000  compliant.  With  respect  to  the  database  marketing  subsidiary,
databases  maintained  for  clients  include  a four  digit  year  code  and

<PAGE>

are subsequently not exposed to Year 2000 issues.  The Company is also beginning
to inquire as to the status of its key suppliers and vendors with respect to the
Year 2000. The Company believes it is taking the necessary steps to resolve Year
2000 issues;  however,  there can be no assurance  that a failure to resolve any
such issue would not have a material  adverse effect on the Company.  Management
believes,  based on  available  information,  that it will be able to manage its
total Year 2000 transition  without any material  adverse effect on its business
operations, products or financial prospects.

Seasonality  and  Cyclicality:  The  businesses of  telemarketing  and marketing
services  tend to be  seasonal.  Telemarketing  has higher  revenues and profits
occurring in the fourth fiscal  quarter,  followed by the first fiscal  quarter.
This is due to  subscription  renewal  campaigns for tax exempt  clients,  which
generally  begin in the spring  time and  continue  during  the  summer  months.
Marketing  services  tend to have higher  revenues and profits  occurring in the
second fiscal quarter, based on the seasonality of its clients' mail dates.

New Accounting Pronouncements:

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income"
("SFAS  130").  SFAS 130  establishes  standards  for  reporting  and display of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial  statements.  An enterprise  that has no items of other  comprehensive
income in any period presented is not required to report  comprehensive  income.
SFAS 130 is  effective  for fiscal  years  beginning  after  December  15, 1997.
Management  does not believe  that the adoption of SFAS 130 will have a material
impact on the Company's financial statements.

In June 1997, the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business  enterprises report information about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures  about products and services,  geographic areas and major customers.
SFAS 131 is  effective  for fiscal  years  beginning  after  December  15, 1997.
Management  has not yet  assessed  the impact that the adoption of SFAS 131 will
have on the Company's financial statements.

In April 1998, the Accounting  Standards Executive Committee issued Statement of
Position 98-5 Reporting on the Costs of Start-Up Activities (SOP 98-5), which is
required to be adopted by the Company in fiscal 1999, SOP 98-5 provides guidance
on the financial reporting of start-up costs and organization costs. It requires
costs of start-up  activities and organization costs to be expensed as incurred.
Management  believes  that the  implementation  of SOP  98-5  will  result  in a
one-time charge of approximately  $120,000 on the date of adoption which will be
reported as a cumulative effect of a change in accounting principle.


Item 7 - Financial Statements
-----------------------------

The Consolidated  Financial Statements required by this Item 7 are set forth as
indicated in the index following Item 13(a)(1).


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

 None.

<PAGE>


                                PART III


The  information  required  by this Part III (items 9, 10, 11 and 12) is hereby
incorporated by reference from the Company's definitive proxy statement which is
expected to be filed pursuant to Regulation  14A of the Securities  Exchange Act
of 1934 not later than 120 days after the end of the fiscal year covered by this
report.  Certain information,  with respect to the Company's executive officers,
is set forth in Part I, under the caption  "Executive  Officers and Directors of
the Registrant and Significant Employees."



<PAGE>
   

Item 13 - Exhibits and Reports on Form 8-K
------------------------------------------

(A)(1) Financial statements - see "Index to Financial Statements" on page 28.
   (2) Exhibits:
       3(i)   Amended and Restated Articles of Incorporation (b)
       3(ii)  Certificate  of  Amendment  to  the  Amended  and  Restated
              Articles of Incorporation of the Company (b)
             
       3(iii)Certificate  of Amendment to the Articles of  Incorporation
             for change of name to All-Comm Media Corporation (e)
       3(iv) By-Laws (b)            
       3(v)  Certificate  of  Amendment  of Articles of  Incorporation  for
             increase in number of authorized shares to 36,300,000 total (h)
       3(vi) Certificate of Amendment of Articles of  Incorporation  for
             change of name to Marketing Services Group, Inc. (k)            
       3(vii)Certificate of Amendment of Articles of  Incorporation  for
             increase  in number  of  authorized  shares  to  75,150,000
             total (a)   
       10.1  1991 Stock Option Plan (c)
       10.2  Memorandums of Understanding (f)
       10.3  Letter from Seller of SD&A agreeing to long-term obligation payment
             and restructuring (g)
       10.4  Agreement  and  Plan  of  Merger  between   All-Comm  Media
             Corporation and Metro Services Group, Inc. (i)
       10.5  Security Agreement between Milberg Factors,  Inc. and Metro
             Services Group, Inc. (j)
       10.6  Security  Agreement  between  Milberg  Factors,   Inc.  and
             Stephen Dunn & Associates, Inc. (k)
       10.7  Agreement  and Plan of Merger  between  Marketing  Services
             Group, Inc. and Pegasus Internet, Inc. (k)
       10.8  J. Jeremy  Barbera  Employment  Agreement  (c)
       10.9  Robert M. Budlow Employment  Agreement (i)
       10.10 Janet Sautkulis  Employment Agreement (i)
       10.11 Scott  Anderson  Employment  Agreement  (k)
       10.12 Robert  Bourne Employment  Agreement  (k)
       10.13 Thomas Scheir  Employment  Agreement (k)
       10.14 Krista  Mooradian  Employment  Agreement  (k)
       10.15 Stephen  Dun Employment  Agreement (d)
       10.16 Severance Agreement with Barry Peters (j)
       10.17 Severance  Agreement  with E.  William  Savage  (j)
       10.18 Form of Private Placement  Agreement (j)
       10.19 Fourth Memorandum of Understanding (a)
       10.20 Stock   Purchase   Agreement   among   Marketing   Services
             Group,Inc., Stephen M. Reustle and Thomas R. Kellogg (m)
       10.21 Purchase  agreement  dated as of December 24, 1997,  by and between
             the Company and GE Capital (l)
       10.22 Stockholders  Agreement  by and among the  Company,  GE Capital and
             certain existing stockholders of the Company,  dated as of December
             24, 1997 (l)
       10.23 Registration  Rights  Agreement  by and  among the  Company  and GE
             Capital, dated as of December 24, 1997 (l)

<PAGE>

       10.24 The Amended  Certificate of Designation,  Preferences and Relative,
             Participating  and Optional and Other  Special  Rights of Preferred
             Stock and Qualifications,  Limitations and Restrictions Thereof for
             the Series D Convertible Preferred Stock (l)
       10.25 Warrant,  dated as of December  24,  1997,  to purchase  shares of
             Common Stock of the Company (l)            
       10.26 Form  of  Employment   Agreement  by  and  among  Marketing
             Services Group, Inc. and Stephen M. Reustle (m)
       21    List of Company's subsidiaries (a)
       23    Consent of PricewaterhouseCoopers, LLP (a)
       27    Financial Data Schedule (a)
   (a) Incorporated herein
   (b) Incorporated  by reference from the Company's  Registration  Statement on
       Form S-4, Registration Statement No. 33-45192
   (c) Incorporated by reference to the Company's Registration Statement on Form
       S-8, Registration Statement 333-30839
   (d) Incorporated  herein by  reference to the  Company's  Report on Form 8-K
       dated April 25, 1995
   (e) Incorporated  by reference to the  Company's  Report on Form 10-K for the
       fiscal year ended June 30, 1995
   (f) Incorporated  by reference to the  Company's  Report on Form 10-Q for the
       quarter ended March 31, 1996
   (g) Incorporated by reference to the Company's Report on Form 8-K dated June
       7, 1996
   (h) Incorporated by reference to the Company's Report on Form 10-K dated June
       30, 1996
   (i) Incorporated  by  reference  to the  Company's  Report on Form 8-K dated
       October 11, 1996
   (j) Incorporated  by reference to the  Company's  Report on Form 10-Q for the
       quarter ended March 31, 1997
   (k) Incorporated by reference to the Company's  Report on Form 10-KSB for the
       fiscal year ended June 30, 1997
   (l) Incorporated  by  reference  to the  Company's  Report  on Form 8-K dated
       January 13, 1998
   (m) Incorporated by reference to the Company's Report on Form 8-K dated March
       16,1998

(B)Reports on Form 8-K.

   None.

<PAGE>

SIGNATURES

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

                         MARKETING SERVICES GROUP, INC.
                         (Registrant)


                         By:/s/ J. Jeremy Barbera
                         ------------------------
                            J. Jeremy Barbera
                            Chairman of the Board and Chief Executive Officer

                         Date:   September  25, 1998

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         September 25, 1998
---------------------       Chief Executive
J. Jeremy Barbera Officer   (Principal Executive Officer) 
                            

/s/ Cindy H. Hill           Chief Financial Officer(Principal September 25, 1998
-----------------           Financial and Accounting Officer)
Cindy H. Hill               


/s/ Alan I. Annex           Director and Secretary            September 25, 1998
-----------------           
Alan I. Annex


/s/ James G. Brown          Director                          September 25, 1998
------------------         
James G. Brown


/s/ S. James Coppersmith    Director                          September 25, 1998
------------------------    
S. James Coppersmith


/s/ John T. Gerlach         Director                          September 25, 1998
-------------------         
John T. Gerlach


/s/ Seymour Jones           Director                          September 25, 1998
-----------------           
Seymour Jones

<PAGE>

/s/ Michael E. Pralle       Director                          September 25, 1998
---------------------       
Michael E. Pralle


/s/ C. Anthony Wainwright   Director                          September 25, 1998
-------------------------  
C. Anthony Wainwright


The foregoing constitute all of the Board of Directors.


<PAGE>

                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

                          INDEX TO FINANCIAL STATEMENTS
                               [Items 7 and 13(a)]


      (1)FINANCIAL STATEMENTS:                                Page
      ------------------------                                ----

         Report of Independent Accountants                     26

         Consolidated Balance Sheet as of June 30, 1998        27

         Consolidated Statements of Operations
            Years Ended June 30, 1998 and 1997                 28

         Consolidated Statement of Stockholders' Equity
            Years Ended June 30, 1998 and 1997                 29

         Consolidated Statements of Cash Flows
            Years Ended June 30, 1998 and 1997                30-32

         Notes to Consolidated Financial Statements           33-45





<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



September 9, 1998

To the Board of Directors and
Stockholders of Marketing Services Group, Inc.:



In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements  of  operations,  stockholders'  equity  and cash flows
present fairly, in all material  respects,  the financial  position of Marketing
Services Group, Inc. and its Subsidiaries at June 30, 1998, and the consolidated
results  of their  operations  and their cash flows for each of the two years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.  These financial  statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management and evaluating the overall financial statement  presentation.
We believe that our audits provide a reasonable basis for our opinion  expressed
above.




                                  /s/ PRICEWATERHOUSECOOPERS LLP






<PAGE>



                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998




ASSETS

Current assets:
   Cash and cash equivalents                          $  6,234,981
   Accounts receivable billed,
    net of allowance 
    for doubtful accounts of $421,861                   12,606,468
   Accounts receivable unbilled                          3,259,437
   Other current assets                                    724,032
                                                       -----------
     Total current assets                               22,824,918
Property and equipment at cost, net                      1,645,957
Intangible assets at cost, net                          24,771,045
Other assets                                               539,507
                                                           -------

     Total assets                                      $49,781,427
                                                       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY 

Current liabilities:
   Short-term borrowings                               $ 2,522,306
   Accounts payable-trade                               11,420,386
   Accrued expenses and other current liabilities        1,653,871
   Current portion of capital lease obligations            117,911
   Current portion of long term obligations              1,317,540
   Related party payable                                   780,000
                                                           -------
                                  
     Total current liabilities                          17,812,014
                                                        ==========

Capital lease obligations, net of current portion           87,250
Long-term obligations, net of current portion              116,667
Preferred dividends payable                                617,328
Other liabilities                                           72,937
                                                            ------
     Total liabilities                                  18,706,196
                                                        ----------

Redeemable convertible preferred stock  - 
   $.01 par value; 150,000 shares authorized; 
   50,000 shares of Series D convertible preferred 
   stock issued and outstanding                         13,749,973
                                                        ----------

Commitments
Stockholders' equity:
   Common stock - $.01 par value; 75,000,000 
     authorized; 13,098,510 shares issued                  130,985
   Additional paid-in capital                           29,612,816
   Accumulated deficit                                 (12,283,074)
   Less 11,800 shares of common stock 
     in treasury, at cost                                 (135,469)  
                                                          --------   
                             
     Total stockholders' equity                         17,325,258
                                                        ----------

     Total liabilities and stockholders' equity        $49,781,427
                                                       ===========


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

<PAGE>

                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   FOR THE YEARS ENDED JUNE 30, 1998 AND 1997


                                               1998                     1997
                                               ----                     ----

Revenues                                    $51,174,063              $24,144,874
                                            -----------              -----------
Operating costs and expenses:
  Salaries and benefits                      19,255,348               14,967,420
  Direct costs                               26,771,611                5,587,343
  Selling, general and administrative         4,240,805                3,585,972
  Compensation expense on option grants               -                1,650,000
  Restructuring costs                                 -                  958,376
  Depreciation and amortization               1,486,106                  969,594
                                              ---------                  -------
    
    Total operating costs and expenses       51,753,870               27,718,705
  
    Loss from operations                       (579,807)             (3,573,831)

Other expense:
  Discounts on warrant exercises                      -                (113,137)
  Withdrawn public offering costs                     -              (1,179,571)
  Interest expense and other, net              (185,967)               (401,184)
                                               --------                -------- 
                                 
  Total                                        (185,967)             (1,693,892)
                                               --------              ---------- 
                            
  Loss before income taxes                     (765,774)             (5,267,723)
  Provision  for income taxes                   (14,704)               (109,373)
                                                -------                -------- 
                             
  Net loss                                  $  (780,478)          $  (5,377,096)
                                            ===========           ============= 
                              

Net loss attributable to 
  common stockholders*                      $(4,724,480)          $ (20,199,038)
                                            ===========           ============= 

Net loss per common share, 
  basic and fully diluted                       $  (.37)               $  (2.85)
                                                =======                ======== 
                                                 

Weighted average common shares outstanding   12,892,323                7,089,321
                                             ==========                =========



* The twelve months ended June 30, 1998 include the impact of dividends on stock
for (a) a non-cash,  non-recurring  beneficial conversion feature of $3,214,400;
(b) $152,512 from  adjustment of the conversion  ratio for certain  issuances of
common  stock  and  exercises  of stock  options;  (c)  $464,816  in  cumulative
undeclared  dividends;  and (d)  $112,274 of  periodic  non-cash  accretions  on
preferred stock.

The  twelve  months  ended June 30,  1997  include  the impact of  non-recurring
dividends  on  preferred  stock  for  (a)  $8.5  million  non-cash  dividend  on
conversion of Series B Preferred  Stock;  (b) $573,000 on repurchase of Series C
Preferred Stock; (c) periodic non-cash accretions on preferred stock; and (d) $5
million in discounts on warrant exercises.



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


<PAGE>


               MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                   YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>

                                                                      Additional
                                                 Common Stock           Paid-in       Accumulated     Treasury Stock
                                                Shares   Amount         Capital         Deficit       Shares   Amount       Totals
                                                ------   ------         -------         -------       ------   ------       ------

<S>                                          <C>        <C>         <C>            <C>            <C>      <C>           <C>       
Balance July 1, 1996                          3,198,534  $31,985     $13,173,520    $(6,125,500)   (11,800) $(135,469)   $6,944,536

Shares issued upon exercise of options            7,925       79             (79)                                             
Purchase of warrants by consultants                                       81,000                                             81,000
Accretion of redeemable convertible
     preferred stock                                                    (806,425)                                          (806,425)
Issuance of restricted shares for 
     SD&A earn-out                               96,748      967         424,033                                            425,000
Non-recurring issuance of options for
     compensation of executive officers                                1,650,000                                          1,650,000
Issuance of common stock for acquisition
of Metro Services Group                       1,814,000   18,140       7,237,860                                          7,256,000
Recapitalization:
   Conversion of 6,200 shares of Series B
   redeemable convertible preferred stock
   into common                                2,480,000   24,800       1,661,288                                          1,686,088
Accretion on repurchase of 2,000 shares
   of Series C redeemable preferred stock                               (573,305)                                          (573,305)
Issuances of restricted stock in exchange
   for warrants                                 600,000    6,000          (6,000)
Issuances of restricted stock for accrued
   interest on Series B&C redeemable
   convertible preferred stock                   88,857      889         144,864                                            145,753
Issuances of restricted shares upon exercise
   of discounted warrants                     3,152,500   31,526       2,033,600                                          2,065,126
Discounts granted on exercise of warrants                                113,137                                            113,137
Issuances of warrants to consultants                                      76,000                                             76,000
Net loss                                                                             (5,377,096)                         (5,377,096)
                                            ----------   -------      ----------    ------------   -------   --------     ----------
Balance June 30, 1997                       11,438,564   114,386      25,209,493    (11,502,596)   (11,800)  (135,469)   13,685,814

Shares issued upon exercise of options           4,135        41           8,229                                              8,270
Issuances of warrants to consultants                                      19,500                                             19,500
Issuances of common stock for SD&A earn-out    139,178     1,392         423,608                                            425,000
Issuance of common stock for acquisition
   of Pegasus Internet                         600,000     6,000       1,794,000                                          1,800,000
Conversion of $1.7 million of convertible  
   debt to common stock, net of discount
   and stock issuance costs                    694,411     6,944       1,629,228                                          1,636,172
Sale of Series D Preferred Stock,
   net of stock issuance costs                                         3,474,982                                          3,474,982
Dividend for non-cash, non-recurring
   beneficial conversion feature                                      (3,214,400)                                        (3,214,400)
Issuance of common stock for acquisition
   of  Media Marketplace, Inc.                 222,222     2,222         997,778                                          1,000,000
Adjustment to conversion ratio for
   redeemable convertible preferred stock                               (152,512)                                          (152,512)
Cumulative undeclared dividends for
   redeemable convertible preferred stock                               (464,816)                                          (464,816)
Accretion of redeemable convertible
   preferred stock                                                      (112,274)                                          (112,274)
Net loss                                                                               (780,478)                           (780,478)
                                            ----------  --------     -----------   ------------    -------  ---------    -----------
                                             
Balance June 30,1998                        13,098,510  $130,985     $29,612,816   $(12,283,074)   (11,800) $(135,469)  $17,325,258
                                            ==========  ========     ===========   ============    =======  =========   ===========
</TABLE>

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

<PAGE>



                    MARKETING SERVICES GROUP AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                       YEARS ENDED JUNE 30, 1998 AND 1997

                                                         1998           1997
                                                         ----           ----
Operating activities:
   Net loss                                           $(780,478)    $(5,377,096)
   Adjustments to reconcile loss to net cash
     used in operating activities:  
       Gain on sale of land                                   -         (90,021)
       Depreciation                                     412,212         250,194 
       Amortization                                   1,073,894         719,400
       Loss on disposal of assets                             -          35,640
       Discounts on exercise of warrants                      -         113,137 
       Compensation  expense on option  grants                -       1,650,000
       Accretion on note payable and 
         redeemable stock                                37,555         161,597 
       Warrant issuances to  consultants 
         and creditors                                   19,500         152,000 
       Promissory  notes issued for settlement
         agreements                                           -         499,524 
       Bad debt expense                                  70,170               -
   Changes in assets and liabilities net of 
     effects from acquisitions:
       Accounts receivable                             (487,516)       (483,959)
       Other current assets                            (398,413)       (119,263)
       Other assets                                    (362,671)       (144,237)
       Trade accounts payable                        (1,240,126)       (312,493)
       Accrued expenses and other liabilities          (230,616)        281,539
                                                      ---------         -------

   Net cash used in operating activities             (1,886,489)     (2,664,038)
                                                     ----------      ---------- 
Investing activities:
   Proceeds from sale of land                                 -         860,443 
   Acquisition of MMI, net of cash acquired 
     of $340,550                                     (5,691,172)              - 
   Acquisition of Metro, net of cash acquired
     of $349,446                                              -         207,327
   Acquisition of Pegasus, net of cash acquired
     of $43,811                                        (277,692)              -
   Earn-out relating to acquisition of SD&A            (425,000)              -
   Purchases of property and equipment                 (287,529)       (489,846)
   Purchase of note receivable                         (600,000)              -
                                                       --------        -------- 

   Net cash provided by (used in) 
     investing activities                            (7,281,393)        577,924
                                                    -----------         -------
Financing activities:
   Proceeds from sale of convertible preferred 
     stock, net of issue costs of $1,101,719         13,898,280               -
   Net proceeds  from credit  facilities                860,598               - 
   Proceeds from exercise of stock options                8,271       2,065,125 
   Proceeds  from  convertible  notes payable                 -       2,200,000
   Proceeds from issuances of warrants                        -           5,000
   Repayment of land  option                                  -        (150,000)
   Proceeds from bank loans and credit facilities             -       1,686,546
   Repayments of bank loans and credit facilities             -        (524,838)
   Payment on promissory notes                                -         (51,889)
   Repayments of note payable                          (330,095)     (1,000,000)
   Principal payments under capital lease obligation    (96,537)        (41,195)
   Repayments of acquisition debt                    (1,866,666)       (566,667)
                                                     ----------        -------- 
  
   Net cash provided by financing activities         12,473,851       3,622,082
                                                     ----------       ---------

Net increase in cash and cash equivalents             3,305,969       1,535,968
   Cash and cash equivalents at beginning of year     2,929,012       1,393,044
                                                      ---------       ---------

Cash and cash equivalents at end of year             $6,234,981      $2,929,012
                                                     ==========      ==========

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

<PAGE>

                                                     
Supplemental disclosures of cash flow data:          1998          1997
-------------------------------------------          ----          ----
     Cash paid during the year for:
        Interest                                  $ 439,264    $  243,482
        Financing charge                         $1,101,719    $  154,000
        Income tax paid                            $ 45,019    $   45,154


Supplemental schedule of non cash investing and financing  activities
-----------------------------------------------------------------------

For the year ended June 30, 1998:

As a result of the sale of $15,000,000 of redeemable convertible preferred stock
and warrants to General  Electric Capital  Corporation,  more fully described in
Note 10, the Company has recorded the following non-cash preferred  dividends as
of June 30, 1998: (a) $3,214,400 non-cash,  non-recurring  beneficial conversion
feature;  (b) $152,512  adjustment of the conversion ratio for certain issuances
of  common  stock  and  exercises  of stock  options;  (c)  $464,816  cumulative
undeclared  dividends;  and (d)  $112,274  of  period,  non-cash  accretions  on
preferred stock.

Effective  December 1, 1997,  the Company  issued  222,222  shares of its common
stock and paid  $6,000,000  in cash to acquire 100% of the  outstanding  capital
stock of Media Marketplace,  Inc. and Media Marketplace Media Division,  Inc. At
acquisition, assets acquired and liabilities assumed, less payments made for the
acquisition, were:

         Working  capital, other than cash                        $  85,928
         Costs incurred for acquisition                              87,475
         Property and equipment                                    (204,436)
         Costs in excess of net assets of acquired companies     (6,691,964)
         Non-current liabilities                                     31,825
         Common stock issued                                      1,000,000
                                                                  ---------
                                                                
                                                                $(5,691,172)
                                                                =========== 


Convertible  debt and accrued  interest  with an aggregate  principal  amount of
$1,700,000  was  converted  into  694,411  shares of common  stock.  Unamortized
deferred  financing  costs  relating  to the  convertible  debt in the amount of
$99,857 were written off to paid in capital upon conversion.

Capital lease  obligations  of $142,231 were incurred for the leasing of certain
equipment and automobiles.

Property  and  equipment  in the amount of $626,356  were  acquired  through the
foreclosure on a note receivable.

The Company  issued 139,178  shares of common stock,  valued at $425,000,  as an
earn-out  payment to the former  owner of SD&A for  achieving  certain  targeted
earnings  for the  fiscal  year  ended  June 30,  1997.  The  Company  increased
intangible assets by $780,000 and $91,112 due to an earn-out payment paid to the
former owner of SD&A for the  achievement  of defined  results of operations for
the fiscal year ended June 30, 1998 and 1997, respectively.

On July 1, 1997,  the Company issued 600,000 shares of its common stock and paid
$200,000 in cash to acquire 100% of the outstanding  stock of Pegasus  Internet,
Inc. At acquisition, assets acquired and liabilities assumed, less payments made
for the acquisition, were:

         Working capital, other than cash                        $  117,214
         Property and equipment                                     (53,834)
         Costs in excess of net assets of acquired company       (2,141,072)
         Common stock issued                                      1,800,000
                                                                  ---------
                                                 
                                                                 $ (277,692)
                                                                 ========== 

For the year ended June 30, 1997:

Additional  shares of common  stock for the  amount of 7,925  were  issued  upon
exercise of stock options for 15,000 shares,  using 7,075 outstanding  shares as
payment of the exercise price.

The Company  issued  96,748 shares of common  stock,  valued at $425,000,  as an
earn-out  payment to the former  owner of SD&A for  achieving  certain  targeted
earnings for the fiscal year ended June 30, 1996.

Two former  members of  executive  management  were  granted  stock  options for
600,000  shares  of  common  stock  as  part  of  their  employment  agreements.
Compensation expense of $1,650,000 was recognized for the difference between the
exercise price and the fair market value at date of grant.

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

<PAGE>

The Company  issued  1,814,000  shares of its common stock and  $1,000,000  face
value in 6% convertible  notes to acquire 100% of the outstanding stock of Metro
Services Group,  Inc. The debt was originally  discounted to $920,000 to reflect
an effective  interest rate of 10%,  increased to $943,806 in April,  1997, as a
result of a $100,000 prepayment. At acquisition, assets acquired and liabilities
assumed, less payments made for acquisition, were:

         Working  capital, other than cash                       $  389,310
         Property and equipment                                    (242,726)
         Other assets                                               (50,000) 
         Costs in excess of net assets of acquired company       (8,236,046)
         Long-term debt, discounted                                 943,806
         Other liabilities                                          146,983
         Common stock issued                                      7,256,000
                                                                  ---------

                                                                 $  207,327
                                                                 ==========

The Company  issued  3,168,857  shares of its common stock and  $1,000,000  face
value in debt as part of a recapitalization. 6,200 shares of Redeemable Series B
Preferred  Stock were converted into  2,480,000  common shares;  2,000 shares of
Redeemable  Series C Preferred  Stock were  repurchased for $1,000,000 in notes;
warrants for  3,000,000  shares were  exchanged  for 600,000  common  shares and
$145,753 in accrued  interest was converted into 88,857 common shares.  Interest
expense for fiscal 1997 was $128,264 (see Note 11).

The Company  entered into  promissory  notes  payable for  executive  management
settlement  agreements at a discounted value of $499,524,  of which $447,635 was
unpaid at June 30, 1997.

To raise $2.1 million in cash, the Company  accepted offers from warrant holders
to discount  their  exercise  prices as an inducement to exercise.  The non-cash
value of the discounts  totaled  $5,088,637,  of which  $113,137 was expensed in
fiscal 1997 and $4,975,500 was charged directly to paid in capital.

The Company made  prepayments  on a portion of  discounted  long-term  debt to a
former owner of Metro Services Group,  Inc., in non-cash accretion of $23,810 on
the discounted debt and goodwill.  Accretion of the discount on the unpaid notes
was $33,333.

Intangible  assets were increased by $758,888,  payable half in common stock and
half in cash to the former owner of SD&A as additional  consideration  resulting
from SD&A's achievement of defined results of operations, during fiscal 1997.

The Company  issued  warrants to acquire  common stock for  consulting  services
valued at $152,000.

On July 1, 1997,  the Company  consummated  an  agreement  to  purchase  Pegasus
Internet,  Inc. At June 30,  1997,  the  Company  had accrued  $80,000 in unpaid
acquisition costs.


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

<PAGE>


                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION:
--------------------------

The consolidated financial statements include the accounts of Marketing Services
Group,  Inc.  and its  wholly-owned  subsidiaries.  ("MSGI"  or the  "Company").
Operating  Subsidiaries  include:  Alliance  Media  Corporation;  Stephen Dunn &
Associates  ("SD&A");   Metro  Direct,  Inc.;  Pegasus  Internet,   Inc.;  Media
Marketplace,  Inc.; Media  Marketplace  Media Division Inc.; Metro  Fulfillment,
Inc. All material intercompany accounts and transactions have been eliminated in
consolidation.

The Company provides direct marketing and database marketing,  telemarketing and
telefundraising,  media planning and buying, online consulting and commerce, Web
design and interactive fulfillment services.  Substantially all of the Company's
business  activity is conducted with customers  located within the United States
and Canada.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles 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
value of intangible assets,  deferred tax valuation  allowance and the allowance
for doubtful accounts. Actual results could differ from those estimates.


2.  SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------

Cash and Cash Equivalents:
Highly liquid  investments with an original maturity of three months or less are
considered to be cash equivalents.

Property and Equipment:
Property and equipment are stated at cost. Depreciation and amortization,  which
includes the amortization of assets recorded under capital leases,  are computed
using the straight-line method over the estimated useful lives of the respective
assets. Estimated useful lives are as follows:

         Equipment........................5 years
         Furniture and fixtures...........2 to 7 years
         Computer equipment and software..3 to 5 years

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

The  costs 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.

Intangible Assets:
Intangible assets consist of covenants not to compete, proprietary software, and
the remaining excess purchase price paid over identified intangible and tangible
net assets of acquired  companies.  Intangible  assets are  amortized  under the
straight-line  method  over the period of expected  benefit of 3- 40 years.

<PAGE>

The Company assesses the  recoverability of its intangible assets by determining
whether the amortization of the unamortized  balance over its remaining life can
be  recovered  through  projected  future cash flows  (undiscounted  and without
interest charges).  If projected future cash flows indicate that the unamortized
amounts  will not be  recovered,  an  adjustment  will be made to reduce the net
amounts to an amount  consistent with projected  future cash flows discounted at
the Company's  incremental  borrowing rate.  Cash flow  projections are based on
trends  of  historical   performance   and   management's   estimate  of  future
performance,  giving  consideration to existing and anticipated  competitive and
economic  conditions.  No impairment  has been  recognized  in the  accompanying
financial statements.

Amortization  expense  during  the  years  ended  June  30,  1998  and  1997 was
approximately $1,074,000, and $719,000,  respectively.  Accumulated amortization
as of June 30, 1998 was approximately $2,217,000.

Revenue recognition:
Revenues  derived from direct  marketing and database  marketing are  recognized
when services have been fully performed and completed (the "Service Date"),  but
does not bill for such services,  in accordance with industry  practices,  until
all services relating to a client's campaign, including services to be performed
by unrelated third parties, have been completed.  The client's obligation to pay
for its completed  services is not contingent upon completion of the services to
be performed by these unrelated third parties. In any event,  clients are billed
no later than a predetermined mailing date for their respective campaigns, which
date is  generally  not more than thirty days after the Service  Date.  Unbilled
receivables  represent the portion of revenues  recognized in excess of revenues
billed in accordance with this practice.

Revenues  derived from  telemarketing  and  telefundraising  are recognized when
pledged cash is received for on-site  campaigns  and when  services are provided
for  off-site  campaigns.  Revenues  derived  from media  planning and buying is
recognized when services are performed.  Revenues derived from online consulting
and commerce and Web design products are recognized when services are performed.
Revenues  derived from  fulfillment  services are  recognized  when products are
shipped. Deferred revenue represents billings in excess of revenue recognized.

Income taxes:
The Company  recognizes  deferred taxes under the asset and liability  method of
accounting  for income  taxes.  Under the asset and liability  method,  deferred
income taxes are recognized 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 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.

Concentration of Credit Risk:
Financial  instruments that potentially  subject the Company to concentration of
credit  risk  consist   primarily  of  temporary  cash   investments  and  trade
receivables.  The Company restricts  investment of temporary cash investments to
financial  institutions with high credit standing. A significant portion of cash
balances are maintained with one financial  institution and may, at time, exceed
insurable amounts.  Credit risk on trade receivables is minimized as a result of
the large and diverse nature of the Company's customer base.

Earnings (loss) per share:
In October 1997,  the Company  adopted the  provisions of Statement of Financial
Accounting  Standards No. 128, "Earnings Per Share" ("SFAS 128"). This statement
eliminates  the  presentation  of primary EPS and requires the  presentation  of
basic EPS (the principal  difference being that common stock equivalents are not
considered in the

<PAGE>

computation  of basic EPS).  It also  requires the  presentation  of diluted EPS
which gives effect to all dilutive  common shares that were  outstanding  during
the  period.  Earnings  per  share  for all prior  periods  presented  have been
restated.

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

Disclosures  required by Statement of Financial  Accounting  Standards  No. 123,
"Accounting for Stock-Based  Compensation" ("SFAS No. 123"), including pro forma
operating  results  had  the  Company  prepared  its  financial   statements  in
accordance  with the  fair-value-based  method  of  accounting  for  stock-based
compensation, have been included in Note 12.

Reclassifications:
Certain  reclassifications  have been made to the 1997  financial  statements to
conform with the 1998 presentation.


3.  ACQUISITIONS
----------------

Media Marketplace, Inc:

Effective  December 1, 1997, the Company entered into a stock purchase agreement
to acquire all of the issued and  outstanding  capital  stock (the  "Shares") of
Media Marketplace, Inc. and Media Marketplace Media Division, Inc. (collectively
"MMI").  The total cost of the acquisition was $7,294,197,  consisting of a cash
purchase  price of  $6,000,000,  an  aggregate of 222,222  restricted  shares of
common stock of MSGI, par value $.01 per share, at an agreed upon price of $4.50
per share,  assumption of a note payable of $150,000 and  transaction  and other
costs  aggregating  $144,197.  The cost of the  acquisition was allocated to the
assets acquired and liabilities assumed, based upon their estimated fair values,
as follows:

        Working capital               $   429,622
        Property and equipment            204,436
        Non-current liabilities           (31,825)
        Intangible assets               6,691,964
                                      -----------
                                       $7,294,197
                                       ==========

The estimated  fair value of the  intangible  assets are being  amortized by the
straight-line  method over their  estimated  useful lives  ranging from three to
forty years.

As part of the acquisition,  the agreement includes an earn-out payment of up to
$1,000,000  a year for each fiscal year  ending  June 30,  1999,  2000 and 2001,
adjustable  forward to apply to the next fiscal  year if no earn-out  payment is
due for one such year. The earn-out payments are contingent upon MMI meeting (a)
targeted  earnings as defined in the agreement and (b) targeted billings of MSGI
subsidiaries and affiliates for electronic data processing  services for clients
originally introduced by MMI.

<PAGE>

MMI was founded in 1973 and  specializes  in  providing  list  management,  list
brokerage  and media  planning and buying  services to national  publishing  and
fundraising  clients  in the direct  marketing  industry,  including  magazines,
continuity clubs, membership groups and catalog buyers.

Pegasus Internet, Inc:

Effective July 1, 1997,  MSGI acquired all of the  outstanding  common shares of
Pegasus Internet, Inc. ("Pegasus").  In exchange for all of the then outstanding
shares of Pegasus,  the Company issued 600,000 shares of its Common Stock valued
at $1,800,000 plus cash of $200,000. The Company's Chief Executive Officer owned
25% of Pegasus,  for which he received 25% of the  consideration  paid.  Pegasus
provides  Internet  services  including web site planning and development,  site
hosting,  on-line ticketing,  system development,  graphic design and electronic
commerce.  The purchase  price was allocated to assets  acquired  based on their
estimated fair value. This treatment  resulted in approximately  $2.0 million of
costs in excess of net assets acquired,  after recording proprietary software of
$100,000.  Such excess is being amortized over the expected period of benefit of
ten years.  The software is amortized over its expected  benefit period of three
years.

Metro Direct, Inc.:

Effective  October 1, 1996, the Company  acquired all of the outstanding  common
shares of Metro Services Group, Inc., renamed Metro Direct, Inc.  ("Metro").  In
exchange for all of the then  outstanding  shares of Metro,  the Company  issued
1,814,000  shares of its common stock valued at $7,256,000 and promissory  notes
(the "Notes") totaling $1,000,000.  The Notes, which have a stated interest rate
of 6%, were  discounted to $920,000,  (adjusted to $944,000 as of June 30, 1997,
subsequent to an April payment) to reflect an estimated  effective interest rate
of 10%. The Notes were due and payable,  together with interest thereon, on June
30,  1998,  and were  convertible  on or before  maturity,  at the option of the
holder,  into shares of common stock at a conversion rate of $5.38 per share. In
April  1997,  $100,000 of the Notes were  repaid,  in July 1997,  $400,000  were
repaid,  and in January 1998,  the  remaining  $500,000 of principal was repaid.
These  early  repayments  resulted  in  an  increase  to  intangible  assets  of
approximately $11,000 for the unamortized premium.

The purchase  price was allocated to assets  acquired  based on their  estimated
fair value.  This treatment  resulted in approximately  $7.3 million of costs in
excess of net  assets  acquired,  after  recording  covenants  not to compete of
$650,000 and  proprietary  software of $250,000.  Such excess is being amortized
over the expected  period of benefit of forty years.  The covenants and software
are  amortized  over their  expected  benefit  periods of three and five  years,
respectively.

Effective  July 1, 1997,  the  Company  entered  into  agreements  to extend the
covenants-not-to-compete  with the former Metro  principals  from three years to
six years. Accordingly, the amortization period was extended prospectively.  The
impact of the  extended  amortization  was a reduction of $124,000 of expense in
the year ended June 30, 1998.

These  acquisitions  were accounted for using the purchase method of accounting.
Accordingly,  the operating  results of these  acquisitions  are included in the
results of  operations  from the date of  acquisition.  The  following  summary,
prepared on a pro forma basis,  combines the consolidated  results of operations
as if  Metro  and MMI had  been  acquired  as of the  beginning  of the  periods
presented,   after  including  the  impact  of  certain  adjustments,   such  as
amortization of intangibles, dividends on preferred stock and increased interest
on  acquisition  debt.  The pro forma net loss for the year ended June 30, 1997,
does not include the non-cash  compensation  expense of $1.7 million recorded on
the  grant  of  options  in  September,  1996,  as well as the $1.2  million  in
withdrawn  offering costs and $1.0 million in restructuring  costs, as discussed
in notes 12, 15 and 16, respectively.

<PAGE>

                                            Supplemental
                                       Pro forma information
                                     For the year ended June 30,
                                             Unaudited

                                          1998            1997
                                          ----            ----
          Revenues                    $68,505,000    $ 58,003,000
          Net loss                    $  (598,000)   $ (1,349,986)
          Net loss to common          $(2,016,000)   $(17,460,480)
          Loss per common share,
            basic and fully diluted         $(.16)         $(2.25)

The unaudited pro forma  information is provided for information  purposes only.
It is based on historic information and is not necessarily  indicative of future
results of operations of the combined entities.


4.  PROPERTY AND EQUIPMENT:
---------------------------

Property and  equipment  at June  30,  1998  consist  of the  following:

       Office furnishings and equipment                1,937,144 
       Assets under capital leases                       303,723
       Leasehold improvements                            208,879
                                                         -------          
                                                       2,449,746
       Less accumulated depreciation and
         amortization                                   (803,789)
                                                        --------           
                                                 
                                                       $1,645,957
                                                       ==========

Assets  under  capital  leases  as of June 30,  1998,  consist  of  $26,243  for
automobiles  and  $277,480  for  computer  and  related  equipment.  Accumulated
amortization for assets under capital leases was $127,583 as of June 30, 1998.

Depreciation expense was $412,212 and $250,194 for the years ended June 30, 1998
and 1997, respectively.


5.  INTANGIBLE ASSETS:
----------------------

Intangible assets at June 30, 1998, consist of the following:

           Covenants not to compete                 $  1,650,000
           Proprietary software                          350,000
           Goodwill                                   24,208,394
                                                      ----------
                                                      26,208,394
           Less accumulated amortization              (2,217,349)
                                                      ----------
                               
                                                     $23,991,045
                                                     ===========

The increase in intangible  assets during 1998 was due to the costs in excess of
net assets acquired in the Media Marketplace,  Inc. and Pegasus acquisitions, as
well as recording a contingent payment of $780,000 and $91,112

<PAGE>

due to the former owner of SD&A subsequent to the achievement of defined results
of  operations  of  SD&A  during  the  years  ended  June  30,  1998  and  1997,
respectively.  In addition,  certain loans to former owners were prepaid  during
the year ended June 30, 1998 and goodwill was  increased  for $29,712 due to the
unamortized discount.


6.  SHORT TERM BORROWINGS:
--------------------------

In August 1997,  SD&A entered into a two-year  renewable  credit facility with a
lender  for a line  of  credit  commitment  of up to a  maximum  of  $2,000,000,
collateralized  by its accounts  receivable.  Interest is payable monthly at the
Chase  Manhattan  reference  rate (8 1/2% at June 30,  1998)  plus 1 1/2% with a
minimum annual interest  requirement of $80,000.  The facility has an annual fee
of 1% of the  available  line.  The  facility has tangible net worth and working
capital  covenants.  The proceeds of the credit  facility were used to fully pay
the prior  outstanding  bank line and SD&A seller note  payable.  As of June 30,
1998, SD&A had drawn $1,517,182 on the line.

In April 1997, Metro entered into a two-year renewable revolving credit facility
with a lender for a line of credit  commitment of up to a maximum of $1,500,000,
collateralized  by its accounts  receivable.  Interest is payable monthly at the
Chase  Manhattan  reference  rate (8 1/2% at June 30, 1998) plus 1 1/2%,  with a
minimum annual interest  requirement of $60,000.  The facility has an annual fee
of 1% of the available line. As of June 30, 1998,  Metro had drawn $1,005,124 on
the line. The facility has tangible net worth and working capital covenants.


7.  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
---------------------------------------------------

Accrued expenses as of June 30, 1998 consisted of the following:
     
           Salaries and benefits                        $962,048
           Professional fees                            $236,703
           Other                                         455,120
                                                         -------
           
           Total                                      $1,653,871
                                                      ==========

8.  LONG TERM OBLIGATIONS:
--------------------------

Long term obligations as of June 30, 1998 consist of the following:
   
          6% Convertible notes (a)                   $   500,000
          Promissory notes to former shareholder
            of SD&A (b)                                  816,667
          Promissory notes to former executives,
            net of unamortized discount (c)              117,540
                                                         -------

          Total                                        1,434,207
          Less:  Current portion                      (1,317,540)
                                                      ---------- 
      
          Total long term obligations                $   116,667
                                                     ===========

(a)In April  1997,  the  Company  obtained  $2,046,000,  net of  fees,  from the
   private  placement of 6% convertible  notes, with a face value of $2,200,000.
   The notes are payable  with  interest on April 15,  1999,  if not  previously
   converted. The notes are convertible at the option of the holder, into shares
   of the Company's  Common Stock at the lesser of $2.50 per share or 83% of the
   average  closing bid price of the Common

<PAGE>

   Stock  during the last five trading days  prior to conversion.  During fiscal
   1998,  $1,700,000  face value of the notes, plus interest, was converted into
   694,412 shares.

(b)Payable at $58,333 per month, plus interest at 8%.

(c)The notes are payable in equal monthly installments of $30,000 (see note 16).

Aggregate  future  annual  maturities  for all  long-term  debt are as  follows:
$1,359,667 in fiscal year 1999 and $117,833 in fiscal year 2000.


9.  COMMITMENTS AND CONTINGENCIES:
----------------------------------

Leases:  The Company  leases its  corporate  office  space and  equipment  under
non-cancelable  long term leases.  The lease requires monthly rental payments of
$11,805 through January 1, 1999, with an option to renew. The Company incurs all
costs of insurance, maintenance and utilities.

Future minimum rental  commitments under all  non-cancelable  leases, as of June
30, 1998 are as follows:

                        Operating Leases    Capital Leases
                        ----------------    --------------
           1999         $   782,856            $129,378
           2000             724,360              61,560
           2001             731,288              25,270
           2002             618,827               5,615
           2003             222,369                   -
                            -------             -------                   
                
                         $3,079,700             221,823
                         ==========            
Less interest                                    16,662
                                                 ------

Present value of capital lease obligation     $ 205,161
                                              =========
                                         

Rent expense was  approximately  $646,000 and  $445,000,  for fiscal years ended
1998 and 1997, respectively. Total rent paid to a former subsidiary owner during
1998 and 1997 was approximately $142,100, and $138,000, respectively.


10.  PREFERRED STOCK:
---------------------

On December 24, 1997, the Company and General Electric Capital  Corporation ("GE
Capital") entered into a purchase agreement (the "Purchase Agreement") providing
for the  purchase  by GE  Capital of (i)  50,000  shares of Series D  redeemable
convertible  preferred  stock,  par value  $0.01 per  share,  (the  "Convertible
Preferred  Stock"),  and (ii)  warrants to purchase up to  10,670,000  shares of
Common  Stock  (the  "Warrants"),   all  for  an  aggregate  purchase  price  of
$15,000,000.  The  Convertible  Preferred  Stock is  convertible  into shares of
Common Stock at a conversion rate,  subject to antidilution  adjustments.  As of
March 31, 1998, the conversion rate was  approximately  89.02,  resulting in the
beneficial  ownership by GE Capital of 4,451,177  shares of Common Stock.  On an
as-converted basis, the Convertible Preferred Stock represents approximately 24%
of the  issued  and  outstanding  shares  of  Common  Stock.  The  Warrants  are
exercisable in November 2001 and are subject to reduction or cancellation  based
on the Company's  meeting  certain  financial goals set forth in the Warrants or
upon occurrence of a qualified secondary offering, as defined.

The  Company  has  recorded  the  Convertible  Preferred  Stock at a discount of
approximately  $1,362,000,  to  reflect an  allocation  of the  proceeds  to the
estimated  value of the warrants and is being amortized into dividends using the
"interest  method" over the redemption  period.  Approximately  $112,000 of such

<PAGE>

discount  was  included  as a  dividend  for the year ended  June 30,  1998.  In
addition, the Company recorded a non-cash,  non-recurring dividend of $3,214,400
representing  the  difference  between the conversion  price of the  Convertible
Preferred  Stock and the fair market value of the common stock as of the date of
the agreement.

The  Convertible  Preferred  Stock is convertible at the option of the holder at
any time and at the option of the  Company  (a) at any time the  current  market
price,  as defined,  equals or exceeds $8.75 per share,  subject to adjustments,
for at least 20 days during a period of 30 consecutive business days or (b) upon
the occurrence of a qualified secondary offering, as defined.

Dividends are cumulative  and accrue at the rate of 6% per annum,  adjusted upon
event of default. The Convertible Preferred Stock is mandatorily  redeemable for
$300 per share,  if not previously  converted,  on the sixth  anniversary of the
original  issue date and is  redeemable  at the  option of the  holder  upon the
occurrence  of an organic  change in the  Company,  as  defined in the  Purchase
Agreement. As of June 30, 1998, approximately $620,000 was accrued for dividends
in arrears.

The  Purchase  Agreement  contains,  among other  provisions,  requirements  for
maintaining certain minimum tangible net worth, as defined,  and other financial
ratios and restrictions on payment of dividends.


11.  RECAPITALIZATION:
----------------------

On December 23, 1996 the Company and certain of its security  holders effected a
recapitalization  of the Company's  capital  stock,  whereby:  (i) the Company's
Series B Convertible  Preferred  Stock,  par value $.01 per share (the "Series B
Preferred Stock"), was converted into 2,480,000 shares of Common Stock; (ii) the
Company's  Series C Convertible  Preferred  Stock, par value $.01 per share (the
"Series  C  Preferred  Stock"),  was  repurchased  for  promissory  notes  in an
aggregate principal amount of $1.0 million, which promissory notes bore interest
at a rate of 8% per annum were paid in full in April,  1997;  (iii) all  accrued
interest  on the Series B Preferred  Stock and the Series C Preferred  Stock was
converted  into 88,857  shares of Common  Stock;  (iv)  warrants  related to the
Series C Preferred Stock were exchanged for 600,000 shares of Common Stock. Upon
conversion of the Series B Preferred Stock and accumulated interest thereon into
Common Stock,  the Company incurred a non-cash,  non-recurring  dividend for the
difference  between  the  conversion  price and the  market  price of the Common
Stock,  totaling $8.5 million.  Upon repurchase of the Series C Preferred Stock,
the Company  incurred a  non-recurring  dividend of $573,000 for the  difference
between  the  repurchase  price  and the  accreted  book  value of the  stock at
December 23, 1996.

Prior to the recapitalization,  the Company recorded dividends in fiscal 1997 of
$806,425 to its  preferred  stockholders  to accrete  the value  assigned to the
stock at June 6, 1996 (date of sale) up to its convertible value at June 6, 1998
(date of automatic conversion prior to the recapitalization).


12.  STOCKHOLDERS' EQUITY:
--------------------------

Effective  February 8, 1998, the shareholders and Board of Directors approved an
increase in the number of authorized  shares of common stock, from 36,250,000 to
75,000,000 and the number of preferred shares from 50,000 to 150,000.

In August 1996,  consultants paid $5,000 for warrants valued at $81,000,  as per
consulting agreements.

During  fiscal  year end 1998 and 1997,  the Company  issued  139,178 and 96,748
shares of common stock,  respectively as additional  earn-out payments resulting
from SD&A's  achievement  of defined  results of operations  for fiscal 1997 and
1996.

<PAGE>

In March 1997,  the Company  accepted  offers from  certain  warrant-holders  to
exercise  their  warrants for  3,152,500  shares of common  stock at  discounted
exercise  prices.  The  Company  recognized  the  dates  of  acceptance  as  new
measurement  dates and,  accordingly,  recorded  non-cash  charges totaling $5.1
million in March 1997,  to reflect  the market  value of the  discounts.  Of the
total,  $113,000 was charged  directly to expense as the underlying  transaction
was debt  related,  and the  remainder  was charged  directly  to  stockholders'
equity.

In May and June 1997, the Company  issued  warrants for 240,000 shares of common
stock valued at $76,000 to three consultants for financial advisory services.

As of June 30, 1998,  the Company has 597,234  warrants  outstanding to purchase
shares of common stock at prices  ranging from $2.50 to $8.00.  All  outstanding
warrants are currently exercisable.

Stock  Options:  The  Company  has a  non-qualified  stock  option  plan for key
employees,  officers,  directors and consultants to purchase 3,150,000 shares of
common stock.  The Plan is  administered by the Board of Directors which has the
authority to determine  which  officers and key employees of the Company will be
granted options, the option price and exercisability of the options. In no event
shall an option expire more than ten years after the date of grant.

The following  summarizes the stock option  transactions under the 1991 Plan for
the two years ended June 30, 1998:
                  
                                           Number      Option Price
                                         of Shares       Per Share
                                         ---------       ---------

        Outstanding at July 1, 1996       524,807

        Granted                         1,117,000      $2.50 to $3.00
        Exercised                         (15,000)         $2.625
        Canceled                          (40,060)     $2.00 to $2.50
                                         --------     

        Outstanding at June 30, 1997    1,586,747

        Granted                         1,302,100      $2.825 to $6.00
        Exercised                          (4,135)          $2.00
        Canceled                          (93,132)     $2.00 to $16.00
                                          -------      

        Outstanding at June 30, 1998    2,791,580
                                        =========

In fiscal  year end June 30,  1997,  the Company  recorded a non-cash  charge of
$1,650,000 to compensation  expense for the difference  between market price and
exercise price for options granted to certain members of company management.

In addition to the Plan,  the Company has other option  agreements  with current
and former officers, directors, employees and owners of an acquired Company. The
following summarizes transactions outside the 1991 Plan for the two fiscal years
ended June 30, 1998:

<PAGE>

                                         Number        Option Price
                                        of Shares        Per Share
                                        ---------        ---------

        Outstanding at July 1, 1996         2,250
        Granted                         1,000,000     $2.625 to $3.50
                                        ---------       
        
        Outstanding at June 30, 1997    1,002,250
        Canceled                           (2,250)         $16.00
                                           ------       
        
        Outstanding at June 30, 1998    1,000,000
                                        =========

As of June 30, 1998, 2,568,999  options are  exercisable.  The weighted  average
exercise  price of all  outstanding  options is $3.04 and the  weighted  average
remaining  contractual  life is 5.77 years.  Except as noted below,  all options
granted in fiscal years 1998 and 1997 were issued at fair market value.  At June
30, 1998, 358,420 options were available for grant.

Under SFAS No. 123, had the Company  determined  compensation  cost based on the
fair value at the grant date for its stock  options,  the Company's net loss and
earnings per share would have been adjusted to the pro forma  amounts  indicated
below:
                                                  Years ended June 30,
                                                  --------------------
                                                  1998            1997
                                                  ----            ----
       
     Net loss                   as reported     $(780,478)    $(5,377,096)
                                pro forma     $(2,798,152)    $(7,822,901)

     Net loss attributable to
       common stockholders      as reported   $(4,724,480)   $(20,199,038)
                                pro forma     $(6,742,154)   $(22,644,843)
    
     Earnings per share         as reported      $(.37)         $(2.85)
                                pro forma        $(.52)         $(3.19)

Pro forma net loss  reflects  only options  granted in fiscal 1996 through 1998.
Therefore,  the full impact of calculating  compensation  cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts  presented
above because  compensation  cost is reflected over the options' maximum vesting
period of seven years and compensation cost for options granted prior to July 1,
1995, is not considered. The fair value of each stock option is estimated on the
date of grant using the  Black-Scholes  option  pricing model with the following
weighted  average  assumptions:   an  expected  life  of  four  years,  expected
volatility of 50%, no dividend yield and a risk-free  interest rate ranging from
5.23% to 6.61%.


13.  INCOME TAXES:
------------------

Income tax expense from continuing operations is as follows:

                                            Years Ended June 30,
                                            --------------------
                                            1998            1997
                                            ----            ----
        
          Current state and local          $14,704        $109,373
                                           =======        ========
<PAGE>

A  reconciliation  of the  Federal  statutory  income tax rate to the  effective
income tax rate based on pre-tax loss from continuing operations follows:

                                            1998        1997
                                            ----        ----

        Statutory rate                      (34)%       (34)%
        Change in valuation allowance        13 %        34 %
        State income taxes, net of
           Federal benefit                    9 %         2 %
        Non-deductible expenses              36 %
        Non-taxable income                  (10)%
        Prior year tax benefit              (11)%
        Other                                (1)%
                                            -----        ---- 

        Effective rate                        2 %         2 %
                                              ===         ===

<PAGE>

 
                                                    As of June 30,
                                                        1998
                                                        ----
       Deferred tax assets:
         Net operating loss carryforwards            1,810,178
         Compensation on option grants                 619,310
         Amortization of intangibles                   121,423
         Other                                         119,034
                                                       -------
       Total deferred tax assets                     2,669,945
      
       Valuation allowance                          (2,669,945)
                                                    ---------- 
       Net deferred tax assets                      $        -
                                                    ========== 


The Company has a net operating loss of approximately $5,320,000 available which
expires  from 2008  through  2013.  These  losses can only be offset with future
income and are subject to annual limitations.


14.  RELATED PARTY TRANSACTIONS:
--------------------------------

A director and the  secretary  of the Company,  is a partner in a law firm which
provides  legal  services for which the Company  incurred  expenses  aggregating
approximately $176,000 and $110,000 during fiscal 1998 and 1997, respectively.

During fiscal 1997,  two directors  purchased  warrants for 50,000 common shares
each,  for $2,500 each pursuant to consulting  agreements  entered into prior to
their appointments.


15.  WITHDRAWAL OF REGISTRATION STATEMENT:
------------------------------------------

On October 17, 1996, the Company filed a Form SB-2  registration  statement (the
"Registration  Statement")  with the  Securities  and Exchange  Commission.  The
Registration  Statement  related to a proposed  underwritten  public offering of
2,100,000  shares of Common Stock, of which 1,750,000  shares were being offered
by the Company and 350,000  were being  offered by certain  stockholders  of the
Company.  It also  related to the sale of  1,381,056  shares of Common  Stock by
certain selling  stockholders on a delayed basis. Due to market  conditions,  on
February 11, 1997, the Company withdrew the Registration  Statement and expensed
$1.2 million in proposed offering costs in fiscal 1997.


16.  RESTRUCTURING COSTS:
-------------------------

During the year ended June 30,  1997,  the Company  effected  certain  corporate
restructuring  steps,  including the decision to reduce  corporate  staffing and
related  administrative  costs,  as  well as  making  two  executive  management
changes. In this connection,  restructuring  expenses of $986,000 were recorded,
including  $44,000 in  estimated  office  restructuring  costs and  $942,000  in
executive  management  and other  settlement  costs.  The  executive  management
settlement  agreements  include two non-interest  bearing  promissory notes with
face  values  of  $290,000  and   $250,000,   respectively,   payable  in  equal
installments  over eighteen months  starting in May 1997.  These notes have been
discounted to $268,000 and $231,000, respectively, to reflect effective interest
rates of 10%.

<PAGE>

17. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
--------------------------------------------------------

In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income"
("SFAS  130").  SFAS 130  establishes  standards  for  reporting  and display of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial  statements.  An enterprise  that has no items of other  comprehensive
income in any period presented is not required to report  comprehensive  income.
SFAS 130 is  effective  for fiscal  years  beginning  after  December  15, 1997.
Management  does not believe  that the adoption of SFAS 130 will have a material
impact on the Company's financial statements.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business  enterprises report information about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures  about products and services,  geographic areas and major customers.
SFAS 131 is  effective  for fiscal  years  beginning  after  December  15, 1997.
Management  has not yet  assessed  the impact that the adoption of SFAS 131 will
have on the Company's financial statements.

In April 1998, the Accounting  Standards Executive Committee issued Statement of
Position 98-5 Reporting on the Costs of Start-Up Activities (SOP 98-5), which is
required to be adopted by the Company in fiscal 1999, SOP 98-5 provides guidance
on the financial reporting of start-up costs and organization costs. It requires
costs of start-up  activities and organization costs to be expensed as incurred.
Management  believes  that the  implementation  of SOP  98-5  will  result  in a
one-time  charge of $120,000 on the date of adoption which will be reported as a
cumulative effect of a change in accounting principle.


18.  EARNINGS PER SHARE:
------------------------

The following  schedule  lists the effect of securities  that could  potentially
dilute  basic  EPS in the  future.  Such  securities  were not  included  in the
computation of diluted EPS, as they are  antidilutive  as a result of net losses
during the periods presented.
                                                    Year ended
                                                     June 30,
                                                     --------
                                                 1998        1997
                                                 ----        ----

Convertible preferred stock ...............   4,451,117

Options and warrants with exercise prices 
  below average market price computed 
  using the treasury stock method .........   1,138,264   3,027,624

Convertible notes and interest ............     211,506     896,338

Options and warrants  outstanding to purchase  697,037 shares of common stock at
exercise  prices  above the average  market price of the common stock during the
year ended June 30,  1998 were not  included in the above  table,  as the effect
would be antidilutive.


19.  EMPLOYEE RETIREMENT SAVINGS PLAN (401K):
---------------------------------------------

Certain  subsidiaries  sponsor a tax deferred  retirement  savings plan ("401(k)
plan") which permits  eligible  employees to contribute  varying  percentages of
their compensation up to the limit allowed by the Internal Revenue Service.

Certain subsidiaries matches employees'  contributions to a maximum of 2% of the
employee's salary.  Matching  contributions charged to expense were $ 48,822 and
$23,353 for the fiscal years ended June 30, 1998 and 1997, respectively.

<PAGE>

Certain  subsidiaries  also  provide for  discretionary  company  contributions.
Discretionary  contributions charged to expense for the fiscal year end June 30,
1998 were $24,959.  No discretionary  contributions  were incurred by the fiscal
year ended June 30, 1997.