---

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

# FORM 10-KSB/A
(Amendment No. 2)

| | [x] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | --- | ------------------------------------------------------------------------------------

# For the
fiscal year ended June 30, 2004

| | [  ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE ACT OF 1934
| | ---- | ----------------------------------------------------------------------------------------------------

For the transition period from __________ to __________.

Commission file number: 0-21853

---

MEDIA
SCIENCES INTERNATIONAL, INC.(Name of small business issuer in its charter)

---

| | DELAWARE
(State or other jurisdiction of incorporation or organization) |  | 87-0475073
(I.R.S. Employer Identification No.) | 
| | ----------------------------------------------------------------------- |  | ----------------------------------------------- | 

| | 8 Allerman Road, Oakland, NJ
(Address of principal executive offices) |  | 07463
(Zip Code) | 
| | --------------------------------------------------------------------- |  | ---------------- | 

Issuers telephone number: (201) 236-9311

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

| | Title of each class
Common Stock |  | Name of each exchange on which registered
AMEX | 
| | -------------------------------- |  | ---------------------------------------------- | 

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

Common Stock(Title of Class)

Check  whether the issuer (1) filed all reports  required  to be filed by Section 13 or 15(d) of the  Exchange  Act
during the past 12 months (or for such shorter period that the  registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the 90 past days. YES [X] NO [  ]

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

State issuers revenues for its most recent fiscal year:  $17,073,751.

The aggregate market value
of voting and non-voting stock of the issuer held by non-affiliates on September
10, 2004 was $12,400,698.

# APPLICABLE
ONLY TO CORPORATE REGISTRANTS

As of September 10, 2004,
we had 9,932,210 shares of common stock issued and outstanding.

# DOCUMENTS
INCORPORATED BY REFERENCE

None.

Transitional Small Business Disclosure Format (check one): YES [  ] NO [X]

---

INTRODUCTORY NOTE

In this Amendment No. 2 to our Annual
Report on Form 10-KSB/A (the Second Amendment) for the year ended June 30,
2004, we further amend the following items set forth in our Amendment No. 1 to our Annual
Report on Form 10-KSB/A (the First Amendment) filed on July 22, 2005:

Part II  Item 7. Financial Statements, Auditor's Report
      Part II  Item 8A. Controls and Procedures
      Part III  Item 13. Exhibits

The First Amendment restated our
consolidated financial statements for the years ended June 30, 2004 and 2003 and the
related disclosures. The following items were amended in the First Amendment as a result
of the restatement:

Part II  Item 6. Managements Discussion and Analysis
      Part II  Item 7. Financial Statements
      Part II  Item 8A. Controls and Procedures
      Part III  Item 13. Exhibits

In connection with the preparation of
the Quarterly Report on Form 10-QSB of the Company for the quarter ended March 31, 2005,
the Companys current independent registered public accounting firm brought to the
attention of the Company that certain of the Companys issued and outstanding stock
options are subject to variable plan accounting treatment under the Financial Accounting
Standards Boards Interpretation 44, Accounting for Certain Transactions
Involving Stock Compensation an Interpretation of Accounting Principles Board Opinion No.
25 (APB 25) (Issue Date 3/00). Accordingly, certain previously
unrecognized compensation expenses should have been recognized in certain of the
Companys previously issued financial statements. After reviewing the matter with its
current and former independent registered public accounting firms, the Company has
identified certain non-cash adjustments that necessitated the restatement of its financial
statements for each of the first two quarters in the fiscal year ending June 30, 2005 and
for the fiscal year ended June 30, 2004 and for the quarters within the fiscal year ended
June 30, 2004.

These non-cash adjustments reflect
variable plan accounting treatment of the affected stock options for the relevant periods,
resulting from cashless exercise provisions applicable to options held by employees and
directors. Under variable plan option accounting, non-cash compensation expense is
increased or decreased as a result of changes in the market price of the Companys
common stock. On May 10, 2005, the Board of Directors of the Company rescinded the
cashless exercise provisions for all of the Companys outstanding option grants.
Consequently, the Companys stock options will no longer be subject to variable plan
accounting treatment after the fiscal year ended June 30, 2005.

The restatement for the year ended
June 30, 2004 resulted in an increase in selling, general and administrative expenses of
$358,675. Net income for the year ended June 30, 2004 decreased by $262,335. The impact of
the restatement for the year ended June 30, 2003 was none. The cumulative effect of the
variable plan accounting through June 30, 2002 was $.053 million and is reflected within
the consolidated statement of changes in shareholders equity as a restatement
adjustment.

Except as discussed above, we have
not modified or updated disclosures presented in the original Annual Report on Form
10-KSB, except as required to reflect the effects of the restatement, in this Second
Amendment. Accordingly, this Second Amendment does not reflect events occurring after the
filing of our original Form 10-KSB or modify or update those disclosures affected by
subsequent events. Information not affected by the restatement is unchanged and reflects
the disclosures made at the time of the original filing of the Form 10-KSB on September
28, 2004. This Second Amendment should be read in conjunction with our filings made with
the Securities and Exchange Commission subsequent to the filing of the original Form
10-KSB, including any amendments to those filings.

Please refer to Note 2 to the
accompanying consolidated financial statements for additional information on the
restatement.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.

# TABLE OF
CONTENTS

|           |  |                                                                                                                                     | Page
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------- | ----
|PART I     |  |                                                                                                                                     |     
|           |  |                                                                                                                                     |     
|Item 1.    |  | Description of Business                                                                                                             | 4   
|Item 2.    |  | Description of Property                                                                                                             | 9   
|Item 3.    |  | Legal Proceedings                                                                                                                   | 9   
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                 | 9   
|           |  |                                                                                                                                     |     
|PART II    |  |                                                                                                                                     |     
|           |  |                                                                                                                                     |     
|Item 5.    |  | Market for Common Stock and Related Stockholder Matters                                                                             | 10  
|Item 6.    |  | Managements Discussion and Analysis                                                                                                | 13  
|Item 7.    |  | Financial Statements                                                                                                                | 19  
|Item 8.    |  | Changes In and Disagreements With Accountants on Accounting and
                    Financial Disclosure                            | 48  
|Item 8A.   |  | Controls and Procedures                                                                                                             | 49  
|Item 8B.   |  | Other Information                                                                                                                   | 50  
|           |  |                                                                                                                                     |     
|PART III   |  |                                                                                                                                     |     
|           |  |                                                                                                                                     |     
|Item 9.    |  | Directors, Executive Officers, Promoters and Control Persons;
                    Compliance With Section 16(a) of the Exchange Act | 51  
|Item 10.   |  | Executive Compensation                                                                                                              | 56  
|Item 11.   |  | Security Ownership of Certain Beneficial Owners and Management                                                                      | 59  
|Item 12.   |  | Certain Relationships and Related Transactions                                                                                      | 62  
|Item 13.   |  | Exhibits                                                                                                                            | 64  
|Item 14.   |  | Principal Accountant Fees and Services                                                                                              | 66  
|           |  |                                                                                                                                     |     
|Signatures |  |                                                                                                                                     | 67  

---

# PART I

## ITEM 1.  
DESCRIPTION OF BUSINESS

## Our
Organization History

We  are  a  Delaware   corporation   named  Media   Sciences   International,   Inc.   Our  web  site   address  is
www.mediasciences.com.

We originally incorporated
under the laws of the State of Utah on August 11, 1983 under the name Communitra
Energy, Inc. On July 16, 1985, we amended our articles of incorporation to
change our name to Seafoods Plus, Ltd. We did not engage in any substantive
business activity from approximately 1988 to June 18, 1998.

On June 18, 1998, we
acquired Cadapult Graphic Systems Inc., a privately-held New Jersey corporation
formed on May 1, 1987 engaged in the business of providing of computer graphics
systems, peripherals, supplies and services to visual communicators and graphics
professionals, in a transaction viewed as a reverse acquisition.

On August 14, 1998, we
reincorporated under the laws of the State of Delaware as Cadapult Graphic
Systems, Inc. On August 11, 1999, we formed Media Sciences, Inc., as a
wholly-owned New Jersey subsidiary, for the manufacture and distribution of
digital color printer supplies.

In December  1999,  Media  Sciences,  Inc.  acquired the assets of  ultraHue,  Inc.,  a New Mexico  corporation,  a
manufacturer of workgroup color printer supplies.

On April 19, 2002, we
amended our certificate of incorporation to change our corporate name to Media
Sciences International, Inc.

On April 26, 2002, we
formed Cadapult Graphic Systems, Inc., as a wholly-owned New Jersey subsidiary,
for selling supplies directly to certain end users.

We are presently  organized with two operating  subsidiaries:  Media Sciences,  Inc. and Cadapult  Graphic Systems,
Inc. Media  Sciences  International,  Inc., as a parent  corporation,  does not engage in  substantive  independent
business operations.  We conduct substantially all of our operations through our subsidiaries.

As of September 20,  2004,  we had  9,932,210  shares of common stock issued and  outstanding.  and no preferred  shares
outstanding.

We have not been subject to
bankruptcy, receivership or any similar proceedings.

## Our Business

We are a manufacturer of
supplies for business color printers. We operate through two wholly-owned
subsidiaries.

Our wholly-owned
subsidiary, Media Sciences, Inc., manufactures and distributes printer supplies,
including solid ink sticks and toner cartridges for use in Tektronix, Xerox,
QMS-Minolta, Epson, Ricoh and other color printers. We intend to grow this
business through an expansion of our product line, expansion of our distribution
channels, through our INKlusive free color printer program and through demand
creation marketing activities. While we primarily sell our supplies through an
international distribution channel, we also sell supplies directly to certain
end users through our INKlusive program.

Our wholly-owned
subsidiary, Cadapult Graphic Systems, Inc., sells supplies directly to certain
end users through our INKlusive color printer program and to those with whom we
have a historical relationship.

---

## Operating
Strategy

We have a strategic
objective of becoming the leading independent manufacturer of supplies for
digital color business printers. We intend to achieve this objective through an
expansion of our product line, through brand development, an expansion of our
distribution network and through marketing programs.

The opportunity to sell
Media Sciences supplies exists in the installed base of workgroup, or business,
color printers. The installed base are those color printers used by
organizations of all sizes. Almost all of these organizations are using the
printer manufacturers supplies, such as Tektronix, Xerox or QMS. We
believe that as color printers become more commonplace in the office
environment, a subset of these users will seek alternative supplies to the
printer manufacturers brands, primarily as a way to reduce the cost of
ownership of their color printers. If we look at the color market as being
analogous to the monochrome printer and supply market, we believe an opportunity
exists for alternate supply manufacturers to achieve a 20-25% market share in
the aggregate. Our objective is to be the leader within this market space by
providing high quality, less expensive color printer supplies through the same
distribution channels used for selling the printer manufacturers supplies.

In addition to penetrating
the installed base, we intend to create a significant new set of color printer
users who are contractually committed to our supplies. We are striving to
achieve this objective through our sales programs such as our INKlusive color
printer program. We believe this program provides a unique opportunity for
organizations that are not currently using color printers to migrate to color
without the cost and technology risk of buying a printer outright.

## Principal
Products and Services and Programs

Products

Solid Ink Sticks. We
manufacture and distribute solid ink sticks for use in the Xerox/Tektronix
Phaser 340, 350, 360, 840, 850, 860, 8200 and Phaser 8400 color printers. Our
ink is sold under the Media Sciences brand, and under the house
brands of several of our customers. We offer flexible, custom packaging to meet
the needs of those distribution partners. Our solid ink is typically sold to
organizations at prices that are 20% to 50% less than those of the
Xerox/Tektronix brand.

Toner Cartridges. We
manufacture toner cartridges for use in Tektronix, Xerox, QMS-Minolta, Epson,
and Ricoh color pinters. We offer two lines of toner cartridges: Premium color
toner cartridges and our Clearcase line of toner cartridges. As with our ink,
our toner cartridges are sold under the Media Sciences brand and under the house
brands of our distributors. We plan to expand our toner cartridges offerings
both within the above lines of color printers and to other color printer
manufacturers as well.

| | o | Premium Color Toner Cartridges  Our Premium Color Toner Cartridge line of
toner cartridges includes toner cartridges for Xerox/Tektronix Phaser 1235,
2135, 7300 and 6200 color printers, QMS-Minolta 3100 and Epson C4000 color
printers. These are new cartridges offered at a discount to those of Xerox.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Clearcase  Our Clearcase line of toner cartridges are for use in
Xerox/Tektronix Phaser 560, 740, 750, 780, 790 and 7700 color printers, QMS
Magicolor 330 and Ricoh 3800 color printers. These are newly manufactured toner
cartridges, featuring a unique clear case, allowing the user to see the colored
toner within the cartridges. These cartridges are offered at a discount of up to
30% to the prices of the printer manufacturers.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

Sales Programs

INKlusive.          Our INKlusive color printer program  provides a customer with a workgroup color printer,  on-site
service  and a box of ink,  all for the cost of just the ink  itself.  It is truly a free  color  printer  program.
Consequently,  the  INKlusive  program  provides  the  customer  with one of the  lowest  cost of  ownerships  of a
business color printer in the industry today.

There are currently two
versions of the program, one at $99 per month and the other at $199 per month.
Under the $199 program the customer receives twice the ink and a printer with
more features. The $99 program is targeted at the new color printer user or to
those who are tired of using slow and expensive ink-jet printers. The program
requires a 24 month commitment, and upon successful completion of the program,
the printer is the customers to keep at no additional charge.

The INKlusive program is
targeted at small businesses, education, not-for-profits and real estate agents
and brokers. The program is advanced by our channel partners who receive a
commission for each unit placed, and are encouraged to sell additional Media
Sciences supplies to the customer.

Media Sciences offers this
program in conjunction with a financing company. Media Sciences does not own or
otherwise finance the cost of the printer.

No-Cap Color.   Our
No-Cap Color program provided a customer with one or more workgroup color
printers, at no charge, in return for a monthly or bi-monthly commitment to
purchase certain Media Sciences supplies from us. We offered several printers
under this program, including two business printers, one solid ink, one laser,
and one graphic arts printer. These printers had retail values of up to $6,000
and included service throughout the duration of the program. We targeted the
broad corporate market with this program, as well as certain vertical markets.
The printer remained the property of Media Sciences or its assignees at all
times.

Printers for our No-Cap
Color program were purchased outright and/or leased to us by third party leasing
companies. We have discontinued new unit placements under the No-Cap program in
favor of INKlusive program placements. We expect to continue to generate
revenues from the existing No-Cap printer base for at least one year.

## Marketing and
Sales Plans

We intend to increase our marketing
and sales efforts. The goal of these efforts is to increase revenues through
increased market awareness of our products and sales programs.

We are expanding our Media
Sciences distribution channels through outside sales efforts and direct mail. We
intend to strengthen these channels through performance based sales incentive
programs. We plan to build end-user awareness and demand for our supplies
through advertising and marketing campaigns.

We are marketing our
INKlusive program through our channel partners, web advertising and affiliates
and through direct mail promotions.

---

## Industry and
Market Overview

The office environment has
been dominated by monochrome (black and white) printers and color monitors. Over
the past several years color printers have been introduced to the office for
high impact communications where color presentation was critical. Today, the
production of color documents in the office is less the exception and more the
norm, and with many favorable market drivers, the use of color documents is
expected to grow.

The adoption of color in
the office has been facilitated by lower technology costs of acquisition such as
sub-$1000 color laser printers along with increased print speeds and
reliability. In addition to the technology, favorable market dynamics support
the use of office color printers. Primary contributors are the use of internet,
which has broadened the acceptance of color communication, and the
distribute and print model, where digital document delivery is
enhanced with localized printing as a way to shorten turn around times and
reduce production costs.

Growth in the installed
base of color laser printers has accelerated in recent years with a 15% year
over year unit growth in 2001, 23% in 2002 and 49% in 2003 (source: IDC
Research; Bear Stearns 2003). In addition, worldwide sales of color laser
printers is expected to grow at a CAGR (compound annual growth rate) of more
than 25% in the period 2002-2007 from 800,000 units in 2002 to 2.7 million units
in 2007 (source: Lyra Research December 2003 Imaging Spectrum Magazine). To
compliment the growth of the color printer installed base, the production of
color pages is growing. Impressions produced on digital color production
printers are expected to grow from 11 billion in 2001 to 54 billion in 2006
(source: Xerox Corporation News Release November 24, 2003).

As a result of the
increasing installed base and incremental page production, there is an increase
in the usage of supplies. Lyra Research estimates worldwide shipments of color
cartridges will increase at a CAGR of nearly 32% from 20.6 million to 61.8
million over the period of 2003- 2007 (source: Lyra Research December 2003
Imaging Spectrum Magazine). Lyra also forecasts that laser cartridge sales will
outpace the sales of ink cartridges this year (source: News Release Image Source
Magazine May 2004).

Today, the dominant
providers of color printer supplies are the printer manufacturers themselves.
These manufacturers reduce the cost of the printer hardware to gain market
share, in an effort to capture the recurring profitable revenue stream of
supplies. There is little competition to this source of supplies. Organizations
will have to manage the increasing expense of printing in color as more printers
are placed, pages produced and supplies consumed. As a result, they will look
for cost saving supply alternatives to manage the ongoing expense. The current
growth in color printer supplies is analogous to the historical growth of
monochrome printer supplies. In a 2000 research study, Lyra Research estimated
that monochrome third party supply/alternative supply manufacturers will provide
approximately 22-27% of the supplies consumed through 2003. We believe a similar
opportunity exists for color alternatives.

## Distribution
Methods of the Products and Services

Media Sciences,  Inc. sells through an international  network of channel partners.  Our products are sold under the
Media Sciences brand, the house brands of some of our distribution partners and in generic, or non-branded boxes.

Our distribution can also
be profiled by the markets they serve, including office supply wholesalers,
remanufacturers, technology resellers, catalog and web resellers, and those who
sell to the government.

Our products are available
in North and South America, Europe, South Africa, and Australia.

Cadapult Graphic Systems,
Inc. sells supplies directly to certain end users through our INKlusive program
and to those with whom we have a historical relationship. These direct sales are
conducted through telephone and Internet sales efforts.

---

## Competition

Media Sciences competes
primarily with the original manufacturer of the printers for which we provide
supplies, including Xerox, which sells printers under the Tektronix and Xerox
brands, QMS-Minolta, Epson and Ricoh. Other than the original equipment
manufacturers, we are not aware of any other significant competitor that
provides solid ink or toner for use in these printers.

Cadapult competes with
numerous resellers of computer printer supplies including Internet resellers,
catalogs, and other local, regional and national suppliers.

## Principal
Suppliers

Purchases in fiscal year
ended June 30, 2004 from three vendors amounted to approximately 45% of cost of
goods sold, with no one vendor accounting for more than 18% of cost of goods
sold. Purchases in the fiscal year ended June 30, 2003 from one vendor amounted
to 11% of cost of goods sold.

We purchase certain
important raw materials from a sole source or a limited number of suppliers.
Management believes that other suppliers could qualify to provide similar raw
materials on comparable terms. The time required to locate and qualify other
suppliers, however, could cause a delay in manufacturing that could be
disruptive to our Company.

## Dependence on
Major Customers

Sales to one customer
represented approximately 7% of our revenues in our fiscal year ended June 30,
2004. Sales to that same customer represented 11% of our revenues in our fiscal
year ended June 30, 2003.

## Intellectual
Property

We regard our trademarks,
trade secrets, and proprietary technology and similar intellectual property as
critical to our success, and rely on trademark, copyright and patent law, trade
secret protection and confidentiality and other agreements with our employees,
customers, partners and others to protect our proprietary rights. We have
registered certain trademarks in the United States and have applied for the
registration of other trademarks in the United States. We have applied for, and
been granted, certain patents in the United States.

## Need for
Government Approval

Not applicable.

## Government
Regulation

Not applicable.

## Research, Engineering and Development

We direct our research, engineering and
development efforts primarily toward developing new products and processes and
improving product performance. Research, engineering and product development
costs, which consist of salary and related benefits costs of our technical
staff, as well as product development costs including conceptual formulation,
design and testing of product alternatives, construction of prototypes, are
expensed as incurred. For the years ended June 30, 2004 and 2003 our research,
engineering and product development costs were approximately $740,000 and
$120,000 respectively.

---

## Compliance
with Environmental Laws

Not applicable.

## Employees

We currently have 38
full-time employees, including seven management level employees and one part
time employee.

## ITEM 2.  
DESCRIPTION OF PROPERTY

We maintain our executive
offices at Allendale, New Jersey, pursuant to a lease expiring on May 31, 2011.
We occupy approximately 15,400 square feet, including warehousing and
manufacturing facilities at our executive offices in Allendale, New Jersey.

We also maintain a sales
office in Redmond, Washington.

Our offices are adequately
covered by insurance for claims arising out of such occupancies.

Our present facilities have
been suitable for our operations and needs through the present. We believe that
we may need new or additional facilities in the future to accommodate our
current and projected growth. We are evaluating proposals for new or additional
facilities.

The table below sets forth
the location, approximate square footage, approximate annual rent, use of each
location and expiration date of each lease. The leases summarized in the table
provide for moderate annual rental increases.

`--------------------  -----------  -----------------  ----------------------  ---------------
                      Approximate    Approximate                              Lease
Location              Square Feet    Annual Rent      Use                     Expiration Date
--------------------  -----------  -----------------  ----------------------  ---------------

40 Boroline Road         15,400        $184,800       Executive Offices,      May 31, 2011
Allendale, NJ 07401                                   Warehouse, and
                                                      Manufacturing Facility

201 MJL Center            1,500         $28,200       Sales                   month to month
16398 NE 85th Street                                                          lease
Redmond, WA 98052
--------------------  -----------  -----------------  ----------------------  ---------------`

## ITEM 3.   LEGAL
PROCEEDINGS

In March 2003, we initiated
a claim with our umbrella insurance carrier for the unreimbursed portion of the
warranty claims resulting from solid ink recalled in January 2002. In January
2004, the insurance company denied coverage and filed a suit against the Company
seeking to rescind the policy or in the alternative to have the court declare
that the insurance company has no obligation to indemnify the Company for these
claims. In September 2004, the Company entered into voluntary mediation with the
insurance company resulting in a settlement of the matter. The insurance company
agreed to pay the Company $500,000 without admitting that the policy covered the
claims.

Other than the above, as at
June 30, 2004, we are not a party to any material pending legal proceeding,
other than ordinary routine litigation incidental to our business.

## ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

---

# PART II

## ITEM 5.      MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS

## Market
Information

Our common stock is listed
on the American Stock Exchange under the symbol GFX.

The following table sets
forth for the periods indicated, the high and low closing sale prices for a
share of our common stock, during the relevant periods, as reported by the
American Stock Exchange.

`Fiscal Year    Quarter Ended           High      Low
-----------    -------------           -----    -----

2003           September 30, 2002      $1.00    $0.60
               December 31, 2002       $0.85    $0.50
               March 31, 2003          $0.63    $0.47
               June 30, 2003           $0.60    $0.40
2004           September 30, 2003      $1.59    $0.60
               December 31, 2003       $1.34    $1.04
               March 31, 2004          $1.20    $0.85
               June 30, 2004           $1.85    $1.10
-----------    -------------           -----    -----`

## Holders

The approximate number of
holders of record of our common stock as of September 1, 2004 was 418. As of
that date, there were approximately 666 beneficial stockholders, including
stockholders holding common stock under nominee security position listings.

## Dividends

We have never declared any
cash dividends on our common stock. Future cash dividends on the common stock,
if any, will be at the discretion of our Board of Directors and will depend on
our future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions, and other factors that the Board
of Directors may consider important.

No shares of series A
preferred stock are presently outstanding. Prior to January 1, 2004, we had
shares of series A preferred stock issued and outstanding. Our series A
preferred stock carried a fixed dividend at an annual rate of 11.5%. Dividends
were to be paid each quarter in arrears. The first dividend payment occurred on
January 1, 2000. The certificate of designation for the series A preferred stock
provided that unless and until we have fully paid all dividends on the
outstanding shares of series A preferred stock, we would not to declare or pay
cash dividends, or distribute or set aside assets, for any of our other
securities. Further, the certificate of designation for the series A preferred
stock provided that we may not pay dividends if payment of dividends would
violate certain financial criteria of our senior lending agreement with a
financial institution.

---

Our senior lending
agreement with a financial institution restricts the payment of dividends if
certain financial conditions are not met. Under the senior lending agreement, we
are required to maintain a certain level of tangible capital funds. Tangible
capital funds is defined as the sum of stockholders equity, plus
subordinated debt, plus dividends payable, minus intangibles and loans to
stockholders, employees, other related parties. The lender sets the level of
tangible capital funds that we are required to maintain. For June 30, 2004,
September 30, 2004, December 31, 2004, and March 31, 2005, the minimum levels
were set at $500,000, $600,000, $700,00 and $800,000. Additionally, under the
senior lending agreement, we are required to maintain a debt service coverage
ratio of not less than 1.2 to 1 for the quarter ending September 30, 2004 and of
not less than 1.35 to 1 for the quarters ending thereafter. The ratio is
determined on a quarterly basis, considering net income plus interest
expense, tax expense, depreciation and amortization expense, less, the
sum of dividends actually paid, unfunded capital expenditures and taxes actually
paid, divided by the sum of the current portion of long term debt
actually paid, any unscheduled debt payments, and interest expense actually
paid.

We do not pay, but we do
accrue, dividends if payment would violate the terms of the senior lending
agreement. As of June 30, 2004, we are not in default of the financial
restrictions of the senior lending agreement that prohibits the payment of
dividends. As of June 30, 2003, and as of September 30, 2003, payment of all
accrued but unpaid dividends would have violated the tangible capital funds
level and the debt service coverage ratio that we are required to maintain under
the senior lending agreement. We qualified to recommence the payment of
dividends on or about January 1, 2004.

In connection with our
fiscal years ended June 30, 2002 and June 30, 2003 and through the quarter ended
March 31, 2004, we paid or accrued dividends on our series A preferred stock as
follows:

| | o | in the year ended June 30, 2002, we accrued $577,476 of stock dividends and paid
dividends totaling $52,039 through issuance of 53,558 shares of common stock
valued at $0.95 to $1.10 per share, and as of June 30, 2002, we had $113,849 in
dividends accrued and unpaid;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o | in the year ended June 30, 2003, we accrued $586,059 of stock dividends and paid
dividends totaling $43,556 through issuance of 45,847 shares of common stock
valued at $0.95 per share, and as of June 30, 2003, we had $699,919 in dividends
accrued and unpaid;         
| | o | in the three months ended September 30, 2003, we accrued $157,406 in dividends;
and, as of September 30, 2003, an aggregate of $857,325 in dividends remained
accrued and unpaid; and                                                                                      
| | o | in 2004, we paid an aggregate of $66,125 in accrued dividends.                                                                                                                                                                                                             

## Transfer Agent

The transfer agent for our
common stock is Continental Stock Transfer & Trust Company, New York, New
York.

---

## Recent Sales
of Unregistered Securities

On December 31, 2003, we concluded
an exchange offer with our preferred stockholders through which they had an
opportunity to exchange each of their preferred shares for 10 shares of our
common stock. Each preferred shareholder had acquired their preferred shares as
part of a private placement of 550,000 units of our securities which we
concluded in March 2000. In connection with the exchange offer, preferred
shareholders tendered a total of 507,500 preferred shares, representing 93% of
the outstanding preferred shares, in exchange for a total of 5,075,000 shares of
common stock. This includes the exchange, after the exchange offer expiration
date, of 50,000 preferred shares held by an elderly holder who did not timely
accept the preferred stock offer of conversion. Preferred shareholders who
accepted the offer waived their rights to unpaid dividends and interest on their
preferred stock. Preferred shareholders also voted upon, and approved, an
amendment to the preferred stock certificate of designation providing for
automatic conversion if less than a majority of the originally issued preferred
stock became outstanding. Pursuant to the terms of the certificate of
designation for our preferred stock, as amended, the other 40,000 preferred
shares outstanding were converted into 200,000 shares of common stock and
subsequently were paid accrued interest and dividends. We relied on an exemption
from registration for a private transaction not involving a public distribution provided by Section 4(2) under the Securities Act.

On May 24, 2004, we issued
to two of our management level employees, Frances Blanco and Duncan Huyler,
options to purchase 100,000 shares of our common stock, of which 50,000 options
vested on the grant date, and the remaining 50,000 options are subject to
vesting over the period May 25, 2004 through May 24, 2006. The options are exercisable for ten years at
$1.06 per share. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) under
the Securities Act.

On June 30, 2004, in a
transaction deemed exempt from registration pursuant to Section 4(2) of the
Securities Act, we sold 1,000,000 shares of common stock to GFX Investments,
LLC, an entity controlled by Richard L. Scott, for $1.25 million. We used the
proceeds for debt reduction and working capital. In conjunction with the
investment, we agreed to appoint a nominee of GFX Investments, Alan Bazaar, Vice
President and Portfolio Manager for Richard L. Scott Investments, to our board
of directors.

---

## ITEM 6.  
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

## FORWARD-LOOKING
INFORMATION

This report on Form 10-KSB
contains certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), which represent our expectations and beliefs,
including, but not limited to statements concerning Media Sciences
expected growth. The words believe, expect,
anticipate, estimate, project, and similar
expressions identify forward-looking statements, which speak only as of the date
such statement was made. These statements by their nature involve substantial
risks and uncertainties, certain of which are beyond our control, and actual
results may differ materially depending on a variety of important factors.

The following discussion
and analysis should be read in conjunction with the information set forth in the
audited financial statements for the year ended June 30, 2004.

## RESULTS OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 2004

Sales.  
Consolidated  sales for the year ended June 30,  2004,  compared to the year ended June 30,  2003,
increased  approximately 17% to $17.1 million from $14.6 million. Media Sciences sales increased  approximately 33%
to $12.8  million  from  $9.6  million.  Cadapult  sales  decreased  approximately  17% to $4.7  million  from $5.7
million.  Intercompany  sales,  which  consist  primarily  of sales of  supplies  from Media  Sciences  to Cadapult
decreased to $0.5 million  from $0.7  million.  The growth in Media  Sciences  sales and the  attrition in Cadapult
sales are consistent with our strategy of focusing on the Media Sciences business.

Gross Profit. The
consolidated gross profit for the year ended June 30, 2004 was $8.1 million, or
approximately 48% of sales, as compared to $7.4 million, or approximately 51% of
sales, for the year period ended June 30, 2003. Media Sciences gross
profit margins fell to 51% from 58% in the prior year. The drop in gross profit
margins was due primarily to a shift in the mix of toner product sales. Sales of
Premium toner cartridges, which carry significantly lower gross profit margins
than do Clearcase cartridges, grew significantly during the year ended June 30,
2004, while Clearcase sales during that same period contracted. Cadapults
gross profit margins increased slightly to 33% from 31% as leases associated
with our former No-Cap Color program matured.

Selling, General and
Administrative. Consolidated selling, general and administrative expenses for the year ended June 30, 2004
increased to $7 million, or 41% of sales, from $5.5 million, or 38% of sales, for the year
ended June 30, 2003. Media Sciences selling, general and administrative expenses
increased to 45% of sales from 41% of sales. The increase in Media Sciences selling,
general and administrative expenses was due to an increase in engineering and product
development expenses of $620,000 and marketing expenses of $250,000 both associated with
the development, commercialization and launch of ten new products, the most significant of
which started shipping in fiscal 2005 and to increased non-cash compensation due to
variable plan accounting. Other incremental expenses included commissions for the
INKlusive printer program, and a shift in allocation of overhead from Cadapult to Media
Sciences. These increases to Media Sciences selling, general and administrative expenses
were offset by the $500,000 settlement with our umbrella insurance carrier.
Cadapults selling, general and administrative costs decreased to 27% of sales from
29% of sales primarily due to the shift in allocation of overhead from Cadapult to Media
Sciences.

Depreciation and
Amortization. Depreciation and amortization expense for the year ended June
30, 2004 decreased slightly to $0.76 million, including $0.5 million included in
cost of sales, from $0.79 million for the year ended June 30, 2003 of which
$0.53 million was included in cost of sales.

Interest Expense.
Interest expense for the year ended June 30, 2004 decreased to $0.37 million
from $0.45 million incurred for the year ended June 30, 2003. The decrease in
interest expense was due to the retirement of all non-bank debt which carried
interest rates ranging from 13%-23%, and the retirement of several capital
leases.

Income Taxes. For the year ended June
30, 2004, we recorded an income tax expense of $0.34 million as compared to an income tax
expense of $0.6 million for the year ended June 30, 2003. For the years ended June 30,
2004 and 2003 the Companys effective tax rate was 46% and 40% respectively. The
effective aggregate state and federal tax rate varies due to the impact of variable plan
accounting.

---

Dividends.   For the year ended June 30, 2004, we incurred a preferred  stock dividend  charge of $2.3 million
including a $2.1 million  non-cash  preferred  stock dividend and induced  conversion  charge  associated  with the
conversion of our preferred stock to common stock.

Net Income (Loss)
Applicable to Common Shareholders. For the year ended June 30, 2004 we incurred a loss applicable to
common shareholders of $1.87 million or $(0.30) per share basic and diluted as restated,
as compared to the year ended June 30, 2003, where we earned $0.25 million, or $0.07 per
share basic and diluted. The loss applicable to common shareholders in 2004 was due to the
non-cash induced conversion charge.

## RESULTS OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 2003

Sales.     Sales for the year ended June 30,  2003,  compared  to the year  period  ended  June 30,  2002,  increased
approximately  5% to $14.6 million from $13.8 million.  Media Sciences sales  increased  approximately  16% to $9.6
million from $8.3 million.

Gross Profit.   Gross
profit for the year ended June 30, 2003 was $7.4 million, or approximately 51%
of sales, as compared to $6.6 million, or approximately 48% of sales, for the
year period ended June 30, 2002. The increase in gross profit margins reflects
the continued increase in Media Sciences business relative to the Cadapult
business.

Selling, General and
Administrative.   Selling, general and administrative expenses for the year
ended June 30, 2003 decreased to $5.3 million, or 36% of sales, from $6.3
million, or 45% of sales, for the year ended June 30, 2002. For the year ended
June 30, 2003, our selling general and administrative costs included
approximately $1.35 million of expenses related to the recall of our solid ink
in January 2002 and the related warranty expenses as compared to approximately
$3 million, net of $1 million insurance benefit for the prior year. In addition,
for the year ended June 30, 2002, we recorded a net reduction in our selling,
general and administrative costs of approximately $0.6 million due to the
settlement of a legal malpractice suit.

Depreciation and
Amortization.   Depreciation and amortization expense for the year ended June
30, 2003 increased to $0.79 million, including $0.53 million included in cost of
sales, from $0.74 million for the year ended June 30, 2002 of which $0.45
million was included in cost of sales.

Interest Expense.
Interest expense for the year ended June 30, 2003 increased to $0.45 million
from $0.4 million incurred for the year ended June 30, 2002. The increase in
interest was due to increased borrowings and the interest component of payments
on capital leases and the supplier agreement.

Income Taxes.    For
the year ended June 30, 2003, we recorded a current income tax expense of $0.13
million and a deferred income tax expense of $0.45 million as compared to a
current income tax expense of $4,330 and a deferred income tax benefit of $0.15
million for the year ended June 30, 2002. We recorded the current income tax
expense because of New Jerseys two-year suspension of the use of net
operating loss carry forwards.

Dividends.  For the year ended June 30, 2003, we accrued  $0.59  million of stock  dividends to our preferred
shareholders  and paid  $43,556 in stock  dividends  through a common  stock  issuance at $0.95 per share.  In June
2002, our Board of Directors voted to offer preferred  shareholders the option to receive  payment-in-kind  for the
dividend  periods  ending June 30, 2002 and  September  30, 2002 in order to conserve  cash flow,  through a common
stock issuance at $0.95 per share,  the fair market value of our common stock on that date.  Fourteen  shareholders
elected to receive their dividend payments through the  payment-in-kind,  totaling $87,112 and consisting of 91,694
shares of common stock for the two periods ending June 30, 2002 and September 30, 2002.

Net Income (Loss)
Applicable to Common Shareholders. For the year ended June 30, 2003 we
earned $245,391, or $0.07 per share basic and diluted, as compared to the year
ended June 30, 2002, where we incurred a loss applicable to common shareholders
of $859,048, or $0.25 per share. The conversion of the Series A convertible
preferred stock has been excluded from the computation of diluted earnings per
share for the years ended June 30, 2003 and 2002, as the conversion would be
anti-dilutive after adding back preferred stock dividends to net income.

---

## LIQUIDITY AND CAPITAL RESOURCES

We experienced positive cash flows
from operating activities for the year ended June 30, 2004. Cash flows from operating
activities of $1.1 million resulted primarily from net income of $0.4 million, non-cash
charges of $0.76 million for depreciation and amortization, $0.36 million for the impact
of variable plan accounting and $0.37 million for deferred income taxes and an increase in
accounts payable of $1.2 million, offset by an insurance claim receivable of $0.5 million,
an increase in inventories of $1.2 million and a decrease in the accrued supplier expense
of $0.45 million. The increase in inventories was due to the increase in the number of
products in our product line, increased sales and the extended lead time from our Asian
suppliers.

The cash we used in
investing activities for the year ended June 30, 2004 included the purchase of
equipment and tooling in the amount of $0.46 million.

We have an agreement with a
lender under which we can borrow up to $3 million under a revolving
line-of-credit, subject to availability of collateral. Borrowings bear interest
at 1.75% over the lenders base rate, are payable on demand and are
collateralized by all assets of our company. We are also subject to an annual
facility fee of 0.75% of the maximum line amount. As of June 30, 2004 we had
$1.8 million outstanding under this line and the interest rate was 5.75%. This
line expires on October 31, 2006.

In June 2004, we entered
into a one-year amortizing note with our bank in the amount of $400,000 that
bears an interest rate of 2% over the lenders base rate. The proceeds were
used to repay eight, $50,000 notes carrying interest rates of 20%. These notes
originated in June 2001 when we entered into a $400,000 promissory note with
Consonant Services Group, which was subsequently refinanced though the eight
individual notes. As of June 30, 2004, the interest rate on the one-year note
was 6%.

Both the revolving line of
credit and the one-year term note with the bank are subject to certain financial
covenants including a Debt Service Ratio and a Tangible Capital Funds
calculation, both as defined. At no time have we been in violation of these
covenants. In addition, there is a restriction on the payment of dividends if
certain financial conditions are not met.

In June 2004, we sold
1,000,000 shares of common stock to a private investor. The net proceeds to the
Company were $1.2 million.

Between August 2000 and
September 2003, the Company borrowed an aggregate of $450,000 from its
President. The funds were used for general corporate purposes. The debt was
structured through two notes payable. The first note, in the amount of $255,000,
bore an interest rate of 10% per annum and was payable in monthly installments
of interest only through May 2004. The second note, in the amount of $195,000,
bore an interest rate of 20% per annum and was payable in monthly installments
of interest only through May 2005. Both of these notes were repaid in full in
May and June of 2004. There is no representation or assurance made that Mr.
Levin will make any further loans to us.

In December 2000, the note
payable to ultraHue came due and was satisfied with a cash payment of $760,000
and a demand note in the amount of $400,000 bearing an interest rate of 13% per
annum. Through June 2003, we repaid $150,000 of this note. This note was repaid
in full in February 2004.

On June 14, 2002, we issued
short-term promissory notes aggregating $175,000 and warrants to purchase up to
87,500 shares of our common stock exercisable for five years at $1.00 per share
to seven note holders: Paul Levin, Frank and Edna Blanco, Nathan D. Watters,
Adam H. Watters, Mitchell Baker, Esther Baker, and Harold and Marsha Kugelman.
The notes matured in December 2002 and bore simple interest at the rate of 12%
per year. In December 2002, we repaid the $175,000 borrowed in June through cash
principal payments of $75,000 and through the issuance of new, one-year notes
aggregating $100,000 and bearing simple interest of 20%, payable quarterly.
These notes were repaid in full in December 2003. The note holders were persons
who bear the following relationships with Media Sciences or with our officers
and directors: Paul Levin is the father of Michael W. Levin, President and
Chairman of Media Sciences; Frank and Edna Blanco are the parents of Frances
Blanco, Vice President and a director of Media Sciences; Mitchell Baker is the
son of Paul Baker, a director of Media Sciences; and Esther Baker is the wife of
Paul Baker. Three of the four new note holders were persons who bear the
following relationships with Media Sciences or with our officers and directors:
Paul Levin is the father of Michael W. Levin, President and Chairman of Media
Sciences; Frank and Edna Blanco are the parents of Frances Blanco, Vice
President and a director of Media Sciences; and Mitchell Baker is the son of
Paul Baker, a director of Media Sciences.

---

The terms of the loans from
the Companys officers, directors, and others having relationships with our
officers and directors were determined by the Board of Directors in light of the
Companys financial condition, the terms of previous borrowings from such
persons, and the terms on which short-term loans were available from public
resources. The terms of these loans were deemed fair to the Company and viewed
as arms length transactions. There are no ongoing contractual or other
commitments with any of these persons resulting from these transactions, and
there is no representation or assurances made that any of these persons will
make any further loans to us.

## CRITICAL
ACCOUNTING POLICIES

## Use of
Estimates

The accompanying
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States. When more than
one accounting principle, or method of its application, is generally accepted,
management selects the principle or method that is appropriate in the
Companys specific circumstances. Application of the accounting principles
requires the Companys management to make estimates about the future
resolution of existing uncertainties and that affect the reported amounts of
assets, liabilities, revenues, and expenses which in the normal course of
business are subsequently adjusted to actual results. Actual results could
differ from such estimates. In preparing these financial statements, management
has made its best estimates and judgments of the amounts and disclosures
included in the consolidated financial statements giving due regard to
materiality.

## Revenue
Recognition, Accounts Receivable and Allowance for Doubtful Accounts

Revenue is recognized at
the point of shipment for goods sold, and ratably through the duration of
service contracts. Deferred revenue consists principally of billings on service
contracts prior to rendering related services.

The Company markets its
products to an international network of dealers and distributors. Credit is
extended after a credit review by management which is based on a customers
ability to perform its obligations. Such reviews are regularly updated. The
allowance for doubtful accounts is based upon agings of customer balances and
specific account reviews by management. Foreign receivables are insured. Media
Sciences International, Inc. has no significant concentrations of credit risks
and generally does not require collateral or other security from its customers.

## Inventories
and Inventory Reserves

Inventories are stated at
the lower of cost or market, with costs being determined on a first-in,
first-out method. Work-in-process and finished goods include material costs,
labor costs and manufacturing overhead. The Company evaluates its inventories
periodically to identify excess, slow-moving and obsolete inventories and assess
reserve adequacy.

## Warranty
Accrual

The Company provides a
warranty for all of its consumable supply products. The Companys warranty
stipulates that it will pay reasonable and customary charges for the repair of a
printer needing service as a result of using the Companys products. The
Company estimates the costs that may be incurred and records a liability in the
amount of such costs at the time product revenue is recognized. Factors that may
affect the warranty include the number of units shipped to customers, historical
and anticipated rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of the recorded warranty liability and
adjusts the amount as necessary. These expenses are classified as selling,
general and administrative costs. The warranty accruals at June 30, 2004 and
2003 were $340,592 and $250,000, respectively.

---

## Goodwill and
Impairment

The excess of the purchase
consideration over the fair value of the net assets of acquired businesses is
considered to be goodwill and, until June 30, 2001, was being amortized over 15
years using the straight-line method.

The Company reviews
goodwill when events or changes in circumstances indicate that the carrying
amount of goodwill may not be recoverable. We also review goodwill as required
by SFAS No. 142, Goodwill and Other Intangible Assets, which
requires that goodwill be tested annually using a two-step process. The first is
to identify any potential impairment by comparing the carrying value of
reporting units to their fair value. If a potential impairment is identified,
the second step is to compare the implied fair value of goodwill with its
carrying amount to measure the impairment loss. Reporting unit fair value is
estimated using the income approach, which assumes that the value of a reporting
unit can be computed as the present value of the assumed future returns of an
enterprise discounted at a rate of return that reflects the riskiness of an
investment. A significant increase in the rate at which the assumed future
returns are discounted could result in an unexpected impairment charge to
goodwill, which could have a negative impact on our operating results.

At June 30, 2004 and 2003,
net goodwill amounted to $4,986,030 after accumulated amortization amounting to
$521,962 for both years. The goodwill resulted from the acquisition of
substantially all of the assets of UltraHue, Inc. We have completed all
transitional and annual impairment tests necessary to date and concluded that
our goodwill is not impaired.

## Stock-Based
Compensation

The Company follows the intrinsic
value method of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related interpretations in accounting
for its employee stock options. Financial Accounting Standards Board Statement No. 123
Accounting for Stock-Based Compensation (SFAS 123) permits the
Company to elect to follow the intrinsic value method of APB 25 rather than the
alternative fair value accounting provided under SFAS 123, but requires pro forma net
income and earnings per share disclosures as well as various other disclosures. As a
result of amendments to SFAS 123, the Company will be required to expense employee stock
options over the vesting period beginning with its quarter ending September 30, 2006. The
Company has also adopted the disclosure provisions required under Financial Accounting
Standards Board Statement No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure (SFAS 148). Under APB 25, because the exercise
price of all of the Companys stock options has equaled the market price of the
underlying stock on the date of grant, no compensation expense was recognized at the time
the options were granted.

The Company, its Audit Committee and
its current and former independent registered public accounting firms have agreed that
certain of the Companys issued and outstanding stock options that permit cashless
exercise should be subject to variable plan accounting treatment under applicable
accounting standards, and, accordingly, previously unrecognized compensation expenses
should have been recognized in certain of the Companys previously issued financial
statements under the Financial Accounting Standards Boards Interpretation 44,
Accounting for Certain Transactions Involving Stock Compensation an Interpretation
of APB No. 25 (Issue Date 3/00). Accordingly, management has restated the
Companys financial statements for the effects of variable plan accounting for the
first two quarters of the fiscal year ending June 30, 2005 and for the fiscal year ended
June 30, 2004, and for the quarters within the fiscal year ended June 30, 2004.

Pro forma information regarding net
income (loss) and income (loss) per share applicable to common shareholders is required by
SFAS 123 and SFAS 148, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of those statements.

---

The  following  table  illustrates  the effect on results of  operations  if the Company had applied the fair value
recognition provisions of SFAS No. 123 :

`Fiscal Year Ended
                                                                       June 30,
                                                           2004 (Restated)       2003
                                                           ---------------    -----------

Net income (loss), applicable to common
              shareholders as reported                         $(1,872,813)   $   245,391

Impact of variable plan accounting, net of related tax
              effects                                              262,335           --

Stock-based employee compensation expense under
              fair value method, net of related tax effects       (136,544)       (64,599)
                                                               -----------    -----------

Pro forma net income (loss) applicable to common
              shareholders                                     $(1,747,022)   $   180,792
                                                               ===========    ===========

Net income (loss) per share applicable to common
shareholders :
         Basic and diluted, as reported                             $(0.30)         $0.07
                                                                    ======          =====
         Basic and diluted, pro forma                               $(0.28)         $0.05
                                                                    ======          =====`

## CAPITAL
EXPENDITURES

We have committed to
certain tooling costs associated with new product introductions. These tooling
costs over the next twelve months are estimated to be up to $700,000. In
addition we plan to acquire certain manufacturing equipment to scale our solid
ink manufacturing. Cost of this equipment during the next twelve months is
estimated to be up to $500,000. We plan to finance these
expenditures through internal cash generation and, where appropriate, operating
leases.

## INFLATION

We have historically offset
any inflation in operating costs by a combination of increased productivity and
price increases, where appropriate. We do not expect inflation to have a
significant impact on our business in the future.

## SEASONALITY

We anticipate that our cash
flow from operations will be slightly better in the fall and winter months than
in the spring and summer months due to the sales cycles associated with our
Cadapult business. In the event that we are unable to generate sufficient cash
flows from operations, we may be required to utilize other cash reserves, if
any, or seek additional equity or debt financing to meet operating expenses, and
there can be no assurance that there will be any other cash reserves or that
additional financing will be available or, if available, on reasonable terms.

---

## ITEM 7.  
FINANCIAL STATEMENTS

## Financial
Report - June 30, 2004

|                                                           | 
|---------------------------------------------------------- | 
|Report of Independent Registered Public Accounting Firm    | 
|Independent Auditors' Report                               | 
|Consolidated Balance Sheets                                | 
|Consolidated Statements of Operations                      | 
|Consolidated Statements of Changes in Shareholders' Equity | 
|Consolidated Statements of Cash Flows                      | 
|Notes to Consolidated Financial Statements                 | 
|Restatement of Quarterly Data (Unaudited)                  | 

---

# REPORT OF
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Media Sciences International, Inc.

We have audited the
accompanying consolidated balance sheet of Media Sciences International, Inc.
and Subsidiaries as of June 30, 2004, and the related consolidated statements of
operations, changes in shareholders equity and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States.) Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Media Sciences International, Inc.
and Subsidiaries as of June 30, 2004, and their results of operations and cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 2 to the
accompanying consolidated financial statements, the Company has restated its consolidated
balance sheet as of June 30, 2004, and the related consolidated statement of operations,
changes in shareholders equity and cash flows for the year ended June 30, 2004 for
the effects of variable plan stock option accounting.

| | /s/ J.H. Cohn LLP
| | -----------------

Roseland, New Jersey
August 4, 2004, except for the effects of (1) the
matter discussed in the fourth paragraph of Note 10,
which are as of September 10, 2004, and (2) the
matter discussed in Note 2, which are as of July 6, 2005.

---

# INDEPENDENT
AUDITORS REPORT

To the Board of Directors and Shareholders of
Media Sciences International, Inc.

We have audited the accompanying
consolidated balance sheet (restated) of Media Sciences International, Inc. and
subsidiaries as of June 30, 2003 and the related consolidated statements of operations,
changes in shareholders equity (restated) and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. 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
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Media Sciences International, Inc. and subsidiaries at
June 30, 2003 and the consolidated results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted in the
United States of America.

As discussed in Notes 1 and 2 to the
consolidated financial statements, previously unrecognized non-cash compensation expenses
were discovered in the current year affecting the fiscal 2003 consolidated balance sheet
and the related consolidated statement of changes in shareholders equity for the
year then ended.

Accordingly, the accompanying
consolidated balance sheet as of June 30, 2003 and the related consolidated statement of
stockholders equity for the year then ended have been restated.

| | WISS & COMPANY, LLP

Livingston, New Jersey
August 6, 2003, except for Notes 1&2
which are as of July 6, 2005
| | -------------------------------------------------------------------------------------------------------------

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# CONSOLIDATED
BALANCE SHEETS

`ASSETS                                               June 30,
                       ------                                   --------------------------------
                                                                2004 (Restated)   2003 (Restated)
                                                                 (Notes 1&2)       (Notes 1&2)
                                                                ---------------   ---------------

CURRENT ASSETS :
    Cash                                                        $       666,116   $        66,467
    Accounts receivable, less allowance for
        doubtful accounts of $35,000                                  1,626,287         1,841,060
    Insurance claim receivable                                          500,000              --
    Inventories                                                       2,274,088         1,089,809
    Deferred tax assets                                               1,222,774         1,000,000
    Prepaid expenses and other current assets                           280,530           173,050
                                                                ---------------   ---------------
        Total Current Assets                                          6,569,795         4,170,386
                                                                ---------------   ---------------

PROPERTY AND EQUIPMENT, NET                                           1,072,186         1,362,734
                                                                ---------------   ---------------

OTHER ASSETS:
    Goodwill and other intangible assets, net                         4,468,973         4,478,190
    Deferred tax assets                                                    --              47,315
    Other assets                                                         48,100            58,102
                                                                ---------------   ---------------
                                                                      4,517,073         4,583,607
                                                                ---------------   ---------------

TOTAL ASSETS                                                    $    12,159,054   $    10,116,727
                                                                ===============   ===============

                  LIABILITIES AND SHAREHOLDERS' EQUITY
                  ------------------------------------

CURRENT LIABILITIES:
    Bank debt                                                   $     2,189,054   $     1,779,862
    Other short-term debt and current maturities
        of long-term debt                                                39,081           405,256
    Accounts payable                                                  2,511,117         1,340,257
    Accrued expenses and other current liabilities                      248,580           258,512
    Income taxes payable                                                 92,651           131,425
    Accrued product warranty                                            340,592           250,000
    Accrued expense - supplier                                             --             448,952
    Dividends payable                                                      --             699,919
    Loans from investors                                                   --             200,000
    Loans from officer                                                     --             280,000
    Deferred revenue                                                    153,273           196,234
                                                                ---------------   ---------------
        Total Current Liabilities                                     5,574,348         5,990,417
                                                                ---------------   ---------------

OTHER LIABILITIES :
    Long-term debt, less current maturities                                --              39,081
    Loan from investors                                                    --             400,000
    Loan from officer                                                      --             195,000
    Deferred tax liabilities                                            543,880              --
                                                                ---------------   ---------------
        Total Other Liabilities                                         543,880           634,081
                                                                ---------------   ---------------

TOTAL LIABILITIES                                                     6,118,228         6,624,498
                                                                ---------------   ---------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY :
    Series A Convertible Preferred stock, $.001 par value
      Authorized 1,000,000 shares; issued none in 2004,
      547,500 in 2003                                                      --                 547
    Common Stock, .001 par value
       Authorized 20,000,000 shares; issued 9,857,210 shares
       in 2004, 3,577,210 shares in 2003                                  9,858             3,578
    Additional paid-in capital                                        7,837,948         5,163,076
    Cost of 10,564 shares of common stock in treasury                   (20,832)          (20,832)
    Accumulated deficit                                              (1,786,148)       (1,654,140)
                                                                ---------------   ---------------
        Total Shareholders' Equity                                    6,040,826         3,492,229
                                                                ---------------   ---------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                      $    12,159,054   $    10,116,727
                                                                ===============   ===============`

See accompanying notes to consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF OPERATIONS

`Year Ended June 30,
                                                      -------------------------------
                                                      2004 (Restated)        2003
                                                      ---------------    ------------

NET SALES                                             $    17,073,751    $ 14,597,862
                                                      ---------------    ------------

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation              8,427,102       6,642,710
    Depreciation                                              504,435         532,403
                                                      ---------------    ------------
        Total cost of goods sold                            8,931,537       7,175,113
                                                      ---------------    ------------

GROSS PROFIT                                                8,142,214       7,422,749
                                                      ---------------    ------------

OTHER COSTS AND EXPENSES:
    Selling, general and administrative, excluding
      depreciation, amortization and impact of
      variable plan accounting                              6,416,797       5,255,743
    Depreciation and amortization                             253,706         258,109
    Impact of variable plan accounting                        358,675            --
                                                      ---------------    ------------
        Total other costs and expenses                      7,029,178       5,513,852
                                                      ---------------    ------------

INCOME FROM OPERATIONS                                      1,113,036       1,908,897

INTEREST EXPENSE                                              373,442         448,623
                                                      ---------------    ------------

INCOME BEFORE INCOME TAXES                                    739,594       1,460,274

PROVISION FOR INCOME TAXES                                    342,967         585,258
                                                      ---------------    ------------

NET INCOME                                                    396,627         875,016

PREFERRED STOCK DIVIDENDS, INCLUDING CHARGE FOR
INDUCED CONVERSION                                          2,269,440         629,625
                                                      ---------------    ------------

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS   $    (1,872,813)   $    245,391
                                                      ===============    ============



BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING            6,214,835       3,565,748
                                                      ===============    ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING          6,214,835       3,571,374
                                                      ===============    ============

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
APPLICABLE TO COMMON SHAREHOLDERS                     $         (0.30)   $       0.07
                                                      ===============    ============`

See accompanying notes to consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.AND
SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY

`Preferred Stock       Common Stock      Additional                                 Total
                                     -----------------   ------------------     Paid-in     Treasury    Accumulated   Shareholders'
                                      Shares    Amount    Shares    Amount      Capital       Stock       Deficit        Equity
                                     --------   ------   ---------  -------   -----------   ---------   -----------   -----------

BALANCES, JUNE 30, 2002               547,500   $  547   3,531,363  $ 3,532   $ 5,119,566   $ (20,832)  $(1,899,531)  $ 3,203,282
(RESTATED)

   Issuance of common stock for
     dividend payment                    --       --        45,847       46        43,510        --            --          43,556
   Preferred stock dividend              --       --          --       --            --          --        (629,625)     (629,625)
   Net income                            --       --          --       --            --          --         875,016       875,016
                                     --------   ------   ---------  -------   -----------   ---------   -----------   -----------
BALANCES, JUNE 30, 2003
(RESTATED)                            547,500      547   3,577,210    3,578     5,163,076     (20,832)   (1,654,140)    3,492,229

   Issuance of common stock for
     conversion of preferred stock
     and accrued dividends and
     interest, net of costs of
     $61,640                         (547,500)    (547)  5,275,000    5,275     2,851,757        --            --       2,856,485
   Preferred stock dividend              --       --          --       --            --          --        (157,406)     (157,406)
   Charge for induced conversion         --       --          --       --      (1,740,805)       --        (371,229)   (2,112,034)
   Sale of common stock, net of
     expenses                            --       --     1,000,000    1,000     1,199,000        --            --       1,200,000
   Issuance of common stock for
     exercise of stock options           --       --         5,000        5         6,245        --            --           6,250
   Impact of variable plan
     accounting                          --       --          --       --         358,675        --            --         358,675
   Net income                            --       --          --       --            --          --         396,627       396,627
                                     --------   ------   ---------  -------   -----------   ---------   -----------   -----------
BALANCES, JUNE 30, 2004
(RESTATED)                               --       --     9,857,210  $ 9,858   $ 7,837,948   $ (20,832)  $(1,786,148)  $ 6,040,826
                                     ========   ======   =========  =======   ===========   =========   ===========   ===========`

See accompanying notes to consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.AND
SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF CASH FLOWS

`2004 (Restated)       2003
                                                                ---------------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES :
    Net income                                                      $   396,627    $   875,016
    Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation and amortization                                  758,141        790,512
         Impact of variable plan accounting                             358,675           --
         Deferred income taxes                                          368,421        452,685
         Provision for bad debts                                         55,445        118,220
         Changes in operating assets and liabilities :
             Accounts receivable                                        159,328       (702,010)
             Insurance claim receivable                                (500,000)          --
             Inventories                                             (1,184,279)       165,514
             Prepaid expenses and other current assets                 (107,480)      (113,204)
             Other assets                                                10,002           (369)
             Accounts payable                                         1,170,860       (971,533)
             Income taxes payable                                       (38,774)          --
             Accrued expenses and other current liabilities              95,551         10,441
             Accrued expense - supplier                                (448,952)      (276,844)
             Deferred revenue                                           (42,961)       (34,063)
                                                                    -----------    -----------
                 Net cash provided by operating activities            1,050,604        314,365
                                                                    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES :
    Purchases of property and equipment                                (458,376)      (296,296)
    Purchase of intangible assets                                          --          (94,608)
                                                                    -----------    -----------
                 Net cash used in investing activities                 (458,376)      (390,904)
                                                                    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES :
    Bank line of credit, net                                              9,192         90,947
    Bank term loan proceeds                                             400,000           --
    Payments of debt                                                   (405,256)      (174,879)
    Loan from (repayments to) officer                                  (475,000)       120,000
    Payments on loans from investors                                   (600,000)        64,758
    Dividends paid                                                      (66,125)          --
    Proceeds of issuance of common stock, net                         1,206,250           --
    Costs of preferred stock conversion                                 (61,640)          --
                                                                    -----------    -----------
                 Net cash provided by financing activities                7,421        100,826
                                                                    -----------    -----------

NET INCREASE IN CASH                                                    599,649         24,287

CASH, BEGINNING OF YEAR                                                  66,467         42,180
                                                                    -----------    -----------

CASH, END OF YEAR                                                   $   666,116    $    66,467
                                                                    ===========    ===========

SUPPLEMENTAL CASH FLOW  INFORMATION :
    Interest paid                                                   $   406,176    $   401,982
                                                                    ===========    ===========
    Income taxes paid                                               $    13,431    $     1,148
                                                                    ===========    ===========
    Issuance of common stock as dividend payment                    $   791,200    $    43,556
                                                                    ===========    ===========
    Issuance of common stock for accrued interest on dividends      $    14,891    $      --
                                                                    ===========    ===========
    Inventories transferred to equipment                            $      --      $    69,260
                                                                    ===========    ===========
    Conversion of preferred stock and accrued dividends
      to common stock                                               $ 2,856,485    $      --
                                                                    ===========    ===========
    Induced conversion of preferred stock                           $ 2,112,034    $      --
                                                                    ===========    ===========`

See accompanying notes to consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## NOTE 1  BASIS OF PRESENTATION :

Our accounting and reporting policies
conform to accounting principles generally accepted in the United States of America. The
consolidated financial statements presented herein are restated. You should read these
consolidated financial statements in conjunction with the information set forth in our
Form 8-K filed on May 11, 2005.

## NOTE 2  RESTATEMENT
OF FINANCIAL STATEMENTS :

In connection with the preparation of
the Quarterly Report on Form 10-QSB of the Company for the quarter ended March 31, 2005,
the Companys current independent registered public accounting firm brought to the
attention of the Company that certain of the Companys issued and outstanding stock
options are subject to variable plan accounting treatment under the Financial Accounting
Standards Boards Interpretation 44, Accounting for Certain Transactions
Involving Stock Compensation an Interpretation of Accounting Principles Board Opinion No.
25 (APB 25) (Issue Date 3/00). Accordingly, certain previously
unrecognized compensation expenses should have been recognized in certain of the
Companys previously issued financial statements. After reviewing the matter with its
current and former independent registered public accounting firms, the Company has
identified certain non-cash adjustments that necessitated the restatement of its financial
statements for each of the first two quarters in the fiscal year ending June 30, 2005 and
for the fiscal year ended June 30, 2004 and for the quarters within the fiscal year ended
June 30, 2004.

These non-cash adjustments reflect
variable plan accounting treatment of the affected stock options for the relevant periods,
resulting from cashless exercise provisions applicable to options held by employees and
directors. Under variable plan option accounting, non-cash compensation expense is
increased or decreased as a result of changes in the market price of the Companys
common stock. The restatement for the year ended June 30, 2004 resulted in an increase in
selling, general and administrative expenses of $358,675. Net income for the year ended
June 30, 2004 decreased by $262,335. On May 10, 2005, the Board of Directors of the
Company rescinded the cashless exercise provisions for all of the Companys
outstanding option grants. Consequently, the Companys stock options will no longer
be subject to variable plan accounting treatment after the fiscal year ended June 30,
2005.

The cumulative effect of the variable
plan accounting through June 30, 2002 was $53,000 and is reflected within the consolidated
statement of changes in shareholders equity as a restatement adjustment.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## NOTE 3  NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature
of the Business 
Media Sciences International, Inc. and Subsidiaries,
collectively referred to as the Company, manufactures and
distributes supplies for workgroup color printers. Our products include solid
ink sticks and color toner cartridges for use in office color printers. We
distribute our products through an international network of dealers and
distributors. We also sell directly to end users located in the United States through programs designed to
foster our supplies business. We have our corporate headquarters in New Jersey
with an office in Redmond, Washington.

Principles
of Consolidation 
The consolidated financial statements include the
accounts of Media Sciences International, Inc. and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.

Estimates
and Uncertainties 
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results, as
determined at a later date, could differ from those estimates.

Revenue
Recognition 
Revenue is recognized at the point of shipment
for goods sold, and ratably through the duration of service contracts and
collection is reasonably assured. Deferred revenue consists principally of
billings on service contracts prior to rendering related services.

Concentration
of Credit Risk 
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and
unsecured trade receivables. We maintain our cash balances in financial
institutions which are insured by the Federal Deposit Insurance Corporation up
to $100,000 each. At various times during the year, such balances may exceed the
FDIC limit.

Concentrations of credit
risk with respect to all trade receivables are considered to be limited due to
the quantity of customers comprising the Companys customer base. We
perform ongoing credit evaluations of our customers financial condition
and do not require collateral. We maintain credit insurance on our foreign
receivables. We maintain an appropriate allowance for doubtful accounts based on
our history of past write-offs, collections and current credit evaluations.
Consequently, management believes that credit risk beyond the established
allowance at June 30, 2004 is limited.

Financial
Instruments Financial instruments include cash, accounts
receivable, accounts payable, accrued expenses, and short-term and long-term
debt. The amounts reported for financial instruments are considered to be
reasonable approximations of their fair values. The fair value estimates
presented herein were based on market or other information available to
management. The use of different assumptions and/or estimation methodologies
could have a material effect on the estimated fair value amounts.

Vendor Concentration Purchases in 2004 from three vendors amounted to 45% of
cost of goods sold. No single vendor accounted for more than 18% of cost of
goods sold.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Major
Customers 
Sales to one customer as a percentage of total sales
amounted to 7% and 11% in 2004 and 2003, respectively.

Inventories 
Inventories, consisting of materials, labor and manufacturing
overhead are stated at the lower of cost or market, with cost being determined
on a first-in, first-out basis.

Property
and Equipment 
Property and equipment are stated at cost. The
Company provides for depreciation using straight-line and accelerated methods by
charges to expense at rates based upon the useful lives of 3 to 7 years for
furniture, equipment, automobiles, tooling and molds and over the useful lives
or the lease term, if shorter, for leasehold improvements.

Long-Lived
Assets 
At least annually, the Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets,
requires testing of goodwill for impairment. Based on the Companys testing
of goodwill, no impairment existed at June 30, 2004 and 2003.

In addition, the Company
assesses long-lived assets with definite useful lives, including property and
equipment and other intangible assets, for impairment whenever events or
circumstances indicate that the carrying value may not be fully recoverable by
comparing the carrying value to estimated future undiscounted cash flows. To the
extent that there is impairment, analysis is performed based on several
criteria, including, but not limited to, revenue trends, discounted operating
cash flows and other operating factors to determine the impairment amount. No
material impairment adjustments to other intangible assets or other long-lived
assets were made during fiscal 2004 or 2003.

Advertising
Expense 
The Company accounts for advertising costs in
accordance with Statement of Position 93-7, Reporting on Advertising
Costs. Advertising expenses are deferred until first use of the
advertising. Deferred advertising costs at June 30, 2004 and 2003 totaled
approximately $63,000 and $128,000, respectively. Advertising expense for the
years ended June 30, 2004 and 2003 amounted to approximately $650,000 and
$400,000, respectively.

Income Taxes 
The Company recognizes deferred tax assets, net of
applicable valuation allowances, related to net operating loss carryforwards and
certain temporary differences and deferred tax liabilities related to certain
temporary differences. The Company is required to recognize a future tax benefit
to the extent that realization of such benefit is more likely than not.
Otherwise, a valuation allowance is applied. At June 30, 2004, the Company
believes that the more likely than not criteria have been met and,
accordingly, has recorded a deferred tax asset to recognize a future tax
benefit.

Employee Benefit Plan 
We maintain a 401(k) savings/retirement plan for all
eligible employees. The plan allows for employee contributions to be matched by
the Company. Our contributions for the years ended June 30, 2004 and 2003 were
$26,700 and $23,000, respectively.

Income (Loss) Per Share 
Basic income (loss) per common share is computed
using the weighted average number of common shares outstanding. Diluted earnings
per common share is computed using the weighted average number of shares
outstanding as adjusted for the incremental shares attributed to outstanding
options and warrants to purchase common stock, and other potentially dilutive
securities.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the computation of basic and diluted income (loss) per common share:

`Year Ended June 30,
                                                                        ------------------------------
                                                                        2004 (Restated)       2003
                                                                        ---------------    -----------
Numerator:
  Net income (loss) applicable to common shareholders -
  basic and diluted                                                         $(1,872,813)   $   245,391
                                                                            ===========    ===========

Denominator:
  Denominator for basic earnings per common share:
      Weighted average shares                                                 6,214,835      3,565,748

      Effect of dilutive securities - stock options and warrants                   --            5,626
                                                                            -----------    -----------

  Denominator for diluted earnings per common share                           6,214,835      3,571,374
                                                                            ===========    ===========

Net income (loss) per common share, basic and diluted                            $(0.30)        $ 0.07
                                                                                 ======         ======`

The assumed conversion of
the Series A convertible preferred stock has been excluded from the computation
of diluted earnings per share for the year ended June 30, 2003. Such conversion,
when taking into account the additional net income generated by the elimination
of the dividend, would have been anti-dilutive.

The following warrants and
options to purchase common stock were excluded from the computation of diluted
earnings per share for the years ended June 30, 2004 and 2003 because their
exercise price was greater than the average market price of the common stock for
those periods :

`Year Ended June 30,
                                                    --------------------------
                                                       2004           2003
                                                    -----------    -----------

             Anti-dilutive warrants and options       3,386,156      3,260,839
                                                    ===========    ===========`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## Stock Options
and Related Pro Forma Disclosure :

The Company follows the intrinsic
value method of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related interpretations in accounting
for its employee stock options. Financial Accounting Standards Board Statement No. 123
Accounting for Stock-Based Compensation (SFAS 123) permits the
Company to elect to follow the intrinsic value method of APB 25 rather than the
alternative fair value accounting provided under SFAS 123, but requires pro forma net
income and earnings per share disclosures as well as various other disclosures. As a
result of amendments to SFAS 123, the Company will be required to expense employee stock
options over the vesting period beginning with its quarter ending September 30, 2006. The
Company has also adopted the disclosure provisions required under Financial Accounting
Standards Board Statement No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure (SFAS 148). Under APB 25, because the exercise
price of all of the Companys stock options has equaled the market price of the
underlying stock on the date of grant, no compensation expense was recognized at the time
the options were granted.

The Company, its Audit Committee and
its current and former independent registered public accounting firms have agreed that
certain of the Companys issued and outstanding stock options that permit cashless
exercise should be subject to variable plan accounting treatment under applicable
accounting standards, and, accordingly, previously unrecognized compensation expenses
should have been recognized in certain of the Companys previously issued financial
statements under the Financial Accounting Standards Boards Interpretation 44,
Accounting for Certain Transactions Involving Stock Compensation an Interpretation
of APB No. 25 (Issue Date 3/00). Accordingly, management has restated the
Companys financial statements for the first two quarters of the fiscal year ending
June 30, 2005 and for the fiscal year ended June 30, 2004, and for the quarters within the
fiscal year ended June 30, 2004.

Pro forma information regarding net
income (loss) and income (loss) per share applicable to common shareholders is required by
SFAS 123 and SFAS 148, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of those statements.

The fair value of options granted in
2005 and 2004 were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions, respectively:

`2004          2003
         ----------------------------------------------------    -----------    --------
         Risk-free interest rate                                 3.83 - 6.0%        6.0%
         Dividend yield                                                 0.0%        0.0%
         Expected common stock market price volatility factor       74 - 86%         74%
         Weighted average expected life of stock options           8.9 years    10 years`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

For purposes of pro forma
disclosures, the estimated fair value of options is amortized to expense over
the options vesting periods. The Companys pro forma information
follows:

`Year Ended June 30,
                                                                 ------------------------------
                                                                 2004 (Restated)       2003
                                                                 ---------------    -----------

Net income (loss) applicable to common shareholders, as
reported                                                         $    (1,872,813)   $   245,391

Impact of variable plan accounting, net of related tax effects           262,335           --
Stock-based employee compensation expense under
   fair value method, net of related tax effects                        (136,544)       (64,599)
                                                                 ---------------    -----------
Pro forma net income (loss) applicable to common shareholders        $(1,747,022)   $   180,792
                                                                 ===============    ===========

Net income (loss) per share applicable to common shareholders:
         Basic and diluted, as reported                                   $(0.30)        $0.07
                                                                          ======         =====
         Basic and diluted, pro forma                                     $(0.28)        $0.05
                                                                          ======         =====`

Recent Accounting
Pronouncements  In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 requires that a liability be recorded in the
guarantors balance sheet upon issuance of a guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued, including a
rollforward of the entitys product warranty liabilities. The Company has
adopted FIN 45 which has had no material impact on its financial position,
results of operations or cash flows.

In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock- Based Compensation, Transition
and Disclosure. SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in tabular format. Additionally,
SFAS 148 requires disclosure of the pro forma effect in interim financial
statements. The Company has adopted SFAS 148 which has had no material impact on
its financial position, results of operations or cash flows.

In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150
requires that financial instruments within the scope of SFAS 150 be classified
as a liability or an asset. SFAS 150 was effective for all financial instruments
entered into after May 31, 2003 and otherwise, the beginning of the first
interim period after June 15, 2003. The Company has adopted SFAS 150 which has
had no material impact on its financial position, results of operations or cash
flows.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

In December 2003, the FASB
issued FIN 46(R), Consolidation of Variable Interest Entities. This
Interpretation clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46(R) applies to variable interest entities created after January 31, 2003,
and was effective as of July 31, 2003 for variable interest entities created
prior to February 1, 2003. The Company has adopted FIN 46(R) which has had no
material impact on its financial position, results of operations or cash flows.

Engineering and
Product Development Engineering and product development
costs, which consist of salary and related benefits costs of our technical
staff, as well as product development costs including conceptual formulation,
design and testing of product alternatives, and construction of prototypes, are
expensed as incurred. For the years ended June 30, 2004 and 2003, our
engineering and product development costs were approximately $740,000 and
$120,000 respectively.

## NOTE
4  INVENTORIES:

Inventories are summarized as follows:

`June 30,
                                                               ----------
                                                            2004         2003
                                                         ----------   ----------
        Raw materials                                    $  265,178   $  124,429
        Finished goods                                    2,008,910      965,380
                                                         ----------   ----------
                                                         $2,274,088   $1,089,809
                                                         ==========   ==========`

## NOTE 5  PROPERTY AND EQUIPMENT:

Property and equipment are summarized as follows:

`June 30,
                                                                             --------
                                                                      2004               2003
                                                                   -----------       ------------
         Equipment                                                  $1,401,068         $1,361,238
         Equipment at customer location                                951,109            951,109
         Furniture and fixtures                                        433,405            329,510
         Automobiles                                                    52,035             52,035
         Leasehold improvements                                        223,664            223,664
              Tooling and molds                                        962,185            647,751
                                                                   -----------       ------------
                                                                     4,023,466          3,565,307
         Less: Accumulated depreciation and amortization             2,951,280          2,202,573
                                                                   -----------        -----------
                                                                    $1,072,186         $1,362,734
                                                                    ==========         ==========`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## NOTE
6  GOODWILL AND OTHER INTANGIBLE ASSETS:

Goodwill and other intangible assets are summarized as follows:

`June 30,
                                           Life             ----------
                                          (Years)        2004         2003
                                          -------     ----------   ----------
     Goodwill                                --       $4,986,030   $4,986,030
     Other                                   1-5          46,000       46,000
                                                      ----------   ----------
                                                       5,032,030    5,032,030
     Less: Accumulated amortization                      563,057      553,840
                                                      ----------   ----------
                                                      $4,468,973   $4,478,190
                                                      ==========   ==========`

The components of other
intangible assets include two acquired URLs. The carrying value of the
Companys other intangible assets is $46,000 less accumulated amortization
of $41,096 and $31,879 at June 30, 2004 and 2003, respectively. Amortization
expense for the fiscal years 2004 and 2003 was $9,217.

As of June 30, 2004 and
2003, the carrying value of goodwill amounted to $4,986,030, less accumulated
amortization from periods prior to the adoption of SFAS 142 in July 2001 of
$521,962. During the years ended June 30, 2004 and 2003, no goodwill was
impaired or written off.

## NOTE
7  DEBT:

The Company's borrowings consisted of the following:

`June 30,
                                                                    ----------
                                                                 2004         2003
                                                              ----------   ----------
     Short-term debt:
       Revolving line-of-credit with bank                     $1,789,054   $1,779,862
       Note payable to bank                                      400,000         --
       Note payable relating to acquisition of UltraHue             --        250,000
       Note payable to officer                                      --        280,000
       Notes payable to investors                                   --        200,000
       Current maturities of long-term debt                       39,081      155,256
                                                              ----------   ----------
                                                              $2,228,135   $2,665,118
                                                              ==========   ==========
     Long-term debt:
       Long-term debt, less current maturities                $     --     $   39,081
       Note payable to officer                                      --        195,000
       Note payable to investors                                    --        400,000
                                                              ----------   ----------
                                                              $     --     $  634,081
                                                              ==========   ==========`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

We have a revolving
line-of-credit which provides for maximum borrowings of $3,000,000. The maximum
amount available for borrowings at any time is subject to a borrowing base
formula tied to the level of our accounts receivable and inventory. In
connection with the negotiation of this facility during 2003, we granted a
security interest in all of our assets. Borrowings bear interest at a rate of
1.75% over the banks base rate and we pay an annual facility fee of 0.75%
of the maximum line amount. The line-of-credit expires on October 31, 2006.

In June 2004, we entered
into a one-year term note with our bank in the amount of $400,000 that bears
interest at 2% over the banks base rate. The proceeds were used to repay
notes due to several individuals that bore interest at 20% and were due in June
2005.

Both the revolving
line-of-credit and the one-year term note with the bank are subject to certain
financial covenants including a Debt Service Ratio and a Tangible Capital Funds
calculation, both as defined. At no time have we been in violation of these
covenants. Our President provides the bank with a limited personal guarantee of
$500,000. In addition, there is a restriction on the payment of dividends if
certain financial conditions are not met.

The note payable relating
to the acquisition of UltraHue, Inc. consisted of a $250,000 note that bore
interest at 13% and was due on demand. This note was paid in March 2004.

Between August 2000 and
September 2003, we borrowed an aggregate of $450,000 bearing interest rates from 10% to 20% from our President. The
funds were used for general corporate purposes and were repaid in May and June
2004. The interest accrued and/or paid on these loans was $62,696 and $51,628
for the years ended June 30, 2004 and 2003, respectively.

In November and December
2002, we borrowed an aggregate of $200,000 from several individuals that bore
interest ranging from 20-23%. These notes were paid during December 2003.

As of June 30, 2004, the
current maturities of long-term debt were comprised primarily of our remaining
capital lease obligations, and there was no non-current long-term debt.

## NOTE
8  INCOME TAXES:

The components of income taxes are summarized as follows:

`Year Ended June 30,
                                                 ----------------------
                                                   2004         2003
                                                 ---------    ---------
     Current:
       Federal                                   $    --      $    --
       State                                       (25,454)     132,573
                                                 ---------    ---------
     Total Current                                 (25,454)     132,573
                                                 ---------    ---------
     Deferred:
       Federal                                     265,799      452,685
       State                                       102,622         --
                                                 ---------    ---------
     Total Deferred                                368,421      452,685
                                                 ---------    ---------
     Income Tax Expense                          $ 342,967    $ 585,258
                                                 =========    =========`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

The Company has available
federal net operating loss carryforwards of approximately $2,500,000 which
expire through 2022, and state net operating loss carryforwards of approximately
$1,000,000 which expire through 2005.

A reconciliation of income
tax expense provided at the federal statutory rate (34%) to income tax expense
is as follows:

`Year Ended June 30,
                                                                   -------------------
                                                                     2004       2003
                                                                   --------   --------
     Income tax expense computed at federal statutory rate         $251,462   $496,493
     State income taxes (net of federal benefit)                     50,930     87,617
     Other (including permanent differences)                         40,575      1,148
                                                                   --------   --------
                                                                    342,967    585,258
                                                                   ========   ========`

Significant components of the Company's deferred tax assets and liabilities are as follows:

`June 30,
                                                          -------------------------
                                                             2004          2003
                                                          -----------   -----------
     Deferred tax assets :
       Net operating loss carryforwards                   $   904,205   $ 1,200,000

       Deferred compensation                                   96,340          --
       Accruals and reserves                                  222,229      (152,685)
                                                          -----------   -----------
              Total deferred tax assets                   $ 1,222,774   $ 1,047,315
                                                          ===========   ===========

     Deferred tax liabilities :
        Depreciation and amortization                     $   543,880   $      --
                                                          ===========   ===========`

## NOTE
9  SHAREHOLDERS EQUITY:

| | a) | Stock Compensation Plan:
| | -- | ------------------------

| | We
have an incentive stock option plan (the 1998 Plan), pursuant to which
500,000 shares of common stock have been reserved. The stock options (which may
be incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended) entitle the holder to purchase shares
of the Companys common stock for up to ten years from the date of grant
(five years for persons owning more than 10 % of the total combined voting power
of the Company) at a price not less than the fair market value (110% of fair
market value for persons owning more than 10% of the combined voting power of
the Company) of the common stock on the date of grant. In general, any employee,
director, officer or exclusive agent of, or advisor or consultant to, the
Company or a related entity, is eligible to participate in the Plan. The stock
options are nontransferable, except upon death.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

| | b) | Non-Plan Options:
| | -- | -----------------

| | In
December 1999, the Company granted each of two employees five-year stock options
to purchase up to 50,001 shares. The options are exercisable at $1.27 per share,
were completely vested at June 30, 2004, and expire in December 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended June 30, 2001, the Company granted an employee five-year stock
options to purchase up to 100,000 shares all of which were vested as of June 30,
2003. The options are exercisable at $1.25 per share and expire in June 2005. In
July 2004, the employee exercised 5,000 options for net proceeds to the Company
of $6,250.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended June 30, 2003, the Company granted each of five employees
five-year stock options to purchase up to 25,000 shares, which vested on April
6, 2004 and are exercisable at $0.50 per share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended June 30, 2003, the Company granted its President five-year stock
options to purchase up to 500,000 shares that are exercisable at $1.00 per share
and expire in June 2008. Options to purchase 250,000 shares vested immediately
and options to purchase an additional 250,000 shares vest ratably over the
period from July 1, 2003 through June 30, 2005. A total of 375,000 options are
vested at June 30, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended June 30, 2004, the Company granted each of two employees ten-year
stock options to purchase up to 100,000 shares, which are exercisable at $1.06
per share. Options to purchase 50,000 shares each vested immediately and options
to purchase an additional 50,000 shares each vest ratably over the period from
May 24, 2004 through May 23, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes the 1998 Plan and non-plan stock option activity for
the two years ended June 30, 2004:
| | ----------------------------------------------------------------------------------------------------------------------

`Weighted
                                               Number of       Average
                                                Shares      Exercise Price
--------------------------------------------------------------------------

Options outstanding at June 30, 2002            1,204,730       $1.49

Year ended June 30, 2003:
    Granted                                       723,401        0.86
    Exercised                                        --          --
    Cancelled                                    (564,723)       1.37
                                                 --------

Options outstanding at June 30, 2003            1,363,408        1.20

Year ended June 30, 2004:
    Granted                                       247,500        1.07
    Exercised                                      (5,000)       1.25
    Cancelled                                    (218,750)       1.28
                                                --------

Options outstanding at June 30, 2004            1,387,158       $1.17
                                               ==========       =====`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

| | The
following table summarizes information about outstanding and exercisable 1998
Plan and non-Plan options at June 30, 2004:
| | -----------------------------------------------------------------------------------------------------------------------------

`Options Outstanding                                   Options Exercisable
     -------------------------------------------------------------------    -----------------------------
                                                             Weighted
                                                             Average
                                           Weighted          Remaining                        Weighted
       Range of                Number      Average           Contractual      Number          Average
     Exercise Prices        Outstanding    Exercise Price    Life-Years     Exercisable    Exercise Price
     ---------------        -----------    --------------    -----------    -----------    --------------

     $0.43 to $0.65             239,201         $0.56           6.14            223,867         $0.55
     $1.00 to $2.00           1,049,857          1.16           4.67            765,221          1.19
     $2.01 to $4.00              98,100          2.74           5.46             98,100          2.74
                            -----------         -----           ----          ---------         -----
                              1,387,158         $1.17           4.98          1,087,188         $1.20
                            ===========         =====           ====          =========         =====`

| | c) | Warrants:
| | -- | ---------

| | In
October 1999, the Company issued 30,000 warrants to purchase its common stock
between $3.00 - $4.00 per share in exchange for investor relations services
which were subsequently capitalized. The warrants, which were valued at
approximately $100,000 using the Black-Scholes option pricing model, were
recognized as a cost of issuance of the Series A Preferred shares and expire on
September 29, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Between
October 1999 and March 2000, the Company issued 1,926,500 warrants to purchase
common stock in connection with the issuance of the Series A Preferred shares as
more fully described below. 1,100,000 warrants at $4.50 expire on September 29,
2004, 40,000 warrants at $3.75 expire on December 10, 2004, 236,500 warrants at
$1.65 expire on March 9, 2005 and 550,000 warrants at $3.75 expire on March 9,
2005. The value of the warrants was recognized as a cost of issuance of the
Series A Preferred shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2001, the Company issued 200,000 warrants to purchase its common stock at
$1.00 per share in consideration for consulting services. The warrants, which
were valued at $25,000, expire on May 31, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2002, the Company issued 87,500 warrants to purchase its common stock at
$1.00 per share in connection with its notes payable. The warrants were valued
at $43,372 and expire in June 2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

| | The following table summarizes the warrant activity for the two years ended June 30, 2004:
| | ------------------------------------------------------------------------------------------

`Weighted
                                                              Number of       Average
                                                               Shares      Exercise Price
                --------------------------------------------------------------------------


                Warrants outstanding at June 30, 2002         2,349,000        $3.57

                Year ended June 30, 2003:
                    Granted                                        --           --
                    Exercised                                      --           --
                    Cancelled                                      --           --
                                                            -----------

                Warrants outstanding at June 30, 2003         2,349,000         3.57

                Year ended June 30, 2004:
                    Granted                                        --           --
                    Exercised                                      --           --
                    Cancelled                                  (105,000)        4.29
                                                             ----------

                Options outstanding at June 30, 2004          2,244,000        $3.54
                                                             ==========        =====`

| | The following table summarizes information about outstanding and warrants at  June 30, 2004:
| | --------------------------------------------------------------------------------------------

`Warrants Outstanding                     Warrants Exercisable
                      ---------------------------------------------    -----------------------------
                                                        Weighted
                                                        Average
                                      Weighted          Remaining                        Weighted
  Range of                Number      Average           Contractual      Number          Average
Exercise Prices        Outstanding    Exercise Price    Life-Years     Exercisable    Exercise Price
---------------        -----------    --------------    -----------    -----------    --------------

$1.00 to $1.65             524,000         $1.29            1.53           524,000         $1.29
$3.00 to $4.00             620,000          3.74            0.63           620,000          3.74
$4.50                    1,100,000          4.50            0.25         1,100,000          4.50
                         ---------         -----            ----         ---------         -----

                         2,244,000         $3.54            0.66         2,244,000         $3.54
                         =========         =====            ====         =========         =====`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

| | d) | Common Stock:
| | -- | -------------

| | During
the year ended June 30, 2003, we issued 45,847 shares of common stock valued at
$43,556 in lieu of cash payments for dividends on our Series A Preferred Stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended June 30, 2004, we issued 5,275,000 shares of common stock in
connection with the conversion of the remaining 547,500 Series A Preferred stock
as described below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended June 30, 2004, we issued 5,000 shares of common stock in
connection with the exercise of certain management stock options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 30, 2004, we sold 1,000,000 shares of common stock to an investor for net
proceeds of $1,200,000.
| | ---------------------------------------------------------------------------------------------------------

| | e) | Preferred Stock:
| | -- | ----------------

| | The
Companys Certificate of Incorporation authorizes the issuance of up to
5,000,000 shares of Preferred Stock. The Board of Directors is authorized to
issue shares of Preferred Stock from time to time in one or more series and to
establish and designate any such series and to fix the number of shares and the
relative conversion rights, voting rights, terms of redemption and liquidation.
In December 1999, the Board authorized the issuance of up to 1,000,000 shares of
Series A Preferred Stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 10, 2000, the Company completed a private placement wherein it sold
550,000 units for $10.00 per unit representing 550,000 shares of its Series A
Preferred Stock and 1,100,000 warrants exercisable for five years to purchase
one share of common stock at $4.50 per share. Net proceeds received from the
sale totaled $4,566,549.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Dividends
on the Series A shares accrued at the rate of 11.5% per annum and were payable
quarterly. Each Series A share was initially convertible at the option of the
holder at the rate of 3.077 shares of common stock for one Series A share. In
December 2001, the rate of conversion changed to five shares of common stock for
one Series A share.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended June 30, 2001, 2,500 Series A shares converted into 7,692 shares
of the Companys common stock.
| | ---------------------------------------------------------------------------------------------------------------------

| | In
November 2003, we initiated a voluntary Offer of Conversion, whereby preferred
shareholders who accepted the offer waived their rights to unpaid dividends and
interest on their preferred stock and they received ten shares of common stock
for each preferred share tendered. 87% of the preferred shareholders tendered a
total of 507,500, or 93% of the outstanding, Series A shares. The balance of the
Series A shares (40,000) were automatically converted to common stock at the
rate of five shares of common stock for each preferred share, pursuant to the
terms of the amended Certificate of Designation, which amendment was approved by
a majority of the preferred shareholders. Those preferred shareholders whose
preferred shares were converted at the rate of five to one were paid their
accrued and unpaid dividends which totaled $66,125.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

| | The
conversion of the preferred stock was accounted for according to EITF Topic No.
D-42 as an Induced Conversion of Preferred Stock. Consequently the fair value of
the securities (ten shares of common stock) issued over the fair value of the
securities issuable pursuant to the original conversion terms (five shares of
common stock) less the accrued dividends and interest given up by the
shareholders was subtracted from net income to arrive at net loss applicable to
common shareholders. The non-cash charge for induced conversion included in
preferred stock dividends in the consolidated statement of operations for the
year ended June 30, 2004 was calculated as follows :
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`Fair value of securities issued (5,275,000 x $1.15)         $ 6,066,250
         Less :
             Fair value of securities issuable pursuant to the
                 original conversion terms (547,500 x 5 x $1.15)      (3,148,125)
             Value of accrued dividends waived                          (791,200)
             Value of accrued interest waived                            (14,891)
                                                                     -----------

         Non-cash charge included in preferred stock dividends       $ 2,112,034
                                                                     ===========`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## NOTE
10  COMMITMENTS AND CONTINGENCIES:

Leases
 We lease our premises under lease agreements which expire through 2011
and equipment under operating leases that expire through 2006. As of June 30,
2004, the Companys property under capital leases, which is included in
property and equipment, has a cost of $710,873 and accumulated depreciation of
$637,587 and consists of printers placed at customer locations and manufacturing
equipment.

Future minimum lease payments are as follows:

`Capital Leases
                                                                       Included
                                                                     in Property          Operating
                      Year Ending June 30,                          and Equipment           Leases
                      --------------------                          --------------        ----------
                           2005                                     $       40,089        $  328,839
                           2006                                               --             309,931
                           2007                                               --             259,947
                           2008                                               --             259,947
                           2009                                               --             259,947
                           Thereafter                                         --             498,233
                                                                    --------------        ----------
              Total future minimum lease payments                           40,089        $1,916,844
                                                                                          ==========
              Less: Amount representing interest                             2,620
                                                                    --------------
              Present value of minimum lease payments (Note 5)              37,469
              Less:  Current maturities                                     37,469
                                                                    --------------
              Non-current                                           $         --
                                                                    ==============`

Rent expense amounted to $296,369 and $267,683 for the years ended June 30, 2004 and 2003, respectively.

Employment
Agreement  On July 1, 2003, the Company entered into a
five-year employment agreement with its President for a base salary of $200,000
per annum subject to certain adjustments.

LitigationThe Company is a defendant in legal proceedings arising in the
ordinary course of its business activities. Although the ultimate disposition of
these proceedings is not presently determinable, management does not expect the
outcome to have a material adverse effect on the Companys consolidated
financial position or results of operations.

## NOTE
11  SUPPLIER AGREEMENT:

On May 4, 2001, the Company
entered into an agreement with a supplier, whereby, beginning May 1, 2001, we
were required to pay $.50 per ink stick sold, increasing to $.75 on May 1, 2002,
$1.00 on May 1, 2003 and $1.50 on May 1, 2004. The present value, $884,000, of
the maximum commitment under the agreement, $1,000,000, was recorded as a
liability at June 30, 2001. At June 30, 2004, this commitment was paid in full
and we are no longer subject to these payments.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## NOTE
12  WARRANTY EXPENSES:

The
Company provides a warranty for all of its consumable supply products and for its
INKlusive printer program. The Companys warranty stipulates that it will pay
reasonable and customary charges for the repair of a printer needing service as a result
of using the Companys products. The Company estimates the costs that may be incurred
and records a liability in the amount of such costs at the time product revenue is
recognized. Factors that may affect the warranty include the number of units shipped to
customers, historical and anticipated rates of warranty claims and cost per claim. The
Company periodically assesses the adequacy of the recorded warranty liability and adjusts
the amount as necessary. These expenses are classified as selling, general and
administrative costs.

Changes in accrued product warranty for the years ended June 30, 2004 and 2003 are as follows:

`Year Ended June 30,
                                                            ---------------------------
                                                               2004            2003
                                                            -----------     -----------
           Warranty reserve at the beginning of the year    $   250,000     $   500,000
                                                            -----------     -----------

                  Warranties accrued during the period        1,409,249       1,329,263
                  Warranties settled during the period       (1,318,657)     (1,579,263)
                                                            -----------     -----------
           Net change in warranty reserve                        90,592        (250,000)
                                                            -----------     -----------

           Warranty reserve at the end of the year          $   340,592     $   250,000
                                                            ===========     ===========`

In January 2002, the
Company recalled all solid ink products manufactured between May 2001 and
January 2002. It was discovered that the use of our solid ink sticks
manufactured during that time period could cause printer reliability issues.
Management believes that it has resolved the problem. In addition, two
independent test laboratories have tested the reliability of the Companys
solid ink and have found no reliability issues associated with the use of our
solid ink products.

The Company filed a claim
under its umbrella liability policy for the unreimbursed portion of the warranty
expenses associated with the recall in January 2002. The insurance carrier
denied coverage under the policy, and filed suit for a declaratory judgement
seeking to rescind the policy or in the alternative to have the court declare
that the insurance company has no obligation to indemnify the Company for these
claims. The Company filed an answer and counterclaim in this matter. On
September 10, 2004, the Company agreed to settle the matter and it received
$500,000 as consideration for the settlement. The claim was recorded as a
receivable as of June 30, 2004 with a corresponding credit to warranty expense.

Even though management
believes that the recall is complete, the Company will continue to receive
warranty claims associated with the recalled ink and other warranty expenses for
products sold and not under the recall. While the Company believes that the
reserve should be adequate to resolve the remaining claims, it is possible that
the warranty claims may exceed the accrual and, therefore, differences, if any,
will be expensed in future periods.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## NOTE
13  SEGMENT INFORMATION:

The Company has adopted the
provisions of Statements of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). Pursuant to the provisions of SFAS 131, the Company is reporting
segment net sales, cost of goods sold, gross profit, selling, general,
administrative and other expenses and operating income in the same format
reviewed by the Companys chief operating decision maker (the
management approach). The Company has two reporting segments:
Media Sciences and Cadapult. The Media Sciences segment
is comprised of the operations connected with the manufacturing and distributing
color printer supplies, including ink sticks and toner cartridges through
distributors. The Cadapult segment is comprised of selling supplies, including
Media Sciences supplies, directly to certain end users and the sale and support
of other computer graphics systems. Media Sciences international sales were $1.7 million and $1.8 million for the years ended June 30, 2004 and
2003, respectively.

The Company assesses and measures segment operating results based on operating income.

Asset information is not reported since the Company does not use this measure to assess performance.

Related segment information follows:

`June 30,
                                                           2004 (Restated)        2003
                                                           ---------------    ------------
Net sales:
     Media Sciences                                           $ 12,841,857    $  9,599,263
     Cadapult                                                    4,695,465       5,702,070
     Elimination                                                  (463,571)       (703,471)
                                                              ------------    ------------
          Totals                                              $ 17,073,751    $ 14,597,862
                                                              ============    ============
Cost of goods sold:
     Media Sciences                                           $  6,287,666    $  3,986,179
     Cadapult                                                    3,142,547       3,922,211
     Elimination                                                  (498,676)       (733,277)
                                                              ------------    ------------
          Totals                                              $  8,931,537    $  7,175,113
                                                              ============    ============

Gross profit:
     Media Sciences                                           $  6,554,191    $  5,613,084
     Cadapult                                                    1,552,918       1,779,859
     Elimination                                                    35,105          29,806
                                                              ------------    ------------
          Totals                                              $  8,142,214    $  7,422,749
                                                              ============    ============

Selling, general, administrative and other expenses:
     Media Sciences                                           $  5,758,326    $  3,880,980
     Cadapult                                                    1,270,852       1,632,872
     Elimination                                                      --              --
                                                              ------------    ------------
          Totals                                              $  7,029,178    $  5,513,852
                                                              ============    ============

Operating income:
     Media Sciences                                           $    795,865    $  1,732,104
     Cadapult                                                      282,066         146,987
     Elimination                                                    35,105          29,806
                                                              ------------    ------------
          Totals                                              $  1,113,036    $  1,908,897
                                                              ============    ============

Reconciliation to consolidated net income:
     Segment operating income                                 $  1,113,036    $  1,908,897
     Non-operating items                                          (373,442)       (448,623)
     Income taxes                                                 (342,967)       (585,258)
                                                              ------------    ------------
     Net income                                               $    396,627    $    875,016
                                                              ============    ============`

---

RESTATEMENT OF
QUARTERLY DATA (UNAUDITED)

In connection with the preparation of
the Quarterly Report on Form 10-QSB of the Company for the quarter ended March 31, 2005,
the Companys current independent registered public accounting firm brought to the
attention of the Company that certain of the Companys issued and outstanding stock
options are subject to variable plan accounting treatment under the Financial Accounting
Standards Boards Interpretation 44, Accounting for Certain Transactions
Involving Stock Compensation an Interpretation of Accounting Principles Board Opinion No.
25 (APB 25) (Issue Date 3/00). Accordingly, certain previously
unrecognized compensation expenses should have been recognized in certain of the
Companys previously issued financial statements. After reviewing the matter with its
current and former independent registered public accounting firms, the Company has
identified certain non-cash adjustments that necessitated the restatement of its financial
statements for each of the first two quarters in the fiscal year ending June 30, 2005 and
for the fiscal year ended June 30, 2004 and for the quarters within the fiscal year ended
June 30, 2004 (see Note 2 to financial statements).

These non-cash adjustments reflect
variable plan accounting treatment of the affected stock options for the relevant periods,
resulting from cashless exercise provisions applicable to options held by employees and
directors. Under variable plan option accounting, non-cash compensation expense is
increased or decreased as a result of changes in the market price of the Companys
common stock.

The following tables show the effects
of the restatement on the Companys quarterly results of operations. In the tables
that follow, the columns labeled Restatement Adjustments represent adjustments
for compensation expense (credit) previously not recognized.

---

MEDIA SCIENCES
INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2003

`Three Months Ended
                                                                        September 30, 2003
                                                       As Previously        Restatement          As Restated
                                                         Reported           Adjustment
                                                       -------------    -------------------     -----------

NET SALES                                              $   3,615,518                   --       $ 3,615,518
                                                       -------------    -------------------     -----------

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation             1,614,637                   --         1,614,637
    Depreciation                                             145,156                   --           145,156
                                                       -------------    -------------------     -----------
        Total cost of goods sold                           1,759,793                   --         1,759,793
                                                       -------------    -------------------     -----------

GROSS PROFIT                                               1,855,725                   --         1,855,725
                                                       -------------    -------------------     -----------

OTHER COSTS AND EXPENSES:
    Selling, general and administrative, excluding
        depreciation, amortization, loss from sublease
        and moving expenses and impact of variable
        plan accounting                                    1,310,751                   --         1,310,751
    Depreciation and amortization                             62,447                   --            62,447
    Impact of variable plan accounting                          --                  110,575         110,575
                                                       -------------    -------------------     -----------
        Total other costs and expenses                     1,373,198                110,575       1,483,773
                                                       -------------    -------------------     -----------

INCOME FROM OPERATIONS                                       482,527               (110,575)        371,952

INTEREST EXPENSE                                             107,308                   --           107,308
                                                       -------------    -------------------     -----------

INCOME BEFORE INCOME TAXES                                   375,219               (110,575)        264,644

PROVISION FOR  INCOME TAXES                                  149,954                (21,650)        128,304
                                                       -------------    -------------------     -----------

NET INCOME                                                   225,265                (88,925)        136,340

PREFERRED STOCK DIVIDENDS AND CHARGE FOR
INDUCED CONVERSION                                           157,406                   --           157,406
                                                       -------------    -------------------     -----------

NET INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS                                           $      67,859    $           (88,925)    $   (21,066)
                                                       =============    ===================     ===========

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING                                           3,577,210              3,577,210       3,577,210
                                                       =============    ===================     ===========

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
APPLICABLE TO COMMON SHAREHOLDERS                      $        0.02    $             (0.02)    $     (0.01)
                                                       =============    ===================     ===========`

---

MEDIA SCIENCES
INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 2003

`Three Months Ended
                                                                        December 31, 2003
                                                       As Previously        Restatement          As Restated
                                                         Reported           Adjustment
                                                       -------------    ------------------      -----------

NET SALES                                              $   4,417,483                  --        $ 4,417,483
                                                       -------------    ------------------      -----------

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation             2,132,869                  --          2,132,869
    Depreciation                                             139,662                  --            139,662
                                                       -------------    ------------------      -----------
        Total cost of goods sold                           2,272,531                  --          2,272,531
                                                       -------------    ------------------      -----------

GROSS PROFIT                                               2,144,952                  --          2,144,952
                                                       -------------    ------------------      -----------

OTHER COSTS AND EXPENSES:
    Selling, general and administrative, excluding
        depreciation, amortization, loss from
        sublease and moving expenses and
        impact of variable plan accounting                 1,478,072                  --          1,478,072
    Depreciation and amortization                             67,139                  --             67,139
    Impact of variable plan accounting                          --                   1,384            1,384
                                                       -------------    ------------------      -----------
        Total other costs and expenses                     1,545,211                 1,384        1,546,595
                                                       -------------    ------------------      -----------

INCOME FROM OPERATIONS                                       599,741                (1,384)         598,357

INTEREST EXPENSE                                              93,900                  --             93,900
                                                       -------------    ------------------      -----------

INCOME BEFORE INCOME TAXES                                   505,841                (1,384)         504,457

PROVISION FOR  INCOME TAXES                                  202,471                (2,725)         199,746
                                                       -------------    ------------------      -----------

NET INCOME                                                   303,370                 1,341          304,711

PREFERRED STOCK DIVIDENDS AND CHARGE FOR
INDUCED CONVERSION                                         1,913,824                  --          1,913,824
                                                       -------------    ------------------      -----------

NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS                                           $  (1,610,454)   $            1,341      $(1,609,113)
                                                       =============    ==================      ===========


BASIC AND DILUTED WEIGHTED AVERAGE
  COMMON SHARES OUTSTANDING                                3,577,210             3,577,210        3,577,210
                                                       =============    ==================      ===========

BASIC AND DILUTED NET LOSS PER SHARE
APPLICABLE TO COMMON SHAREHOLDERS                      $       (0.45)   $            (0.00)     $     (0.45)
                                                       =============    ==================      ===========`

---

MEDIA SCIENCES
INTERNATIONAL, INC. AND SUBSIDIARIES
RESTATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 2004

`Three Months Ended
                                                                          March 31, 2004
                                                       As Previously        Restatement          As Restated
                                                         Reported           Adjustment
                                                       -------------    ------------------      -----------

NET SALES                                              $   4,874,606                  --        $ 4,874,606
                                                       -------------    ------------------      -----------

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation             2,567,609                  --          2,567,609
    Depreciation                                             118,754                  --            118,754
                                                       -------------    ------------------      -----------
        Total cost of goods sold                           2,686,363                  --          2,686,363
                                                       -------------    ------------------      -----------

GROSS PROFIT                                               2,188,243                  --          2,188,243
                                                       -------------    ------------------      -----------

OTHER COSTS AND EXPENSES:

    Selling, general and administrative, excluding
         depreciation, amortization, loss from
         sublease and moving expenses and
         impact of variable plan accounting                1,817,619                  --          1,817,619
    Depreciation and amortization                             61,909                  --             61,909
    Loss from sublease and moving expenses                      --                    --               --
    Impact of variable plan accounting                          --                  26,719           26,719
                                                       -------------    ------------------      -----------
        Total other costs and expenses                     1,879,528                26,719        1,906,247
                                                       -------------    ------------------      -----------

INCOME FROM OPERATIONS                                       308,715               (26,719)         281,996

INTEREST EXPENSE                                              95,298                  --             95,298
                                                       -------------    ------------------      -----------

INCOME BEFORE INCOME TAXES                                   213,417               (26,719)         186,698

PROVISION FOR  INCOME TAXES                                   85,366                  --             85,366
                                                       -------------    ------------------      -----------

NET INCOME                                                   128,051               (26,719)         101,332

PREFERRED STOCK DIVIDENDS AND CHARGE FOR
INDUCED CONVERSION                                              --                    --               --
                                                       -------------    ------------------      -----------

NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS                                           $    128,051     $          (26,719)     $   101,332
                                                       ============     ==================      ===========


BASIC WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING                                            8,602,210              8,602,210        8,602,210
                                                       ============     ==================      ===========
DILUTED WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING                                            8,691,117              8,691,117        8,691,117
                                                       ============     ==================      ===========

BASIC AND DILUTED NET INCOME PER SHARE
APPLICABLE TO COMMON SHAREHOLDERS                      $       0.01     $            (0.00)     $      0.01
                                                       ============     ==================      ===========`

---

## ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

(a)  Former Independent Accountant

Wiss & Company LLP
audited our financial statements for our fiscal year ended June 30, 2003. Wiss
& Company had been our principal independent accountant since about June
1998.

In 2003, Wiss & Company
informed us that they decided to discontinue providing audit
services to publicly-held companies registered with the United States Securities
and Exchange Commission and to exit the practice area.

We requested Wiss &
Company to stand for re-election as our principal independent accountant and to
continue to perform audit services for us in connection with our 2004 fiscal
quarters until we had the opportunity to select and obtain new independent
accountants in connection with our June 30, 2004 fiscal year end, and Wiss &
Company agreed to do so.

On February 10, 2004, we
engaged J.H. Cohn LLP as our principal independent registered public accounting
firm, and the services of Wiss & Company as our principal independent
accountant were concluded. The change in accountants was necessitated by the
decision of Wiss & Company to exit the SEC practice area.

Wiss & Companys
reports on our financial statements for the past two years did not contain an
adverse opinion or disclaimer of opinion, and were not modified as to
uncertainty, audit scope, or accounting principles. There were no disagreements
with Wiss & Company, whether or not resolved, on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to Wiss & Companys satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in connection with its reports.

(b)  New Independent Accountant

On February 10, 2004, we
engaged J.H. Cohn LLP as our principal independent registered public accounting
firm. As described above, the change in accountants was necessitated by the
decision of Wiss & Company to exit the SEC practice area. Our Audit
Committee, and our Board of Directors, approved the selection of J.H. Cohn LLP
as our principal independent registered public accounting firm. We did not
previously consult with J.H. Cohn LLP regarding the application of accounting
principles to a specific completed or contemplated transaction, or the type of
audit opinion that might be rendered on our financial statements, and no written
or oral advice was provided that was an important factor considered by us in
reaching a decision as to any accounting, auditing or financial reporting issue.

---

## ITEM 8A.
CONTROLS AND PROCEDURES

The Companys management, with
the participation of our Chief Executive Officer and Principal Financial Officer, has
evaluated the effectiveness of the Companys disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and Rule 15a-15(e) of the Exchange Act) as of the
end of the period covered by this report. Based on that evaluation, the Companys
Chief Executive Officer and Principal Financial Officer have concluded that, as of such
date, the Companys disclosure controls and procedures were not effective.

There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that
occurred during the fiscal year 2004 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

In connection with its review of the
Companys financial statements for the quarter ended March 31, 2005, J.H. Cohn LLP,
the Companys independent registered public accounting firm, brought to the attention
of the Company that certain issued and outstanding options that permitted cashless
exercise were subject to variable plan accounting treatment under the Financial
Accounting Standards Boards Interpretation 44, Accounting for Certain
Transactions Involving Stock Compensation an Interpretation of APB Opinion No. 25
(Issue Date 3/00). Accordingly, certain previously unrecognized compensation expense
should have been recognized as compensation expense in certain of the financial statements
previously issued by the Company.

Consequently, J.H. Cohn LLP also
advised the Audit Committee and management of certain material weaknesses, including the
inability to prepare financial statements and footnotes in accordance with U.S. generally
accepted accounting principles and SEC rules, and improper accounting procedures for
grants with cashless exercise provisions per Financial Accounting Standards
Boards Interpretation 44, Accounting for Certain Transactions Involving Stock
Compensation  an Interpretation of APB Opinion No. 25". J.H. Cohn LLP indicated
that they considered these deficiencies to be material weaknesses as that term is defined
under standards established by the Public Company Accounting Oversight Board (United
States).

In light of the need for a
restatement and the material weaknesses in the Companys internal controls,
commencing in the fourth quarter of the Companys 2005 fiscal year, the Company has
begun undertaking a review of the Companys disclosure, financial information and
internal controls and procedures. This review includes increased diligence by the
Companys management and directors, as well as the use of additional outside
resources. Further, the Company has accelerated its timetable to hire a Chief Financial
Officer and has initiated the search process. The Company is committed to addressing its
control environment and reporting procedures.

On May 10, 2005, the Board of
Directors of the Company rescinded the cashless exercise provision for all of the
Companys outstanding option grants. Thus, variable accounting relating to the
cashless exercise feature is no longer required after the Companys fiscal quarter
ended June 30, 2005.

The Companys management,
including its Chief Executive Officer and its Principal Financial Officer, does not expect
that disclosure controls or internal controls over financial reporting will prevent all
errors or all instances of fraud, even as the same are improved to address any
deficiencies. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. A
control system, no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives will be met. Over time,
controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the Company have been detected.

---

Because of the inherent limitation of
a cost-effective control system, misstatements due to error or fraud may occur and not be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or
mistake. Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls.

The Company has recently commenced
its effort to ensure compliance with Section 404 of the Sarbanes-Oxley Act of 2002. As a
non-accelerated filer with a fiscal year end of June 30, the Company must first begin to
comply with the requirements of Section 404 for the fiscal year ending June 30, 2007.
During the periods through June 30, 2007, we will review, and where necessary, enhance our
internal control design and documentation, management review, and ongoing risk assessment
as part of our internal control program.

## ITEM 8B. OTHER
INFORMATION

In June 2004, we entered
into a one-year amortizing note with our bank in the amount of $400,000 that
bears an interest rate of 2% over the lenders base rate. The proceeds were
used to repay eight, $50,000 notes carrying interest rates of 20%. These notes
originated in June 2001 when we entered into a $400,000 promissory note with
Consonant Services Group, which was subsequently refinanced though the eight
individual notes. As of June 30, 2004, the interest rate on the one-year note
was 6%.

In September 2004, we
entered into a settlement agreement with our umbrella insurance carrier under
which we received $500,000 to settle the outstanding litigation regarding
insurance coverage for our solid ink recall in January 2002.

---

# PART III

## ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

## Our Management

The persons listed in the
table below are our present directors and executive officers.

`----------------   ---   ------------------------------------------------------------
Name               Age   Position
----------------   ---   ------------------------------------------------------------
Michael W. Levin   39    Chief Executive Officer, President and Chairman of the Board
Frances Blanco     43    Vice President Marketing and Investor Relations, Treasurer,
                         and Director
Duncan Huyler      43    Vice President Operations and Technical Services
Duncan Yates       34    Vice President Sales
Denise Hawkins     35    Vice President, Controller and Secretary
Paul C. Baker      67    Director
Edwin Ruzinsky     71    Director
Donald Gunn        52    Director and Vice President of Engineering
Henry Royer        72    Director
Alan Bazaar        34    Director
----------------   ---   ------------------------------------------------------------`

Our directors are elected annually
to serve for one year and hold office until the next annual meeting of the
shareholders and until their successors are elected and qualified. Our Board of
Directors may increase the size of the Board of Directors. Any director who
fills a position created by the Board of Directors serves until the next annual
meeting of the shareholders. Our officers are elected by the Board of Directors
at the first meeting after each annual meeting of our shareholders, and hold
office until their death, resignation or removal from office.

## Management
Profile

Michael W. Levin, Chief Executive Officer, President and Chairman of the Board:

Michael W. Levin has served
as our Chief Executive Officer, President and Chairman of the Board since June
18, 1998. Mr. Levin serves on the compensation committee. Before June 1998, he
had served as President, Treasurer, Secretary and Chairman of Media
Sciences predecessor, Cadapult Graphic Systems Inc. (CGSI)
since 1987, when he founded CGSI while attending Lehigh University. He is
responsible for a senior management team as well as merger and acquisition
activity and corporate finance. In 2002, Mr. Levin was recognized in Business
News New Jerseysannual 40 under 40 issue, which profiles
the states outstanding business leaders under the age of 40. He also was
selected as the honorary annual fundraising chairman for the Childrens
Cancer Research Fund of New York Medical College in 1999. In 1987, Mr. Levin
graduated summa cum laude from Lehigh University, receiving a Bachelor of
Science Degree in Mechanical Engineering.

Frances Blanco, Vice President of Marketing and Investor Relations, Treasurer, and Director:

Frances Blanco has served
as our Vice President of Marketing and Investor Relations, Treasurer, and a
Director since June 18, 1998. She also served as Secretary from June 18, 1998
through June 30, 2004. From 1993 to June 18, 1998, she served as Vice President
of Marketing and Investor Relations, Treasurer, Secretary and a director of
CGSI. Blanco manages all aspects of marketing, including brand identity, demand
creation and vendor relationships for us as well as investor relations. From
1984 through 1989, Blanco was a Reseller Account Manager at Lotus, where she
designed and implemented tactical channel programs. From August 1989 through
June 1993, Blanco served as a Business Development Manager at Tektronix, Inc.,
where she was responsible for the development of color printing standards in
strategic customers. She earned a Bachelor of Science degree in Marketing from
Bentley College in 1982 and a Masters of Business Administration degree from
Boston College in 1985.

---

Duncan Huyler, Vice President of Operations and Technical Services:

Duncan Huyler has served as
our Vice President of Operations and Technical Services since June 18, 1998.
From 1993 to June 18, 1998, he served as Vice President of Technical Services
for CGSI. Huyler manages all technical and customer service aspects for
us, as well as operational management including IT,
telecommunications, purchasing and internal controls. From May 1983 through
October 1987, Huyler served as an officer in the U.S. Army. From September 1988
through August 1993, Huyler worked for The May Department Stores Company
and Lord & Taylor, where his positions included Senior Financial Analyst and
Director of Systems. Huyler graduated from Cornell University in 1983 with a
Bachelor of Science degree in Business and earned a Masters of Business
Administration from the University of Louisville in 1987.

Duncan Yates, Vice President of Sales:

Duncan Yates has served as
Vice President of Sales since July 2000. Prior to July 2000, Yates served as the
Regional Sales Manager for Cadapult Graphic Systems, which he joined in 1993.
Yates manages all aspects of direct sales for Media Sciences value added
reseller business, including achieving quarterly revenue and gross profit
targets, developing sales plans and strategies, hiring and training sales staff,
and implementing vertical market pilot programs. Yates is also responsible for
technology reseller development. Yates is a 1992 graduate of Western Maryland
College with a Bachelor of Science degree in Political Science.

Denise Hawkins, Vice President, Controller and Secretary:

Denise Hawkins has served
as Vice President for Media Sciences since February 12, 2003, and as Secretary
since July 1, 2004. Ms. Hawkins manages the accounting aspects of the business
while working closely with the President and senior management team. She is a
Certified Public Accountant and a Certified Management Accountant. She began her
employment with the company in July of 2001 as the Controller. Ms. Hawkins
graduated from the State University of New York-The College at New Paltz with a
Bachelor of Science degree in Accountancy in 1990 and graduated from Marist
College in 1998 with a Masters in Business Administration in Finance. Prior to
her position at Media Sciences, Ms. Hawkins was the controller for NFK
Excavating and Construction, Inc. (2000-2001), Horizon Medical Group, PC
(1998-2000) and VAC Service Corp.(1992-1998). She is currently serving as the
Treasurer for the Board of Helping Hands Christian Pre-School. Ms Hawkins is
affiliated with the New Jersey State Society of Certified Public Accountants,
the Institute of Management Accountants and the Society for Human Resource
Management.

Paul C. Baker, Director:

Paul C. Baker has served as
a Director since June 18, 1998. Mr. Baker is the chairman of the Compensation
committee and also serves on the audit committee. From 1986 to 2000 he was
President of Sherwood Partners, Inc., a venture capital and management
consulting company, which he founded, that focused on developing companies with
high growth potential. From 2000 to present, he has been General Partner of PCB
Associates, LLC which performs similar services. Prior to 1986, Baker held
various management positions during 25 years of employment with American
Cyanamid Co., including President of Cyanamids Shulton, Inc. subsidiary
from 1977 to 1979 and Group Vice President of Cyanamid from 1979 to1984. Baker
graduated from Lehigh University in 1959 and 1960 with degrees in Engineering
and Liberal Arts and received his MBA degree from Fairleigh Dickinson
University in 1963.

---

Edwin Ruzinsky, Director:

Mr.  Ruzinsky has served as a Director  since August 27, 1999 and is the chairman of the audit committee.  He is a
Certified Public  Accountant and a Certified  Management  Consultant.  Prior to his retirement on June 1, 1996 as a
Partner in Deloitte  Consulting  LLC, a wholly-owned  subsidiary of Deloitte & Touche LLP, he served for many years
as the firm's  National  Director-Media  Industry  Services.  He  previously  served Times  Mirror  Company as Vice
President of Finance &  Administration/Book  Publishing  Group and  Parent's  Magazine  Enterprises,  Inc. as Chief
Accounting Officer.  Mr.Ruzinsky continues serving as a member of the Pace University/Dyson  School of Liberal Arts
&  Sciences/Master  of Science in  Publishing  Advisory  Board.  He is  currently  a member of the Boards of Dowden
Health Media,  Inc., a provider of specialized  publications and customized  communication  products for healthcare
professionals and consumers,  and of Gentis,  Inc., engaged in the research and development of therapeutic products
for the repair and  regeneration  of human  tissues  (such as  cartilage  tissue and  intervertebral  disc  tissue)
through  the use of  scaffolds  that  beneficially  affect  progenitor  and  other  cells at the site of  repair or
regeneration.

Donald Gunn, Vice President of Engineering and Director:

Donald Gunn has served as a
Director since December 23, 1999. Since December 13, 1999, he has served as Vice
President of Engineering. Gunn manages product development and strategic major
account relationships for Media Sciences. He founded ultraHue, Inc., a
manufacturer of ink and toner products for computer printers in March 1996. He
served as President and Chief Executive Officer of ultraHue until we acquired
ultraHue on December 13, 1999. From June 1997 to November 1998, he served as the
Western Sales Manager for Invention Machine Corporation, a Boston based provider
of software designed to aid engineers in the development of engineering
solutions. From August 1995 to May 1997, he worked as Regional Manager for the
Pacific Northwest for 3D Systems, located in Valencia, California, a company
that produces stereo lithography machines. From October 1987 to August 1995, he
worked for the Color Printer Division of Tektronix, Inc., located in
Wilsonville, Oregon, in various sales and marketing positions, including Major
Account Manager and VAR Account Manager for the Western United States. From July
1986 to October 1987, he worked as a sales manager for Silma, Inc., located in
Santa Clara, California, a company that produced software for industrial
equipment. From January 1985 to June 1986, he was the Western Area Sales Manager
for AAB Robotics, located in Fort Collins, Colorado, a company that produced
equipment for the welding industry. He received a Bachelors of Science degree in
Electrical Engineering from the University of Illinois in 1974.

Henry Royer, Director:

Henry Royer has served as a
Director since December 23, 1999. Mr. Royer serves on the Compensation
committee. From 1965 to 1983, Mr. Royer held several positions at First National
Bank of Duluth, serving as Executive Vice President/Loans when he left First
National Bank. He then joined The Merchants National Bank of Cedar Rapids, now
named US Bank Cedar Rapids, N.A., where he served as Chairman and President
until August 1994. From September 1994 through December 31, 1997, he served as
the President and Chief Executive Officer of River City Bank, Sacramento,
California. He served as an Independent Trustee of Berthel Growth & Income
Trust I from its date of inception in 1995 through February 5, 1999, when he
resigned to join Berthel Fisher & Company Planning Inc., and was elected
President of Berthel Trust in July 1999. He was elected President of Berthel
SBIC, LLC in August 1999. He currently serves as Chairman of the board of Cedar
Rapids Bank and Trust and as a member of the board of QCRH a bank holding
company. He also serves on various Boards of privately-held companies. He
graduated in 1953 from Colorado College with a B.A. in Money and Banking.

---

Alan Bazaar, Director:

Alan Bazaar has served as a Director  since June 30, 2004.  He is a Certified  Public  Accountant.  Mr. Bazaar is a
Vice  President  and  Portfolio  Manager at  Richard  L.  Scott  Investments,  LLC.  His  responsibilities  include
co-managing a public company portfolio for Richard L. Scott Investments,  LLC, a value-oriented,  family investment
office,  focused on both public and private equity  investments.  Mr. Bazaar performs all elements of due diligence
on perspective  investment  companies.  From 1995 to July 1999, Mr. Bazaar was with Arthur  Andersen LLP. At Arthur
Andersen,  he worked for both the Assurance and Financial  Buyer's  Practices and in his last position he served as
a Supervisory  Senior  Consultant in their Business  Fraud and  Investigation  Services Unit. Mr. Bazaar  graduated
from  Bucknell  University  in 1992 with a degree  in  History,  and he  received  a MBA from New York  University,
Leonard N. Stern School of Business in 1997.

## Board
Committees and Meetings

During the fiscal year that
ended on June 30, 2004, the Board of Directors held five meetings. During this
period, all of the directors serving on the Board at the time attended or
participated in more than 75% of the aggregate of the total number of meetings
of the Board of Directors. The Audit Committee met three times in connection
with fiscal year 2004.

We have an Audit Committee,
which through the review of our 2003 fiscal year financials consisted of the
following members of the Board of Directors: Edwin Ruzinsky, Paul Baker and
Sagiv Shiv, a former board member. In connection with our fiscal year ended 2004, our Audit Committee
consists of: Edwin Ruzinsky and Paul Baker.

Mr. Ruzinsky is a financial  expert.  The function of the Audit Committee  includes  reviewing  internal  financial
information,  monitoring cash flow, budget variances and credit arrangements,  reviewing the audit program of Media
Sciences,  reviewing with Media Sciences' independent  accountants the results of all audits upon their completion,
annually selecting and recommending independent  accountants,  overseeing the quarterly unaudited reporting process
and  taking  such  other  action  as may be  necessary  to assure  the  adequacy  and  integrity  of all  financial
information  distribution  by Media  Sciences.  Each member of the Audit  Committee is independent as defined under
the American Stock  Exchange's  listing  standards.  The Audit Committee  consists of  non-employee  directors whom
Media Sciences has determined are free of any  relationship  that could  influence  their  judgement as a committee
member and are not associated with a major vendor to, or a customer of, Media Sciences.

We have a Compensation
Committee, which has consisted of the following members of the Board of
Directors: Paul Baker, Henry Royer and Michael W. Levin. The function of the
Compensation Committee is to make determinations concerning salaries and
incentive compensation for our officers and employees.

Members of the Audit
Committee and Compensation Committee are selected each year by our Board of
Directors after our annual stockholders meeting. Selection to a committee
of the Board of Directors is determined by the majority vote of the Board of
Directors. The Board of Directors intends to elect incumbent directors who are
re-elected to the Board of Directors to continue to serve on the committees they
presently serve.

We have not yet adopted a
code of ethics applicable to our directors, officers and employees. We are in
the process of implementing a code of ethics, and expect to adopt a code of
ethics prior to September 2004 during our fiscal year 2005.

We presently do not have a
separate nominating committee of the Board of Directors for the selection of
directors, and do not have a nominating committee charter. Presently, all such
actions are performed by the entire Board of Directors.

## Other
Information About Directors

None of the directors are
directors of other reporting companies, are associated by family relationships,
or have been involved in legal proceedings.

---

## Section 16(a)
Beneficial Ownership Reporting Compliance

Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires Media Sciences
executive officers, directors, and persons who beneficially own more than ten
percent of Media Sciences common stock to file with the Securities and
Exchange Commission initial reports of beneficial ownership and reports of
changes in beneficial ownership of Media Sciences common stock. Such
persons are also required by Securities and Exchange Commission regulations to
furnish Media Sciences with copies of all such Section 16(a) forms filed by such
person. Based solely on a review of the copies of such reports furnished to
Media Sciences, Media Sciences is not aware of any material delinquencies in the
filing of such reports, except as follows:

| | o | In connection with the obligation to make online filings commencing in 2003,
officers and directors experienced delays in obtaining their respective initial
Edgar filings codes, and, accordingly, were unable to file certain reports
timely. These reports included the following:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o | On August 18, 2003, Frances Blanco filed a Form 5 reporting the acquisition of
employee stock options granted on April 7, 2003.
| |  | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | o | On August 21, 2003, Duncan Huyler filed a Form 5 reporting the acquisition of
employee stock options granted on April 7, 2003.
| |  | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | o | On August 21, 2003, Duncan Yates filed a Form 5 reporting the acquisition of
employee stock options granted on April 7, 2003.
| |  | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | o | On August 25, 2003, Donald Gunn filed a Form 5 reporting the acquisition of
employee stock options granted on April 6, 2003.
| |  | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | o | On August 25, 2003, Sagiv Shai, a former director, filed a Form 5 reporting the
acquisition of stock options granted as director compensation on January 21,
2003.
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o | On September 9, 2003, Michael Levin filed a Form 5 reporting the acquisition of
employee stock options granted as of June 27, 2003.
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | o | On November 14, 2003, each of Paul Baker and Edwin Ruzinsky filed a Form 5
reporting the acquisition of stock options granted as director compensation on
May 6, 2003.
| |  | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Other untimely filings included the following:
| | - | ----------------------------------------------

| |  | o | On February 12, 2004, Berthel SBIC LLC filed a Form 4 reporting the acquisition
of stock options granted in connection with director compensation on February
10, 2004.
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o | On February 26, 2004, Sagiv Shai, a former director, filed a Form 4 reporting
the acquisition of stock options granted as director compensation on February
10, 2004.
| |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | o | On July 7, 2004, Duncan Yates filed a Form 4 reporting the exercise of stock
options and the sale of the underlying shares transacted on July 21, 2004. The
reason for the late filing was the delay in obtaining replacement Edgar filing
codes.
| |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

## ITEM 10.  
EXECUTIVE COMPENSATION

## Summary
Compensation Table

The table below sets forth
information concerning the annual and long-term compensation during our last
three fiscal years of our Chief Executive Officer and all of our other officers
(Named Executive Officers).

`---------------------------         ----    ------------  -----------  -------------------  ----------------
                                                                       Long Term
                                                                       Compensation
                                         Annual Compensation           Awards
                                                                       Securities
                                                                       Underlying           All Other
Name and Principal Position         Year    Salary        Bonus        Options/SARS (#)     Compensation (a)
---------------------------         ----    ------------  -----------  -------------------  ----------------

Michael W. Levin                    2004    $200,000      $28,500                     0               $4,416
  Chief Executive Officer           2003    $150,000      $15,000 (b)           500,000 (c)           $2,593
  and President                     2002    $150,000      $15,000 (d)                 0               $2,625
Frances Blanco                      2004    $120,000      $ 3,500               100,000 (e)           $4,317
  Vice President and Treasurer      2003    $100,000      $15,000 (b)            25,000 (f)           $2,872
  and (former) Secretary            2002    $100,000      $15,000 (d)                 0               $2,787
Duncan Huyler                       2004    $120,000      $ 6,000               100,000 (e)           $3,418
  Vice President                    2003    $107,185      $ 8,000 (b)            25,000 (f)           $  888
                                    2002    $107,185      $ 8,000 (d)                 0               $  223
Duncan Yates                        2004    $130,000      $11,000                     0               $1,740
  Vice President                    2003    $116,845      $15,000 (b)            25,000 (f)           $  938
                                    2002    $118,184      $15,000 (d)                 0               $1,012
Donald Gunn                         2004    $100,000      $20,607                     0               $2,522
  Vice President                    2003    $ 90,833      $10,000                25,000 (f)           $2,087
                                    2002    $ 80,000      $     0                50,001 (g)           $1,510
Denise Hawkins                      2004    $ 64,890      $ 1,000                     0               $1,099
  Vice President                    2003    $ 51,731 (h)  $     0                     0               $  647
  (Principal Financial
  Officer) and Secretary
---------------------------         ----    ------------  -----------  -------------------  ----------------`

|(a) | Refers to our matching  contribution  under our 401(k)  plan,  and  premiums  for life  insurance  where the
       beneficiary is not the company.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Refers to bonus  compensation,  including deferred bonus of $15,000 for each of Levin, Blanco and Yates, and
       of $8,000 for Huyler.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(c) | Refers to stock options granted in June 2003,  pursuant to an employment  agreement  effective as of July 1,
       2003.  The stock  options are  exercisable  at $1.00 per share and expire in June 2008.  Options to purchase
       250,000  shares vested  immediately  and options to purchase an additional  250,000 shares vest ratably over
       the period July 1, 2003 through June 30, 2005.  As of June 30, 2004, 375,000 options are vested.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Refers to bonus  compensation,  including deferred bonus of $7,500 for each of Levin,  Blanco and Yates, and
       of $4,000 for Huyler.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(e) | On May 24, 2004, we issued to each of Frances  Blanco and Duncan Huyler,  stock options to purchase  100,000
       shares of our common stock,  of which 50,000  options  vested on the grant date,  and the  remaining  50,000
       options are subject to vesting over the period May 25, 2004 through May 24, 2006.  The  options  are  exercisable  for ten years at
       $1.06 per share.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | On April 7, 2003, we issued to each of Duncan Huyler,  Frances Blanco,  Duncan Yates and Donald Gunn,  stock
       options  to  purchase  25,000  shares of common  stock.  The stock  options  vested on April 6, 2004 and are
       exercisable until April 5, 2008 at $0.50 per share.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | Refers to stock  options,  granted in fiscal year 2000 and reissued in fiscal year 2002, to purchase  50,001
       shares of our common  stock,  subject to vesting  over a three year  period,  exercisable  for five years at
       $1.27 per share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) | Became an officer on February 12, 2003. Her reported  fiscal year 2003  compensation  covers the full fiscal
       year.
|--- | -------------------------------------------------------------------------------------------------------------------------

---

## Stock Option
Information

# Option
Grants in Fiscal 2004

The table below sets forth
information concerning stock options granted during the fiscal year ended June
30, 2004 to the Named Executive Officers. The percentage of total stock options
is based on 247,500 stock options granted to officers, directors, and employees
during the 2004 fiscal year.

`----------------  ----------  --------------  -----------  ----------
                  Number of
                  Securities  Percent of
                  Underlying  Total Options
                  Options     Granted to      Exercise of
                  Granted     Employees in    Base Price   Expiration
Name              (#)         Fiscal Year     ($/Sh)       Date
----------------  ----------  --------------  -----------  ----------
Frances Blanco       100,000             40%        $1.06     5-24-14
Duncan Huyler        100,000             40%        $1.06     5-24-14
----------------  ----------  --------------  -----------  ----------`

# Option
Exercises in Fiscal 2004 and Year End Option Values

The following table sets
forth information concerning the value of unexercised stock options at June 30,
2004 for the Named Executive Officers. The dollar values of the options was
determined by multiplying the number of stock options by the difference between
the fair market value of a share of common stock underlying an option and the
exercise price of the option. Out-of-the-money options are reported as having a
dollar value of $0. The last sale price of a share of our common stock on June
30, 2004 was $1.54, as reported by AMEX.

`-----------------  -----------  --------  --------------------------  --------------------------
                   Number of
                   Shares                 Number of Unexercised         Value of Unexercised
                   Acquired     Value     Securities Underlying         In-the-Money Options
Name               on Exercise  Realized  Options at Fiscal Year End    at Fiscal Year End
                                          --------------------------  --------------------------
                                          Exercisable  Unexercisable  Exercisable  Unexercisable
-----------------  -----------  --------  -----------  -------------  -----------  -------------
Michael W. Levin             0         0      375,000        125,000     $202,500        $67,500
Frances Blanco               0         0       82,741         50,000     $ 52,245        $24,000
Duncan Huyler                0         0       84,265         50,000     $ 53,937        $24,000
Duncan Yates (a)         5,000    $2,250      145,430              0     $ 55,995        $     0
Donald Gunn                  0         0       75,001              0     $ 39,500        $     0
Denise Hawkins               0         0        6,668          3,334     $      0        $     0
-----------------  -----------  --------  -----------  -------------  -----------  -------------`

|(a) | Exercised  5,000  options on July 21, 2004.  The value  realized  upon  exercise was  determined by market
         value per share of common  stock on that date of $1.70 less the  exercise  price of  options.  At year end
         2004,  Yates held 17,000  out-of-the  money  options  which are not included in the column of  unexercised
         in-the-money options value.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Director
Compensation

We have a compensation plan
for our independent directors. Eligible outside directors are paid $5,000 per
year, payable quarterly, for attendance at regular and special meetings and may
be reimbursed for their reasonable out-of-pocket expenses incurred in connection
with their attendance at meetings of the Board of Directors and for other
expenses incurred in their capacity as directors of Media Sciences. Outside
directors are granted five or ten year stock options under the incentive stock
option plan to purchase 10,000 shares of common stock, exercisable at the fair
market value on the date of appointment to the Board. Outside directors will
also be granted, annually, additional stock options to purchase 5,000 shares of
common stock.

---

## Employment
Agreement with Named Executive Officer

Michael W. Levin serves as
our Chief Executive Officer and President pursuant to a five-year employment
agreement that began as of July 1, 2003. His current annual salary for fiscal
year 2004 is to be $200,000. We granted him 500,000 five-year stock options to
purchase 500,000 shares of common stock. The exercise price for the stock
options is $1.00 per share. Stock options to purchase 250,000 shares vested
immediately, additional stock options to purchase 125,000 shares vested on June
30, 2004, and the remaining 125,000 stock options are to vest ratably over the
period July 1, 2004 through June 30, 2005. These stock options are cumulative
and are subject to anti-dilution rights.

He is also entitled to
receive:

|o | death benefits of $100,000;                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------
|o | a fifteen-year term life insurance policy for $2,000,000;                                                                              
|o | a luxury automobile;                                                                                                                   
|o | reimbursement for reasonable travel and other business related expenses;                                                               
|o | six weeks vacation;                                                                                                                    
|o | medical and dental insurance; and                                                                                                      
|o | participation
in any employee plan, perquisite and other benefits made available to Media
Sciences employees or management in general.

We may also award him an annual performance bonus or other bonus as determined by the Board of Directors.

If we undergo a
change of control, we must pay him an amount equal to 290% of his
base compensation. He has the right to terminate his employment if we undergo a
change in control. As defined in his employment agreement, a change of control
refers to:

|o | a change in our ownership or management that is required to be reported under the federal securities
         laws;
|- | -------------------------------------------------------------------------------------------------------------------

|o | the acquisition, other than directly from Media Sciences, of 25% or more of our
common stock or our voting securities by persons other than Media Sciences or
Levin;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | a change in a majority of the current Board of Directors, excluding a Board
approved change that does not result from a proxy contest;
|- | --------------------------------------------------------------------------------------------------------------------------------------

|o | a reorganization, merger, consolidation or sale of substantially all of our
assets, after which our shareholders do not own, in the same proportion, more
than 50% of the voting power, after which a majority of the board of directors
changes, and after which a new shareholder beneficially owns 25% or more of the
voting power; or
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | shareholder approval of our liquidation or dissolution.
|- | -------------------------------------------------------

The employment agreement
provides for termination for cause.

## Stock Option Plan

Under our incentive stock
option plan for employees, which was adopted by our Board of Directors and
approved by our shareholders in 1998, we reserved 500,000 shares of our common
stock for issuance pursuant to exercises of incentive stock options. An
incentive stock option entitles the holder to purchase a share of our common
stock at a purchase price equal to the fair market value of the common stock on
the day of grant. During the year ended June 30, 2004, no stock options granted
under this stock option plan were exercised. As of June 30, 2004, we had
outstanding stock options to purchase 367,156 shares of common stock,
exercisable, subject to vesting, for five or ten years from the date of grant at
prices of $0.43 to $4.00. If we undergo a change of control, the
incentive based stock options shall vest immediately.

---

## Employee
Profit Sharing Plan

We have a tax-qualified
employee paired profit sharing plan sponsored by Scudder Financial Services,
Inc. This 401(k) plan covers all of our employees that have been employed for at
least six months and meet other age and eligibility requirements. Under the
401(k) plan, employees may choose to reduce their current compensation by up to
15% each year and have that amount contributed to the 401(k) plan. We make
matching contributions equal to 25% of the employees contribution. In our
discretion, we may contribute unmatched contributions. The 401(k) plan qualifies
under Section 401 of the Internal Revenue Code, so that we can deduct
contributions by employees or by us. Employee contributions to the 401(k) plan
are fully vested at all times, and our contributions, if any, vest at the rate
of 25% after two years and after two years at the rate of 25% a year until fully
vested.

## ITEM 11.  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

## Security Ownership
of Certain Beneficial Owners

The table below sets forth,
as of July 28, 2004, the shares of our common stock beneficially owned by each
person known to us to be the beneficial owner of more than five percent of our
outstanding shares of common stock, except that the security ownership of
management is provided in a separate table. This information was determined in
accordance with Rule 13(d)-3 under the Securities Exchange Act of 1934, and is
based upon the information provided by the persons listed below. As of July 28,
2004, we had 9,932,210 shares of common stock issued and outstanding.

All persons named in the
table have the sole voting and dispositive power with respect to common stock
beneficially owned. Beneficial ownership of shares of common stock that are
acquirable within 60 days upon the exercise or conversion of stock options and
warrants are listed separately. For each person named in the table, the
calculation of percent of class gives effect to those acquirable shares.

`----------------------------------------  -------------------    -----------------   --------
                                                                 Additional Shares
Name and Address                          Amount and Nature      Acquirable Within   Percent
of Beneficial Owner                       of Beneficial Owner    60 days             of Class
----------------------------------------  -------------------    -----------------   --------
Berthel SBIC, LLC (a)                               1,112,797              353,000      14.3%
  100 Second Street SE,
  Cedar Rapids, Iowa 52407
Richard L. Scott (b)                                1,829,750               10,000      18.5%
100 First Stamford Place
Stamford, Ct. 06902
----------------------------------------  -------------------    -----------------   --------`

|(a) | The  beneficial  owners of Berthel SBIC are:  Thomas J.  Berthel,  Chief  Executive  Officer and Chairman;
         Ronald O.  Brendengen,  Chief  Financial  Officer and Chief  Operation  Officer;  Henry Royer,  President;
         Leslie D. Smith, Secretary; and Julie K. Driscoll, Assistant Secretary.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Holds the securities  through  different  entities,  including GFX  Investments,  LLC, for which he is the
         beneficial  owner.  Includes  6,000 shares  purchased by the Frances  Annette Scott  Revocable  Trust,  of
         which his spouse is the trustee.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

## Security
Ownership of Management

The table below sets forth,
as of July 28, 2004, the shares of our common stock beneficially owned by each
of our officers and directors, and by all of our officers and directors as a
group. This information was determined in accordance with Rule 13(d)-3 under the
Securities Exchange Act of 1934, and is based upon the information provided by
the persons listed below. As of July 28, 2004, we had 9,932,210 shares of common
stock issued and outstanding.

All persons named in the
table have the sole voting and dispositive power with respect to common stock
beneficially owned. Beneficial ownership of shares of common stock that are
acquirable within 60 days upon the exercise or conversion of stock options and
warrants are listed separately. For each person named in the table, the
calculation of percent of class gives effect to those acquirable shares.

The address of each of the
persons named in the table is c/o Media Sciences International, Inc., 40
Boroline Road, Allendale, New Jersey 07401, unless otherwise indicated.

`----------------------------------------  -------------------    -----------------   --------
                                                                 Additional Shares
Name and Address                          Amount and Nature      Acquirable Within   Percent
of Beneficial Owner                       of Beneficial Owner    60 days             of Class
----------------------------------------  -------------------    -----------------   --------
Michael W. Levin (a)                                1,518,450         375,000           18.4%
Frances Blanco                                         40,775         132,741  (b)       1.7%
Duncan Huyler                                          40,775         134,265  (b)       1.7%
Duncan Yates                                           20,300         145,430  (b)       1.6%
Denise Hawkins                                            500          10,002  (c)       0.1%
Paul Baker                                             67,500         100,500  (d)       1.7%
Edwin Ruzinsky                                         20,000          40,000            0.6%
Donald Gunn                                            25,000          75,001  (b)       1.0%
Henry Royer (e)                                     1,112,797         353,000           14.3%
   c/o Berthel SBIC
   100 Second Street SE
   Cedar Rapids, Iowa 52407
Alan L. Bazaar (f)                                          0               0              0%
   c/o Richard L. Scott Investments, LLC
   100 First Stamford Place
   Stamford, Ct. 06902
----------------------------------------  -------------------    -----------------   --------
All present officers and directors
as a group (10 persons)                             2,846,097       1,365,939           37.3%
----------------------------------------  -------------------    -----------------   --------`

|(a) | Includes  120,000 shares owned by his minor  children.  Does not include stock options,  scheduled to vest
         ratably over the period July 1, 2004 through June 30, 2005, exercisable into 125,000 shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Includes  50,000 stock  options,  scheduled  to vest  ratably from May 24, 2004 through May 24, 2006.  The
         underlying 50,000 shares are included as shares for resale pursuant to this prospectus.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Includes 3,334 shares acquirable upon vesting of stock options scheduled to vest on July 15, 2004.
|--- | --------------------------------------------------------------------------------------------------

|(d) | Includes  beneficial  ownership  of warrants  held by spouse to purchase  12,500  shares of common  stock,
         expiring on June 12, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Henry Royer's reported beneficial ownership refers to the beneficial ownership of Berthel SBIC.
|--- | -----------------------------------------------------------------------------------------------

|(f) | Alan Bazaar disclaims  beneficial  ownership of shares  beneficially owned by Richard L. Scott or entities
         affiliated with Richard L. Scott, for which Mr. Scott is the beneficial owner.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Changes in
Control

We do not have any
arrangements that may result in a change in control.

---

## Securities
Authorized for Issuance under Equity Compensation Plans

`Number of securities to       Weighted average
                                        be issued upon exercise       exercise price of        Number of securities
                                        of outstanding options,     outstanding options,     remaining available for
            Plan category                 warrants and rights        warrants and rights         future issuance
            -------------                 -------------------        -------------------         ---------------

Equity compensation plans approved by          1,087,156                        $1.01                 132,844
securities holders

Equity compensation plans not                  2,544,002                        $3.26                       0
approved by security holders

Total                                          3,631,158                        $2.58                 132,844`

Plans in the Shareholder Approved Category

Under our incentive stock
option plan for employees, directors and consultants, which was adopted by our
Board of Directors and approved by our shareholders on August 10, 1998, we
reserved 500,000 shares of our common stock for issuance pursuant to exercises
of incentive stock options. An incentive stock option entitles the holder to
purchase a share of our common stock at a purchase price equal to the fair
market value of the common stock on the day of grant. As of June 30, 2004, we
have outstanding incentive stock options to purchase 367,156 shares of common
stock, exercisable, subject to vesting, for five or ten years from the date of
grant, at prices of $0.43 to $4.00 per share.

Pursuant to an oral
employment agreement effective as of July 2000, and as amended September 7,
2000, we issued to Duncan Yates stock options, which were reissued on May 6,
2001, to purchase up to 100,000 shares of common stock, of which stock options
to acquire 50,000 shares vested immediately and stock options to acquire an
additional 50,000 shares are subject to vesting upon us attaining certain
specified corporate milestones, exercisable for five years at $1.25 per share.
As of June 30, 2003, all 100,000 options are exercisable. In June 2004, Mr.
Yates exercised options to purchase 5,000 shares at $1.25 per share and sold
these shares into the open market at $1.70 per share.

On April 7, 2003, we issued
to each of Duncan Huyler, Frances Blanco, Duncan Yates, Donald Gunn and Randy
Hooker, stock options to purchase 25,000 shares of common stock. The stock
options vest on April 6, 2004 and are exercisable until April 5, 2008 at $0.50
per share.

In June 2003, we issued to
Michael Levin stock options to purchase up to 500,000 shares of common stock,
exercisable at $1.00 per share and expiring in June 2008. Options to purchase
250,000 shares vested immediately and options to purchase an additional 250,000
shares vest ratably over the period July 1, 2003 through June 30, 2005.

Plans Not in the Shareholder Approved Category

On December 13, 1999, we
issued to each of Donald Gunn and another employee, stock options which were
reissued on December 14, 2001, to purchase 50,001 shares of our common stock,
subject to vesting over a three year period, exercisable for five years at $1.27
per share. As of June 30, 2003, all 100,002 options are exercisable.

From October 1999 to March
10, 2000, we conducted a private placement of 550,000 units of our securities
and raised gross proceeds of approximately $5,500,000. Each unit consisted of
one share of convertible preferred stock and a warrant, exercisable for five
years at $4.50 per share, to purchase two shares of common stock. In connection
with the private placement, we issued to the investors and consultants,
including the placement agent and members of the selling group, an aggregate of
550,000 shares of preferred stock and 1,956,500 warrants, exercisable for five
years, to purchase shares of common stock, as follows: 15,000 shares at $3.00
per share; 40,000 shares at $3.75 per share; 15,000 shares at $4.00 per share;
550,000 shares at $3.75 per share; 236,500 shares at $1.65 per share; and
1,100,000 shares at $4.50 per share.

---

On May 31, 2001, we issued
warrants to purchase up to 200,000 shares of our common stock exercisable for
five years at $1.00 per share in consideration for consulting services. In July
2004, three warrant holders exercised their warrants to purchase 25,000 shares
each at $1.00 per share.

On June 14, 2002, in
connection with the issuance of short-term promissory notes, we issued warrants
to purchase up to 87,500 shares of our common stock exercisable for five years
at $1.00 per share.

On May 24, 2004, we issued
to two of our management level employees, Frances Blanco and Duncan Huyler,
options to purchase 100,000 shares of our common stock, of which 50,000 options
vested on the grant date, and the remaining 50,000 options are subject to
vesting over the period May 25, 2004 through May 24, 2006. The options are exercisable for ten years at
$1.06 per share.

## ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Between August 2000 and
September 2003, we borrowed an aggregate of $450,000 from Michael W. Levin, our
President. The funds were used for general corporate purposes. The debt was
structured through two notes payable. The first note, in the amount of $255,000,
bore an interest rate of 10% per annum and was payable in monthly installments
of interest only through May 2004. The second note, in the amount of $195,000,
bore an interest rate of 20% per annum and was payable in monthly installments
of interest only through May 2005. In January 2004, Mr. Levin, voluntarily
reduced the interest rate on the loan due May 2005 to 10%. We repaid both loans
in May and June 2004. There is no representation or assurance made that Mr.
Levin will make any further loans to us.

The terms of loans from our
officers, directors, and others having relationships with our officers and
directors were determined by the Board of Directors in light of our financial
condition, the terms of previous borrowings from such persons, and the terms on
which short-term loans were available from public resources. The terms of these
loans were deemed fair to the company and viewed as arms length
transactions. There are no ongoing contractual or other commitments with any of
these persons resulting from these transactions, and there is no representation
or assurances made that any of these persons will make any further loans to us.

On June 5, 2001, we issued
a $400,000 promissory note and warrants to purchase up to 200,000 shares of our
common stock at $1.00 per share to Consonant Services Group. The note matured on
June 5, 2003 and bore a simple interest at the rate of 12% per year. The note
was secured by a security agreement which covered all corporate assets. Two
members of this investor group were persons who bear the following relationships
with Media Sciences or with our officers and directors: Paul Baker is a director
of Media Sciences and Mitchell Baker is the son of Paul Baker. On June 5, 2003,
we repaid the $400,000 note due to the Consonant Services Group, through the
issuance of eight, $50,000 promissory notes, due on June 5, 2005 and carrying a
20% interest rate, to the eight individuals comprising the Consonant Services
Group. These notes were unsecured. In June 2004, we repaid these notes after
securing a one year, $400,000 term loan from our bank, carrying an interest rate
of the banks base rate plus 2%. At June 30, 2004, the interest rate on this term
loan was 6%. In July 2004, three warrant holders exercised a total of 75,000
warrants for proceeds to the Company of $75,000.

---

On June 14, 2002, we issued
short-term promissory notes aggregating $175,000 and warrants to purchase up to
87,500 shares of our common stock exercisable for five years at $1.00 per share
to seven note holders: Paul Levin, Frank and Edna Blanco, Nathan D. Watters,
Adam H. Watters, Mitchell Baker, Esther Baker, and Harold and Marsha Kugelman.
The notes matured in December 2002 and bore simple interest at the rate of 12%
per year. In December 2002, we repaid the $175,000 borrowed in June through cash
principal payments of $75,000 and through the issuance of new, one-year notes
aggregating $100,000 and bearing simple interest of 20%, payable quarterly. In
December 2003, we repaid the notes in full. The note holders were persons who
bear the following relationships with Media Sciences or with our officers and
directors: Paul Levin is the father of Michael W. Levin, President and Chairman
of Media Sciences; Frank and Edna Blanco are the parents of Frances Blanco, Vice
President and a director of Media Sciences; Mitchell Baker is the son of Paul
Baker, a director of Media Sciences; and Esther Baker is the wife of Paul Baker.

On September 24, 2002, we
granted options to purchase 5,000 shares of common stock, exercisable for ten
years at $0.65 per share to each of Paul Baker, Berthel SBIC, and Ed Ruzinsky in
connection with their services on the Board of Directors.

In October 2002, we
borrowed $100,000 at a 23% interest rate, with interest due monthly, from Paul
Baker, a director of Media Sciences. This loan matured in, and was repaid in,
October 2003.

On November 19, 2002, Edwin
Ruzinsky purchased 10,000 shares of Media Sciences common stock for $6,500 in
the open market.

In December 2002, we
borrowed $25,000 at a 23% interest rate, with interest due monthly, from Duncan
Yates, an officer. This loan matured in and was repaid in December 2003.

On January 1, 2003, we
granted options to purchase 10,000 shares of common stock, exercisable for ten
years at $0.60 per share to Sagiv Shiv in connection with his services on the
Board of Directors.

On April 7, 2003, we issued
to each of Duncan Huyler, Frances Blanco, Duncan Yates and Donald Gunn, stock
options to purchase 25,000 shares of common stock. The stock options vested on
April 6, 2004 and are exercisable until April 5, 2008 at $0.50 per share.

On May 6, 2003, we granted
options to purchase 10,000 shares of common stock, exercisable for ten years at
$0.43 per share, to each of Paul Baker and Ed Ruzinsky in connection with their
services on the Board of Directors.

In June 2003, pursuant to
an employment agreement effective as of July 1, 2003, we issued to Michael Levin
stock options to purchase up to 500,000 shares of common stock, exercisable at
$1.00 per share and expiring in June 2008. Options to purchase 250,000 shares
vested immediately, options to purchase an additional 125,000 shares vested on
June 30, 2004, and options to purchase an additional 125,000 shares are to vest
ratably over the period July 1, 2004 through June 30, 2005.

On February 10, 2004, we
granted options to purchase 5,000 shares of common stock, exercisable for ten
years at $0.85 per share to each of Paul Baker, Ed Ruzinsky, Berthal SBIC and
Sagiv Shiv in connection with their services on the Board of Directors.

On January 16, 2004, Denise
Hawkins purchased 500 shares in the open market for $530.

On May 11, 2004, Michael
Levin gifted an aggregate of 22,000 shares to his minor children.

On May 11, 2004, Shiv Sagiv
resigned from our board of directors due to personal reasons.

On May 24, 2004, we issued
to each of Frances Blanco and Duncan Huyler stock options to purchase 100,000
shares of our common stock, of which 50,000 options vested on the grant date,
and the remaining 50,000 options are subject to vesting over the period May 25, 2004 through May 24, 2006.
The options are exercisable for ten years at $1.06 per share.

---

On June 21, 2004, Duncan
Yates exercised 5,000 stock options at $1.25 per share, and sold 5,000 shares of
common stock in the open market at $1.70 per share.

On June 30, 2004, we sold
1,000,000 shares of common stock to GFX Investments, LLC, an entity controlled
by Richard L. Scott, for $1.25 million. In conjunction with the investment, we
agreed to appoint a nominee of GFX Investments, Alan Bazaar, Vice President and
Portfolio Manager for Richard L. Scott Investments, LLC, to our board of
directors, and we granted Mr. Scott 10,000 stock options, exercisable at $1.69
per share for five years in connection with Board of Directors services. At
various times between March 17, 2004 and May 21, 2004, Mr. Scott, through
entities controlled by him, purchased an aggregate of 823,750 shares in the open
market, at prices of $1.07 to $1.36 per share, for an aggregate purchase price
of $982,513. On June 3, 2004, the Frances Annette Scott Revocable Trust, of
which Mr. Scotts spouse is the trustee, purchased 6,000 shares in the open
market for $6,735.

## ITEM 13.     EXHIBITS

Exhibits required to be
filed by Item 601 of Regulation S-B are included in Exhibits to this Report as
follows:

`Exhibit   Description
-------   -----------

2           Agreement of Change in Corporate Structure (Incorporated by
            reference to Exhibit 2 of Quarterly Report on Form 10-QSB filed on
            May 15, 2002).
3(i)(1)     Certificate of Incorporation of Cadapult Graphic Systems, Inc., a
            Delaware corporation (Incorporated by reference to Exhibit 3.1 of
            Quarterly Report on Form 10-QSB/A filed on September 1, 1998).
3(i)(2)     Certificate of Amendment of Certificate of Incorporation of Cadapult
            Graphic Systems, Inc. (Incorporated by reference to Exhibit 3(i)(5)
            of Annual Report on Form 10-KSB filed on September 28, 1999).
3(i)(3)     Certificate of Incorporation of Media Sciences, Inc. (Incorporated
            by reference to Exhibit 3(i)(6) of Annual Report on Form 10-KSB
            filed on September 28, 1999).
3(i)(4)     Certificate of Amendment of Certificate of Incorporation of Cadapult
            Graphic Systems, Inc. (Incorporated by reference to Exhibit 3(i)(1)
            of Quarterly Report on Form 10-QSB filed on May 15, 2002).
3(i)(5)     Certificate of Incorporation of Cadapult Graphic Systems, Inc. (a
            New Jersey corporation) (Incorporated by reference to Exhibit
            3(i)(2) of Quarterly Report on Form 10-QSB filed on May 15, 2002).
3(ii)       By-Laws (Incorporated by reference to Exhibit 3.2 of Quarterly
            Report on Form 10-QSB/A filed on September 1, 1998).
4.1         Specimen of common stock certificate (Incorporated by reference to
            Exhibit 4.7 of Form 8-A filed on August 8, 2000).
4.2         Specimen of preferred stock certificate (Incorporated by reference
            to Exhibit 4.8 of Form 8-A filed on August 8, 2000).
4.3         1998 Incentive Plan (Incentive Stock Option Plan) (Incorporated by
            reference to Exhibit 4.1 of Annual Report on Form 10-KSB filed on
            September 28, 1999).
4.4         Certificate of Designation (Incorporated by reference to Exhibit 4.5
            of Registration Statement on Form SB-2, Registration Number
            333-91005, originally filed on November 15, 1999).
4.5         Form of Warrant Certificate for Purchasers of Units (Incorporated by
            reference to Exhibit 4.6 of Registration Statement on Form SB-2,
            Registration Number 333-91005, originally filed on November 15,
            1999).
4.6         Certificate of Amendment of Certificate of Designation of Series A
            Preferred Stock (Incorporated by reference to Exhibit 3(i)(6) of
            Annual Report on Form 10-KSB filed on September 15, 2003).
4.7         Certificate of Amendment of Certificate of Designation of Series A
            Preferred Stock (Incorporated by reference to Exhibit 4.7 of
            Registration Statement on Form SB-2, Registration Number
            333-112340, filed on January 30, 2004).`

---

`10.1        Lease Agreement (Incorporated by reference to Exhibit 10.13 of
            Annual Report on Form 10-KSB filed on or about September 28, 2000).
10.2        Amended  Employment Agreement of Duncan Huyler (Incorporated by
            reference to Exhibit 3.2 of Quarterly Report on Form 10-QSB filed
            on May 4, 1999).
10.3        Amended Employment Agreement of Frances Blanco (Incorporated by
            reference to Exhibit 3.3 of Quarterly Report on Form 10-QSB filed
            on May 4, 1999).
10.4        Agreement with Consonant Services Group (Incorporated by
            reference to Exhibit 10.6 of Registration Statement on Form
            SB-2, Registration Number 333-83668, filed on March 4, 2002).
10.5        Form of Warrant Agreement with Consonant Services Group
            (Incorporated by reference to Exhibit 10.11 of Registration
            Statement on Form SB-2, Registration Number 333-83668, filed on
            March 4, 2002).
10.6        Form of Amended Option Agreement with Frances Blanco
            (Incorporated by reference to Exhibit 10.8 of Registration
            Statement on Form SB-2, Registration Number 333-83668, filed
            on March 4, 2002).
10.7        Form of Amended Option Agreement with Duncan Huyler
            (Incorporated by reference to Exhibit 10.9 of Registration
            Statement on Form SB-2, Registration Number 333-83668, filed
            on March 4, 2002).
10.8        Form of Amended Option Agreement with Duncan Yates
            (Incorporated by reference to Exhibit 10.10 of Registration
            Statement on Form SB-2, Registration Number 333-83668, filed
            on March 4, 2002).
10.9        Form of Amended Option Agreement with Donald Gunn
            (Incorporated by reference to Exhibit 10.12 of Registration
            Statement on Form SB-2, Registration Number 333-83668, filed
            on March 4, 2002).
10.10       Form of Amended Option Agreement with Randy Hooker
            (Incorporated by reference to Exhibit 10.13 of Registration
            Statement on Form SB-2, Registration Number 333-83668, filed
            on March 4, 2002).
10.11       Form of Promissory Note issued in June 2002 (Incorporated by
            reference to Exhibit 10.14 of Annual Report on Form 10-KSB filed
            on October 15, 2002).
10.12       Form of Warrants issued in June 2002 (Incorporated by reference to
            Exhibit 10.14 of Annual Report on Form 10-KSB filed on October 15,
            2002).
10.13       Form of Employment Agreement with Michael W. Levin (Incorporated
            by reference to Exhibit 10.16 of Annual Report on Form 10-KSB filed
            on September 15, 2003).
10.14       Form of Loan and Security Agreement (Incorporated by reference to
            Exhibit 10.17 of Annual Report on Form 10-KSB filed on September
            15, 2003).
10.15       Form of Option Agreement with Management issued April 2003
            (Incorporated by reference to Exhibit 10.15 of Registration
            Statement on Form SB-2, Registration Number 333-112340, filed on
            January 30, 2004).
10.16       Option Agreement with Frances Blanco issued May 2004 (Incorporated
            by reference to Exhibit 10.16 of Registration Statement on Form
            SB-2, filed on July 30, 2004).
10.17       Option  Agreement with Duncan Huyler issued May 2004 (Incorporated
            by reference to Exhibit 10.17 of Registration Statement on
            Form SB-2, filed on July 30, 2004).
10.18       First Amendment to Loan and Security Agreement, dated June 11, 2004
            (Incorporated by reference to Exhibit 10.18 of Registration
            Statement on Form SB-2, filed on July 30, 2004).
10.19       Term Note, dated June 11, 2004 (Incorporated by reference to
            Exhibit 10.19 of Registration Statement on Form SB-2, filed on
            July 30, 2004).
10.20       Common Stock Purchase Agreement, dated June 30, 2004 (Incorporated
            by reference to Exhibit 10.20 of Registration Statement on
            Form SB-2, filed on July 30, 2004).
10.21       Registration Rights Agreement, dated June 30, 2004 (Incorporated by
            reference to Exhibit 10.21 of Registration Statement on Form SB-2,
            filed on July 30, 2004).`

---

`11*         Statement Concerning Computation of Per Share Earnings is hereby
            incorporated by reference to "Financial Statements" of Part II -
            Item 7, contained in this Form 10-KSB.
21          Subsidiaries of the Registrant (Incorporated by reference to
            Exhibit 21 of Registration Statement on Form SB-2, filed on July
            30, 2004).
31.1*       Certification of CEO Pursuant to Securities Exchange Act Rule
            13a-14(a)/15d-14(a)
31.2*       Certification of CFO Pursuant to Securities Exchange Act Rule
            13a-14(a)/15d-14(a)
32.1*       Certification of CEO Pursuant to Securities Exchange Act Rule
            13a-14(b) and 18 U.S.C. Section 1350
32.2*       Certification of CFO Pursuant to Securities Exchange Act Rule
            13a-14(b) and 18 U.S.C. Section 1350
__________

*    Filed herewith.`

## ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

## Audit Fees

Fees for audit services
provided by J.H. Cohn LLP, our current principal independent registered public
accounting firm, during the year ended June 30, 2004 was $11,315. Fees for audit
services provided by Wiss & Company, LLP, our former principal accountant,
during the years ended June 30, 2003 and 2004 were $46,624 and $11,710,
respectively.

Audit services consisted
primarily of the annual audits, review of our financial statements, and services
that are normally provided by our accountants in connection with statutory and
regulatory filings or engagements for those fiscal years.

## Audit-Related
Fees

There were no fees billed for
services reasonably related to the performance of the audit or review of our
financial statements outside of those fees disclosed above under the caption
Audit Fees for fiscal years ended June 30, 2003 and 2004.

## Tax Fees

Fees for tax services
provided by J.H. Cohn LLP, our current principal independent registered public
accounting firm, during the year ended June 30, 2004 was $1,172. Fees for tax
services provided by Wiss & Company, LLP, our former principal accountant,
during the years ended June 30, 2003 and 2004 were $9,153 and $7,895,
respectively.

Tax services related
primarily to the preparation of company tax filings with regulatory agencies.

## All Other Fees

There were no other fees
billed for services.

---

# SIGNATURES

In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

| | MEDIA SCIENCES INTERNATIONAL, INC.
| | ----------------------------------

| | By:      /s/ Michael W. Levin
      Michael W. Levin
      Chief Executive Officer and President
| | ------------------------------------------------------------------------------------------------

| | Dated:  August 15, 2005
| | -----------------------

In
accordance with the Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated:

|SIGNATURES | TITLE | DATE
|---------- | ----- | ----

|/s/ Michael W. LevinMichael W. Levin | Chairman of the Board, President and Chief Executive Officer | August 15, 2005
|------------------------------------ | ------------------------------------------------------------ | ---------------

|/s/ Denise HawkinsDenise Hawkins | Vice President, Controller(Principal Financial Officer) and Secretary | August 15, 2005
|-------------------------------- | --------------------------------------------------------------------- | ---------------

|/s/ Frances BlancoFrances Blanco | Director, Vice President, and Treasurer | August 15, 2005
|-------------------------------- | --------------------------------------- | ---------------

|/s/ Donald GunnDonald Gunn | Director | August 15, 2005
|-------------------------- | -------- | ---------------

|/s/ Paul C. BakerPaul C. Baker | Director | August 15, 2005
|------------------------------ | -------- | ---------------

|/s/ Alan L. BazaarAlan L. Bazaar | Director | August 15, 2005
|-------------------------------- | -------- | ---------------

|/s/ Ed RuzinskyEd Ruzinsky | Director | August 15, 2005
|-------------------------- | -------- | ---------------

|/s/ Henry RoyerEd Ruzinsky | Director | August 15, 2005
|-------------------------- | -------- | ---------------

---