UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-K





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


EXCHANGE
ACT OF 1934





For
      the fiscal year ended June 30, 2009





OR





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





For
      the transition period from ______________________
      to________________________


Commission
file number 0-16730





MSGI Security Solutions,
Inc.


(Exact
Name of Registrant as Specified in Its Charter)




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





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





Common Stock, par value $.01
per share


(Title of
class)




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





Yes  ̈ No  x





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





Yes  ̈ No  x





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





Yes x No   ̈





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





Yes x No   ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not herein, and 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-K or any amendment to this Form
10-K.   x





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




Large
accelerated filer  ̈  Accelerated
filer  ̈    Non-accelerated
filer  ̈  Smaller
reporting company x




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




Yes  ̈ No  x





As of
December 30, 2008, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $3,218,514.





As of
September 30, 2009, there were 39,005,805 shares of the Registrant's common
stock outstanding.










TABLE OF
CONTENTS





Part
      IItem
      1.
                          Description
      of Business
                          3Item
      1A.
                          Risk
      Factors
                          13Item
      1B.
                          Unresolved
      Staff Comments
                          17Item
      2.
                          Properties
                          18Item
      3.
                          Legal
      Proceedings
                          18Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          18Part IIItem
      5.
                          Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                          19Item
      6.
                          Selected
      Financial Data
                          19Item
      7.
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          19Item
      7A.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          31Item
      8.
                          Financial
      Statements and Supplementary Data
                          32Item
      9.
                          Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosures
                          61Item
      9A(T).
                          Controls
      and Procedures
                          61Item
      9B.
                          Other
      Information
                          64Part IIIItem
      10.
                          Directors,
      Executive Officers and Corporate Governance
                          64Item
      11.
                          Executive
      Compensation
                          67Item
      12.
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                          71Item
      13.
                          Certain
      Relationships and Related Transactions, and Director
      Independence
                          73Item
      14.
                          Principal
      Accountant Fees and Services
                          75Part IVItem 15.
                          Exhibits
                          76Signatures
                          77




2




PART
I





Special Note Regarding
Forward-Looking Statements




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




Item 1. Description of
Business





General





MSGI
Security Solutions, Inc. (MSGI or the Company) is a provider of proprietary
solutions to commercial and governmental organizations. The Company is
developing a global combination of innovative emerging businesses that leverage
information and technology. The Company is headquartered in New York City where
it serves the needs of counter-terrorism, public safety, and law enforcement and
is developing new technologies in nanotechnology and alternative energy as a
result of its recently formed relationship with The National Aeronautics and
Space Administration (NASA).





The Company’s
Strategy





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





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





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





Background





The
Company was originally incorporated in Nevada in 1919.





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




3





Date
                    
                    Name of Company Acquired / Ownership
      Interest
                    
                    Service PerformedJuly
      2005
                    
                    Acquired
      additional equity in Future Developments America, Inc. bringing total
      ownership from 51% stake to 100% and restructured the business with the
      founders of such business such that Future Developments America, Inc.
      became a non-exclusive sales organization and the founders (through “FDL”
      an entity in which the founders own 100% interest) of such business
      re-acquired the underlying technology and operating
assets.
                    
                    Provider
      of technology-based products and services specializing in
      application-specific and custom-tailored restricted-access intelligence
      products, systems and proprietary solutionsAugust
      2005
                    
                    Acquired
      additional equity in Innalogic, LLC bringing total ownership stake to
      84%
                    
                    Designs
      and deploys content-rich software products for a wide range of wireless
      mobile devices.January
      2007
                    
                    Excelsa
      S.p.A. filed for bankruptcy. The investment, originally acquired in
      December 2004, was fully impaired.April
      2007
                    
                    Entered
      into a license agreement with CODA Octopus, Inc. (CODA) where by MSGI will
      receive a royalty on sales of products by CODA using the Innalogic
      proprietary technology.January 2008 – April 2008
                    
                    Investments
      in Current Technology Corp. for a total original interest of
      12.6%.
                    
                    Provider
      of GPS systems and services for security both for the civilian and
      military markets.May
      2009
                    
                    Surrender
      of a portion of the Investments in Current Technology Corp. bringing total
      interest to approximately 9.5%





Liquidity





The
Company has limited capital resources, has incurred significant historical
losses and negative cash flows from operations and has limited current revenues.
The Company believes that funds on hand combined with funds that will be
available from its various operations will not be adequate to finance its
operations and capital expenditure requirements and enable the Company to meet
its financial obligations and payments under its convertible notes and
promissory notes for the next twelve months. Significant portions of our notes
payable are past due or due within the next twelve months, and we do not have
adequate capital to pay such debts. Further, there is uncertainty as to timing,
volume and profitability of transactions that may arise from our relationship
with NASA and others, and whether we can adequately fund and commercialize any
such technologies. There can be no assurance as to the timing of when or if we
will receive amounts due to us for products shipped to customers prior to June
30, 2009 under the sub-contract relationship with Apro Media Corp and such
relationship has ceased.  There are no assurances that any further or
currently anticipated capital raising transactions will be consummated. Although
certain transactions have been successfully closed in the past, failure of our
operations to generate sufficient future cash flow and failure to consummate our
strategic transactions or raise additional financing could have a material
adverse effect on the Company's ability to continue as a going concern and to
achieve its business objectives. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability of the
carrying amount of recorded assets or the amount of liabilities that might
result should the Company be unable to continue as a going concern.





We have
historically financed (and refinanced) our operations with several debt
issuances. Notes payable at June 30, 2009 and 2008 are summarized as
follows:




4




Instrument
                                                      
                                                      Maturity
                                                      
                                                      Face Amount
                                                      
                                                      Coupon Interest
                                                        Rate
                                                      
                                                      Carrying Amount
                                                        at June 30, 2009,
                                                        net of discount
                                                      
                                                      Carrying Amount
                                                        at June 30, 2008,
                                                        net of discount6%
      Notes
                                                      
                                                      Dec.
      13, 2009
                                                      
                                                      
                                                      1,000,000
                                                      
                                                      6%
                                                      
                                                      $
                                                      45,940
                                                      
                                                      $             1006%
      April Notes
                                                      
                                                      April
      4, 2010
                                                      
                                                      
                                                      1,000,000
                                                      
                                                      6%
                                                      
                                                      
                                                      11,630
                                                      
                                                      558%
      Debentures
                                                      
                                                      May
      21, 2010
                                                      
                                                      
                                                      4,000,000
                                                      
                                                      8%
                                                      
                                                      
                                                      19,891
                                                      
                                                      628%
      Notes
                                                      
                                                      May
      21, 2010
                                                      
                                                      
                                                      4,000,000
                                                      
                                                      8%
                                                      
                                                      
                                                      4,000,000
                                                      
                                                      -Term
      notes short-term
                                                      
                                                      December
      31,
                                                        2009
                                                      
                                                      
                                                      400,000
                                                      
                                                      18%
                                                      
                                                      
                                                      400,000
                                                      
                                                      400,000Term
      note short-term
                                                      
                                                      February
      28,
                                                        2009*
                                                      
                                                      
                                                      960,000
                                                      
                                                      18%
                                                      
                                                      
                                                      960,000
                                                      
                                                      960,000Term
      note short-term
                                                      
                                                      March
      31,
                                                        2009*
                                                      
                                                      
                                                      1,500,000
                                                      
                                                      18%
                                                      
                                                      
                                                      1,500,000
                                                      
                                                      1,500,000Term
      notes short-term
                                                      
                                                      June
      17, 2009*
                                                      
                                                      
                                                      250,000
                                                      
                                                      18%
                                                      
                                                      
                                                      250,000
                                                      
                                                      —Short
      term borrowings from Apro Media Corp
                                                      
                                                      N/A
                                                      
                                                      
                                                      200,000
                                                      
                                                      N/A
                                                      
                                                      
                                                      206,950
                                                      
                                                      200,000Short
      term borrowings from Current Technologies Corp.
                                                      
                                                      N/A
                                                      
                                                      
                                                      70,000
                                                      
                                                      N/A
                                                      
                                                      
                                                      70,000
                                                      
                                                      —Short
      term borrowings from officer of the Company
                                                      
                                                      N/A
                                                      
                                                      
                                                      167,062
                                                      
                                                      N/A
                                                      
                                                      
                                                      167,062
                                                      
                                                      —Short
      term borrowings from others
                                                      
                                                      N/A
                                                      
                                                      
                                                      60,000
                                                      
                                                      N/A
                                                      
                                                      
                                                      60,000
                                                      
                                                      —$
                                                      13,607,062
                                                      
                                                      
                                                      
                                                      $
                                                      7,691,473
                                                      
                                                      $3,060,217





*These
notes are past due, and are now due on demand.





During
the year ended June 30, 2009, the Company closed one financing transaction.
During the year ended June 30, 2008, the Company closed on two financing
transactions. Modifications to existing debt instruments and new instruments
entered into during 2009 are described below. See description of the accounting
implication of certain features of these notes in the Notes to the Consolidated
Financial Statements.





Term
Notes


On
December 13, 2007, the Company entered into four short-term notes with private
institutional lenders. These promissory notes provided proceeds totaling $2.86
million to the Company. The proceeds of these notes were used to purchase
inventory. The notes carry a variable rate of interest based on the prime rate
plus two percent. These notes had an original maturity date of April 15, 2008.
These notes were not repaid on this date and the terms were amended at several
different dates to extend them to their current maturity dates of February 28,
2009 for one note, March 31, 2009 for one note and December 31, 2009 for the
remaining two notes. While two notes payable are technically in default at this
time, neither of the lenders have claimed default on the notes and the Company
is presently in discussions with these lenders regarding extended terms for
these notes payable. There are no guarantees that the Company will successfully
execute the proposed addendum extensions with the various lenders. As a result
of the technical defaults, the interest rates are now 18%





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





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




5




In
addition, the terms of certain of the Amendments to the Loan Agreements called
for the Company to issue five-year warrants to purchase shares of common stock
of the Company to certain group lenders each week beginning May 1, 2008 and
continuing for each week that the principal balance of the term notes remains
outstanding. These warrants are to be issued with an exercise price set at the
greater of market value on the date of issuance or $0.50 per
share.  As of June 30, 2008, a total of 284,717 warrants were issued
to the note holders, 33,218 warrants with an exercise price at $0.60 per share
and the remaining at an exercise price of $0.50 per share.  These
warrants were subsequently cancelled with the October 2008 addendum and replaced
with other warrants and stock issued.  In addition, there were 520,000
shares of common stock issued in fiscal 2008 in connection with these
addendums.





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





Effective
October 1, 2008, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
terminated all warrants to purchase common stock issued under previous addendum
agreements, which aggregated 1,000,000 warrants issued under those previous
addendum agreements, and, in their place, issued new warrants and additional
shares of common stock. At execution of the addendums, the Company issued
378,000 shares of common stock and warrants to purchase an additional 378,000
shares of common stock at an exercise price of $0.50. The Company issued an
additional 252,000 shares of common stock and warrants to purchase an additional
252,000 shares of common stock, at an exercise price of $0.50, between the date
of the agreement and December 31, 2008.





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





Effective
April 1, 2009, the Company entered into additional addendum agreements with two
out of four lenders with regard to their respectively held Notes, which issued
new warrants and additional shares of common stock and extended the maturity
date to December 31, 2009.  The Company issued an additional 221,195
shares of common stock and warrants to purchase an additional 221,195 shares of
common stock, at an exercise price of the greater of $0.25 or market value on
the date of the grant.





The net
effect of all of the addendums to these term notes during the year ended June
30, 2009, was the issuance of 1,055,615 warrants at an exercise price ranging
from $0.25 to $0.50 and 1,984,186 shares of common stock.  The stock
was determined to have a fair value of $420,749 for the year ended June 30,
2009, based upon the fair market value of the common stock on each date
issued.  The warrants were determined to have a value of $44,987,
which includes an offset of the value of the cancelled warrants previously
recorded. The warrants were fair valued, at each warrant issuance, using the
Black-Scholes model.  The warrant and stock values were recorded as
additional interest expense on the note during the year ended June 30,
2009.





Exchange of Series H
Preferred Stock and Put Options


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





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





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





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




6




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





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





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





The put
option agreement was accounted for as a liability under guidance from SFAS 150,
“Accounting for Certain Hybrid Financial Instruments with Characteristics of
both Liabilities and Equity.”  The Company had to allocate the
proceeds between the put option and the preferred stock, and determined that the
entire proceeds should be first allocated to the liability instrument. The
initial fair value calculated at January 10, 2008 for the put option agreement
was $5,800,000.  The liability is adjusted to fair value for each
reporting period and the fair value at August 22, 2008 was $6,700,000, such that
an aggregate loss of $1.7 million has been recognized since
inception.





On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, LP (Enable), an existing institutional investor of MSGI and as
of that date, holder of 100% of MSGI’s Series H Convertible Preferred Stock
pursuant to which MSGI retired all outstanding shares of the Series H Preferred
Stock, 5,000,000 warrants issued in connection with the preferred stock,
exercisable for shares of common stock of MSGI and put options exercisable for
5,000,000 shares of Common Stock, which had a fair value of $6,700,000 on August
22, 2008 (see Note 12). In exchange for the retirement and/or redemption of the
above securities, MSGI issued Enable an 8% Secured Convertible Debenture (the 8%
Debentures) due May 21, 2010 in the principal amount of $4,000,000 (see Note 6),
a $1,000,000 cash redemption payment and transferred to Enable warrants to
purchase up to, in the aggregate, 20,000,000 shares of the common stock of
Current Technology Corporation. The redemption payment was paid by MSGI from the
proceeds of the restricted cash accounts maintained in connection with the
original issuance of the Series H Preferred Stock. The balance of the funds held
in the restricted cash accounts of $800,000 was released to MSGI for working
capital purposes. In connection with the Securities Exchange Agreement and the
Debenture, MSGI and its subsidiaries entered into a Security Agreement and a
Subsidiary Guarantee Agreement, whereby MSGI and the subsidiaries granted Enable
a first priority security interest in certain property of MSGI and each of the
Subsidiaries.  The net effect of this transaction resulted in a gain
of $1,700,000, recognized during the year ended June 30, 2009.





Advances





During
the year ended June 30, 2008, the Company received funding in the amount of
$200,000 from Apro Media. These funds were advanced to the Company against
expected collections of accounts receivable generated under the Apro
sub-contract agreement. During the year ended June 30, 2009, the Company
received an additional $6,950 from Apro Media, bringing the aggregate to
$206,950. There is no interest expense associated with this advanced funding and
this is to be repaid to Apro upon collection of the related accounts receivable,
which has not yet occurred.





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





During
the year ended June 30, 2009, the Company received net funding in the amount of
approximately $167,000 from a certain corporate officer. There is no interest
expense associated with this advanced funding and this is to be repaid upon
collection of the Apro Media related accounts receivable, which has not yet
occurred.




7




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





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





Industry




The
primary industries in which our companies have historically operated are
homeland security and international public safety. In the United States and
abroad, homeland security and public safety are not purely separate areas, but
rather law enforcement, fire departments, civil defense organizations and
medical response teams are a crucial segment of any crisis situation, and work
together with multiple government agencies to manage and resolve emergency
situations. The Company believes its products and services work throughout the
chain of threat prevention, detection, dissuasion, management and resolution to
expedite the collection and dissemination of data in a secure fashion to field
agents and decision-makers. The Company believes that its new relationship with
NASA will serve to broaden its capacities in these areas as well as diversify
the range of products and services available and, thus, open the Company to new
markets and industries.




Services Offered by MSGI and
its Subsidiaries


Further,
MSGI has also historically acquired controlling interests in early-stage, early
growth technology and software development businesses. These identified emerging
firms are led by entrepreneurs and management teams that have “bleeding edge”
products, but lack the infrastructure, business relationships and financing that
MSGI can offer. The Company will typically seek to acquire a 51% controlling
interest in the target company for a combination of cash and securities. The
target company generally must agree to a ratchet provision by which the
Company’s stake increases up to another 25% for failure to reach first years
expectations. MSGI generally retains a right of first refusal in the event that
any of the minority parties in the various companies receives an unsolicited
offer for their interests in the business. To the extent these target companies
do not meet MSGI’s continuing expectations; the Company will generally dispose
of its interests in such operations.





Relationship
with The National Aeronautics and Space Administration:





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





In August
2009, the Company announced the formation of its first subsidiary for NASA based
technology. The subsidiary, named Nanobeak Inc. (Nanobeak) is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection. Some potential space and terrestrial applications for this technology
include cabin air monitoring onboard the Space Shuttle and future spacecraft,
surveillance of global weather, forest fire detection and monitoring,
radiation detection and various other critical capabilities. The commercial
applications of these nanotech chemical sensors relate specifically to efforts
in Homeland Security and defense, medical diagnostics and environmental
monitoring and controls. Nanobeak seeks to offer products in each of these
market sectors beginning in the current fiscal year ending June 30, 2010, but
the timing of such offers may be effected by unforeseen difficulties in
development and commercialization efforts. In September 2009, the Company
announced that it is launching its first product derived from the NASA
nanotechnology, a handheld testing and detection device for diabetes that uses
breath instead of blood. Nanobeak intends to take the handheld sensor from
prototype to commercial production and international distribution. The Company,
through Nanobeak, plans to engage in product testing in conjunction with a major
hospital network in the United States, followed by licensing discussions with
the top multinational pharmaceutical companies.





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




8




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




Hyundai


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





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





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





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





There
have been no business transactions under the Sub-Contract or License agreement
as of June 30, 2009 or to date and the Company currently is not anticipating any
in the near future. This business relationship has now ceased.





In May
2009, the Company engaged the law firm of GCA Law Partners LLP (GCA), of
Mountain View, California, to represent the Company in potential legal action
against Hyundai and others. Subsequently, the Company, through GCA, filed suit
in United States District Court, Northern District of California naming Hyundai,
among others, as a defendant. The Company seeks restitution for breach of
contract, among other allegations.





Apro


On May
10, 2007, the Company entered into an exclusive sub-contract and distribution
agreement with Apro Media Corp. (Apro or Apro Media) for at least $105 million
of expected sub-contracting business over seven years to provide commercial
security services to a Fortune 100 defense contractor. Under the terms of
contract, MSGI acquires components from Korea and delivers fully integrated
security solutions at an average expected level of $15 million per year for the
length of the seven-year engagement.   The contract calls for gross profit
margins estimated to be between 26% and 35% including a profit sharing
arrangement with Apro Media, which will initially take the form of unregistered
MSGI common stock, followed by a combination of stock and cash and eventually
just cash.   In the aggregate, assuming all the revenue targets
are met over the next seven years, Apro Media would eventually acquire
approximately 15.75 million shares of MSGI common stock. MSGI was referred to
Apro Media by Hyundai as part of a general expansion into the Asian security
market, however revenue under the Apro contract does not constitute revenue
under the existing Hyundai agreements to acquire common stock of
MSGI.





Per the
terms of the sub-contract agreement with Apro, the Company is to compensate Apro
with 3,000,000 shares of the Company’s common stock when the sub-contract
transactions result in $10.0 million of GAAP recognized revenue for the Company.
During the year ended June 30, 2008 the Company recognized approximately $3.8
million in revenues resulting from activities under the sub-contract agreement
which such revenues were subsequently reversed. In December 2007, the Company
elected to issue 1,000,000 shares of common stock to Apro pursuant to this
agreement. The Company computed a fair value for a pro rata share of the
remaining shares to be issued under that agreement, which was $62,336 at June
30, 2008, and was reflected as a liability in our Consolidated Balance Sheet at
June 30, 2008.  A credit of $62,336 was realized to the Consolidated
Statement of Operations during the year ended June 30, 2009, as reversal for
this accrual, relative to the fact that the Company has initiated legal action
against Apro and, as such, considers the transactions to be null and void and
has no further obligation. As such, the remaining shares will not be
issued.  The total expense for the year ended June 30, 2008 related to
shares both issued and issuable to Apro was approximately $1.1
million.




9




The
Company had additional shipments and corresponding billings to clients in the
aggregate of approximately $1.6 million resulting from activities under the Apro
sub-contract agreement during the fiscal year ended June 30, 2008. These
shipments have not been reported as revenue during the fiscal year ended June
30, 2008 due to issues surrounding collectibility of payment and other factors
and therefore, these transactions did not meet the criteria for revenue
recognition as of June 30, 2008 or to date.





In
addition, the Company had additional shipments and corresponding billings to
clients of approximately $4.9 million during the year ended June 30, 2008, that
was not directly attributable to the Apro sub-contract, but was as a result of
direct and indirect referrals from Apro and entities related to Apro. These
shipments have not been reported as revenue during the fiscal year ended June
30, 2008 due to issues surrounding collectibility of payment and other factors
and therefore, these transactions did not meet the criteria for revenue
recognition as of June 30, 2008 or to date. These shipments will also be
recognized as revenue, as well as billings reflected as an asset, if the
payments are received.  Inventory costs related to these transactions
were reported on the balance sheet in “Costs of product shipped to customers for
which revenue has not been recognized” and these costs have been fully reserved
and written off as of June 30, 2009 (see Note 2).





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





In May
2009, the Company engaged the law firm of GCA Law Partners LLP (GCA), of
Mountain View, California, to represent the Company in potential legal action
against Apro and others. Subsequently, the Company, through GCA, filed suit in
United States District Court, Northern District of California, naming Hyundai,
among others, as a defendant. The Company seeks restitution for breach of
contract, among other allegations.





Innalogic,
LLC:




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





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





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





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




10




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





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


Scenarios
include:




·
            Wired
      or Wireless Video Camera Network





·
            Sensor
      Network





·
            Intelligent
      Appliances





·
            Building
      Automation and Control




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





During
the year ended June 30, 2009, there were no product sales by the Innalogic
subsidiary. During the year ended June 30, 2008, the Company recognized $100,000
of referral fee revenue from CODA, in connection with the above License
Agreement with CODA. As of June 30, 2009, $60,000 of the fiscal 2008 referral
fee remains uncollected and the Company has a full reserve for this balance in
allowance for doubtful accounts.





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




Future
Developments America, Inc. (FDA):




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




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





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





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




11




Client
Base





The
Company’s potential clients include private and public-sector organizations
focused on homeland security, law enforcement, and military and intelligence
operations that support anti-terrorism and national security interests, medical
service providers, and energy service producers and providers. The firm’s
clients will come from a broad range of sectors and industries, and include law
enforcement agencies, federal/state/regional agencies and institutions, judicial
organizations, oil/gas businesses, commercial properties, banking and financial
institutions, hotels, casinos, retail, warehousing and transportation entities,
recreational facilities and parks, environmental agencies, industrial firms,
loss prevention/investigation agencies, disaster site surveillance firms,
bodyguard services, property management, building contractors, construction
companies, hospitals and clinics, health care service providers and energy
producers and providers. To date we have provided our technology to various
private and public sector organizations, both domestically and abroad. We have
generated revenues from such deployments, while some deployments were
trial-basis demonstrations. Our ability to deliver our technology to customers
is hindered by our liquidity and resource issues.




Competition





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





In our
historical business operations, there have been several companies deploying
wireless video technologies and covert surveillance tools. Only a handful,
however, are doing so with wireless product offerings aimed exclusively at the
homeland security and public safety markets. It has been difficult to identify
direct competitors of the Company in terms of the Company’s core competencies
and basic market positioning. The competitors that come closest to mirroring the
Company’s business model are Gans & Pugh Associates, Inc., a developer of
wireless systems that employ traditional radio frequency technologies; Verint
Systems, Inc., a provider of analytic software-based solutions for video
security which competes against the Company in one of its service areas -
assessing network-based security relative to Internet and data transmissions
from multiple communications networks; and Vistascape, a provider of a security
data management solution that integrates the monitoring and management of
security hardware and software products.




Facilities





The
Company leases all of its real property. Facilities for its headquarters are in
New York City. The Company also leases space in San Francisco, California for
use in its developing relationship with The National Aeronautics and Space
Administration. The Company believes that its remaining facilities are in good
condition and are adequate for its current needs, however, to the extent that
the burgeoning relationship with NASA, we may need to seek additional facilities
and resources. The Company currently leases the facilities for both its
headquarters in New York City and its California office on a month-to-month
basis, but expects to execute a long-term lease agreement in the near future.
The Company plans to relocate its headquarters to the San Francisco Bay area
during the third quarter of the fiscal year ending June 30, 2010.





Intellectual Property
Rights





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




Research and
Development




The
Company recognizes research and development costs associated with certain
product development activities.  The Company realized no such expenses
during the year ended June 30, 2009. The Company realized expenses of $88,200
during the fiscal year ended June 30, 2008 for costs associated with development
of RFID technologies related to the Apro Media relationship.




12




Employees





At June
30, 2009, the Company and its majority owned subsidiaries employed approximately
three persons on a full-time basis. Additionally, two individuals were engaged
on a consulting basis. We intend to hire additional personnel as the development
of our business makes such action appropriate. Our employees are not represented
by a labor union or other collectively bargained agreement.





Item 1A. Risk
Factors





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




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




The
Company currently has severely limited capital resources and has incurred
significant historical losses and negative cash flows from operations. The
Company has historically engaged in the execution of various convertible debt
instruments, which have raised significant working capital. A significant
portion of such instruments are due on demand or with in the next 12 months, and
the Company does not currently have the resources to pay such
instruments.  The Company has expended or committed a considerable
portion of the capital raised through the various debt instruments in the
relationship and business operations with Hyundai and Apro and such
relationships have now ceased. In addition, the Company has instituted cost
reduction measures, including the reduction of workforce and corporate overhead.
The Company believes that its recently acquired collaborative relationship with
NASA should yield future commercial opportunities, however, there can be no
assurances that this will occur. The Company will need to raise additional
capital to finance its new operations and repay its existing debts, and there
can be no assurances that the Company can raise additional funds or such funds
will be on terms acceptable to the Company. Failure of the new businesses to
generate such sufficient future cash flow could have a material adverse effect
on the Company's ability to continue as a going concern and to achieve its
business objectives.




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




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




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




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




13




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




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




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




our new
products are not introduced on a timely basis;




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




our new
products experience reliability or quality problems.




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




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




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




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




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




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




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




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




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




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




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




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




14




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




the
increasing demands on the Company's operational systems;




adverse
effects on the Company's reported operating results;




the
amortization of acquired intangible assets; and




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




The
largest asset on our books at June 30, 2009 is our investment in Current
Technologies, Inc. (“Current”).   During 2008, the Company owned
approximately 18% of the common stock of Current, and warrants to acquire an
additional 20% of the ownership in Current. The company also entered into a
subcontract agreement with Current designed to provide sales opportunities for
both entities.  However, to date, we have not received any sales
opportunities from such relationship.  We have had to reduce our
investment in Current to meet other obligations, such that at June 30, 2009 we
own 13% of the common stock of Current, on a fully diluted basis.  We
may not be able to influence the business relationships as a result of the
decline in ownership. Further, the value of the investment in Current may
decline, or we may not be able to realize its carrying value, if we are required
to dispose of the common stock at unfavorable terms.




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




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




Our
business is difficult to evaluate because our financial statements do not
reflect the operations of our recently developed business
relationships.




Most
recently, we have entered into the collaboration with NASA and have subsequently
formed new operating subsidiaries. Therefore, our historical operating results
may not be indicative of our future operating results. Our financial statements
do not reflect such activities, are not comparable to our historical financial
statements, nor do they give a clear indication of our future
performance.




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




As a
public company, we are subject to the reporting requirements of the Securities
Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002. These requirements may
place a strain on our systems and resources. The Securities Exchange Act
requires, among other things, that we file annual, quarterly and current reports
with respect to our business and financial condition. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective disclosure controls and
procedures and internal controls for financial reporting.  These
requirements necessitate that the Company have adequate accounting and internal
audit staffing in order to ensure that compliance is achieved and
maintained.  The Company is required to be in compliance by the period
ended June 30, 2010.  The Company does not currently have any
dedicated internal audit staff and current internal audit capabilities are
limited.  In order to maintain and improve the effectiveness of our
disclosure controls and procedures and internal control over financial
reporting, significant resources and management oversight will be required. As a
result, management’s attention may be diverted from other business concerns,
which could have a material adverse effect on our business, financial condition,
results of operations and cash flows. In addition, as we will need to hire
additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge, or engage appropriate consulting
services in order to reach and maintain compliance, we cannot assure you that we
will be able to do so in a timely fashion.




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




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




15




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




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




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




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




the
timing of sales of assets;




the
cyclical elements of our clients' industries;




the
demand for our products and services;




the
market acceptance of new products and services;




specific
economic conditions in the electronic surveillance industry; and




general
economic conditions.




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




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




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




The
price of our stock has been volatile.




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




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




announcements
regarding our products, services or technologies;




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




developments
relating to our patents or proprietary rights;




specific
conditions affecting the electronic surveillance industry;




sales of
our common stock into the public market;




general
market conditions; and




other
factors.




16




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




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




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




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




subjecting
us to significant liability for damages;




resulting
in invalidation of our proprietary rights;




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




resulting
in the diversion of management time and attention.




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




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




As of
September 30, 2009, there were 39,005,805 shares of our common stock
outstanding, of which approximately 28,052,000 shares are freely tradable
without restriction under the Securities Act or are eligible for sale in the
public market without regard to the availability of current public information,
volume limitations, manner of sale restrictions, or notice requirement under
Rule 144(k), and does not include any shares held by or purchased from persons
deemed to be our "affiliates" which are subject to certain resale limitations
pursuant to Rule 144 under the Securities Act. The remaining shares of common
stock outstanding are eligible for sale pursuant to rule 144 under the
Securities Act. Since June 30, 2009, the Company has issued 14,590,500 shares of
common stock. Of these shares, 5,800,000 were issued under a certain Warrant
Exchange Agreement, 500,000 were issued pursuant to a certain short-tem note,
45,500 were issued pursuant to certain addendum to short-terms loans and
8,245,000 were issued to a variety of service providers for services to be
rendered.




Item 1B. Unresolved Staff
Comments





N/A


17


Item 2.
Properties





The
Company is headquartered in New York City where it maintains approximately 3,200
square feet of office space. We lease approximately 1,200 square feet, which is
equipped to fully meet the needs of our corporate finance office. This lease
runs on a month-to-month basis with a monthly rent of $8,500. The Company also
leases approximately 1,000 square feet of space for office use in San Francisco.
This lease runs on a monthly basis with a monthly rent of $3,800. It is
anticipated by the Company that we will be vacating the space in New York during
the third quarter of the fiscal year ending June 30, 2010 and we will be taking
additional space in the San Francisco area when our headquarters are relocated
and as the relationship with NASA develops further.




Item 3. Legal
Proceedings




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





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





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





N/A


18


PART
II





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





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




Low
                  
                  
                  HighFiscal
      2009Fourth
      Quarter
                  
                  $
                  0.03
                  
                  
                  $
                  0.12Third
      Quarter
                  
                  
                  0.03
                  
                  
                  
                  0.20Second
      Quarter
                  
                  
                  0.07
                  
                  
                  
                  0.26First
      Quarter
                  
                  
                  0.20
                  
                  
                  
                  0.54Fiscal
      2008Fourth
      Quarter
                  
                  $
                  0.17
                  
                  
                  $
                  0.75Third
      Quarter
                  
                  
                  0.60
                  
                  
                  
                  1.05Second
      Quarter
                  
                  
                  0.86
                  
                  
                  
                  1.89First
      Quarter
                  
                  
                  0.47
                  
                  
                  
                  1.64





As of
June 30, 2009, there were approximately 902 registered holders of record of the
Company’s common stock.





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


Item 6. Select Financial
Data





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





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





Critical Accounting
Policies





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





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




·
            Revenue
      Recognition and





·
            Costs
      of Product Shipped to Customers for which Revenue has not been
      Recognized





·
            Accounts Receivable and Allowance
      for Doubtful Accounts





·
            Accounting for Income
      Taxes





·
            Equity based
      compensation


19


·
            Debt instruments and the features
      / instruments contained
therein





·
            Investments in non-consolidated
      entities





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





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





Revenue
Recognition:


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





Our
revenues for the year ended June 30, 2009 were derived from consulting services
provided to third parties.





The
Company had certain shipments to various customers associated with our Apro
relationships during fiscal 2008 in the aggregate of approximately $6.4 million
that were not recognized as revenue in fiscal 2008 due to certain revenue
recognition criteria not being met as of June 30, 2008, related to the assurance
of collectability among other factors.  These transactions will be
recognized as revenue in the period in which all the revenue recognition
criteria, as noted above, has been fully met. Therefore, there is no revenue or
related accounts receivable recorded for these transactions in 2008 or 2009.
Inventory costs related to these transactions for which revenue has not been
recognized had been reported on the consolidated balance sheet in Costs of
product shipped to customers for which revenue has not been
recognized.  As of June 30, 2009, the value of all such inventory has
been fully reserved and written off, as the revenue transactions has not yet
been recognized and there is litigation to attempt to recover some of the
damages that we suffered as a result of such transactions.





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





As of
June 30, 2008, the Company had capitalized the expense recognition of
approximately $5.4 million in product costs for goods that were shipped to
customers associated with our Apro relationships as of June 30, 2008 but for
which revenue has not yet been recognized.  The Company had also
recorded a reserve against these product costs in the amount of approximately
$1.4 million. During the fiscal year ended June 30, 2009, the Company recorded
an additional reserve of approximately $4.0 million, thus fully reserving the
entire capitalized balance of approximately $5.4 million.  We have
instituted a law suit to recover soe of the damages that we suffered as a result
of such transactions.




Accounts
Receivable and Allowance for Doubtful Accounts:





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




20




Accounting
for Income Taxes:





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





The
Company follows the provisions of Financial Standards Accounting Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS 109” (FIN 48). FIN 48 provides recognition criteria and a
related measurement model for uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 requires that a position taken or expected
to be taken in a tax return be recognized in the financial statements when it is
more likely than not that the position would be sustained upon examination by
tax authorities. Tax positions that meet the more likely than not threshold are
then measured using a probability weighted approach recognizing the largest
amount of tax benefit that is greater than 50% likely of being realized upon
ultimate settlement. The adoption did not have an effect on the consolidated
financial statements and there is no liability related to unrecognized tax
benefits at June 30, 2009.





Equity
Based Compensation:





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





Debt
instruments, and the features/instruments contained therein:





Deferred
financing costs are amortized over the term of its associated debt instrument.
The Company evaluates the terms of the debt instruments to determine if any
embedded derivatives or beneficial conversion features exist. The Company
allocates the aggregate proceeds of the notes payable between the warrants and
the notes based on their relative fair values in accordance with Accounting
Principles Board No. 14 (“APB 14”), “Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants”. The fair value of the warrants is
calculated utilizing the Black-Scholes option-pricing model. The Company is
amortizing the resultant discount or other features over the term of the notes
through its earliest maturity date using the effective interest method. Under
this method, the interest expense recognized each period will increase
significantly as the instrument approaches its maturity date.  If the
maturity of the debt is accelerated because of defaults or conversions, then the
amortization is accelerated. The Company’s debt instruments do not contain any
embedded derivatives at June 30, 2009.





Investments
in Non-Consolidated Entities:





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





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


21


Overview





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





Hyundai


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





Apro
Media


On May
10, 2007, the Company entered into an exclusive sub-contract and distribution
agreement with Apro Media Corp. for at least $105 million of expected
sub-contracting business over seven years to provide commercial security
services to a Fortune 100 defense contractor and/or other customers. Under
the terms of the contract, MSGI will acquire components from Korea and deliver
fully integrated security solutions at an average expected level of $15 million
per year for the length of the seven-year engagement. The contract calls for
gross profit margins estimated to be between 26% and 35% including a profit
sharing arrangement with Apro Media, which will initially take the form of
unregistered MSGI common stock, followed by a combination of stock and cash and
eventually just cash. The Company has subsequently named Apro as a defendant in
a legal action taken in the State of California and currently views any and all
contracts and agreements with Apro in breach.





CODA


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





Major recent financing
transactions


On
December 13, 2007, the Company entered into four short-term notes with private
institutional lenders. These promissory notes provided proceeds totaling $2.86
million to the Company. The proceeds of these notes were used to purchase
inventory to fulfill various purchase orders referred to us by Apro. These notes
have been amended at various times and now bear interest at 18% per annum. As of
June 30, 2009, these short-term notes remain outstanding to the four lenders,
and all are due on demand and are classified as current liabilities on the
consolidated balance sheet.





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





On
January 10, 2008, the Company entered into a Subscription Investment Agreement
with Current Technology Corporation, a corporation formed under the laws of the
Canada Business Corporation Act. Under this agreement, at March 31, 2009, the
Company has invested a total of $2 million and owns 20 million shares of the
common stock of Current Technology, which represents approximately 13% ownership
of their outstanding common stock.  In addition, the Company held
warrants to purchase 20 million additional shares of common stock.  As
of June 30, 2009, the Company has an option to invest an additional $500,000
under the original agreement terms. In August 2008, the 20 million warrants were
assigned to a third party as part of a Securities Exchange Agreement involving
the Company’s Preferred Stock. During the year ended June 30, 2009, the Company
was forced to surrender 5,000,000 shares of common stock in Current Technology
as part of an amendment to a loan agreement associated with an advance from an
officer (see Note 5).


22


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





On March
16, 2009, the Company entered into three convertible promissory notes with
Enable which provided the Company with gross proceeds of $250,000. The notes
bear interest at a rate of 10% annually and are convertible into shares of
common stock of the Company at a conversion rate of $0.25 per share. As an
incentive for Enable to issue these convertible promissory notes, the Company
and Enable entered into a certain warrant exchange agreement whereby Enable has
been granted the right to exchange all warrants held from previous transactions
into 10,000,000 shares of common stock of the Company. The original warrants
carry exercise prices ranging from $0.50 to $2.50 and represent a total of
14,642,852 shares available to purchase.





During
2009 and 2008, the Company received net proceeds of approximately $167,000 and
$0 of advances from officers and others, which have no stated interest rate or
maturity date.





Results of Operations Fiscal
2009 Compared to Fiscal 2008





For the
year ended June 30, 2009 (the Current Period), the Company realized revenues in
the amount of $282,000 from consulting service provided to third
parties.





For the
year ended June 30, 2008 (the Prior Period), the Company realized revenues in
the amount of approximately $3.8 million from the sales of products through our
relationship with Apro Media Corp., a $100,000 royalty fee / referral fee income
generated from the CODA Octopus Group, Inc., and $128,000 for consulting
services. The Company had additional shipments and corresponding billings to
various customers in the aggregate of approximately $6.5 million, which have not
been recognized as revenues in fiscal 2008 or fiscal 2009 to date as a result of
issues surrounding collectibility. In addition, the $6.5 million of billings
have been reversed and are not reflected as of June 30, 2008 or
2009.  Of these shipments, approximately $1.6 million were from
shipments of products through our relationship with Apro and approximately $4.9
million were from shipments to other customers referred to us by
Apro.





Costs of
goods sold of approximately $4.1 million in the Current Period were the result
of the Company recording a reserve for potential loss in recognition of
potential recovery issues surrounding costs associated with product shipped to
customers during the Prior Period for which revenue has not yet been recognized
due to recognition criteria on the transactions having not been met. These costs
are not associated with the revenue realized during the Current
Period.





Costs of
goods sold of approximately $4.2 million in the Prior Period consisted primarily
of the expenses related to acquiring the components required to provide the
specific technology applications ordered by individual customers. The Company
classified as an asset approximately $5.4 million in costs associated with the
product shipped during the Prior Period due to the revenue recognition criteria
on these transactions have not been met. The Company recorded a reserve for
potential loss of approximately $1.4 million in recognition of potential
recovery issues for certain of such transactions, which is included in costs of
goods sold for the Prior Period. The gross profit realized on individual
commercial sales averaged 26% for transactions for product shipments, with the
revenue for the referral and consulting fee raising the overall gross profit to
the 30%.  This was offset with the reserve against the product costs,
which created the negative gross margin since there was no revenue recognized in
fiscal 2008 against these transactions. The Company has commenced litigation
against the parties to such transaction for breach of contract.





Research
and development expenses were approximately $88,000 in the Prior Period and
related to the development of RFID technologies. There were no such costs
realized in the Current Period. The Company ceased much of its operations as it
re-focused its business relationships from Apro/Hyundai to NASA related
technologies.




Salaries
and benefits of approximately $1.1 million in the Current Period decreased by
approximately $1.2 million from salaries and benefits of approximately $2.3
million in the Prior Period. Salaries and benefits decreased primarily due to
accruals of additional payroll taxes, penalties and interest booked in the Prior
Period by the Company, which were not realized during the Current
Period.


23


Selling,
general and administrative expenses of approximately $1.4 million in the Current
Period decreased by approximately $3.1 million or 69% from comparable expenses
of $4.5 million in the Prior Period. The decrease is due primarily to the cost
of shares issued to Apro in connection with the Company’s sub-contract
agreement, which resulted in an expense of approximately $1.1 million in the
Prior Period versus a credit of approximately $62,000 in the Current Period, as
well as reductions in investor relations of approximately $1.0 million,
professional fees such as legal and accounting of approximately $0.6 million,
office expenses of approximately $0.1 million and travel and entertainment
expenses of approximately $0.2 million. The Company ceased much of its
operations as it re-focused its business relationships from Apro/Hyundai to NASA
related technologies.





During
the Current Period, the Company recorded depreciation and amortization expense
of approximately $15,000, which represented a decrease of approximately $12,000
from comparable expenses of approximately $27,000 in the Prior Period. This
variance is the result of certain intangible assets being fully amortized during
the Prior Period.





Interest
income of approximately $13,000 in the Current Period increased over interest
income of approximately $6,000 in the Prior Period due primarily to the Company
holding larger average cash balances during the course of the Current Period
than that of the Prior Period.





Interest
expense of approximately $2.7 million in the Current Period decreased by
approximately $8.9 million from interest expense of approximately $11.6 million
in the Prior Period. The expenses in the Prior Period were due primarily to the
effect of certain repricing transactions during the year affecting certain debt
instruments and the adjustments to the values of certain equity instruments
granted to note holders. The non-cash component of interest expense was
approximately $1.5 million in the Current Period as compared to $9.8 million in
the Prior Period.





Non-cash
expenses for the revaluation of the fair value of the put option in the amount
of approximately $1.6 million were realized in the Prior Period. These expenses
related to recognition by the Company of the fair value of the put options
issued with the Convertible Series H Preferred Stock, above the amount of gross
proceeds of the issuance of the stock. An additional non-cash expense or
approximately $150,000 was realized in the Current Period, such that an
aggregate loss of $1.7 million has been recognized since inception. This
aggregate loss was offset by a gain of approximately $1.7 million in the Current
Period upon cancellation and redemption of the Series H Preferred Stock. There
is no outstanding Series H Preferred Stock as of June 30, 2009.




The
non-cash loss on debt guarantee realized during the Current Period was the
result of the forfeiture of a portion of the Company’s investment in Current
Technology Corporation under the guarantee of a certain bridge loan agreement,
which was entered into by Mr. J. Jeremy Barbera, Chief Executive Officer and
Chairman of MSGI (see Note 16) ), and for which a portion of the proceeds were
used to advance funds to the Company. The Company surrendered 5,000,000 shares
of common stock of Current Technology Corporation at a carrying value of
$500,000. The Company has no further guarantee obligations under the bridge loan
agreement.





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





As a
result of the above, net loss attributable to common stockholders of
approximately $8.0 million in the Current Period decreased by approximately
$12.2 million from comparable net loss of $20.2 million in the Prior
Period.





Off-Balance Sheet
Arrangements





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


24


Liquidity and Capital
Resources





Historically,
the Company has funded its operations, capital expenditures and acquisitions
primarily through private placements of equity and debt transactions. The
Company currently has limited capital resources, has incurred significant
historical losses and negative cash flows from operations and has limited
current revenues. At June 30, 2009, the Company had approximately $700 in cash
and no accounts receivable. The Company believes that funds on hand combined
with funds that will be available from its various operations will not be
adequate to finance its operations and enable the Company to meet its financial
obligations and payments under its convertible notes and promissory notes for
the next twelve months. A significant portion of our promissory notes and and
other notes payable are past due or due within the next 12
months.  Further, there is uncertainty as to timing, volume and
profitability of transactions that may arise from our relationship with NASA and
others. There can be no assurance as to the timing of when we will receive
amounts due to us for products shipped to customers prior to June 30, 2009, and
we have commenced litigation to attempt to recover damages. There are no
assurances that any further capital raising transactions will be consummated.
Although certain transactions have been successfully closed in the past, failure
of our operations to generate sufficient future cash flow and failure to
consummate our strategic transactions or raise additional financing could have a
material adverse effect on the Company's ability to continue as a going concern
and to achieve its business objectives. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.




The
transactions described below were entered into after June 30, 2009, and will
impact our liquidity:





In July
2009, the Company executed a NASA Funding Promissory Note in the amount of
$240,004 with a lender who also holds a promissory note from December 2007. The
new promissory note was executed in order to enable the Company to meet its
obligations under a certain Space Act Agreement, which had been entered into
with The National Aeronautics and Space Administration. The note bears interest
at 25% and matures on August 30, 2009. In addition, the Company is obligated to
issue 500,000 shares of common stock to the lender as additional consideration
to enter into the note agreement. The shares were issued to the lender in
September 2009. As of the date of this filing, the principal balance and accrued
interest has not yet been paid to the lender. Although the note is technically
in default as of the date of this filing, there has been no claim of default by
the lender and the Company is currently in negotiations with the lender for an
extension to the terms of the note. There is no guarantee that the Company will
be successful in this effort. Since June 30, 2009, the Company has issued
14,590,500 shares of common stock. Of these shares, 5,800,000 were issued under
a certain Warrant Exchange Agreement, 500,000 were issued pursuant to a certain
short-tem note, 45,500 were issued pursuant to certain addendum to short-terms
loans and 8,245,000 were issued to a variety of service providers for services
to be rendered.




Analysis
of cash flows during fiscal years ended June 30, 2009 and 2008:





The
Company realized a net loss of approximately $8.0 and $20.2 million in the
Current Period and Prior Period, respectively. The net loss includes
approximately $2.3 million and $13.4 million of non-cash charges to our
statement of operations in the Current and Prior Periods,
respectively.  Cash used in operating activities was approximately
$1.3 and $6.3 million in the Current Period and Prior Period, respectively. Net
cash used in operating activities in the Current Period principally resulted
from the net loss regognized, in addition to a gain on a securities exchange
agreement of approximately $1.7 million, offset by non-cash adjustments and
increases in accounts payable and accrued liabilities. We believe the impairment
to the working relationships with Hyundai and Apro, as a result of the alleged
negligent actions of Hyundai, Apro and others, and the resulting inability to
collect receipts on invoices presented to customers, will result in the delay of
receipts of funds until such time as the current legal actions are either
adjudicated or settled.  As a result, we have continued to stretch
payments to our vendors and employees, have not filed or paid payroll taxes and
have had to renegotiate several debt obligations.




During
the Current Period, the Company used net cash of approximately $0.2 million in
investing activities related primarily to our deposits on technology licenses
with NASA.  In the Prior Period, the Company used net cash of
approximately $2.0 million in investing activities related to our investment in
Current Technology.




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


25


Financing activities - Debt and
Advances:




Debt
obligations are summarized as follows:




Instrument
                                      
                                      Maturity
                                      
                                      
                                      Face Amount
                                      
                                      
                                      Coupon Interest
                                        Rate
                                      
                                      
                                      Carrying Amount
                                        at June 30, 2009,
                                        net of discount
                                      
                                      
                                      Carrying Amount
                                        at June 30, 2008,
                                        net of discount6%
      Notes
                                      
                                      Dec.
      13, 2009
                                      
                                      
                                      
                                      1,000,000
                                      
                                      
                                      
                                      6
                                      %
                                      
                                      $
                                      45,940
                                      
                                      
                                      $
                                      1006%
      April Notes
                                      
                                      April
      4, 2010
                                      
                                      
                                      
                                      1,000,000
                                      
                                      
                                      
                                      6
                                      %
                                      
                                      
                                      11,630
                                      
                                      
                                      
                                      558%
      Debentures
                                      
                                      May
      21, 2010
                                      
                                      
                                      
                                      4,000,000
                                      
                                      
                                      
                                      8
                                      %
                                      
                                      
                                      19,891
                                      
                                      
                                      
                                      628%
      Notes
                                      
                                      May
      21, 2010
                                      
                                      
                                      
                                      4,000,000
                                      
                                      
                                      
                                      8
                                      %
                                      
                                      
                                      4,000,000
                                      
                                      
                                      
                                      —Term
      notes short-term
                                      
                                      December
      31,
                                        2009
                                      
                                      
                                      
                                      400,000
                                      
                                      
                                      
                                      18
                                      %
                                      
                                      
                                      400,000
                                      
                                      
                                      
                                      400,000Term
      note short-term
                                      
                                      February 28,
                                        2009*
                                      
                                      
                                      
                                      960,000
                                      
                                      
                                      
                                      18
                                      %
                                      
                                      
                                      960,000
                                      
                                      
                                      
                                      960,000Term
      note short-term
                                      
                                      March
      31,
                                        2009*
                                      
                                      
                                      
                                      1,500,000
                                      
                                      
                                      
                                      18
                                      %
                                      
                                      
                                      1,500,000
                                      
                                      
                                      
                                      1,500,000Term
      notes short-term
                                      
                                      June 17, 2009*
                                      
                                      
                                      
                                      250,000
                                      
                                      
                                      
                                      18
                                      %
                                      
                                      
                                      250,000
                                      
                                      
                                      
                                      —Short
      term borrowings from Apro Media Corp
                                      
                                      
                                      N/A
                                      
                                      
                                      
                                      200,000
                                      
                                      
                                      
                                      N/A
                                      
                                      
                                      
                                      206,950
                                      
                                      
                                      
                                      200,000Short
      term borrowings from Current Technologies Corp.
                                      
                                      
                                      N/A
                                      
                                      
                                      
                                      70,000
                                      
                                      
                                      
                                      N/A
                                      
                                      
                                      
                                      70,000
                                      
                                      
                                      
                                      —Short
      term borrowings from officer of the Company
                                      
                                      
                                      N/A
                                      
                                      
                                      
                                      167,062
                                      
                                      
                                      
                                      N/A
                                      
                                      
                                      
                                      167,062
                                      
                                      
                                      
                                      —Short
      term borrowings from others
                                      
                                      
                                      N/A
                                      
                                      
                                      
                                      60,000
                                      
                                      
                                      
                                      N/A
                                      
                                      
                                      
                                      60,000
                                      
                                      
                                      
                                      —$
                                      13,607,062
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      7,691,473
                                      
                                      
                                      $
                                      3,060,217





*These
notes are due on demand.





As of
June 30, 2009, the Company has the following debt commitments
outstanding:





Callable Secured Convertible
Note financing





8% Notes


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





The 8%
Notes have a maturity date of May 21, 2010 and accrue interest at a rate of 8%
per annum. Per the terms of the Notes, interest is due on a quarterly basis,
beginning on October 1, 2008. The investors can convert the principal amount of
the 8% Notes into common stock of the Company, provided certain conditions are
met, and each conversion is subject to certain volume limitations. The
conversion price of the 8% Notes is currently at $0.25.





8%
Debentures


On May
21, 2007, MSGI entered into a private placement with several institutional
investors and issued 8% convertible debentures in the aggregate principal amount
of $5,000,000 (the 8% Debentures), of which $4,000,000 is currently outstanding
with the remaining principal balance having been converted into shares of common
stock during fiscal 2008. There were no conversions during the year ended June
30, 2009.





The 8%
Debentures have a maturity date of May 21, 2010 and accrue interest at a rate of
8% per annum. Payments of principal and interest under the Debentures are not
due until the maturity date.  The investors can convert the principal
amount of the 8% Debentures into common stock of the Company, provided certain
conditions are met, and each conversion is subject to certain volume
limitations. The conversion price of the 8% Debentures is currently at
$0.25.





In
connection with this debt, the note holders have warrants for the purchase of up
to 7,142,852 shares of common stock, exercisable over a five-year period at an
exercise price of $0.50.  These warrants can be exchanged by the
holder for shares of common stock of the Company per the Warrant Exchange
Agreement dated March 16, 2009. The shares will be issued to the holders of the
exchanged warrants over time.


26


The
Company allocated the aggregate proceeds of the 8% Debentures between the
warrants and the Debentures based on their fair value and calculated a
beneficial conversion feature and warrant discount in an amount in excess of the
$5 million in proceeds received.  Therefore, the total discount was
limited to $5 million.    The discount on the Debentures was
allocated from the gross proceeds and recorded as additional paid-in
capital.  The discount is being amortized to interest expense over the
three-year maturity date. Should the 8% Debentures be converted or paid prior to
the payment terms, the amortization of the discount will be
accelerated.   On March 16, 2009, the Company entered into
certain convertible promissory notes, which effected the anti-dilution provision
of these Debentures. The conversion price of the Debentures was reduced from
$0.50 to $0.25. No additional beneficial conversion expense was recorded related
to the conversion price change due to the immaterial effect of this adjustment
to the financial results of the Company as of June 30, 2009.




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





6% Notes


On
December 13, 2006, pursuant to a Securities Purchase Agreement between the
Company and several institutional investors, MSGI issued $2,000,000 aggregate
principal amount of Callable Secured Convertible Notes (the 6% Notes) and stock
purchase warrants exercisable for 3,000,000 shares of common stock in a private
placement for an aggregate offering price of $2,000,000, of which $1,000,000 is
currently outstanding with the remaining principal balance having been converted
into shares of common stock during fiscal 2008.  There were no
conversions during the year ended June 30, 2009.





The 6%
Notes have a single balloon payment of $1,000,000 due on the maturity date of
December 13, 2009 and will accrue interest at a rate of 6% per
annum.  The Investors can convert the principal amount of the 6% Notes
into common stock of the Company, provided certain conditions are met, and each
conversion is subject to certain volume limitations.  The conversion
price of the 6% Notes is currently at $0.25.  The payment obligations
under the Notes accelerate if payments under the Notes are not made when due or
upon the occurrence of other defaults described in the Notes.  The
warrants are exercisable through December 2013.  The exercise price of
the warrants is $0.50 per share. These warrants can be exchanged by the holder
for shares of common stock of the company per the Warrant Exchange Agreement
dated March 16, 2009. The shares will be issued to the holders of the exchanged
warrants over time and an aggregate of 500,000 shares have been issued under
this agreement as of June 30, 2009.





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





The
Company allocated the aggregate proceeds of the 6% Notes between the warrants
and the Notes based on their fair values and calculated a beneficial conversion
feature and warrant discount in an amount in excess of the $1 million in
proceeds received. Therefore, the total discount was limited to $1 million. The
Company is amortizing this discount over the remaining term of the 6% Notes
through December 2009. Should the 6% Notes be converted or paid prior to the
payment terms, the amortization of the discount will be accelerated. On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these Notes. The conversion price of the
Notes was reduced from $0.50 to $0.25. No additional beneficial conversion
expense was recorded related to the conversion price change due to the
immaterial effect of this adjustment to the financial results of the Company as
of June 30, 2009.





6% April
Notes


On April
5, 2007, pursuant to a Securities Purchase Agreement between the Company and
several institutional investors, MSGI issued $1.0 million aggregate principal
amount of Callable Secured Convertible Notes (the 6% April Notes) and stock
purchase warrants exercisable for 1,500,000 shares of common stock in a private
placement for an aggregate offering price of $1.0 million. The warrants have an
exercise price of $1.00 and are exercisable for a term of 7 years. These
warrants can be exchanged by the holder for shares of common stock of the
company per the Warrant Exchange Agreement dated March 16, 2009. The shares will
be issued to the holders of the exchanged warrants over time and an aggregate of
500,000 shares have been issued under this agreement as of June 30,
2009.





The 6%
April Notes have a single balloon payment of $1.0 million due on the maturity
date of April 4, 2010 and will accrue interest at a rate of 6% per
annum.  The Investors can convert the principal amount of the 6% April
Notes into common stock of the Company, provided certain conditions are met, and
each conversion is subject to certain volume limitations.  The
conversion price of the 6% April Notes is currently $0.25.





The
Company allocated the aggregate proceeds of the 6% April Notes between the
warrants and the Notes based on their fair values and calculated a beneficial
conversion feature and warrant discount in an amount in excess of the $1 million
in proceeds received.  Therefore, the total discount was limited to $1
million.  The Company is amortizing this discount to interest expense
over the remaining term of the 6% April Notes through April
2010.  Should the 6% April Notes be converted or paid prior to the
payment terms, the amortization of the discount will be accelerated. On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these April Notes. The conversion price
of the April Notes was reduced from $0.50 to $0.25. No additional beneficial
conversion expense was recorded related to the conversion price change due to
the immaterial effect of this adjustment to the financial results of the Company
as of June 30, 2009.


27


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





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





Convertible Term Notes
payable


On
December 13, 2007, the Company entered into four short-term notes with private
institutional lenders. These promissory notes provided proceeds totaling $2.86
million to the Company. The proceeds of these notes were used to purchase
inventory associated with the Apro transactions. The notes carry a variable rate
of interest based on the prime rate plus two percent. These notes had an
original maturity date of April 15, 2008. These notes were not repaid on this
date and the terms were amended at several different dates to extend them to
their current maturity dates of February 28, 2009 for one note, March 31, 2009
for one note and December 31, 2009 for the remaining two notes. While two notes
payable are technically in default at this time, neither of the lenders have
claimed default on the notes and the Company is presently in discussions with
these lenders regarding extended terms for these notes payable. There are no
guarantees that the Company will successfully execute the proposed addendum
extensions with the various lenders.





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





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





In
addition, the terms of certain of the Amendments to the Loan Agreements called
for the Company to issue five-year warrants to purchase shares of common stock
of the Company to certain group lenders each week beginning May 1, 2008 and
continuing for each week that the principal balance of the term notes remains
outstanding. These warrants are to be issued with an exercise price set at the
greater of market value on the date of issuance or $0.50 per
share.  As of June 30, 2008, a total of 284,717 warrants were issued
to the note holders, 33,218 warrants with an exercise price at $0.60 per share
and the remaining at an exercise price of $0.50 per share.  These
warrants were subsequently cancelled with the October 2008 addendum and replaced
with other warrants and stock issued.  In addition, there were 520,000
shares of common stock issued in fiscal 2008 in connection with these
addendums.





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





Effective
October 1, 2008, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
terminated all warrants to purchase common stock issued under previous addendum
agreements, which aggregated 1,000,000 warrants issued under those previous
addendum agreements, and, in their place, issued new warrants and
additional shares of common stock. At execution of the addendums, the Company
issued 378,000 shares of common stock and warrants to purchase an additional
378,000 shares of common stock at an exercise price of $0.50. The Company issued
an additional 252,000 shares of common stock and warrants to purchase an
additional 252,000 shares of common stock, at an exercise price of $0.50,
between the date of the agreement and December 31, 2008.





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


28


Effective
April 1, 2009, the Company entered into additional addendum agreements with two
out of four lenders with regard to their respectively held Notes, which issued
new warrants and additional shares of common stock and extended the maturity
date to December 31, 2009.  The Company issued an additional 221,195
shares of common stock and warrants to purchase an additional 221,195 shares of
common stock, at an exercise price of the greater of $0.25 or market value on
the date of the grant





The net
effect of all of the addendums to these term notes during the year ended June
30, 2009, was the issuance of 1,055,615 warrants at an exercise prices ranging
from $0.25 to $0.50 and 1,984,186 shares of common stock.  The stock
was determined to have a fair value of $420,749 for the year ended June 30,
2009, based upon the fair market value of the common stock on each date
issued.  The warrants were determined to have a value of $44,987,
which includes an offset of the value of the cancelled warrants previously
recorded. The warrants were fair valued, at each warrant issuance, using the
Black-Scholes model.  The warrant and stock values were recorded as
additional interest expense on the note during the year ended June 30,
2009.





10%Convertible Term Notes
payable





On March
16, 2009, the Company entered into three convertible promissory notes with
Enable which provided the Company with gross proceeds of $250,000. The notes
bear interest at a rate of 10% annually and are convertible into shares of
common stock of the Company at a conversion rate of $0.25 per share. The notes
had a maturity date of June 17, 2009.  As an inducement to Enable to
enter into the Convertible Term Notes, the Company entered into a Warrant
Exchange Agreement with Enable. The remaining terms of the 10% notes carry the
same provisions as the 8% Debentures. Although the note is technically in
default as of June 30, 2009, the lender has not made a claim of default and the
Company is currently in negotiations for an extension to the terms of the note.
There can be no guarantee that the Company will be successful in securing such
extension.





Advances


During
the year ended June 30, 2008, the Company received funding in the amount of
$200,000 from Apro Media. These funds were advanced to the Company against
expected collections of accounts receivable generated under the Apro
sub-contract agreement. During the year ended June 30, 2009, the Company
received an additional $6,950 from Apro Media, bringing the aggregate to
$206,950. There is no interest expense associated with this advanced funding and
this is to be repaid to Apro upon collection of the related accounts receivable,
which has not yet occurred.





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





During
the year ended June 30, 2009, the Company received net funding in the amount of
approximately $167,000 from a certain corporate officer. There is no interest
expense associated with this advanced funding and this is to be repaid upon
collection of the Apro Media related accounts receivable, which has not yet
occurred.





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





Summary of Recent Accounting
Pronouncements





In June
2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, "The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles-a replacement of FASB Statement No. 162".  SFAS
No. 168 establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. This SFAS is effective for the Company's
interim reporting period ending on September 30, 2009, and is not expected to
have a material impact on the Company's consolidated financial
statements.





In May
2009, the FASB issued SFAS No. 165, "Subsequent Events".  SFAS 165
establishes general standards for accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued and was effective for interim and annual periods ending
after June 15, 2009. The adoption of SFAS No. 165 did not have an impact on the
Company's financial statements.  The Company evaluated all subsequent
events that occurred from July 1, 2009 through October 13, 2009, and disclosed
all material subsequent events in Note 19.


29


In April
2009, FASB issued FSP SFAS No. 157-4, "Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly".  FSP SFAS No.
157-4 provides guidelines for making fair value measurements more consistent
with the principles presented in SFAS No. 157, Fair Value Measurements. The FSP
relates to determining fair values when there is no active market or where the
price inputs being used represent distressed sales. It reaffirms what SFAS No.
157 states is the objective of fair value measurement-to reflect how much an
asset would be sold for in an orderly transaction (as opposed to a distressed or
forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if
a formerly active market has become inactive and in determining fair values when
markets have become inactive. The FSP is effective for the Company's annual
reporting for the fiscal year ended on June 30, 2009. The implementation of FSP
SFAS No. 157-4 did not materially impact the Company's consolidated financial
statements.





In April
2009, FASB issued FSP SFAS No. 107-1 and APB 28-1, "Interim Disclosures about
Fair Value of Financial Instruments". FSP SFAS No. 107-1 and APB 28-1 enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures. The FSP relates to fair value disclosures for any financial
instruments that are not currently reflected a company's balance sheet at fair
value. Prior to the effective date of this FSP, fair values for these assets and
liabilities have only been disclosed once a year. The FSP will now require these
disclosures on a quarterly basis, providing qualitative and quantitative
information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value. The disclosure requirement under
this FSP is effective for the Company's interim reporting period ending on
September 30, 2009.





In
October 2008, the FASB issued FASB Staff Position SFAS No. 157-3, "Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not
Active". FSP SFAS No. 157-3 clarifies the application of SFAS No. 157, which the
Company adopted with respect to financial assets and liabilities as of July 1,
2008. The Company will adopt SFAS No. 157 for its non-financial assets and
liabilities beginning July 1, 2009. The Company has considered the guidance
provided by FSP SFAS No. 157-3 in its determination of estimated fair values,
and the impact was not material.





In June
2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock" (EITF 07-5).
Equity-linked instruments (or embedded features) that otherwise meet the
definition of a derivative as outlined in SFAS No. 133, " Accounting for
Derivative Instruments and Hedging Activities, " are not accounted for as
derivatives if certain criteria are met, one of which is that the instrument (or
embedded feature) must be indexed to the entity's stock. EITF 07-5 provides
guidance on determining if equity-linked instruments (or embedded features) such
as warrants to purchase our stock are considered indexed to our stock. EITF 07-5
is effective for the Company in its fiscal year beginning July 1, 2009 and will
be applied to outstanding instruments as of that date. Upon adoption, a
cumulative effect adjustment will be recorded, if necessary, based on amounts
that would have been recognized if this guidance had been applied from the
issuance date of the affected instruments. Initial adoption of EITF 07-5 is not
expected to materially impact the Company's financial
statements.  However, future movements of our stock price alone could
materially affect both our results of operations and financial position in the
future. Substantial movements in our stock price could result in material
volatility in our results of operations and financial position as under this
pronouncement we could be required to report obligations and expense in our
financial statements that will never be settled in cash.





In May
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).
" FSP APB 14-1 clarifies that convertible debt instruments that may be settled
in cash upon either mandatory or optional conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "
Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. "
Additionally, FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP APB 14-1 is effective for the Company in
its fiscal year beginning July 1, 2009, and must be applied on a retrospective
basis. Adoption of the guidance provided by FSP APB 14-1 is not expected to
materially impact the Company's consolidated financial statements.





In April
2008, the FASB adopted FSP SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets, amending the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets . This FSP is effective for intangible assets acquired on or after July
1, 2009. This SFAS is not expected to have a material impact on the Company's
consolidated financial position, results of operations and cash
flows.


30


In
February 2008, the FASB adopted FSP SFAS No. 157-2, Effective Date of FASB
Statement No. 157,delaying the effective date of SFAS No. 157 for one year for
all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The Company is currently evaluating the impact of the
implementation of the deferred portion of SFAS No. 157 on its consolidated
financial statements.





Item 7A. Quantitative and
Qualitative Disclosures About Market Risk





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


31


Item 8. Financial Statements
and Supplementary Data





Report
of Independent Registered Public Accounting Firm





Board of
Directors and Stockholders


MSGI
Security Solutions, Inc.





We have
audited the accompanying consolidated balance sheets of MSGI Security Solutions,
Inc. and Subsidiaries as of June 30, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity (deficit), and cash flows for
each of the years then ended.  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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly we express no such opinion.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of MSGI Security Solutions, Inc. and
Subsidiaries as of June 30, 2009 and 2008, and the results of its operations and
its cash flows for each of the years then ended, in conformity with accounting
principles generally accepted in the United States of America.





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





/s/
Amper, Politziner & Mattia, LLP





October
13, 2009


Edison,
New Jersey


32


MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS AS OF JUNE 30,








2009
                                    
                                    
                                    2008ASSETSCurrent
      assets:Cash
                                    
                                    $
                                    689
                                    
                                    
                                    $
                                    150,624Restricted
      cash
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,800,000Accounts
      receivable, net of allowances of $60,000
                                    
                                    
                                    -
                                    
                                    
                                    
                                    128,000Costs
      of product shipped to customers for which revenues have not yet been
      recognized, net of reserve of $5,416,616 and $1,349,970,
      respectively  (see Note 2)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,066,646Total
      current assets
                                    
                                    
                                    689
                                    
                                    
                                    
                                    6,145,270Investment
      in Current Technology Corporation (see Note 5)
                                    
                                    
                                    1,500,000
                                    
                                    
                                    
                                    2,000,000Property
      and equipment, net
                                    
                                    
                                    32,299
                                    
                                    
                                    
                                    30,946Deposits
      on technology licenses (see Note 4)
                                    
                                    
                                    175,000
                                    
                                    
                                    
                                    -Other
      assets, principally deferred financing costs, net
                                    
                                    
                                    338,223
                                    
                                    
                                    
                                    894,006Total
      assets
                                    
                                    $
                                    2,046,211
                                    
                                    
                                    $
                                    9,070,222LIABILITIES AND STOCKHOLDERS’ EQUITY
      (DEFICIT)Current
      liabilities:Accounts
      payable - trade
                                    
                                    $
                                    2,723,392
                                    
                                    
                                    $
                                    2,572,471Convertible
      term notes payable
                                    
                                    
                                    2,860,000
                                    
                                    
                                    
                                    2,860,000Accrued
      expenses and other current liabilities
                                    
                                    
                                    4,684,192
                                    
                                    
                                    
                                    2,755,588Advances
      from strategic partners
                                    
                                    
                                    276,950
                                    
                                    
                                    
                                    200,000Advances
      from corporate officer
                                    
                                    
                                    167,062
                                    
                                    
                                    
                                    -Other
      advances
                                    
                                    
                                    60,000
                                    
                                    
                                    
                                    -10%
      Convertible promissory note payable
                                    
                                    
                                    250,000
                                    
                                    
                                    
                                    -6%
      Callable convertible notes payable, net of discount of $1,942,430 as of
      2009
                                    
                                    
                                    57,570
                                    
                                    
                                    
                                    -8%
      Callable convertible notes payable net of discount of $3,980,109 as of
      2009
                                    
                                    
                                    4,019,891
                                    
                                    
                                    
                                    -Accrued
      liability for put options
                                    
                                    
                                    -
                                    
                                    
                                    
                                    6,550,000Total
      current liabilities
                                    
                                    
                                    15,099,057
                                    
                                    
                                    
                                    14,938,0598%
      Callable convertible notes payable, net of discount of $3,999,938 as of
      2008
                                    
                                    
                                    -
                                    
                                    
                                    
                                    626%
      Callable convertible notes payable, net of discount of $1,999,845 as of
      2008
                                    
                                    
                                    -
                                    
                                    
                                    
                                    155Total
      liabilities
                                    
                                    
                                    15,099,057
                                    
                                    
                                    
                                    14,938,276Stockholders’
      equity (deficit):Convertible
      preferred stock - $.01 par value; 0 shares at June 30, 2009 and 5,000,000
      shares at June 30, 2008 of Series H issued and outstanding
                                    
                                    
                                    -
                                    
                                    
                                    
                                    50,000Common
      stock - $.01 par value; 100,000,000 authorized; 24,932,967 and 22,348,781
      shares issued; 24,915,305 and 22,331,119 shares outstanding as of June 30,
      2009 and 2008, respectively
                                    
                                    
                                    249,329
                                    
                                    
                                    
                                    223,487Additional
      paid-in capital
                                    
                                    
                                    272,057,383
                                    
                                    
                                    
                                    271,243,011Accumulated
      deficit
                                    
                                    
                                    (283,965,848
                                    )
                                    
                                    
                                    (275,990,842
                                    )Less:  17,662
      shares of common stock in treasury, at cost
                                    
                                    
                                    (1,393,710
                                    )
                                    
                                    
                                    (1,393,710
                                    )Total stockholders’ equity (deficit)
                                    
                                    
                                    (13,052,846
                                    )
                                    
                                    
                                    (5,868,054
                                    )Total
      liabilities and stockholders’ equity (deficit)
                                    
                                    $
                                    2,046,211
                                    
                                    
                                    $
                                    9,070,222





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


33





MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR THE
YEARS ENDED JUNE 30,





2009
                      
                      
                      2008RevenueProduct
      Revenue – Apro subcontract
                      
                      $
                      -
                      
                      
                      $
                      3,816,560Referral
      fee revenue
                      
                      
                      -
                      
                      
                      
                      100,000Consulting
      fee revenue
                      
                      
                      282,000
                      
                      
                      
                      128,000Total
      revenue
                      
                      
                      282,000
                      
                      
                      
                      4,044,560Cost
      of revenue / products sold, including write down of $4,066,646 in 2009 and
      $1,349,970 in 2008
                      
                      
                      4,066,646
                      
                      
                      
                      4,194,327Gross
      loss
                      
                      
                      (3,784,646
                      )
                      
                      
                      (149,767
                      )Operating
      costs and expenses:Salaries
      and benefits
                      
                      
                      1,121,734
                      
                      
                      
                      2,307,067Research
      and development
                      
                      
                      -
                      
                      
                      
                      88,200Selling,
      general and administrative (including non-cash credit of $(62,336) in 2009
      and expense of  $1,052,336 in 2008 for shares to be issued to
      Apro Media)
                      
                      
                      1,392,832
                      
                      
                      
                      4,471,929Depreciation
      and amortization
                      
                      
                      14,760
                      
                      
                      
                      26,953Total
      operating costs and expenses
                      
                      
                      2,529,326
                      
                      
                      
                      6,894,149Loss
      from operations
                      
                      
                      (6,313,972
                      )
                      
                      
                      (7,043,916
                      )Other
      income (expense):Interest
      income
                      
                      
                      13,124
                      
                      
                      
                      5,861Interest
      expense
                      
                      
                      (2,707,501
                      )
                      
                      
                      (11,584,299
                      )Non-cash
      expense for revaluation of put options to fair value
                      
                      
                      (150,000
                      )
                      
                      
                      (1,550,000
                      )Non-cash
      loss on debt guarantee
                      
                      
                      (500,000
                      )
                      
                      
                      -Gain
      on put options
                      
                      
                      1,700,000
                      
                      
                      
                      -Total
      other income (expense)
                      
                      
                      (1,644,377
                      )
                      
                      
                      (13,128,438
                      )Loss before
      provision for income taxes
                      
                      
                      (7,958,349
                      )
                      
                      
                      (20,172,354
                      )Provision
      for income taxes
                      
                      
                      16,657
                      
                      
                      
                      6,000Net
      loss
                      
                      $
                      (7,975,006
                      )
                      
                      $
                      (20,178,354
                      )Basic
      and diluted loss per share attributable to common
    stockholders
                      
                      $
                      (0.34
                      )
                      
                      $
                      (1.19
                      )Weighted
      average common shares outstanding basic and diluted
                      
                      
                      23,665,256
                      
                      
                      
                      17,016,261





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


34


MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


FOR THE
YEARS ENDED JUNE 30, 2009 AND 2008





AdditionalCommon
      Stock
                                                    
                                                    
                                                    Preferred
      Stock
                                                    
                                                    
                                                    Paid-in
                                                    
                                                    
                                                    Accumulated
                                                    
                                                    
                                                    Treasury
      StockShares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Shares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Capital
                                                    
                                                    
                                                    Deficit
                                                    
                                                    
                                                    Shares
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    TotalsBalance
      June 30, 2007
                                                    
                                                    
                                                    10,325,687
                                                    
                                                    
                                                    $
                                                    103,257
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    256,074,720
                                                    
                                                    
                                                    $
                                                    (255,812,488
                                                    )
                                                    
                                                    
                                                    (17,662
                                                    )
                                                    
                                                    $
                                                    (1,393,710
                                                    )
                                                    
                                                    $
                                                    (1,028,221
                                                    )Issuance
      of convertible preferred Series H shares (see Note 13)
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    5,000,000
                                                    
                                                    
                                                    
                                                    50,000
                                                    
                                                    
                                                    
                                                    (50,000
                                                    )
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    -Non-cash
      compensation expense
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    485,570
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    485,570Issuance
      of shares of common stock to members of the Board of
    Directors
                                                    
                                                    
                                                    91,965
                                                    
                                                    
                                                    
                                                    920
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    192,209
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    193,129Issuance
      of shares of common stock to investor relations firms
                                                    
                                                    
                                                    300,000
                                                    
                                                    
                                                    
                                                    3,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    201,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    204,0008%
      and 6% convertible debt and accrued interest converted to shares of common
      stock
                                                    
                                                    
                                                    10,111,129
                                                    
                                                    
                                                    
                                                    101,110
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    6,599,177
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    6,700,287Issuance
      of shares of common stock to Apro Media Corp. pursuant to subcontract
      agreement
                                                    
                                                    
                                                    1,000,000
                                                    
                                                    
                                                    
                                                    10,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    980,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    990,000Charge
      related to modification to exercise price of warrants previously
      issued
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    4,969,008
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    4,969,008Debt
      discount for  warrants issued in connection with December 2007
      notes
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    80,208
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    80,208Fair
      value of warrants issued to investor relations firms for services
      rendered
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    332,421
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    332,421Additional
      debt discount recorded in connection with reset of conversion price under
      anti-dilution provisions of convertible debt
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    1,077,993
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    1,077,993Fair
      value of warrants issued under Addendums to term notes
    payable
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    83,105
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    83,105Issuance
      of shares of common stock under Addendum to term notes
    payable
                                                    
                                                    
                                                    520,000
                                                    
                                                    
                                                    
                                                    5,200
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    217,600
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    222,800Net
      Loss
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (20,178,354
                                                    )
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (20,178,354
                                                    )Balance
      June 30, 2008
                                                    
                                                    
                                                    22,348,781
                                                    
                                                    
                                                    $
                                                    223,487
                                                    
                                                    
                                                    
                                                    5,000,000
                                                    
                                                    
                                                    $
                                                    50,000
                                                    
                                                    
                                                    $
                                                    271,243,011
                                                    
                                                    
                                                    $
                                                    (275,990,842
                                                    )
                                                    
                                                    
                                                    (17,662
                                                    )
                                                    
                                                    $
                                                    (1,393,710
                                                    )
                                                    
                                                    $
                                                    (5,868,054
                                                    )Exchange
      of preferred stock for debt in Securities Exchange
    Agreement
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (5,000,000
                                                    )
                                                    
                                                    
                                                    (50,000
                                                    )
                                                    
                                                    
                                                    50,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    -Issuance
      of shares of common stock under Securities Exchange
    Agreement
                                                    
                                                    
                                                    500,000
                                                    
                                                    
                                                    
                                                    5,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    35,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    40,000Non
      cash compensation expense
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    221,478
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    221,478Issuance
      of shares of common stock to Officer as a bonus
                                                    
                                                    
                                                    100,000
                                                    
                                                    
                                                    
                                                    1,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    62,000
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    63,000Issuance
      of shares of common stock under Addendum to term notes
    payable
                                                    
                                                    
                                                    1,984,186
                                                    
                                                    
                                                    
                                                    19,842
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    400,907
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    420,749Fair
      value of warrants issued under Addendum to term notes
    payable
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    44,987
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    44,987Net
      loss
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (7,975,006
                                                    )
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (7,975,006
                                                    )Balance
      June 30, 2009
                                                    
                                                    
                                                    24,932,967
                                                    
                                                    
                                                    $
                                                    249,329
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    —
                                                    
                                                    
                                                    $
                                                    272,057,383
                                                    
                                                    
                                                    $
                                                    (283,965,848
                                                    )
                                                    
                                                    
                                                    (17,662
                                                    )
                                                    
                                                    $
                                                    (1,393,710
                                                    )
                                                    
                                                    $
                                                    (13,052,846
                                                    )





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


35


MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR THE
YEARS ENDED JUNE 30,





2009
                        
                        
                        2008OPERATING
      ACTIVITIES:Net
      loss
                        
                        $
                        (7,975,006
                        )
                        
                        $
                        (20,178,354
                        )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Provision
      for doubtful accounts - CODA
                        
                        
                        -
                        
                        
                        
                        60,000Gain
      on put options
                        
                        
                        (1,700,000
                        )
                        
                        
                        -Depreciation
                        
                        
                        14,760
                        
                        
                        
                        14,340Amortization
                        
                        
                        -
                        
                        
                        
                        12,613Amortization
      of deferred financing costs
                        
                        
                        581,538
                        
                        
                        
                        774,869Non-cash
      compensation expense
                        
                        
                        233,278
                        
                        
                        
                        516,153Non-cash
      expense for revaluation of put options
                        
                        
                        150,000
                        
                        
                        
                        1,550,000Non-cash
      interest expense
                        
                        
                        867,980
                        
                        
                        
                        9,763,795Non-cash
      expense (credit) for shares to be issued to Apro Media
                        
                        
                        (62,336
                        )
                        
                        
                        1,052,336Reserve
      on deferred costs of products shipped
                        
                        
                        4,066,646
                        
                        
                        
                        1,349,970Non-cash
      expense for shares and warrants issued for services
                        
                        
                        -
                        
                        
                        
                        536,421Non-cash
      loss on guarantee of debt
                        
                        
                        500,000
                        
                        
                        
                        -Changes
      in assets and liabilities:Accounts
      receivable
                        
                        
                        128,000
                        
                        
                        
                        (188,000
                        )Inventory
                        
                        
                        -
                        
                        
                        
                        (288,170
                        )Cost
      of product shipped to customers for which revenue has not yet been
      recognized
                        
                        
                        -
                        
                        
                        
                        (4,066,646
                        )Other
      current assets
                        
                        
                        -
                        
                        
                        
                        9,250Other
      assets
                        
                        
                        (5,755
                        )
                        
                        
                        (24,304
                        )Accounts
      payable - trade
                        
                        
                        150,921
                        
                        
                        
                        990,092Accrued
      expenses and other liabilities
                        
                        
                        1,737,140
                        
                        
                        
                        1,798,301Net
      cash (used in) operating activities
                        
                        
                        (1,312,834
                        )
                        
                        
                        (6,317,334
                        )INVESTING
      ACTIVITIES:Investment
      in Current Technologies Corporation
                        
                        
                        -
                        
                        
                        
                        (2,000,000
                        )Deposits
      on technology licenses
                        
                        
                        (175,000
                        )
                        
                        
                        -Purchases
      of property and equipment
                        
                        
                        (16,113
                        )
                        
                        
                        (25,733
                        )Net
      cash (used in) investing activities
                        
                        
                        (191,113
                        )
                        
                        
                        (2,025,733
                        )FINANCING
      ACTIVITIES:Proceeds
      from the issuance convertible term notes
                        
                        
                        -
                        
                        
                        
                        2,860,000Proceeds
      from the issuance of Series H Preferred Stock
                        
                        
                        -
                        
                        
                        
                        5,000,000Proceeds
      from convertible promissory notes
                        
                        
                        250,000
                        
                        
                        
                        -Restricted
      Cash proceeds (deposits)
                        
                        
                        1,800,000
                        
                        
                        
                        (1,800,000
                        )Cash
      paid from restricted cash in securities exchange agreement
                        
                        
                        (1,000,000
                        )
                        
                        
                        -Cash
      advances from strategic partners, officers and others
                        
                        
                        304,012
                        
                        
                        
                        200,000Financing
      costs related to Preferred Shares and Put Options
                        
                        
                        -
                        
                        
                        
                        (230,000
                        )Net
      cash provided by financing activities
                        
                        
                        1,354,012
                        
                        
                        
                        6,030,000Net
      decrease in cash and cash equivalents
                        
                        
                        (149,935
                        )
                        
                        
                        (2,313,067
                        )Cash
      and cash equivalents at beginning of year
                        
                        
                        150,624
                        
                        
                        
                        2,463,691Cash
      and cash equivalents at end of year
                        
                        $
                        689
                        
                        
                        $
                        150,624Supplemental
      disclosure of cash paid:Interest
                        
                        $
                        -
                        
                        
                        $
                        20,326Taxes
                        
                        $
                        -
                        
                        
                        $
                        -





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


See Note
19 for further supplemental cash flow information.


36





MSGI
SECURITY SOLUTIONS, INC. AND SUBSIDIARIES




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





1.      LIQUIDITY
AND COMPANY OVERVIEW:





Liquidity and Capital
Resources:





Historically,
the Company has funded its operations, capital expenditures and acquisitions
primarily through private placements of equity and debt. The Company currently
has limited capital resources, has incurred significant historical losses and
has negative cash flows from operations and has minimal current period revenues.
At June 30, 2009, the Company had $689 in cash and no accounts receivable. The
Company believes that funds on hand combined with funds that will be available
from its various operations will not be adequate to finance its operations
requirements and enable the Company to meet its financial obligations and
payments under its convertible notes and promissory notes for the next twelve
months. Certain promissory notes in the amount of $960,000 were due February 28,
2009, $1,500,000 were due March 31, 2009 and $250,000 were due on June 17, 2009.
These notes are technically in default as of the date of this filing, but none
of the lenders have made a claim of default and the Company is in the process of
negotiating extended terms for each of the debt instruments. Other promissory
notes in the amount of $400,000 are due on December 31, 2009. All other
convertible notes are due prior to June 30, 2010; and the Company does not have
the funds to repay such notes.  Further, there is uncertainty as to
timing, volume and profitability of transactions that may arise from our
relationship with Hyundai Syscomm Corp. (Hyundai), Apro Media Corp. (Apro), The
National Aeronautics and Space Administrations (NASA) and others. There can be
no assurance as to the timing of when or if we will receive amounts due to us
for products shipped to customers prior to June 30, 2008, which transactions
have not yet been recognized as revenue.  As of the date of this
filing, the Company has ceased its business relationship with both Hyundai and
Apro and a legal action has been filed in the State of California naming both,
among others, as defendants. There are no assurances that any further capital
raising transactions will be consummated. Although certain transactions have
been successfully closed, failure of our operations to generate sufficient
future cash flow and failure to consummate our strategic transactions or raise
additional financing could have a material adverse effect on the Company's
ability to continue as a going concern and to achieve its business objectives.
These conditions raise substantial doubt about the Company’s ability to continue
as a going concern. If the
Company is unable to raise additional funds, it may be forced to further reduce,
or cease operations, liquidate assets, or renegotiate terms with lenders and
others of which there can be no assurance of success. The
accompanying financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.




Summary
of significant recent financing transactions:





On August
22, 2008, the Company entered into an Exchange Agreement with Enable Growth
Partners, LP (Enable), an existing institutional investor of MSGI and as of that
date, holder of 100% of MSGI’s Series H Convertible Preferred Stock pursuant to
which MSGI retired all outstanding shares of the Series H Preferred, warrants
issued in connection with the preferred stock, exercisable for 5,000,000 shares
of common stock of MSGI and put options exercisable for 5,000,000 shares of
common stock of MSGI. Enable recently acquired the Series H Preferred Stock,
Warrants and Options pursuant to a private transaction with third parties. In
exchange for the retirement and/or redemption of the securities, MSGI issued
Enable an 8% Secured Convertible Debenture due May 21, 2010 in the principal
amount of $4,000,000, a $1,000,000 cash redemption payment and transferred to
Enable warrants to purchase up to, in the aggregate, 20,000,000 shares of the
common stock of Current Technology Corporation. The Redemption Payment was paid
by MSGI from the proceeds of the restricted cash accounts maintained in
connection with the original issuance of the Series H Preferred
Stock.  The balance of the funds held in the restricted cash accounts
of $800,000 was released to MSGI for working capital purposes (See Note
3).





Effective
October 1, 2008, the Company entered into addendum agreements to certain term
notes payable, aggregating $2,860,000, with three out of four lenders, which
terminated all warrants to purchase common stock issued under previous addendum
agreements and, in their place, issued new warrants and additional shares of
common stock. At execution of the addendums, the Company issued 378,000 shares
of common stock and warrants to purchase an additional 378,000 shares of common
stock at a price of $0.50. The Company issued an additional 252,000 shares of
common stock and warrants to purchase an additional 252,000 shares of common
stock, at an exercise price of the greater of $0.50 or market value on the date
of grant, between the date of agreement and December 31, 2008.


37





Effective
January 1, 2009, the Company entered into addendum agreements to certain term
notes payable with certain lenders, which issued new warrants and additional
shares of common stock and revised the maturity date to March 31, 2009. The
Company issued an additional 204,420 shares of common stock and warrants to
purchase an additional 204,420 shares of common stock, at an exercise price of
the greater of $0.50 or market value on the date of grant. Effective February 1,
2009, the Company entered into an addendum to a certain term note payable
with an additional lender which, at execution of the addendum, the Company
issued 400,000 shares of common stock as well as revised the maturity date of
this note to February 28, 2009. As of the date of this filing, the terms of two
out of four of these notes have not been extended beyond the respective maturity
dates stated above. Although the notes are technically in default, none of the
lenders involved have made a claim of default and the Company is currently in
negotiations for further extensions for all of the notes involved.





Effective
April 1, 2009, the Company entered into addendum agreements to certain notes
payable with two lenders, which obligated the Company to issue new warrants and
shares of common stock and revised the maturity dates of the two notes to
December 31, 2009. Further, the addendum resent the exercise price of certain
previously issued warrants to the two lenders from $0.50 to $0.25. For the three
month period ended June 30, 2009, the Company issued an additional 221,195
shares of common stock and warrants to purchase an additional 221,195 shares of
common stock at an exercise price of $0.25.





On March
16, 2009, the Company entered into three convertible promissory notes with
Enable which provided the Company with gross proceeds of $250,000. The notes
bear interest at a rate of 10% annually and are convertible into shares of
common stock of the Company at a conversion rate of $0.25 per share. As an
incentive for Enable to issue these convertible promissory notes, the Company
and Enable entered into a certain warrant exchange agreement whereby Enable has
been granted the right to exchange all warrants held from previous transactions
into 10,000,000 shares of common stock of the Company. The original warrants
carry exercise prices ranging from $0.50 to $2.50 and represent a total of
14,642,852 shares available to purchase (See Note 3).





During
2009 and 2008, the Company received net proceeds of approximately $504,000 and
$0 of advances from officers strategic partners, and others, which have no
stated interest rate or maturity date.





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





Company
Overview:





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





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


38





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





As of the
date of this filing, the Company has announced the formation of two new
subsidiaries under the relationship with NASA:





In August
2009, the Company announced the formation of its first subsidiary for NASA based
technology. The subsidiary, named Nanobeak Inc. (Nanobeak) is a nanotechnology
company focused on carbon based chemical sending for gas and organic vapor
detection. Some potential space and terrestrial applications for this technology
include cabin air monitoring onboard the Space Shuttle and future spacecraft,
surveillance of global weather, forest fire detection and monitoring, radiation
detection and various other critical capabilities. The commercial applications
of these nanotech chemical sensors relate specifically to efforts in Homeland
Security and defense, medical diagnostics and environmental monitoring and
controls. Nanobeak seeks to  offer products in each of these market
sectors beginning in the current fiscal year ending June 30, 2010, but the
timing of these efforts can not be assured. In September 2009, the Company
announced that it is launching its first product derived from the NASA
nanotechnology, a handheld testing and detection device for Diabetes that uses
breath instead of blood. Nanobeak will take the prototype handheld sensor out of
the laboratory and into the marketplace. The Company, through Nanobeak, will
engage in product testing in conjunction with a major hospital network in the
United States, followed by licensing discussions with the top pharmaceutical
companies.





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





As
described in Note 13, the Company had focused its efforts over the past two
years on its relationships with Apro and Hyundai.  The transactions
expected to be realized under agreements with such parties have not materialized
as expected, and the Company has commenced litigation against such
parties.  Accordingly, the various agreements with Hyundai are deemed
by the company to be null and void as of June 30, 2009.





MSGI has
also historically acquired controlling interests in early-stage, early growth
technology and software development businesses. These identified emerging firms
are led by entrepreneurs and management teams that have “bleeding edge”
products, but lack the infrastructure, business relationships and financing that
MSGI can offer. The Company will typically seek to acquire a 51% controlling
interest in the target company for a combination of cash and securities. The
target company generally must agree to a ratchet provision by which the
Company’s stake increases up to another 25% for failure to reach first years
expectations. MSGI generally retains a right of first refusal in the event that
any of the minority parties in the various companies receives an unsolicited
offer for their interests in the business. To the extent these target companies
do not meet MSGI’s continuing expectations; the Company will generally dispose
of its interests in such operations.





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation:





The
consolidated financial statements include the accounts of MSGI and its majority
owned subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation. The Company believes it has only one reporting
segment.


39


Revenue
Recognition:





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





Our
revenues in 2009 were derived from providing consulting services to outside
third parties. There was no deferred revenue as of June 30,
2009.  Revenues for services are recognized upon completion and
acceptance of customer specified services.





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





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





As of
June 30, 2009, the Company has capitalized approximately $5.4 million in product
costs for goods that were shipped to customers during fiscal 2008 but for which
revenue has not yet been recognized in either fiscal 2008 in fiscal 2009. The
Company has also recorded a full reserve against these product costs in the
aggregate amount of approximately $5.4 million, of which $4.1 million was
recorded during the year ended June 30, 2009. This reserve estimates the
potential costs that may be unrecoverable. The Company is currently engaged in
vigorous collection activities regarding the various amounts due which are
related to these costs, which have now been fully reserved. The Company has
filed legal action against various parties involved in the business operations
and anticipates that certain payment will be forthcoming through court action or
potential settlement and that income will be recognized, effectively offsetting
the expense of the reserve, upon receipt of payment.  However, there
can be no assurances that this will occur.





Accounts receivable and allowance
for doubtful accounts:





The
Company extends credit to its customers in the ordinary course of business.
Accounts are reported net of an allowance for uncollectible accounts. Bad debts
are provided on the allowance method based on historical experience and
management’s evaluation of outstanding accounts receivable. In assessing
collectibility, the Company considers factors such as historical collections, a
customer’s credit worthiness, age of the receivable balance both individually
and in the aggregate, and general economic conditions that may affect a
customer’s ability to pay. The Company does not require collateral from
customers nor are customers required to make up-front payments for goods and
services. At June 30, 2009 and 2008, the Company has an allowance for doubtful
accounts of $60,000 for accounts receivable from CODA (see Note
13).





Deferred Financing and other
debt-related Costs:





Deferred
financing costs are amortized over the term of its associated debt instrument.
The Company evaluates the terms of the debt instruments to determine if any
embedded derivatives or beneficial conversion features exist. The Company
allocates the aggregate proceeds of the notes payable between the warrants and
the notes based on their relative fair values in accordance with Accounting
Principle Board No. 14 (APB 14), “Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants.” The fair value of the warrants issued to
note holders or placement agents are calculated utilizing the Black-Scholes
option-pricing model. The Company is amortizing the resultant discount or other
features over the term of the notes through its earliest maturity date using the
effective interest method. Under this method, the interest expense recognized
each period will increase significantly as the instrument approaches its
maturity date. If the maturity of the debt is accelerated because of defaults or
conversions, then the amortization is accelerated. The Company’s debt
instruments do not contain any embedded derivatives at June 30, 2009 and
2008.


40





Property
and Equipment:




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




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





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





Investments in non-consolidated
companies:





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





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





Long-Lived
Assets:




In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, the Company reviews for impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable.  In general, the Company will recognize impairment when
the sum of undiscounted future cash flows (without interest charges) is less
than the carrying amount of such assets.  The measurement for such
impairment loss is based on the fair value of the asset. Such assets are
amortized over their estimated useful life.





Research
and Development Costs:





The
Company recognizes research and development costs associated with certain
product development activities. The Company recorded expenses of $88,200 during
the year ended June 30, 2008 for costs associated with development of RFID
technologies. No such costs were incurred during the year ended June 30,
2009.





Cost of Revenue / Product
Sold:





Costs of
goods sold are primarily the expenses related to acquiring, testing and
assembling the components required to provide the specific technology
applications ordered by each individual customer. In addition, reserves against
costs of product shipped to customers for which revenue has not been recognized
are also included in these expenses.


41


Income Taxes:





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





On July
1, 2007, the Company adopted the provisions of Financial Standards Accounting
Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS 109” (FIN 48). FIN 48 provides recognition criteria and a
related measurement model for uncertain tax positions taken or expected to be
taken in income tax returns. FIN 48 requires that a position taken or expected
to be taken in a tax return be recognized in the financial statements when it is
more likely than not that the position would be sustained upon examination by
tax authorities. Tax positions that meet the more likely than not threshold are
then measured using a probability weighted approach recognizing the largest
amount of tax benefit that is greater than 50% likely of being realized upon
ultimate settlement. There is no liability related to unrecognized tax benefits
at June 30, 2009 and 2008.





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





Use
of Estimates:




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





Concentration
of Credit Risk:





Major
Customers


The
Company’s services are currently provided to one client located in the
continental United States. Three customers accounted for 86% of revenues for the
year ended June 30, 2008, of which none were in accounts receivable at June 30,
2008. During the year ended June 30, 2009, the Company provided consulting
services to one client and all revenues recognized during the year were derived
from this one client. Further, our relationship with Apro Media and Hyundai is
considered to be terminated at this time, and the new relationship with NASA is
considered to be critical to the Company’s ongoing business
activities.





Major
Supplier


The
Company purchased 100% of its products from one supplier for the year ended June
30, 2008.  This supplier relationship was obtained in connection with
our Apro sub-contract.  While this supplier was important to the
Company’s operations under the sub-contract agreement with Apro, it is not
expected that we will have significant ongoing transactions with such vendor. No
products were purchased during the year ended June 30, 2009.





Cash
concentration


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





Earnings
(Loss) Per Share:





In
accordance with SFAS No. 128, “Earnings Per Share,” basic earnings (loss) per
share is calculated based on the weighted average number of shares of common
stock outstanding during the reporting period. Diluted earnings (loss) per share
gives effect to all potentially dilutive common shares that were outstanding
during the reporting period; however such potentially dilutive common shares are
excluded from the calculation of earnings (loss) per share if their effect would
be anti-dilutive. In addition, stock options and warrants with exercise prices
above average market price in the amount of 21,750,079 and 13,695,873 shares for
the periods ended June 30, 2009 and 2008, respectively, were not included in the
computation of diluted loss per share as they are anti-dilutive. Stock options
and warrants with exercise prices below average market price in the amount of
8,027,569 for the period ended June 30, 2008 were not included in the
computation of diluted loss per share as they are anti-dilutive as a result of
net losses during the period presented.  There were no stock options
or warrants with exercise prices below average market price as of June 30,
2009.


42


Summary of Recent Accounting
Pronouncements





In June
2009, the Financial Accounting Standards Board (FASB), issued SFAS No. 168, "The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles-a replacement of FASB Statement No. 162".  SFAS
No. 168 establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. This SFAS is effective for the Company's
interim reporting period ending on September 30, 2009, and is not expected to
have a material impact on the Company's consolidated financial
statements.





In May
2009, the FASB issued SFAS No. 165, "Subsequent Events".  SFAS 165
establishes general standards for accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued and was effective for interim and annual periods ending
after June 15, 2009. The adoption of SFAS No. 165 did not have an impact on the
Company's consolidated financial statements.  The Company evaluated
all subsequent events that occurred from July 1, 2009 through October 13, 2009,
and disclosed all material subsequent events in Note 20.





In April
2009, FASB issued FSP SFAS No. 157-4, "Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly".  FSP SFAS No.
157-4 provides guidelines for making fair value measurements more consistent
with the principles presented in SFAS No. 157, Fair Value Measurements. The FSP
relates to determining fair values when there is no active market or where the
price inputs being used represent distressed sales. It reaffirms what SFAS No.
157 states is the objective of fair value measurement-to reflect how much an
asset would be sold for in an orderly transaction (as opposed to a distressed or
forced transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if
a formerly active market has become inactive and in determining fair values when
markets have become inactive. The FSP is effective for the Company's annual
reporting for the fiscal year ended on June 30, 2009. The implementation of FSP
SFAS No. 157-4 did not materially impact the Company's consolidated financial
statements.





In April
2009, FASB issued FSP SFAS No. 107-1 and APB 28-1, "Interim Disclosures about
Fair Value of Financial Instruments". FSP SFAS No. 107-1 and APB 28-1 enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures. The FSP relates to fair value disclosures for any financial
instruments that are not currently reflected a company's balance sheet at fair
value. Prior to the effective date of this FSP, fair values for these assets and
liabilities have only been disclosed once a year. The FSP will now require these
disclosures on a quarterly basis, providing qualitative and quantitative
information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value. The disclosure requirement under
this FSP is effective for the Company's interim reporting period ending on
September 30, 2009.





In
October 2008, the FASB issued FASB Staff Position SFAS No. 157-3, "Determining
the Fair Value of a Financial Asset When the Market for That Asset is Not
Active". FSP SFAS No. 157-3 clarifies the application of SFAS No. 157, which the
Company adopted with respect to financial assets and liabilities as of July 1,
2008. The Company will adopt SFAS No. 157 for its non-financial assets and
liabilities beginning July 1, 2009. The Company has considered the guidance
provided by FSP SFAS No. 157-3 in its determination of estimated fair values,
and the impact was not material.


43


In June
2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock" (EITF 07-5).
Equity-linked instruments (or embedded features) that otherwise meet the
definition of a derivative as outlined in SFAS No. 133, " Accounting for
Derivative Instruments and Hedging Activities, " are not accounted for as
derivatives if certain criteria are met, one of which is that the instrument (or
embedded feature) must be indexed to the entity's stock. EITF 07-5 provides
guidance on determining if equity-linked instruments (or embedded features) such
as warrants to purchase our stock are considered indexed to our stock. EITF 07-5
is effective for the Company in its fiscal year beginning July 1, 2009 and will
be applied to outstanding instruments as of that date. Upon adoption, a
cumulative effect adjustment will be recorded, if necessary, based on amounts
that would have been recognized if this guidance had been applied from the
issuance date of the affected instruments. Initial adoption of EITF 07-5 is not
expected to materially impact the Company's financial
statements.  However, future movements of our stock price alone could
materially affect both our results of operations and financial position in the
future. Substantial movements in our stock price could result in material
volatility in our results of operations and financial position as under this
pronouncement we could be required to report obligations and expense in our
financial statements that will never be settled in cash.





In May
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).
" FSP APB 14-1 clarifies that convertible debt instruments that may be settled
in cash upon either mandatory or optional conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "
Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. "
Additionally, FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP APB 14-1 is effective for the Company in
its fiscal year beginning July 1, 2009, and must be applied on a retrospective
basis. Adoption of the guidance provided by FSP APB 14-1 is not expected to
materially impact the Company's consolidated financial statements.





In April
2008, the FASB adopted FSP SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets, amending the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets . This FSP is effective for intangible assets acquired on or after July
1, 2009. This SFAS is not expected to have a material impact on the Company's
consolidated financial position, results of operations and cash
flows.





In
February 2008, the FASB adopted FSP SFAS No. 157-2, Effective Date of FASB
Statement No. 157,delaying the effective date of SFAS No. 157 for one year for
all non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The Company is currently evaluating the impact of the
implementation of the deferred portion of SFAS No. 157 on its consolidated
financial statements.





3.  SECURITIES
EXCHANGE TRANSACTIONS





On August
22, 2008, the Company entered into a Securities Exchange Agreement with Enable
Growth Partners, LP (Enable), an existing institutional investor of MSGI and as
of that date, holder of 100% of MSGI’s Series H Convertible Preferred Stock
pursuant to which MSGI retired all outstanding shares of the Series H Preferred
Stock, 5,000,000 warrants issued in connection with the preferred stock,
exercisable for shares of common stock of MSGI and put options exercisable for
5,000,000 shares of Common Stock, which had a fair value of $6,700,000 on August
22, 2008. In exchange for the retirement and/or redemption of the above
securities, MSGI issued Enable an 8% Secured Convertible Debenture (the 8%
Debentures) due May 21, 2010 in the principal amount of $4,000,000 (see Note 6),
a $1,000,000 cash redemption payment and transferred to Enable warrants to
purchase up to, in the aggregate, 20,000,000 shares of the common stock of
Current Technology Corporation. The redemption payment was paid by MSGI from the
proceeds of the restricted cash accounts maintained in connection with the
original issuance of the Series H Preferred Stock. The balance of the funds held
in the restricted cash accounts of $800,000 was released to MSGI for working
capital purposes. In connection with the Securities Exchange Agreement and the
Debenture, MSGI and its subsidiaries entered into a Security Agreement and a
Subsidiary Guarantee Agreement, whereby MSGI and the subsidiaries granted Enable
a first priority security interest in certain property of MSGI and each of the
Subsidiaries.  The net effect of this transaction resulted in a gain
of $1,700,000, recognized during the year ended June 30, 2009.





On March
16, 2009, the Company entered into a Warrant Exchange Agreement with Enable.
Under this agreement Enable has been granted the right to exchange all warrants
held into 10,000,000 shares of common stock of the Company, provided, however,
that at no time shall any Holder beneficially own more than the Beneficial
Ownership Limitation of 9.99% of the Common Stock issued and outstanding from
time to time. The original warrants carry exercise prices ranging from $0.50 to
$2.50 and represent a total of 14,642,852 shares available to purchase. A
non-cash interest expense of approximately $700,000 representing the fair market
value of the committed shares has been recognized, and a corresponding accrued
liability has been booked by the Company, as of March 31, 2009. This accrued
liability will be adjusted to market value at the end of each reporting period.
500,000 shares of common stock have been issued under this exchange agreement as
of June 30, 2009. As of June 30, 2009, 9,500,000 shares remain to be issued
under the Warrant Exchange Agreement. A liability of $285,000 has been booked by
the Company to recognize the fair value of these shares at a market price of
$0.03 per share at June 30, 2009.


44


4.
DEPOSITS ON TECHNOLOGY LICENSES





During
the twelve month period ended June 30, 2009, the Company expended $175,000 as
non-refundable deposits with a NASA for the rights to license technologies from
the agency. On August 10, 2009, the Company announced that it had entered into a
long-term relationship with NASA and intends to bring such technologies to
commercial markets. The Company will be required to reimburse certain estimated
costs to be incurred by NASA in further development of these
technologies.





5.
INVESTMENTS





Current Technology
Corporation


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





The
Company currently has a $1.5 million investment in Current Technology
Corporation, a corporation formed under the laws of the Canada Business
Corporation Act. The Company owns 15 million shares of the common stock of
Current Technology, which represents approximately 9.5% ownership of its
outstanding common stock. The Company recorded the investment on a cost method
of accounting.




Pursuant
to the original share purchase transaction, the Company held warrants to
purchase 20,000,000 additional shares of common stock of Current Technology
Corporation with an exercise price of $0.15 per share.  In August
2008, MSGI entered into a Securities Exchange Agreement with holders of the
Company’s Series H Preferred stock and other instruments.  In
connection with this exchange, the warrants to purchase 20,000,000 additional
shares of common stock of Current Technology were assigned to the parties to
this agreement  (See Note 3).





Pursuant
to a junior guarantee provided by the Company under a certain bridge loan
agreement, which was entered into by Mr. J. Jeremy Barbera, Chief Executive
Officer and Chairman of MSGI (see Note 16), the Company surrendered 5,000,000
shares of common stock of it’s holdings in Current Technology Corporation at a
carrying value of $500,000. The Company has no further guarantee obligations
under the bridge loan agreement.





In
addition, as part of this investment transaction, Current Technology is to
outsource 25% of its business to MSGI through Celevoke, Inc. (an entity in which
Current Technology holds a 59% ownership interest).  No such
transactions between MSGI and Celevoke have occurred during the year ended June
30, 2009 or to date.





6. 8%
CALLABLE CONVERTIBLE NOTES PAYABLE





The 8%
Callable Convertible Notes Payable consist of the following as of June 30,
2009:


45





Instrument
                            
                            Maturity
                            
                            FaceAmount
                            
                            
                            Discount
                            
                            
                            CarryingAmountat
                              June30,2009
                              netofdiscount
                            
                            
                            Carrying
                              AmountatJune
                              30,2008,netof
                              discount8%
      Debentures
                            
                            May
      21, 2010
                            
                            $
                            4,000,000
                            
                            
                            $
                            3,980,109
                            
                            
                            $
                            19,891
                            
                            
                            $
                            628%
      Notes
                            
                            May
      21, 2010
                            
                            
                            4,000,000
                            
                            
                            
                            —
                            
                            
                            
                            4,000,000
                            
                            
                            
                            —Total
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            4,019,891
                            
                            
                            $
                            62





8% Notes


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





The 8%
Notes have a maturity date of May 21, 2010 and accrue interest at a rate of 8%
per annum. Per the Notes, interest is payable on a quarterly basis, beginning in
October 2008.  The investors can convert the principal amount of the
8% Notes into common stock of the Company, provided certain conditions are met,
and each conversion is subject to certain volume limitations. The conversion
price of the 8% Notes is currently at $0.25.





Total
interest expense for the fiscal year ended June 30, 2009 in connection with this
note was approximately $274,000.





8%
Debentures


On May
21, 2007, MSGI entered into a private placement with several institutional
investors and issued 8% convertible debentures in the aggregate principal amount
of $5,000,000 (the 8% Debentures), of which $4,000,000 is currently outstanding
with the remaining principal balance having been converted into shares of common
stock during fiscal 2008. There were no conversions during the fiscal year ended
June 30, 2009.





The 8%
Debentures have a maturity date of May 21, 2010 and accrue interest at a rate of
8% per annum. Payments of principal and interest under the Debentures are not
due until the maturity date.  The investors can convert the principal
amount of the 8% Debentures into common stock of the Company, provided certain
conditions are met, and each conversion is subject to certain volume
limitations. The conversion price of the 8% Debentures is currently at
$0.25.





In
connection with this debt, the note holders have warrants for the purchase of up
to 7,142,852 shares of common stock, exercisable over a five-year period at an
exercise price of $0.50.  These warrants could be exchanged by the
holder for shares of common stock of the Company per the Warrant Exchange
Agreement dated March 16, 2009 (see Note 3). The shares will be issued to the
holders of the exchanged warrants over time.





The
Company allocated the aggregate proceeds of the 8% Debentures between the
warrants and the Debentures based on their fair value and calculated a
beneficial conversion feature and warrant discount in an amount in excess of the
$5 million in proceeds received.  Therefore, the total discount was
limited to $5 million.    The discount on the Debentures was
allocated from the gross proceeds and recorded as additional paid-in
capital.  The discount is being amortized to interest expense over the
three-year maturity date. Should the 8% Debentures be converted or paid prior to
the payment terms, the amortization of the discount will be
accelerated.   On March 16, 2009, the Company entered into
certain convertible promissory notes, which effected the anti-dilution provision
of these Debentures. The conversion price of the Debentures was reduced from
$0.50 to $0.25. No additional beneficial conversion expense was recorded related
to the conversion price change due to the immaterial effect of this adjustment
to the financial results of the Company as of June 30, 2009.




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





Total
interest expense, including debt discount amortization, for the years ended June
30, 2009 and 2008 in connection with this note was approximately $594,000
and$1,825,800, respectively.


46





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





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





7.   6%
CALLABLE CONVERTIBLE NOTES PAYABLE




The 6%
Callable Convertible Notes Payable consist of the following as of June 30,
2009:





Instrument
                            
                            Maturity
                            
                            Face Amount
                            
                            
                            Discount
                            
                            
                            Carrying
                              Amount atJune
                              30,2009,
                              net of discount
                            
                            
                            CarryingAmount
                              at June30, 2008,
                              net of discount6%
      Notes
                            
                            December
      13, 2009
                            
                            $
                            1,000,000
                            
                            
                            $
                            954,060
                            
                            
                            $
                            45,940
                            
                            
                            $
                            1006%
      April Notes
                            
                            April
      5, 2010
                            
                            
                            1,000,000
                            
                            
                            
                            988,370
                            
                            
                            
                            11,630
                            
                            
                            
                            55Total
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            57,570
                            
                            
                            $
                            155





6% December
Notes


On
December 13, 2006, pursuant to a Securities Purchase Agreement between the
Company and several institutional investors, MSGI issued $2,000,000 aggregate
principal amount of Callable Secured Convertible Notes (the 6% Notes) and stock
purchase warrants exercisable for 3,000,000 shares of common stock in a private
placement for an aggregate offering price of $2,000,000, of which $1,000,000 is
currently outstanding with the remaining principal balance having been converted
into shares of common stock during fiscal 2008.  There were no
conversions during the year ended June 30, 2009.





The 6%
Notes have a single balloon payment of $1,000,000 due on the maturity date of
December 13, 2009 and will accrue interest at a rate of 6% per
annum.  The Investors can convert the principal amount of the 6% Notes
into common stock of the Company, provided certain conditions are met, and each
conversion is subject to certain volume limitations.  The conversion
price of the 6% Notes is currently at $0.25.  The payment obligations
under the Notes accelerate if payments under the Notes are not made when due or
upon the occurrence of other defaults described in the Notes.  The
warrants are exercisable through December 2013.  The exercise price of
the warrants is $0.50 per share. These warrants could be exchanged by the holder
for shares of common stock of the company per the Warrant Exchange Agreement
dated March 16, 2009 (see Note 3). The shares will be issued to the holders of
the exchanged warrants over time.





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





The
Company allocated the aggregate proceeds of the 6% Notes between the warrants
and the Notes based on their fair values and calculated a beneficial conversion
feature and warrant discount in an amount in excess of the $1 million in
proceeds received. Therefore, the total discount was limited to $1 million. The
Company is amortizing this discount over the remaining term of the 6% Notes
through December 2009. Should the 6% Notes be converted or paid prior to the
payment terms, the amortization of the discount will be accelerated. On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these Notes. The conversion price of the
Notes was reduced from $0.50 to $0.25. No additional beneficial conversion
expense was recorded related to the conversion price change due to the
immaterial effect of this adjustment to the financial results of the Company as
of June 30, 2009.


47


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





As a
result of the conversion transaction of the Callable Secured Convertible 8%
Notes above and the 6% Notes converted, anti-dilution provisions of the
remaining 6% Notes were triggered. The conversion price of the remaining 6%
Notes was reduced from the variable conversion rate noted above to a fixed rate
of $0.50. As a result, the Company recognized an additional beneficial
conversion discount of approximately $263,900 which was recorded as a discount
to the note and allocated to additional paid in capital.  This
additional discount will be amortized over the remaining term of the
note.





Interest
expense, including the accelerated discount, was $166,307
and  $978,026 for the years ended June 30, 2009 and 2008,
respectively.





6% April
Notes


On April
5, 2007, pursuant to a Securities Purchase Agreement between the Company and
several institutional investors, MSGI issued $1.0 million aggregate principal
amount of Callable Secured Convertible Notes (the 6% April Notes) and stock
purchase warrants exercisable for 1,500,000 shares of common stock in a private
placement for an aggregate offering price of $1.0 million. The 6% April Notes
have a single balloon payment of $1.0 million due on the maturity date of April
4, 2010 and will accrue interest at a rate of 6% per annum.  The
Investors can convert the principal amount of the 6% April Notes into common
stock of the Company, provided certain conditions are met, and each conversion
is subject to certain volume limitations.  The warrants have an
exercise price of $1.00 and are exercisable for a term of 7 years. These
warrants can be exchanged by the holder for shares of common stock of the
company per the Warrant Exchange Agreement dated March 16, 2009 (see Note 3).
The shares will be issued to the holders of the exchanged warrants over
time.





As a
result of a conversion transaction of the Callable Secured Convertible 8% Notes
and the 6% Notes converted above, anti-dilution provisions of the April 6% Notes
were triggered. The conversion price of the April 6% Notes was reduced from a
variable conversion rate noted above to a fixed rate of $0.50. As a result, the
Company recognized an additional beneficial conversion discount of approximately
$166,700, which was recorded as a discount to the note and allocated to
additional paid in capital. This additional discount will be amortized over the
remaining term of the note.





The
Company allocated the aggregate proceeds of the 6% April Notes between the
warrants and the Notes based on their fair values and calculated a beneficial
conversion feature and warrant discount in an amount in excess of the $1 million
in proceeds received.  Therefore, the total discount was limited to $1
million.  The Company is amortizing this discount to interest expense
over the remaining term of the 6% April Notes through April
2010.  Should the 6% April Notes be converted or paid prior to the
payment terms, the amortization of the discount will be accelerated. On March
16, 2009, the Company entered into certain convertible promissory notes, which
effected the anti-dilution provision of these April Notes. The conversion price
of the April Notes was reduced from $0.50 to $0.25. No additional beneficial
conversion expense was recorded related to the conversion price change due to
the apparent immaterial effect of this adjustment to the financial results of
the Company as of June 30, 2009.





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


48





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





Total
interest expense, including debt discount amortization, for the years ended June
30, 2009 and 2008 in connection with this note was approximately $123,907
and $143,553, respectively.





8.  OTHER
NOTES PAYABLE AND ADVANCES





Other
Notes Payable consists of the following as of June 30, 2009:





Instrument
                    
                    Maturity
                    
                    Face Amount
                    
                    
                    Discount
                    
                    
                    Carrying Amount at
                      June 30, 2009, net of
                      discount
                    
                    
                    Carrying
                      Amount at June
                      30, 2008,
                      net of discountConvertible
      Term Notes – short term
                    
                    February
      28, 2009
                    
                    $
                    960,000
                    
                    
                    $
                    -
                    
                    
                    $
                    960,000
                    
                    
                    $
                    960,000Convertible
      Term Notes – short term
                    
                    March
      31, 2009
                    
                    
                    1,500,000
                    
                    
                    
                    -
                    
                    
                    
                    1,500,000
                    
                    
                    
                    1,500,000Convertible
      Term Notes – short term
                    
                    December
      31, 2009
                    
                    
                    400,000
                    
                    
                    
                    -
                    
                    
                    
                    400,000
                    
                    
                    
                    400,00010%
      Convertible Term Notes – short term
                    
                    June
      17, 2009
                    
                    
                    250,000
                    
                    
                    
                    -
                    
                    
                    
                    250,000
                    
                    
                    
                    -Total
                    
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    $
                    3,110,000
                    
                    
                    $
                    2,860,000




Convertible Term Notes
payable


On
December 13, 2007, the Company entered into four short-term notes with private
institutional lenders. These promissory notes provided proceeds totaling $2.86
million to the Company. The proceeds of these notes were used to purchase
inventory. The notes carry a variable rate of interest based on the prime rate
plus two percent. These notes had an original maturity date of April 15, 2008.
These notes were not repaid on this date and the terms were amended at several
different dates to extend them to maturity dates of February 28, 2009, March 31,
2009, and December 31, 2009. While two of the notes payable are technically in
default at this time, neither of the lenders have claimed default on the notes
and the Company is presently in discussions with these lenders regarding
extended terms for these notes payable. There are no guarantees that the Company
will successfully execute the proposed addendum extensions with the two
lenders.





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





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


49


In
addition, the terms of certain of the Amendments to the Loan Agreements called
for the Company to issue five-year warrants to purchase shares of common stock
of the Company to certain group lenders each week beginning May 1, 2008 and
continuing for each week that the principal balance of the term notes remains
outstanding. These warrants are to be issued with an exercise price set at the
greater of market value on the date of issuance or $0.50 per
share.  As of June 30, 2008, a total of 284,717 warrants were issued
to the note holders, 33,218 warrants with an exercise price at $0.60 per share
and the remaining at an exercise price of $0.50 per share.  These
warrants were subsequently cancelled with the October 2008 addendum and replaced
with other warrants and stock issued.  In addition, there were 520,000
shares of common stock issued in fiscal 2008 in connection with these
addendums.





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





Effective
October 1, 2008, the Company entered into additional addendum agreements with
three out of four lenders with regard to their respectively held Notes, which
terminated all warrants to purchase common stock issued under previous addendum
agreements, which aggregated 1,000,000 warrants issued under those previous
addendum agreements, and, in their place, issued new warrants and additional
shares of common stock. At execution of the addendums, the Company issued
378,000 shares of common stock and warrants to purchase an additional 378,000
shares of common stock at an exercise price of $0.50. The Company issued an
additional 252,000 shares of common stock and warrants to purchase an additional
252,000 shares of common stock, at an exercise price of $0.50, between the date
of the agreement and December 31, 2008.





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





The net
effect of all of the addendums to these term notes during the year ended June
30, 2009, was the issuance of 1,055,615 warrants at an exercise price ranging
from $0.25 to $0.50 and 1,984,186 shares of common stock.  The stock
was determined to have a fair value of $420,749 for the year ended June 30,
2009, based upon the fair market value of the common stock on each date
issued.  The warrants were determined to have a value of $44,987 per
SE, which includes an offset of the value of the cancelled warrants previously
recorded. The warrants were fair valued, at each warrant issuance, using the
Black-Scholes model.  The warrant and stock values were recorded as
additional interest expense on the note during the year ended June 30,
2009.





The
following assumptions were used in the Black-Scholes model for the warrants for
the year ended June 30, 2009:





Expected
      term (years)
              3Dividend
      yield
              0%Expected
      volatility
              143%
      - 213%Risk-Free
      interest rate
              0.98-2.12%Weighted
      average fair value
              $0.18




Expected
volatility is based solely on historical volatility of our common stock over the
period commensurate with the expected term of the stock options. We rely solely
on historical volatility because our traded options do not have sufficient
trading activity to allow us to incorporate the mean historical implied
volatility from traded options into our estimate of future volatility. The
expected term calculation for stock options is based on the “simplified” method
described in Staff Accounting Bulletin No. 107, Share−Based Payment. The
risk−free interest rate is based on the U.S. Treasury yield in effect at the
time of grant for an instrument with a maturity that is commensurate with the
expected term of the stock options. The dividend yield of zero is based on the
fact that we have never paid cash dividends on our common stock, and we have no
present intention to pay cash dividends.


50




10% Convertible Term Notes
payable





On March
16, 2009, the Company entered into three convertible promissory notes with
Enable which provided the Company with gross proceeds of $250,000. The notes
bear interest at a rate of 10% annually and are convertible into shares of
common stock of the Company at a conversion rate of $0.25 per share. Total
interest expense was approximately $7,000 for the year ended June 30,
2009.  The notes had a maturity date of June 17, 2009.  As
an inducement to Enable to enter into the Convertible Term Notes, the Company
entered into a Warrant Exchange Agreement with Enable (see Note 3). The
remaining terms of the 10% notes carry the same provisions as the 8% Debentures
in Note 6. While the notes are technically in default at June 30, 2009, the
lender has made no claim of default and the Company is currently in negotiations
with the lender for an extension to the terms of the notes. There can be no
assurance that the Company will be successful in securing the
extensions.





Advances


During
the year ended June 30, 2008, the Company received funding in the amount of
$200,000 from Apro Media. These funds were advanced to the Company against
expected collections of accounts receivable generated under the Apro
sub-contract agreement. During the year ended June 30, 2009, the Company
received an additional $6,950 from Apro Media, bringing the aggregate to
$206,950. There is no interest expense associated with this advanced funding and
this is to be repaid to Apro upon collection of the related accounts receivable,
which has not yet occurred.





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





During
the year ended June 30, 2009, the Company received net funding in the amount of
approximately $167,000 from a certain corporate officer (see Note 16). There is
no interest expense associated with this advanced funding and this is to be
repaid upon collection of the Apro Media related accounts receivable, which has
not yet occurred.





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





9. COMMON
STOCK, STOCK OPTIONS AND WARRANTS





Common
Stock Transactions:





During
the fiscal year ended June 30, 2009, the Company issued 2,584,186 shares of
common stock. Of these shares, 100,000 were issued to a certain corporate
officer under an award granted to the officer by the Board of Directors in May
2007 resulting in an expense of $63,000 based upon the fair value of the stock
on the date of issuance, 500,000 shares were issued to a certain lender under a
Warrant Exchange Agreement (see Note 3). The remaining 1,984,186 shares were
issued to various lenders in connection with addendum to the December 2007
convertible terms notes.





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





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





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


51





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





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





Per the
terms of the sub-contract agreement with Apro, the Company is to compensate Apro
with 3,000,000 shares of the Company’s common stock when the sub-contract
transactions result in $10.0 million of GAAP recognized revenue for the Company.
During the year ended June 30, 2008 the Company recognized approximately $3.8
million in revenues resulting from activities under the sub-contract agreement.
In December 2007, the Company issued 1,000,000 shares of common stock to Apro
for that agreement. The Company computed a fair value for a pro rata share of
the remaining shares to be issued under that agreement, which was $62,336 at
June 30, 2008 and reflected as a liability.  The total expense for the
year ended June 30, 2008 related to shares both issued and issuable to Apro was
$1,052,336.  The Company has subsequently named Apro as a defendant in
a legal action taken in the State of California and currently views any and all
contracts and agreements with Apro in breach.  Based on this, the
62,336 accrued as of June 30, 2008 has been reversed out during fiscal 2009, as
the Company does not anticipate doing further business with Apro, and therefore
the remaining shares will never be earned by Apro.





Stock
Options:





The
Company maintains a qualified stock option plan (the 1999 Plan) for the issuance
of up to 1,125,120 shares of common stock under qualified and non-qualified
stock options.  The 1999 Plan is administered by the compensation
committee of the Board of Directors which has the authority to determine which
officers and key employees of the Company will be granted options, the option
price and vesting of the options.  In no event shall an option expire
more than ten years after the date of grant.





The
Company accounts for employee stock-based compensation under SFAS 123R,
“Share-Based Payment”, which requires all share−based payments to employees,
including grants of employee stock options, to be recognized in the financial
statement at their fair values.  The expense is being recognized on a
straight−line basis over the vesting period of the options. The Company did not
record a tax benefit related to the share−based compensation expense since the
Company has a full valuation allowance against deferred tax assets.





The stock
based compensation expense related to stock options for the years ended June 30,
2009 and 2008 was approximately $221,000 and $486,000, respectively. The
non-cash compensation expense is included in salaries and benefits as a
component of operating costs on the consolidated statements of
operations.  As of June 30, 2009, non-vested compensation cost that
has not yet been recognized was approximately $5,000, which will be recognized
during the fiscal year ending June 30, 2010.




The fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model. There were no stock option grants during the
fiscal years ended June 30, 2009 or 2008.





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





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


52





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





In
addition to the 1999 Plan, the Company has option agreements with current
directors of the Company. The following summarizes stock options outstanding as
of June 30, 2009.  There were no transactions for the two years ended
June 30, 2009:




Number
                      
                      
                      Exercise
      Price
                      
                      
                      Weighted
      Averageof
      Shares
                      
                      
                      Per
      Share
                      
                      
                      Exercise
      PriceOutstanding
      at June 30, 2007, 2008 and 2009
                      
                      
                      40,000
                      
                      
                      $
                      1.50
      to $4.13
                      
                      
                      $
                      2.81




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





As of
June 30, 2009, 1,016,666 options are exercisable, with no aggregate intrinsic
value and a weighted average contractual life of 6.1 years.  The
weighted average exercise price of all outstanding options is $1.98 and the
weighted average remaining contractual life is 6.1 years. At June 30, 2009,
140,122 options were available for grant.





Warrants:





The
following summarizes the warrant transactions for the two years ended June 30,
2009:





Number
                          
                          
                          Exerciseof Shares
                          
                          
                          PriceOutstanding
      at June 30, 2007
                          
                          
                          9,386,586
                          
                          
                          $
                          1.00 to $8.25Granted
                          
                          
                          11,341,856
                          
                          
                          $
                          0.50
      to $2.50Exercised
                          
                          
                          -Cancelled
      / Expired
                          
                          
                          (30,000
                          )
                          
                          $
                          6.00Outstanding
      at June 30, 2008
                          
                          
                          20,698,442
                          
                          
                          $
                          0.50 to $8.25Granted
                          
                          
                          1,770,898
                          
                          
                          $
                          0.25
      to $0.50Exercised
      / Exchanged
                          
                          
                          (732,066
                          )
                          
                          $
                          1.00Cancelled
      / Expired
                          
                          
                          (1,012,195
                          )
                          
                          $
                          0.50
      to $7.50Outstanding
      at June 30, 2009
                          
                          
                          20,725,079
                          
                          
                          $
                          0.25 to $8.25





All
warrants are currently exercisable.





As of
June 30, 2009, the Company has 20,725,079 of warrants outstanding for the
purchase shares of common stock at prices ranging from $0.25 to $8.25, all of
which are currently exercisable. The major transactions involving the warrants
for the current period are below:





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





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


53





On March
16, 2009, the Company entered into a Warrant Exchange Agreement with Enable.
Under this agreement Enable has been granted the right to exchange all warrants
held into 10,000,000 shares of common stock of the Company, provided, however,
that at no time shall any Holder beneficially own more than the Beneficial
Ownership Limitation of 9.99% of the Common Stock issued and outstanding from
time to time. The original warrants carry exercise prices ranging from $0.50 to
$2.50 and represent a total of 14,642,852 shares available to purchase. A
non-cash interest expense of approximately $700,000 representing the fair market
value of the committed shares has been recognized, and a corresponding accrued
liability has been booked by the Company, as of March 31, 2009. This accrued
liability will be adjusted to market value at the end of each reporting period
and was $285,000 at June 30, 2009. The Company issued 500,000 shares of common
stock under the Warrant Exchange Agreement during the year ended June 30, 2009.
This issuance of shares resulted in an exchange of approximately 732,000 of the
14,642,852 outstanding warrants. As of June 30, 2009 $285,000 remains accrued in
the accompanying consolidated balance sheet, representing the remaining
9,500,000 shares of common stock to be issued under this agreement.





10.
INTANGIBLE ASSETS:




In
connection with the acquisition of Innalogic, intangible assets related to
unpatented technologies totaling $287,288 were acquired and was amortized over
the period of expected benefit of five years. As of June 30, 2009 and 2008, the
asset was fully amortized.





Amortization
expense recorded for each of the years ended June 30, 2009 and 2008 was
approximately $0.00 and  $13,000, respectively.





11.  PROPERTY
AND EQUIPMENT:




Property
and equipment at June 30, consist of:


2009
                    
                    
                    2008Machinery,
      equipment and furniture
                    
                    $
                    86,794
                    
                    
                    $
                    70,681Less:
      accumulated depreciation
                    
                    
                    (54,495
                    )
                    
                    
                    (39,735
                    )Property
      and equipment, net
                    
                    $
                    32,299
                    
                    
                    $
                    30,946





Depreciation
expense was approximately $15,000 and $14,000 for the years ended June 30, 2009
and 2008, respectively.





12.   ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES:





Accrued
expenses as of June 30, 2009 and 2008 consist of the
following:





2009
                    
                    
                    2008Salaries
      and benefits
                    
                    $
                    397,558
                    
                    
                    $
                    136,487Payroll
      taxes and penalties
                    
                    
                    1,489,450
                    
                    
                    
                    1,341,746Fair
      value of shares to be issued to Apro
                    
                    
                    -
                    
                    
                    
                    62,336Warrant
      exchange liability (see Note 3)
                    
                    
                    285,000
                    
                    
                    
                    -Audit
      and tax preparation fees
                    
                    
                    214,755
                    
                    
                    
                    280,352Interest
                    
                    
                    1,953,706
                    
                    
                    
                    716,857Taxes
                    
                    
                    42,907
                    
                    
                    
                    32,907Board
      fees
                    
                    
                    80,000
                    
                    
                    
                    52,996Rent
                    
                    
                    97,910
                    
                    
                    
                    -Other
                    
                    
                    122,906
                    
                    
                    
                    131,907Total
                    
                    $
                    4,684,192
                    
                    
                    $
                    2,755,588





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





13.
CERTAIN KEY RELATIONSHIPS





Relationship with Hyundai
Syscomm Corp.


54


Beginning
September 11, 2006, the Company entered into several Agreements with Hyundai
Syscomm Corp. (Hyundai).   The Company currently has executed a
License Agreement, Subscription Agreement and a Sub-Contract with Hyundai and in
prior periods received in consideration a one-time $500,000 fee for the License
and the Company issued 900,000 shares of the Company's common stock to Hyundai,
in connection with all the agreements, of which 35,000 shares of common stock
remain to be issued at June 30, 2009.





The
initial term of the Sub-Contracting Agreement is three years, with subsequent
automatic one-year renewals unless the Sub-Contracting Agreement is terminated
by either party under the terms allowed by the Agreement.





On
February 7, 2007, the Company issued to Hyundai a warrant to purchase up to a
maximum of 24,000,000 shares of common stock in exchange for a maximum of
$80,000,000 in revenue, which was expected to be realized by the Company over a
maximum period of four years. The vesting of the Warrant will take place
quarterly over the four-year period based on 300,000 shares for every $1,000,000
in revenue realized by the Company from contracts referred to us by
Hyundai.  The revenue is subject to the sub-contracting agreement
between Hyundai and the Company dated October 25, 2006.  No
transactions under this agreement have occurred as of and through June 30, 2009
or to date and therefore there have been no warrants vested under this
agreement. As such, the various agreements with Hyundai are deemed by the
company to be null and void as of June 30, 2009. In May 2009, the Company
engaged the law firm of GCA Law Partners LLP of Mountain View, California to
represent the Company in legal action against Hyundai Syscomm Corp, as well as
several other entities and individuals, for alleged breach of
contract.





Relationship with Apro Media
Corporation





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





Per the
terms of the sub-contract agreement with Apro, the Company is to compensate Apro
with 3,000,000 shares of the Company’s common stock when the sub-contract
transactions result in $10.0 million of GAAP recognized revenue for the Company.
In December 2007, the Company elected to issue 1,000,000 shares of common stock
to Apro under that agreement. The Company computed a fair value for a pro rata
share of the remaining shares to be issued under that agreement, which was
$62,336 at June 30, 2008,  and has been reflected as a liability in
our consolidated balance sheet. As discussed below, such revenue is never
expected to be recognized by the Company, and therefore this accrual has been
reversed out during the year ended June 30, 2009.  The expense
(income) is included in selling, general and administrative
expenses.





For the
years ended June 30, 2009 and 2008, the Company had shipped product to various
customers in the aggregate of approximately $0 and $1.6 million under the Apro
sub-contract agreement. These shipments have not been recognized as revenue in
fiscal 2008 or to date in fiscal year 2009.  In addition inventory
costs related to these transactions had been reported on the balance sheet in
Costs of product shipped to customers for which revenue has not been recognized
as of June 30, 2008 and these costs have been fully reserved and written off as
of December 31, 2008. See Note 2 for further details.


55


On August
22, 2008, MSGI negotiated an acceleration of both its sub-contracting agreements
with Hyundai and Apro, through Hirsch Capital Corp., the San Francisco based
private equity firm operating Hyundai Syscomm and Apro Media. Under the
accelerated terms, MSGI would endeavor to build up to a platform with the
potential to generate approximately $100 million in expected annual gross
revenue supporting several of the largest commercial businesses in Korea (see
Daewoo sub-contract below).  Based upon its commitment to expand MSGI
to a potential run rate of $100 million in annual gross revenue, Hirsch Capital
will have the right to earn shares of MSGI as indicated under the Apro
sub-contracting and distribution agreement referenced above. There have not yet
been any business transactions under this new contract, and the Company
considers the contract to be null and void.





In May
2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View,
California to represent the Company in legal action against Apro Media
Corporation, as well as several other Korean entities and individuals, for
alleged breach of contract. As such, the sub-contract with Apro is deemed by the
Company to be null and void as of June 30, 2009.





Daewoo / Hankook
relationships





On
September 17, 2008, the Company executed a new contract with Hankook
Semiconductor, a division of Samsung Electronics, to manufacture and supply
advanced technology displays and other electronic products for commercial
security purposes for Daewoo International. Under the terms of the new contract,
MSGI will subcontract to Hankook the right to manufacture certain Hi-definition
display systems, which will be supplied to Daewoo for its existing customers.
MSGI has similarly entered into an agreement to supply Daewoo with these
products based upon Daewoo specifications from its customers. There have not yet
been any business transactions under this new contract. As such, the
contract with Hankook and Daewoo is deemed by the Company to be null and void as
of June 30, 2009.





In May
2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View,
California to represent the Company in legal action against Hankook
Semiconductor, as well as several other Korean entities and individuals, for
alleged breach of contract.





Relationship with CODA
Octopus Group





On April
1, 2007, the Company entered into a non-exclusive license agreement with CODA
Octopus, Inc. (CODA) whereby the Company will receive a referral fee on sales of
products using the Innalogic proprietary technology. The Company recognized
$100,000 in revenues during the year ended June 30, 2008 under this arrangement.
No such revenue has been recognized during the year ended June 30,
2009.





14.   COMMITMENTS
AND CONTINGENCIES:




Operating
Leases:





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





Rent
expense for such space was approximately $283,000 and $214,000 for fiscal years
ended June 30, 2009 and 2008, respectively.





Contingencies
and Litigation:





Certain
legal actions in the normal course of business are pending to which the Company
is a party. Several of the ongoing matters relate to vendors seeking to get paid
amounts owed by us, which amounts are fully accrued as of June 30, 2009. The
Company does not expect that the ultimate resolution of the pending legal
matters will have a material effect on the financial condition, results of
operations or cash flows of the Company.


56


In May
2009, the Company engaged the law firm of GCA Law Partners LLP, of Mountain
View, California, to represent us in a legal action against Hyundai Syscomm
Corp., Apro Media Corp., Hirsch Capital Corp. and other entities and
individuals. Subsequently, the Company filed suit in United States District
Court, Northern District of California, alleging, among other faults, fraud,
breach of contract and unfair business practices. The Company seeks financial
relief and compensation for the alleged actions of the parties named in the
action. The engagement agreement calls for GCA to be compensated for all fees
incurred on a contingent basis, pending outcome of the lawsuit, and, further,
calls for the Company to issue 50,000 shares of common stock of the Company to
each of the two partners managing the legal proceedings. The shares were issued
to the attorneys in September 2009, and were fully accrued for at June 30,
2009.





15.
SERIES H CONVERTIBLE PREFERRED STOCK AND PUT OPTION





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





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





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





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





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





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





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


57


The put
option agreement was accounted for as a liability under guidance from SFAS 150,
“Accounting for Certain Hybrid Financial Instruments with Characteristics of
both Liabilities and Equity.”  The Company had to allocate the
proceeds between the put option and the preferred stock, and determined that the
entire proceeds should be first allocated to the liability instrument. The
initial fair value calculated at January 10, 2008 for the put option agreement
was $5,800,000.  The liability is adjusted to fair value for each
reporting period and the fair value at August 22, 2008 was $6,700,000, such that
an aggregate loss of $1.7 million has been recognized since inception. Fair
value for the put options was calculated using the following assumptions as of
August 22, 2008:





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





On August
22, 2008, the Company entered into a Securities Exchange Agreement (see Note 3)
with the holders of the Series H Convertible Preferred Shares and Put Options.
The effect of this transaction was to fully cancel and redeem the Series H
Preferred Stock, certain warrants and the Put Option agreements in exchange for
other securities issued.  Therefore, as of June 30, 2009, there are no
shares of the Series H Preferred Stock outstanding, as well as there is no
liability related to the put option.





16. OTHER
COMMITTMENTS





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


58




17.   INCOME
TAXES:





Deferred
tax assets are comprised of the following:


As of June 30,2009
                                              
                                              
                                              2008Deferred
      tax assets:Net
      operating loss carry-forwards
                                              
                                              $
                                              43,869,000
                                              
                                              
                                              $
                                              40,677,000Compensation
      principally on option grants
                                              
                                              
                                              1,563,000
                                              
                                              
                                              
                                              1,319,000Amortization
      of intangibles
                                              
                                              
                                              974,000
                                              
                                              
                                              
                                              974,000Capital
      loss carryfoward
                                              
                                              
                                              2,763,000
                                              
                                              
                                              
                                              2,763,000Other
                                              
                                              
                                              577,000
                                              
                                              
                                              
                                              577,000Total
      deferred tax assets
                                              
                                              
                                              49,746,000
                                              
                                              
                                              
                                              46,310,000Deferred
      tax liabilities:Discount
      on convertible notes
                                              
                                              
                                              (2,369,000
                                              )
                                              
                                              
                                              (2,580,000
                                              )Total
      deferred tax liabilities
                                              
                                              
                                              (2,369,000
                                              )
                                              
                                              
                                              (2,580,000
                                              )Valuation
      allowance
                                              
                                              
                                              (47,377,000
                                              )
                                              
                                              
                                              (43,730,000
                                              )Net
      deferred tax assets
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -




The
difference between the Company’s U.S. federal statutory rate of 34%, as well as
its state and local rate net of federal benefit of 5%, when compared to the
effective rate is principally the result of no current domestic income tax as a
result of net operating losses and the recording of a full valuation allowance
against resultant deferred tax assets. The recorded income tax expense reflects
domestic state income taxes.





The
Company has a U.S. federal net operating loss carry forward of approximately
$112,000,000 available, which expires from 2012 through 2029. These loss carry
forwards may be subject to annual limitations under Internal Revenue Code
Section 382 and some loss carry forwards are subject to SRLY limitations.
 No Section 382 study has been performed by the Company. The Company
has recognized a full valuation allowance against deferred tax assets because it
is more likely than not that sufficient taxable income will not be generated
during the carry forward period available under the tax law to utilize the
deferred tax assets. Of the net operating loss carry forwards approximately
$61,000,000 is the result of deductions related to the exercise of non-qualified
stock options in previous years.  The realization of the net operating
loss carry forwards would result in a credit to equity.





The
Company has reviewed its deferred tax assets and has determined that the entire
amount of its deferred tax assets should be reserved as the assets are not
considered to be more likely than not recoverable in the future.





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


59





The
Company believes that there is no significant financial statement impact as a
result of FIN 48 for the year ended June 30, 2009. No financial statement
benefit has been taken for the Company’s net operating loss
carryforwards.





18.   EMPLOYEE
RETIREMENT SAVINGS 401(k) PLANS:




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





The
Company currently matches the 50% of the first $3,000 of employee contribution
up to a maximum of $1,500 per employee. There were no employee contributions to
the plan or matching contributions made during the fiscal years ended June 30,
2009 or 2008. The plan also provided for discretionary Company contributions.
There were no discretionary contributions in fiscal years 2009 or
2008.





19.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:





For the
year ended June 30, 2009:





·
            Deferred
      financing charges accrued in connection with Securities Exchange
      Agreement, in the amount of $20,000





For the
year ended June 30, 2008:





·
            Conversion
      of $4,571,958 in convertible debt principal and $667,198 of interest into
      10,111,129 shares of common stock.





·
            Issuance
      of 1,000,000 shares of common stock to Apro Media Corp pursuant to
      sub-contractor agreement, with a fair value of
  $990,000.





·
            Issuance
      of 91,965 shares of common stock to members of the Board of Directors as
      payment for services, with a fair value of
  $193,129.





·
            Additional
      debt discount of $1,032,408 related to anti-dilution provision of
      conversion feature option on Notes.





·
            Deferred
      financing fees and warrant discount related to new term debt, with a value
      of $182,992





20.
SUBSEQUENT EVENTS:





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





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


60





In August
2009, the Company announced that it had formed its first subsidiary for NASA
based technology. This new subsidiary, named Nanobeak Inc., is a nanotechnology
company focused on carbon based chemical sensing for gas and organic vapor
detection – effectively electronic sniffing. NASA developed these
Nano Chemical Sensors for space missions to increase scientific measurement
capabilities with less mass and lower power requirements. The potential space
and terrestrial applications include cabin air monitoring onboard the Space
Shuttle, surveillance of global weather, forest fire monitoring, radiation
detection, and various other mission critical capabilities. This technology was
developed at the NASA Ames Research Center located in Moffet Field, California.
The commercial applications of these Nano Chemical Sensors relate specifically
to Homeland Security and Defense, Medical Diagnoses, Environmental Monitoring
and Process Control. Nanobeak seek to offer offer products in each of these
sectors beginning in the fiscal year ending June 30, 2010, but timing of these
efforts can not be assured. The Company subsequently reported the launching of
its first product derived from NASA technology, a handheld test for Diabetes,
which uses breath instead of blood. Nanobeak will take the prototype handheld
sensor, which measures acetone levels with a simple breath, out of the
laboratory and into the marketplace. Nanobeak will undertake product testing
which will be done in conjunction with a major hospital network in the United
States, followed by licensing discussions with the top pharmaceutical
companies.





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





Subsequent
to June 30, 2009, the Company entered into several business development,
investor relations and consulting and advisory agreements with two separate
service providers. Under the terms of these agreements, the Company has
committed to issue shares of common stock in lieu of cash in consideration for
the valuable services provided and to be provided by these individual firms. As
of the date of this filing, the Company has issued approximately 5.2 million
shares of common stock in lieu of various categories of cash compensation for
services rendered and to be rendered by the firms. Such services include, but
are not be limited to, investor relations, identification of potential providers
of equity or hybrid financing, the identification of strategic or joint-venture
and licensing partners, the identification of merger and/or acquisition
candidates, the provision of general business advice, the overview of
governmental procurement programs, the preparation of disclosure, marketing and
promotional materials.





Since
June 30, 2009, the Company has issued 14,590,500 shares of common stock. Of
these shares, 5,800,000 were issued under a certain Warrant Exchange Agreement,
500,000 were issued pursuant to a certain short-tem note, 45,500 were issued
pursuant to certain addendum to short-terms loans and 8,245,000 were issued to a
variety of service providers for services to be rendered.





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





N/A





Item 9A(T).
Controls and Procedures





Disclosure
Controls and Procedures




We are
responsible for maintaining disclosure controls and procedures designed to
provide reasonable assurance that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934, as amended, (“Exchange
Act”) is recorded, processed, summarized and reported within the specified time
periods and accumulated and communicated to our management, including our Chief
Executive Officer and Chief Accounting Officer, as appropriate, to allow for
timely decisions regarding required disclosure.


61




Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Accounting Officer, we have evaluated the
effectiveness of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, at
June 30, 2009. Based upon this evaluation, our Chief Executive Officer and
Chief Accounting Officer concluded that, as of that date, our disclosure
controls and procedures were not effective at the reasonable assurance level due
to the material weaknesses in our internal control over financial reporting (as
described below in “Management’s Report on Internal Control over Financial
Reporting”), which we view as an integral part of our disclosure controls and
procedures.





On
October 13, 2009, our independent registered public accounting firm Amper,
Politziner & Mattia, LLP (AP&M), informed us and our Audit Committee of
the Board of Directors that they had discovered conditions which they deemed to
be material weaknesses in our internal controls (as defined by standards
established by the Public Company Accounting Oversight Board) summarized as
follows:





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





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





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





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





·
            Ineffective
      controls over revenue recognition.





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





·
            Documentation
      (and retention thereof) of certain transactions was not completed on a
      timely basis.





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





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





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





Management’s
Report on Internal Control over Financial Reporting





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


62





Our Chief
Executive Officer and Chief Accounting Officer conducted an evaluation of the
effectiveness of internal control over financial reporting using the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control – Integrated Framework.  As a result of
this assessment, management identified material weaknesses in internal control
over financial reporting.




A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of our annual or interim consolidated financial
statements will not be prevented or detected on a timely basis. In our
assessment of the effectiveness of internal control over financial reporting at
June 30, 2009, we identified the following material weaknesses:





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





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





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





·
            Ineffective
      controls over accounts payable
processing





·
            Ineffective
      controls over contract
administration





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





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





Based on
its evaluation and due to the material weaknesses noted above, our management
concluded that our internal control over financial reporting was not effective
as of June 30, 2009.





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





The
information set forth in this Item 9A(T) shall not be considered filed under the
Exchange Act. This annual report does not include an attestation report of
Amper, Politziner & Mattia, LLP, the Company’s independent registered public
accounting firm, regarding internal control over financial
reporting. Management’s report was not subject to attestation by Amper,
Politziner & Mattia, LLP pursuant to temporary rules of the SEC that permit
the Company to provide only management’s report in this Form 10-K.





Remediation
of Material Weaknesses





The
Company intends to take action to hire additional staff, implement stronger
financial reporting systems and software and develop the adequate policies and
procedures with said enhanced staff to ensure all noted material weaknesses are
addressed and resolved. The Company also retained a third party consulting
services to assist in developing and maintaining adequate internal control over
financial reporting during the fiscal year ended June 30,
2008.  However, due to the Company’s cash flow constraints and changes
in the business requirements from the change in key relationships and lack of
internal resources, the continued assistance from this consulting firm and the
timing of implementing the adequate policies and procedures, as determined to be
required, has not yet been determined. The Company cannot predict when it will
be able to appropriately address such weaknesses.


63





Item 9B. Other
Information


None





PART
III




Item 9. Directors, Executive
Officers and Corporate Governance





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





Name
                          
                          Age
                          
                          Positions and Offices, if any,
      Held
                          
                          Director SinceJ.
      Jeremy Barbera

                              and
      Chief Executive Officer
                          
                          52
                          
                          Chairman
      of the Board of Directors
                          
                          1996Richard
      J. Mitchell, III

                              and
      Secretary
                          
                          50
                          
                          Chief
      Accounting Officer, TreasurerJoseph
      C. Peters
                          
                          52
                          
                          President
      and Director
                          
                          2004John
      T. Gerlach
                          
                          77
                          
                          Director
                          
                          1997Seymour
      Jones
                          
                          78
                          
                          Director
                          
                          1996David
      C. Stoller
                          
                          59
                          
                          Director
                          
                          2004





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





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


64




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




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




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




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




Relationships
and Interests in Proposals; Involvement in Certain Legal
Proceedings


65




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




Section
16(A) Beneficial Ownership Reporting Compliance





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





Based
solely on the Company's review of the copies of such forms it has received and
written representations from certain reporting persons that they were not
required to file reports on Form 5 for the fiscal year ended June 30, 2009, the
Company believes that all its officers, directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during the fiscal year ended June 30, 2009.





Code of
Ethics





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





Board of
Directors and Committee Information





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





Audit
Committee





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





Compensation
Committee





The
members of the Compensation Committee during fiscal year 2009 were Mr. Seymour
Jones, Mr. Joseph Peters, and Mr. John Gerlach. Mr. Gerlach is Chairman of the
Committee. Mr. Gerlach and Mr. Jones served as members of the Compensation
Committee of the Company's Board of Directors during all of fiscal years 2009
and 2008. Mr. Peters served as a member of the committee in fiscal year 2007.
Mr. Peters was also an officer and employee of the Company during the fiscal
years ended June 30, 2009 and 2008.


66


Nomination
Matters





The Board
of Directors does not currently have a nominating committee or a committee
performing similar functions. Given the size of the Company and the historic
lack of director nominations by stockholders, the Board has determined that no
such committee is necessary. Similarly, although the Company’s By-laws contain
procedures for stockholder nominations, the Board has determined that adoption
of a formal policy regarding the consideration of director candidates
recommended by stockholders is not required. The Company intends to review
periodically both whether a more formal policy regarding stockholder nominations
should be adopted and whether a nominating committee should be established.
Until such time as a nominating committee is established, the full Board, which
includes two directors employed by the Company and therefore not “independent”
under applicable standards, will participate in the consideration of candidates.
The Board does not utilize a nominating committee charter when performing the
functions of such committee. The procedures for stockholder nominations and the
desired qualifications of candidates, among other nominations matters, did not
change during the 2009 fiscal year.





Item 11. Executive
Compensation





The
following table provides certain information concerning compensation of the
Company's Chief Executive Officer and any other executive officer of the Company
who received compensation in excess of $100,000 during the fiscal year ended
June 30, 2009 (the "Named Executive Officers"):





SUMMARY
COMPENSATION TABLE





FiscalYear
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    Non-Equity
                                    
                                    
                                    Non-qualifiedName
      and Principal
                                    
                                    Ended
                                    
                                    Annual
                                    
                                    
                                    Annual
                                    
                                    
                                    Stock
                                    
                                    
                                    Option
                                    
                                    
                                    Incentive
                                    
                                    
                                    Deferred
                                    
                                    
                                    All
      OtherPosition
                                    
                                    June
      30,
                                    
                                    Salary
                                    
                                    
                                    Bonus
                                    
                                    
                                    Awards
                                    
                                    
                                    Awards
                                    
                                    
                                    Compensation
                                    
                                    
                                    Compensation
                                    
                                    
                                    Compensation
                                    
                                    
                                    TotalJ.
      Jeremy Barbera (1)
                                    
                                    2009
                                    
                                    $
                                    501,923
                                    
                                    
                                    
                                    —
                                    
                                    
                                    $
                                    8,000
                                    (3)
                                    
                                    $
                                    92,950
                                    (4)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    $
                                    602873Chairman
      of the
                                    
                                    2008
                                    
                                    
                                    497,200
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    30,600
                                    (3)
                                    
                                    
                                    185,900
                                    (4)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    713,700Board
      and ChiefExecutive
      OfficerRichard
      J. Mitchell III (2)
                                    
                                    2009
                                    
                                    
                                    125,481
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    35,590
                                    (5)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    161,071Chief
      Accounting Officer
                                    
                                    2008
                                    
                                    
                                    125,000
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    74,000
                                    (5)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    199,000Treasurer
      and Secretary




(1)   
As a result of limited cash availability during the fiscal year ended June 30,
2009, Mr. Barbera has been paid only $307,136 of the annual salary accrued and
reported for the year.




(2)   
As a result of limited cash availability during the fiscal year ended June 30,
2009, Mr. Mitchell has been paid only $77,388 of the annual salary accrued and
reported for the year.





(3)   
On May 7, 2007, the Board of Directors voted unanimously to authorize the
issuance of 300,000 shares of the Company’s common stock to Mr. Barbera as an
incentive to retain the services of Mr. Barbera. The shares are to be issued in
three equal installments of 100,000 shares each over a period of three years.
The first issuance of 100,000 shares occurred on May 7, 2007, the second
issuance of 100,000 shares was earned on May 7, 2008 and the third issuance of
100,000 shares was earned on May 7, 2009. The shares are valued at each
reporting period at the current market price for shares earned to date and once
issued, the stock is valued at the current market price on the date of issuance.
For fiscal 2008, there were 100,000 shares issued at a value of $0.63 per
share and the remaining 100,000 shares not issued were valued at $0.43 for the
portion of shares earned at June 30, 2008, resulting in an expense in fiscal
2008 of $30,600. The remaining 100,000 shares authorized were issued at a value
of $0.08 per share for an expense of $8,000 during the year ended June 30,
2009.





(4)   
Represents options to purchase 200,000 shares of the Company’s common stock at
an exercise price of $1.50 per share. Options were issued on June 29, 2007 and
expire 10 years from the date of issuance. The dollar amount presented
represents the expense each year as recognized under SFAS 123R. The overall fair
value of these shares was $278,000 which is based on a fair value of $1.39 per
share. This fair value was estimated using the Black-Scholes option pricing
model with the following assumptions
applied; dividend yield of zero, expected volatility of 142.3%, risk-free
interest rate of 4.75% and an expected lifeof 6 years. The expense is being
amortized over a period of 1.5 years, which is the vesting term of the
options.




67




(5)   
Represents options to purchase 25,000 shares of the Company’s common stock at
$1.40 per share, 50,000 shares at $1.50 per share and 7,500 shares at $1.50
per share. Options were issued on May 7, 2007, June 29, 2007 and February 7,
2005, respectively, and expire 10 years from the dates of issuance. The dollar
amount presented represents the expense for each fiscal year under SFAS 123R for
options currently vesting. The fair value of the May 7 grant was estimated
using the Black-Scholes option pricing model with the following assumptions
applied; dividend yield of zero, expected volatility of 140.9%, risk-free
interest rate of 4.75% and an expected life of 6 years. The fair value of the
June 29 grant was estimated using the Black-Scholes option pricing model with
the following assumptions applied; dividend yield of zero, expected
volatility of 142.3%, risk-free interest rate of 4.75% and an expected life of 6
years.





STOCK
OPTION GRANTS





The
Company maintains a qualified stock option plan (the "1999 Plan") for the
issuance of up to 1,125,120 shares of common stock under qualified and
non-qualified stock options. The 1999 Plan is administered by the compensation
committee of the Board of Directors which has the authority to determine which
officers and key employees of the Company will be granted options, the option
price and vesting of the options. In no event shall an option expire more than
ten years after the date of grant.




There
were no options granted in the fiscal years 2009 or 2008.





Outstanding
Equity Awards at Fiscal Year End





The
following table sets forth certain information regarding unexercised options,
unvested stock and equity incentive plan awards for each Named Executive Officer
outstanding as of the end of the Company’s fiscal year 2009:





Option
      Awards
                              
                              Stock
      AwardsEquityEquity
                              
                              
                              IncentiveEquity
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              Incentive
                              
                              
                              PlanIncentive
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              Plan
      Awards:
                              
                              
                              Awards:Plan
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              Market
                              
                              
                              Number
      of
                              
                              
                              Market
      orAwards
                              
                              
                              
                              
                              
                              
                              Number
      of
                              
                              
                              Value
      of
                              
                              
                              Unearned
                              
                              
                              Payout
      ValueNumber
      of
                              
                              
                              Number
      of
                              
                              
                              Number
      of
                              
                              
                              
                              
                              
                              
                              Shares
                              
                              
                              Shares
      or
                              
                              
                              Shares,
                              
                              
                              of
      UnearnedSecurities
                              
                              
                              Securities
                              
                              
                              Securites
                              
                              
                              
                              
                              
                              
                              or
      Units
                              
                              
                              Units
      of
                              
                              
                              Units
      or
                              
                              
                              Shares,
      UnitsUnderlying
                              
                              
                              Underlying
                              
                              
                              Underlying
                              
                              
                              Option
                              
                              
                              
                              of
      Stock
                              
                              
                              Stock
      That
                              
                              
                              Other
      Rights
                              
                              
                              or
      OtherUnexercised
                              
                              
                              Unexercised
                              
                              
                              Unexercised
                              
                              
                              Exercise
                              
                              Option
                              
                              That
      Have
                              
                              
                              Have
      Not
                              
                              
                              That
      Have
                              
                              
                              Rights
      ThatOptions
      (#)
                              
                              
                              Options
      (#)
                              
                              
                              Unearned
                              
                              
                              Price
                              
                              Expiration
                              
                              Not
      Vested
                              
                              
                              Vested
                              
                              
                              Not
      Vested
                              
                              
                              Have
      NotName
                              
                              Exercisable
                              
                              
                              Unexercisable
                              
                              
                              Options
      (#)
                              
                              
                              ($)
                              
                              Date
                              
                              (#)
                              
                              
                              ($)
                              
                              
                              ($)
                              
                              
                              Vested
      ($)J.
      Barbera
                              
                              
                              100,000
                              (1)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1.50
                              
                              3/24/14
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —200,000
                              (2)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1.50
                              
                              3/24/14
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —200,000
                              (3)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1.50
                              
                              6/29/17
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —R.
      Mitchell
                              
                              
                              10,000
                              (4)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1.50
                              
                              3/24/14
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —16,666
                              (5)
                              
                              
                              8,334
                              (5)
                              
                              
                              —
                              
                              
                              
                              1.40
                              
                              5/07/17
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —50,000
                              (6)
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1.50
                              
                              6/29/17
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —





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


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


68





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


(4)
            Represents
      a grant of 10,000 options to purchase common stock at $1.50 per shares,
      vested over three years on each anniversary date with a term of 10
      years.


(5)
            Represents
      a grant of 25,000 options to purchase common stock at $1.40 per shares,
      vested over three years on each anniversary date of the grant, with a term
      of 10 years.


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





Equity
Compensation Plan Information





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





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





COMPENSATION
OF DIRECTORS





Beginning
in October 2003, directors who are not employees of the Company receive an
annual retainer fee of $5,000, $1,000 for each Board Meeting attended, $500 for
each standing committee meeting attended and $500 for each standing committee
meeting for the Chairman of such Committee. Such Directors will also be
reimbursed for their reasonable expenses for attending board and committee
meetings, and will receive an annual grant of options on June 30 of each year to
acquire 10,000 shares of common stock for each fiscal year of service, at an
exercise price equal to the fair market value on the date of grant. Any Director
who is also an employee of the Company is not entitled to any compensation or
reimbursement of expenses for serving as a Director of the Company or a
member of any committee thereof. The Directors agreed to waive the annual option
grant for the fiscal years ended June 30, 2003, 2004, 2005 and 2006. The
annual options grants previously waived were issued on June 29, 2007. The
Directors agreed to waive the annual option grant for the fiscal years ended
June 30, 2008 and 2009.





The
following table sets forth certain information regarding all compensation earned
by directors for the Company’s
2009 fiscal year.


69





NonqualifiedFees
      Earned
                
                
                
                
                
                
                
                
                Non-Equity
                
                
                Deferredor
      Paid in
                
                
                Stock
                
                
                Option
                
                
                Incentive
      Plan
                
                
                Compensation
                
                
                All
      OtherCash
                
                
                Awards
                
                
                Awards
                
                
                Compensation
                
                
                Earnings
                
                
                Compensation
                
                
                TotalName
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                ($)
                
                
                ($)J.
      Gerlach
                
                $
                10,000
                (1)
                
                
                —
                
                
                $
                35,590
                (2)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                45,590S.
      Jones
                
                $
                8,500
                (1)
                
                
                —
                
                
                
                35,590
                (2)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                44,090D.
      Stoller
                
                $
                8,500
                (1)
                
                
                —
                
                
                
                35,590
                (2)
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                $
                44,090





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


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





Employment
Contracts and Termination of Employment




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





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





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





COMPENSATION
POLICIES FOR EXECUTIVE OFFICERS





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


70





RELATIONSHIP
OF PERFORMANCE TO EXECUTIVE COMPENSATION





The base
salary of Mr. Barbera is not set by terms of an employment agreement, but is
comparable to his prior effective emplyment agreement and is maintained at such
level as to attract and retain him. The Compensation Committee believes this
salary is competitive and represents a fair estimate of the value of the
services rendered by Mr. Barbera.




Respectively
submitted,


COMPENSATION
COMMITTEE


John T.
Gerlach





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





Common
Stock – Five Percent Holders





The
following table sets forth, as of September 30, 2009, certain information with
respect to any person, including any group, who is known to the Company to be
the beneficial owner of more than 5% of the common stock of the
Company.





Title
      of
                    
                    Name
      and Address of
                    
                    Amount
      and Nature of
                    
                    
                    Percent
      ofClass
                    
                    Beneficial Owner
                    
                    Beneficial Owner (1)
                    
                    
                    ClassCommon
                    
                    Carta
      De Dinero, LLC
                    
                    
                    3,000,000
                    
                    
                    
                    7.63
                    %Common
                    
                    Leon
      Frenkel
                    
                    
                    3,024,186
                    
                    
                    
                    7.69
                    %Common
                    
                    Bespoke
      Growth Partners , Inc.
                    
                    
                    2,200,000
                    
                    
                    
                    5.60
                    %


(1)
              Unless
      otherwise indicated, each of the persons named in the table has sole
      voting and investment power with respect to the shares set forth opposite
      such person’s name. With respect to each person or group, percentages are
      calculated based on the number of shares beneficially owned, including
      shares that may be acquired by such person or group within 60 days of
      September 30, 2009 upon the exercise of stock options, warrants or
      other purchase rights, but not the exercise of options, warrants or other
      purchase rights held by any other
person.





Common
Stock – Management





The
following table sets forth, as of September 30, 2009, certain information
certain information concerning the ownership of the Company’s common stock of
each (i) director, (ii) nominee, (iii) executive officers and former executive
officers named in the Summary Compensation Table and referred to as the “Named
Executive Officers,” and (iv) all current directors and executive officers of
the Company as a group.


71





Title
      of
                                                            
                                                            Name
      and Address of
                                                            
                                                            
                                                            
                                                            
                                                            Percent
      ofClass
                                                            
                                                            Beneficial Owner
                                                            
                                                            Beneficial Ownership (1)
                                                            
                                                            
                                                            ClassCommon
                                                            
                                                            J.
      Jeremy Barbera (2)
                                                            
                                                            
                                                            1,300,000
                                                            
                                                            
                                                            
                                                            3.33
                                                            %575
      Madison AveNew
      York, NY 10022Common
                                                            
                                                            Seymour
      Jones  (3)
                                                            
                                                            
                                                            144,221
                                                            
                                                            
                                                            
                                                            *575
      Madison AveNew
      York, NY 10022Common
                                                            
                                                            John
      Gerlach  (4)
                                                            
                                                            
                                                            145,395
                                                            
                                                            
                                                            
                                                            *575
      Madison AveNew
      York, NY 10022Common
                                                            
                                                            David
      Stoller  (5)
                                                            
                                                            
                                                            101,250
                                                            
                                                            
                                                            
                                                            *575
      Madison AveNew
      York, NY 10022Common
                                                            
                                                            Joseph
      Peters  (6)
                                                            
                                                            
                                                            327,400
                                                            
                                                            
                                                            
                                                            *575
      Madison AveNew
      York, NY 10022Common
                                                            
                                                            Richard
      Mitchell  (7)
                                                            
                                                            
                                                            169,200
                                                            
                                                            
                                                            
                                                            *575
      Madison AveNew
      York, NY 10022All
      Directors and Named Executive Officers
                                                            
                                                            
                                                            2,187,466
                                                            
                                                            
                                                            
                                                            5.60
                                                            %reported
      as a group





* Less than 1%





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


(2)
            Includes
      (i) 415,000 issued upon conversion of Series G Convertible Preferred
      Shares, (ii) 200,000 issued as retention incentive, (iii) 185,000 shares
      previously owned and purchased on the open market and (iv) 500,000 options
      to purchase shares of common stock. With respect to the options to
      purchase shares of common stock, all are exercisable at September 30,
      2009.


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


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


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


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


(7)
            Includes
      (i) 84,200 issued upon conversion of Series G Convertible Preferred Shares
      and (ii) 85,000 options to purchase shares of common stock. With respect
      to the options to purchase shares of common stock, 76,666 are exercisable
      at September 30, 2008.


72





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





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




Relationship
with The National Aeronautics and Space Administration:





The
Company’s collaborative relationship with NASA was begun in August 2009 with the
execution of a Space Act Agreement (SAA) forming a partnership between MSGI and
the Ames Research Center (ARC) located at Moffet Field in California. The
purpose of this collaboration between MSGI and NASA is to develop new prototype
chemical sensors using NASA’s nano-sensor technology to meet MSGI’s need in
sensor commercialization in security, biomedical and other areas. This sensor
technology platform could potentially be used in efforts such as chemical leak
detection and hazardous material detection. MSGI intends to develop this
technology for commercial applications, homeland security applications, and
medical diagnostic applications for type I diabetes (acetone detection) at first
and possibly other species in future years.





In August
2009, the Company announced the formation of its first subsidiary for NASA based
technology. The subsidiary, named Nanobeak Inc. (Nanobeak) is a nanotechnology
company focused on carbon based chemical sending for gas and organic vapor
detection. Some potential space and terrestrial applications for this technology
include cabin air monitoring onboard the Space Shuttle and future spacecraft,
surveillance of global weather, forest fire detection and monitoring, radiation
detection and various other critical capabilities. The commercial applications
of these nanotech chemical sensors relate specifically to efforts in Homeland
Security and defense, medical diagnostics and environmental monitoring and
controls. Nanobeak will offer products in each of these market sectors beginning
in the current fiscal year ending June 30, 2010. In September 209, the Company
announced that it is launching its first product derived from the NASA
nanotechnology, a handheld testing and detection device for Diabetes that uses
breath instead of blood. Nanobeak will take the prototype handheld sensor out of
the laboratory and into the marketplace. The Company, through Nanobeak, will
engage in product testing in conjunction with a major hospital network in the
United States, followed by licensing discussions with the top
pharmaceutical companies.





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




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





Hyundai


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




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




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





73





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




There
have been no business transactions under the Sub-Contract or License agreement
as of June 30, 2009 or to date and the Company currently is not anticipating any
in the near future. The Company considers these transactions to be null and
void.





In May
2009, the Company engaged the law firm of GCA Law Partners LLP (GCA), of
Mountain View, California, to represent the Company in potential legal action
against Hyundai and others. Subsequently, the Company, through GCA, filed suit
in United States District Court, Northern District of California, naming
Hyundai, among others, as a defendant. The Company seeks restitution for breach
of contract, among other allegations.





Apro


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




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





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


74





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





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





In May
2009, the Company engaged the law firm of GCA Law Partners LLP (GCA), of
Mountain View, California, to represent the Company in potential legal action
against Apro and others. Subsequently, the Company, through GCA, filed suit in
United States District Court, Northern District of California, naming Hyundai,
among others, as a defendant. The Company seeks restitution for breach of
contract, among other allegations.





Relationship
with Coda Octopus Group, Inc.:




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




The
Company has recognized $100,000 in revenues during the year ended June 30, 2008
as a result of this license agreement. No such revenues were recognized during
the year ended June 30, 2009.





Item 14.Principle Accountant Fees
and Services





The
aggregate fees billed by Amper, Politziner & Mattia, LLP independent
accountants, for professional services rendered to MSGI Security Solutions, Inc
during the fiscal years ended June 30, 2009 and 2008 were comprised of the
following:





Fiscal
      Year
                  
                  
                  Fiscal
      Year2009
                  
                  
                  2008Audit
      Fees
                  
                  $
                  110,800
                  
                  
                  $
                  325,200Tax
      Fees
                  
                  
                  —
                  
                  
                  
                  3,225All
      other Fees
                  
                  
                  —
                  
                  
                  
                  —Total
      Fees
                  
                  $
                  110,800
                  
                  
                  $
                  328,425


75





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





Tax fees
related primarily to tax compliance and advisory services for federal and state
tax returns for 2008.





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




Item 15.
Exhibits





21
            
            List
      of Company's subsidiaries23.1
            
            Consent
      of Amper, Politziner & Mattia, LLP31.1
            
            Certifications
      of the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certifications
      of the Chief Accounting Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            
            Certifications
      of the Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            
            Certifications
      of the Chief Accounting Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002


76





SIGNATURES





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




MSGI SECURITY SOLUTIONS,
    INC.(Registrant)By:
                    /s/ J. Jeremy BarberaJ.
      Jeremy BarberaChief
      Executive OfficerBy:
                    /s/ Richard J. Mitchell
  IIIRichard
      J. Mitchell IIIChief
      Accounting Officer and Principle Financial
  Officer




Date:
October 13, 2009





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 Barebera
                    
                    Chairman
      of the Board and Chief Executive
                    
                    October
      13, 2009J.
      Jeremy Barbera
                    
                    Officer
      (Principal Executive Officer)/s/John T. Gerlach
                    
                    Director
                    
                    October
      13, 2009John
      T. Gerlach/s/Seymour Jones
                    
                    Director
                    
                    October
      13, 2009Seymour
      Jones/s/Joseph Peters
                    
                    Director
                    
                    October
      13, 2009Joseph
      Peters/s/David Stoller
                    
                    Director
                    
                    October
      13, 2009David
      Stoller


77