---

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

# FORM 10-KSB/A

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

# For the
fiscal year ended June 30, 2005

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

For the transition period from __________ to __________.

Commission file number: 1-16053

---

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) 677-9311

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. [  ]

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No
[X]

State issuer's revenues for its most recent fiscal year:  $17,878,838.

The aggregate market value of voting
and non-voting stock of the issuer held by non-affiliates on September 9, 2005 was
$12,400,698.

# APPLICABLE ONLY TO
CORPORATE REGISTRANTS

As of August 31, 2005, we had
10,978,606 shares of common stock issued and outstanding.

# DOCUMENTS INCORPORATED
BY REFERENCE

None.

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

---

# INTRODUCTORY NOTE

This Amendment on Form 10-KSB/A (the
Form 10-KSB/A) to our previously filed Annual Report on Form 10-KSB for the
year ended June 30, 2005 is being filed to reflect the restatement of our consolidated
financial statements to correct the cumulative effect of errors related to our provision
for income taxes arising from the years ended June 30, 2003 and prior, as discussed in
Note 1B to the consolidated financial statements included in Item 7 of Part II of this
Form 10-KSB/A.

This Form 10-KSB/A amends and
restates the previously filed Annual Report on Form 10-KSB, filed on September 13, 2005
(the Form 10-KSB), to: (i) amend Items 6 and 7 of Part II to reflect the
restatement; (ii) amend Item 8A of Part II to reflect our revised evaluation of our
disclosure controls and procedures as of June 30, 2005; and (iii) amend Item 13 of Part
III.

Except as discussed above to reflect
the restatement, we have not modified or updated disclosures presented in the Form 10-KSB.
Accordingly, this Form 10-KSB/A does not reflect events occurring after the filing of the
Form 10-KSB or modify or update those disclosures affected by subsequent events.

Please refer to Note 1B to the
accompanying consolidated financial statements at Part II, Item 7 for additional
information regarding the restatement.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.

# TABLE OF
CONTENTS

|           |  |                                                                                                          | Page
|---------- |  | -------------------------------------------------------------------------------------------------------- | ----
|PART I     |  |                                                                                                          |     
|           |  |                                                                                                          |     
|Item 1.    |  | Description of Business                                                                                  | 3   
|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                                                                     | 12  
|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 and Executive Officers of the Registrant                                                       | 51  
|Item 10.   |  | Executive Compensation                                                                                   | 55  
|Item 11.   |  | Security Ownership of Certain Beneficial Owners and Management                                           | 58  
|Item 12.   |  | Certain Relationships and Related Transactions                                                           | 62  
|Item 13.   |  | Exhibits                                                                                                 | 63  
|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 and for the sale and servicing of electronic pre-press
systems.

In May 2005, we discontinued all
electronic pre-press systems sales and service operations, the majority of the Cadapult
business.

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 August 31, 2005 we had
10,978,606 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 and industrial coders (printers). We operate in one business
segment 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, Oki 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. Our products are a high quality, lower cost alternative to the printer
manufacturers brand.

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 Xerox,
Oki or Konica-Minolta. 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 22-27% 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.   We manufacture and
distribute solid ink sticks for use in certain business color printers. Specifically we
manufacture solid ink for use in the Xerox/Tektronix Phaser 340, 350, 360, 840, 850, 860,
8200, 8400, 8500 color printers and for use in the Xerox WorkCentre C2424 multifunction
device. 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 brand.

We also manufacture solid ink for use
in industrial marking, or coding, applications. These products include solid ink for use
in the Markem 9000 and 5000 series coders. These products are sold under private label
brands and offer a savings of up to 24-30% versus the Markem brand.

We are in discussions with a printer
manufacturer to become their primary supplier of solid ink sticks for the printers they
manufacture. Should this opportunity come to fruition, we will sell these products
exclusively to that customer for sale under their own brand.

Toner Cartridges.   We
manufacture toner cartridges for use in Tektronix, Xerox, Konica-Minolta, Oki, Epson, and
Ricoh color printers. 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, and 7300 and
Oki 5000, 7000 and 9000 series color printers, These are new cartridges offered at a
discount to those of the printer manufacturer. These cartridges are offered at a discount
of up to 30% to the prices of the printer manufacturers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Clearcase  Our Clearcase line of toner cartridges are for use in Xerox/Tektronix
Phaser 560, 740, 750, 780, 790, 7700 and 6200 color printers, Konica-Minolta (formally
QMS) Magicolor 330, 3100 and 2300 and Epson C4000 and C900 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

INKlusive.   Our INKlusive color printer program provides a customer with a workgroup color
          printer or multifunction device, on-site service and a defined, regular shipment
          of supplies (ink or toner), all for the cost of just the supplies. 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 four versions of
the program starting at $79 per month for two years through $199 per month for three
years. The program includes both color toner and solid ink based printers and a solid ink
based multifunction device. The program requires a 24 to 36 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. More
information on the INKlusive program is available at www.inklusive.com.

Media Sciences offers this program in
conjunction with a financing company. Media Sciences does not own or otherwise finance the
cost of the printer, nor does Media Sciences guarantee the credit worthiness of the
customer. Under our agreement with the financing company, at the time of placement of the
INKlusive printer, we are paid in full for the printer and the two (or three, as the case
may be) years of supplies. We recognize the revenue from the supplies as they are shipped
over the term of the INKlusive agreement. Consequently, the difference in timing between
receipt of payment for the supplies and those that are shipped gives rise to deferred
revenue on our balance sheet.

For the year ended June 30, 2005
revenue recognized for the shipment of INKlusive supplies represented approximately 3% of
our total revenues, and gave rise to an additional $800,000 in deferred revenue which will
be recognized as the supplies are shipped over the remaining terms of those INKlusive
agreements.

# Marketing and Sales Plans

Our marketing strategy is embodied by
four objectives :

|1) |  | Build awareness among end users and dealers that Media Sciences products are a
                    quality option for business color printer supplies.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|2) |  | Position Media Sciences as the leader in aftermarket office color printer
                    supplies.
|-- |  | -------------------------------------------------------------------------------------------------------

|3) |  | Reinforce that not all aftermarket choices are the same, and that the safe and
                    profitable choice is Media Sciences.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|4) |  | Educate our channels on the breadth of the market opportunity showing them that
                    color is no longer a niche market.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------

The execution of the above strategy
is multifaceted and is centered on three areas :

|1) |  | Product Marketing
|-- |  | -----------------

|2) |  | Channel Marketing
|-- |  | -----------------

|3) |  | End User Marketing
|-- |  | ------------------

Product marketing encompasses all
product-centric marketing efforts including, but not limited to the identification of new
product development targets, packaging, product pricing, and product specific collateral
materials. We plan to expand our product line, brand of our warranty, and
improve the out-of-box experience with Media Sciences products. Our goal with our product
marketing efforts is show the end user that Media Sciences are a quality alternative to
the printer manufacturers brand.

Channel marketing encompasses all
communications, efforts and programs centered on the identification, recruitment, training
and growth of our channel partners. These efforts include product launches, regular
communications via e-mail, mail, telephone and webinars, and channel programs
such as our Clear Profits program. The purpose of our channel marketing efforts is to
build awareness within the channel, of the market and our products and to help our channel
partners see the business opportunity presented by the sale of Media Sciences supplies. In
short we strive to show channel partners how they can increase their profitability and
customer satisfaction by selling Media Sciences supplies.

---

End user marketing is directed at the
owners and users of office color printers and those responsible for purchasing supplies
for these printers. Our efforts include direct mail, trade shows, advertising, end user
endorsements, and public relations. The goal of these efforts is to build awareness and
initiate conversions from the printer manufacturers supplies to Media Sciences
supplies.

Our sales efforts compliment our
marketing strategy and focus on channel development, and end user conversions.

Our channel development sales
activities include :

|o |  | Identifying and recruiting new and incremental channels for our products and programs (INKlusive).
|- |  | --------------------------------------------------------------------------------------------------

|o |  | Providing product training, including tactics used by the printer manufacturers to compete with aftermarket supplies.
|- |  | ---------------------------------------------------------------------------------------------------------------------

|o |  | Providing information and training on the office color market to help the channel identify
opportunities within their customer base.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

|o |  | Providing information and training on the office color market to help the channel identify
opportunities within their customer base.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

|o |  | Development of incentive programs to increase the focus on Media Sciences products by
increasing the financial opportunity for the channel and its salespeople and by making it
fun to sell Media Sciences products.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Development of channels in markets outside of the US and Western Europe.
|- |  | ------------------------------------------------------------------------

|o |  | Getting face to face with as many of our channel partners as possible.
|- |  | ----------------------------------------------------------------------

In order to accomplish the above, we
are increasing our sales staffing including inside sales personnel and channel managers.

Our end user sales activities are
primarily focused on Fortune 1000 companies and other large color printer installations.
These activities, often executed in concert with a channel partner, include identifying
large opportunities and pursuing them by supporting the individual(s) within the target
organization responsible for evaluating, selecting and purchasing color printer supplies,
so that they can make an informed decision on Media Sciences as an alternative to the
printer manufacturers brand of supplies. This support may include cost of ownership
studies, reliability studies, and Media Sciences product to test and evaluate.

# 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 in the office environment 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. Industry sources
forecast a decline in Monochrome supply shipments beginning in 2005. In conjunction with
flat monochrome laser printer sales, the percentage share of color laser printers is
growing.

The adoption of color in the office
has been facilitated by lower costs of acquisition such as sub-$1000 and sub $500 color
laser printers along with increased print speeds and reliability. In addition to the lower
costs, favorable market dynamics are driving 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 30% within the period 2003-2009 from over 1 million units in 2003 to
approximately 7 million units in 2009 (source: Lyra Research, Inc. August 2005, Hard Copy
Supplies Advisory Service, Frist Half 2005 Forecast). 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 37% from 20.6 million to close to 100 million units over the period of
2003- 2009 (source: Lyra Research, Inc. Hard Copy Advisory Service First Half 2005-
Forecast). 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 sources 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 has been limited 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. Today the
aftermarket is robust for monochrome, remanufactured and new build toner cartridges. These
aftermarket monochrome are brought to market through many of the same distribution
channels with whom Media Sciences partners. The aftermarket for color cartridges has
lagged monochromes adoption of after market supplies, as the cost of the actual
printers has remained high, thereby sustaining a perception of risk when using an
alternative to the printer manufacturers brand. With the recent declines in the cost
of office color printers, the perceived risk is diminishing and users are increasing their
pace of adoption of aftermarket color 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 that
similar metrics exist for color by which up to 27% of the supplies consumed may be
aftermarket choices.

# Distribution Methods of
the Products and Programs

Our primary goal in building our
distribution channels is to have our products readily available to the end users.
Consequently, we look to mirror the distribution points of the printer manufacturers, and
add additional, unique, distribution points that serve the cost conscious end user. As a
result, we sell through an international network of channel partners, including
wholesalers, distributors, dealers, internet resellers, printer manufacturers and contract
stationers.

We have a dual branding strategy
 our products are sold under the Media Sciences brand, and where a partner has
equity in their own brand we will work with that partner to provide our products to them
under their brand. Currently approximately 50% of our sales are under the Media Science
brand and the balance under our partners brands. Our goal is to grow the Media
Sciences branded product sales to 75% of our sales within five years.

Our products are available in most
parts of the world. However, approximately 85% of our sales are in the United States, with
a majority of the balance of our sales in Western Europe. Our goal is to have our
international sales represent no less than 30% of our revenues within three years, while
continuing to aggressively grow our US sales.

# 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, Konica-Minolta (formally
QMS), Epson, Brother and Ricoh. These competitors use several tactics to limit the
penetration of aftermarket supplies including remanufactured products and newly
manufactured products such as those offered by Media Sciences. These tactics include
protecting their technology through the use of patents, through the development of sales
and marketing programs those that provide for incentives to distribution channels that
sell exclusively the printer manufacturers brand supplies, and through fear,
uncertainty and doubt (FUD). Media Sciences competes with these manufacturers primarily by
offering a compelling value proposition of quality, value (through lower end user costs
and higher channel margins) and choice.

Media Sciences also competes with
entities that remanufacture color toner cartridges that compete with Media Sciences
newly manufactured cartridges. Remanufactured toner cartridges are often available at
lower prices than the equivalent, newly manufactured, Media Sciences toner cartridge.
Media Sciences competes with these products based on quality, reliability, warranty and
excellent product availability. Some remanufacturers choose to sell Media Sciences
products to their customer rather than make the substantial investment in developing the
technologies and processes necessary to remanufacture color toner cartridges.

Media Sciences is buying certain
color toner cartridges, from a supplier, on a non-exclusive basis. While we believe Media
Sciences combination of distribution, warranty, channel programs, brand recognition
and product breadth will allow us to compete well with others selling similar products, we
may see increased competition for these particular products.

---

We have observed some solid ink
products entering the market from a Korean manufacturer. We compete with these products
based on the quality of Media Sciences solid inks, and our extensive efforts to
avoid infringement of the printer manufacturers intellectual property. In addition,
our warranty, channel programs, brand recognition and product breadth make Media Sciences
a better choice for the distribution channel and the end user.

# Principal Suppliers

Purchases in fiscal year ended June
30, 2005 from three vendors amounted to approximately 44% of cost of goods sold, with no
one vendor accounting for more than 15% 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

Net sales to one customer represented
approximately 11% of our revenues for the year ended June 30, 2005 and 7% of our revenues
for the year ended June 30, 2004. This customer accounts for approximately 4% and 6% of
accounts receivable at June 30, 2005 and 2004 respectively.

# 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. In 2004 we
were granted certain patents in the United States, the term of which are 14 years.

# 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, 2005 and 2004 our research, engineering and product development costs were
approximately $0.50 million and $0.74 million respectively.

# Compliance with
Environmental Laws

Not applicable.

# Employees

We currently have 48 full-time
employees, including seven management level employees and one part time employee.

---

# ITEM 2.   DESCRIPTION OF
PROPERTY

We maintain our executive offices at
Oakland, New Jersey, pursuant to a lease expiring on September 30, 2009. We occupy
approximately 41,800 square feet, including warehousing and manufacturing.

We are subject to a lease expiring on
May 31, 2011 for our former facility in Allendale, New Jersey. We have entered into a
sublease expiring on May 31, 2011, the expiration date of our lease. The sublease provides
for annual rent payments to us of $0.17 million.

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.

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.

|                                     |                        |                        |                                                          |                     
|------------------------------------ | ---------------------- | ---------------------- | -------------------------------------------------------- | --------------------
|Location                             | ApproximateSquare Feet | ApproximateAnnual Rent | Use                                                      | LeaseExpiration Date
|                                     |                        |                        |                                                          |                     
|8 Allerman Road
Oakland, NJ  07436   | 41,800                 | $0.30 million          | Executive Offices,
Warehouse, and
Manufacturing
Facility | September 30, 2009  
|                                     |                        |                        |                                                          |                     
|40 Boroline Road
Allendale, NJ 07401 | 15,400                 | $0.18 million          | Former offices, now
being sublet.                        | May 31, 2011        

# ITEM 3.   LEGAL PROCEEDINGS

In May 2005, we filed suit in New
Jersey state court against our former insurance broker for insurance malpractice. The suit
contends, in sum and substance, that the insurance broker was negligent and breached its
duty of care in connection with the procurement of an umbrella insurance policy. The suit
asserts four causes of action for negligent procurement, failure to procure required
coverage, breach of the standard of care, and failure to advise.

In particular, the suit alleges that
the insurance broker breached its duty by failing to identify our subsidiary in insurance
applications; submitting insurance applications, without our review, incorrectly denying
the existence of our subsidiary; and failing to correct such an error. The suit further
alleges that our insurance broker failed to procure the umbrella insurance we required and
were led to believe we purchased. Finally, the suit alleges that our insurance broker
breached its duty by failing to be aware that our subsidiary did not have adequate
coverage and to advise us that our subsidiary was not adequately covered.

The suit seeks recovery of the
balance of unrecouped losses for third party damages that should have been covered under
the umbrella insurance procured by our insurance broker but was not due to the
aforementioned negligence and breaches of duty of care by our insurance broker.

Other than the above, as at June 30,
2005, 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                                            
|            |                                                                                                                                                    |                                                 |                                                
|2004
2005   | September 30, 2003
December 31, 2003 
March 31, 2004    
June 30, 2004     
September 30, 2004
December 31, 2004 
March 31, 2005    
June 30, 2005 | $1.59
$1.34
$1.20
$1.85
$2.00
$1.70
$2.40
$2.15 | $0.60
$1.04
$0.85
$1.10
$1.63
$1.39
$1.60
$1.60

# Holders

The number of holders of record of
our common stock as of September 6, 2005 was 363.

# 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.

# 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 August 8, 2005, we issued to a
management level employee, Donald Gunn, stock options to purchase up to 100,000 shares of
our common stock. The options are subject to vesting, upon Gunns relocation to
corporate offices, as follows: 50,000 stock options on such date, and the other 50,000
stock options at the rate of 10,000 stock options per year for five years starting on the
first anniversary of such date. The options are exercisable for ten years at $1.65 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.

---

# ITEM 6.   
MANAGEMENTS DISCUSSION AND ANALYSIS

# FORWARD-LOOKING
INFORMATION

This report on Form 10-KSB/A 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, 2005.

# INTRODUCTION

As a result of new processes and
controls implemented during the Companys third fiscal quarter ended March 31, 2006
over tax compliance and tax accounting, the Company identified errors in previously filed
tax returns, for which amended returns will be filed. These errors also contributed to
errors in the Companys tax accounting for the year ended June 30, 2003 and prior
years. For these periods, the Companys cumulative tax expense was understated by
$161,956.

These errors had no effect on the
Companys results of operations or net cash flows for any of the comparative periods
presented in this Form 10-KSB/A. The cumulative effect of these errors did overstate the
Companys deferred tax assets by $243,974, taxes payable by $82,018, and retained
earnings by $161,956 in the Form 10-KSB for the fiscal year ended June 30, 2005, filed on
September 13, 2005. The cumulative effects of these errors have been corrected in the
consolidated financial statements included in this Form 10-KSB/A. For additional
information regarding the restatement, please refer to Note 1B to the accompanying
consolidated financial statements.

# RESULTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2005

Sales.   Consolidated sales for the year ended June 30, 2005, compared to the year ended
          June 30, 2004, increased approximately 24% to $17.9 million from $14.5 million.
          Sales of solid ink sticks increased approximately 50% over 2004 while sales of
          color toner cartridges increased slightly by 3%. The mix of both solid ink and
          color toner cartridges shifted from older models to new models. This trend is to
          be expected as lower color printer prices encourage the migration from older
          slower printers with high service costs to newer, faster color printers with
          lower service costs. Based on recent and expected product introductions, we
          believe that our growth in color toner cartridge sales will outpace the growth
          of our solid ink sales over the coming year.

Gross Profit.   The consolidated
gross profit for the year ended June 30, 2005 was $8.7 million, or approximately 49% of
sales, as compared to $7.1 million, also approximately 49% of sales, for the year period
ended June 30, 2004. Despite the significant increase in solid ink sales which typically
carry higher margins than those of our color toner cartridges, our consolidated gross
profit margins were essentially unchanged from the prior year. The primary contributing
factor that tempered our margins was a shift in the makeup of our color toner cartridge
sales. Specifically, as described above, there was a shift from older, higher margin
products to newer, lower margin products. While the shift to newer products will continue,
we recently introduced several new color toner cartridge lines that will replace our lower
margin toner cartridges. In addition, we have embarked upon several initiatives to
increase our manufacturing efficiencies and to reduce raw material costs. Consequently,
despite the increased growth in color toner cartridges which have historically carried
lower margins than our solid inks, we anticipate consistent, if not expanding, margins
over the coming year.

Selling, General and
Administrative.   Consolidated selling, general and administrative expenses for the year
ended June 30, 2005 increased to $7.9 million, or 44% of sales, from $6.4 million, or 44%
of sales, for the year ended June 30, 2004. Selling, general and administrative expenses
for the year ended June 30, 2005 include $0.55 million of non-recurring expenses that
resulted from the move of our administrative and manufacturing facilities. Selling,
general and administrative expenses also include $0.20 million and $0.35 million in
non-cash compensation expense for the years ended June 30, 2005 and 2004 respectively, as
a result of variable plan accounting treatment. Since our stock options are no longer
subject to variable plan accounting treatment, we do not anticipate further non-cash
compensation charges until our adoption of SFAS 123(R). While we intend to increase
expenditures in advertising, marketing, research and development and overall payroll
costs, we expect our selling, general and administrative expenses to decrease as a
percentage of sales.

---

Depreciation and Amortization.   Depreciation and amortization expense for the year ended June 30, 2005 decreased to $0.52
million, including $0.24 million included in cost of sales, from $0.76 million for the
year ended June 30, 2004 of which $0.50 million was included in cost of sales. The
decrease in depreciation and amortization resulted from several tooling investments being
fully depreciated in the fiscal year ended June 30, 2004. During the year ended June 30,
2005, we invested approximately $1.7 million in various fixed assets and leasehold
improvements that will be depreciated over useful lives of three to seven years.
Consequently, we expect our depreciation and amortization expenses, both in cost of goods
and in selling, general and administrative expenses to increase.

Interest Expense.   Interest
expense for the year ended June 30, 2005 decreased to $0.18 million from $0.37 million
incurred for the year ended June 30, 2004. The decrease in interest expense was due to
decreased borrowings and to reduced borrowing costs. We anticipate continued decreased
borrowings as we generate cash from operations, which should result in decreased interest
expense, despite an increasing interest rate environment.

Income Taxes.   For the year
ended June 30, 2005, we recorded an income tax expense from continuing operations of $0.25
million as compared to an income tax expense from continuing operations of $0.20 million
for the year ended June 30, 2004. For the years ended June 30, 2005 and 2004 the
Companys effective tax rate was 39% and 51% respectively. The effective aggregate
state and federal tax rate varies due to the impact of variable plan accounting and
certain research and development and manufacturing credits. The restatement reflected in
this Form 10-KSB/A had no effect on the 2005 income tax expense.

Preferred Stock Dividends.   For
the year ended June 30, 2005, we paid no preferred stock 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.

Income (Loss) from Continuing
Operations Applicable to Common Shareholders.   For the year ended June 30, 2005, we
earned $0.38 million from continuing operations or $0.04 per share basic and diluted, as
compared to the year ended June 30, 2004, where we incurred a loss from continuing of
$2.07 million or $(0.33) per share basic and diluted. The loss from continuing operations
applicable to common shareholders for the year ended June 30, 2004 was due to the non-cash
induced conversion charge. The restatement reflected in this Form 10-KSB/A had no effect
on the income (loss) from continuing operations or the net income (loss) for either 2005
or 2004.

Income (Loss) from Discontinued
Operations.   During the fourth quarter of fiscal 2005, we ceased certain sales
operations under Cadapult. Specifically, we ceased all electronic pre-press equipment
sales and service operations. In conjunction with the discontinuance of that business, we
sold our service contracts to an unrelated entity, wrote off certain inventory associated
with that business, and wrote off the goodwill associated with that business. The results
of operations for that line of business are classified as a discontinued operation.

Sales and service revenues from the
discontinued operations for the years ended June 30, 2005 and 2004 were $1.5 million and
$2.0 million, respectively. The income (loss), net of tax, from discontinued operations
for the years ended June 30, 2005 and 2004 were $(0.46) million and $0.20 million
respectively. The restatement reflected in this Form 10-KSB/A had no effect on the income
(loss), net of tax, from discontinued operations or the net income (loss) for either 2005
or 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 22% to $14.5 million from $11.9 million.
          Solid ink sales increased approximately 33%, while color toner cartridge sales
          increased approximately 16%.

Gross Profit.   The consolidated
gross profit for the year ended June 30, 2004 was $7.1 million, or approximately 49% of
sales, as compared to $6.3 million, or approximately 53% of sales, for the year period
ended June 30, 2003. The decrease 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.

---

Selling, General and
Administrative.   Consolidated selling, general and administrative expenses for the year
ended June 30, 2004 increased to $6.4 million, or 44% of sales, from $4.8 million, or 40%
of sales, for the year ended June 30, 2003. The increase in selling, general and
administrative expenses was due to an increase in engineering and product development
expenses of $0.62 million and marketing expenses of $0.25 million 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. These increases to selling, general and administrative expenses
were offset by the $0.5 million settlement with our umbrella insurance carrier.

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 from continuing operations of $0.20
million as compared to an income tax expense from continuing operations of $0.43 million
for the year ended June 30, 2003. For the years ended June 30, 2004 and 2003, the
Companys effective tax rate was 51% and 40%, respectively. The effective aggregate
state and federal tax rate varies due to the impact of variable plan accounting. The
restatement reflected in this Form 10-KSB/A had no effect on the 2004 income tax expense.

Preferred Stock 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. For the year
ended June 30, 2003, we incurred a preferred stock dividend charge of $0.63 million.

Income (Loss) from Continuing
Operations Applicable to Common Shareholders.   For the year ended June 30, 2004 we
incurred a loss from continuing operations applicable to common shareholders of $2.07
million or $(0.33) per share basic and diluted, as compared to the year ended June 30,
2003, where we earned $0.01 million from continuing operations or $0.00 per share basic
and diluted. The loss from continuing operations applicable to common shareholders for the
year ended June 30, 2004 was due to the non-cash induced conversion charge. The
restatement reflected in this Form 10-KSB/A had no effect on the 2004 loss from continuing
operations or the net loss applicable to common shareholders. We did not attempt to
apportion the cumulative $0.16 million adjustment among 2003 and any prior years nor
allocate it between continuing or discontinued operations.

Income from Discontinued
Operations.   Sales and service revenues from the discontinued operations for the years
ended June 30, 2004 and 2003 were $2.0 million and $2.7 million respectively. The income,
net of tax, from discontinued operations for the years ended June 30, 2004 and 2003 was
$0.20 million $0.23 million. The restatement reflected in this Form 10-KSB/A had no effect
on income, net of tax, from discontinued operations or the net loss applicable to common
shareholders for 2004. We did not attempt to apportion the cumulative $0.16 million
adjustment among 2003 and any prior years nor allocate it between continuing or
discontinued operations.

# LIQUIDITY AND CAPITAL
RESOURCES

We experienced positive cash flows
from operating activities for the year ended June 30, 2005. Cash flows from operating
activities of $0.16 million resulted primarily from income from continuing operations of
$0.38 million and cash provided by discontinued operations of $0.30 million, net non-cash
charges of $0.79 million, receipt of an insurance claim receivable of $0.50 million, cash
received from landlord of $0.20 million, and an increase in deferred revenue of $0.78
million, offset by increases in accounts receivable of $0.56 million and in inventories of
$0.92 million and a decrease in accounts payable of $1.3 million. The restatement
reflected in this Form 10-KSB/A had no effect on either the 2005 or 2004 net cash provided
by operating activities, net cash used in investing activities, or net cash provided by
financing activities.

The increase in inventories was due
to the increase in the number of products in our product line, increased sales, minimum
order requirements necessary to secure advantageous pricing and the extended lead time
from our Asian suppliers. In addition, we sought to increase certain inventory levels in
order to assure an in-stock position on our products. An initiative is under way to
maintain or reduce our inventory levels while increasing the breadth of our product line
and while ensuring an in-stock position and advantageous pricing from our vendors.

---

Accounts payable decreased
significantly as we sought to bring our suppliers into normal payment terms. At June 30,
2005, we had achieved that objective. Therefore, we expect any changes in accounts payable
to be relative to overall purchasing activity.

Our most recent INKlusive program has
generated positive cash flow since we are paid in advance for the ink to be shipped over a
two year period, thus giving rise to deferred revenues. The continued ability for
INKlusive to generate positive cash flow through increases in deferred revenue is a
function of customer acceptance of future programs and the structure of the financing of
those programs.

The cash we used in investing
activities for the year ended June 30, 2005 included the purchase of equipment, tooling
and leasehold improvements in the amount of $1.7 million. We plan additional capital
expenditures over the next twelve months of approximately $0.75 million, which we plan to
finance through internal cash generation and where appropriate through operating leases.

We have a revolving line-of-credit
which provides for maximum borrowings of $3 million. In connection with the negotiation of
this facility during 2004, we granted a security interest in all of our assets. Borrowings
bear interest at a rate of 0.75% over the banks base rate. As of June 30, 2005 we
had $1.6 million outstanding under this line and the interest rate was 6.75%. The
line-of-credit expires on November 30, 2006.

In March 2005, we entered into a
five-year term note with our bank in the amount of $0.5 million that bears interest at a
fixed rate of 6.5%. The proceeds were used to finance the leasehold improvements to our
new facility.

Both the revolving line-of-credit and
the five-year term note with the bank are subject to two financial covenants including a
ratio of Funded Debt (defined as all borrowed debt including senior borrowed debt and
subordinated debt) to EBITDA (defined as net income plus interest expense plus income tax
expense plus depreciation plus amortization), of not more than 2.50 to 1.00 and a ratio of
Cash Flow (defined as net income after taxes plus depreciation, plus interest expense,
minus nonrecurring gains, plus nonrecurring losses, plus non-cash expenses, minus dividend
distributions, plus capital contributions) to cash uses (defined as prior years
current maturities of long term debt including capital lease payments, plus current
years interest expense, plus unfunded capital expenditures), of not less than 1.0,
measured on a rolling four quarter basis. At no time have we been in violation of these
covenants.

On March 2, 2005, we sold 500,000
shares of common stock to an investor at $2.00 per share for net proceeds of $0.97
million. The proceeds were used for working capital.

On July 27, 2005, we entered into an
equipment lease line of credit with $1 million in availability with the bank. 
Borrowings bear interest at a rate of approximately 1% over the banks base
rate.  The bank will hold title to the equipment leased under the credit line. 
Any unutilized balance on line of credit expires on July 26, 2006.

We believe that we will be able to
fund our cash requirements for the foreseeable future through a combination of internal
cash generation, the revolving line-of-credit and the lease line of credit.

---

# 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 INKlusive contracts
(generally, two years) provided collection is reasonably assured. Provisions for rebates,
product returns and discounts to customers are recognized as reductions in determining net
sales in the same period as the related sales are recorded. All sales are in US dollars.

Under the Companys INKlusive
program, a customer commits to purchase a fixed quantity of supplies from the Company,
typically over a two year period. These supplies are automatically shipped to the customer
on a regular basis. In exchange, and through a financing partner, the Company provides the
customer with a color printer at no additional charge. Under our agreement with the
financing company, at the time of placement of the INKlusive printer, we are paid in full
for the printer and the two years of supplies. The Company recognizes the revenue from the
supplies as they are shipped over the term of the INKlusive agreement. The Company is not
exposed to the credit risk of any individual customer in the INKlusive program. Deferred
revenue consists principally of billings on INKlusive contracts prior to shipping supplies
to fulfill those contracts.

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 up to 90% of face value. 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 and under its INKlusive free color 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. The warranty
accruals at June 30, 2005 and 2004 were $0.29 million and $0.34 million, 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, goodwill amounted
to $4.5 million net of accumulated amortization of $0.52 million. The goodwill resulted
from the acquisition of substantially all of the assets of UltraHue, Inc., and from the
acquisition of substantially all of the assets of three computer resellers by Cadapult.

In May 2005, we ceased certain sales
operations under Cadapult. Specifically we ceased all sales and service of pre-press
computer graphics systems. We evaluated the goodwill resulting from the three Cadapult
acquisitions and determined that the goodwill resulting from those acquisitions was fully
impaired. Consequently, we incurred an impairment charge of approximately $0.88 million
which is reflected in the results from discontinued operations in our Statement of
Operations for the year ended June 30, 2005. We have completed all transitional and annual
impairment tests necessary to date and concluded that no other goodwill is impaired.

At June 30, 2005, goodwill amounted
to $3.6 million net of accumulated amortization of $0.40 million.

# 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.

Prior to May 10, 2005, certain stock
options permitted cashless exercise and were accounted for pursuant to variable plan
accounting treatment. Under variable plan accounting treatment, non-cash compensation
expense is increased or decreased as a result of changes in the market price of the
Companys common stock. For the years ended June 30, 2005 and 2004, non-cash
compensation expense was $212,455 and $358,675, respectively, of which $13,159 and
$11,205, respectively, was included in the income (loss) from discontinued operations.

On May 10, 2005 our 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.

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 based on the
assumption disclosed in Note 1 to the Consolidated Financial Statements.

---

# RECENT
ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued
SFAS No. 123(R) (revised 2004), Share-Based Payment, which amends FASB
Statement No. 123 and will be effective for us for the fiscal year ending June 30, 2007.
The new standard will require us to expense employee stock options and other share-based
payments over the vesting period. The FASB believes the use of a binomial lattice model
for option valuation is capable of more fully reflecting certain characteristics of
employee share options compared to the Black-Scholes options pricing model. The new
standard may be adopted in one of three ways  the modified prospective transition
method, a variation of the modified prospective transition method or the modified
retrospective transition method. We are currently evaluating how we will adopt the
standard and evaluating the effect that the adoption of SFAS 123(R) will have on our
financial position and results of operations.

In November 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This
statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing,to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4,
previously stated that ...under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to
require treatment as current period charges ... SFAS No. 151 requires that those
items be recognized as current-period charges regardless of whether they meet the
criterion of so abnormal. In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 shall be applied prospectively
and are effective for inventory costs incurred during fiscal years beginning after June
15, 2005, with earlier application permitted for inventory costs incurred during fiscal
years beginning after the date this statement was issued. The adoption of SFAS No. 151 may
have a material impact on our financial position and results of operations.

In December 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets,an amendment of APB Opinion
No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions,is based on the principle that exchanges of nonmonetary
assets should be measured based onthe fair value of assets exchanged. The guidance
in that opinion, however, included certain exceptions tothat principle. This
statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges ofsimilar productive assets that do not have commercial substance. A nonmonetary
exchange has commercialsubstance if the future cash flows of the entity are
expected to change significantly as a result of theexchange. SFAS No. 153 is
effective for nonmonetary exchanges occurring in fiscal periods beginningafter
June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on
our financial position and results of operations.

# CAPITAL EXPENDITURES

We plan on various capital
expenditures over the next twelve months of approximately $0.75 million. These
expenditures will include analytical equipment for toner and solid ink development and
quality assurance, instruments and equipment for the development of integrated circuits,
and upgrades to our information technology systems. In addition we plan to acquire certain
manufacturing equipment to scale our manufacturing capability and to increase
productivity. We plan to finance these expenditures through internal cash generation and,
where appropriate, through operating leases.

# INFLATION

We have been subject to several
significant increases in raw materials costs over the last 18 months. While we have
historically offset any inflation in operating costs through increased productivity, the
recent increases have impacted profit margins. We have embarked on a program to improve
our procurement of raw materials and to optimize our processes to increase our yields. We
believe that these programs will enhance our margins to offset the increases in raw
material prices that we have incurred.

# SEASONALITY

We do not experience any significant
seasonality in our business.

---

## ITEM 7.  
FINANCIAL STATEMENTS

# Financial Report 
June 30, 2005

|                                                                           | 
|-------------------------------------------------------------------------- | 
|Report of Independent Registered Public Accounting Firm                    | 
|Consolidated Balance Sheets                                                | 
|Consolidated Statements of Operations                                      | 
|Consolidated Statements of Changes in Shareholders' Equity                 | 
|Consolidated Statements of Cash Flows                                      | 
|Notes to Consolidated Financial Statements                                 | 
|Presentation of Quarterly Data Showing Discontinued Operations (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 sheets of Media Sciences International, Inc. and Subsidiaries as of
June 30, 2005 and 2004, and the related consolidated statements of operations, changes in
shareholders equity and cash flows for the years 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 audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States.) Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. 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
financial position of Media Sciences International, Inc. and Subsidiaries as of June 30,
2005 and 2004, and their results of operations and cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1B to the
accompanying consolidated financial statements, the Company has restated its consolidated
balance sheets as of June 30, 2005 and 2004, and the related consolidated statements of
changes in shareholders equity and cash flows for the years ended June 30, 2005 and
2004 for the cumulative effects of the 2003 and prior years income tax provision
errors.

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

Roseland, New Jersey
August 5, 2005, except for the
effects of
the matter discussed in Note 1B,
which are as of May 19, 2006.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND SUBSIDIARIES

# CONSOLIDATED BALANCE
SHEETS (RESTATED)

`ASSETS                                              June 30,
                                                                         -------------------------------
                                                                               2005            2004
                                                                         (Notes 1A & 1B) (Notes 1A & 1B)
                                                                         --------------- ---------------

CURRENT ASSETS :
    Cash                                                                    $    611,016    $    666,116
    Accounts receivable, less allowance for doubtful
       accounts of $35,000                                                     2,175,512       1,626,287
    Insurance claim receivable                                                      --           500,000
    Inventories                                                                3,196,323       2,274,088
    Deferred tax assets                                                          959,910         978,800
    Prepaid expenses and other current assets                                    308,822         280,530
                                                                            ------------    ------------
        Total Current Assets                                                   7,251,583       6,325,821
                                                                            ------------    ------------

PROPERTY AND EQUIPMENT, NET                                                    2,058,251       1,072,186
                                                                            ------------    ------------

OTHER ASSETS :
    Goodwill and other intangible assets, net                                  3,584,231       4,468,973
    Other assets                                                                  63,911          48,100
                                                                            ------------    ------------
                                                                               3,648,142       4,517,073
                                                                            ------------    ------------

TOTAL ASSETS                                                                $ 12,957,976    $ 11,915,080
                                                                            ============    ============

                  LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES :
    Bank line of credit                                                     $  1,620,233    $  1,789,054
    Bank term loan                                                               100,000         400,000
    Current maturities of long-term debt                                            --            39,081
    Accounts payable                                                           1,254,921       2,511,117
    Accrued expenses and other current liabilities                               142,432         248,580
    Income taxes payable                                                             295          10,633
    Accrued product warranty                                                     291,733         340,592
    Deferred revenue                                                             526,853         153,273
                                                                            ------------    ------------
        Total Current Liabilities                                              3,936,467       5,492,330
                                                                            ------------    ------------

OTHER LIABILITIES :
    Bank term loan, less current maturities                                      375,000            --
    Deferred rent liability                                                      341,988            --
    Deferred revenue, less current portion                                       280,418            --
    Deferred tax liabilities                                                     404,099         543,880
                                                                            ------------    ------------
        Total Other Liabilities                                                1,401,505         543,880
                                                                            ------------    ------------

TOTAL LIABILITIES                                                              5,337,972       6,036,210
                                                                            ------------    ------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY :
    Series A Convertible Preferred stock, $.001 par value
       Authorized 1,000,000 shares; none issued                                     --              --
    Common Stock, .001 par value
       Authorized 20,000,000 shares; issued 10,953,606 shares
       in 2005 and 9,857,210 shares in 2004                                       10,954           9,858
    Additional paid-in capital                                                 9,753,405       7,837,948
    Cost of 54,577 shares in 2005 and 10,564 shares in 2004, of common          (112,913)        (20,832)
        stock in treasury
    Accumulated deficit                                                       (2,031,442)     (1,948,104)
                                                                            ------------    ------------
        Total Shareholders' Equity                                             7,620,004       5,878,870
                                                                            ------------    ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                  $ 12,957,976    $ 11,915,080
                                                                            ============    ============`

See accompanying notes to consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF OPERATIONS

`Year Ended June 30,
                                                                               2005            2004
                                                                           ------------    ------------

NET SALES                                                                  $ 17,878,838    $ 14,474,316
                                                                           ------------    ------------

COST OF GOODS SOLD :
    Cost of goods sold, excluding depreciation                                8,924,730       6,842,038
    Depreciation                                                                238,137         504,435
                                                                           ------------    ------------
        Total cost of goods sold                                              9,162,867       7,346,473
                                                                           ------------    ------------

GROSS PROFIT                                                                  8,715,971       7,127,843
                                                                           ------------    ------------

OTHER COSTS AND EXPENSES :
    Selling, general and administrative, excluding depreciation,
      amortization, loss from sublease, moving expenses and
      impact of variable plan accounting                                      6,884,306       5,752,023
  Depreciation and amortization                                                 281,719         253,706
  Loss from sublease and moving expenses                                        545,128            --
  Impact of variable plan accounting                                            199,296         347,470
                                                                           ------------    ------------
        Total other costs and expenses                                        7,910,449       6,353,199
                                                                           ------------    ------------

INCOME FROM OPERATIONS                                                          805,522         774,644

INTEREST EXPENSE                                                                179,385         373,442
                                                                           ------------    ------------

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                           626,137         401,202
PROVISION FOR INCOME TAXES                                                      245,696         203,129
                                                                           ------------    ------------

INCOME FROM CONTINUING OPERATIONS                                               380,441         198,073
                                                                           ------------    ------------

INCOME (LOSS) FROM DISCONTINUED OPERATIONS                                     (789,193)        338,392
PROVISION (BENEFIT) FOR INCOME TAXES                                           (325,414)        139,838
                                                                           ------------    ------------

INCOME (LOSS) FROM DISCONTINUED OPERATIONS                                     (463,779)        198,554
                                                                           ------------    ------------
NET INCOME (LOSS)                                                               (83,338)        396,627

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

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                                 $    (83,338)   $ (1,872,813)
                                                                           ============    ============

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                             10,259,423       6,214,835
                                                                           ============    ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                           10,259,423       6,214,835
                                                                           ============    ============

INCOME (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS :
  BASIC AND DILUTED                                                        $       0.04    $      (0.33)
                                                                           ============    ============

INCOME (LOSS) PER COMMON SHARE FROM DISCONTINUED OPERATIONS :
  BASIC AND DILUTED                                                        $      (0.05)   $       0.03
                                                                           ============    ============

NET LOSS PER COMMON SHARE :
  BASIC AND DILUTED                                                        $      (0.01)   $      (0.30)
                                                                           ============    ============`

See accompanying notes to consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.AND
SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY (RESTATED)

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

BALANCES, JUNE 30, 2003, as
originally reported                  547,500  $  547    3,577,210  $ 3,578   $ 5,163,076   $ (20,832)  $(1,654,140)  $ 3,492,229
   Cumulative net increase in
      net loss                          --      --           --       --            --          --        (161,956)     (161,956)
                                    --------  ------   ----------  -------   -----------   ---------   -----------   -----------
BALANCES, JUNE 30, 2003 (Restated)   547,500  $  547    3,577,210  $ 3,578   $ 5,163,076   $ (20,832)  $(1,816,096)  $ 3,330,273

   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)   (1,948,104)    5,878,870

   Sale of common stock, net of
      expenses                          --      --        500,000      500       974,500        --            --         975,000
   Issuance of common stock for
      exercise of stock options         --      --        287,396      287       275,836     (92,081)         --         184,042
   Issuance of common stock for
      exercise of stock warrants        --      --        309,000      309       452,666        --            --         452,975
   Impact of variable plan
      accounting                        --      --           --       --         212,455        --            --         212,455
   Net loss                             --      --           --       --            --          --         (83,338)      (83,338)
                                    --------  ------   ----------  -------   -----------   ---------   -----------   -----------
BALANCES, JUNE 30, 2005 (Restated)      --    $ --     10,953,606  $10,954   $ 9,753,405   $(112,913)  $(2,031,442)  $ 7,620,004
                                    ========  ======   ==========  =======   ===========   =========   ===========   ===========`

See accompanying notes to consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.AND
SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF CASH FLOWS (RESTATED)

`Year Ended June 30,
                                                                    2005            2004
                                                                 -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES :
    Income from continuing operations                            $   380,441    $   198,073
    Adjustments to reconcile income from continuing operations
      to net cash provided by operating activities:
         Depreciation and amortization                               519,856        758,141
         Deferred income taxes                                      (120,891)       368,421
         Provision for bad debts                                       9,323         55,445
         Impact of variable plan accounting                          212,455        358,675
         Loss on write-off of leasehold improvements                 180,364           --
         Cash provided by discontinued operations                    304,152        198,554
         Changes in operating assets and liabilities :
             Accounts receivable                                    (558,548)       159,328
             Insurance claim receivable                              500,000       (500,000)
             Cash received from landlord as lease incentive          200,000           --
             Deferred rent liability                                 141,988           --
             Inventories                                            (922,235)    (1,184,279)
             Prepaid expenses and other current assets               (28,292)      (107,480)
             Other assets                                            (15,811)        10,002
             Accounts payable                                     (1,256,196)     1,170,860
             Accrued expenses and other current liabilities         (155,007)      (353,401)
             Income taxes payable                                    (10,338)       (38,774)
             Deferred revenue                                        777,513        (42,961)
                                                                 -----------    -----------
                 Net cash provided by operating activities           158,774      1,050,604
                                                                 -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES :
    Purchases of property and equipment                           (1,692,990)      (458,376)
    Sale of Cadapult service contracts                                     1           --
                                                                 -----------    -----------
                 Net cash used in investing activities            (1,692,989)      (458,376)
                                                                 -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES :
    Bank line of credit, net                                        (168,821)         9,192
    Bank term loan, net                                               75,000        400,000
    Payments of other short-term debt                                (39,081)      (405,256)
    Payments on loans from officers                                     --         (475,000)
    Payments on loans from investors                                    --         (600,000)
    Dividends paid                                                      --          (66,125)
    Proceeds of issuance of common stock, net                      1,612,017      1,206,250
    Costs of preferred stock conversion                                 --          (61,640)
                                                                 -----------    -----------
                 Net cash provided by financing activities         1,479,115          7,421
                                                                 -----------    -----------

NET INCREASE (DECREASE) IN CASH                                      (55,100)       599,649

CASH, BEGINNING OF YEAR                                              666,116         66,467
                                                                 -----------    -----------

CASH, END OF YEAR                                                $   611,016    $   666,116
                                                                 ===========    ===========

SUPPLEMENTAL CASH FLOW  INFORMATION :
    Interest paid                                                $   179,385    $   406,176
                                                                 ===========    ===========
    Income taxes paid                                            $   155,598    $    13,431
                                                                 ===========    ===========
NON CASH INVESTING AND FINANCING TRANSACTIONS:
    Issuance of common stock as dividend payment                 $      --      $   791,200
                                                                 ===========    ===========
    Issuance of common stock for accrued interest on dividends   $      --      $    14,891
                                                                 ===========    ===========
    Conversion of preferred stock and accrued dividends
       to common stock                                           $      --      $ 2,856,485
                                                                 ===========    ===========
    Induced conversion of preferred stock                        $      --      $ 2,112,034
                                                                 ===========    ===========
    Cashless exercise of stock options                           $    92,081    $      --
                                                                 ===========    ===========`

See accompanying notes to consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 1A  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.

# NOTE 1B 
RESTATEMENT OF FINANCIAL STATEMENTS :

As a result of new processes and
controls implemented during the Companys third fiscal quarter ended March 31, 2006
over tax compliance and tax accounting, the Company identified errors in previously filed
tax returns, for which amended returns will be filed. These errors also contributed to
errors in the Companys tax accounting for the year ended June 30, 2003 and prior
years. For these periods, the Companys cumulative tax expense was understated by
$161,956.

These errors had no effect on the
Companys results of operations or net cash flows for any of the comparative periods
presented in this Form 10-KSB/A. The cumulative effect of these errors did overstate the
Companys deferred tax assets by $243,974, taxes payable by $82,018, and retained
earnings by $161,956 in the Form 10-KSB for the fiscal year ended June 30, 2005, filed on
September 13, 2005. The cumulative effects of these errors have been corrected in the
accompanying consolidated financial statements included in this Form 10-KSB/A.

The following table reflects the effects of the errors on previously issued financial statements, prior to any restatement:

`1Q & 2Q 2006      2005             2004           2003 & Prior
------------------------------------  ----------------  ---------------  -------------  --------------
Income tax expense                    no effect         no effect        no effect      $161,956
                                                                                        understatement
------------------------------------  ----------------  ---------------  -------------  --------------
Net income                            no effect         no effect        no effect      $161,956
                                                                                        overstatement
------------------------------------  ----------------  ---------------  -------------  --------------
Cash flows from operating activities  no net effect     no net effect    no net effect  no net effect
------------------------------------  ----------------  ---------------  -------------  --------------

Ending Balance Sheet
 - Deferred tax assets                $243,974          $243,974         $243,974       $243,974
                                      overstatement     overstatement    overstatement  overstatement
 - Income taxes payable *             $82,018           $82,018          $82,018        $82,018
                                      overstatement *   overstatement *  overstatement  overstatement
 - Retained earnings                  $161,956          $161,956         $161,956       $161,956
                                      overstatement     overstatement    overstatement  overstatement
------------------------------------  ----------------  ---------------  -------------  --------------`

* In the June 30, 2005 and
September 30, 2005 balance sheets, Taxes payable was overstated and/or Prepaid taxes,
included in the Prepaid expenses and other current assets caption, was
understated by the aggregate $82,018 error. In all other periods presented in this table,
the Company had an Income taxes payable liability, which was overstated as shown.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 1C 
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Nature
of 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, color toner
cartridges and other consumable items. 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, such as our
INKlusive free color printer program. In May 2005, we discontinued our electronic
pre-press sales and service operations conducted by our subsidiary, Cadapult Graphic
Systems, Inc. (Cadapult) (see Note 12.) We have our corporate headquarters in
New Jersey.

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 INKlusive contracts (generally, two years)
provided collection is reasonably assured. Provisions for rebates, product returns and
discounts to customers recognized for as reductions in determining net sales in the same
period as the related sales are recorded.

Under
the Companys INKlusive program, we provide a customer with a workgroup color printer
or multifunction device, on-site service and a defined, regular shipment of supplies (ink
or toner), all for the cost of just the supplies. We offer this program in conjunction
with a financing company. Media Sciences does not own or otherwise finance the cost of the
printer, nor does Media Sciences guarantee the credit worthiness of the customer. Under
our agreement with the financing company, at the time of placement of the INKlusive
printer, we are paid in full for the printer and the two years of supplies. We recognize
the revenue from the supplies as they are shipped over the term of the INKlusive
agreement. Consequently, the difference in timing between receipt of payment for the
supplies and those that are shipped gives rise to deferred revenue on our balance sheet.

Concentrations
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, 2005 is limited.

Financial
Instruments Financial instruments include cash, accounts receivable,
accounts payable 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.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Vendor
Concentrations Purchases in 2005 and 2004 from three vendors
amounted to 44% and 45% of cost of goods sold, respectively. No single vendor accounted
for more than 15% and 18% of cost of goods sold, respectively.

Major
Customers Net sales to one customer represented approximately 11% of
revenues for the year ended June 30, 2005 and 7% of revenues for the year ended June 30,
2004. This customer accounts for approximately 4% and 6% of accounts receivable at June
30, 2005 and 2004 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 the straight-line method by charges to expense at rates
based upon the useful lives of three to seven 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 The Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, requires testing of goodwill for
impairment at least 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.
Based on the Companys testing of goodwill, no impairment existed at June 30, 2004.
Based on the Companys testing of goodwill and the decision to discontinue certain
Cadapult operations, the net goodwill resulting from three acquisitions by Cadapult, in
the amount of $880,000 was deemed impaired and written off at June 30, 2005. The
impairment charge is reflected in the results from discontinued operations in our
Statement of Operations for the year ended June 30, 2005. We have completed all
transitional and annual impairment tests necessary to date and concluded that no other
goodwill is impaired.

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, 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 the years ended June 30, 2005 and 2004.

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, 2005 and 2004 totaled approximately $51,000 and $63,000, respectively.
Advertising expense for the years ended June 30, 2005 and 2004 amounted to approximately
$950,000 and $650,000, 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 recognizes 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, 2005, the
Company believes that the more likely than not criteria have been met and,
accordingly, has recorded a net 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, 2005 and 2004 were $36,700 and
$26,700, respectively.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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.

The following table sets forth the
computation of the basic and diluted income per common share from continuing operations:

`Year Ended June 30,
                                                                                 ----------------------------
                                                                                     2005            2004
                                                                                 ------------    ------------
Numerator:
  Income (loss) from continuing operations applicable to common shareholders -
  basic and diluted                                                              $    380,441    $ (2,071,367)
                                                                                 ============    ============

Denominator:
  Denominator for basic income (loss) per common share:
     Weighted average shares                                                       10,259,423       6,214,835

     Effect of dilutive securities - stock options and warrants                       452,623            --
                                                                                 ------------    ------------

  Denominator for diluted income (loss) per common share                           10,712,046       6,214,835
                                                                                 ============    ============

Income (loss) per common share, basic and diluted                                    $  0.04         $(0.33)
                                                                                     =======         =======`

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

`Year Ended June 30,
                                                                                 ----------------------------
                                                                                     2005            2004
                                                                                 ------------    ------------
Numerator:
  Net loss applicable to common shareholders -
  basic and diluted                                                              $    (83,338)    $(1,872,813)
                                                                                 ============    ============

Denominator:
  Denominator for basic loss per common share:
     Weighted average shares                                                       10,259,423       6,214,835

     Effect of dilutive securities - stock options and warrants                          --              --
                                                                                 ------------    ------------

  Denominator for diluted loss per common share                                    10,259,423       6,214,835
                                                                                 ============    ============

Net loss per common share, basic and diluted                                         $(0.01)         $(0.30)
                                                                                     =======         =======`

The
following warrants and options to purchase common stock were excluded from the computation
of diluted earnings (on a continuing basis) or net loss per share for the years ended June
30, 2005 and 2004 because their exercise price was greater than the average market price
of the common stock for those periods :

`Year Ended June 30,
                                                            ----------------------------
                                                                2005            2004
                                                            ------------    ------------

             Anti-dilutive warrants and options                  149,150       3,386,156
                                                            ============    ============`

---

# 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 (loss) and
earnings (loss) 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.

Prior to May 10, 2005, certain stock
options permitted cashless exercise and were accounted for pursuant to variable plan
accounting treatment. Under variable plan accounting treatment, non-cash compensation
expense is increased or decreased as a result of changes in the market price of the
Companys common stock. For the years ended June 30, 2005 and 2004, non-cash
compensation expense was $212,455 and $358,675, respectively, of which $13,159 and
$11,205, respectively, was included in the income (loss) from discontinued operations.

On May 10, 2005 our 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.

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:

|                                                     |  |            
|---------------------------------------------------- |  | -----------
|                                                     |  | 2005       
|                                                    
|Risk-free interest rate                              |  | 3.94 - 4.5%
|Dividend yield                                       |  | 0.0        
|Expected common stock market price volatility factor |  | 9 - 16%    
|Weighted average expected life of stock options      |  | 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,
                                                                    ---------------------------
                                                                        2005            2004
                                                                    ------------    -----------
Net loss applicable to common shareholders, as reported              $   (83,338)   $(1,872,813)

Impact of variable plan accounting, net of related tax effects           168,440        262,335
Stock-based employee compensation expense under
   fair value method, net of related tax effects                         (63,672)      (136,544)
                                                                     -----------    -----------
Pro forma net income (loss) applicable to common shareholders        $    21,430    $(1,747,022)
                                                                     ===========    ===========

Net income income (loss) per share applicable to common
shareholders:
         Basic and diluted, as reported                                  $(0.01)       $(0.30)
                                                                         ======        ======
         Basic and diluted, pro forma                                    $ 0.00        $(0.28)
                                                                         ======        ======`

Recent
Accounting Pronouncements  In December 2004, the FASB issued SFAS No.
123(R) (revised 2004), Share-Based Payment, which amends FASB Statement No.
123 and will be effective for us for the fiscal year ending June 30, 2007. The new
standard will require us to expense employee stock options and other share-based payments
over the vesting period. The FASB believes the use of a binomial lattice model for option
valuation is capable of more fully reflecting certain characteristics of employee share
options compared to the Black-Scholes options pricing model. The new standard may be
adopted in one of three ways  the modified prospective transition method, a
variation of the modified prospective transition method or the modified retrospective
transition method. We are currently evaluating how we will adopt the standard and
evaluating the effect that the adoption of SFAS 123(R) will have on our financial position
and results of operations.

In November 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This
statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing,to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4,
previously stated that ...under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to
require treatment as current period charges ... SFAS No. 151 requires that those
items be recognized as current-period charges regardless of whether they meet the
criterion of so abnormal. In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 shall be applied prospectively
and are effective for inventory costs incurred during fiscal years beginning after June
15, 2005, with earlier application permitted for inventory costs incurred during fiscal
years beginning after the date this statement was issued. The adoption of SFAS No. 151 may
have a material impact on our financial position and results of operations.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

In December 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets,an amendment of APB Opinion
No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions,is based on the principle that exchanges of nonmonetary
assets should be measured based onthe fair value of assets exchanged. The guidance
in that opinion, however, included certain exceptions tothat principle. This
statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges ofsimilar productive assets that do not have commercial substance. A nonmonetary
exchange has commercialsubstance if the future cash flows of the entity are
expected to change significantly as a result of theexchange. SFAS No. 153 is
effective for nonmonetary exchanges occurring in fiscal periods beginningafter
June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impact on
our financial position and results of operations.

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, 2005 and 2004, our engineering and product development costs were
approximately $500,000 and $740,000, respectively.

# NOTE 2 
INVENTORIES:

Inventories are summarized as follows:

`June 30,
                                                             -----------------------
                                                                2005         2004
                                                             ----------   ----------
         Raw materials                                       $1,040,390   $  265,178
         Finished goods                                       2,155,933    2,008,910
                                                             ----------   ----------
                                                             $3,196,323   $2,274,088
                                                             ==========   ==========`

## NOTE 3  PROPERTY AND EQUIPMENT:

Property
and equipment are summarized as follows:

`June 30,
                                                             --------------------------
                                                                2005           2004          Useful Lives
                                                             -----------   ------------      ------------
         Equipment                                           $   892,424   $ 1,401,068       3 - 7 years
         Equipment at customer location **                             -       951,109       3 years
         Furniture and fixtures                                  445,104       433,405       7 years
         Automobiles                                              30,434        52,035       5 years
         Leasehold improvements                                  626,351       223,664       5 - 10 years
         Tooling and molds                                     1,876,716       962,185       3 years
                                                             -----------   -----------
                                                               3,871,029     4,023,466
         Less: Accumulated depreciation and amortization       1,812,778     2,951,280
                                                             -----------   -----------
                                                             $ 2,058,251   $ 1,072,186
                                                             ===========   ===========`

** Equipment at customer location
refers to color printers placed under the Cadapult No-Cap Color printer program which has
been discontinued. At June 30, 2004, these assets were fully depreciated.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## NOTE
4  GOODWILL AND OTHER INTANGIBLE ASSETS:

Goodwill
and other intangible assets are summarized as follows:

`June 30,
                                                  Life       ----------------------------
                                                 (Years)        2005             2004
                                                 -------     -----------      -----------

         Goodwill                                  --        $ 3,965,977      $ 4,986,030
         Other                                     1-5            46,000           46,000
                                                             -----------      -----------
                                                               4,011,977        5,032,030
         Less: Accumulated amortization                          427,746          563,057
                                                             -----------      -----------
                                                             $ 3,584,231      $ 4,468,973
                                                             ===========      ===========`

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 $46,000
and $41,096 at June 30, 2005 and 2004, respectively. Amortization expense for the fiscal
years 2005 and 2004 was $4,904 and $9,217 respectively.

As
of June 30, 2004, 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. As
explained in Note 1, during the year ended June 30, 2005 net goodwill in the amount of
$880,000 was deemed impaired and written off. During the year ended June 30, 2004, no
goodwill was impaired or written off.

## NOTE
5  DEBT:

The
Companys borrowings consisted of the following:

`June 30,
                                                              -----------------------
                                                                 2005         2004
                                                              ----------   ----------
         Short-term debt:
           Revolving line-of-credit with bank                 $1,620,233   $1,789,054
           Note payable to bank                                  100,000      400,000
           Current maturities of long-term debt                    --          39,081
                                                              ----------   ----------
                                                              $1,720,233   $2,228,135
                                                              ==========   ==========
         Long-term debt:
           Note payable to bank, less current maturities      $  375,000   $     --
                                                              ==========   ==========`

We
have a revolving line-of-credit which provides for maximum borrowings of $3,000,000. In
connection with the negotiation of this facility during 2004, we granted a security
interest in all of our assets. Borrowings bear interest at a rate of 0.75% over the
banks base rate (an effective rate of 6.75% at June 30, 2005) and are payable on
demand. The line-of-credit expires on November 30, 2006.

In
March 2005, we entered into a five-year term note with our bank in the amount of $500,000
that bears interest at a fixed rate of 6.5%. The proceeds were used to finance the
leasehold improvements to our new facility.

On
July 27, 2005, we entered into an equipment lease line of credit with $1 million in
availability with the bank.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Both
the revolving line-of-credit and the five-year term note with the bank are subject to two
financial covenants including a ratio of Funded Debt to EBITDA, both as defined, of not
more than 2.50 to 1.00 and a ratio of Cash Flow to Cash Uses, both as defined, of not less
than 1.0, measured on a rolling four quarter basis. At no time have we been in violation
of these covenants.

## NOTE
6  INCOME TAXES:

The
components of income taxes applicable to both continuing and discontinued operations are
summarized as follows:

`Year Ended June 30,
                                                             ----------------------
                                                               2005         2004
                                                             ---------    ---------

         Current:
           Federal                                           $    --      $    --
           State                                                41,173      (25,454)
                                                             ---------    ---------
         Total Current                                       $  41,173      (25,454)
                                                             ---------    ---------
         Deferred:
           Federal                                             (67,760)     265,799
           State                                               (53,131)     102,622
                                                             ---------    ---------
         Total Deferred                                       (120,891)     368,421
                                                             ---------    ---------
         Income Tax Expense (Benefit)                        $ (79,718)   $ 342,967
                                                             =========    =========`

At
June 30, 2005, the Company has available federal net operating loss carryforwards of
approximately $300,000 which expire through 2022, and state net operating loss
carryforwards of approximately $2,960,000 which expire through 2025.

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

`Year Ended June 30,
                                                             ----------------------
                                                               2005         2004
                                                             ---------    ---------
Income tax expense computed at federal statutory rate        $ (67,760)   $ 251,462
State income taxes (net of federal)                            (11,958)      50,930
Other (including permanent differences)                           --         40,575
                                                             ---------    ---------
                                                             $ (79,718)   $ 342,967
                                                             =========    =========`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

`June 30,
                                                       -------------------------
                                                         2005           2004
                                                       (Restated)     (Restated)
                                                       ----------     ----------
         Deferred tax assets :
            Net operating loss carryforwards           $  106,550     $  660,231
             Deferred compensation                        140,355         96,340
             Deferred rent liability                      124,989           --
             Deferred revenue                             322,908         61,309
             R & D and other credits                      117,370           --
           Accruals and reserves                          147,738        160,920
                                                       ----------     ----------
                  Total deferred tax assets            $  959,910     $  978,800
                                                       ==========     ==========
         Deferred tax liabilities :
            Depreciation and amortization              $  404,099     $  543,880
                                                       ==========     ==========`

## NOTE
         7  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. As of June 30, 2005, 35,144 stock options are
available for grant under the Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 were exercisable at $1.27 per share, were
completely vested at June 30, 2004, and expired unexercised 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. In December 2004, the
employee exercised 95,000 options for net proceeds to the Company of $118,750.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

| | 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. In 2005, two of these employees exercised 25,000 options each for net
proceeds to the Company of $25,000 and one employee executed a cashless exercise of 25,000
options, for which the Company received 6,250 shares of common stock with a fair value of
$12,500, and no cash proceeds.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 vested ratably over the period from July 1, 2003 through June
30, 2005. A total of 500,000 options are vested at June 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. During 2005, one employee executed a cashless exercise of 50,000 options for
which the Company received 25,090 shares of common stock with a fair value of $53,000, and
no cash proceeds. 50,000 options for that same employee were cancelled upon the
termination of his employment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year ended June 30, 2005, the Company granted an employee ten-year stock options to
purchase up to 100,000 shares, which are exercisable at $1.60 per share and expire in June
2015. The options vest ratably, on an annual basis, over the period June 6, 2005 through
June 5, 2010.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | Option Summary:
| | -- | ---------------

| | The
following table summarizes the 1998 Plan and non-plan stock option activity for the two
years ended June 30, 2005:
| | ----------------------------------------------------------------------------------------------------------------------

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

             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

             Year ended June 30, 2005:
                 Granted                                            201,950             1.68
                 Exercised                                         (287,396)            0.96
                 Cancelled                                         (190,169)            1.30
                                                                  ---------

             Options outstanding at June 30, 2005                 1,111,543            $1.29
                                                                  =========            =====`

---

# 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, 2005:
| | -----------------------------------------------------------------------------------------------------------------------------

`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 $0.85         123,200        $0.56              5.77          123,200         $0.56
     $1.00 to $2.00         884,743         1.23              5.22          694,793          1.13
     $2.01 to $4.00         103,600         2.69              4.89           95,600          2.73
                          ---------        -----              ----          -------         -----
                          1,111,543        $1.29              5.25          913,593         $1.22
                          =========        =====              ====          =======         =====`

| | d) | Warrants:
| | -- | ---------

| | In
October 1999, the Company issued 30,000 warrants to purchase its common stock exercisable
between $3.00  $4.00 per share in exchange for investor relations services, the
value of which was subsequently capitalized. The value of the warrants, which was
approximately $100,000 using the Black-Scholes option pricing model, was recognized as a
cost of issuance of the Series A Preferred shares. The warrants expired 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 exercisable at $4.50 per share expired on September
29, 2004, 40,000 warrants exercisable at $3.75 per share expired on December 10, 2004,
236,500 warrants exercisable at $1.65 per share expired on March 9, 2005 and 550,000
warrants exercisable at $3.75 per share expired on March 9, 2005. The value of the
warrants was recognized as a cost of issuance of the Series A Preferred shares. In March
2005, 221,500 warrants exercisable at $1.65 per share were exercised for net proceeds to
the Company of $365,475. The balance of these warrants expired between October 2004 and
March 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 2004, 75,000 warrants were exercised for net
proceeds to the Company of $75,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. In May 2005, 12,500 warrants were exercised for net proceeds to the Company
of $12,500.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# 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, 2005:
| | ------------------------------------------------------------------------------------------

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

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

         Year ended June 30, 2004:
             Granted                                             -            -
             Exercised                                           -            -
             Cancelled                                    (105,000)           4.29
                                                        ----------
         Warrants outstanding at June 30, 2004           2,244,000            3.54

         Year ended June 30, 2005:
             Granted                                             -            -
             Exercised                                    (309,000)           1.47
             Cancelled                                  (1,735,000)           4.20
                                                        ----------

         Warrants outstanding at June 30, 2005             200,000           $1.00
                                                        ==========           =====`

| | The following
table summarizes information about outstanding warrants at June 30, 2005:
| | ---------------------------------------------------------------------------------------

`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              200,000         $1.00            1.32         200,000          $1.00
                            =======         =====            ====         =======          =====`

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

| | e) | Common Stock:
| | -- | -------------

| | During
the year ended June 30, 2004, we issued 5,275,000 common shares for the conversion of
547,500 shares of Series A Preferred Stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------

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

| | On
March 2, 2005, we sold 500,000 shares of common stock to an investor at $2.00 per share
for net proceeds of $975,000.
| | ------------------------------------------------------------------------------------------------------------------------

| | f) | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
8  COMMITMENTS AND CONTINGENCIES:

Leases
 We lease our premises under lease agreements which expire through 2011 and
equipment under operating leases that expire through 2006.

Future
minimum lease payments are as follows:

`Operating
                 Year Ending June 30,                            Leases
                 --------------------                          ----------
                      2006                                     $  606,250
                      2007                                        556,266
                      2008                                        556,266
                      2009                                        556,266
                      2010                                        334,027
                      Thereafter                                  238,285
                                                               ----------
                 Total future minimum lease payments           $2,847,360
                                                               ==========`

Net
rent expense amounted to $449,420 and $296,369 for the years ended June 30, 2005 and 2004,
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 In May 2005, we filed suit in New Jersey state court against our former
insurance broker for insurance malpractice. The suit contends, in sum and substance, that
the insurance broker was negligent and breached its duty of care in connection with the
procurement of an umbrella insurance policy. The suit asserts four causes of action for
(1) negligent procurement; (2) failure to procure required coverage; (3) breach of the
standard of care; and (4) failure to advise.

In particular, the suit alleges that
the insurance broker breached its duty by failing to identify our subsidiary in insurance
applications; submitting insurance applications, without our review, incorrectly denying
the existence of our subsidiary; and failing to correct such an error. The suit further
alleges that our insurance broker failed to procure the umbrella insurance we required,
and were led to believe we purchased. Finally, the suit alleges that our insurance broker
breached its duty by failing to be aware that our subsidiary did not have adequate
coverage and to advise us that our subsidiary was not adequately covered.

The suit seeks recovery of the
balance of unrecouped losses for third party damages that should have been covered under
the umbrella insurance procured by our insurance broker but was not due to the
aforementioned negligence and breaches of duty of care by our insurance broker. Proceeds
of this suit, if any, will be recorded in the period when received.

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.

Other than the above, as at June 30,
2005, we are not a party to any material pending legal proceeding, other than ordinary
routine litigation incidental to our business.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 9 
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, 2005 and 2004 are as follows:

`Year Ended June 30,
                                                            ---------------------------
                                                               2005            2004
                                                            -----------     -----------
Warranty reserve at the beginning of the year               $   340,592     $   250,000
                                                            -----------     -----------

       Warranties accrued during the period                   1,115,914       1,409,249
       Warranties settled during the period                  (1,164,773)     (1,318,657)
                                                            -----------     -----------
Net change in warranty reserve                                  (48,859)         90,592
                                                            -----------     -----------

Warranty reserve at the end of the year                     $   291,733     $   340,592
                                                            ===========     ===========`

The
Company filed a claim under its umbrella liability policy for the unreimbursed portion of
the warranty expenses associated with a recall of solid ink products 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.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 10 
HEADQUARTERS FACILITY MOVE :

On
September 30, 2004, we entered into a lease agreement, effective October 1, 2004, for
office facilities in Oakland, New Jersey. The lease is for a term of five years, at an
annual rate of $296,318. Pursuant to the lease, our landlord provided us with a $200,000
cash allowance for improvements to the facility. These improvements have been capitalized
and will be amortized over the term of the lease. The $200,000 allowance also gives rise
to a deferred rent liability on our balance sheet, which is also being amortized over the
lease term. The benefit of the amortization of the deferred rent liability is equal to and
offset by the amortization expense of the $200,000 in landlord funded leasehold
improvements.

In
addition to the above $200,000 in leasehold improvements, we invested approximately
$400,000 in additional leasehold improvements which are being amortized over the lease
term.

The
direct costs of moving amounted to approximately $100,000 for the year ended June 30,
2005. We recorded these expenses as operating expenses.

Indirect
costs of the move, which have also been recorded as operating expenses, include rent and
utility expenses resulting from operating both the Allendale and Oakland facilities for
two months and significant personnel overtime resulting from the breakdown, move and
set-up of operations from Allendale to Oakland.

We
do not anticipate any material additional moving expenses.

# NOTE 11  SUBLEASE
OF PREVIOUS FACILITIES :

On
January 20, 2005, we entered into a sublease agreement with Dynamic Imaging, Inc.
(Dynamic). Pursuant to the sublease agreement, we agreed to sublease to
Dynamic our leased premises at 40 Boroline Road, Allendale, New Jersey,
07401(Allendale Facility), at an annual rent of $177,100. The sublease is for
a term of six years and three months commencing March 1, 2005 and expiring on May 30,
2011, the expiration date of our lease. In addition, we provided the tenant with four
months of rent at no charge. Our current annual rent for 40 Boroline Road is $184,800 and
will increase to $209,440 effective June 2006.

As
a result of the discontinued use of the Allendale Facility, we incurred the following
expenses in the year ended June 30, 2005: the write-off of Allendale leasehold
improvements, the real estate broker commission for the sublease, and the present value of
the rent differential between our remaining rent liability and our expected rental income.
The aggregate value of these one-time expenses was $443,061 and was recorded as an
operating expense. The present value of the rent differential of $204,834 was recorded as
a deferred rent liability on our balance sheet. As a result of this accounting treatment,
the effects of the sublease will not impact our future results of operations.

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 12 
DISCONTINUED OPERATIONS :

In May 2005, a decision was made to
cease certain sales and service operations under Cadapult. Specifically we ceased all
electronic pre-press sales and service operations. In connection with the discontinuance
of these operations, on May 7, 2005, Cadapult, entered into an Asset Purchase Agreement
with IO Integration, Inc. Pursuant to the agreement, for the consideration of $1, Cadapult
sold to IO Integration certain assets related to its systems integration business,
consisting of its service and support contracts and pre-paid expenses and IO Integration
assumed all obligations and liabilities in connection with the performance of the service
and support contracts. Accordingly, the results of operations of the electronic pre-press
sales and service operations have been reclassified and are included in discontinued
operations. Sales and service revenues from the discontinued operations for the years
ended June 30, 2005 and 2004 were $1.5 million and $2.0 million, respectively. The pre-tax
income (loss) from discontinued operations for the years ended June 30, 2005 and 2004 were
$(0.79) million and $0.34 million respectively.

We evaluated the goodwill resulting
from three Cadapult acquisitions associated with the discontinued operations and
determined that the goodwill resulting from those acquisitions was fully impaired.
Consequently, we incurred an impairment charge of approximately $880,000 which is
reflected in the results from discontinued operations in our Statement of Operations for
the year ended June 30, 2005.

Further, we wrote off approximately
$90,000 of inventory associated with the discontinued operations.

Cadapult continues to sell Media
Sciences supplies and the INKlusive free color printer program to end users. Since this is
essentially the same business as the rest of the Companys continuing operations, and
as a result of the presentation of Cadapults electronic pre-press sales and service
operations as discontinued operations, segment information will no longer be presented.

The unaudited information below shows
the effects of reclassifying the electronic pre-press systems sales and service operations
as discontinued operations for the four quarters in each of the fiscal years ended June
30, 2005 and 2004.

---

# MEDIA SCIENCES
INTERNATIONAL, INC.
AND SUBSIDIARIES

# CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
REFLECTING DISCONTINUED OPERATIONS
(UNAUDITED)

`Three Months Ended September 30,
                                                                            2004          2003
                                                                         -----------   -----------

NET SALES                                                                $ 4,411,908   $ 3,403,031
                                                                         -----------   -----------

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation                             2,234,077     1,507,163

    Depreciation                                                              63,319       145,156
                                                                         -----------   -----------
        Total cost of goods sold                                           2,297,396     1,652,319
                                                                         -----------   -----------

GROSS PROFIT                                                               2,114,512     1,750,712
                                                                         -----------   -----------

OTHER COSTS AND EXPENSES:
    Selling, general and administrative, excluding depreciation,
      amortization and impact of variable plan accounting                  1,608,450     1,216,396
  Depreciation and amortization                                               66,549        62,447
  Impact of variable plan accounting                                          72,761       107,065
                                                                         -----------   -----------
        Total other costs and expenses                                     1,747,760     1,385,908

INCOME FROM OPERATIONS                                                       366,752       364,804

INTEREST EXPENSE                                                              52,520       107,308
                                                                         -----------   -----------

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                        314,232       257,496
  PROVISION FOR INCOME TAXES                                                 132,818       124,041
                                                                         -----------   -----------

INCOME FROM CONTINUING OPERATIONS                                            181,414       133,455
                                                                         -----------   -----------

INCOME FROM DISCONTINUED OPERATIONS                                           55,965         7,148
  PROVISION FOR INCOME TAXES                                                  23,485         4,263
                                                                         -----------   -----------

INCOME FROM DISCONTINUED OPERATIONS                                           32,480         2,885
                                                                         -----------   -----------

NET INCOME                                                                   213,894       136,340

PREFERRED STOCK DIVIDENDS                                                       --         157,406
                                                                         -----------   -----------

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS                      $   213,894   $   (21,066)
                                                                         ===========   ===========

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                           9,913,916     3,577,210
                                                                         ===========   ===========
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                        10,482,432     3,577,210
                                                                         ===========   ===========

INCOME (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS :
     BASIC AND DILUTED                                                   $      0.02   $     (0.01)
                                                                         ===========   ===========

INCOME PER COMMON SHARE FROM DISCONTINUED OPERATIONS :
     BASIC AND DILUTED                                                   $      0.00   $      0.00
                                                                         ===========   ===========

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

---

# MEDIA SCIENCES
INTERNATIONAL, INC.
AND SUBSIDIARIES

# CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED ENDED DECEMBER 31, 2004 AND 2003
REFLECTING DISCONTINUED OPERATIONS
(UNAUDITED)

`Three Months Ended December 31,
                                                                            2004            2003
                                                                        ------------    ------------

NET SALES                                                               $  4,658,357    $  3,548,539
                                                                        ------------    ------------

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation                             2,298,622       1,655,061
    Depreciation                                                              70,897         139,661
                                                                        ------------    ------------
        Total cost of goods sold                                           2,369,519       1,794,722
                                                                        ------------    ------------

GROSS PROFIT                                                               2,288,838       1,753,817
                                                                        ------------    ------------

OTHER COSTS AND EXPENSES:
    Selling, general and administrative, excluding depreciation,
      amortization and impact of variable plan accounting                  1,795,040       1,355,209
  Depreciation and amortization                                               59,121          67,139
  Impact of variable plan accounting                                         (26,126)          1,539
                                                                        ------------    ------------
        Total other costs and expenses                                     1,828,035       1,423,887

INCOME FROM OPERATIONS                                                       460,803         329,930

INTEREST EXPENSE                                                              52,865          93,900
                                                                        ------------    ------------

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                        407,938         236,030
  PROVISION FOR INCOME TAXES                                                 165,064          92,437
                                                                        ------------    ------------

INCOME FROM CONTINUING OPERATIONS                                            242,874         143,593
                                                                        ------------    ------------

INCOME FROM DISCONTINUED OPERATIONS                                           55,936         268,428
  PROVISION FOR INCOME TAXES                                                  22,478         107,309
                                                                        ------------    ------------

INCOME FROM DISCONTINUED OPERATIONS                                           33,458         161,119
                                                                        ------------    ------------

NET INCOME                                                                   276,332         304,712

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

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS                     $    276,332    $ (1,609,112)
                                                                        ============    ============

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                           9,937,043       3,577,210
                                                                        ============    ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                        10,361,754       3,577,210
                                                                        ============    ============

INCOME (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS :
     BASIC AND DILUTED                                                  $       0.02    $      (0.49)
                                                                        ============    ============

INCOME PER COMMON SHARE FROM DISCONTINUED OPERATIONS :
     BASIC AND DILUTED                                                  $       0.01    $       0.04
                                                                        ============    ============

NET INCOME (LOSS) PER COMMON SHARE :
     BASIC AND DILUTED                                                  $       0.03    $      (0.45)
                                                                        ============    ============`

---

# MEDIA SCIENCES
INTERNATIONAL, INC.
AND SUBSIDIARIES

# CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED ENDED MARCH 31, 2005 AND 2004
REFLECTING DISCONTINUED OPERATIONS
(UNAUDITED)

`Three Months Ended March 31,
                                                                            2005            2004
                                                                        ------------    ------------

NET SALES                                                                $  4,070,179    $  3,909,836
                                                                         ------------    ------------

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation                              1,981,371       1,944,108
    Depreciation                                                               66,629         118,754
                                                                         ------------    ------------
        Total cost of goods sold                                            2,048,000       2,062,862
                                                                         ------------    ------------

GROSS PROFIT                                                                2,022,179       1,846,974
                                                                         ------------    ------------

OTHER COSTS AND EXPENSES:
    Selling, general and administrative, excluding depreciation,
      amortization, loss from sublease, moving expenses and
      impact of variable plan accounting                                    1,818,132       1,668,893
  Depreciation and amortization                                                71,880          61,909
  Loss from sublease and moving expenses                                      528,050            --
  Impact of variable plan accounting                                          192,321          26,719
                                                                         ------------    ------------
        Total other costs and expenses                                      2,610,383       1,757,521

INCOME (LOSS) FROM OPERATIONS                                                (588,204)         89,453

INTEREST EXPENSE                                                               44,533          95,298
                                                                         ------------    ------------

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                          (632,737)         (5,845)
  PROVISION (BENEFIT) FOR INCOME TAXES                                       (176,168)          8,349
                                                                         ------------    ------------

LOSS FROM CONTINUING OPERATIONS                                              (456,569)        (14,194)
                                                                         ------------    ------------

INCOME (LOSS) FROM DISCONTINUED OPERATIONS                                    (82,740)        192,542
  PROVISION (BENEFIT) FOR INCOME TAXES                                        (27,783)         77,017
                                                                         ------------    ------------

INCOME (LOSS) FROM DISCONTINUED OPERATIONS                                    (54,957)        115,525
                                                                         ------------    ------------

NET INCOME (LOSS)                                                            (511,526)        101,331

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

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS                      $   (511,526)   $    101,331
                                                                         ============    ============

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                           10,288,450       8,602,210
                                                                         ============    ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                         10,288,450       8,691,117
                                                                         ============    ============

LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS :
     BASIC AND DILUTED                                                   $      (0.04)   $      (0.00)
                                                                         ============    ============

INCOME (LOSS) PER COMMON SHARE FROM DISCONTINUED OPERATIONS :
     BASIC AND DILUTED                                                   $      (0.01)   $       0.01
                                                                         ============    ============

NET INCOME (LOSS) PER COMMON SHARE :
     BASIC AND DILUTED                                                   $      (0.05)   $       0.01
                                                                         ============    ============`

---

# MEDIA SCIENCES
INTERNATIONAL, INC.
AND SUBSIDIARIES

# CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED ENDED JUNE 30, 2005 AND 2004
REFLECTING DISCONTINUED OPERATIONS
(UNAUDITED)

`Three Months Ended June 30,
                                                                            2005            2004
                                                                        ------------    ------------

NET SALES                                                               $  4,738,394    $  3,612,910
                                                                        ------------    ------------

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation                             2,410,660       1,735,705
    Depreciation                                                              37,292         100,864
                                                                        ------------    ------------
        Total cost of goods sold                                           2,447,952       1,836,569
                                                                        ------------    ------------

GROSS PROFIT                                                               2,290,442       1,776,341
                                                                        ------------    ------------

OTHER COSTS AND EXPENSES:
    Selling, general and administrative, excluding depreciation,
       amortization, loss from sublease, moving expenses and
       impact of variable plan accounting                                  1,662,684       1,511,526
  Depreciation and amortization                                               84,169          62,211
  Loss from sublease and moving expenses                                      17,078            --
  Impact of variable plan accounting                                         (39,660)        212,147
                                                                        ------------    ------------
        Total other costs and expenses                                     1,724,271       1,785,884

INCOME (LOSS) FROM OPERATIONS                                                566,171          (9,543)

INTEREST EXPENSE                                                              29,467          76,936
                                                                        ------------    ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                 536,704         (86,479)
  PROVISION (BENEFIT) FOR INCOME TAXES                                       123,982         (46,072)
                                                                        ------------    ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                                     412,722         (40,407)
                                                                        ------------    ------------

LOSS FROM DISCONTINUED OPERATIONS                                           (818,354)       (129,725)
  BENEFIT FOR INCOME TAXES                                                  (343,594)        (48,751)
                                                                        ------------    ------------

LOSS FROM DISCONTINUED OPERATIONS                                           (474,760)        (80,974)
                                                                        ------------    ------------

NET LOSS                                                                     (62,038)       (121,381)

PREFERRED STOCK DIVIDENDS AND CHARGE FOR
   INDUCED CONVERSION                                                           --           198,210
                                                                        ------------    ------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS                              $    (62,038)   $   (319,591)
                                                                        ============    ============

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                          10,906,933       6,214,835
                                                                        ============    ============
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                        10,906,933       6,214,835
                                                                        ============    ============

INCOME (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS :
     BASIC AND DILUTED                                                  $       0.04    $      (0.04)
                                                                        ============    ============

LOSS PER COMMON SHARE FROM DISCONTINUED OPERATIONS :
     BASIC AND DILUTED                                                  $      (0.05)   $      (0.01)
                                                                        ============    ============

NET LOSS PER COMMON SHARE :
     BASIC AND DILUTED                                                  $      (0.01)   $      (0.05)
                                                                        ============    ============`

---

# 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 two years prior to its resignation, 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 Chief Financial Officer, has
re-evaluated the effectiveness of the Companys disclosure controls and procedures
(as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of
the end of the period covered by this report. Based on that re-evaluation, the
Companys Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of such period, the Companys disclosure controls and procedures are not
effective. As further discussed below, in 2006, the Companys management identified
that a deficiency existed as of June 30, 2005 in the controls associated with the
Companys tax accounting and its provision to actual reconciliation process. In
accordance with Auditing Standard No. 2 and consistent with PCAOB Release No. 2005-023
issued in November 2005, in determining whether a control deficiency existed at June 30,
2005, professional judgment must be applied to identify the cause of the misstatement,
rather than merely attributing it to the period(s) affected. In this case, a cumulative
error originated with respect to the Companys tax provision in or before its fiscal
year ended June 30, 2003. Accordingly, the Companys management deems such control
deficiency to be a material weakness in its controls and procedures. A material weakness
is a control deficiency, or combination of control deficiencies, that results in a more
than remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.

The Companys management,
including its Chief Executive Officer and its Chief 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 limitations
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.

# Restatement and
Remediation of Internal Control Weaknesses

On March 15, 2006, the Company hired
a Chief Financial Officer, with substantial Sarbanes-Oxley compliance experience. 
With the hiring of its Chief Financial Officer, the Company has been developing a detailed
plan to address compliance with Section 404 of the Sarbanes-Oxley Act of 2002.  In
mid-March 2006, the Company initiated and since then has made progress on several projects
focused on assessing potential risks, better understanding and documenting its processes,
and implementing certain preventative or detective controls to address key risks. These
are important first steps toward designing and implementing an effective compliance
plan.  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, 2008.

As part of its risk assessment, the
Company undertook an extensive review of its tax compliance efforts and the controls
associated with its tax accounting process. As a result of new processes and controls
implemented during the quarter ended March 31, 2006, the Company identified errors in
previously filed tax returns that contributed to errors in the Companys tax
accounting for the year ended June 30, 2003 and prior years. For these periods, the
Companys cumulative tax expense was understated by $161,956. In 2006, in order to
ensure the continued independence of its registered public accounting firm, the Company on
April 10, 2006 engaged Cipolla Sziklay, LLC (an accounting firm not affiliated with the
Companys independent registered public accounting firm) to provide tax services.

These errors had no effect on the
Companys results of operations or net cash flows for the quarter ended March 31,
2006, prior quarters in this 2006 fiscal year, or for the years ended June 30, 2005 or
2004. The cumulative effect of these errors overstated the Companys deferred tax
assets by $243,974, taxes payable by $82,018, and retained earnings by $161,956 on prior
balance sheets presented this year and for the years ended June 30, 2005 and 2004 in our
Form 10-KSB for the year ended June 30, 2005, filed on September 13, 2005.

---

Corrections to properly reflect the
carrying values of the Companys deferred tax assets, income taxes payable, and
retained earnings for the fiscal years ended June 30, 2005 and 2004 are reflected in this
Form 10-KSB/A, as further discussed in Note 1B to the consolidated financial statements.
Corresponding corrections to the Companys interim condensed consolidated financial
statements for the quarters ended September 30, 2005 and December 31, 2005 will also be
filed on Form 10-QSB/As.

In the quarter ended March 31, 2006,
the Company implemented additional procedures and controls in purchasing, receiving, and
inventory management, and was in the process of recruiting additional personnel to further
segregate certain duties. We will continue to conduct a thorough risk assessment, document
our processes, and where necessary, enhance our system of internal controls.  The
Company is committed to the continued improvement of its control systems and financial
reporting process.

# Changes in Internal
Controls over Financial Reporting

There have not been any changes,
except as described below, in the Companys internal control over financial reporting
(as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal
quarter ended June 30, 2005 that have materially affected, or are reasonably likely to
materially affect, the Companys 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 notes 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).

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.

In light of the need for a
restatement of certain financial statements, which was completed, and the material
weaknesses in the Companys internal controls, commencing in the fourth quarter of
the Companys 2005 fiscal year, the Company began 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, and increased awareness of recent
accounting pronouncements. Further, the Company has accelerated its search and timetable
to hire a Chief Financial Officer and has begun interviewing candidates. The Company is
committed to addressing its control environment and reporting procedures.

## ITEM 8B.   OTHER INFORMATION

In March 2005, we entered into a
$500,000 note with a bank, carrying a 6.5% fixed interest rate and payable in monthly
installments over five years. The note is cross collateralized and cross defaulted with
the revolving line of credit. The proceeds were used to finance the leasehold improvements
to our Oakland facility.

In June 2005, we entered in an
amendment to the loan documents with the bank. As amended, both our revolving
line-of-credit and the five-year term note with the bank are subject to two financial
covenants including a ratio of Funded Debt to EBITDA of not more than 2.50 to 1.00 and a
ratio of Cash Flow to Cash Uses of not less than 1.0, measured on a rolling four quarter
basis.

On July 27, 2005, we entered into an
equipment lease line of credit with $1 million in availability with the bank.

---

# PART III

## ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

## Our Management

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

|                 |  | 
|---------------- |  | 
|Name             |  | 
|                 |  | 
|Michael W. Levin |  | 
|Frances Blanco   |  | 
|Larry Anderson   |  | 
|Denise Hawkins   |  | 
|Paul C. Baker    |  | 
|Edwin Ruzinsky   |  | 
|Donald Gunn      |  | 
|Henry Royer      |  | 
|Alan Bazaar      |  | 

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s annual 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.

---

Lawrence Anderson, Vice
President:

Lawrence Anderson has served as Vice
President of Operations since June 6, 2005. From April 1997 to November 2000, Mr. Anderson
was Vice President World Wide Operations for Katun Corporation, located in Bloomington,
Minnesota. From January 2001 to November 2004, Mr. Anderson was Vice President
Manufacturing/Operations for WatchGuard Technologies Inc., located in Seattle, Washington.
Prior to joining our company, Mr. Anderson had been retired since November 2004.

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 Board 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. On March 31, 2005, Dowden Health Media, Inc. on whose board Mr.
          Ruzinsky served, was sold.

---

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. Mr. Bazaar serves on both the audit committee and the compensation
committee. 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, 2005, 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 four times in connection with fiscal year 2005.

We have an Audit Committee,  which consists of the following members of the Board of Directors:  Edwin Ruzinsky,  Paul
Baker and Alan Bazaar.

Mr. Ruzinsky and Mr. Bazaar are financial experts. 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 Alan Bazaar. 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 adopted a Code of Ethics. Our
Code of Ethics is available on our website at www.mediasciences.com.

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

Other than Mr. Royer, who is a Board
member of QCR Holdings, Inc., a reporting company, none of the directors are directors of
other reporting companies. None of the directors 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 during and in connection with Media Sciences fiscal year
ended 2005, Media Sciences is not aware of any material delinquencies in the filing of
such reports, except as follows:

| | o | On January 21, 2005, Berthel SBIC LLC filed a Form 4 reporting late three transactions,
the expiration of warrants in October 2004 and December 2004, and the acquisition of stock
options in December 2004.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | On March 4, 2005, Berthel SBIC LLC filed a late Form 4 reporting one transaction, the
sale of common stock in February 2005.
| | - | ----------------------------------------------------------------------------------------------------------------------------

| | o | On July 14, 2005, Duncan Huyler, a former officer, who resigned as of March 31, 2005,
filed a Form 4 reporting late five transactions, the expiration of stock options on March
31, 2005, three exercises of stock options in April and May 2005, and a sale in July
2005.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | On August 9, 2005, Donald Gunn filed a Form 4 reporting late one transaction, the
expiration of warrants in December 2004.
| | - | --------------------------------------------------------------------------------------------------------------------------

---

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

Michael W. Levin                    2005    $200,000        $     0                  0                   $5,650
  Chief Executive Officer           2004    $200,000        $28,500                  0                   $4,416
  and President                     2003    $150,000        $15,000 (b)        500,000  (c)              $2,593
Frances Blanco                      2005    $130,000        $25,000                  0                   $3,763
  Vice President and Treasurer      2004    $120,000        $ 3,500            100,000  (d)              $4,317
  and (former) Secretary            2003    $100,000        $15,000 (b)         25,000  (e)              $2,872
Larry Anderson                      2005    $ 13,333 (i)    $25,000            100,000  (g)                  $0
  Vice President
Duncan Huyler                       2005    $102,500 (j)    $     0                  0                   $3,405
  Former Vice President             2004    $120,000        $ 6,000            100,000  (d)              $3,418
                                    2003    $107,185        $ 8,000 (b)         25,000  (e)                $888
Duncan Yates                        2005    $ 97,883 (k)    $20,000                  0                   $1,403
  Former Vice President             2004    $130,000        $11,000                  0                   $1,740
                                    2003    $116,845        $15,000 (b)         25,000  (e)                $938
Donald Gunn                         2005    $125,000        $20,000                  0                   $2,969
  Vice President                    2004    $100,000        $20,607                  0                   $2,522
                                    2003    $ 90,833        $10,000             25,000  (e)              $2,087
Denise Hawkins                      2005    $ 68,890        $ 5,000             20,000  (h)              $1,136
  Vice President                    2004    $ 64,890        $ 1,000                  0                   $1,099
  Principal Financial Officer       2003    $ 51,731 (f)    $     0                  0                    $ 647
  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 vested
               ratably over the period July 1, 2003 through June 30, 2005. As of June 30, 2005,
               500,000 options are vested.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | On May 24, 2004, we issued to 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. As of March 31, 2005, Mr. Huyler was vested with
               50,000 options and the reminder was forfeited. As of June 30, 2005, Ms. Blanco
               is vested with 75,000 options.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(g) | On June 6, 2005, we issued to Larry Anderson, stock options to purchase 100,000
               shares of our common stock, which vest ratably over five years. The options are
               exercisable until June 5, 2015 at $1.60 per share.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|(h) | On January 12, 2005, we issued Denise Hawkins, stock options to purchase 20,000
               shares of our common stock, which vest equally over three years. The options are
               exercisable until January 11, 2015 at $1.91 per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | Became an officer on June 6, 2005. His reported fiscal 2005 compensation covers
               the period June 6, 2005 through June 30, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(j) | Ceased being an officer and an employee on March 31, 2005. His reported fiscal
               2005 compensation covers the period July 1, 2004 through March 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(k) | Ceased being an officer and an employee on March 11, 2005. His reported fiscal
               2005 compensation covers the period July 1, 2004 through March 11, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Stock Option Information

# Option Grants in
Fiscal 2005

The table below sets forth
information concerning stock options granted during the fiscal year ended June 30, 2005 to
the Named Executive Officers. The percentage of total stock options is based on 201,950
stock options granted to officers, directors, and employees during the 2005 fiscal year.

`----------------------------------------------------------------------------------------
                  Number of Securities    Percent of Total
                   Underlying Options    Options Granted to    Exercise of
                        Granted             Employees in        Base Price    Expiration
Name                      (#)               Fiscal Year           ($/Sh)         Date
--------------    --------------------   ------------------    -----------    ----------


Larry Anderson          100,000                 50%               $1.60          6-05-15
Denise Hawkins           20,000                 10%               $1.91          1-11-15
----------------------------------------------------------------------------------------`

# Option Exercises in
Fiscal 2005 and Year End Option Values

The following table sets forth
information concerning the value of unexercised stock options at June 30, 2005 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, 2005 was $1.73, as reported by AMEX.

`---------------------------------------------------------------------------------------------------------------------
                             Number of Shares                   Number of Unexercised         Value of Unexercised
                                Acquired on      Value           Securities Underlying         In-the-Money Options
Name                             Exercise        Realized    Options at Fiscal Year End        at Fiscal Year End
-------------------------    ----------------    --------    --------------------------    --------------------------
                                                             Exercisable  Unexercisable    Exercisable  Unexercisable
                                                             -----------  -------------    -----------  -------------
Michael W. Levin                     0              0            500,000              0       $365,000        $     0
Frances Blanco                       0              0            107,471         25,000       $ 81,000        $16,750
Larry Anderson                       0              0                  0        100,000       $      0        $13,000
Donald Gunn                          0              0             25,000              0       $ 30,750        $     0
Denise Hawkins                       0              0             10,002         20,000       $    300        $     0
---------------------------------------------------------------------------------------------------------------------`

---

# Director Compensation

We have a compensation plan for our
independent directors. For the year ended June 30, 2004, eligible outside directors were
paid $5,000 per year, payable quarterly, for attendance at regular and special meetings.
Effective July 1, 2005, eligible outside directors are paid $10,000 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 10,000 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 2006 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 on the date of grant, additional stock options to purchase 125,000
shares vested on June 30, 2004, and the remaining stock options to purchase 125,000 shares
vested on 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, 2005, 67,396 stock options granted
under this stock option plan were exercised. As of June 30, 2005, we had outstanding stock
options under the plan to purchase 361,543 shares of common stock, exercisable, subject to
vesting, for 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
August 17, 2005, 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 August 17, 2005, we had 10,978,606 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.

`----------------------------------------------------------------------------------------------
Name and Address                   Amount and Nature         Additional Shares        Percent
of Beneficial Owner               of Beneficial Owner    Acquirable Within 60 days    of Class
------------------------------    -------------------    -------------------------    --------

Berthel SBIC, LLC (a)                       1,063,416                   20,000 (c)        9.9%
  100 Second Street SE,
  Cedar Rapids, Iowa 52407
Richard L. Scott (b)                        1,829,750                   15,000 (d)       16.8%
  100 First Stamford Place
  Stamford, Ct. 06902
MicroCapital LLC (e)                          964,900                        0            8.8%
   201 Post Street, Suite 1001
   San Francisco, CA  94108
----------------------------------------------------------------------------------------------`

|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Refers to shares acquirable upon exercise of 10,000 options at $3.13 per share
                    which expire in December 2009, 5,000 options at $2.19 per share which expire in
                    July 2010, and 5,000 options at $2.00 per share which expire in July 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|(d) | Refers to shares acquirable upon exercise of 10,000 options at $1.69 per share
                    which expire in June 2009, and 5,000 options at $1.45 per share which expire in
                    December 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Holds the securities through different entities, including MicroCapital Fund LP
                    and MicroCapital Fund Ltd.
|--- | ------------------------------------------------------------------------------------------------------------------------------

## Security
Ownership of Management

The table below sets forth, as of
August 17, 2005, 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 August 17, 2005,
we had 10,978,606 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., 8 Allerman Road, Oakland, NJ
07463, unless otherwise indicated.

`-----------------------------------------------------------------------------------------------------
Name and Address                          Amount and Nature         Additional Shares        Percent
of Beneficial Owner                      of Beneficial Owner    Acquirable Within 60 days    of Class
------------------------------           -------------------    -------------------------    --------

Michael W. Levin                              1,418,450  (a)           500,000  (c)           17.5%
Frances Blanco                                   42,775  (b)           107,741  (d)            1.4%
Larry Anderson                                        0                      0  (e)              0%
Denise Hawkins                                      500                 10,002  (f)            0.1%
Paul Baker                                       67,500                105,500  (g)            1.6%
Edwin Ruzinsky                                   20,000                 45,000  (h)            0.6%
Donald Gunn                                      25,000                 25,000  (i)            0.5%
Henry Royer (j)                               1,063,416                 20,000  (k)            9.9%
   c/o Berthel SBIC
   100 Second Street SE
   Cedar Rapids, Iowa 52407
Alan L. Bazaar (l)                            1,829,750                 15,000  (m)           16.8%
   c/o Richard L. Scott Investments, LLC
   100 First Stamford Place
   Stamford, CT 06902
-----------------------------------------------------------------------------------------------------
All present officers and directors            4,467,391                829,613                48.2%
   as a group (9 persons)
-----------------------------------------------------------------------------------------------------`

|(a) | Includes 120,000 shares owned by his minor children.
|--- | ----------------------------------------------------

|(b) | Includes 2,000 shares
          owned by her husband.
|--- | -----------------------------------------------------

|(c) | Refers to shares acquirable upon exercise of 500,000 options at $1.00 per share,
          which expire in June 2008.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(d) | Refers to shares acquirable upon exercise of
          7,741 options at $1.25 per share which expire in June 2008, 25,000
options at $0.50 per share which expire in April 2008, and 75,000 options at $1.06 per
share, which expire in May 2014. Does not include an additional 25,000 options at $1.06
per share, which vest in May 2006 and which expire in May 2014.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Refers to shares acquirable upon exercise of 1,370 options at $1.60 per share
                    which expire in June 2015. Does not include an additional 100,000 options at
                    $1.60 per share which vest ratably, on an annual basis, over the period July 1,
                    2005 through June 5, 2011 and which expire in June 2015.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | Refers to shares acquirable upon exercise of 10,002 options at $1.70 per share
                    which expire in July 2011. Does not include 20,000 options at $1.91 per share
                    which vest equally on January 12, 2006, 2007 and 2008 and which expire in
                    January 2015.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | Refers to shares acquirable upon exercise of 3,000 options at $2.00 per share
                    which expire in August 2008, 30,000 options at $3.31 per share which expire in
                    April 2009, 5,000 options at $2.19 per share which expire in July 2010, 5,000
                    options at $2.00 per share which expire in July 2011, 5,000 options at $0.65 per
                    share which expire in September 2012, 10,000 options at $0.43 per share which
                    expire in May 2013, 5,000 options at $1.45 per share which expire in December
                    2014 and 5,000 options at $0.85 per share which expire in February 2014.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|(h) | Refers to shares acquirable upon exercise of 10,000 options at $2.06 per share
                    which expire in August 2009, 5,000 options at $2.19 per share which expire in
                    July 2010, 5,000 options at $2.00 per share which expire in July 2011, 5,000
                    options at $0.65 per share which expire in September 2012, 10,000 options at
                    $0.43 per share which expire in May 2013, 5,000 options at $1.45 per share which
                    expire in December 2014 and 5,000 options at $0.85 per share which expire in
                    February 2014.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | Refers to shares acquirable upon exercise of 25,000 options at $0.50 per share
                    which expire in April 2008. Does not include stock options to purchase up to
                    100,000 shares of our common stock, issued in August 2005, subject to future
                    vesting.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(j) | For purposes of the table, Henry Royers reported beneficial ownership
                    refers to the beneficial ownership of Berthel SBIC.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(k) | Refers to shares acquirable upon exercise of 10,000 options at $3.13 per share
                    which expire in December 2009, 5,000 options at $2.19 per share which expire in
                    July 2010, and 5,000 options at $2.00 per share which expire in July 2011.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(l) | For purposes of the table, Alan Bazaars reported beneficial ownership
                    refers to the beneficial ownership of Richard L. Scott Investments, LLC and its
                    affiliates.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(m) | Refers to shares acquirable upon exercise of 10,000 options at $1.69 per share
                    which expire in June 2009, and 5,000 options at $1.45 per share which expire in
                    December 2009.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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

The following table set forth
outstanding securities authorized for issuance under equity compensation plans as of June
30, 2005.

`--------------------------------------------------------------------------------------------------------------------
                                        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          1,011,543                        $1.26                  35,144
securities holders

Equity compensation plans not                    300,000                         1.20                       0
approved by security holders

--------------------------------------------------------------------------------------------------------------------
Total                                          1,311,543                        $1.25                  35,144
--------------------------------------------------------------------------------------------------------------------`

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,
2005, we have outstanding incentive stock options to purchase 361,543 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.

On April 7, 2003, we issued to each
of Frances Blanco and Donald Gunn, 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.

On May 24, 2004, we issued to Frances
Blanco, options to purchase 100,000 shares of our common stock, of which 50,000 options
vested on the grant date, 25,000 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. As of August 17, 2005, 75,000 options have vested.

Plans Not in the Shareholder Approved Category

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 an aggregate of 75,000 shares 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. In May 2005, one
warrant holder exercised its warrants to purchase 12,500 shares at $1.00 per share.

On June 6, 2005, we issued to Larry
Anderson options to purchase 100,000 shares of our common stock, which vest ratably, on an
annual basis, over the period June 6, 2005 through June 5, 2010. The options are
exercisable for ten years at $1.60 per share. As of August 17, 2005, no options had
vested.

---

## 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, 2003, we entered into
eight, $50,000 promissory notes, due on June 5, 2005 and carrying a 20% interest rate, to
the eight individuals including Paul Baker who is a director of Media Sciences and
Mitchell Baker who is the son of Paul Baker. 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%.

In December 2002, we entered into
four, one-year notes aggregating $100,000 and bearing simple interest of 20%, payable
quarterly. In December 2003, we repaid the notes in full. Three of 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; and Mitchell Baker is the son of Paul Baker, a director of
Media Sciences.

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.

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

On May 24, 2004, we issued to each of
Frances Blanco an officer and director, and Duncan Huyler, a former officer, 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.In May 2005, Duncan Huyler executed a cashless exercise of 50,000 options.
The balance of Mr. Huylers options were forfeited upon the termination of
his employment.

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.

---

On March 2, 2005, we sold an
aggregate of 500,000 shares of our common stock at a price of $2 per share to MicroCapital
Fund LP and MicroCapital Fund Ltd. for aggregate gross proceeds of $1 million.
MicroCapital Fund LP purchased 375,000 shares and MicroCapital Fund Ltd. purchased 125,000
shares.

On June 6, 2005, we issued to Larry
Anderson, an officer, stock options to purchase 100,000 shares of our common stock, which
vest ratably, on an annual basis, over the period June 6, 2005 through June 5, 2010. The
options are exercisable for ten years at $1.60 per share.

On August 8, 2005, we issued to
Donald Gunn, an officer, stock options to purchase up to 100,000 shares of our common
stock. The options are subject to vesting, upon Gunns relocation to corporate
offices, as follows: 50,000 stock options on such date, and the other 50,000 stock options
at the rate of 10,000 stock options per year for five years starting on the first
anniversary of such date. The options are exercisable for ten years at $1.65 per share.

## 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).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|10.22 |  | Loan Agreement with PNC Bank (Incorporated by reference to Exhibit 10 of Current Report on
Form 8-K filed on December 20, 2004).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Sublease Agreement (Incorporated by reference to Exhibit 10 of Current Report on Form 8-K
filed on January 24, 2005).
|----- |  | ---------------------------------------------------------------------------------------------------------------------

|10.24 |  | Term Note with PNC Bank, dated as of March 28, 2005 (Incorporated by reference to Exhibit
10.1 of Current Report on Form 8-K filed on April 4, 2005)
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Amendment to Loan Documents with PNC Bank, dated a of March 28, 2005 (Incorporated by
reference to Exhibit 10.2 of Current Report on Form 8-K filed on April 4, 2005)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Second Amendment to Loan Documents, June 2005 (Incorporated by reference to Exhibit 10.26
of Annual Report on Form 10-KSB filed on September 13, 2005)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | Master Lease Agreement, July 2005 (Incorporated by reference to Exhibit 10.27 of Annual
Report on Form 10-KSB filed on September 13, 2005)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | Option Agreement with Larry Anderson, June 2005 (Incorporated by reference to Exhibit
10.28 of Annual Report on Form 10-KSB filed on September 13, 2005)
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|10.29 |  | Option Agreement with Donald Gunn, August 2005 (Incorporated by reference to Exhibit 10.29
of Annual Report on Form 10-KSB filed on September 13, 2005)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|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).
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|23.1* |  | Consent of J.H. Cohn LLP
|----- |  | ------------------------

|31.1* |  | Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
|----- |  | -----------------------------------------------------------------------------------------------------

|31.2* |  | Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a)
|----- |  | -----------------------------------------------------------------------------------------------------

|32.1* |  | Certification  of Chief Executive Officer Pursuant to Securities  Exchange Act Rule  13a-14(b) and 18 U.S.C.  Section
                   1350
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|32.2* |  | Certification  of Chief Financial Officer Pursuant to Securities  Exchange Act Rule  13a-14(b) and 18 U.S.C.  Section
                   1350
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|________*  Filed herewith. |  | 
|-------------------------- |  | 

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## 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 years ended June 30, 2005 and 2004 were $56,105 and $11,315, respectively. Fees for
audit services provided by Wiss & Company, LLP, our former principal accountant,
during the year ended June 30, 2004 were $11,710.

Audit services consisted primarily of
the annual audits, review of our financial statements, services provided in connection
with the restatement of our financial statements for the year ended June 30, 2004, 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

Fees for audit-related services
provided by J.H. Cohn LLP, our current principal independent registered public accounting
firm, during the year ended June 30, 2005 were $7,511. 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
year ended June 30, 2004.

Audit-related fees consisted
primarily of the review of financial statements for inclusion in registration statements
filed by the Company.

# Tax Fees

Fees for tax services provided by
J.H. Cohn LLP, our current principal independent registered public accounting firm, during
the years ended June 30, 2005 and 2004 were $5,117 and $1,172, respectively. Fees for tax
services provided by Wiss & Company, LLP, our former principal accountant, during the
year ended June 30, 2004 were $7,895.

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: May 25, 2006
| | -------------------

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 | May 25, 2006
|------------------------------------ | ------------------------------------------------------------ | ------------

|/s/ Kevan D. BloomgrenKevan D. Bloomgren | Chief Financial Officer | May 25, 2006
|---------------------------------------- | ----------------------- | ------------

|/s/ Frances BlancoFrances Blanco | Director and Vice President | May 25, 2006
|-------------------------------- | --------------------------- | ------------

|/s/ Paul C. BakerPaul C. Baker | Director | May 25, 2006
|------------------------------ | -------- | ------------

|/s/ Edwin RuzinskyEdwin Ruzinsky | Director | May 25, 2006
|-------------------------------- | -------- | ------------

|/s/ Henry RoyerHenry Royer | Director | May 25, 2006
|-------------------------- | -------- | ------------

|/s/ Alan L. BazaarAlan L. Bazaar | Director | May 25, 2006
|-------------------------------- | -------- | ------------

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