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

                                FORM 10-KSB/A
                                -------------

      [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the fiscal year ended June 30, 1997

                                      OR

   [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

            For the transition period from _____________to_____________

                         Commission file number 0-16730

                         MARKETING SERVICES GROUP, INC.
                         ------------------------------
        (Exact name of small business issuer as specified in its charter)

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

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

Registrant's telephone number, including area code:          (212) 594-7688
Securities registered pursuant to Section 12(b) of the Act:       None
Securities registered pursuant to Section 12(g) of the Act:       None

                    Common Stock, par value $.01 per share
                    --------------------------------------
                               (Title of class)

Check  whether  the Issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the  Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
                                  Yes X   No __

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

The issuer's revenues for its fiscal year ended June 30, 1997 are $24,144,874.

As of October 23, 1997,  the aggregate  market value of the voting stock held by
non-affiliates of the Registrant was approximately $49,527,000.

As of October 23, 1997, there were 12,721,176 shares of the Registrant's  common
stock outstanding.

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


<PAGE>

                                    PART I

Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Certain statements in this  Annual  Report on Form 10-KSB/A  under the  captions
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations," "Business" and elsewhere in this Report constitute "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995 (the "Reform Act"). Such  forward-looking  statements  involve known and
unknown  risks,  uncertainties  and other  factors  which  may cause the  actual
results,  performance or achievements of the Company,  or industry results to be
materially  different  from any  future  results,  performance  or  achievements
expressed or implied by such forward-looking  statements.  Such factors include,
among others, the following: general economic and business conditions;  industry
capacity;  direct  marketing and other  industry  trends;  demographic  changes;
competition; the loss of any significant customers; changes in business strategy
or development  plans;  availability  and successful  integration of acquisition
candidates;   availability,   terms  and  deployment  of  capital;  advances  in
technology; quality of management; business abilities and judgment of personnel;
availability of qualified personnel;  changes in, or the failure to comply with,
government regulations; and computer, telephone and postal costs.

Item 1 - Business
-----------------
General:
Marketing  Services  Group,  Inc. (the  "Company" or "MSGI")  provides  database
management,  custom  telemarketing  /telefundraising  and other direct marketing
services to a diverse group of over 600 clients  located  throughout  the United
States and Canada.  These  services  include  customer and market data analysis,
database  creation  and  analysis,  data  warehousing,  merge/purge,  predictive
behavioral   modeling,   list   processing,   brokerage  and  management,   data
enhancement,  other direct  marketing  information  services and custom outbound
telemarketing/telefundraising  services.  The Company  believes its expertise in
applying these direct marketing tools increases the productivity of its clients'
marketing expenditures.

The Company's  services  have enabled it to become a leading  provider of direct
marketing  services to performing  arts and cultural  institutions in the United
States.  The Company's  clients include Lincoln Center for the Performing  Arts,
Kennedy  center for the  Performing  Arts,  Art  Institute of Chicago,  New York
Philharmonic,  Los Angeles  Philharmonic,  Boston  Symphony,  UCLA and  numerous
public  broadcasting   stations.  In  addition,  the  Company  renders  database
management and direct  marketing  services to such  commercial  clients as Crain
Communications,  the CIT Group, 3Com Corporation,  Citicorp, UNOCAL, Walt Disney
Company, Avery Dennison and Gymboree.

The Company  utilizes  industry  specific  knowledge  and  proprietary  database
software applications to produce customized data management and direct marketing
solutions.  The Company's  telemarketing/telefundraising  services are conducted
both on-site at  client-provided  facilities  and also at the Company's  calling
center in Berkeley,  California. The Company seeks to become an integral part of
its  clients'  marketing  programs  and foster  long-term  client  relationships
thereby providing recurring revenue opportunities.

The business of MSGI,  previously known as All-Comm Media  Corporation and prior
to that as  Sports-Tech,  Inc.,  arises out of an April 25, 1995 merger  between
Alliance  Media  Corporation  ("Alliance")  and the Company,  and the concurrent
acquisition of Stephen Dunn & Associates, Inc. ("SD&A"), a leading telemarketing
and  telefundraising  company  specializing in direct marketing services for the
arts,   educational   and   other   institutional   tax-exempt    organizations.
Simultaneously,  the former  management and directors of the Company resigned in
favor of the merger with Alliance and its plan to build a specialized  marketing
services  company with a focus on providing  direct  marketing,  information and
media  services.  The change in the  Company's  name was  approved  at a special
stockholders  meeting  held on  August  22,  1995  to  reflect  a new  direction
originating from the change in management and board of directors associated with
the merger with Alliance.  Subsequent to another  management change, on June 30,
1997, the stockholders approved the current name of the Company. Effective as of
October 1, 1996, the Company acquired Metro Services Group,  Inc. (to be renamed
Metro Direct, Inc.) ("Metro") pursuant to a merger agreement. Metro develops and
markets  information-based  services,  used  primarily in direct  marketing by a
variety of  commercial  and  not-for-profit  organizations,  principally  in the
United States.  The Company's shares are traded on the NASDAQ Small Cap MarketSM
under the symbol "MSGI". The Company's  principal  executive offices are located
at 333 Seventh Avenue,  20th Floor,  New York, NY 10001. Its telephone number is
(212) 594-7688.

<PAGE>

The Company's Strategy:
MSGI's  strategy to enhance its position as a  value-added  premium  provider of
database  management,  custom  telemarketing/telefundraising  services and other
direct marketing services is to:

    Increase  revenues by  expanding  the range of direct  marketing  services
     offered and by cross-selling;
    Deepen market  penetration in new  industries and market  segments as well
     as those currently served by the Company;
    Develop  existing  and  create  new  proprietary   database  software  and
     database management applications;
    Increase capacity for  telemarketing/telefundraising  services and enhance
     on-site data and calling systems; and
    Pursue  strategic acquisitions, joint ventures and marketing  alliances to
     expand direct marketing services offered and industries served.

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

History and Prior Activities:
The Company was originally  incorporated in Nevada in 1919.  During 1991,  under
prior   management,   the  Company  acquired  a  100%  interest  in  Sports-Tech
International,  Inc. ("STI") and changed its name to Sports-Tech,  Inc. In 1993,
the Company acquired the business of High School Gridiron Report  ("HSGR").  STI
and HSGR  supplied  information  services  and  technology  as well as academic,
athletic and video data to high  school,  college and  professional  coaches and
student athletes. In November, 1994, after a failed business strategy, the prior
management of the Company  discontinued these operations through the sale of STI
and the  cessation  of the HSGR  operation.  Prior to, and as a condition of the
merger with Alliance, the Company was required to divest its investments, except
for an undeveloped parcel of land in Laughlin,  Nevada. In August, 1996 the land
was  sold.  (See  All-Comm  Holdings,  Inc.  herein  for a  description  of this
investment and the terms of its sale.)

Merger with Alliance Media Corporation:
On April 25,  1995,  STI  Merger  Corporation  ("Merger  Sub"),  a wholly  owned
subsidiary of the Company, was merged (the "Merger") with and into Alliance.

The assets of Alliance acquired by the Company  consisted  primarily of: (i) all
of the  issued  and  outstanding  stock of SD&A,  which  Alliance  had  acquired
effective  April 25, 1995 pursuant to a Stock  Purchase  Agreement,  dated as of
January 31, 1995,  between Alliance and Mr. Stephen Dunn (the "Dunn Agreement");
(ii) a five-year  covenant  not to compete  with the former  owner of SD&A;  and
(iii) the cash proceeds (net of certain payments,  including the payment of $1.5
million  required  pursuant  to the  terms of the Dunn  Agreement)  of a private
placement of equity securities by Alliance, which securities,  upon consummation
of the Merger, were converted into shares of the Company's common stock.

Stephen Dunn & Associates, Inc. ("SD&A"):
SD&A was formed in 1983 and was  acquired  by the  Company  in the  merger  with
Alliance.  For the twelve month period ended June 30, 1997 ("Fiscal 1997"), SD&A
had  revenues of more than $15.9  million.  Clients of SD&A  include many of the
larger  performing  arts and cultural  institutions,  such as major  symphonies,
theatres and musical arts companies,  along with public  broadcasting  stations,
advocacy groups and educational institutions. SD&A's clients include over 150 of
the nation's leading institutions and universities. SD&A has its headquarters in
Los Angeles, California and operates a telemarketing calling center in Berkeley,
California.

Stock Split - Change in Authorized Common Shares:
Effective  August  22,  1995,  the  Company's  Board  of  Directors  approved  a
one-for-four  reverse stock split of the Company's  authorized and issued common
stock.  Fractional  shares were  rounded up to whole  shares.  After the reverse
stock split, approximately 3,016,000 shares were outstanding.  All share and per
share data in this Annual Report  reflect the effect of the reverse stock split.
Effective  August 14, 1996, the Company's  shareholders  approved an increase in
the number of authorized shares of common stock from 6,250,000 to 36,250,000, to
facilitate its corporate strategy and growth plans.

Current Activities:
Acquisition of Metro Direct:
Metro was formed in 1987 and was  acquired by the Company  effective  October 1,
1996,  pursuant to a merger agreement.  For the nine month period ended June 30,
1997, Metro had revenues of more than $8.1 million.  Clients include many of the
same performing arts and cultural  institutions,  public broadcasting,  advocacy
groups and educational  institutions as SD&A, as well as a variety of commercial
organizations.  Metro has its  headquarters  in New York  City,  with  satellite
offices in Michigan, Illinois, California and Georgia.

Metro develops and markets a variety of database direct  marketing  products and
services to a wide range of  commercial  clients and  tax-exempt  organizations.
Metro provides  information-based  products and services to the direct marketing
industry through its four divisions: Metro Direct Marketing, which provides full
service  direct  marketing  programs  for  consumers  and  business  to business
clients,  particularly  in the financial  services and  publishing  areas;  MSGI
Computer  Services which  utilizes a combination of mainframe,  PC platforms and
Internet servers for database development,  data enhancement,  response analysis
and predictive modeling  capabilities;  MetroArts develops and executes customer
acquisition  campaigns  for the  performing  arts,  entertainment  and  cultural
institutions and Metro Non-Profit  provides strategic  planning,  membership and
direct mail fundraising campaigns for non-profit  institutions.  The majority of
Metro's revenues are derived from a commercially driven client base.

In exchange for all of the then outstanding  shares of Metro, the Company issued
1,814,000  shares of its common stock valued at $7,256,000 and promissory  notes
(the "Notes") totaling $1,000,000.  The Notes, which have a stated interest rate
of 6%, were  discounted to $920,000 to reflect an estimated  effective  interest
rate of 10%. The Notes are due and payable,  together with interest thereon,  on
June 30, 1998, subject to earlier repayment,  at the option of the holder,  upon
completion  by the Company of a public  offering of its equity  securities.  The
Notes are convertible on or before maturity,  at the option of the holder,  into
shares of common stock at a conversion rate of $5.38 per share.  $100,000 of the
principal  amount of the Notes was paid by the  Company as of June 30,  1997 and
$400,000 was paid in July, 1997.

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

The  operating  results of this  acquisition  are  included in the  consolidated
results of operations from the date of acquisition.

Acquisition of Pegasus Internet, Inc. ("Pegasus"):
Effective July 1, 1997, MSGI announced the  acquisition of Pegasus.  Pegasus was
formed in 1994 and is  incorporated  in New York.  For the year  ended  June 30,
1997, Pegasus had unaudited revenues of approximately  $445,000. In exchange for
all of the then outstanding shares of Pegasus, the Company issued 600,000 shares
of its  common  stock,  valued at  $1,800,000,  and  $200,000  in cash.  Pegasus
provides a full suite of Internet  services,  including content  development and
planning,  marketing strategy,  on-line ticketing system development,  technical
site hosting,  graphic design,  multimedia  production and electronic  commerce.
Pegasus' clients include Lincoln Center,  Boston Symphony,  Chicago Symphony and
Metropolitan Opera Guild.

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

Recapitalization:
On December 23, 1996, the Company and certain of its securityholders  effected a
recapitalization  of the Company's  capital  stock,  whereby:  (i) the Company's
Series B Convertible  Preferred  Stock,  par value $.01 per share (the "Series B
Preferred  Stock"),  was  converted,  in  accordance  with its terms without the
payment of additional consideration, into 2,480,000 shares of Common Stock; (ii)
the Company's  Series C Convertible  Preferred  Stock,  par value $.01 per share
(the "Series C Preferred  Stock"),  was repurchased  for promissory  notes in an
aggregate principal amount of $1.0 million, which promissory notes bore interest
at a rate of 8% per  annum  and were  repayable  on  demand at any time from and
after the date of the consummation of a proposed underwritten public offering by
the Company of Common Stock, but in any event such notes originally matured June
7, 1998 but were paid in full in April,  1997; (iii) all accrued interest on the
Series B Preferred  Stock and the Series C Preferred  Stock was  converted  into
88,857 shares of Common Stock;  (iv) warrants  related to the Series C Preferred
Stock,  currently  exercisable  for  3,000,000  shares  of  Common  Stock,  were
exchanged for 600,000 shares of Common Stock; and (v) options held by two of the
Company's  principal  executive  officers to purchase  300,000  shares of common
stock were to be  canceled  at no cost to the  Company,  subject  to  successful
completion of an underwritten  offering. The public offering was not consummated
and, accordingly, the options were not canceled. Upon conversion of the Series B
Preferred Stock and accumulated  interest  thereon into Common Stock on December
23,  1996,  the Company  incurred a  non-cash,  non-recurring  dividend  for the
difference  between  the  conversion  price and the  market  price of the Common
Stock,  totaling $8.5 million.  Upon repurchase of the Series C Preferred Stock,
the Company  incurred a  non-recurring  dividend of $573,000 for the  difference
between  the  repurchase  price  and the  accreted  book  value of the  stock at
December  23, 1996.  These  dividends  do not impact net income  (loss),  but do
impact net income (loss)  attributable to common stockholders in the calculation
of earnings per share.

Withdrawal of Registration Statement:
On October 17, 1996, the Company filed a Form SB-2  registration  statement (the
"Registration  Statement")  with the  Securities  and Exchange  Commission.  The
Registration  Statement related to a proposed  underwritten public offering (the
"Proposed  Offering") of 2,100,000  shares of Common Stock,  of which  1,750,000
shares  were being  offered by the Company  and  350,000  were being  offered by
certain  stockholders  of the Company.  It also related to the sale of 1,381,056
shares of Common Stock by certain selling  stockholders on a delayed basis.  Due
to  market   conditions,   on  February  11,  1997,  the  Company  withdrew  the
Registration  Statement and pursued other sources of financing.  As such, in the
year ended June 30, 1997, the Company expensed $1.2 million in Proposed Offering
costs.

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

Financing:
In March 1997, to obtain $2.1 million in working capital and reduce the overhang
associated  with the existence of  outstanding  warrants,  the Company  accepted
offers from certain  warrant-holders  to exercise  their  warrants for 3,152,500
shares of common stock at discounted exercise prices.

In the fourth quarter of 1997,  the Company  obtained  $2,046,000,  net of fees,
from  the  private  placement  of 6%  convertible  notes,  with a face  value of
$2,200,000.  The notes are  payable  with  interest  on April 15,  1999,  if not
previously  converted.  The notes are  convertible  into shares of the Company's
Common Stock at the lesser of $2.50 per share or 83% of the average  closing bid
price of the Common Stock during the last five trading days prior to conversion.
Subsequent to June 30, 1997,  through September 23, 1997,  $1,675,000 face value
of the notes, plus interest, was converted into 684,122 shares.

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

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

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

Telemarketing/telefundraising  projects generally require significant amounts of
customer  information  supplied  by the client or third  party  sources.  Custom
telemarketing/telefundraising  programs  seek  to  maximize  a  client's  direct
marketing  results by  utilizing  appropriate  databases to  communicate  with a
specific audience.  This  customization is often achieved through  sophisticated
and  comprehensive  data analysis which identifies  psychographic,  cultural and
behavioral patterns in specific geographic markets.

Industry  Growth - The use of direct  marketing has increased  over the last few
years due in part to the relative cost efficiency of direct  marketing  compared
to mass  marketing,  as well as the rapid  development of more powerful and more
cost-effective  information technology and data capture capabilities.  According
to industry  sources,  over the next decade,  demographic  shifts and changes in
lifestyle,  combined with new marketing  mediums,  are expected to create higher
demand  by  businesses  for  marketing   information  and  services  to  provide
businesses  with direct access to their  customers and a more efficient means of
targeting  specific audiences and developing  long-term customer  relationships.
According to a study commissioned by the Direct Marketing  Association  ("DMA"),
expenditures for direct marketing services in 1996 were estimated to approximate
$144.5 billion,  the largest component of which, $57.8 billion, was attributable
to telemarketing.  The study estimated that annual direct marketing  advertising
expenditures may grow to $205 billion by the year 2001,  including $84.4 billion
on telemarketing.

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

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

Growth Strategy:
As  clients  for the  Company's  services  demand  more  sophisticated  database
management services,  custom telemarketing/  telefundraising  services and other
direct  marketing  services,  the Company  believes  that there are  significant
growth  opportunities to expand its business.  Accordingly,  the key elements of
the Company's growth strategy are as follows:

Expand the Range of Services Offered and  Cross-Selling - The Company intends to
offer a wider range of direct marketing  services while  maintaining its current
level of quality and  performance.  To effect this  strategy,  the Company  will
focus on assembling a spectrum of direct marketing services, including expanding
outbound  custom   telemarketing/telefundraising   services,   market  research,
training, marketing,  consulting, and database management services as well as an
array of  ancillary  services.  These  services  include  electronic  and  other
multimedia  mediums,  including  the Internet,  for inclusion  within a client's
marketing  programs.  The  Company  intends to  utilize  its  technological  and
industry  expertise to provide  flexible  integrated  solutions to meet clients'
specialized   requirements   and  to  improve   coordination   between  database
capabilities and value-added premium telemarketing services.

Expand  Market   Penetration -  The  Company   intends  to  capitalize  on  core
competencies  and industry  specific  expertise,  particularly in the performing
arts and  cultural  markets,  which it  believes  will  enable it to  maintain a
competitive advantage.  For example, the live entertainment and events marketing
industry spends substantial amounts on advertising and direct marketing programs
which  utilize  many  of the  Company's  services,  such as  audience  analysis,
customer profiling,  database creation and management, list processing services,
telemarketing and direct marketing  support.  The Company believes its expertise
in database  management and custom  telemarketing  will permit it, over time, to
gain a larger market share.

In addition,  the Company believes that its developed  expertise and experience,
as well as its broad and well-known client base and quality service, will enable
it  to  gain  further   acceptance  in  such  industries  as  publishing,   live
entertainment  and events marketing,  public  broadcasting,  financial  services
(including  credit card,  home  mortgage and home equity  services),  education,
travel and leisure and healthcare.

Develop  Existing and Create New  Proprietary  Software and Database  Management
Applications - The  Company  intends to  continue  to develop  existing  and new
proprietary customized data processing software products and services that allow
enhancement of a client's direct marketing  databases.  These software  products
and services also improve the  effectiveness of  telemarketing  programs and the
management of client information.  The Company intends to continue to expand its
direct  marketing  service  offerings,  particularly  with software  designed to
create and manage large relational and/or  multidimensional  databases,  and its
ability to integrate such data with different  marketing  programs  developed in
collaboration with its clients.

Increase Capacity for  Telemarketing/Telefundraising  Services;  Enhance On-Site
Data and Calling Systems - The Company has recently  expanded its calling center
in  Berkeley,  California  to  accommodate  more  calling  stations and upgraded
technology  in  order  to  increase  revenues,   improve  margins  and  increase
efficiency in client direct marketing programs. The Company intends to implement
similar  technological  improvements at on-site locations through new technology
configurations  and software systems that link information with client databases
and direct  marketing  programs and to further upgrade both the Berkeley calling
center and other on-site locations as needed.

Pursue  Strategic  Acquisitions,  Joint  Ventures and Marketing  Alliances - The
Company believes that as the direct marketing industry consolidates,  breadth of
skills,  industry  knowledge  and size will  become.  As a result,  the  Company
intends to expand its  capabilities  to  increase  industry  knowledge  and help
clients to improve returns on marketing  expenditures.  Although the Company has
not  specifically  identified  any  particular  geographic  market,  the Company
believes  it can  enter new  geographic  markets  and  increase  penetration  of
targeted  industries by acquiring  companies with clients in such new geographic
markets whose business focus will complement and/or expand the Company's current
range  of  services.   As  a  result,  the  Company  seeks  and  is  considering
acquisitions in order to enlarge its core  competencies  in database  management
and custom telemarketing/telefundraising  services and to increase its potential
for cross-selling and providing other direct marketing  services.  No agreement,
definitive  or  otherwise,  has been  reached  with  respect to any  acquisition
currently  being  considered and no assurance can be given that the Company will
complete either the acquisitions  under  consideration or any other acquisition,
or that any acquisition, if completed, will be successful.

The Company also intends to continue to grow internally by investing in systems,
technology  and personnel  development  to enable  clients to utilize,  within a
single   environment,   various  services  such  as  database   creation,   data
warehousing,   database  management  and  decision  support  capabilities,  list
processing,  modeling,  and response  measurement  and  analysis.  Because these
services provide the fundamental  support systems for direct marketing and media
selection processes, the Company seeks to expand its base of technology.

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

Database Management  Services - The Company's database management services begin
with database  creation and  development,  which include the planning stages and
analytical  processes  to review all of the client's  customer  and  operational
files.   Utilizing  both  proprietary  and  commercial  software,   the  Company
consolidates all of the separate  information and relationships  across multiple
files and converts the client's raw information into a consolidated format. Once
the client's customer data is consolidated and the database created, the data is
enhanced using a wide selection of demographic, geographic, census and lifestyle
information  for over 95  million  households  and 153  million  individuals  to
identify  patterns and  probabilities  of behavior.  The Company  licenses  this
information from a variety of leading data compilers.

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

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

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

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

The Company also offers an array of list acquisition  techniques.  Approximately
12,000  lists are  available  for  rental in the list  industry.  The  Company's
account  managers,  most of whom are hired from existing Company  accounts,  use
their  industry  experience  as  well  as  sophisticated  computer  profiles  to
recommend  particular  lists for  customer  acquisition  campaigns.  The Company
acquires  hundreds of  millions of records  annually  for  customer  acquisition
campaigns.  The Company also manages over 75 lists for rental purposes on behalf
of list owners.

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

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

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

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

Market  Analysis -  The  Company's  market  research  services  include  problem
conceptualization,  program design,  data gathering and results analysis.  These
services are conducted through telephone, mail and focus groups. Through the use
of data  capture  technology,  the  Company  is also able to obtain  data from a
statistically  predictable  sample of market survey  contacts.  The Company then
tabulates and analyzes fielded data using multi-variate  statistical techniques,
and produces detailed reports to answer clients' marketing questions and suggest
further marketing opportunities.

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

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

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

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

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

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

Personnel and Training:
The Company  believes  that the quality and  training of its  employees is a key
element of client  satisfaction.  The Company further believes that its strategy
of recruiting personnel with industry specific  experience,  technical knowledge
or affinities related to the client's purpose,  particularly with respect to its
custom  telemarketing/telefundraising  on-site calling services, attracts a more
effective  work force.  The Company  offers  in-house  and  on-the-job  training
programs for personnel,  including  instruction on the nature and purpose of the
specific projects,  as well as regular briefings  concerning  regulatory matters
and proper  telemarketing and data capture techniques.  Calls are typically made
from a lead  provided by the client or other third  party  sources.  Callers are
always required to identify  themselves and the institution  they represent,  in
advance of any dialogue. Since calls are meant to be non-intrusive and friendly,
it often takes two or more calls to a customer to confirm a transaction.

Approximately  80%  of  the  Company's  service  representatives  are  part-time
employees  who are  compensated  on an hourly  basis  with a  commission  and/or
performance  bonus,  which  is  typical  for  the  telemarketing  industry.  The
Company's use of calling  facilities  provided by a client  relates in part to a
high level of  dedication to customer  service and to the localized  talent pool
found by the Company to be most  effective for employee  retention.  None of the
Company's  employees is represented by a labor union and the Company believes it
has satisfactory relations with its employees.

Client Base:
The Company  believes  that its large and  diversified  client base is a primary
asset which contributes to stability and the opportunity for growth in revenues.
The  Company  has   approximately  600  clients  who  utilize  various  database
management  services,  custom  telemarketing/telefundraising  services and other
direct  marketing  services.  These  clients are  comprised  of leading arts and
cultural  institutions,   advocacy  groups,  and  commercial  companies  in  the
publishing,  live  entertainment  and  events  marketing,  public  broadcasting,
financial  services  (including  credit  card,  home  mortgage  and home  equity
services),  education,  travel and leisure and healthcare industries.  No single
client accounted for more than 5% of such total revenue in fiscal 1997.

Quality Assurance:
Each of the Company's operating  businesses has consistently  emphasized service
and employee  training.  In particular,  the Company's quality assurance program
with  respect  to  its  telemarketing/  telefundraising  services  includes  the
selection and training of qualified  calling  representatives,  the training and
professional  development  of call center  management  personnel,  monitoring of
calls and sales  verification and editing.  Both the Company and its clients are
able to perform real time on-site and remote call monitoring to maintain quality
and efficiency. Sales confirmations may be recorded (with customer consent), and
calls may also be monitored by  management  personnel to verify the accuracy and
authenticity of transactions.

The  Company  diligently  pursues  its  policies  of good  practice  and has had
satisfactory experience with regulators concerning its activities.  Although the
telemarketing  industry  has had,  in  certain  instances,  a history of abusive
practices,  many of which  have  been  targeted  at the  elderly  or  uneducated
segments of the population,  the individuals  targeted by the Company  generally
consist  of  affinity  group  members  who are  receptive  to the  calls,  often
volunteering  valuable  marketing  information to the  institution for which the
representative is calling.

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

Competition  is based on quality  and  reliability  of  products  and  services,
technological  expertise,  historical experience,  ability to develop customized
solutions  for  clients,  technological  capabilities  and  price.  The  Company
believes that it competes  favorably,  especially in the arts and entertainment,
publishing,  financial services and fundraising sectors. The Company's principal
competitors in the database management services field are Abacus Direct,  Acxiom
Corporation, Dimac Corporation,  Direct Marketing Technology,  Fair-Isaac, Inc.,
Harte-Hanks  Communications,  Inc. and May & Speh, Inc. The Company's  principal
competitors  in  the  custom  telemarketing/   telefundraising  field  are  Arts
Marketing,  Inc.  and  Ruffalo,  Cody &  Associates,  and,  with  respect to the
operation of calling centers, The Share Group and Great Lakes Communications.

Competitive Strengths:
Customized Premium Services - The Company believes that a competitive  advantage
of its  services  is the custom  nature and  value-added  component  it provides
within a client's overall  marketing  process.  This  customization  arises from
enhancing  and  integrating  data  provided  by  clients  to  achieve  the  most
productive  and  cost-effective   marketing   program.   The  Company  not  only
collaborates on message content but also assists its client in identifying which
medium or mix of mediums is best  suited to  implement  the  client's  marketing
program.

Long-Term  Client  Relationships  and  Recurring  Revenue  Streams - The Company
believes that the reason the majority of its client-base  stays with the Company
for many  years is  because of the  Company's  ability  to  provide  customized,
quality services. The Company is able to gain knowledge of and experience with a
client's customer base and market dynamics. The Company seeks recurring revenues
by becoming an integral part of clients'  marketing programs along with offering
a wide breadth of ongoing interrelated services.  Although many of the Company's
arrangements with clients are entered into on a project by project basis, it has
been the Company's experience that its database management clients cannot easily
change service  providers due to the breadth and nature of the ongoing  services
provided.  These services  often become a key element of the clients'  marketing
operations and there are significant costs associated with making such a change.

Continuity  of  Management,   Industry  Specific  Expertise  and  Investment  in
Technical  Personnel - The Company  believes that its industry  focused approach
creates a competitive  advantage  over other  providers of database  management,
custom   telemarketing/telefundraising   services  and  other  direct  marketing
services who have a more generalized  approach.  The Company has hired and seeks
to hire many  individuals with industry  specific  experience who understand the
nature of the  clients'  customers  and the  dynamics  of the  marketplace.  The
Company considers such personnel better able to apply the Company's  proprietary
software  programs to meet the client's  direct  marketing  and data  processing
needs.

State-of-the-Art   Technology - The  Company's  investment  in  state-of-the-art
technology has enabled it to provide quality service to clients for whom the use
of timely,  accurate data is critical for the success of their direct  marketing
programs.  This is  particularly  true with  respect to the  Company's  database
management  services  designed to drive higher  response rates within a specific
time period allotted for a marketing program. In addition,  much outsourced data
processing requires prompt turnaround time for marketing decisions.

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

The Company leases all of its real property.  The Company leases  facilities for
its  headquarters  and its sales and  service  offices  in New York City and Los
Angeles,  California,  its data  center in New York  City and its  telemarketing
calling center in Berkeley,  California.  To accommodate  its rapid growth,  the
Company plans to expand its data center and  administrative  offices in New York
during fiscal 1998. The Company's  administrative  office for its  telemarketing
/telefundraising  operations  in Los Angeles is located in office  space  leased
from the former owner of SD&A,  which lease the Company  believes is on terms no
less  favorable  than those  that  would be  available  from  independent  third
parties.  The Company  believes that all of its facilities are in good condition
and are  adequate for its current  needs  through  fiscal  1998,  except for its
planned expansion in New York. The Company has begun negotiations for additional
space in the building it currently  occupies and believes  such space is readily
available at commercially  reasonable rates and terms. The Company also believes
that its  technological  resources,  including the mainframe  computer and other
data processing and data storage computers and electronic  machinery at its data
center  in New York  City,  as well as its  related  operating,  processing  and
database  software,  are  all  adequate  for  its  needs  through  fiscal  1998.
Nevertheless,  the  Company  intends  to  expand  its  technological  resources,
including  computer  systems,  software,  telemarketing  equipment and technical
support.  Any such  expansion  may require the leasing of  additional  operating
office space.

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

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

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

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

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

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

All-Comm Holdings, Inc:
In  1979,  under  prior  management,   the  Company,  through  its  wholly-owned
subsidiary,  acquired 6.72 acres of  undeveloped  land on the Colorado  River in
Laughlin,  Nevada, for approximately  $560,000.  On August 16, 1996 the land was
sold to an independent third party, via a public auction,  for $952,000 in cash,
resulting in a net gain of  approximately  $90,000 over book value,  as adjusted
for capitalized costs and assessments  during the holding period. In June, 1997,
All-Comm Holdings, Inc. was dissolved.

Employees:
At September 24, 1997, the Company,  SD&A, Metro and Pegasus  collectively  have
approximately 1,150 employees,  of whom approximately 1,000 are part-time.  None
of the Company's employees are covered by collective  bargaining  agreements and
the Company believes that its relations with its employees are good.


Item 2 - Properties
-------------------
The Company,  through All-Comm Holdings,  Inc., owned the property identified in
Item 1. The Company  leases  approximately  2,000 square feet of office space in
Los  Angeles,  California.  The lease runs  through  May 31,  1998.  SD&A leases
approximately  5,500 square feet of office space in Venice,  California from its
founder and president, 6,600 square feet in Berkeley, California, and 250 square
feet in Patterson,  New York. These leases range from month-to-month,  to August
2001, and include options to renew. Metro currently leases  approximately 14,000
square feet of office and data processing  space in New York, New York, which it
plans to expand in fiscal 1998, to  accommodate  its rapid  growth.  The Company
believes  its  facilities  are  suitable and adequate for the purposes for which
they are used and are adequately maintained.


Item 3 - Legal Proceedings
--------------------------
The  Company  has been party to minor  legal  proceedings.  The outcome of these
legal  proceedings  are not  expected to have a material  adverse  effect on the
consolidated  financial  condition,  liquidity or  expectations  of the Company,
based on the Company's current understanding of the relevant facts and law.


Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
On June 30, 1997, the Company held a Special  Meeting of Shareholders to vote on
management's  proposal to amend the Company's  Amended and Restated  Articles of
Incorporation to change the name of the Company from All Comm Media  Corporation
to Marketing Services Group, Inc. The shares voted were as follows:

                        For            8,484,960
                        Against           11,805
                        Abstentions        1,302
                        Broker non-votes    None


<PAGE>


                                       PART II

Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
------------------------------------------------------------------------------
The  common  stock of the  Company  previously  traded on the  NASDAQ  Small-Cap
MarketSM  under the symbol SPTK. As approved by the  shareholders  on August 22,
1995, the Company changed its name to All-Comm Media  Corporation and the symbol
was changed to ALCM.  As  approved by the  stockholders  on June 30,  1997,  the
Company changed its name to Marketing  Services  Group,  Inc. and the symbol was
changed to MSGI. The following  table reflects the high and low sales prices for
the Company's  common stock for the fiscal quarters  indicated,  as furnished by
the NASD,  adjusted to reflect a  one-for-four  reverse  stock  split,  effected
August 22, 1995:

                                        Common Stock
                             Low Sales Price    High Sales Price
                             ---------------    ----------------
           Fiscal 1997
             Fourth Quarter       $1.69             $3.56
             Third Quarter         2.00              5.25
             Second Quarter        3.19              5.63
             First Quarter         4.63              6.13
           Fiscal 1996
             Fourth Quarter       $2.13             $6.38
             Third Quarter         3.00              4.44
             Second Quarter        1.88              5.00
             First Quarter         3.63              8.25

As of June 30, 1997, there were  approximately 900 registered  holders of record
of the Company's  common stock.  (This number does not include  investors  whose
accounts are maintained by securities firms in "street name".)

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

Item 6 - Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------

Introduction:

This discussion  summarizes the significant  factors  affecting the consolidated
operating results,  financial  condition and liquidity/cash  flow of the Company
for  the  three  year  period  ended  June  30,  1997.  This  should  be read in
conjunction with the financial statements,  and notes thereto,  included in this
Annual  Report.  As more  fully  described  in  Footnote  4 to the  consolidated
financial statements, on April 25, 1995, the Company purchased 100% of the stock
of Alliance which had simultaneously acquired SD&A. These acquisitions have been
reflected in the consolidated  financial statements using the purchase method of
accounting.   Accordingly,   the   Consolidated   Statement  of  Operations  and
Consolidated Statement of Cash Flows include the operations of Alliance and SD&A
starting on April 25, 1995.

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

In the year ended June 30, 1995,  ("Fiscal 1995"), the Company  discontinued the
operations of Sports-Tech  International,  Inc. and High School Gridiron Report.
In Fiscal 1995, the Company sold Sports-Tech  International  and closed the HSGR
operation.  The  ultimate  sale  of STI  resulted  in a gain  of  $322,000.  The
Consolidated  Financial  Statements  have been  reclassified  to report  the net
assets,  operating  results,  gain  on  disposition  and  cash  flows  of  these
operations  as  discontinued  operations.   With  the  disposition  of  the  STI
operations,  closure of the HSGR  operations and the acquisition of Alliance and
Metro, the Company is now operating in the direct marketing industry.

Results of Operations 1997 compared to 1996:

Revenues  of $24.1  million  for the year ended June 30,  1997  ("Fiscal  1997")
increased by $8.2 million over revenues of $15.9  million  during the year ended
June  30,  1996  ("Fiscal  1996"),  principally  due  to  the  inclusion  of the
operations of Metro effective  October 1, 1996. Fiscal 1997 revenues from SD&A's
off-site campaigns totaled $3.1 million (19.4% of SD&A revenues), an increase of
$0.4 million over Fiscal 1996.  Fiscal 1997 revenues from on-site  telemarketing
and telefundraising  campaigns totaled $12.9 million (80.6% of SD&A revenues), a
decrease of $0.4 million over Fiscal 1996. On average,  SD&A's margins  relating
to off-site  campaigns  are  generally  higher than margins  relating to on-site
campaigns.

Salaries and benefits of $15.0 million in Fiscal 1997  increased by $2.3 million
over salaries and benefits of $12.7 million in fiscal 1996,  principally  due to
the  inclusion  of $1.8  million  from Metro.  SD&A  increased  by $0.6  million
principally   due  to  the  minimum  wage   increase  and  changes  in  campaign
efficiencies. Corporate administrative salaries decreased by $0.1 million due to
corporate restructuring and resulting  administrative  headcount reductions.  In
addition,  in Fiscal 1997 the Company incurred a non-recurring,  non-cash charge
of $1,650,000 to compensation  expense relating to options granted to two former
principal  executive  officers.  Such charge was  incurred  because the exercise
price of each option,  which was based upon the market price of the common stock
on May 30, 1996 (the date which the Company  intended as the  effective  date of
the grant)  rather  than the market  price on  September  26,  1996 (the  actual
effective  date of the  grant),  was lower than the  market  price of the common
stock on September 26, 1996.

Direct  costs of $5.6  million in Fiscal 1997  increased  by $4.8  million  over
direct costs of $0.8 million in Fiscal 1996, principally due to the inclusion of
Metro.

Selling,  general and  administrative  expenses  of $2.7  million in Fiscal 1997
increased by $1.0 million or 59.5% over $1.7 million of such  expenses in Fiscal
1996, principally due to the inclusion of $0.8 million from Metro. The remaining
increase of $0.2 million which came from SD&A resulted from increased travel and
training  principally as a result of bringing  campaign  managers to Los Angeles
for  training on SD&A's new on-site  software,  combined  with  increased  rent,
business taxes and insurance  associated  with moving and expanding the Berkeley
Calling Center in August 1996.

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

Professional  fees of $0.9 million in Fiscal 1997 increased by $0.3 million,  or
39%,  over $0.6 million in Fiscal  1996,  principally  to the  inclusion of $0.2
million  from  Metro,  as well as a  non-recurring  charge  of $0.1  million  in
consulting  fees  attributable  to the  value of  warrants  acquired  by  former
consultants during the period.

Depreciation  expense of  $250,000  in Fiscal 1997  increased  by $110,000  over
$140,000 in Fiscal 1996  including  $86,000 from Metro.  The remaining  increase
resulted principally from leasehold  improvements made in the move and expansion
of SD&A's Berkeley Calling Center.

Amortization  of  intangible  assets of  $719,000 in Fiscal  1997  increased  by
$357,000 over $362,000 in Fiscal 1996. Of the increase, $338,000 is attributable
to the  amortization  of costs in excess of net tangible  assets acquired in the
Metro  acquisition  starting on October 1, 1997,  including the  amortization of
$250,000 in  proprietary  software  over its expected  period of benefit of five
years. A value of $650,000 was assigned to the covenants-not-to-compete with the
former  principals of Metro and is being  amortized over their three year lives.
The unassigned  excess costs are being  amortized over their expected  period of
benefit   of   forty    years.    Amortization    of   the    goodwill   and   a
covenant-not-to-compete  associated  with the Alliance and SD&A  acquisition  on
April 25,  1995  increased  by  $22,000  in Fiscal  1997 due to an  increase  in
goodwill of $850,000 as of June 30, 1996 for  payments  made to the former owner
of SD&A resulting from  achievement of defined results of operations of SD&A for
the year then ended.  Amortization  expense is  expected to increase  during the
year  ended June 30,  1998 due to the  inclusion  of a full year of Metro,  plus
amortization  of  amounts  payable  to the  former  owner of SD&A for  achieving
defined results of operations for the two years ended June 30, 1997.

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

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

Interest  expense of $530,000 in Fiscal 1997  increased by $25,000 over $505,000
in Fiscal 1996. The current year included  $128,000 on the Company's  redeemable
convertible  preferred  stock,  prior to its  conversion  and  repurchase in the
December 1996 recapitalization, $78,000 payable on notes to the former owners of
Metro,  $55,000 on the Company's  $2.2 million in convertible  notes  (including
amortization of issuance  costs) and $42,000 from the inclusion of Metro.  These
amounts were offset by reductions of $226,000 due to principal repayments on the
SD&A seller debt and  reductions  in the  interest  rate  combined  with $46,000
incurred in Fiscal 1996 for expenses  incurred from warrants issued in financing
transactions  and  $6,000 of other  minor net  reductions.  Interest  expense is
expected  to  increase  slightly at the  operating  subsidiary  level due to new
financing arrangements,  offset by significant reductions at the corporate level
upon further pay down and conversions of existing corporate debt.

The  Company  recorded  a net gain of $90,000  from the sale of its  undeveloped
parcel of land in Laughlin,  Nevada in August 1996,  which gain was recorded net
of commissions and related selling expenses.

The provision  for income taxes in Fiscal 1997 of $109,000  decreased by $32,000
over the provision of $141,000 in Fiscal 1996. The provision  results from state
and local taxes  incurred on taxable  income at the operating  subsidiary  level
which can not be offset by losses  incurred  at the  corporate  level.  Taxes of
$64,000  resulted  from  inclusion  of Metro and were  offset by  reductions  of
$96,000 due  primarily to lower  taxable  income and changes in filing status at
SD&A.

Results of Operations 1996 compared to 1995:

Revenues of $15.9 million in Fiscal 1996  increased by $12.3 million over Fiscal
1995 revenues,  principally due to the inclusion of a full year of operations of
SD&A in Fiscal  1996 as compared  with the period  from the date of  acquisition
(April 25,  1995) to June 30, 1995 in Fiscal  1995.  Fiscal 1996  revenues  from
off-site  campaigns  totaled $2.7 million  (16.7% of revenues) and revenues from
on-site telemarketing and telefundraising campaigns totaled $13.2 million (83.3%
of revenues).  During Fiscal 1995 and 1996,  the Company's  margins  relating to
off-site  campaigns  were  generally  higher  than  margins  relating to on-site
campaigns.

Salaries and benefits of $12.7 million in Fiscal 1996  increased by $9.6 million
over  salaries and benefits of $3.1 million in Fiscal 1995,  principally  due to
the  inclusion  of a full  year  of  operations  of SD&A in  Fiscal  1996.  As a
percentage of revenues,  however,  salaries and benefits  declined from 86.5% to
80.0%  because,  in Fiscal 1995 and Fiscal 1996,  the Company had a full year of
administrative   salaries  and  benefits  at  the  corporate  level   (including
administrative  salaries  and  benefits  associated  with the  Company's  former
management  prior to the  acquisition  of Alliance) but only  approximately  two
months of revenues from the operations of SD&A in Fiscal 1995.

Direct  costs of $0.8  million in Fiscal 1996  increased  by $0.7  million  over
direct costs of $0.1 million in Fiscal 1995, principally due to the inclusion of
costs associated with the Berkeley  calling center  operations for all of Fiscal
1996 as well as $0.2 million in costs  associated with advertising for staff for
on-site campaigns in Fiscal 1996.

Selling,  general and  administrative  expenses  of $1.7  million in Fiscal 1996
increased by $0.6 million,  or 59%, over $1.1 million of such expenses in Fiscal
1995,  principally  due to the inclusion of a full year of operations of SD&A in
Fiscal 1996. Professional fees of $0.6 million in 1996 increased by $166,323, or
36.2%, over professional fees of $0.5 million in Fiscal 1995, principally due to
legal  and  accounting  fees  incurred  in  connection  with the  evaluation  of
potential acquisitions and financing sources.

Depreciation  expense of  $140,000  in fiscal  1996  increased  by $88,000  over
$52,000 in 1995 due to a full year of depreciation at SD&A.

Amortization  of intangible  assets of $0.4 million in Fiscal 1996  increased by
$0.3 million over  amortization of approximately  $65,000 in Fiscal 1995, due to
the amortization of the goodwill and a  covenant-not-to-compete  associated with
the Alliance and SD&A acquisitions on April 25, 1995.

The Company had other  expense of $0.5 million in Fiscal 1996  compared to other
income of $1.2 million in Fiscal 1995, a decrease of $1.7  million,  principally
due to  increases  in Fiscal 1996  interest  expense  related to the SD&A Seller
Debt.  In Fiscal  1995,  the  Company had  nonrecurring  net gains from sales of
securities of $1.6 million, which were partially offset by a loan commitment fee
of $0.3 million in connection with the original purchase of such securities.

The  provision  for  income  taxes  in  Fiscal  1996 of  $141,000  increased  by
approximately  $66,000, or 88.1%, over the provision for income taxes of $75,000
in  1995.  The  provision  for  income  taxes  increased,  despite  losses  from
continuing operations,  as a result of state and local taxes incurred on taxable
income at the operating  subsidiary level.  Under applicable tax law, such taxes
at the operating  subsidiary level could not be offset by losses incurred at the
corporate level.

The gain on sale of,  and loss  from,  discontinued  operations  in Fiscal  1995
relates  to the STI and HSGR  operations  which  were  either  sold or closed in
Fiscal 1995 as a condition precedent to the acquisition of Alliance.  No amounts
related to discontinued operations were incurred in Fiscal 1996.

As a result of the foregoing factors, the Company had a net loss of $1.1 million
in Fiscal 1996 as compared to net income of $0.1 million in 1995.

Capital Resources and Liquidity:

Historically,  the Company has funded its operations,  capital  expenditures and
acquisitions primarily through cash flow from operations,  private placements of
common and preferred stock, and its SD&A credit facility.

Cash used for operating  activities  totaled  $2,664,000 for fiscal 1997. Fiscal
1997 operating  activities  included cash for non-recurring  charges incurred on
the Company's withdrawn public offering, as well as the corporate  restructuring
and related prior management settlement agreements.

Cash provided by investing  activities  totaled  $578,000 for fiscal 1997. These
activities included $860,000 provided from the August 1996 sale of the Company's
land in Laughlin,  Nevada,  and $207,000 net cash received from the inclusion of
Metro.  These were offset by $490,000 in purchases  of property  and  equipment,
principally  computer  hardware  and  software at Metro,  and for  expansion  of
capacity at SD&A's Berkeley Calling Center.  The Company  anticipates  continued
capital  expenditures in fiscal 1998 for computer hardware and software at Metro
and Pegasus.

Net cash provided by financing activities during fiscal 1997 totaled $3,622,000.
The Company  had  intended  to raise  funds for  capital  expenditures  and debt
repayment  in  fiscal  1997  via  an  underwritten  public  offering.  Upon  its
withdrawal in February 1997, the Company  pursued  private  financing  including
obtaining  $2,065,000  through induced warrant exercises and $2,200,000 from the
sale of  convertible  notes.  $1,675,000  of the notes were  converted to common
stock  subsequent to year end, through  September 23, 1997.  During fiscal 1997,
Metro obtained a credit facility with a lender for up to $1.5 million,  of which
$812,000 was used as of June 30, 1997.  Also during fiscal 1997,  SD&A increased
its $500,000 credit facility to $875,000, consisting of a $125,000 term loan and
$750,000  line of credit,  of which  $104,000 and $746,000,  respectively,  were
outstanding  as of June 30,  1997.  In August,  1997,  SD&A  replaced its credit
facility with a line of credit for up to $2.0 million.

Effective October 1, 1996, the Company purchased all of the outstanding stock of
Metro for  1,814,000  shares of its  common  stock,  valued  at  $7,256,000  and
$1,000,000 in convertible  notes.  In April,  1997, the Company paid $100,000 of
the Metro seller debt. An additional  $400,000 of Metro seller debt,  originally
due in June 1998, was paid in July, 1997.

As part if its December 23, 1996  recapitalization,  the Company repurchased its
Series C redeemable convertible preferred stock for a $1,000,000 note, which was
paid in April,  1997.  Also during fiscal 1997, the Company paid $467,000 of its
SD&A seller debt.

The Company  believes that funds available from operations and its unused credit
facilities  will be adequate to finance its current  operations and  anticipated
growth and meet planned capital  expenditures  and interest and debt obligations
in its fiscal year ending  June 30,  1998.  In  conjunction  with the  Company's
acquisition  strategy,  additional  financing may be required to meet  potential
acquisition payment  requirements.  The Company believes that it has the ability
to raise funds through  private  placements  or public  offerings of debt and/or
equity  securities  to  meet  these  requirements.  There  can be no  assurance,
however,  that such capital will be required or available at terms acceptable to
the  Company,  or at all. The Company is engaged in ongoing  evaluation  of, and
discussions with, third parties regarding possible  acquisitions;  however,  the
Company  currently has no definitive  agreements with respect to any significant
acquisitions.

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

New Accounting Pronouncements:

In February  1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  Per
Share" ("SFAS 128") which is effective for financial statements for both interim
and annual periods ending after  December 15, 1997.  Earlier  application is not
permitted;  however,  restatement  of all  prior-period  earnings per share data
presented is required.  The Company has not yet  determined  the effect SFAS 128
will have on its financial statements;  however, the adoption is not expected to
have a material impact on the financial position or results of operations of the
Company.

In March 1997, the FASB issued SFAS No. 129,  "Disclosure  of Information  about
Capital  Structure" ("SFAS 129"), which is required to be adopted by the Company
in fiscal 1998.  This  Statement  specifies  certain  disclosures  about capital
structure. Management does not expect that implementation of this Statement will
have a significant impact on the financial statements of the Company.

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

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


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


Item 8 - Changes in and  Disagreements  with  Accountants on Accounting and
---------------------------------------------------------------------------
Financial Disclosure
--------------------
None


<PAGE>

                                   PART III

Item 9 - Executive Officers and Directors of the Registrant
-----------------------------------------------------------
The Company's executive officers, directors and their positions with MSGI are
as follows:

Name                   Age     Position
----                   ---     --------
J. Jeremy Barbera      41      Chairman of the Board of Directors, Chief
                                Executive Officer, President and Chief
                                Operating Officer

Scott Anderson         40      Chief Financial Officer and Treasurer

Stephen Dunn           47      Vice President of MSGI and President and Chief
                                Executive Officer of Stephen Dunn &
                                Associates, Inc.

Robert M. Budlow       36      Vice President of MSGI and President of 
                                Metro Direct

Alan I. Annex          35      Director and Secretary

S. James Coppersmith   64      Director

Seymour Jones          66      Director

C. Anthony Wainwright  64      Director

Mr.  Barbera  has been  Chairman,  Chief  Executive  and  Operating  Officer and
President  of the Company  since  March 31,  1997,  and was a Director  and Vice
President  of the Company  from  October  1996 to March 1997.  He has been Chief
Executive  Officer of Metro since its formation in 1987. Mr. Barbera has sixteen
years of  experience  in data  management  services,  and over  twenty  years of
experience in the entertainment marketing area.

Mr.  Anderson has been Chief  Financial  Officer of the Company  since May 1996,
Treasurer  since May, 1997,  and was Controller  from May 1995 to May 1996 and a
Director  of the  Company  from May 1996 to August  1996.  Prior  thereto,  from
December  1994 to April 1995,  he was  associated  with the  accounting  firm of
Coopers &  Lybrand  L.L.P.,  and,  from  1988 to 1994,  he was a manager  in the
assurance  department  of an  affiliate  of the  accounting  firm of  Deloitte &
Touche, LLP. Mr. Anderson is a Certified Public Accountant.

Mr. Dunn has been Vice  President of the Company  since  September  1996 and has
also been President and Chief  Executive  Officer of SD&A,  which he co-founded,
since its formation in 1983. Previously, Mr. Dunn served as a consultant for the
Los Angeles  Olympic  Organizing  Committee  for the Olympic Arts  Festival,  as
Director of Marketing for the New World Festival of the Arts, and as Director of
Marketing for the Berkeley Repertory Theater.

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

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

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

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

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

Compliance with Section 16(A) of the Exchange Act:
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  Securities  and  Exchange  Commission  (the
"Commission")  and the NASDAQ National 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, 1997,  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, 1997, except that
Messrs.  Anderson  and Barbera  each made one late filing due to  administrative
timing errors on their part with respect to reporting  stock options  granted to
Mr. Anderson and repayment of convertible debt to Mr. Barbera.

<PAGE>

Item 10 - Executive Compensation
--------------------------------
Summary Compensation Table:
The following  table (the "Summary  Compensation  Table")  provides  information
relating to compensation for the fiscal years ended June 30, 1997, 1996 and 1995
for the Chairman of the Board and Chief Executive  Officer and each of the other
executive officers of the Company whose compensation is required to be disclosed
by the rules and regulations of the Commission during such years as shown in the
table (collectively, the "Named Executive Officers").

<TABLE>
                                                                                                Long-Term
                                         Fiscal                            Other           Compensation Awards
                                          Year                             Annual      Restricted       Securities
                                          Ended       Annual      Annual   Compen-       Stock          Underlying
Name and Principal Position              June 30,    Salary($)   Bonus($)  sation($)    Awards($)     Options/SARs(#)
---------------------------              --------    ---------   --------  ---------    ---------     ---------------
<S>                                      <C>         <C>         <C>       <C>          <C>           <C>

J. Jeremy Barbera(1)
Chairman of the Board, CEO, President      1997       120,883                                              1,000,000
   & COO

Stephen Dunn(2)                            1997       254,521
   VP, MSGI; President & CEO, SD&A         1996       228,462                                                  5,000
                                           1995        42,308

Thomas Scheir(2)                           1997       154,521     60,000                                      40,000
   Executive VP, SD&A                      1996       128,461     60,000                                      12,500
                                           1995        21,635

Krista Mooradian(2)                        1997       127,936     25,000                                      20,000
   VP, SD&A                                1996        85,092     29,372                                       5,375
                                           1995        12,692      2,060
Robert N. Budlow(3)
   VP, MSGI; President, Metro Direct       1997        93,750

Janet Sautkulis(3)
   COO, Metro Direct                       1997        93,750


Barry Peters(2)(4)                         1997       118,776               409,200                          300,000
   Chairman of the Board & CEO             1996       100,626                              32,058            150,000
   (to 3/31/97)                            1995        26,442

E. William Savage(2)(4)                    1997       108,699               367,500                          300,000
   President, COO, Secretary               1996       100,626                              32,058            150,000
   & Treasurer (to 3/31/97)                1995        26,442

</TABLE>
------------
(1)Mr. Barbera was appointed  Chairman of the Board,  Chief  Executive  Officer,
   President  and  Chief  Operating  Officer  effective  March 31,  1997.  Prior
   thereto,  commencing  with the October 1, 1996  acquisition of Metro,  he was
   Vice President of MSGI and Executive Vice President of Metro.  Pursuant to an
   employment  agreement  dated May 27, 1997,  his annual salary  increased from
   $150,000 to $250,000 through May 31, 1998. As of June 30, 1997, Mr. Barbera's
   salary  reflects  earnings  for the nine  months  from  the  date of  Metro's
   acquisition.
(2)Prior to the  acquisition  of  Alliance  in  April,  1995  none of the  Named
   Executive  Officers was an officer or employee of the  Company.  In addition,
   because  the  acquisition  of  Alliance  took  place  in  April,   1995,  the
   compensation  shown for each of the Named  Executive  Officers for the fiscal
   year ended June 30, 1995  reflects  only two months of  compensation  in such
   fiscal year.
(3)The annual  salaries for Mr. Budlow and Ms.  Sautkulis are $125,000 each. Due
   to the  acquisition  of Metro on October 1, 1996,  their annual  compensation
   only reflects nine months of salary.
(4)Messrs.  Peters and Savage left the service of the  Company  effective  March
   31, 1997.  Other annual  compensation  for 1997 includes  compensation  under
   separation agreements.  The total other annual compensation paid through June
   30, 1997 was $135,120 and $130,921, to Peters and Savage, respectively.

Stock Option Grants:
The table below provides  information  relating to stock options  granted to the
Named Executive Officers during the fiscal year ended June 30, 1997.

<PAGE>

<TABLE>

                                                     Individual Grants
                     -----------------------------------------------------------------------------
                       Number of           % of Total          Exercise     Market
                     Securities Under-    Options/SARs         or Base      Price
                      lying Options/   Granted to Employees  Price ($ per  on Date      Expiration
Name                 SARs Granted (#)    in Fiscal Year(2)     share(3))  of Grant($)      Date
----                 ----------------    -----------------     ---------  -----------   ----------
<S>                  <C>               <C>                   <C>          <C>           <C>    
J. Jeremy Barbera...    333,334(1)             47%               2.625                    5/27/04
                        333,333(1)                               3.00        2.625        5/27/04
                        333,333(1)                               3.50        2.625        5/27/04
Thomas Scheir.......     40,000                 2%               2.625                    5/27/04
Krista Mooradian....     20,000                 1%               2.625                    5/27/04
Barry Peters........    150,000                14%               2.50        5.375        9/25/03
                        150,000                                  3.00        5.375        9/25/03
E. William Savage...    150,000                14%               2.50        5.375        9/25/03
                        150,000                                  3.00        5.375        9/25/03
</TABLE>
-------------
(1)Mr.  Barbera's  options are  exercisable  as follows:  1/3 of each tranche is
  available for exercise  immediately,  1/3 of each tranche becomes available in
  May, 1998, with the remaining 1/3 exercisable in May, 1999.
(2)During  the  fiscal  year  ended  June  30,  1997,   all  employees  and  all
  non-employee  Directors of the Company  received  stock options for a total of
  2,117,000 shares of Common Stock.
(3)Exercise  price is the closing sales price of the Common Stock as reported on
  The  Nasdaq  SmallCap  MarketSM  on the date of the  grant,  unless  otherwise
  identified.

The  following  table sets forth  information  regarding the number and value of
securities  underlying  unexercised  stock  options held by the Named  Executive
Officers as of June 30, 1997.

                   Number of Securities Underlying  Value of Unexercised In-the-
                     Unexercised Options/SARs           Money Options/ SARs
                       at Fiscal Year End (#)        at Fiscal Year End ($) (1)
Name                 Exercisable/Unexercisable       Exercisable/Unexercisable
----                 -------------------------       -------------------------
J. Jeremy Barbera.....   333,334/666,666               $69,445/$138,889
Stephen Dunn..........       5,000/0                         0/0
Thomas Scheir.........      52,500/0                    34,063/0
Krista Mooradian......      25,375/0                    16,047/0
Barry Peters..........     450,000/0                   281,250/0
E. William Savage.....     450,000/0                   281,250/0
-------------
(1)Fair market  value of $3.125 per share at June 30, 1997 was used to determine
   the value of in-the-money options.

Compensation of Directors:
Directors  who are not employees of the Company  received an annual  retainer of
$10,000  for  serving  on the  Company's  board  of  directors  (the  "Board  of
Directors")  during fiscal 1997. Such Directors are also be reimbursed for their
reasonable expenses for attending board and committee meetings. 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.

Pursuant to a resolution of the Board of Directors on May 27,1997,  non-employee
members of the Board  agreed to serve  without  cash  compensation  starting  in
fiscal  1998.  It was agreed  that each  outside  director be  compensated  with
options to purchase 100,000 shares of common stock of the Company at an exercise
price of $2.625 per share, with 50% immediately exercisable,  25% exercisable on
May 27, 1998 and 25% exercisable on May 27, 1999.

Employment Contracts and Termination of Employment:
The  Company  has  entered  into  employment  agreements  with each of its named
executives.

Mr. Barbera was appointed to the position of Chief Executive  Officer of MSGI by
the Board,  effective March 31, 1997. He had previously  served as President and
Chief Operating  Officer of Metro under an employment  contract dated October 1,
1996.  Under the contract,  Mr. Barbera's base salary was $150,000 for the first
year of  employment.  On May 27,  1997,  the Company  amended and  restated  Mr.
Barbera's  employment  contract,  based on the  additional  responsibilities  he
assumed  on March  31,  1997.  Under  the  terms of the  amended  contract,  Mr.
Barbera's  employment  term is for three years  beginning  May 27, 1997,  and is
automatically  renewable for an additional three year period, unless the Company
or Mr.  Barbera gives  written  notice;  his amended  annual base salary for the
first year of the amended  employment  term is $250,000,  with  $300,000 for the
second year and $350,000  for the third year.  Mr.  Barbera is also  eligible to
receive  raises and  bonuses  in each year of the  employment  contract,  at the
determination  of the  Compensation  Committee  of the Board of Directors of the
Company,  based on earnings and other  targeted  criteria.  On May 27, 1997, Mr.
Barbera was granted options to acquire  1,000,000  shares of common stock of the
Company;  333,334 exercisable at $2.625 per share,  333,333 exercisable at $3.00
per share and 333,333  exercisable at $3.50 per share.  One third of the options
in each  tranche  vest  immediately  and one third of each  tranche  will become
available on each of the next two anniversary dates.

Mr. Barbera has agreed in his employment  agreement (i) not to compete with MSGI
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  MSGI  and  its
subsidiaries,  not to  solicit  or  encourage  certain  clients  of  MSGI or its
subsidiaries,  to cease doing business with MSGI 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.

Mr.  Budlow  and Ms.  Sautkulis  entered  into  separate  employment  agreements
effective October 1, 1996,  providing for employment as Executive Vice President
& Chief  Operating  Officer of Metro and as Executive  Vice  President & General
Manager of Metro,  respectively.  Each  agreement  provides  for an initial term
expiring on September 30, 1999 (the  "Employment  Term") and is renewable for an
additional  three-year  term unless Metro or the employee gives written  notice.
The base salary for each of Mr. Budlow and Ms.  Sautkulis  during the Employment
Term is $125,000  for the first year,  $165,000 for the second year and $200,000
for the third year.  Mr.  Budlow and Ms.  Sautkulis are each eligible to receive
raises and bonuses  based upon the  achievement  of earnings and other  targeted
criteria if and as  determined  by the  Compensation  Committee  of the Board of
Directors.  The  agreements  also provide for the granting to Mr. Budlow and Ms.
Sautkulis of options to acquire  Common Stock if and as determined by the Option
Plan Committee.  Each has agreed in his or her respective  employment  agreement
(i) not to  compete  with  Metro  or to be  associated  with any  other  similar
business  during the Employment  Term,  except that may each own up to 5% of the
outstanding common stock of certain corporations, as described more fully in the
relevant  employment  agreement,  and (ii) upon  termination of employment  with
Metro,  not to  solicit  or  encourage  certain  clients of Metro (as more fully
described in the relevant  employment  agreement),  to cease doing business with
Metro, and not to do business with any other similar  business,  for a period of
three years from the date of such termination.

Mr. Dunn and Mr. Scheir entered into separate employment agreements effective as
of April 25, 1995, providing for their employment as the President and the Chief
Financial Officer of SD&A, respectively.  Each agreement provides for an initial
term expiring on April 25, 1997,  and is renewable  for an  additional  one-year
term at the discretion of the employee covered  thereby,  subject to termination
as  provided  therein.  Mr.  Dunn's base salary  during his  employment  term is
$225,000  for the first year,  $250,000 for the second year and $275,000 for the
third year. Mr.  Scheir's base salary during his employment term is $125,000 for
the first year, $150,000 for the second year and $175,000 for the third year. At
the end of each year, in the sole  discretion of the board of directors of SD&A,
each of Mr. Dunn and Mr. Scheir may be paid a cash bonus.  The  agreements  also
provide for other  fringe  benefits as may be approved by the board of directors
of SD&A. Each of Mr. Dunn and Mr. Scheir has agreed in his respective employment
agreement not to (i) own, become employed by, or become a partner of any similar
business during the term of his employment  agreement,  except that each may own
1% or less of any  similar  business or (ii)  compete  with SD&A for a period of
three years after the termination of his employment.

On April 25, 1997, Mr. Dunn informally agreed to extend his full-time employment
with SD&A until December 31, 1997.  During this period, he will retain his title
of Chief Executive Officer of SD&A and Vice President of MSGI.

Mr. Scheir entered into an agreement in the subsequent  period to be employed as
SD&A's Chief Operating  Officer  through  December 31, 1999, with an annual base
salary of $175,000  through  December  31, 1997,  $200,000 in calendar  1998 and
$250,000 in calendar 1999.

Effective July 1, 1997, Ms.  Mooradian  entered into an employment  agreement to
serve as President of SD&A until  December 31, 1999,  with an annual base salary
of $175,000 through December 31, 1997, $200,000 in calendar 1998 and $250,000 in
calendar 1999.

Mr.  Peters and Mr.  Savage  served in the  capacity  of Chairman of the Board &
Chief Executive  Officer of the Company and President & Chief Operating  Officer
of the  Company,  respectively.  Their  employment  with the Company  terminated
effective  March 31, 1997 and they  entered  into  settlement  agreements  which
included cash payments and promissory  notes  payable.  The notes are payable in
equal monthly installments,  starting May 14, 1997. Amounts payable on the notes
at June 30, 1997 totaled $448,000.  Additionally,  for a period of one year from
the date of the settlement  agreements,  each former executive  receives medical
benefits  for himself and his  immediate  family and  continued  use of a leased
automobile.

<PAGE>

Item 11 - Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
The following  table sets forth  certain  information  regarding the  beneficial
ownership  of Common Stock as of  September  30, 1997 by: (i) each  Director and
each of the Named Executive Officers;  (ii) all executive officers and Directors
of the  Company as a group;  and (iii) each  person  known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock.

                                               Amount and Nature of Common
                                                Stock Beneficially Owned
Name and Address of Beneficial Holder(1)           Number      Percent
----------------------------------------           ------      -------
Directors and Named Executive Officers:
J. Jeremy Barbera(2)............................1,664,671       12.7%
Robert M. Budlow................................  544,200        4.3%
Janet Sautkulis.................................  181,400        1.4%
Stephen Dunn(3).................................  132,216        1.0%
Thomas Scheir(4)................................   60,875        *
Krista Mooradian(5).............................   25,375        *
Barry Peters(6).................................  475,871        3.6%
E. William Savage(7)............................  630,327        4.8%
Alan I. Annex(8)................................   59,683        *
S. James Coppersmith(9).........................  100,000        *
Seymour Jones(10)...............................   75,000        *
C. Anthony Wainwright(11).......................  118,408        *
All Directors and Named Executive Officers 
  as a group (14 persons)(12)...................4,589,806       31.5%

5% Stockholders:
Naomi Bodner(13)................................2,040,893       16.1%
Laura Huberfeld(13).............................2,040,893       16.1%
-------------
* 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 333,334  beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997, and 92,937 shares issuable upon conversion of notes.

(3)Includes  5,000  beneficially  owned shares of Common Stock issuable upon the
exercise of warrants which are currently  exercisable or are exercisable  within
60 days of September 30, 1997.

(4)Includes  52,500  beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997.

(5)Includes  25,375  beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997.

(6)Includes 450,000  beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997 and 25,871  beneficially owned shares owned by family
members with respect to which Mr. Peters disclaims beneficial ownership.

(7)Includes 450,000  beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997 and 19,336  beneficially owned shares owned by family
members of which Mr. Savage disclaims beneficial ownership.

(8)Includes  50,000  beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997, and 6,250  beneficially  owned shares  issuable upon
the exercise of currently exercisable warrants owned by Camhy Karlinsky & Stein,
LLP. Mr. Annex is one of thirteen partners in such firm.

(9)Includes  50,000  beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997 and 50,000  beneficially owned shares of Common Stock
issuable upon the exercise of currently exercisable warrants.

(10) Includes 50,000 beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997 and 25,000  beneficially owned shares of Common Stock
issuable upon the exercise of currently exercisable warrants.

(11) Includes 65,000 beneficially owned shares of Common Stock issuable upon the
exercise of options which are currently exercisable or are exercisable within 60
days of September 30, 1997 and 50,000  beneficially owned shares of Common Stock
issuable upon the exercise of a contractual right to purchase warrants currently
exercisable for such Common Stock.

(12) Of the total shares of Common Stock,  convertible  debt,  stock options and
warrants  beneficially  held by the  Company's  directors  and  named  executive
officers, 255,207 shares of Common Stock are owned by family members.

(13) The  address  for each of the 5%  Stockholders  is as  follows:  c/o  Broad
Capital  Associates,  Inc.,  152 West 57th  Street,  New York,  New York  10019.
Beneficially owned shares of common stock held in partnerships and joint tenancy
include 214,591 shares.


Item 12 - Certain Relationships and Related Transactions
--------------------------------------------------------
Transactions  with Mr. Dunn: In connection with the acquisition of SD&A on April
25, 1995,  Alliance issued promissory notes in an aggregate  principal amount of
$4.5 million to Mr. Dunn.  Interest on such notes was payable  monthly at a rate
equal to the prime rate of Bank of America,  N.T. & S.A., as in effect from time
to time,  subject to a maximum of 10% and a minimum  of 8%.  Principal  payments
were  due  quarterly,   and  originally   $1.5  million  was  due  in  quarterly
installments  during fiscal 1996. All of the  outstanding  common shares of SD&A
were  initially  pledged to  collateralize  such notes but were released in June
1996. In connection with such notes, an operating  covenants  agreement  between
the Company and Mr. Dunn included, among other things, provisions requiring that
SD&A have a  minimum  level of  working  capital  and cash  levels,  subject  to
periodic increases based on sales, before dividend payments could be made to the
parent company. In June 1996, the operating covenants agreement was terminated.

Prior to October 1995, the Company made all principal payments when due. Each of
the  principal  payments due October 1, 1995,  January 1, 1996 and April 1, 1996
were deferred as they became due and thereafter from time to time. In June 1996,
principal  payments of  approximately  $2.0 million were made and the  remaining
obligations  were  restructured  such that the  remaining  $2.1  million  is now
payable in  installments  of $58,333 per month,  plus  interest at 8%,  starting
September  19,  1996.  As of June,  1997,  due to a pending  change in financing
relationships, the May and June, 1997 payments had not been made.
These payments were paid in full in August, 1997.

SD&A leases its corporate  business  premises from Mr. Dunn.  The lease requires
monthly rental  payments of $11,805  through  January 1, 1999, with an option to
renew. SD&A incurs all costs of insurance, maintenance and utilities. Total rent
paid by SD&A to Mr.  Dunn during 1997 and 1996 was  approximately  $141,600  and
$138,000, respectively.

Bank  Credit  Line:  Mr.  Dunn was a  guarantor  of SD&A's  credit  line until
December, 1996.

Transactions  with Mr.  Barbera:  In October  1996 the Company  consummated  its
acquisition  of Metro.  In February  1996,  Mr.  Barbera,  then a shareholder of
Metro,  borrowed $50,000 from Metro.  Interest on such indebtedness accrues at a
rate of 6% per annum. The principal of such indebtedness,  together with accrued
interest  thereon,  is repayable in four equal  quarterly  installment  starting
March 31,  1998.  With the October 1, 1996  acquisition  of Metro,  Mr.  Barbera
received a 6%  promissory  note for  $600,000,  due and payable,  together  with
interest,  on June 30, 1998. In April,  1997, the Company repaid $100,000 of the
promissory note.

Transactions  with Mr.  Budlow  and Ms.  Sautkulis:  With the  October  1,  1996
acquisition  of Metro,  Mr. Budlow and Ms.  Sautkulis,  former  shareholders  of
Metro,   received  6%   promissory   notes   totaling   $300,000  and  $100,000,
respectively.  Such  notes  were  originally  due  and  payable,  together  with
interest,  on June 30,  1998.  In  July,  1997,  the  Company  prepaid  the full
principal amounts due to Mr. Budlow and Ms. Sautkulis.

Transactions with Mr. Annex: Mr. Annex, Secretary and a Director of the Company,
is a partner in a law firm which  provides  legal  services to the Company.  The
Company  recognized  expenses  aggregating  approximately  $110,000  and $31,000
during  fiscal 1997 and 1996,  respectively.  Mr. Annex has informed the Company
that such fees did not  represent  more that 5% of such firms  revenues  for its
fiscal years ended during such periods.

Transactions  with the Company's  Outside Board of Directors:  In May, 1997, the
Company's  outside  directors  each received  options for 100,000  common shares
(400,000 in the  aggregate),  exercisable at $2.625 per share, of which one half
vested immediately and one fourth vest in each of May 1998 and May 1999.

On April 15, 1996, the Company  entered into an agreement with Mr. Seymour Jones
to retain his services as a financial consultant and advisor to the Company on a
non-exclusive basis for a period of one year. Effective July 1996, the agreement
was terminated.  Notwithstanding such termination, pursuant to the terms of such
agreement,  in August 1996 Mr. Jones  purchased from the Company,  for $2,500 in
the  aggregate,  warrants  exercisable  for 50,000  shares of Common Stock at an
exercise price of $2.50 per share for the first 25,000  shares,  $3.00 per share
for the next 15,000 shares and $3.50 per share for the remaining  10,000 shares.
The  warrants  are  currently   exercisable   and  expire  on  April  15,  2000.
Subsequently,  Mr. Jones gifted  warrants for 25,000  shares to an  unaffiliated
third party.

On April 17,  1996,  the Company  entered  into an  agreement  with Mr. S. James
Coppersmith to retain his services as a financial  consultant and advisor to the
Company on a non-exclusive basis for a period of one year.  Effective July 1996,
the agreement was terminated.  Notwithstanding such termination, pursuant to the
terms of such agreement,  in September 1996 Mr.  Coppersmith  purchased from the
Company, for $2,500 in the aggregate,  warrants exercisable for 50,000 shares of
Common  Stock at an  exercise  price of $2.50 per  share  for the  first  25,000
shares,  $3.00 per share for the next 15,000  shares and $3.50 per share for the
remaining  10,000 shares.  The warrants are currently  exercisable and expire on
May 15, 2000.

On June 3, 1996,  the Company  entered  into an  agreement  with Mr. C.  Anthony
Wainwright to retain his services as a financial  consultant  and advisor to the
Company on a non-exclusive  basis for a period of two years. As compensation for
such services, Mr. Wainwright is entitled to receive the sum of $1,000 per month
for the term of the agreement plus all  out-of-pocket  expenses  incurred by Mr.
Wainwright  in  the   performance   of  such   services,   provided  that  prior
authorization from the Company shall have been received with respect to any such
expense.  In addition,  pursuant to the terms of such agreement,  Mr. Wainwright
has the right,  which right, as of the date hereof,  has not been exercised,  to
purchase from the Company,  for $2,500 in the aggregate warrants exercisable for
50,000  shares of Common  Stock at an exercise  price of $4.00 per share for the
first 25,000  shares,  $4.50 per share for the next 15,000  shares and $5.00 per
share for the  remaining  10,000  shares.  The warrants may be exercised  over a
four-year  period  commencing  June 3, 1996.  The  agreement is only  assignable
without the prior  written  consent of the other party in the event of a sale of
all or  substantially  all of the  business of the party  desiring to assign the
agreement. The agreement also provides for indemnification of Mr. Wainwright and
his affiliates (and their respective directors, officers, stockholders,  general
and  limited  partners,  employees,  agents  and  controlling  persons  and  the
successors and assigns of all of the foregoing) by the Company for any losses or
claims arising out of the rendering of the services called for in the agreement,
other than for negligence or willful misconduct.

Transactions   with  5%  Stockholders.   Each  of  2,000  shares  of  redeemable
convertible  preferred  stock  held by Naomi  Bodner  and Laura  Huberfeld  plus
accumulated  accrued  dividends  thereon  and  the  235  shares  held  by  their
partnership  plus accrued  dividends were  converted  into 826,302,  826,302 and
97,091  shares  of  common  stock,  respectively,   in  the  December  23,  1996
recapitalization  described  in  Part  I,  Item 1,  "Current  Activities"  under
"Recapitalization."

In March,  1997, the Company  accepted  offers from certain  warrant-holders  to
exercise  their  warrants for  3,152,500  shares of common  stock at  discounted
exercise  prices as  discussed  in Part I, Item 1,  "Current  Activities"  under
"Financing."  In  this  transaction,   Ms.  Bodner,   Ms.  Huberfeld  and  their
partnership  exercised  warrants for 1,000,000,  1,000,000 and 117,500 shares of
common stock respectively.


Item 13 - Exhibits and Reports on Form 8-K
------------------------------------------
(A)(1) Financial  statements - see "Index to Financial  Statements" on page 29.

   (2) Exhibits:
       3 (i)   Amended and Restated Articles of Incorporation (b)
       3 (ii)  Certificate  of  Amendment  to Amended  and  Restated  Articles
               of Incorporation of the Company (b)
       3 (iii) Certificate of Amendment to the Articles of Incorporation for
               change of name to All-Comm Media Corporation (e)
       3 (iv)  By-Laws (b)
       3 (v)   Certificate of Amendment of Articles of Incorporation for
               increase in number of authorized shares to 36,300,000 total (h)
       3 (vi)  Certificate of Amendment of Articles of Incorporation for change
               of name to Marketing Services Group, Inc. (l)

       10.1  1991 Stock Option Plan (c)
       10.2  Operating  Covenants  Agreement,  dated  April 25,  1995,  between
             Alliance Media Corporation and Mr. Stephen Dunn (d)
       10.3  Pledge Agreement, dated as of April 25, 1995, between Alliance 
             Media Corporation and Mr. Stephen Dunn (d)
       10.4  Option Agreement(e)
       10.5  Amendment to Option  Agreement (f) 
       10.6  Memorandums of Understanding (f)
       10.7  Sample Series B Convertible Preferred Stock Subscription
             Agreement (g)
       10.8  Sample Private Placement Purchase Agreement for Convertible Notes
             (g)
       10.9  Letter from Seller of SD&A agreeing to long-term obligation payment
             and restructuring (g)
       10.10 Sample Convertible Notes Rescission Letter (h)
       10.11 Sample Series C  Convertible Preferred  Stock  Subscription
             Agreement (h)
       10.12 Agreement and Plan of Merger between  All-Comm  Media  Corporation
             and Metro Services Group, Inc. (i)
       10.13 Security  Agreement  between  Milberg  Factors,   Inc.  and  Metro
             Services Group, Inc. (j)
       10.14 Security Agreement between Milberg Factors,  Inc. and Stephen Dunn
             & Associates, Inc. (l)
       10.15 Agreement and Plan of Merger  between  Marketing  Services  Group,
             Inc. and Pegasus Internet, Inc. (l)
       10.16 J. Jeremy Barbera Employment Agreement (c) 
       10.17 Robert M. Budlow Employment Agreement (i) 
       10.18 Janet Sautkulis Employment Agreement (i)
       10.19 Scott Anderson Employment Agreement (l)  
       10.20 Robert Bourne Employment Agreement (l)  
       10.21 Thomas Scheir Employment Agreement (l)
       10.22 Krista Mooradian Employment Agreement (l)  
       10.23 Stephen Dunn Employment Agreement (d) 
       10.24 Severance Agreement with Barry Peters (j)
       10.25 Severance Agreement with E. William Savage (j) 
       10.26 Form of Private Placement Agreement (j)  
       10.27 Form of Series B Conversion  Agreement (k)
       10.28 Form of Warrant Cancellation Agreement (k)
       10.29 Form of Series C Repurchase and Exchange Agreement (k)
       10.30 Form of Option Cancellation Agreement (k)
       10.31 Form of Amended and Restated Series B Conversion Agreement (k)
       10.32 Form of Amended and  Restated  Series C  Repurchase  and  Exchange
             Agreement (k)
       10.33 Form of Amended and Restated Option Cancellation Agreement (k)

       11   Statement re: computation of per share earnings (a)

       21   List of Company's subsidiaries (a)

       23   Consent of Coopers and Lybrand LLP (a)

       27   Financial Data Schedule (a)

(a)Incorporated herein
(b)Incorporated by reference from the Company's  Registration Statement on
   Form S-4, Registration Statement No. 33-45192
(c)Incorporated  by reference to the  Company's  Registration  Statement on Form
   S-8, Registration Statement 333-30839
(d)Incorporated  herein by reference to the  Company's  Report on Form 8-K dated
   April 25, 1995
(e)Incorporated  by  reference  to the  Company's  Report  on Form  10-K for the
   fiscal year ended June 30, 1995
(f)Incorporated  by  reference  to the  Company's  Report  on Form  10-Q for the
   quarter ended March 31, 1996
(g)Incorporated  by reference to the Company's  Report on Form 8-K dated June 7,
   1996
(h)Incorporated  by  reference to the  Company's  Report on Form 10-K dated June
   30, 1996
(i)Incorporated  by reference to the Company's  Report on Form 8-K dated October
   11, 1996
(j)Incorporated  by  reference  to the  Company's  Report  on Form  10-Q for the
   quarter ended March 31, 1997
(k)Incorporated  by reference to the  Company's  Registration  Statement on Form
   SB-2, as amended, originally filed on October 17, 1996
(l)Incorporated  by  reference  to the  Company's  report on Form 10-KSB for the
   fiscal year ended June 30, 1997.

(B) Reports on Form 8-K.
   The Company  filed a Report on Form 8-K  reporting  the change of the name of
   the Company from All-Comm  Media  Corporation  to Marketing  Services  Group,
   Inc.,  pursuant to approval by the  shareholders at a special meeting on June
   30, 1997.


                                  SIGNATURES

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

                             MARKETING SERVICES GROUP, INC.
                             (Registrant)

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

                             Date:   September 26, 1997

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

Signature                  Title                             Date
---------                  -----                             -------

/s/ J. Jeremy Barbera    Chairman of the Board and           September 26, 1997
J. Jeremy Barbera        Chief Executive Officer   
                         (Principal Executive Officer)


/s/ Scott Anderson       Chief Financial Officer(Principal   September 26, 1997
Scott Anderson           Financial and Accounting Officer)


/s/ Alan I. Annex        Director and Secretary              September 26, 1997
Alan I. Annex


/s/ S. James Coppersmith     Director                        September 26, 1997
S. James Coppersmith


/s/ Seymour Jones            Director                        September 26, 1997
Seymour Jones


/s/ C. Anthony Wainwright    Director                        September 26, 1997
C. Anthony Wainwright

The foregoing constitute all of the Board of Directors.


<PAGE>


               MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

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



       (1) FINANCIAL STATEMENTS:                             Page
           Report of Independent Public Accountants           30

           Consolidated Balance Sheets
              June 30, 1997 and 1996                          31

           Consolidated Statements of Operations
              Years Ended June 30, 1997, 1996 and 1995        32

           Consolidated Statements of Stockholders' Equity
              Years Ended June 30, 1997, 1996 and 1995        33

           Consolidated Statements of Cash Flows
              Years Ended June 30, 1997, 1996 and 1995       34-36

           Notes to Consolidated Financial Statements        37-51


<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


The Stockholders of
  Marketing Services Group, Inc.


      We have audited the  accompanying  consolidated  financial  statements  of
Marketing Services Group, Inc. and Subsidiaries,  listed in Items 7 and 13(a) of
this Form 10-KSB. These financial statements are the responsibility of Marketing
Services Group,  Inc.'s management.  Our responsibility is to express an opinion
on these financial statements based on our audits.

      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management, as well as evaluating the overall financial 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  consolidated  financial  position of Marketing
Services  Group,  Inc. and  Subsidiaries  as of June 30, 1997 and 1996,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period  ended June 30, 1997,  in  conformity  with  generally
accepted accounting principles.


                                          /s/ COOPERS & LYBRAND L.L.P.


Los Angeles, CA
September 25, 1997


<PAGE>

             MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
             CONSOLIDATED BALANCE SHEETS - JUNE 30, 1997 AND 1996

                                                   1997            1996
                                                   ----            ----
ASSETS                                                         (as restated)
Current assets:
   Cash and cash equivalents                   $  2,929,012    $  1,393,044
   Accounts receivable billed,
    net of allowance for doubtful accounts
    of $32,329 and $34,906 in 1997 and 1996,
    respectively                                  4,178,634       2,681,748
   Accounts receivable unbilled                     826,204
   Land held for sale at cost                                       921,465
   Other current assets                             281,458         107,658
                                                -----------     -----------
     Total current assets                         8,215,308       5,103,915
Property and equipment at cost, net                 745,783         299,045
Intangible assets at cost, net                   16,126,598       7,851,060
Other assets                                        303,583          47,046
                                                -----------     -----------
     Total assets                               $25,391,272     $13,301,066
                                                ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:  
   Short-term borrowings                        $ 1,661,708     $   500,000
   Trade accounts payable                         2,317,482         470,706
   Accrued salaries and wages                       807,017         706,039
   Other accrued expenses                           734,958         758,112
   Income taxes payable                              41,757          10,000
   Current portion of long term obligations       2,083,772         583,333
   Related party payable                            379,444
                                                -----------     -----------
     Total current liabilities                    8,026,138       3,028,190
Long-term obligations                             3,205,238       1,516,667
Related party payable                               379,444         425,000
Other liabilities                                    94,638          80,315
                                                -----------     -----------
   Total liabilities                             11,705,458       5,050,172
                                                -----------     -----------

Commitments and contingencies:
Redeemable convertible preferred stock - 
  $.01 par value; consisting of 6,200
  shares of Series B convertible preferred
  stock issued and outstanding at June
  30, 1996, none at June 30,1997, 2,000
  shares of Series C convertible preferred
  stock  issued  and  outstanding  at 
  June  30, 1996, none at June  30, 1997
                                                                  1,306,358
                                                                -----------
Stockholders' equity:
   Convertible preferred stock - $.01 par
     value; 50,000 shares authorized,
     none outstanding
   Common stock - authorized  36,250,000 and
     6,250,000  shares of $.01 par value
     at June 30, 1997 and 1996, respectively;
     11,438,564 and 3,198,534 shares issued,
     respectively                                   114,386          31,985
   Additional paid-in capital                    25,209,493      13,173,520
   Accumulated deficit                          (11,502,596)     (6,125,500)
   Less 11,800 shares of common stock in
     treasury, at cost                             (135,469)       (135,469)
                                                -----------     -----------
     Total stockholders' equity                  13,685,814       6,944,536
                                                -----------     -----------
     Total liabilities and stockholders' equity $25,391,272     $13,301,066
                                                ===========     ===========


See Notes to Consolidated Financial Statements.



<PAGE>


               MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED JUNE 30, 1997, 1996, AND 1995

                                            1997           1996         1995
                                                      (as restated)

Revenues                               $ 24,144,874    $15,889,210   $3,630,828
                                        -----------    -----------   ----------
Operating costs and expenses:
   Salaries and benefits                 14,967,420     12,712,150    3,139,232
   Direct costs                           5,587,343        807,057      102,052
   Selling, general and administrative    2,717,583      1,703,355    1,068,675
   Non-recurring compensation expense
      on option grants                    1,650,000
   Non-recurring restructuring costs        958,376
   Professional fees                        868,389        625,667      459,344
   Depreciation                             250,194        139,881       52,348
   Amortization of intangible assets        719,400        361,537       65,101
                                        -----------    -----------  -----------
     Total operating costs and expenses  27,718,705     16,349,647    4,886,752
                                        -----------    -----------  -----------
     Loss from operations                (3,573,831)      (460,437)  (1,255,924)
                                        -----------    -----------  -----------
Other income (expense):
   Non-recurring discounts on warrant
      exercises                            (113,137)
   Non-recurring withdrawn public
      offering costs                     (1,179,571)
   Gain from sales of securities                                      1,579,539
   Loan commitment fee                                                 (300,000)
   Interest and other income                 38,316         12,276       14,726
   Interest expense                        (529,521)      (505,128)     (94,200)
   Gain from sale of land                    90,021
                                        -----------    -----------  -----------
   Total                                 (1,693,892)      (492,852)   1,200,065
                                        -----------    -----------  -----------
   Loss from continuing operations 
     before income taxes                 (5,267,723)      (953,289)     (55,859)
   Provision for income taxes              (109,373)      (141,084)     (75,000)
                                        -----------    -----------  -----------
Loss from continuing operations before 
  discontinued operations                (5,377,096)    (1,094,373)    (130,859)
Gain on sale of discontinued operations                                 322,387
Loss from discontinued operations                                       (81,131)
                                        -----------    -----------  -----------
   Net income (loss)                   $ (5,377,096)   $(1,094,373) $   110,397
                                        ===========    ===========  ===========

Net income (loss) attributable to
  common stockholders*                 $(20,199,038)   $(1,189,341) $   110,397
                                        ===========    ===========  ===========
Income (loss) per common share:
   From continuing operations               $(2.85)       $ (.39)       $(.07)
   From discontinued operations                                           .13
                                            ------        ------        -----
Income (loss) per common share              $(2.85)       $ (.39)       $ .06
                                            ======        ======        =====

Weighted average common and common
 equivalent shares outstanding            7,089,321      3,068,278    1,807,540
                                          =========      =========    =========

Primary and fully  diluted  income  (loss) per common share are the same in each
year. 
 
* The twelve  months  ended June 30, 1997  include  the impact of  non-recurring
dividends  on  preferred  stock  for  (a)  $8.5  million  non-cash  dividend  on
conversion of Series B Preferred  Stock;  (b) $573,000 on repurchase of Series C
Preferred  Stock; (c) periodic  non-cash  accretions on preferred stock; and (d)
$5.0 million in discounts on warrant exercises (see Notes 14 and 22).

See Notes to Consolidated Financial Statements.


<PAGE>


                    MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                                   (as restated)
<TABLE>
<CAPTION>
                                       Convertible                       Additional      Accu-
                                     Preferred Stock     Common Stock      Paid-in       mulated     Treasury Stock
                                     Shares  Amount    Shares    Amount    Capital       Deficit    Shares     Amount     Totals
                                     ------  ------  ---------  -------  ----------   -----------   ------  ---------   ---------
<S>                                 <C>      <C>    <C>        <C>      <C>          <C>           <C>      <C>        <C>

Balance June 30, 1994                                1,436,833  $14,368  $5,928,542   $(5,141,524) (11,800) $(135,469)  $ 665,917
Issuance of restricted shares for
  litigation settlement                                 37,500      375     149,625                                       150,000
Issuance of restricted shares for 
  merger with Alliance Media Corp.                   1,025,000   10,250   2,734,750                                     2,745,000
Issuance of restricted shares as 
  finders fees                                          42,500      425     138,325                                       138,750
Private placement of shares-cash                       413,759    4,138   1,014,537                                     1,018,675
Shares issued upon exercise of 
  stock options and warrants                            72,500      725     207,193                                       207,918
Discounts granted on exercise of
  options                                                                   127,875                                       127,875
Net income                                                                                110,397                         110,397
                                     ------  ------  ---------  -------  ----------   -----------   ------  ---------  ---------- 
Balance June 30, 1995                                3,028,092   30,281  10,300,847    (5,031,127) (11,800)  (135,469)  5,164,532
Issuance of common shares as 
  compensation to employees, 
  directors and consultants                             95,442      954     218,974                                       219,928
Sale of shares (including 12,500
  to related parties)                                   75,000      750     119,250                                       120,000
Sale of Series A Preferred Stock     10,000   $100                          686,669                                       686,769
Repurchase of Series A Preferred
  Stock                             (10,000)  (100)                        (812,400)                                     (812,500)
Warrants issued with Preferred
  Stock                                                                   2,672,522                                     2,672,522
Warrants issued to consultants and
  creditors                                                                  82,626                                        82,626
Accretion of redeemable 
  convertible preferred stock                                               (94,968)                                      (94,968)
Net loss                                                                              (1,094,373)                      (1,094,373)
                                     ------  ------  ---------  -------  ----------   -----------   ------  ---------  ---------- 
Balance June 30, 1996                                3,198,534   31,985  13,173,520   (6,125,500)  (11,800)  (135,469)  6,944,536

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

See Notes to Consolidated Financial Statements.


<PAGE>


                MARKETING SERVICES GROUP AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                   YEARS ENDED JUNE 30, 1997, 1996 AND 1995

                                             1997         1996        1995
                                         -----------  -----------  -----------
Operating activities:                                (as restated)
   Net income (loss)                     $(5,377,096) $(1,094,373) $   110,397
   Adjustments to reconcile loss to net
   cash used in operating activities:
     Gains from sales of securities                                 (1,579,539)
     Gain on sale of STI                                              (322,387)
     Gain on sale of land                    (90,021)
     Depreciation                            250,194      139,881       52,348
     Amortization                            719,400      361,537       65,101
     Loss on disposal of assets               35,640                    30,319
     Discount on exercise of warrants
       and options                                                     127,875
     Discounts on exercise of warrants       113,137
     Compensation expense on option
       grants                              1,650,000
     Stock issuances to employees,
       directors and consultants                          193,677
     Accretion on  note  payable
       and redeemable stock                  161,597
     Warrant   issuances  to
       consultants and creditors             152,000       82,626
    Promissory   notes  issued  for
      settlement  agreements                 499,524
    Accrued interest on redeemable
      convertible preferred stock                          17,490
   Changes in assets and liabilities
   net of effects from acquisition:
     Accounts receivable                    (483,959)    (613,771)    (377,631)
     Other current assets                   (119,263)      38,710      (16,844)
     Other assets                           (144,237)      (8,346)      20,519
     Trade accounts payable                 (312,493)     105,068     (147,360)
     Accrued expenses and other liabilities  259,314      (21,674)       6,757
     Income taxes payable                     22,225      (84,565)      55,000
     Discontinued operations, net                                     (152,662)
                                          ----------   ----------  -----------
   Net cash used in operating activities  (2,664,038)    (883,740)  (2,128,107)
                                          ----------   ----------  ----------- 
Investing activities:
   Proceeds from sales of investments
     in securities                                                   2,682,811
   Purchase of investment in securities                             (1,063,272) 
   Proceeds  from  sale of STI                                         800,000
   Proceeds from sales of fixed assets                                  11,000 
   Proceeds from sale of land                860,443
   Acquisition of Alliance Media
     Corporation, net of cash
     acquired of $567,269                                              259,088
   Acquisition of Metro Services Group,
     Inc., net of cash acquired
     of $349,446                             207,327
   Payments relating to acquisition of
     Alliance & SD&A                                     (477,704)
   Purchase of property and equipment       (489,846)     (94,772)     (43,905)
   Land development costs                                              (10,526)
                                          ----------   ----------   ---------- 
     Net cash provided by (used in)
       investing activities                  577,924     (572,476)   2,635,196
                                          ----------   ----------   ---------- 
Financing activities:
  Proceeds from exercise of warrants       2,065,125  
  Repurchase of preferred  stock                         (812,500)  
  Proceeds from convertible notes
    payable                                2,200,000  
  Proceeds from issuances of 
    common stock                                          120,000    1,226,593 
  Proceeds from issuances of
    preferred stock and warrants               5,000    4,570,682  
  Proceeds from (repayment of)
   land option                              (150,000)     150,000   
  Proceeds from bank loans and
  credit facilities                        1,686,546      500,000    
  Repayments of bank loans and credit
   facilities                               (524,838)     (49,694)    (513,059)
  Payments on promissory notes               (51,889)
  Proceeds from note payable other                                   1,000,000  
  Repayments of note payable other        (1,000,000)     (72,000)  (1,072,000)
  Principal payments under capital
     lease obligation                        (41,195)  
  Related party repayments                  (566,667)  (2,775,000)    (350,000)
                                          ----------   ----------   ---------- 
    Net cash provided by financing
      activities                           3,622,082    1,631,488      291,534
                                          ----------   ----------   ---------- 
Net increase in cash and cash
  equivalents                              1,535,968      175,272      798,623
Cash and cash equivalents at 
  beginning of year                        1,393,044    1,217,772      419,149
                                          ----------   ----------   ---------- 
Cash and cash equivalents at
  end of year                             $2,929,012   $1,393,044   $1,217,772
                                          ==========   ==========   ==========
Supplemental disclosures of
  cash flow data:
    Cash paid during the year for:
     Interest                            $ 243,482     $ 455,276    $ 60,422
     Financing charge                    $ 154,000                  $300,000
     Income tax paid                     $  45,154     $ 155,025    $ 15,000


Supplemental scheduleof non cash investing and financing activities
-------------------------------------------------------------------
For the year ended June 30, 1997:

In August,  1996,  7,925 net additional  shares of common stock were issued upon
exercise of stock options for 15,000 shares,  using 7,075 outstanding  shares as
payment of the exercise price.

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

During September,  1996, two former members of executive management were granted
stock  options for 600,000  shares of common  stock as part of their  employment
agreements. Compensation expense of $1,650,000 was recognized for the difference
between the exercise price and the fair market value at date of grant.

On October 1, 1996, the Company issued  1,814,000 shares of its common stock and
$1,000,000 face value in 6% convertible notes to acquire 100% of the outstanding
stock of Metro  Services  Group,  Inc.  The debt was  originally  discounted  to
$920,000 to reflect an effective  interest rate of 10%, increased to $943,806 in
April,  1997,  as a result of a  $100,000  prepayment.  At  acquisition,  assets
acquired and liabilities assumed, less payments made for acquisition, were:

              Working capital, other than cash  $ 389,310
              Property and equipment             (242,726)
              Other assets                        (50,000)
              Costs in excess of net assets
                of acquired company            (8,236,046)
              Long-term debt, discounted          943,806
              Other liabilities                   146,983
              Common stock issued               7,256,000
                                                ---------
                                                $ 207,327
                                                =========

On December 23, 1996,  the Company issued  3,168,857  shares of its common stock
and $1,000,000 face value in debt as part of a recapitalization. 6,200 shares of
Redeemable Series B Preferred Stock were converted into 2,480,000 common shares;
2,000  shares of  Redeemable  Series C  Preferred  Stock  were  repurchased  for
$1,000,000 in notes;  warrants for 3,000,000  shares were  exchanged for 600,000
common shares and $145,753 in accrued  interest was converted into 88,857 common
shares. Interest expense for fiscal 1997 was $128,264 (see Note 15).

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

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

In April,  1997,  the  Company  made  prepayments  on a portion of  discounted
long-term debt to a former owner of Metro Services Group,  Inc.,  resulting in
non-cash  accretion of $23,810 on the discounted debt and goodwill.  Accretion
of the discount on the unpaid notes was $33,333.

On June 30, 1997, intangible assets were increased by $758,888,  payable half in
common  stock  and  half in  cash  to the  former  owner  of SD&A as  additional
consideration   resulting  from  SD&A's   achievement  of  defined   results  of
operations, during fiscal 1997 (see Note 4).

During  fiscal 1997,  the Company  issued  warrants to acquire  common stock for
consulting services valued at $152,000.

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

<PAGE>

For the year ended June 30, 1996:

In October,  1995, in accordance with the acquisition agreement between Alliance
Media Corporation and the former owner of SD&A, the purchase price was increased
by $85,699.

In October,  1995, the Company issued 6,250 shares of common stock in settlement
of a liability of $26,250.

In November,  1995,  a special  county bond  measure,  with  principal  totaling
$154,814,  was  assessed  on the  Company's  land  and  was  recorded  as a land
improvement, offset by a liability in accrued other expenses.

In April,  1996,  the Company issued 89,192 shares of common stock in settlement
of liabilities to employees, directors and consultants of $193,678.

During the year ended June 30, 1996, the Company issued  warrants to consultants
and creditors valued at $82,626.

Accrued and unpaid interest on shares of redeemable  convertible preferred stock
during fiscal 1996 totaled $17,490.

On June 30,  1996,  intangible  assets were  increased  by $425,000  for accrued
restricted  common stock  payable to the former  owner of SD&A as an  additional
payment resulting from SD&A achievement of defined results of operations.
See Note 4.

For the year ended June 30, 1995:

In Fiscal 1995, the Company purchased all of the capital stock of Alliance Media
Corporation  for  1,025,000   shares  of  common  stock  valued  at  $2,745,000.
Additionally,  37,500  shares of common stock valued at $100,000  were issued as
finders  fee.  Other  direct  costs  of the  acquisition  totaled  approximately
$500,000.  In  conjunction  with  the  acquisition,   net  assets  acquired  and
liabilities assumed, less payments prior to year end, were:

               Working capital, other than cash   $ 601,729
               Property and equipment              (326,320)
               Costs in excess of net assets
                 of companies acquired           (7,337,870)
               Other assets                         (23,451)
               Long term debt                     4,500,000
               Common stock issued                2,845,000
                                                  ---------
                                                  $ 259,088
                                                  =========

Five  thousand  shares  of  common  stock  valued at  $38,750  were  issued as a
commission on the sale of STI during 1995.

The Company  issued  37,500  shares of common stock valued at $150,000 in Fiscal
1995 in settlement of a 1994  liability  for early  termination  of a consulting
agreement.


See Notes to Consolidated Financial Statements.


<PAGE>


               MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  GENERAL
-----------
Marketing  Services Group,  Inc. ("MSGI" or the "Company") was formerly known as
All-Comm Media Corporation and, prior to that, as Sports-Tech, Inc. On April 25,
1995, the Company, through a wholly-owned  subsidiary,  was merged with Alliance
Media Corporation ("Alliance") and its wholly-owned  subsidiary,  Stephen Dunn &
Associates,  Inc. ("SD&A").  Upon consummation of the merger, the members of the
board of directors of the Company  resigned and a new board was appointed.  SD&A
provides  telemarketing and telefundraising  services to not-for-profit arts and
other organizations principally in the United States. Effective October 1, 1996,
the Company  purchased 100% of the  outstanding  stock of Metro Services  Group,
Inc. (to be renamed Metro Direct,  Inc.)  ("Metro").  Metro develops and markets
information-based  services used  primarily in direct  marketing by a variety of
commercial and tax-exempt  organizations.  The Company's  mission is to create a
growth-oriented  direct  marketing  company  through  acquisitions  and internal
growth.

Prior  to  the  merger  with  Alliance,   the  Company's   owned  two  operating
subsidiaries,  Sports-Tech International ("STI") and High School Gridiron Report
("HSGR").  STI was engaged in the sale of computer software,  computer equipment
and computer  aided video systems used by sports  programs at the  professional,
collegiate and high school levels.  HSGR provided academic and video data to aid
in pre-qualifying  high school athletes to colleges and universities.  In fiscal
1995,  the  Company  discontinued  the  operations  of STI and  HSGR.  With  the
disposition  of the STI  operations,  closure  of the  HSGR  operations  and the
acquisitions  of Alliance and Metro,  the Company is now operating in the direct
marketing industry segment.

The Company  believes that funds available from operations and its unused credit
facilities  will be adequate to finance its current  operations and  anticipated
growth and meet planned capital  expenditures,  interest and debt obligations in
its fiscal year ending June 30, 1998.  Thereafter,  and in conjunction  with the
Company's acquisition and growth strategy,  additional financing may be required
to meet potential acquisition payment requirements. The Company believes that it
has the ability to raise funds through private placements or public offerings of
debt  and/or  equity  securities  to meet  these  requirements.  There can be no
assurance,  however,  that such  capital  will be required or available at terms
acceptable  to the  Company,  or at all.  The  Company  is  engaged  in  ongoing
evaluation  of,  and  discussions   with,  third  parties   regarding   possible
acquisitions;  however, the Company currently has no definitive  agreements with
respect to any significant acquisitions.

2.  SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------
Principles of Consolidation:
The consolidated financial statements include the accounts of Marketing Services
Group, Inc. and its wholly-owned  subsidiaries:  Alliance; SD&A; Metro; All-Comm
Holdings, Inc. (formerly, Bullhead Casino Corporation),  dissolved during fiscal
1997;  All-Comm  Acquisition  Corporation  (formerly,  BH  Acquisitions,  Inc.),
dissolved  during  fiscal 1997;  Sports-Tech  International,  Inc.,  sold during
fiscal year 1995; High School Gridiron  Report,  Inc.,  dissolved  during fiscal
year 1996; and BRST Mining Company,  dissolved  during fiscal year 1996. STI and
HSGR are  presented as  discontinued  operations in the  consolidated  financial
statements.  All material  intercompany accounts and transactions are eliminated
in consolidation.

Use of Estimates:
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of  assets  and  liabilities  at the date of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. The most significant estimates and assumptions made in the
preparation  of the  consolidated  financial  statements  relate to the carrying
value of intangible assets,  deferred tax valuation  allowance and the allowance
for doubtful accounts. Actual results could differ from those estimates.

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

Land held for Sale:
The cost of  acquiring,  improving  and  planning  the  development  of land was
capitalized.  Costs related to development  were written off when such plans are
abandoned.  Interest  cost  was  capitalized  in  periods  in  which  activities
specifically  related to the  development  of the land took place.  The land was
valued at lower of cost or market. The land was sold on August 16, 1996.
See Note 7.

Property and Equipment:
Property  and  equipment  is  recorded  at cost less  accumulated  depreciation.
Maintenance  and  repairs  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 included
in current operations.  Depreciation and amortization are provided on a straight
line basis over the useful lives of the assets involved, limited as to leasehold
improvements by the term of the lease, as follows:

      Equipment.........................5 years
      Furniture and fixtures............2 to 7 years
      Computer equipment and software...3 to 5 years
            Leasehold improvements......over the useful life of the assets or
                                        term of the lease, whichever is shorter
                                            
Intangible Assets:
Excess of cost over net assets acquired in connection with the Alliance and SD&A
acquisitions  are being  amortized  over the  period of  expected  benefit of 40
years.  Covenants not to compete are stated at cost and are  amortized  over the
period of expected benefit. Proprietary software is amortized over its period of
expected  benefit  of five  years.  For  each of its  investments,  the  Company
assesses  the  recoverability  of  its  goodwill,  by  determining  whether  the
amortization  of the goodwill  balance over its remaining  life can be recovered
through projected undiscounted future cash flows over the remaining amortization
period.  If projected future cash flows indicate that unamortized  goodwill will
not be recovered,  an  adjustment  will be made to reduce the net goodwill to an
amount  consistent with projected  future cash flows discounted at the Company's
incremental  borrowing  rate.  Cash  flow  projections  are  based on  trends of
historical  performance and management's estimate of future performance,  giving
consideration to existing and anticipated  competitive and economic  conditions.
No impairment has been recognized in the accompanying financial statements.

Revenue recognition:
Revenues  represent  fees earned by SD&A which are recorded when pledged cash is
received  for on-site  campaigns  and when  services  are  provided for off-site
campaigns.  Metro recognizes revenue when its services have been fully performed
and  completed  (the  "Service  Date") but does not bill for such  services,  in
accordance with industry  practices,  until all services  relating to a client's
campaign,  including  services to be performed by unrelated third parties,  have
been completed.  The client's obligation to pay Metro for its completed services
is not  contingent  upon  completion  of the  services to be  performed by these
unrelated  third  parties.  In any  event,  clients  are  billed no later than a
predetermined  mailing  date  for  their  respective  campaigns,  which  date is
generally not more than thirty days after the Service Date. Unbilled receivables
represent  the portion of revenues  recognized  in excess of revenues  billed in
accordance with this practice.

Income taxes:
Deferred  tax assets and  liabilities  are  determined  based on the  difference
between the financial  statement and tax basis of assets and  liabilities  using
enacted tax rates and laws  applicable to the years in which the differences are
expected  to  reverse.  Valuation  allowances,  if  any,  are  established  when
necessary  to reduce  deferred tax assets to the amount that is more likely than
not to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.

Concentration of Credit Risk:
Financial  instruments that potentially  subject the Company to concentration of
credit  risk  consist   primarily  of  temporary  cash   investments  and  trade
receivables.  The Company restricts  investment of temporary cash investments to
financial  institutions  with  high  credit  standing.   Credit  risk  on  trade
receivables  is  minimized  as a result of the large and  diverse  nature of the
Company's customer base.

Stock Option Plan:
Prior to  fiscal  1997,  the  Company  accounted  for its stock  option  plan in
accordance  with the provisions of Accounting  Principles  Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying  stock  exceeded the exercise  price.  In
1997, the Company adopted Statement of Financial  Accounting  Standards ("SFAS")
No. 123, "Accounting for Stock Based  Compensation",  which requires entities to
either  recognize  as  expense  the fair value of all  stock-based  awards or to
provide pro forma net earnings and pro forma earnings per share  disclosures for
employee  stock  option  grants  made  in  1996  and  future  years  as  if  the
fair-value-based  method  defined in SFAS No. 123 had been applied.  The Company
has elected to apply the pro forma disclosure provisions of SFAS No. 123.

Earnings (loss) per share:
Primary earnings (loss) per common and common  equivalent share and earnings per
common and common  equivalent share assuming full dilution are computed based on
the  weighted  average  number of common  shares  outstanding  and common  share
equivalents attributable to the effects, if dilutive, of the assumed exercise of
outstanding stock options and warrants,  and the conversion of convertible notes
and preferred shares.

Reclassifications:
Certain  prior year items have been  reclassified  to conform  with current year
presentation.

3.  ACQUISITION OF METRO SERVICES GROUP, INC.
--------------------------------------------
Effective as of October 1, 1996, the Company acquired Metro Services Group, Inc.
pursuant  to a merger  agreement.  In exchange  for all of the then  outstanding
shares of Metro,  the Company issued 1,814,000 shares of its common stock valued
at $7,256,000 and promissory notes (the "Notes") totaling $1,000,000. The Notes,
which have a stated interest rate of 6%, were discounted to $920,000,  (adjusted
to $944,000 as of June 30, 1997,  subsequent to an April  payment) to reflect an
estimated  effective  interest  rate  of 10%.  The  Notes  are due and  payable,
together with interest  thereon,  on June 30, 1998,  and are  convertible  on or
before maturity,  at the option of the holder,  into shares of common stock at a
conversion  rate of $5.38 per share.  In April 1997,  $100,000 of the Notes were
repaid and, in July 1997, $400,000 were repaid.

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

The  operating  results of this  acquisition  are  included in the  consolidated
results of  operations  from the date of  acquisition.  The  following  summary,
prepared on a pro forma basis,  combines the consolidated  results of operations
as if Metro had been  acquired as of the  beginning  of the  periods  presented,
after  including  the impact of certain  adjustments,  such as  amortization  of
intangibles  and increased  interest on  acquisition  debt. The net loss for the
year ended June 30, 1997  includes  the  non-cash  compensation  expense of $1.7
million recorded on the grant of options in September, 1996, as well as the $1.2
million in withdrawn offering costs and $1.0 million in restructuring  costs, as
discussed in notes 16, 20 and 21. Net loss to common stockholders includes $14.9
million of warrant  discounts,  non-cash  dividends  and  accretion on preferred
stock.

                                           Unaudited
                                      1997           1996
                                      ----           ----
           Revenues               $26,360,830     $23,983,070
           Net loss                (5,400,262)     (1,255,713)
           Net loss to common     (20,222,204)     (1,350,681)
           Loss per common share    $(2.68)          $(0.28)

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

4. ACQUISITION OF ALLIANCE MEDIA CORPORATION AND STEPHEN DUNN & ASSOCIATES, INC.
-------------------------------------------------------------------------------
On April 25, 1995, the Company,  through a statutory merger, acquired all of the
outstanding  common  shares of Alliance.  The purchase  price was  approximately
$2,745,000,  consisting of issuance of 1,025,000 restricted common shares of the
Company to former  shareholders  of Alliance  valued at $2.68 per common  share.
Direct costs of the acquisition approximated $500,000.  Pursuant to the terms of
the merger  agreement,  upon consummation of the merger the then current members
of the Company's board of directors resigned,  and a new board consisting of six
persons designated by Alliance was appointed.

The assets of Alliance  acquired by the Company  consisted  primarily of (i) all
the  issued  and  outstanding   stock  of  SD&A,  which  Alliance  had  acquired
simultaneously  with the merger,  (ii) a five year  covenant not to compete with
the former  owner of SD&A,  and (iii) the cash  proceeds of  $1,509,750  (net of
certain  payments,  including  the payment of $1.5 million made  pursuant to the
acquisition  of SD&A) of a private  placement of equity  securities of Alliance,
which  securities,  upon  consummation  of the merger,  were  converted into the
Company's  common  stock.  The purchase  price of SD&A paid by Alliance was $1.5
million in cash, plus $4.5 million in long-term obligations yielding prime rate,
payable over four years.  Additional  contingent  payments of up to $850,000 per
year  over  the  period  ending  June  30,  1998  may be  required  based on the
achievement of defined results of operations of SD&A after its  acquisition.  At
the Company's option, up to one half of the additional  contingent  payments may
be made with  restricted  common  shares of the  Company.  Alliance and SD&A had
entered into an operating  covenant agreement relating to the operations of SD&A
and  Alliance  had  pledged  all  of the  common  shares  of  SD&A  acquired  to
collateralize its obligations under that agreement.

These  acquisition  terms were revised pursuant to the Company private placement
financing  which  occurred  on June 7, 1996 (see Note 14)  whereby the long term
obligations were revised and approximately  $2.0 million was paid in June, 1996.
The balance of $2.1  million  was revised to be payable in 36 monthly  principal
payments of $58,333,  plus  interest at 8%,  starting  September 19, 1996. As of
June 30, 1997,  due to a pending change in financing  relationship,  the May and
June,  1997  payments  had not been made.  These  payments  were paid in full in
August, 1997.

The assets of SD&A  acquired  by Alliance  (and  therefore  by the Company  upon
consummation of the merger)  consisted  primarily of cash and cash  equivalents,
accounts receivable and furniture, fixtures and equipment.

These  acquisitions  were accounted for using the purchase method.  The purchase
price was allocated to assets acquired based on their estimated fair value. This
treatment initially resulted in approximately $6.3 million of costs in excess of
net assets required,  after recording a covenant not to compete of approximately
$1.0 million. The excess was increased by $759,000 and $850,000 on June 30, 1997
and 1996,  respectively,  due to achievement of defined results of operations of
SD&A for the years then ended.  Such excess,  which may increase for one further
contingent payment, is being amortized over the remainder of the expected period
of benefit of 40 years.

The operating  results of these  acquisitions  are included in the  consolidated
results of  operations  from the date of  acquisition.  The  following  summary,
prepared on a pro forma basis,  combines the consolidated  results of operations
as if  Alliance  and SD&A had been  acquired as of the  beginning  of the period
presented,  after  including  the  impact  of  certain  adjustments,   such  as:
amortization of  intangibles,  increased  interest on the acquisition  debt, and
adjustment of officer salary for new contract.
                                                        1995 (unaudited)
                                                        ----------------
      Net sales                                          $15,013,000
      Loss from continuing operations                       (113,911)
      Loss from continuing operations per common share     $(.04)

The unaudited pro forma information is provided for informational purposes only.
It is based on historical  information and is not necessarily  indicative of the
actual  results that would have  occurred nor is it  necessarily  indicative  of
future results of operations of the combined entities.

5.  DISCONTINUED OPERATIONS
---------------------------
During the year ended June 30,  1995,  the Company sold its STI  subsidiary  for
$800,000,  out of  which  $80,000  was  paid as a  commission  to  STI's  former
president.  The former  president  of STI also  received  5,000 shares of common
stock, valued at $38,750, and warrants to purchase 2,500 shares of the Company's
common stock at $8.00 per share in connection with this transaction. The Company
realized a gain on the sale of $322,387.  No tax was  allocable to this gain due
to net operating loss carryforwards.

Concurrent  with the closing of sale of STI, all  operations  of HSGR ceased and
all  unrecoverable  assets were written  off,  which  amounted to  approximately
$22,000.  Accordingly,  STI and HSGR are reported as discontinued operations for
the year ending June 30, 1995, and the  consolidated  financial  statements were
reclassified to report separately the operating results, gain on disposition and
cash flows of these operations.  Revenues of these  discontinued  operations for
fiscal 1995 were $1,147,829.

6.  PROPERTY AND EQUIPMENT
--------------------------
Property  and  equipment  of  continuing  operations  at June 30,  1997 and 1996
consisted of the following:
                                                    1997         1996
                                                    ----         ----
           Office furnishings and equipmen       $ 934,148    $ 302,607
           Leasehold improvements                  201,212      169,771
                                                 ---------    ---------
                                                 1,135,360      472,378
           Less accumulated depreciation and
               amortization                       (389,577)    (173,333)
                                                 ---------    ---------
                                                 $ 745,783    $ 299,045
                                                 =========    =========

7.  LAND HELD FOR SALE
----------------------
The Company, through its wholly owned subsidiary, All-Comm Holdings, Inc., owned
approximately seven acres of undeveloped land in Laughlin,  Nevada,  which had a
carrying  value of $921,465 as of June 30,  1996.  During  fiscal  1996,  a bond
measure was passed by Clark County,  Nevada authorities,  resulting in a special
assessment  to fund  improvements  which would  benefit the land.  The principal
balance  assessed to the Company totaled  $154,814 plus interest at 6.4% and was
payable in  semi-annual  installments  over  twenty  years.  The  principal  was
capitalized by the Company in fiscal 1996. On August 16, 1996, the land was sold
to, and  liability  assumed by, an  independent  third party,  via auction,  for
$952,000 in cash, resulting in a net gain of approximately $90,000.

8.  INTANGIBLE ASSETS
---------------------
Intangible assets at June 30, 1997 and 1996, consist of the following:

                                                     1997           1996
                                                     ----           ----
            Covenants not to compete             $ 1,650,000     $1,000,000
            Proprietary software                     250,000
            Goodwill                              15,372,636      7,277,698
                                                 -----------    -----------
                                                  17,272,636      8,277,698
            Less accumulated amortization         (1,146,038)      (426,638)
                                                 -----------    -----------
                                                 $16,126,598     $7,851,060
                                                 ===========     ==========

The increase in intangible  assets during 1997 was due to the costs in excess of
net  assets  acquired  in the  Metro  acquisition,  as well as  recording  of an
estimated  contingent  payment  of  $759,000  due to the  former  owner  of SD&A
subsequent to the  achievement  of defined  results of operations of SD&A during
the year ended June 30, 1997.

9.  SHORT-TERM BORROWINGS
-------------------------
At June 30, 1996, SD&A had a $500,000 line of credit from a bank which was fully
used.  The line bore interest at prime plus 1/2% (8.75% at June 30,  1996),  was
collateralized  by  substantially  all  of  SD&A's  assets  and  was  personally
guaranteed  by SD&A's  President.  The line of  credit  also  contained  certain
financial  covenants,  including  current ratio,  working capital,  debt and net
worth, capital expenditure, and cash flow requirements.  During fiscal 1997, the
personal  guarantee of SD&A's  President was removed,  the line was increased to
$750,000 and SD&A  obtained a note  payable of $125,000 to finance  expansion of
the  Berkeley  Calling  Center.  The note  payable  required  monthly  principal
repayments of $3,473, plus interest.

At June 30, 1997, the  outstanding  balances on the note and line of credit were
$104,162 and  $746,000,  respectively,  which bore  interest at the bank's prime
rate plus 3/4% and 1/2%, respectively.

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

In April,  1997,  Metro  entered  into a  two-year  renewable  revolving  credit
facility  with a lender  for a line of credit  commitment  of up to a maximum of
$1,500,000,  collateralized  by its  accounts  receivable.  Interest  is payable
monthly at the Chase  Manhattan  reference rate (8 1/2% at June 30, 1997) plus 1
1/2%, with a minimum annual interest requirement of $60,000. The facility has an
annual fee of 1 1/2% of the available  line.  At June 30, 1997,  Metro had drawn
$811,546 on the line.  The facility  has tangible net worth and working  capital
covenants.

10.  OTHER ACCRUED EXPENSES
---------------------------
Accrued expenses at June 30, 1997 and 1996 consisted of the following:

                                                  1997           1996
                                                  ----           ----
               Accrued professional fees        $362,500       $290,897
               Other                             372,458        467,215
                                                --------       --------
               Total                            $734,958       $758,112
                                                ========       ========

11.  LONG TERM OBLIGATIONS:

      Long term obligations at June 30, 1997 and 1996 consist of the following:

                                                    1997           1996
                                                    ----           ----
      6% Convertible notes (a)                   $2,200,000
      Promissory notes to seller of SD&A (b)      1,633,333     $2,100,000
      Promissory notes to sellers of Metro (c)      877,142
      Promissory notes to former executives (d)     447,635
      Capital lease obligation (e)                  130,900
                                                 ----------     ---------- 
      Total                                       5,289,010      2,100,000
      Less:  Current portion                     (2,083,772)      (583,333)
                                                 ----------     ---------- 

      Total long term obligations                $3,205,238     $1,516,667
                                                 ==========     ==========

(a) In  April,  1997,  the  Company  obtained  $2,046,000,  net of fees from the
private placement of 6% convertible notes, with a face value of $2,200,000.  The
notes are payable with interest on April 15, 1999, if not previously  converted.
The notes are  convertible  into  shares of the  Company's  Common  Stock at the
lesser of $2.50 per share or 83% of the average  closing bid price of the Common
Stock  during the last five  trading  days prior to  conversion.  Subsequent  to
fiscal 1997 through September 23, 1997, $1,675,000 face value of the notes, plus
interest, was converted into 684,122 shares.

(b) In  connection  with the  acquisition  of SD&A on April 25,  1995,  Alliance
issued  promissory  notes totaling  $4,500,000 to SD&A's  current  President and
former sole  shareholder.  The notes bore interest at prime rate,  not to exceed
10% or drop below 8%, and were  payable  monthly.  Principal  payments  were due
quarterly,  and originally  $1,500,000 was due in quarterly  installments during
fiscal 1996. During 1996 the July 1, 1996 principal payment of $375,000 was made
and the long term obligations were restructured to defer principal  payments due
October 1, 1995,  January 1, 1996 and April 1, 1996,  until June 1996.  In June,
1996,  principal payments of $2,025,000 were made and the remaining  obligations
of  $2,100,000  are now  payable at  $58,333  per month,  plus  interest  at 8%,
starting  September  19, 1996. As of June 30, 1997,  due to a pending  change in
financing  relationship,  the May and June  payments  had not been  made.  These
payments were made in full in August, 1997.

(c) As discussed in Note 3, in  connection  with the  acquisition  of Metro,  6%
convertible  promissory notes with a face value of $1,000,000 were issued to the
sellers,  who remain  related  parties.  The notes,  which  were  discounted  to
$920,000 to reflect an effective  interest rate of 10%, are due and payable,  if
not previously  converted,  on June 30, 1998. In April, 1997, the Company repaid
$100,000 face value of the notes, payable to its Chief Executive Officer, and in
July, 1997, an additional $400,000 was repaid.

(d) As discussed in Note 12,  effective March 31, 1997, the Company entered into
settlement  agreements with former senior executives,  which included promissory
notes payable with face amounts totaling $540,000 at 0% interest.  The notes are
payable in equal  monthly  installments,  starting May 14, 1997.  The notes were
discounted to $499,000,  to reflect an effective  interest rate of 10%.  Amounts
payable on these notes at June 30, 1997 totaled $448,000.

(e) Metro leases  certain  computer  hardware  and  software  under a three year
capital lease obligation. Future minimum lease payments at June 30, 1997 are:

                  1998                               $ 68,965
                  1999                                 68,965
                  2000                                  5,746
                                                     --------
                  Total minimum lease payments        143,676
                  Less interest                        12,776
                                                     --------
                  Present value of minimum payments   130,900
                  Current portion                      59,869
                                                     --------
                  Non-current portion                $ 71,031
                                                     ========

12.  EMPLOYMENT CONTRACTS
-------------------------
Subject to  execution  of  definitive  agreements,  the Company has entered into
three-year  employment  arrangements  with current officers of the Company.  The
arrangements provide for annual base salaries,  base increases,  cash and option
bonuses  which are  payable if  specified  management  goals are  achieved,  and
certain  termination  benefits.  In the event of termination  without cause, the
aggregate liability for these employees is approximately $1,425,000.

The Company also had  employment  contracts  with  certain  members of the prior
management of the Company.  Effective  March 31, 1997, the Company  entered into
settlement  agreements  with two former  members of executive  management  which
included cash payments totaling  $200,000,  promissory notes payable with a face
value of $540,000 and other  expenses.  Amounts paid to these  executives  under
these  agreements  in fiscal 1997 totaled  $266,000.  In fiscal 1995,  severance
payments to prior management of Sports-Tech totaling  approximately $60,000 were
made.

13. COMMITMENTS AND CONTINGENCIES
---------------------------------
Leases:  SD&A leases its corporate  business premises from its former owner. The
lease requires  monthly rental payments of $11,805 through January 1, 1999, with
an  option  to renew.  SD&A  incurs  all  costs of  insurance,  maintenance  and
utilities.  Metro  leases its office and data  processing  space under long term
leases. The Company also leases its corporate office space,  copier,  phones and
automobiles.

Future minimum rental  commitments  under  non-cancelable  leases,  as of fiscal
years ending June 30, are as follows:

                      1998      $ 474,968
                      1999        363,609
                      2000        294,858
                      2001        301,358
                      2002        186,560
                               ----------
                               $1,621,353
                               ==========

Rent expense for continuing operations was approximately $445,000, $297,000, and
$89,000,  for fiscal years ended 1997, 1996 and 1995,  respectively.  Total rent
paid by SD&A to its  former  owner  during  1997,  1996  and  from  the  date of
acquisition to June 30, 1995 was approximately  $142,000,  $138,000 and $26,000,
respectively.

The Company is party to various  minor legal  proceedings.  The outcome of these
legal  proceedings  are not  expected to have a material  adverse  effect on the
financial  condition or operation of the Company based on the Company's  current
understanding of the relevant facts and law.

14.  REDEEMABLE CONVERTIBLE PREFERRED STOCK
-------------------------------------------
On June 7, 1996, the Company  completed the private  placements  with accredited
investors of 6,200 shares of Series B redeemable convertible preferred stock for
$3,100,000.  The preferred  stock was preferred as to the Company's  assets over
the common stock in the event of  liquidation,  dissolution or winding-up of the
Company,  prior to distribution of assets to common stockholders.  The preferred
stockholders were entitled to their original  investment,  plus accrued,  unpaid
dividends or, if unavailable,  a ratable  distribution of existing  assets.  The
holders  of the stock  were  entitled  to  receive a  dividend  payable  only on
redemption or credited against  conversion,  which accrued at the rate of 6% per
annum. The convertible preferred stock was convertible,  in whole or in part, at
any time and from  time to time  until  the  second  anniversary  of the date of
issuance,  into  common  shares of the  company  at the lesser of the price paid
divided by $1.25,  or 80% of the average  closing  sales price of the  Company's
common  stock for the last five days  prior to  conversion,  and is  subject  to
certain  restrictions,  including automatic conversion on the second anniversary
of  issuance.  Under  certain  unlikely  conditions  prior  to  conversion,  the
preferred  stock may be redeemed.  In addition,  the Company issued  warrants to
preferred shareholders for 3,100,000 shares of common stock exercisable at $2.50
for three years.  The preferred stock and accrued  interest was converted in the
recapitalization discussed in Note 15.

On June 7, 1996, the Company  completed the private  placements  with accredited
investors of $1,000,000 of convertible  notes and warrants for 3,000,000  shares
of common stock.  In  September,  1996,  the notes and warrants  were  rescinded
retroactive  to June 7,  1996  and  replaced  with  2,000  shares  of  Series  C
redeemable  convertible preferred stock for $1,000,000.  The Series C redeemable
convertible  preferred  stock was preferred as to the Company's  assets over the
common  stock in the event of  liquidation,  dissolution  or  winding-up  of the
Company,  prior to distribution of assets to common stockholders.  The preferred
shareholders  were entitled to their  original  investment,  plus accrued unpaid
dividends or, if  available,  a ratable  distribution  of existing  assets.  The
holders  of the stock  were  entitled  to  receive a  dividend  payable  only on
redemption or credited against conversion,  which accrued at the same rate of 8%
per annum. The Series C redeemable  convertible preferred stock was convertible,
in whole  or in  part,  at any time  and  from  time to time  until  the  second
anniversary  of the date of issuance,  into common  shares of the Company at the
price paid divided by $6.00, and was subject to certain restrictions,  including
automatic  conversion  on the second  anniversary  of  issuance.  Under  certain
unlikely conditions prior to conversion, the preferred stock may be redeemed. In
addition,  the Company issued warrants to preferred  shareholders  for 3,000,000
shares of common stock exercisable at $3.00 for three years. The preferred stock
was repurchased and the related accrued interest and the warrants were converted
to common stock as discussed in Note 15.

The Company  allocated the net proceeds  received on the sales of each series of
preferred  shares  and  warrants  based  on  the  relative  fair  values  of the
securities at the time of issuance.

15.  RECAPITALIZATION
---------------------
On December 23, 1996, the Company and certain of its security holders effected a
recapitalization  of the Company's  capital  stock,  whereby:  (i) the Company's
Series B Convertible  Preferred  Stock,  par value $.01 per share (the "Series B
Preferred  Stock"),  was  converted,  in  accordance  with its terms without the
payment of additional consideration, into 2,480,000 shares of Common Stock; (ii)
the Company's  Series C Convertible  Preferred  Stock,  par value $.01 per share
(the "Series C Preferred  Stock"),  was repurchased  for promissory  notes in an
aggregate principal amount of $1.0 million, which promissory notes bore interest
at a rate of 8% per  annum  and were  repayable  on  demand at any time from and
after the date of the  consummation  of an  underwritten  public offering by the
Company of Common Stock, but in any event such notes originally  matured June 7,
1998 but were paid in full in April,  1997;  (iii) all  accrued  interest on the
Series B Preferred  Stock and the Series C Preferred  Stock was  converted  into
88,857 shares of Common Stock;  (iv) warrants  related to the Series C Preferred
Stock,  currently  exercisable  for  3,000,000  shares  of  Common  Stock,  were
exchanged for 600,000 shares of Common Stock; and (v) options held by two of the
Company's  principal  executive  officers to purchase  300,000  shares of common
stock were to be  canceled  at no cost to the  Company,  subject  to  successful
completion of an underwritten  offering.  The Offering was not consummated  and,
accordingly,  the options were not  canceled.  Upon  conversion  of the Series B
Preferred Stock and accumulated  interest  thereon into Common Stock on December
23,  1996,  the Company  incurred a  non-cash,  non-recurring  dividend  for the
difference  between  the  conversion  price and the  market  price of the Common
Stock,  totaling $8.5 million.  Upon repurchase of the Series C Preferred Stock,
the Company  incurred a  non-recurring  dividend of $573,000 for the  difference
between  the  repurchase  price  and the  accreted  book  value of the  stock at
December  23, 1996.  These  dividends  do not impact net income  (loss),  but do
impact net income (loss)  attributable to common stockholders in the calculation
of earnings per share.

16.  STOCKHOLDERS' EQUITY
-------------------------
Preferred  Stock:  On May 9, 1996, the Company  completed the private  placement
with an  institutional  investor  of  10,000  shares  of  Series  A  convertible
preferred stock for $750,000, $687,000 net after offering costs. The convertible
preferred stock was convertible  into common shares of the Company at the lesser
of the price  paid  divided  by $2.50,  or 80% of the  closing  bid price of the
Company's  common  stock  for the five  trading  days  immediately  prior to the
conversion date, and was subject to certain restrictions.

In  connection  with the June 7, 1996  transactions,  as  described  above,  the
Company reacquired the 10,000 shares of Series A convertible preferred stock for
$800,000 plus fees of $12,500.

Common Stock: The Board of Directors approved a one-for-four reverse stock split
of the Company's authorized and issued common stock,  effective August 22, 1995.
The Board also approved reducing the number of authorized shares of common stock
to  6,250,000  with a par value of $.01 per share,  from the  25,000,000  common
shares  previously  authorized.  Accordingly,  all share and per share data,  as
appropriate, reflect the effect of the reverse split.

Effective August 14, 1996, the  shareholders and Board of Directors  approved an
increase in the number of authorized  shares of common stock,  from 6,250,000 to
36,250,000.

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

In  September  1996,  the  Company  issued  96,748  shares  of  common  stock in
settlement of a $425,000 liability to the former owner of SD&A, as an additional
payment  resulting from SD&A  achievement  of defined  results of operations for
fiscal 1996.

Prior to the  December  23,  1996,  recapitalization  discussed  in Note 15, the
Company  recorded  dividends  in  fiscal  1997  of  $806,425  to  its  preferred
stockholders to accrete the value assigned to the stock at June 6, 1996 (date of
sale) up to its convertible value at June 6, 1998 (date of automatic  conversion
prior to the recapitalization).

In March 1997, to obtain $2.1 million in working capital and reduce the overhang
associated with the existence of such warrants, the Company accepted offers from
certain  warrant-holders  to exercise  their  warrants for  3,152,500  shares of
common stock at discounted  exercise prices. The Company recognized the dates of
acceptance as new measurement dates and, accordingly,  recorded non-cash charges
totaling  $5.1  million  in March  1997,  to  reflect  the  market  value of the
discounts.  Of the  total,  $113,000  was  charged  directly  to  expense as the
underlying  source  transaction  was debt related,  and  $4,976,000  was charged
directly to stockholders  equity as the underlying source transaction was equity
related.

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

During 1996,  the Company  issued 95,442  shares of  restricted  common stock as
compensation to various employees, directors and consultants.

In March 1996, the Company sold 75,000 restricted shares of its common stock for
$120,000 to four individuals, including 12,500 shares to related parties.

In May 1995,  the Company  completed a private  placement  of 413,759  shares of
restricted  common  stock,  at $2.68 per share.  These shares have  registration
rights  as of  December  1,  1995.  Net  proceeds  from  this  offering  totaled
$1,018,675.

As discussed in Note 4, in connection with the acquisition of Alliance and SD&A,
the Company issued 1,025,000 restricted common shares to the former shareholders
of Alliance. Also in connection with the acquisition,  the Company issued 37,500
common shares  valued at $100,000 and warrants to purchase  43,077 common shares
at  $6.00-to-$8.00  per share to investment  banking  firms,  a  shareholder,  a
director and a law firm which  represented  the Company.  These warrants  expire
between April 25, 1998 and April 25, 2000.

In connection  with the sale of  Sports-Tech  International,  Inc.,  the Company
approved  issuance of 5,000  common  shares  valued at $38,750  and  warrants to
purchase 2,500 shares at $8.00 through April 25, 1995 to its former president.

In May,  1995,  the Board of Directors  approved the temporary  reduction of the
exercise  price of certain  warrants  from $6.00 to $2.68 and, on May 31,  1995,
these 37,500 warrants were exercised for $100,500 in cash payments.

As of June 30,  1997,  the Company  has the  following  outstanding  warrants to
purchase 570,577 shares of common stock:

          Date Issued            Shares of Common       Exercise Price Per
        and Exercisable         Stock upon Exercise    Share of Common Stock
        ---------------         -------------------    ---------------------
         April 1995                   33,750                 $6.00 -$8.00
         May 1995                     11,827                   $ 6.00
         January 1996                 32,500                 $3.375-$8.00
         February 1996                15,000                 $3.00 -$4.00
         May 1996                    100,000                    $4.50
         July 1996                    37,500                    $3.50
         August 1996                  50,000                 $2.50 -$3.50
         September 1996               50,000                 $2.50 -$3.50
         May 1997                    140,000                   $ 3.00
         June 1997                   100,000                   $3.375
                                     -------
         Total as of June 30, 1997   570,577
                                     =======

Stock Options:  In 1991, the Company adopted a  non-qualified  stock option plan
(the "1991 Plan") for key  employees,  officers,  directors and  consultants  to
purchase up to 250,000 shares of common stock.  In November,  1995, the Board of
Directors  increased  the number of available  shares by 600,000.  An additional
600,000 shares were approved by the Board of Directors on September 26, 1996 and
1,700,000  shares on May 27,  1997,  increasing  the number of shares  available
under the 1991 Plan to 3,150,000.  The 1991 Plan is administered by the Board of
Directors  which has the authority to determine which officers and key employees
of the Company will be granted options,  the option price and  exercisability of
the  options.  In no event shall an option  expire more than ten years after the
grant.

The following  summarizes the stock option  transactions under the 1991 Plan for
the three fiscal years ended June 30, 1997:

                                         Number         Option Price
                                        of Shares         Per Share
                                        ---------       ------------
         Outstanding at June 30, 1994   107,892        $6.00 to $22.00
         Granted                          8,750        $5.24 to $ 7.00
         Exercised                      (22,500)       $2.68 to $ 5.24
         Canceled                        (3,334)           $6.00
                                      ---------
         Outstanding at June 30, 1995    90,808
         Granted                        525,003        $2.00 to $ 3.00
         Canceled                       (91,004)       $6.00 to $22.00
                                      ---------
         Outstanding at June 30, 1996   524,807
         Granted                      1,117,000        $2.50 to $3.00
         Exercised                      (15,000)           $2.625
         Canceled                       (40,060)       $2.00 to $2.50
                                      ---------
         Outstanding at June 30, 1997 1,586,747
                                      =========

All the  outstanding  options  under  the 1991 Plan are  currently  exercisable,
except for 200,000 options which are exercisable 100,000 in May 1998 and 100,000
in May 1999. They expire as follows:  fiscal 1998 - 2,084,  fiscal 2000 - 5,000,
fiscal 2003 - 462,663 and fiscal 2004 - 1,117,000. The weighted average exercise
price of all  outstanding  options  under  the Plan is  $2.55  and the  weighted
average  remaining  contractual  life is 6.2 years.  Except as noted below,  all
options  granted in fiscal years 1997,  1996 and 1995 were issued at fair market
value. At June 30, 1997, 1,402,564 options were available for grant.

In May, 1995, a $128,000  discount was given to a former director of the Company
to exercise  18,750  options and was  recognized  as  compensation  expense.  On
September  26, 1996,  the Board of Directors  granted  options  exercisable  for
300,000 shares of common stock, par value $.01 per share (the "Common Stock") to
each of the Company's then Chief Executive Officer and Chief Operating  Officer.
Options  exercisable  for the first  150,000  shares  were  granted to each such
officer at an exercise  price of $2.50 per share and the remaining  150,000 each
were granted at an exercise price of $3.00 per share.  On December 23, 1996, the
$3.00  options  were to be  canceled  subject  to  successful  completion  of an
underwritten public offering, as part of the recapitalization  described in Note
15. As described in Note 20, the Offering was not consummated and,  accordingly,
the options were not canceled. The options vest and are exercisable  immediately
and expire on July 1, 2001.  Although the Company  intended to grant the options
in May,  1996,  when the market price of the stock was $2.50,  at September  26,
1996, the date of Board ratification,  the market price was $5.50.  Accordingly,
the  Company  recorded  a  non-recurring,   non-cash  charge  of  $1,650,000  to
compensation  expense for the difference between market price and exercise price
of the options for 600,000 shares.

In addition  to the 1991 Plan,  the Company  has other  option  agreements  with
current  and former  officers,  directors,  employees  and owners of an acquired
Company.

The following summarizes transactions outside the 1991 Plan for the three fiscal
years ended June 30, 1997:
                                            Number       Option Price
                                           of Shares       Per Share
                                           ---------       ---------
         Outstanding at June 30, 1994       73,791      $3.00 to $16.00
         Exercised                         (12,500)          $3.00
         Canceled                          (28,875)     $6.00 to $16.00
                                           -------
         Outstanding at June 30, 1995       32,416
         Canceled                          (30,166)     $4.50 to $6.00
                                         ---------
         Outstanding at June 30, 1996        2,250
         Granted                         1,000,000      $2.625 to $3.50
                                         ---------
         Outstanding at June 30, 1997    1,002,250
                                         =========
During  May,  1997,  1,000,000  options  were issued  pursuant to an  employment
agreement with the Company's current Chief Executive Officer.  These options are
exercisable 1/3 currently,  1/3 in May 1998 and 1/3 in May 1999, have a weighted
average  exercise  price of $3.04 per share and  expire in 2004.  The  remaining
2,250  options are  currently  exercisable,  expire in fiscal  1999,  and have a
weighted average price of $16.00 per share.

Under SFAS No. 123, had the Company  determined  compensation  cost based on the
fair value at the grant date for its stock  options,  the Company's net loss and
earnings per share would have been adjusted to the pro forma  amounts  indicated
below:
                                                        Years ended June 30,
                                                       1997           1996
                                                  -------------   ------------
        Net loss                  as reported     $ (5,377,096)   $(1,094,373)
                                  pro forma       $ (7,822,901)   $(1,847,535)
        Net loss attributable to
          common stockholders     as reported     $(20,199,038)   $(1,189,341)
                                  pro forma       $(22,644,843)   $(1,942,503)
        Earnings per share        as reported        $(2.85)        $(0.39)
                                  pro forma           (3.19)         (0.63)

Pro  forma net loss  reflects  only  options  granted  in fiscal  1997 and 1996.
Therefore,  the full impact of calculating  compensation  cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts  presented
above because  compensation  cost is reflected over the options' maximum vesting
period of seven years and compensation cost for options granted prior to July 1,
1995, is not considered. The fair value of each stock option is estimated on the
date of grant using the  Black-Scholes  option  pricing model with the following
weighted  average  assumptions:   an  expected  life  of  four  years,  expected
volatility of 50%, no dividend yield and a risk-free  interest rate ranging from
5.23% to 6.61%.

Common Stock in Treasury:  The Company has purchased 26,800 shares of its common
stock for a total  cost of  $214,579  (or an  average  of $8.00 per  share).  In
connection  with the  acquisition  of the High School  Gridiron  Report  assets,
15,000 shares were issued from the treasury stock. The remaining treasury shares
have a total cost of $135,469 (or an average of $11.48 per share).

17.  INCOME TAXES
-----------------
Income tax expense from continuing operations is as follows:

                                          Years Ended June 30,
                                     1997        1996        1995
                                     ----        ----        ----
         Current state and local   $109,373    $141,084    $75,000
                                   ========    ========    =======

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

                                                 1997     1996     1995
                                                 ----     ----     ----
         Statutory rate                          (34)%    (34)%    (34)% 
         Increase in tax rate resulting from:
           Loss limitations and valuation
             allowance                            34       34       34
           State income taxes                      2       15      134
                                                 ---      ---      ---
            Effective rate                         2%      15%     134%
                                                 ===      ===      ===

                                                       1997          1996
                                                       ----          ----
           Deferred tax assets:
              Net operating loss carryforwards     $1,687,100      $691,100
              Compensation on option grants           561,000
              Amortization of intangibles             149,500       142,300
              Other                                   245,750        95,900
                                                  -----------      --------
           Total deferred tax assets                2,643,350       929,300
              Valuation allowance                  (2,573,600)     (789,800)
                                                  -----------      --------
           Net deferred tax assets                     69,750       139,500
                                                  -----------      --------
           Deferred tax liabilities:
              Cash to accrual adjustment              (69,750)     (139,500)
                                                  -----------     ---------
           Total deferred tax liabilities             (69,750)     (139,500)
                                                  -----------     ---------
           Total deferred taxes, net              $    -          $    -
                                                  ===========     =========

The Company has a net operating loss of approximately $4,962,000 available which
expires  from 2008  through  2012.  These  losses can only be offset with future
income and are subject to annual limitations.

No income  taxes are  allocable to the gain on sale of  discontinued  operations
during 1995 due to utilization of net operating loss carryforwards.

18.  GAINS FROM SALES OF SECURITIES
-----------------------------------
In July,  1994,  the Company  borrowed  $1,000,000  to fund the  exercise by the
Company of a common stock purchase  warrant.  The loan was  collateralized  by a
pledge of such common  stock  pursuant to the terms of a pledge  agreement.  The
parties to the $1,000,000  loan  included,  among others,  the Company's  former
chairman,  former  president,  a former  director  and a  stockholder,  who each
provided $200,000.  The other lenders were non-affiliates.  The lenders received
the repayment of the $1,000,000  loan,  interest at 7.75% totaling  $9,493 and a
$300,000 commitment fee from the proceeds of the subsequent sales of such common
stock.  Effective July 1, 1994, the Company adopted SFAS No. 115 "Accounting for
Certain  Investments in Debt and Equity Securities." In accordance with SFAS No.
115,   the   Company's    marketable    equity    securities   were   considered
"available-for-sale"  investments  and were  carried  at market  value  with the
difference   between  cost  and  market   value   recorded  as  a  component  of
stockholders'  equity.  The Company  subsequently  sold all these securities and
recognized a gain of $1,580,000 in fiscal 1995.

19.  RELATED PARTY TRANSACTIONS
-------------------------------
In May, 1997, the Company's  outside directors each received options for 100,000
common shares  (400,000 in the aggregate),  exercisable at $2.625,  of which one
half vested immediately and one fourth vest in each of May 1998 and May 1999.

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

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

A former  director of the Company is the senior  managing  director of a private
merchant  banking  firm  which  was paid  approximately  $5,700  for  investment
advisory  services in 1995. In connection  with the  acquisition of Alliance,  a
finders fee totaling  $100,000  was paid to the merchant  banking firm in fiscal
1995,  along  with the  former  director  and the other  principal  owner of the
merchant  banking firm each  receiving  9,375  restricted  common  shares of the
Company  valued at $2.67 per share and warrants to purchase  6,250 common shares
at $8.00 per share.

On June 9, 1994, the Company  borrowed  $350,000 from the Company's former chief
executive  officer and its former  president and pledged its equity  interest in
the Laughlin land as security for  repayment of the loan.  The note was due July
31, 1995 with  interest at the rate of 7.25% (the Bank of America  Nevada  prime
rate at the time of execution).  The promissory note and interest of $8,695 were
repaid in advance on October 4, 1994.

A former  director of the Company,  and another  person  serving as secretary in
1993, were each partners in different law firms that provided legal services for
which the Company recognized expenses aggregating approximately $31,000 in 1995.

In April  1995,  the former  chairman  of the  Company  purchased  property  and
equipment  owned by the Company  with a cost of  $160,109  and net book value of
$5,870 for a discounted appraised value of $11,000 in cash.

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

21.  RESTRUCTURING COSTS
------------------------
During the quarter ended March 31, 1997, the Company effected certain  corporate
restructuring  steps,  including the decision to reduce  corporate  staffing and
related  administrative  costs,  as  well as  making  two  executive  management
changes. In this connection,  restructuring  expenses of $986,000 were recorded,
including  $44,000 in  estimated  office  restructuring  costs and  $942,000  in
executive  management  and other  settlement  costs.  The  executive  management
settlement  agreements  include two non-interest  bearing  promissory notes with
face  values  of  $290,000  and   $250,000,   respectively,   payable  in  equal
installments  over eighteen months starting in May, 1997.  These notes have been
discounted to $268,000 and $231,000, respectively, to reflect effective interest
rates of 10%.

22.  RESTATEMENTS FOR CORRECTIONS OF ERRORS
-------------------------------------------
The financial statements for the three and nine months ended March 31, 1997, the
three months ended September 30, 1996 and year ended June 30, 1996 were restated
for corrections of errors.

In March, 1997, to reduce the overhang associated with outstanding  warrants and
to obtain working capital subsequent to the withdrawal of the Company's proposed
underwritten   public  offering,   the  Company  accepted  offers  from  certain
warrant-holders  to exercise their warrants to obtain 3,100,000 shares of Common
Stock at  discounted  exercise  prices  which  arose from a June 6, 1996 sale of
redeemable  convertible  preferred stock with attached  warrants.  As originally
filed in the financial  statements for the three and nine months ended March 31,
1997, the discount of $4,975,500 on these warrants was originally  classified as
a charge to expense as the underlying redeemable convertible preferred stock was
classified as mezzanine financing for financial reporting.  Subsequently, it was
determined that the warrants and the redeemable  convertible preferred stock are
equity instruments and accordingly,  the charge was reclassified from an expense
transaction to an equity transaction. There is no change to the net worth of the
Company or to its earnings per share as the charge affects net loss attributable
to common  stockholders in the earnings per share calculation in the same manner
as an expense transaction.

As  originally  filed,  the  financial  statements  for the three  months  ended
September  30, 1996 did not include  compensation  expense for the stock options
granted to officers  (as  discussed  in Note 16), as the  Company  intended  the
options to be granted in May 1996 when the market  price of the stock was $2.50.
The net loss  attributable  to common  stockholders  for the three  months ended
September 30, 1996 was originally  reported at $344,481 and related net loss per
share was $(0.11).

Subsequently, in accordance with Securities and Exchange Commission requirements
it was  determined  that the  grant of these  options  was not  effective  until
ratification  by the Board on  September  26,  1996,  when the market  price was
$5.50.  Accordingly,  the Company amended the financial statements for the three
months ended  September 30, 1996 to record a  non-recurring,  non-cash charge of
$1,650,000  for  compensation  expense  in  connection  with the  grant of these
options, which increased the net loss for the quarter to $1,994,481 and net loss
per share to $(0.62).

Additionally,   as  originally  filed,  the  Company  reported  its  Convertible
Preferred  Stock as equity.  The Preferred  Stock  contained two  provisions for
mandatory redemption, which the Company had considered remote and not within the
control of the holders.  Subsequently,  in accordance  with the  Securities  and
Exchange  Commission   requirements,   these  securities  were  reclassified  as
mezzanine  financing  and the  September  30, 1996 and June 30,  1996  financial
statements  were restated  accordingly.  In  conjunction  with this,  previously
recorded dividends of $66,500 for the three months ended September 30, 1996 were
reclassified  as interest  and the net loss of $277,981  increased  to $344,481.
Previously  recorded  dividends of $17,490 for the year ended June 30, 1996 were
reclassified as interest and the net loss of $1,076,833 increased to $1,094,373.
There was no impact on earnings per share from this adjustment, as the dividends
had previously increased the net loss attributable to common stockholders.

Also,  as  originally  filed,  accretion  of  the  discount  on  the  redeemable
convertible  preferred  stock was not  included as a  preferred  dividend in the
earnings per share  calculation  for the year ended June 30, 1996. As such,  the
calculation  has been  restated to consider  the fiscal  1996  accretion  of the
preferred   dividend  which  has  resulted  in  an  increase  in  the  net  loss
attributable to common stockholders by $94,968 and increased net loss per common
share from $(0.36) to $(0.39).

23.  NEW ACCOUNTING PRONOUNCEMENTS
----------------------------------
In February  1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  Per
Share" ("SFAS 128") which is effective for financial statements for both interim
and annual periods ending after  December 15, 1997.  Earlier  application is not
permitted;  however,  restatement  of all  prior-period  earnings per share data
presented is required.  The Company has not yet  determined  the effect SFAS 128
will have on its financial statements;  however, the adoption is not expected to
have a material impact on the financial position or results of operations of the
Company.

In March 1997, the FASB issued SFAS No. 129,  "Disclosure  of Information  about
Capital  Structure" ("SFAS 129"), which is required to be adopted by the Company
in fiscal 1998.  This  Statement  specifies  certain  disclosures  about capital
structure. Management does not expect that implementation of this Statement will
have a significant impact on the financial statements of the Company.

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

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

24.  SUBSEQUENT EVENTS
----------------------
Effective  July 1,  1997,  the  Company  acquired  100% of the stock of  Pegasus
Internet,  Inc.  ("Pegasus").  Terms of the  agreement  called for  issuance  of
600,000  shares of common  stock of the  Company  valued  at $1.8  million  plus
$200,000 in cash. The Company's  Chief  Executive  Officer owned 25% of Pegasus.
Pegasus provides Internet services  including web site planning and development,
site  hosting,   on-line  ticketing  system  development,   graphic  design  and
electronic commerce.

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


                                  SIGNATURES

Pursuant to the requirements of Section 16(a) of the Securities  Exchange Act of
1934, the Registrant has duly caused this Form 10-K/A to be signed on its behalf
by the undersigned, thereunto duly authorized.

                               MARKETING SERVICES GROUP, INC.
                               (Registrant)

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

                               By: /s/ Scott A. Anderson
                               Chief Financial and Accounting Officer
                               Date:   October 27, 1997