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

FORM 10-QSB

| | x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE     ACT OF 1934
| | - | -------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006

| | o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
| | - | ---------------------------------------------------------------

For the transition period from __________ to __________.

Commission file number:1-16053

---



MEDIA SCIENCES INTERNATIONAL, INC.(Exact name of registrant as specified 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 07436
(Address of principal executive offices)

(201) 677-9311
(Issuer's telephone number)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

---

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the 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 past 90 days.
Yesx
Noo

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

As of October 27, 2006, we had
11,218,363 shares of common stock issued and outstanding.

Transitional Small Business Disclosure Format (check one):
YESx
NOo






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# MEDIA
SCIENCES INTERNATIONAL, INC.
AND
SUBSIDIARIES

# FORM 10-QSB
FOR THE
QUARTER ENDED SEPTEMBER 30, 2006

# TABLE OF
CONTENTS

|                               |  |  
|------------------------------ |  | -
|PART I.  FINANCIAL INFORMATION |  |  
|                               |  |  
|ITEM 1. FINANCIAL STATEMENTS   |  | 3
|                               |  |  

| | Condensed Consolidated Balance Sheets as of September 30, 2006 (Unaudited)
     and June 30, 2006                                  | 3
| | ---------------------------------------------------------------------------------------------------------------------------------- | -
| |                                                                                                                                    |  
| | Condensed Consolidated Statements of Income for the Three Months Ended
     September 30, 2006 and 2005 (Unaudited)                | 4
| |                                                                                                                                    |  
| | Condensed Consolidated Statement of Changes in Shareholders' Equity for the
     Three Months Ended September 30, 2006 (Unaudited) | 5
| |                                                                                                                                    |  
| | Condensed Consolidated Statements of Cash Flows for the Three Months Ended
     September 30, 2006 and 2005 (Unaudited)            | 6
| |                                                                                                                                    |  
| | Notes to Condensed Consolidated Financial Statements                                                                               | 7
| |                                                                                                                                    |  

|                                             |  |   
|-------------------------------------------- |  | --
|ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS |  | 18
|                                             |  |   
|ITEM 3. CONTROLS AND PROCEDURES              |  | 25
|                                             |  |   

|                            |  |   
|--------------------------- |  | --
|                            |  |   
|PART II.  OTHER INFORMATION |  |   
|                            |  |   
|ITEM 6. EXHIBITS            |  | 26
|                            |  |   
|SIGNATURES                  |  | 27
|                            |  |   

2

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PART I. FINANCIAL
INFORMATION

## ITEM 1. 
FINANCIAL STATEMENTS

# MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|ASSETS                                                 | September 30,2006(Unaudited) | June 30,2006(Note 1)
|------------------------------------------------------ | ---------------------------- | --------------------
|                                                       |                              |                     
|CURRENT ASSETS:                                        |                              |                     
|Cash and cash equivalents                              |                              |                     
|Accounts receivable, net                               |                              |                     
|Inventories, net                                       |                              |                     
|Deferred tax assets                                    |                              |                     
|Prepaid expenses and other current assets              |                              |                     
|                                                       |                              |                     
|Total Current Assets                                   |                              |                     
|                                                       |                              |                     
|PROPERTY AND EQUIPMENT, NET                            |                              |                     
|                                                       |                              |                     
|OTHER ASSETS:                                          |                              |                     
|Goodwill and other intangible assets, net              |                              |                     
|Other assets                                           |                              |                     
|                                                       |                              |                     
|Total Other Assets                                     |                              |                     
|                                                       |                              |                     
|TOTAL ASSETS                                           |                              |                     
|                                                       |                              |                     
|                                                       |                              |                     
|LIABILITIES AND SHAREHOLDERS' EQUITY                   |                              |                     
|                                                       |                              |                     
|CURRENT LIABILITIES:                                   |                              |                     
|Current maturities of long-term debt                   |                              |                     
|Accounts payable                                       |                              |                     
|Accrued compensation and benefits                      |                              |                     
|Other accrued expenses and current liabilities         |                              |                     
|Income taxes payable                                   |                              |                     
|Accrued product warranty costs                         |                              |                     
|Deferred revenue                                       |                              |                     
|                                                       |                              |                     
|Total Current Liabilities                              |                              |                     
|                                                       |                              |                     
|OTHER LIABILITIES:                                     |                              |                     
|Long-term debt, less current maturities                |                              |                     
|Deferred rent liability                                |                              |                     
|Deferred revenue, less current portion                 |                              |                     
|Deferred tax liabilities                               |                              |                     
|                                                       |                              |                     
|Total Other Liabilities                                |                              |                     
|                                                       |                              |                     
|                                                       |                              |                     
|TOTAL LIABILITIES                                      |                              |                     
|                                                       |                              |                     
|                                                       |                              |                     
|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 11,196,363 shares |                              |                     
|in September and 11,131,363 shares in June             |                              |                     
|Additional paid-in capital                             |                              |                     
|Deferred stock-based compensation                      |                              |                     
|Retained earnings                                      |                              |                     
|                                                       |                              |                     
|Total Shareholders' Equity                             |                              |                     
|                                                       |                              |                     
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY             |                              |                     
|                                                       |                              |                     

See accompanying notes
to condensed consolidated financial statements.

3

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# MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

|                                                                             | Three Months Ended September 30,
|---------------------------------------------------------------------------- | --------------------------------
|
|                                                                             |                                 
|                                                                             |                                 
|NET REVENUES                                                                 |                                 
|                                                                             |                                 
|COST OF GOODS SOLD:                                                          |                                 
|Cost of goods sold, excluding depreciation and amortization,                 |                                 
|product warranty and shipping and freight                                    |                                 
|Depreciation and amortization                                                |                                 
|Product warranty                                                             |                                 
|Shipping and freight                                                         |                                 
|                                                                             |                                 
|Total cost of goods sold                                                     |                                 
|                                                                             |                                 
|                                                                             |                                 
|GROSS PROFIT                                                                 |                                 
|                                                                             |                                 
|OTHER COSTS AND EXPENSES:                                                    |                                 
|Research and development                                                     |                                 
|Selling, general and administrative, excluding depreciation and amortization |                                 
|Depreciation and amortization                                                |                                 
|                                                                             |                                 
|Total other costs and expenses                                               |                                 
|                                                                             |                                 
|                                                                             |                                 
|INCOME FROM OPERATIONS                                                       |                                 
|                                                                             |                                 
|Interest income (expense), net                                               |                                 
|                                                                             |                                 
|                                                                             |                                 
|INCOME BEFORE INCOME TAXES                                                   |                                 
|Provision for income taxes                                                   |                                 
|                                                                             |                                 
|                                                                             |                                 
|NET INCOME                                                                   |                                 
|                                                                             |                                 
|                                                                             |                                 
|                                                                             |                                 
|EARNINGS PER SHARE                                                           |                                 
|Basic and diluted                                                            |                                 
|                                                                             |                                 
|                                                                             |                                 
|                                                                             |                                 
|WEIGHTED AVERAGE SHARES USED TO COMPUTE EARNINGS PER SHARE                   |                                 
|Basic                                                                        |                                 
|Diluted                                                                      |                                 

See accompanying notes
to condensed consolidated financial statements.

4

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# MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)

|                                         | Common Stock | AdditionalPaid-in | Retained | Stock-Based | TotalShareholders'
|---------------------------------------- | ------------ | ----------------- | -------- | ----------- | ------------------
|
|                                         |              |                   |          |             |                   
|BALANCES, JUNE 30, 2006                  |              |                   |          | 11,131,363  |                   
|                                         |              |                  
|Issuance of common stock for             |              |                   |          |             |                   
|exercise of stock options                |              |                   |          | 65,000      |                   
|Reclassification of deferred stock-based |              |                   |          |             |                   
|compensation for adoption of             |              |                   |          |             |                   
|SFAS No. 123(R)                          |              |                   |          |            |                   
|Stock based compensation expense         |              |                   |          |            |                   
|Net income                               |              |                   |          |            |                   
|                                         |              |                   |          |             |                   
|BALANCES, SEPTEMBER 30, 2006             |              |                   |          | 11,196,363  |                   
|                                         |              |                   |          |             |                   

See accompanying notes
to condensed consolidated financial statements.

5

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# MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                            | Three Months Ended September 30,
|----------------------------------------------------------- | --------------------------------
|
|                                                            |                                 
|CASH FLOWS FROM OPERATING ACTIVITIES                        |                                 
|Net income                                                  |                                 
|Adjustments to reconcile net income to net cash provided by |                                 
|operating activities:                                       |                                 
|Depreciation and amortization                               |                                 
|Deferred income taxes                                       |                                 
|Provision for bad debts                                     |                                 
|Non-cash stock-based compensation expense                   |                                 
|Excess tax benefits from stock-based compensation           |                                 
|Changes in operating assets and liabilities :               |                                 
|Accounts receivable                                         |                                 
|Inventories                                                 |                                 
|Prepaid expenses and other current assets                   |                                 
|Accounts payable                                            |                                 
|Accrued compensation and benefits                           |                                 
|Other accrued expenses and current liabilities              |                                 
|Income taxes payable                                        |                                 
|Deferred rent liability                                     |                                 
|Deferred revenue                                            |                                 
|                                                            |                                 
|Net cash provided by operating activities                   |                                 
|                                                            |                                 
|                                                            |                                 
|CASH FLOWS FROM INVESTING ACTIVITIES                        |                                 
|Purchases of property and equipment                         |                                 
|                                                            |                                 
|Net cash used in investing activities                       |                                 
|                                                            |                                 
|                                                            |                                 
|CASH FLOWS FROM FINANCING ACTIVITIES                        |                                 
|Bank line of credit repayments, net                         |                                 
|Bank term loan repayments                                   |                                 
|Excess tax benefits from stock-based compensation           |                                 
|Proceeds from issuance of common stock                      |                                 
|                                                            |                                 
|Net cash provided by (used in) financing activities         |                                 
|                                                            |                                 
|                                                            |                                 
|NET INCREASE (DECREASE) IN CASH                             |                                 
|                                                            |                                 
|CASH, BEGINNING OF PERIOD                                   |                                 
|                                                            |                                 
|                                                            |                                 
|CASH, END OF PERIOD                                         |                                 
|                                                            |                                 
|                                                            |                                 
|SUPPLEMENTAL CASH FLOW INFORMATION                          |                                 
|Interest paid                                               |                                 
|Income taxes paid                                           |                                 

See accompanying notes
to condensed consolidated financial statements.

6

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# MEDIA SCIENCES
INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 1  NATURE OF
BUSINESS AND BASIS OF PRESENTATION

Nature of Business.   Media Sciences International, Inc. is a holding company which conducts its
business through its operating subsidiaries. The Company is a manufacturer of business
color printer supplies, which the Company distributes through an international network of
dealers and distributors and directly to end users in the United States through various
programs. In May 2005, one of our subsidiaries, Cadapult Graphic Systems, Inc.
(Cadapult), discontinued its electronic pre-press sales and service
operations.

Basis of Presentation.   The condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC).  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management, the
unaudited condensed consolidated financial statements reflect all adjustments (consisting
only of normal, recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods indicated.  You should
read these condensed consolidated financial statements in conjunction with the audited
consolidated financial statements and notes thereto included in our Annual Report on Form
10-KSB for the year ended June 30, 2006, filed with the SEC on September 28, 2006. The
June 30, 2006 consolidated balance sheet data was derived from audited consolidated
financial statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America.

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

The results of operations for the
three months ended September 30, 2006 are not necessarily indicative of the results that
may be expected for any other interim period or for the full year ending June 30, 2007.

Reclassifications.   Certain prior period balances have been reclassified to conform to the current
financial statement presentation. These reclassifications had no impact on previously
reported results of operations or stockholders equity.

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.

7

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 2 
CONDENSED CONSOLIDATED BALANCE SHEET COMPONENTS

|                                                |  | September 30,2006(Unaudited) | June 30,2006
|----------------------------------------------- |  | ---------------------------- | ------------
|                                                |  |                              |             
|Accounts receivable, net                        |  |                              |             
|Accounts receivable, gross                      |  |                              |             
|Allowance for doubtful accounts                 |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|Inventories, net of reserves                    |  |                              |             
|Raw materials                                   |  |                              |             
|Finished goods                                  |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|Property and Equipment, net                     |  |                              | Useful Lives
|                                                |  |                              |             
|Equipment                                       |  |                              | 3 - 7 years 
|Furniture and fixtures                          |  |                              | 7 years     
|Automobiles                                     |  |                              | 5 years     
|Leasehold improvements                          |  |                              | 5 - 10 years
|Tooling and molds                               |  |                              | 3 years     
|                                                |  |                              |             
|                                                |  |                              |             
|Less: Accumulated depreciation and amortization |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|Goodwill and other intangible assets, net       |  |                             
|Goodwill                                        |  |                              |             
|Other                                           |  |                              | 1-5 years   
|                                                |  |                              |             
|                                                |  |                              |             
|Less: Accumulated amortization                  |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             
|                                                |  |                              |             

8

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# MEDIA SCIENCES
INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 3  DEBT

The Companys indebtedness under
secured bank loan agreements consisted of the following:

|                                        | September 30,2006(Unaudited) | June 30,2006
|--------------------------------------- | ---------------------------- | ------------
|                                        |                              |             
|Short-term debt:                        |                              |             
|Current maturities of long-term debt    |                              |             
|                                        |                              |             
|Long-term debt:                         |                              |             
|Long-term debt, less current maturities |                              |             
|                                        |                              |             
|                                        |                              |             
|Total Bank Debt                         |                              |             
|                                        |                              |             

We have a revolving line of credit
facility which provides for maximum borrowings of $3,000,000. As of September 30, 2006, we
had no outstanding balance under this line. In connection with the negotiation of this
facility during 2004, we granted a security interest in all of our assets. Borrowings
through January 23, 2006 bore interest at a rate of 0.75% over the banks Prime Rate.
On January 23, 2006, we entered into an Amended and Restated Committed Line of Credit Note,
and an Amendment to Loan Documents (collectively, the Amendments). The
Amendments reduced the interest rate by 0.75% to the banks Prime Rate, and extended
the expiration date of the facility by one year to November 30, 2007. The Amendments also
modified certain financial covenants. Borrowings bear interest at the banks Prime
Rate (8.25% at September 30, 2006) and are payable on demand.

On March 17, 2006, we entered into a
five-year term note with the bank in the amount of $250,000 that bears interest at a fixed
rate of 7.75%, and requires monthly repayments of principal of $5,054. At September 30,
2006, this note had a remaining principal balance of $228,961. The proceeds were used to
finance the purchase of certain long-lived manufacturing property and equipment. The note
is cross collateralized and contains cross default provisions with the revolving line of
credit facility.

On July 27, 2005, we entered into an
equipment lease line of credit with $1,000,000 in initial availability with the bank. Borrowings
bear interest at a rate of approximately 1% over the banks Prime Rate, with terms of
three to seven years. The bank will hold title to the equipment leased under the line of
credit. Any unutilized balance on the line of credit expires on November 30,
2006.  In December 2005, we entered into an operating lease under this line,
reducing the availability under the line by $228,682. This lease requires monthly payments
of $3,453, for 72 months. In September 2006, we entered into an additional operating lease
under this line, effectively utilizing the remaining availability under the lease line.
This lease requires monthly payments of $10,621 for 72 months.

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%, and requires monthly repayments of principal of $8,333. At September 30,
2006, this note had a remaining principal balance of $350,000. The proceeds were used to
finance the leasehold improvements to our Oakland facility. The note is cross
collateralized and contains cross default provisions with the revolving line of credit.

Both the amended revolving line of
credit and the five-year term notes with the bank are subject to two amended financial
covenants. At September 30, 2006 and 2005 and June 30, 2006, the Company was in compliance
with all of its financial covenants.

9

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4  EARNINGS
PER SHARE

Basic earnings 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 common shares
outstanding as adjusted for the incremental shares attributable 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 earnings per common share:

|                                               | Three Months EndedSeptember 30,
|---------------------------------------------- | -------------------------------
|
|                                               |                                
|Numerator for basic and diluted:               |                                
|Net Income (a)                                 |                                
|                                               |                                
|                                               |                                
|Denominator :                                  |                                
|For basic earnings per common share           |                                
|weighted average shares outstanding            |                                
|Effect of dilutive securities  stock options, |                                
|restricted stock units and warrants            |                                
|                                               |                                
|For diluted earnings per common share         |                                
|weighted average shares outstanding adjusted   |                                
|for assumed exercises                          |                                
|                                               |                                
|Basic earnings per share                       |                                
|                                               |                                
|                                               |                                
|Diluted earnings per share                     |                                
|                                               |                                

|(a) |  | Net income for the three months ended September 30, 2006 includes $95,963 of
               stock-based compensation expense, net of tax.  Net income for the three
               months ended September 30, 2005 includes no stock-based compensation expense as
               the period preceded the effective date of SFAS No. 123(R). The effect of
               recording stock-based compensation expense on basic and diluted earnings per
               share was $0.01 per share for the three months ended September 30, 2006.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following warrants and options to
purchase common stock were excluded from the computation of diluted earnings per share for
the three months ended September 30, 2006 and 2005 because their exercise price was
greater than the average market price of the common stock for those periods:

|                                   | Three Months EndedSeptember 30,
|---------------------------------- | -------------------------------
|
|                                   |                                
|Anti-dilutive warrants and options |                                

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5  STOCK-BASED
COMPENSATION

Effective July 1, 2006, Media
Sciences adopted the provisions of SFAS No. 123(R), Share-Based Payment.
 SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee
and non-employee services.  Accordingly, stock-based compensation cost is measured at
grant date, based on the fair value of the award, and is recognized as expense over the
awards requisite service period.  The Company previously applied the intrinsic
value and measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and adopted the disclosure only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.

Prior to the adoption of SFAS No.
123(R)

Prior to the adoption of SFAS No. 123(R),
the Company provided the pro forma disclosures required under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure.

The pro forma information for the
three months ended September 30, 2005 follows:

|                                                                          | Three Months EndedSeptember 30, 2005
|------------------------------------------------------------------------- | ------------------------------------
|                                                                          |                                     
|                                                                          |                                     
|Net income as reported                                                    |                                     
|                                                                          |                                     
|Stock-based employee compensation expense under fair value method, net of |                                     
|related tax effects                                                       |                                     
|                                                                          |                                     
|Pro forma net income                                                      |                                     
|                                                                          |                                     
|                                                                          |                                     
|Basic earnings per share:                                                 |                                     
|As reported                                                               |                                     
|Pro forma                                                                 |                                     
|                                                                          |                                     
|Diluted earnings per share:                                               |                                     
|As reported                                                               |                                     
|Pro forma                                                                 |                                     

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5  STOCK-BASED
COMPENSATION (CONTINUED)

Impact of the adoption of SFAS No.
123(R)

The Company elected to adopt the
provisions of SFAS No. 123 (R) effective as of July 1, 2006 by using the modified
prospective application method.  Under this transition method, compensation cost
recognized for the three months ended September 30, 2006 includes (a) compensation cost
for all share-based payments granted prior to, but not yet vested as of June 30, 2006,
based on the grant date fair value estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all share-based payments granted on or
subsequent to July 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R).  Previously reported amounts have not been
restated.  The effect of recording stock-based compensation for the three months
ended September 30, 2006 was as follows:

|                                                   | Three Months EndedSeptember 30, 2006
|-------------------------------------------------- | ------------------------------------
|                                                   |                                     
|Stock-based compensation expense by type of award: |                                     
|Employee stock options (1)                         |                                     
|Restricted stock units (2)                         |                                     
|Amounts capitalized as inventory                   |                                     
|                                                   |                                     
|Total stock-based compensation expense             |                                     
|Tax effect of stock-based compensation recognized  |                                     
|                                                   |                                     
|Net effect on net income                           |                                     
|                                                   |                                     
|                                                   |                                     
|Excess tax benefit effect on:                      |                                     
|Cash flows from operations                         |                                     
|Cash flows from financing activities               |                                     
|Effect on earnings per share:                      |                                     
|Basic                                              |                                     
|Diluted                                            |                                     
|                                                   |                                     

|(1) |  | Includes the recognition of $117,625 of stock-based compensation expense
               ($74,104 after tax) associated with accelerated vesting of options granted to an
               employee covering 50,000 shares. The Companys Board of Directors approved
               this acceleration of vesting associated with termination of the
               individuals employment with the Company.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Stock-based compensation expense of $22,175 would have been recorded under the
               provisions of APB No. 25.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

As of July 1, 2006, the Company had
an unrecorded deferred stock-based compensation balance of $409,872 after estimated
forfeitures.  In connection with the Companys pro forma disclosures prior to the adoption of
SFAS No. 123(R), the Company accounted for forfeitures upon occurrence.  SFAS No.
123(R) requires forfeitures to be estimated at the time of grant and revised if necessary
in subsequent periods if actual forfeitures differ from those estimates.

During the three months ended
September 30, 2006, the Company granted 10,000 stock options with an estimated total
grant-date fair value of $18,570 after estimated forfeitures.  During the same
period, the Company granted 4,357 shares of restricted stock with a grant date fair value
of $16,927 after estimated forfeitures.

As of September 30, 2006, the
unrecorded deferred stock-based compensation balance was $381,174 after estimated
forfeitures and will be recognized over an estimated weighted average amortization period
of about 3.6 years.

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5  STOCK-BASED
COMPENSATION (CONTINUED)

Valuation Assumptions

In connection with the adoption of
SFAS No. 123(R), the Company reassessed its valuation technique and related
assumptions.  The Company estimates the fair value of stock options using a
Black-Scholes option-pricing model, consistent with the provisions of SFAS No. 123(R) and
SEC Staff Accounting Bulletin (SAB) No. 107. For the Companys prior
period pro forma disclosures of net income, stock-based compensation was determined under
a fair value method as prescribed by SFAS No. 123.  The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing model and
the straight-line attribution approach with the following weighted-average assumptions:

|                                                     | Three months ended September 30,
|---------------------------------------------------- | --------------------------------
|
|                                                     |                                 
|                                                     |                                 
|Risk-free interest rate                              |                                 
|Dividend yield                                       |                                 
|Expected common stock market price volatility factor |                                 
|Average expected life of stock options               |                                 

SFAS No. 123(R) requires the use of
option pricing models that were not developed for use in valuing employee stock options.
The Black-Scholes option-pricing model was developed for use in estimating the fair value
of short-lived exchange traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly subjective
assumptions, including the options expected life and the price volatility of the
underlying stock. The expected stock price volatility assumption was determined using the
historic volatility of a peer group of technology-based manufacturing companies with
similar attributes, including market capitalization, annual revenues, and debt leverage.
The Company placed limited reliance on the historic volatility of its common stock given
the substantial reorganization of the Company in 2005. In 2005, the Company discontinued
the electronic pre-press sales and service operations of its Cadapult Graphic Systems
subsidiary.  Historically, these discontinued operations represented a significant
portion of the Companys operations. These discontinued operations were also
materially different, in many respects, from the Companys present technology-based
manufacturing business. For these reasons, the Company determined that historic peer group
volatility was more reflective of market conditions and a better indicator of expected
volatility than its own historic volatility for years prior to 2005.

Given the Companys relatively
limited experience as a public entity, the Company has for now adopted the simplified
method suggested by the SEC in SAB 107 for determining the expected life of the options.
Under this method, the Company calculates the expected term of an option grant by
averaging its vesting and contractual term. The Company estimates its applicable risk-free
rate based upon the yield of U.S. Treasury securities having maturities similar to the
estimated term of an option grant, adjusted to reflect its continuously compounded
zero-coupon equivalent.

Prior to the adoption of SFAS No.
123(R), the Company used a variety of methods to derive its expected volatility, expected
term and risk-free rate assumptions.

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5  STOCK-BASED
COMPENSATION (CONTINUED)

Equity Incentive Program

The Companys equity incentive
program is a broad-based, long-term retention program that is intended to attract and
retain qualified management and technical employees, and align stockholder and employee
interests.  The equity incentive program presently consists of one plan, the Company's 1998 incentive stock plan, under which
non-employee directors, officers, key employees, consultants and all other employees may
be granted options to purchase shares of our stock, restricted stock units and other types
of equity awards. Under our equity incentive program, stock options generally have a
vesting period of three to five years, are exercisable for a period not to exceed ten
years from the date of issuance and are not granted at prices less than the fair market
value of our common stock at the grant date.  Restricted stock units may be granted
with varying service-based vesting requirements.

Under the Companys 1998
incentive stock plan, 1,000,000 common shares are authorized for issuance through awards
of options or other equity instruments.  As of September 30, 2006, 318,435 common
shares remain available for future issuance under the Plan.

The following table summarizes the
activity under the equity incentive plans for the indicated periods:

|                                          | Number of Shares | Weighted AverageExercise Price
|----------------------------------------- | ---------------- | ------------------------------
|                                          |                  |                               
|                                          |                  |                               
|Balance outstanding at June 30, 2005      |                  |                               
|                                          |                  |                               
|Year ended June 30, 2006:                 |                  |                               
|Options granted                           |                  |                               
|Restricted stock units granted            |                  |                               
|Options exercised                         |                  |                               
|Options cancelled/expired/forfeited       |                  |                               
|                                          |                  |                               
|                                          |                  |                               
|Balance outstanding at June 30, 2006      |                  |                               
|Quarter ended September 30, 2006:         |                  |                               
|Options granted                           |                  |                               
|Restricted stock units granted            |                  |                               
|Options exercised                         |                  |                               
|Options cancelled/expired/forfeited       |                  |                               
|                                          |                  |                               
|                                          |                  |                               
|Balance outstanding at September 30, 2006 |                  |                               
|                                          |                  |                               

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5  STOCK-BASED
COMPENSATION (CONTINUED)

The options outstanding and
exercisable at September 30, 2006 were in the following exercise price ranges:

|                         | Options Outstanding | Options Exercisable                              
|------------------------ | ------------------- | -------------------------------------------------
|                         |                     |                                                  
|Range of
Exercise
Prices | Number
Outstanding  | Weighted
Average
Remaining
Contractual
Life-Years
|                         |                     |                                                  
|                         |                     |                                                  
|$0.43 to $0.85           | 78,200              | 4.95                                             
|$1.00 to $2.00           | 849,759             | 4.04                                             
|$2.01 to $4.80           | 244,602             | 7.54                                             
|                         |                     |                                                  
|                         | 1,172,561           | 4.83                                             
|                         |                     |                                                  

The aggregate intrinsic value in the
table above represents the total pretax intrinsic value, based on the Companys
closing stock price of $5.34 as of September 30, 2006, which would have been received by
the option holders had all option holders exercised their options as of that date. The
total number of in-the-money options exercisable as of September 30, 2006 was 929,228.

The weighted average grant date fair
value of options, as determined under SFAS No. 123(R), granted during the three months
ended September 30, 2006 and 2005 was $2.73 and $0.52 per share, respectively.

The total intrinsic value of options
exercised during the three months ended September 30, 2006 and 2005 was $226,550 and
$27,125, respectively.  The total cash received from employees as a result of
employee stock option exercises during the three months ended September 30, 2006 and 2005
was approximately $106,500 and $1,500, respectively.  In connection with these
exercises, the tax benefits realized by the Company for the three months ended September
30, 2006 and 2005 were $83,824 and $0, respectively.

The Company settles employee stock
option exercises with newly issued common shares.

Restricted Stock Units

As of July 1, 2006, the Company had a
deferred stock-based compensation balance related to restricted stock units of $292,996
($206,160 after estimated forfeitures).

During the three months ended
September 30, 2006, the Companys Board of Directors approved the grant of 4,357
shares of restricted stock units to an employee.  These restricted stock units vest
in equal installments on the first and second anniversaries of the grant date.  The
value of the restricted stock units was based on the closing market price of the
Companys common stock on the date of award.  The total grant date fair value of
the restricted stock units granted during the three months ended September 30, 2006 was
$16,927 after estimated forfeitures.  Stock-based compensation cost for
restricted stock units for the three months ended September 30, 2006 was $15,393.

As of September 30, 2006, there was
$207,693 of total deferred stock-based compensation after estimated forfeitures related to
non-vested restricted stock units granted under the Equity Incentive Program.  That
cost is expected to be recognized over an estimated weighted average period of 3.7
years.

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5  STOCK-BASED
COMPENSATION (CONTINUED)

The following table summarizes the Company's restricted stock unit activity for the indicated periods:

|                                           | Number ofShares | Grant DateFair Value | Weighted AverageGrant Date FairValue Per Share
|------------------------------------------ | --------------- | -------------------- | ----------------------------------------------
|                                           |                 |                      |                                               
|                                           |                 |                      |                                               
|Balance outstanding at June 30, 2005       |                 |                      |                                               
|                                           |                 |                      |                                               
|Year ended June 30, 2006:                  |                 |                     
|Restricted stock units granted             |                 |                      |                                               
|Restricted stock units vested              |                 |                      |                                               
|Restricted stock units cancelled/forfeited |                 |                      |                                               
|                                           |                 |                      |                                               
|                                           |                 |                     
|Balance outstanding at June 30, 2006       |                 |                      |                                               
|                                           |                 |                     
|Quarter ended September 30, 2006:          |                 |                      |                                               
|Restricted stock units granted             |                 |                      |                                               
|Restricted stock units vested              |                 |                      |                                               
|Restricted stock units cancelled/forfeited |                 |                      |                                               
|                                           |                 |                      |                                               
|                                           |                 |                      |                                               
|Balance outstanding at September 30, 2006  |                 |                      |                                               
|                                           |                 |                      |                                               

NOTE 6  ACCRUED PRODUCT WARRANTY COSTS

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 liability and expense 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 a separately captioned item in cost
of goods sold.

Changes in accrued product warranty
costs for the three months ended September 30, 2006 and 2005 were as follows:

|                                                              | Three Months EndedSeptember 30,
|------------------------------------------------------------- | -------------------------------
|
|                                                              |                                
|Accrued product warranty costs at the beginning of the period |                                
|                                                              |                                
|Warranties accrued during the period                          |                                
|Warranties settled during the period                          |                                
|                                                              |                                
|Net change in warranty reserve                                |                                
|                                                              |                                
|Accrued product warranty costs at the end of the period       |                                
|                                                              |                                

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# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7  RESEARCH
AND DEVELOPMENT

Research and product development
costs, which consist of salary and related benefits costs of our technical staff, as well
as product development costs including research of existing patents, conceptual
formulation, design and testing of product alternatives, and construction of prototypes,
are expensed as incurred. It also includes indirect costs, including facility costs based
on the departments proportionate share of facility use. For the three months ended
September 30, 2006 and 2005, our research and product development costs were $419,876 and
$219,710, respectively.

NOTE 8  ADVERTISING
EXPENSES

Advertising expenses are deferred
until the first use of the advertising. Deferred advertising costs at September 30, 2006
and 2005 totaled $5,333 and $56,708, respectively. Advertising expense for
the three months ended September 30, 2006 and 2005 amounted to $270,585 and
$142,035, respectively.

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## ITEM 2.  
MANAGEMENT'S DISCUSSION AND ANALYSIS

FORWARD LOOKING STATEMENTS

Our disclosure and analysis in this
report contain forward-looking information, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, about our
financial results and estimates, business prospects and products in development that
involve substantial risks and uncertainties. You can identify these statements by the fact
that they do not relate strictly to historic or current facts. These forward-looking
statements use terms such as believes, expects, may,
will, should, anticipates, estimate,
project, plan, or forecast or other words of similar
meaning relating to future operating or financial performance or by discussions of
strategy that involve risks and uncertainties.   From time to time, we also may make
oral or written forward-looking statements in other materials we release to the public.
 These forward-looking statements are based on many assumptions and factors, and are
subject to many conditions, including, but not limited to, our continuing ability to
obtain additional financing, dependence on contracts with suppliers and major customers,
competitive pricing for our products, demand for our products, changing technology, our
introduction of new products, industry conditions, anticipated future revenues and results
of operations, retention of key officers, management or employees, prospective business
ventures or combinations and their potential effects on our business.  Our actual
results, performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Forward-looking statements are made
based upon managements current expectations and beliefs concerning future
developments and their potential effects upon our business.

We cannot guarantee that any
forward-looking statement will be realized, although we believe we have been prudent in
our plans and assumptions. We cannot predict whether future developments affecting us will
be those anticipated by management, and there are a number of factors that could adversely
affect our future operating results or cause our actual results to differ materially from
the estimates or expectations reflected in such forward-looking statements.  Factors
that might cause or contribute to such differences include, but are not limited to, those
discussed in this section and those set forth in Item 6, Factors Affecting Results
Including Risks and Uncertainties included in our Form 10-KSB for the year ended
June 30, 2006, filed September 28, 2006. You
should carefully review these risks and also review the risks described in other documents
we file from time to time with the SEC.  You are cautioned not to place undue
reliance on these forward-looking statements. We undertake no obligation to publicly
update forward-looking statements, whether as a result of new information, future events
or otherwise.

You should read the following
discussion and analysis in conjunction with the information set forth in the unaudited
financial statements and notes thereto, included elsewhere herein, and the audited
financial statements and the notes thereto, included in our Form 10-KSB for the year ended
June 30, 2006, filed September 28, 2006.

EXECUTIVE SUMMARY

Media Sciences International, Inc. is
the leading independent manufacturer of color toner cartridges and solid ink sticks for
business color printers. Our products are distributed 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.

Effective July 1, 2006, we adopted
the provisions of SFAS No. 123(R), Share-Based Payment, which requires us to
measure all employee stock-based compensation awards using a fair value method and record
such expense in our consolidated financial statements. Prior to July 1, 2006, we had
accounted for stock-based compensation awards in accordance with Accounting Principles
Board (APB) opinion No. 25. We have chosen to implement SFAS No 123(R) using the modified
prospective method. Under this method, periods prior to July 1, 2006 are not restated to
reflect stock-based compensation using a fair value method. Accordingly, our first quarter
2007 results include $145,995 of pretax non-cash stock-based compensation expense ($95,963
after tax), of which $117,625 pretax ($74,104 after tax) relates to a one-time Board
approved severance paid in the form of a stock option vesting acceleration to an
individual.

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Net revenues, cost of goods sold,
gross profit, gross margin, income from operations, net income, and diluted earnings per
share are the key indicators we use to monitor our financial condition and operating
performance. We also use certain non-GAAP measures such as earnings before interest taxes,
depreciation and amortization (EBITDA) to assess business trends and performance, and to
forecast and plan future operations.  The following table sets forth the key
quarterly and annual GAAP financial measures we use to manage our business (in thousands,
except per share data).

|                           | Fiscal Year 2007 |  | Fiscal Year 2006
|-------------------------- | ---------------- |  | ----------------
|                           |                  |  |                 
|                           | 1st              |  | 1st             
|                           | Quarter          |  | Quarter         
|                           |                  |  |                 
|Net revenues               | $5,625           |  | $4,776          
|Costs of goods sold        | $2,515           |  | $2,483          
|                           |                  |  |                 
|Gross profit               | $3,110           |  | $2,294          
|Gross margin               | 55.3%            |  | 48.0%           
|Income from operations (a) | $788             |  | $739            
|Operating margin           | 14.0%            |  | 15.5%           
|Net income (b)             | $543             |  | $423            
|Diluted earnings per share | $0.05            |  | $0.04           

|(a) | includes pretax non-cash stock-based compensation expense of $145,995 and $21,304 during the first quarter of fiscal year 2007 and the fourth quarter of fiscal year 2006, respectively.  
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | includes after-tax non-cash stock-based compensation expense of $95,963 and $13,421 during the first quarter of fiscal year 2007 and the fourth quarter of fiscal year 2006, respectively.

RESULTS OF OPERATIONS

Net Revenues.   Net revenues for the
quarter were the second best on record, $0.3 million behind the record set in the
Companys previous quarter ended June 30, 2006. Our consolidated net revenues for the
three months ended September 30, 2006 compared to the same period in 2005, increased by
$0.8 million, or 18% to $5.6 million, from $4.8 million. The Companys net revenue
growth rate increased from the 8% realized during the three months ended September 30,
2005 over the same period in 2004. For the three months ended September 30, 2006 as
compared to the same period in 2005, sales of color toner cartridges increased by about
42%, while sales of solid ink sticks increased approximately 11%.

The year-over-year increase in net
revenues is attributed primarily to recurring sales from the Companys growing
portfolio of color business printer supply products. To a lesser extent, some of the noted
growth is also attributed to the general growth and increased market acceptance of color
business printers and an increase in market share for some of our existing products.

On September 21, 2006 we announced
the launch of a new product; toner cartridges for use in the Oki® C3100 and C3200
color business printers. The market opportunity associated with this product launch is
significant; with the installed base for Oki C3100 and C3200 printers now the fourth
largest installed base of our portfolio of products. The European market comprises more
than 80% of the estimated total installed base. The Oki C3100 is not sold in the U.S. The
Company began shipping cartridges for use in the Oki C3100 and C3200 in October 2006.

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Gross Profit.   The consolidated gross
profit for the three months ended September 30, 2006 compared to the same period in 2005,
increased by $0.8 million or 36% to $3.1 million from $2.3 million. For the three months
ended September 30, 2006 our gross margin was 55% of net revenues as compared with 48% of
net revenues for the three months ended September 30, 2005. This 700 basis point increase
in margin is primarily attributed to substantial yield improvements in our solid ink
manufacturing, a transition from low margin versions of cartridges to higher margin
Clearcase and Premium cartridges, and a reduction in our product warranty costs. These
favorable improvements to our margins were partially offset by certain increases in our
raw material costs, higher manufacturing depreciation and amortization costs, and greater
costs of outbound shipping and freight.

Our 55% gross margin for the quarter
ended September 30, 2006 was approximately 100 basis points higher than the 54% gross
margin we realized in the prior fiscal quarter ended June 30, 2006. This slight sequential
margin improvement reflects a more favorable sales mix of solid ink to toner business
during the quarter.

We do not expect to realize
significant additional yield improvements in our solid ink production, nor do we have any
further product transitions which will materially reduce our costs. Therefore, any further
increases in raw material or inbound shipping costs may decrease our margins unless offset
by other manufacturing efficiencies. The Company has in development several new color
toner cartridge products which if launched are expected to carry margins that are lower
than our current margins. The impact these new products may have on our future margins
will be a function of each products ultimate sales volumes. If these new products
are particularly successful, it is likely that our future gross margins may reflect some
erosion.

Research and Development.   Research and development spending for the three months ended September 30, 2006
compared to the same period in 2005, increased by $0.20 million or 91% to $0.42 million
from $0.22 million. The $0.42 million of research and development spending for the three
months ended September 30, 2006 includes $0.13 million of non-cash stock-based
compensation expense, $0.12 million of this expense relates to a one-time Board approved
severance paid in the form of a stock option vesting acceleration to a former research and
development executive.

This increase was driven by our
initiatives to increase our product breadth through the development and launch of new
products. The increase in our research and development spending was broad-based. During
2006, we added new technical personnel and management to our research and development
team. We also increased research and development capital and operating expenditures as we
accelerated the pace of new product development. Looking forward, we expect continued
growth in our research and development spending both as a percentage of net revenues and
on a year-over-year basis.

Selling, General and Administrative.   Selling, general and administrative expense, exclusive of depreciation
and amortization, for the three months ended September 30, 2006 compared to the same
period in 2005, increased by $0.55 million or 43% to $1.84 million from $1.28 million;
representing 33% and 27% of net revenues, respectively. The increase in selling, general
and administrative expense was primarily driven by greater year-over-year professional
fees, increased compensation and benefits costs, and greater advertising spending.
Specifically, professional fees increased by $0.22 million, including legal fees
associated with the Xerox litigation and the lawsuit we have pending against our former
insurance broker of about $.14 million, year-end audit fees, costs of implementing SFAS
No. 123(R), and various other projects comprising the difference. Over this same period,
compensation and benefits costs, including sales commissions, increased by about $0.16
million, reflecting the hiring of additional sales, marketing, and operations personnel.
Over these comparative periods, the Company increased its advertising spending by $0.13
million or about 90% to $0.27 million for the three months ended September 30, 2006 from
$0.14 million for the same period in 2005.

Selling, general and administrative
expense, exclusive of depreciation and amortization for the three months ended September
30, 2006 includes $0.019 million of non-cash stock-based compensation expense. During the
remainder of fiscal 2007, we do expect some continued increase our advertising, marketing,
sales and administrative costs through fiscal 2007.

Depreciation and Amortization.   Non-manufacturing depreciation and amortization expense for the three months ended
September 30, 2006 compared to the same period in 2005, increased by $0.02 million to
$0.07 million from $0.05 million. The increase reflects asset additions made by the
Company over the year.

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Interest Income (Expense), net.   For
the three months ended September 30, 2006, the Company had net interest income of $0.008
million as compared with net interest expense of $0.035 million for the three months ended
September 30, 2005. The $0.043 million improvement in net interest income was primarily
driven by a significant reduction in the Companys interest bearing debt and a
significant increase in the Companys interest bearing cash balances.

Income Taxes.   For the three months
ended September 30, 2006, we recorded income tax expense of $0.25 million as compared with
income tax expense of $0.28 million for the three months ended September 30, 2005. For the
three months ended September 30, 2006 and 2005, our effective tax rates were 31.8% and
40.0%, respectively. Our effective blended state and federal tax rate varies due to the
magnitude of various permanent differences between reported pretax income and what is
recognized as taxable income by various taxing authorities. The availability of tax
credits associated with manufacturing and research and development activities, as well as
exclusions, such as the Extraterritorial Income Exclusion, can result in an effective rate
that is lower than the statutory rate.

In April 2006, we initiated a
thorough review of our historic tax compliance. As a result, we identified that we had not
historically taken advantage of all of the credits or income exemptions for which we were
entitled. Further, we implemented certain other fundamental tax planning to reduce our
current and future effective tax rate. As a result, the 800 basis point decrease in our
effective tax rate for the three months ended September 30, 2005 to 2006 reflects the
realization of our tax planning efforts and application of available credits and income
exclusions. We expect our consolidated effective tax rate for the fiscal year ended June
30, 2007 to be about 35%. This effective tax rate could significantly decline further
should we decide to manufacture all or a portion of our products outside the U.S. in lower
tax jurisdictions. We are still evaluating the viability of such a strategy and can make
no assurances that we will either pursue such a strategy or, that if we do, that it will
be successful in realizing the intended benefits.

Income from Continuing Operations.   For the three months ended September 30, 2006, we earned $0.54 million or $0.05 per share
basic and fully diluted. This compares favorably with the $0.42 million or $0.04 per share
basic and fully diluted earned for the three months ended September 30, 2005.

RECENT ACCOUNTING
PRONOUNCEMENTS

In December 2004, the Financial
Accounting Standards Board (the FASB) issued SFAS No. 123 (revised 2004),
Share-Based Payment. SFAS No. 123(R) requires the Company to measure all
employee stock-based compensation awards using a fair value method and record such expense
in its consolidated financial statements.  In March 2005, the SEC issued Staff
Accounting Bulletin (SAB) 107, which provides the Staffs views regarding
interactions between SFAS No. 123(R) and certain SEC rules and regulations and provides
interpretations of the valuation of share-based payments for public companies. The
adoption of SFAS No. 123(R) requires additional accounting related to the income tax
effects and additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. The adoption of SFAS No. 123(R) in the fiscal
quarter ended September 30, 2006, had a material impact on the Companys consolidated
results of operations, financial position and statement of cash flows.

In June 2005, the FASB issued SFAS
No. 154, Accounting Changes and Error Corrections, a replacement of APB
Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, (Statement 154).
Statement 154 changes the requirements for the accounting for and reporting of a change in
accounting principle. Previously, most voluntary changes in accounting principles required
recognition via a cumulative effect adjustment in the determination of net income of the
period of the change. Statement 154 requires retrospective application to prior
periods financial statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. Statement 154 is effective
for accounting changes made in fiscal years beginning after December 15, 2005; however,
Statement 154 does not change the transition provisions of any existing accounting
pronouncements. The adoption of Statement 154 did not have a material effect on the
Companys consolidated financial position, results of operations or cash flows.

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In March 2006, the FASB Emerging
Issues Task Force (EITF) reached a consensus on EITF Issue No. 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation), (EITF
06-3). The guidance prescribes the disclosure of the Companys accounting
treatment of any tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction, which includes, but is not limited to, sales, use, value
added and some excise taxes. The Companys accounting treatment of such taxes
collected is to be made in the Companys disclosure of significant accounting
policies. The provisions of EITF 06-3 are effective for fiscal years beginning after
December 15, 2006. The Companys current disclosure practices comply with the
requirements prescribed by EITF 06-3.

In June 2006, the FASB issued
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes an interpretation of SFAS No. 109. FIN 48 will require the Company to
recognize the financial statement effects of a tax position when it is more likely than
not, based on the technical merits, that the position will be sustained upon examination.
As used in this Interpretation, the term more likely than not means a likelihood of more
than 50 percent; the terms examined and upon examination also include resolution of the
related appeals or litigation processes, if any. The determination of whether or not a tax
position has met the more-likely-than-not recognition threshold is to be determined based
on the facts, circumstances, and information available at the reporting date. The
provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The
adoption of FIN 48 is not expected to have a material effect on the Companys
consolidated financial position, results of operations or cash flows.

In September 2006, the SEC staff
issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 was issued in order to eliminate the diversity of practice
surrounding how public companies quantify financial statement misstatements. This SAB
establishes a dual approach that requires quantification of financial
statement errors based on the effects of the error on each of the Companys financial
statements and the related financial statement disclosures. The SEC has stated that SAB
No. 108 should be applied no later than the annual financial statements for the first
fiscal year ending after November 15, 2006, with earlier application encouraged. The
Company currently believes the adoption of SAB 108 will not have a material impact on its
financial position, results of operations and cash flows.

LIQUIDITY AND CAPITAL
RESOURCES

During the three months ended
September 30, 2006, our cash and equivalents increased by $1.3 million to $2.8 million.
$1.4 million of this increase was generated from operating activities; $0.1 million was
from financing activities, namely proceeds received from employees associated with option
exercises, partially offset by $0.17 million of cash used in investing activities. Cash
used in investing activities included the purchase of equipment, tooling and leasehold
improvements in the amount of $0.17 million represented an increase of $0.04 million or
34% from the comparable spend of $0.12 million for the three months ended September 30,
2005.

The Company generated $1.4 million of
positive cash flow from operating activities for the three months ended September 30, 2006
as compared with $0.5 million for the three months ended September 30, 2005. The $1.4
million of cash generated by operating activities for the three months ended September 30,
2006 resulted from $0.54 million of income from operations, add-back of net non-cash
charges totaling $0.36 million, and $0.47 million of cash provided primarily by a net decrease in
the Companys non-cash working capital (current assets less cash and cash equivalents
net of current liabilities). Specifically, for the three months ended September 30, 2006,
accounts receivable decreased by $0.26 million, prepaid expenses and other current assets
decreased by $0.21 million, inventories increased by $0.23 million, accounts payable
increased by $0.28 million, other accrued expense and current liabilities increased by
$0.37 million, and accrued compensation and benefits deceased by $0.42 million with the
disbursement of fiscal 2006 related incentive compensation.

During the three months ended
September 30, 2006, our inventory levels increased by $0.2 million or 5% to $4.7 million.
The increase in inventories was generally due to the raw materials inventories associated
with new products we are preparing to launch, including the new Oki C3100 and C3200
product.

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. As of September 30, 2006, deferred
revenue associated with the program totaled $1.1 million, unchanged from levels at June
30, 2006. The continued ability of the INKlusive program 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.

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We have a revolving line-of-credit
facility which provides for maximum borrowings of $3.0 million. As of September 30, 2006,
we had no outstanding balance under this line. In connection with the negotiation of this
facility during 2004, we granted a security interest in all of our assets. Borrowings
through January 23, 2006 bore interest at a rate of 0.75% over the banks Prime Rate.
On January 23, 2006 we entered into an Amended and Restated Committed Line of Credit Note,
and an Amendment to Loan Documents (collectively, the Amendments). The
Amendments reduced the interest rate by 0.75% to the banks Prime Rate, and extended
the expiration date of the facility by one year to November 30, 2007. The Amendments also
modified certain financial covenants, which are described below. Borrowings bear interest
at the banks Prime Rate (8.25% at September 30, 2006) and are payable on demand.

In March 2006, we entered into a
five-year term note with our bank in the amount of $0.25 million that bears interest at a
fixed rate of 7.75%, and requires monthly repayments of principal of $5,054. At September
30, 2006, this note had a remaining principal balance of $0.2 million. The proceeds were
used to finance the purchase of certain long-lived manufacturing property and equipment.
The note is cross collateralized and contains cross default provisions with the revolving
line of credit facility.

In July 2005, we entered into an
equipment lease line of credit with $1.0 million in availability with the bank. Borrowings
bear interest at a rate of approximately 1% over the banks Prime Rate, with terms of
three to seven years. The bank will hold title to the equipment leased under the line of
credit. Any unutilized balance on the line of credit expires on November 30,
2006.  In December 2005, we entered into an operating lease under this line,
reducing the availability under the line by $228,682. This lease requires monthly payments
of $3,453, for 72 months. In September 2006, we entered into an operating lease under this
line, effectively utilizing the remaining availability under the lease line. This lease
requires monthly payments of $10,621, for 72 months.

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%, and requires monthly repayments of principal of $8,333. At September
30, 2006, this note had a remaining principal balance of $0.35 million. The proceeds were
used to finance the leasehold improvements to our Oakland facility. The note is cross
collateralized and contains cross default provisions with the revolving line of credit.

Both the amended revolving
line-of-credit and the five-year term notes with the bank are subject to two amended
financial covenants as follows:

| | (a) The Company will maintain, as of the end of each fiscal quarter, a ratio of
                    Funded Debt to EBITDA of not more than 2.50 to 1.00, measured on a rolling four
                    quarter basis commencing with quarter ending June 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) The Company will maintain, as of the end of each fiscal quarter, a ratio of
                    EBITDA to Fixed Charge (EBITDA to Fixed Charge) of more than 1.00 to
                    1.00, measured on a rolling four quarter basis commencing with quarter ending
                    June 30, 2006. (Measurement will be on a six month basis for quarter ended March
                    31, 2006 and a nine month basis for quarter ending March 31, 2006).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As used herein:
| | ---------------

| | CPLTD
means the scheduled payments of principal on all indebtedness for borrowed money having an
original term of more than one year (including but not limited to amortization of
capitalized lease obligations), as shown on the Companys financial statements as of
one year prior to the date of determination.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EBITDA
means net income plus interest expense plus income tax expense plus
depreciation plus amortization.
| | ------------------------------------------------------------------------------------------------------------

| | EBITDA
to Fixed Charge means (i) EBITDA minus Unfunded Capital Expenditures divided
by (ii) taxes actually paid plus CPLTD and interest expense.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

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| | Funded
Debt means all borrowed debt including senior borrowed debt and subordinated
debt.
| | -------------------------------------------------------------------------------------------

| | Unfunded
Capital Expenditures represents the difference between actual capital
expenditures and term financing, the proceeds of which were used to purchase such capital
expenditures. In effect, this represents capital expenditures which were purchased with
operating cash flow.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At no time since the inception of
this loan agreement have we been in violation of these covenants.

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.

INFLATION

We have experienced increases in raw
materials costs and the costs of shipping and freight to deliver those material and
finished products to our facility over the last 12 months. While we have historically
offset any inflation in operating costs through increased productivity and improved yield,
the recent increases have impacted profit margins. We have embarked on a program to
improve our procurement of raw materials. We believe this program will greatly mitigate
the increases in raw material prices and shipping and freight costs that we have
experienced.

SEASONALITY

Historically, we have not experienced
any significant seasonality in our business. As we continue to grow our international
business relative to our North American business, we may experience a more notable level
of seasonality, especially during the summer months.

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## ITEM 3.  
CONTROLS AND PROCEDURES

The Companys management, with
the participation of our Chief Executive Officer and Chief Financial Officer, has
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 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 effective.

There have not been any changes,
except for the improvements described below, in the Companys internal controls over
financial reporting during the three months ended September 30, 2006, that have materially
affected, or are reasonably likely to materially affect, the Companys internal
controls over financial reporting. We attempt to proactively identify opportunities to
continually improve our internal controls, including those over financial reporting, to
ensure they continue to operate effectively and efficiently.

In March 2006, the Company hired a
Chief Financial Officer, with significant Sarbanes-Oxley compliance experience. 
Since then, the Company 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 certain key risks. 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.

During the three months ended
September 30, 2006, the Company implemented additional procedures and controls in
purchasing, receiving, and inventory management, and hired additional staff to 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.

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.

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PART II. OTHER
INFORMATION

## ITEM 6. 
EXHIBITS

The following exhibits are filed with
this report:

|                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number
Exhibit 31.1* 
                  
Exhibit 31.2* 
                  
Exhibit 32.1* 
                  
Exhibit 32.2* 
                  
_____
* Filed herewith. |  | Description of Exhibit

Certification of Chief Executive Officer pursuant to Securities Exchange Act
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer pursuant to Securities Exchange
Act Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer Pursuant to Securities Exchange Act
Rule 13a-14(b) and 18 U.S.C. Section 1350
Certification of Chief Financial Officer Pursuant to Securities Exchange
Act Rule 13a-14(b) and 18 U.S.C. Section 1350

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SIGNATURES

In
accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

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

|Dated:  November 14, 2006 | By:/s/ Michael W. Levin
        Michael W. Levin
        Chief Executive Officer and President
|------------------------- | ----------------------------------------------------------------------------------------------

|Dated:  November 14, 2006 | By:/s/ Kevan D. Bloomgren
        Kevan D. Bloomgren
        Chief Financial Officer
|------------------------- | ------------------------------------------------------------------------------------

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