# 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 March 31, 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) filed
all reports required to be filed by Section 13 or 15(d) of the 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.
Yes x
 No o

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

As of May 4, 2006, the issuer had
11,114,529 shares of common stock outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No
x

---

# MEDIA
SCIENCES INTERNATIONAL, INC.
AND SUBSIDIARIES

# FORM 10-QSB
FOR THE QUARTER ENDED
MARCH 31, 2006

# TABLE OF
CONTENTS

|           |  |                                                                                                                          |  | Page
|---------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                                          |  |     
|PART I.    |  | FINANCIAL INFORMATION                                                                                                    |  |     
|           |  |                                                                                                                          |  |     
|Item 1.    |  | Financial Statements                                                                                                     |  | 3   
|           |  |                                                                                                                          |  |     
|           |  | Condensed Consolidated Balance Sheets
as of March 31, 2006 (Unaudited) and June 30, 2005                                 |  | 3   
|           |  |                                                                                                                          |  |     
|           |  | Condensed Consolidated Statements of Income
For the Three and Nine Months Ended March 31, 2006 and 2005 (Unaudited)      |  | 4   
|           |  |                                                                                                                          |  |     
|           |  | Condensed Consolidated Statement of Changes in Shareholders' Equity
For the Nine Months Ended March 31, 2006 (Unaudited) |  | 5   
|           |  |                                                                                                                          |  |     
|           |  | Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2006 and 2005 (Unaudited)            |  | 6   
|           |  |                                                                                                                          |  |     
|           |  | Notes to Consdense Consolidated Financial Statements                                                                     |  | 7   
|           |  |                                                                                                                          |  |     
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and
Results of Operations                                    |  | 15  
|           |  |                                                                                                                          |  |     
|Item 3.    |  | Controls and Procedures                                                                                                  |  | 20  
|           |  |                                                                                                                          |  |     
|Part II.   |  | OTHER INFORMATION                                                                                                        |  |     
|           |  |                                                                                                                          |  |     
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                      |  | 21  
|           |  |                                                                                                                          |  |     
|Item 5.    |  | Other Information                                                                                                        |  | 21  
|           |  |                                                                                                                          |  |     
|Item 6.    |  | Exhibits                                                                                                                 |  | 23  
|           |  |                                                                                                                          |  |     
|Signatures |  |                                                                                                                          |  | 24  

---

PART I. FINANCIAL
INFORMATION

## ITEM 1. 
FINANCIAL STATEMENTS

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

`March 31,        June 30,
                                     ASSETS                              2006       2005 (Restated)
                                                                     (Unaudited)       (Note 1)
                                                                     ------------    ------------

CURRENT ASSETS :
    Cash                                                             $  1,070,575    $    611,016
    Accounts receivable, less allowance for doubtful accounts
       of $50,000 at March, $35,000 at June                             2,329,076       2,175,512
    Inventories                                                         4,138,113       3,196,323
    Deferred tax assets                                                   582,778         959,910
    Prepaid expenses and other current assets                             422,121         308,822
                                                                     ------------    ------------
        Total Current Assets                                            8,542,663       7,251,583

PROPERTY AND EQUIPMENT, NET                                             2,541,899       2,058,251

OTHER ASSETS:
    Goodwill and other intangible assets, net                           3,584,231       3,584,231
    Other assets                                                           78,201          63,911
                                                                     ------------    ------------
                                                                        3,662,432       3,648,142

                                                                     ------------    ------------
TOTAL ASSETS                                                         $ 14,746,994    $ 12,957,976
                                                                     ============    ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
    Bank line of credit                                              $       --      $  1,620,233
    Bank term loan                                                        150,000         100,000
    Accounts payable                                                    1,542,408       1,254,921
    Accrued compensation and benefits                                     535,996         128,413
    Other accrued expenses and current liabilities                        353,568          14,019
    Income taxes payable                                                  362,500             295
    Accrued product warranty                                              256,060         291,733
    Deferred revenue                                                      699,179         526,853
                                                                     ------------    ------------
        Total Current Liabilities                                       3,899,711       3,936,467

OTHER LIABILITIES :
    Bank term loan, less current maturities                               500,000         375,000
    Deferred rent liability                                               311,946         341,988
    Deferred revenue, less current portion                                430,658         280,418
    Deferred tax liabilities                                              443,556         404,099
                                                                     ------------    ------------
        Total Other Liabilities                                         1,686,160       1,401,505
                                                                     ------------    ------------

TOTAL LIABILITIES                                                       5,585,871       5,337,972
                                                                     ------------    ------------

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 11,067,029 shares in March,
       10,953,606 shares in June                                           11,067          10,954
    Additional paid-in capital                                          9,802,729       9,753,405
    Cost of common stock in treasury, none in March,
       54,577 shares in June                                                 --          (112,913)
    Accumulated deficit                                                  (652,673)     (2,031,442)
                                                                     ------------    ------------
        Total shareholders' equity                                      9,161,123       7,620,004
                                                                     ------------    ------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                           $ 14,746,994    $ 12,957,976
                                                                     ============    ============`

See accompanying notes
to condensed consolidated financial statements.

---

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

`Three Months Ended              Nine Months Ended
                                                                 March 31,                       March 31,
                                                           2006            2005            2006           2005
                                                       ------------    ------------    ------------   ------------

NET SALES                                              $  5,371,581    $  4,070,179    $ 15,247,732   $ 13,140,444

COST OF GOODS SOLD:
    Cost of goods sold, excluding depreciation
        and amortization                                  2,182,348       1,981,371       6,260,166      6,514,070
    Depreciation and amortization                           128,979          66,629         380,747        200,845
                                                       ------------    ------------    ------------   ------------
        Total cost of goods sold                          2,311,327       2,048,000       6,640,913      6,714,915

                                                       ------------    ------------    ------------   ------------
GROSS PROFIT                                              3,060,254       2,022,179       8,606,819      6,425,529

OTHER COSTS AND EXPENSES:
    Selling, general and administrative, excluding
       depreciation and amortization, loss from
       sublease and moving expense,
       and impact of variable plan accounting             2,162,035       1,818,132       6,091,139      5,221,622
    Depreciation and amortization                            58,096          71,880         163,472        197,550
    Loss from sublease and moving expenses                     --           528,050            --          528,050
    Impact of variable plan accounting                         --           192,321            --          238,956
                                                       ------------    ------------    ------------   ------------
        Total other costs and expenses                    2,220,131       2,610,383       6,254,611      6,186,178

                                                       ------------    ------------    ------------   ------------
INCOME (LOSS) FROM OPERATIONS                               840,123        (588,204)      2,352,208        239,351

Interest expense, net                                         4,283          44,533          54,259        149,918
                                                       ------------    ------------    ------------   ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES                                                835,840        (632,737)      2,297,949         89,433
Provision (benefit) for income taxes                        334,336        (176,168)        919,180        121,714
                                                       ------------    ------------    ------------   ------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                    501,504        (456,569)      1,378,769        (32,281)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS                     --           (82,740)           --           29,161
Provision (benefit) for income taxes                           --           (27,783)           --           18,180
                                                       ------------    ------------    ------------   ------------

INCOME (LOSS) FROM DISCONTINUED OPERATIONS                     --           (54,957)           --           10,981
                                                       ------------    ------------    ------------   ------------

NET INCOME (LOSS)                                      $    501,504    $   (511,526)   $  1,378,769   $    (21,300)
                                                       ============    ============    ============   ============


BASIC EARNINGS (LOSS) PER SHARE
    Income (loss) from continuing operations           $       0.05    $      (0.04)   $       0.13   $      (0.00)
    Income (loss) from discontinued operations         $       --      $      (0.01)   $       --     $       0.00
                                                       ------------    ------------    ------------   ------------
    Net Income (loss)                                  $       0.05    $      (0.05)   $       0.13   $      (0.00)
                                                       ============    ============    ============   ============

DILUTED EARNINGS (LOSS) PER SHARE
    Income (loss) from continuing operations           $       0.04    $      (0.04)   $       0.12   $      (0.00)
    Income (loss) from discontinued operations         $       --      $      (0.01)   $       --     $       0.00
                                                       ------------    ------------    ------------   ------------
    Net Income (loss)                                  $       0.04    $      (0.05)   $       0.12   $      (0.00)
                                                       ============    ============    ============   ============


WEIGHTED AVERAGE SHARES USED TO COMPUTE NET
EARNINGS (LOSS) PER SHARE
    Basic                                                11,002,426      10,288,450      10,983,361     10,046,760
    Diluted                                              11,635,422      10,288,450      11,481,475     10,046,760`

See accompanying notes
to condensed consolidated financial statements.

---

# MEDIA SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
NINE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)

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

BALANCES, JUNE 30, 2005                   10,953,606   $    10,954   $ 9,753,405   $  (112,913)   $(1,869,486)   $   7,781,960
                                         -----------   -----------   -----------   -----------    -----------    -------------
   Cumulative net increase in
      net loss - pre-2004                       --            --            --            --         (161,956)        (161,956)
                                         -----------   -----------   -----------   -----------    -----------    -------------
BALANCES, JUNE 30, 2005 (Restated)        10,953,606   $    10,954   $ 9,753,405   $  (112,913)   $(2,031,442)   $   7,620,004

   Issuance of common stock for
       exercise of stock warrants            150,000           150       149,850          --             --            150,000
   Issuance of common stock for
        exercise of stock options             18,000            18        12,332          --             --             12,350
   Cancellation of shares held in
    treasury and returned to unissued
    status                                   (54,577)          (55)     (112,858)      112,913           --               --
   Net income                                  --             --            --            --        1,378,769        1,378,769
                                         -----------   -----------   -----------   -----------    -----------    -------------
BALANCES, MARCH 31, 2006                  11,067,029   $    11,067   $ 9,802,729   $      --      $  (652,673)   $   9,161,123
                                         ===========   ===========   ===========   ===========    ===========    =============`

See accompanying notes
to condensed consolidated financial statements.

---

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

`Nine Months Ended
                                                                               March 31,
                                                                          2006           2005
                                                                       -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES :
    Income (loss) from continuing operations                           $ 1,378,769    $   (32,281)
    Adjustments to reconcile income from continuing operations to
      net cash provided by operating activities:
         Depreciation and amortization                                     544,219        398,395
         Deferred income taxes                                             416,589       (238,013)
         Provision for bad debts                                            26,729          2,969
         Impact of variable plan accounting                                   --          238,956
         Cash provided by discontinued operations                             --           10,981
         Non-cash compensation expense                                      56,934           --
         Changes in operating assets and liabilities :
             Accounts receivable                                          (180,293)      (931,662)
             Insurance claim receivable                                       --          500,000
             Receivable from landlord                                         --          200,000
             Inventories                                                  (941,790)      (231,824)
             Prepaid expenses and other current assets                    (113,299)        33,646
             Other assets                                                  (14,290)       (21,758)
             Accounts payable                                              287,487       (869,311)
             Accrued compensation and benefits                             407,583          4,483
             Other accrued expenses and current liabilities                303,876         10,100
             Income taxes payable                                          362,205        294,490
             Deferred rent liability                                       (30,042)       208,182
             Deferred revenue                                              322,566        605,368
                                                                       -----------    -----------
                 Net cash provided by operating activities               2,827,243        182,721
                                                                       -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES :
    Purchases of property and equipment                                 (1,084,801)    (1,327,064)
                                                                       -----------    -----------
                 Net cash used in investing activities                  (1,084,801)    (1,327,064)
                                                                       -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES :
    Bank line of credit, net                                            (1,620,233)      (871,054)
    Proceeds from bank term loan, net of repayments                        175,000        500,000
    Payments of other short-term debt                                         --          (31,749)
    Proceeds from issuance of common stock                                 162,350      1,575,654
                                                                       -----------    -----------
                 Net cash provided by (used in) financing activities    (1,282,883)     1,172,851
                                                                       -----------    -----------

NET INCREASE IN CASH                                                       459,559         28,508

CASH, BEGINNING OF PERIOD                                                  611,016        666,116
                                                                       -----------    -----------

CASH, END OF PERIOD                                                    $ 1,070,575    $   694,624
                                                                       ===========    ===========

SUPPLEMENTAL CASH FLOW INFORMATION :
    Interest paid                                                      $    53,514    $   149,651
    Income taxes paid                                                  $    58,073    $    52,775`

See accompanying notes
to condensed consolidated financial statements.

---

# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 1  BASIS OF PRESENTATION
:

Our accounting and reporting policies
conform to accounting principles generally accepted in the United States of America. The
condensed consolidated financial statements presented herein are unaudited but reflect all
adjustments which, in our opinion, are necessary for the fair presentation of the
consolidated financial position, results of operations and cash flows for the interim
periods presented. All adjustments reflected in the interim consolidated financial
statements are of a normal recurring nature. You should read these condensed consolidated
financial statements in conjunction with the consolidated financial statements and notes
thereto included in our Annual Report on Form 10-KSB for the year ended June 30, 2005. The
year-end consolidated balance sheet data was derived from audited financial statements but
does not include all disclosures required by accounting principles generally accepted in
the United States of America. The results of operations for the three and nine months
ended March 31, 2006 are not necessarily indicative of the results to be expected for the
full year.

Reclassifications
Certain prior fiscal year balances
were reclassified to conform to the current year presentation.

Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates. On an
on-going basis, we evaluate our estimates, including those related to revenue recognition,
accounts receivable, inventories, long-lived assets, warranty reserves, income taxes and
contingencies. These estimates are based on historical facts and various other assumptions
that we believe are reasonable.

# NOTE 1A  RESTATEMENT :

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

These errors had no effect on the
Companys results of operations or cash flows for the current quarter, prior quarters
in this fiscal year, or comparative periods presented for the prior fiscal year. The
cumulative effect of these errors overstated the Companys deferred tax assets by
$243,974, taxes payable by $82,018, and retained earnings by $161,956 on prior balance
sheets presented this year and for the years ended June 30, 2005 and 2004 in our Form
10-KSB for the year ended June 30, 2005. The affected balances have been restated in the
comparative balance sheet included in this Form 10-QSB. The Company will be filing amended
Form 10-QSBs for its first and second fiscal quarters ended September 30 and December 31, 2005
and an amended Form 10-KSB for the year ended June 30, 2005 to reflect the restatement.
Investors should look to the revised financial information regarding the restatement in
this Form 10-QSB, until the above amendments are filed.

---

# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 1A  RESTATEMENT (CONTINUED) :

The following table reflects the
effects of the errors on previously issued financial statements:

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

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

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

The following table reflects the
effects of the restatement on the Companys accumulated deficit and total
shareholders equity:

`Common Stock            Additional                                    Total
                                         -------------------------     Paid-in      Treasury      Accumulated    Shareholders'
                                           Shares        Amount        Capital        Stock         Deficit         Equity
                                         -----------   -----------   -----------   -----------    -----------    -------------
BALANCES, JUNE 30, 2005                  10,953,606    $    10,954   $ 9,753,405   $  (112,913)   $(1,869,486)   $   7,781,960
   Cumulative net increase in
      net loss - pre-2004                      --             --              --          --         (161,956)        (161,956)
                                         -----------   -----------   -----------   -----------    -----------    -------------
BALANCES, JUNE 30, 2005 (Restated)        10,953,606   $    10,954   $ 9,753,405   $  (112,913)   $(2,031,442)   $   7,620,004
                                         ===========   ===========   ===========   ===========    ===========    =============`

# NOTE 2  NATURE OF
BUSINESS :

Media Sciences International, Inc.
and Subsidiaries, collectively referred to as the Company, manufactures and
distributes supplies for workgroup color printers. Our products include solid ink sticks,
color toner cartridges and other consumable items. We distribute our products through an
international network of dealers and distributors. We also sell directly to end users
located in the United States through programs designed to foster our supplies business,
such as our INKlusive free color printer program. In May 2005, we discontinued our
electronic pre-press sales and service operations conducted by our subsidiary, Cadapult
Graphic Systems, Inc. (Cadapult) (see Note 10.) We have our corporate
headquarters in New Jersey.

---

# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 3 
STOCK-BASED COMPENSATION AND RELATED PRO FORMA DISCLOSURES :

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

Prior to May 10, 2005, certain stock
options permitted cashless exercise and were accounted for pursuant to variable plan
accounting treatment. Under variable plan accounting treatment, non-cash compensation
expense is increased or decreased as a result of changes in the market price of the
Companys common stock. For the three months ended March 31, 2006 there was no
non-cash compensation expense or benefit and for the three months ended March 31, 2005, we
recognized non-cash compensation expense of $205,601 including a $13,280 non-cash
compensation expense which was included in the loss from discontinued operations. For the
nine months ended March 31, 2006 there was no non-cash compensation expense or benefit and
for the nine months ended March 31, 2005, non-cash compensation expense was $255,244, of
which $16,288 was included in the income from discontinued operations.

On May 10, 2005, our Board of
Directors of the Company rescinded the cashless exercise provisions for all of the
Companys outstanding option grants. Consequently, the Companys stock options
were no longer subject to variable plan accounting treatment after the fiscal year ended
June 30, 2005.

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

The fair values of options granted in
the three and nine months ended March 31, 2006 and 2005 were estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-average
assumptions, respectively:

`Three and Nine Months Ended
                                                                    March 31,
                                                             2006               2005
                                                           --------           --------
Risk-free interest rate                                       4.72%             4-4.5%
Dividend yield                                                 0.0%               0.0%
Expected common stock market price volatility factor         50-75%              9-15%
Average expected life of stock options                      9 years           10 years`

---

# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 3 
STOCK-BASED COMPENSATION AND RELATED PRO FORMA DISCLOSURES
      
      
    
(CONTINUED) :

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

`Three Months Ended         Nine Months Ended
                                                               March 31,                  March 31,
                                                          2006         2005          2006           2005
                                                        ---------    ---------    -----------    ---------
Net income (loss) as reported                           $ 501,504    $(511,526)   $ 1,378,769    $ (21,300)

Impact of variable plan accounting, net of related
    tax effects                                              --        159,001           --        199,004

Stock-based employee compensation expense
    under fair value method, net of related
    tax effects                                            (7,157)     (14,126)       (30,269)     (53,627)
                                                        ---------    ---------    -----------    ---------
Pro forma net income (loss)                             $ 494,347    $(366,651)   $ 1,348,500    $ 124,077
                                                        =========    =========    ===========    =========
Net income (loss) per common share:
        Basic, as reported                                  $0.05       $(0.05)         $0.13       $(0.00)
             Diluted, as reported                           $0.04       $(0.05)         $0.12       $(0.00)
        Basic and diluted, pro forma                        $0.04       $(0.04)         $0.12       $ 0.01`

NOTE 4  INVENTORIES :

Inventories are summarized as
follows:

`March 31,     June 30,
                                                          2006         2005
                                                       ----------   ----------
Raw materials                                          $1,589,939   $1,040,390
Finished goods                                          2,548,174    2,155,933
                                                       ----------   ----------
                                                       $4,138,113   $3,196,323
                                                       ==========   ==========`

# NOTE 5 
DEBT :

The Companys borrowings consisted
of the following:

`March 31,     June 30,
                                                          2006         2005
                                                       ----------   ----------

Short-term debt:
  Revolving line-of-credit with bank                   $     --     $1,620,233
  Current maturities of note payable to bank              150,000      100,000
                                                       ----------   ----------
                                                       $  150,000   $1,720,233
                                                       ==========   ==========
Long-term debt:
   Note payable to bank, less current maturities       $  500,000   $  375,000
                                                       ==========   ==========`

---

# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 5 
DEBT (CONTINUED) :

We have a revolving line of credit
which provides for maximum borrowings of $3 million. As of March 31, 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 maturity date by one year to November 30, 2007. The Amendments also modified certain
financial covenants, which are described below.

On March 17, 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 $4,167. 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.

On July 27, 2005, we entered into an
equipment lease line of credit with $1 million in availability with the bank. Borrowings
bear interest at a rate of approximately 1% over the banks 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 rent
payments of $3,453, 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 March 31,
2006, this note had a remaining principal balance of $0.4 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

---

# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 5 
DEBT (CONTINUED) :

| | 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 has the Company been in violation of these covenants.

# NOTE 6  EARNINGS (LOSS) PER
SHARE :

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

The following table sets forth the
computation of the basic and diluted earnings (loss) per common share from continuing
operations, discontinued operations, and net income (loss):

`Three Months Ended              Nine Months Ended
                                                         March 31,                      March 31,
                                                    2006           2005            2006           2005
                                                ------------   ------------    ------------   ------------
Numerator for basic and diluted:
    Income (loss) from continuing operations    $    501,504   $   (456,569)   $  1,378,769   $    (32,281)
    Income (loss) from discontinued operations          --          (54,957)           --           10,981
                                                ------------   ------------    ------------   ------------
    Net Income (loss)                           $    501,504   $   (511,526)   $  1,378,769   $    (21,300)
                                                ============   ============    ============   ============

Denominator :
    Denominator for basic earnings (loss) per
      common share -  weighted average shares     11,002,426     10,288,450      10,983,361     10,046,760
    Effect of dilutive securities - stock
      options and warrants                           632,996           --           498,114           --
                                                ------------   ------------    ------------   ------------
    Denominator for diluted earnings (loss)
      per common share - adjusted weighted
      average shares and assumed conversions      11,635,422     10,288,450      11,481,475     10,046,760
                                                ============   ============    ============   ============

Basic earnings (loss) per share
    Income (loss) from continuing operations    $       0.05   $      (0.04)   $      0.13    $      (0.00)
    Income (loss) from discontinued operations  $       --     $      (0.01)   $      --      $       0.00
                                                ------------   ------------    ------------   ------------
    Net Income (loss)                           $       0.05   $      (0.05)   $      0.13    $      (0.00)
                                                ============   ============    ============   ============

Diluted earnings (loss) per share
    Income (loss) from continuing operations    $       0.04   $      (0.04)   $       0.12   $      (0.00)
    Income (loss) from discontinued operations  $       --     $      (0.01)   $       --     $       0.00
                                                ------------   ------------    ------------   ------------
    Net Income (loss)                           $       0.04   $      (0.05)   $       0.12   $      (0.00)
                                                ============   ============    ============   ============`

---

# MEDIA SCIENCES
INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 6  EARNINGS (LOSS) PER
SHARE (CONTINUED) :

The following warrants and options to
purchase common stock were excluded from the computation of diluted income (loss) per
common share from continuing operations and net income per common share for the three and
nine months ended March 31, 2006 and 2005 because they were anti-dilutive for those
periods:

`Three Months Ended              Nine Months Ended
                                                         March 31,                      March 31,
                                                    2006           2005            2006           2005
                                                ------------   ------------    ------------   ------------
Anti-dilutive warrants and options                    41,200      1,248,641          97,200      1,248,641`

# NOTE 7 
WARRANTY EXPENSES :

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

Changes in accrued product warranty
for the three and nine months ended March 31, 2006 and 2005 are as follows:

`Three Months Ended              Nine Months Ended
                                                             March 31,                      March 31,
                                                        2006           2005            2006           2005
                                                    ------------   ------------    ------------   ------------
Warranty reserve at the beginning of the period     $    275,268   $    339,382    $    291,733   $    340,592

        Warranties accrued during the period             200,321        272,686         696,833        848,159
        Warranties settled during the period            (219,529)      (296,357)       (732,506)      (873,040)
                                                    ------------   ------------    ------------   ------------
Net change in warranty reserve                           (19,208)       (23,671)        (35,673)       (24,881)

Warranty reserve at March 31,                       $    256,060   $    315,711    $    256,060   $    315,711
                                                    ============   ============    ============   ============`

# NOTE 8 
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES :

Engineering and product development
costs, which consist of salaries and related benefit costs of our technical staff, as well
as product development costs, including conceptual formulation, design and testing of
product alternatives, and construction of prototypes, are expensed as incurred. For the
three months ended March 31, 2006 and 2005, engineering and product development costs were
approximately $0.19 million and $0.15 million, respectively. For the nine months ended
March 31, 2006 and 2005, engineering and product development costs were approximately
$0.54 million and $0.37 million, respectively.

---

# MEDIA
SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES

# NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 9 
ADVERTISING EXPENSES :

The Company accounts for advertising
costs in accordance with Statement of Position 93-7, Reporting on Advertising
Costs. Advertising expenses are deferred until first use of the advertising.
Deferred advertising costs at March 31, 2006 and 2005 totaled approximately $0.01 million
and $0.05 million, respectively. Advertising expense for the three months ended March 31,
2006 and 2005 amounted to approximately $0.17 million and $0.24 million, respectively.
Advertising expense for the nine months ended March 31, 2006 and 2005 amounted to
approximately $0.58 million and $0.69 million, respectively.

# NOTE 10 
DISCONTINUED OPERATIONS :

In a prior year (May 2005), a
decision was made to cease certain sales and service operations under Cadapult.
Specifically, the Company ceased all electronic pre-press sales and service operations and
the service operations were sold on May 7, 2005. Accordingly, the results of operations of
the electronic pre-press sales and service operations have been reclassified and are
included in discontinued operations for the three and nine months ended March 31, 2005.
Sales and service revenues from the discontinued operations for the three and nine months
ended March 31, 2005 were $0.26 and $1.15 million, respectively. The pre-tax income (loss)
from discontinued operations for the three and nine months ended March 31, 2005 was
$(0.08) and $0.03 million, respectively.

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

# NOTE 11  RELATED
PARTY TRANSACTION :

In the nine months ended March 31,
2006, pursuant to the employment contract with the Companys Chief Executive Officer,
dated July 1, 2003, the Company incurred a non-cash compensation expense of $56,934.

# NOTE 12  CANCELLATION OF TREASURY SHARES :

On February 7, 2006, the Board of
Directors voted to cancel 54,577 shares of treasury stock. This action reduced the number
of shares outstanding by 54,577 and had no impact on total shareholders equity. The
treasury stock was cancelled and returned to unissued status.

---

## ITEM 2.  
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      
      
   RESULTS OF OPERATIONS

## 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. 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, 2005, filed September 13, 2005.

# RECENT ACCOUNTING
PRONOUNCEMENTS

In December 2004, the FASB issued
SFAS No. 123(R) (revised 2004), Share-Based Payment, which amends FASB
Statement No. 123 and will be effective for us for the fiscal year beginning July 1, 2006.
The new standard will require us to expense employee stock options and other share-based
payments over the service period. The new standard may be adopted in one of three ways
 the modified prospective transition method, a variation of the modified prospective
transition method or the modified retrospective transition method. We are currently
evaluating how we will adopt the standard and evaluating the effect that the adoption of
SFAS 123(R) will have on our financial position and results of operations, although it is
likely that we will have to recognize additional compensation expense in the periods after
adoption.

RESULTS OF OPERATIONS
FOR THE THREE AND NINE
MONTHS ENDED MARCH 31, 2006 AND 2005

Sales.    
          Our consolidated sales from continuing operations for the three months ended
          March 31, 2006 compared to the same period in 2005, increased approximately 32%
          to $5.4 million from $4.1 million. Sales of solid ink sticks increased
          approximately 23%, while sales of color toner cartridges increased by
          approximately 68%. Our consolidated sales from continuing operations for the
          nine months ended March 31, 2006 compared to the same period in 2005, increased
          approximately 16% to $15.2 million from $13.1 million. Sales of solid ink sticks
          increased approximately 14%, while sales of color toner cartridges increased by
          approximately 36%. Direct sales of supplies through our Cadapult subsidiary for
          the three and nine months ended March 31, 2006 decreased by approximately 22%
          and 42%, respectively, as we focused on building our sales through our
          distribution channels.

---

In late September 2005, we started
shipping color toner cartridges for the Oki 5000 series of color printers. In late
December 2005, we started shipping solid ink sticks for the new Xerox Phaser 8500 and
8550, and color toner cartridges for the Ricoh 3800 and related engines. In mid-March
2006, we started shipping universal, high capacity cartridges for use in Xerox Phaser
7300, Oki 9300 and 9500, and Konica 7830 office color printers. In early April 2006, we
started shipping high capacity cartridges for use in Xerox Phaser 6250, Konica Minolta
magicolor 3300, Epson AcuLaser C4100 and Brother HL-4200CN office color printers, the
first independently manufactured, new-build, office color toner cartridges featuring chip
technology. As a result of these new products and current sales trends of existing
products, we expect the growth of color toner cartridge sales to continue to outpace the
growth of our solid inks for the remainder of fiscal 2006.

Gross Profit.    The consolidated gross
profit for the three months ended March 31, 2006 was $3.1 million, or approximately 57% of
sales, as compared to $2.0 million, or approximately 50% of sales, for the three months
ended March 31, 2005. The consolidated gross profit for the nine months ended March 31,
2006 was $8.6 million, or approximately 56% of sales, as compared to $6.4 million, or
approximately 49% of sales, for the nine months ended March 31, 2005. We benefited from
margin expansion in both our solid ink and color toner cartridge lines. Our solid ink
margins increased due to manufacturing efficiencies, which more than offset certain
increases in our raw material costs. Our color toner cartridge margins expanded
significantly due to the mix of products making up our color toner cartridge sales. While
our margins can and do vary due to sales product mix, we believe that they will remain
fairly consistent with our current results throughout the remainder of fiscal 2006.

Selling, General and
Administrative.    Consolidated selling, general and administrative expenses for the three months ended March
31, 2006 increased to $2.2 million, or 40% of sales, from $1.8 million, or 45% of sales,
exclusive of non-recurring charges, for the three months ended March 31, 2005.
Consolidated selling, general and administrative expenses for the nine months ended March
31, 2006 increased to $6.1 million, or 40% of sales, from $5.2 million, or 40% of sales,
exclusive of non-recurring charges, for the nine months ended March 31, 2005. These
increases are attributed to additional compensation and benefits expense and research and
development expense, partially offset by decreased warranty expense. For the three and
nine months ended March 31, 2005, non-cash compensation expenses of $0.19 million and
$0.24 million, respectively, were incurred to reflect the impact of variable plan
accounting treatment. These have been shown as a separate line item on our income
statement. Since our stock options are no longer subject to variable plan accounting
treatment, we do not anticipate further non-cash compensation charges until our adoption
of SFAS 123(R). While we intend to increase expenditures in advertising, marketing,
research and development and general payroll costs, we expect our selling, general and
administrative expenses to remain relatively consistent as a percentage of sales.

For comparability, the non-recurring
costs of moving the Companys operations and an impairment charge associated with
vacating and subleasing the prior facility were excluded from the above analysis for the
three and nine months ended March 31, 2005. These non-recurring charges, shown as separate
line items, were approximately $0.53 million for both the three and nine month periods
ended March 31, 2005.

Depreciation and Amortization.    For
the three months ended March 31, 2006 compared to the same period in 2005, our
depreciation and amortization expense increased to $0.19 million, of which $0.13 million
was included in cost of goods sold, from $0.14 million, of which $0.07 million was
included in cost of goods sold. For the nine months ended March 31, 2006 compared to the
same period in 2005, our depreciation and amortization expense increased to $0.54 million,
of which $0.38 million was included in cost of goods sold, from $0.40 million, of which
$0.20 million was included in cost of goods sold. The year-over-year increase in
depreciation and amortization was primarily due to leasehold improvements related to our
new facility, additions to our manufacturing equipment, and placing in service capitalized
tool and die costs associated with the launch of new color toner cartridge models,
discussed above in Sales. There was no amortization expense associated with intangibles
for the three or nine months ended March 31, 2006. For the three and nine months ended
March 31, 2005, amortization of intangibles was $1,062 and $4,750, respectively.

Interest Expense, Net.    For the three
months ended March 31, 2006 compared to the same period in 2005, our net interest expense
decreased to $0.004 million from $0.045 million. For the nine months ended March 31, 2006
compared to the same period in 2005, our net interest expense decreased to $0.054 million
from $0.150 million. The year-over-year decrease in net interest expense was due to
year-over-year retirement of debt funded by cash flows generated from operations.

---

Income Taxes.    
For the three months
ended March 31, 2006, we recorded an income tax expense from continuing operations of
$0.33 million as compared to an income tax benefit from continuing operations of $0.18
million for the three months ended March 31, 2005. For the nine months ended March 31,
2006, we recorded an income tax expense from continuing operations of $0.92 million as
compared to an income tax expense from continuing operations of $0.12 million for the nine
months ended March 31, 2005. An effective tax rate of 40% was used for the three and nine
months ended March 31, 2006, and 28% and 118% was used for the three and nine months ended
March 31, 2005, respectively. The effective aggregate state and federal tax rate for the periods ended
March 31, 2005 differed from that for the periods ended March 31, 2006 due primarily to
the impact of variable plan accounting in 2005.

Income (Loss) from Continuing
Operations.    For the three months ended March 31, 2006, we earned $0.5 million from
continuing operations, or $0.05 per share basic and $0.04 per share diluted, as compared to
the three months ended March 31, 2005, where we incurred a loss of $0.5 million from
continuing operations, or $(0.04) per share basic and diluted. For the nine months ended
March 31, 2006, we earned $1.4 million from continuing operations, or $0.13 per share basic
and $0.12 per share diluted, as compared to the nine months ended March 31, 2005, where we
incurred a loss of $0.03 million, or $0.00 per share basic and diluted.

Income (Loss) from Discontinued
Operations.    In May 2005, we ceased and sold certain sales operations under Cadapult.
Specifically, we ceased all electronic pre-press equipment sales and service operations.
The results of operations for that line of business are classified as a discontinued
operation.

Sales and service revenues from the
discontinued operations for the three and nine months ended March 31, 2005 were $0.26
million and $1.15 million, respectively. Income (loss), net of tax from discontinued
operations, for the three and nine months ended March 31, 2005 was $(0.055) million and
$0.011 million, respectively.

LIQUIDITY AND CAPITAL
RESOURCES

We experienced positive cash flows
from operating activities for the nine months ended March 31, 2006. Cash flows from
operating activities of $2.8 million resulted primarily from income from continuing
operations of $1.4 million, non-cash charges of $1.0 million, an increase in accounts
payable of $0.29 million, an increase in accrued expenses and other liabilities (including
compensation and benefits) of $0.71 million, an increase in income taxes payable of $0.36
million, and an increase in deferred revenue of $0.32 million, offset by increases in
accounts receivable of $0.18 million, inventories of $0.94 million, and an increase in
prepaid expenses and other current assets of $0.11 million.

Accounts receivable increased over
the levels at June 30, 2005 due to the noted increase in year-over-year sales. At March
31, 2006, 98% of gross receivables were aged at less than 60 days, and approximately $0.06
million (2%) of gross receivables were aged at greater than 90 days.

Under the Companys INKlusive
program, a customer commits to purchase a fixed quantity of supplies from the Company
over a two or three year period. These supplies are automatically shipped to the customer
on a regular basis. In exchange, and through a financing partner, the Company provides the
customer with a color printer at no additional charge. Under our agreement with the
financing company, at the time of placement of the INKlusive printer, we are paid in full
for the printer and the two or three years of supplies. The Company recognizes the revenue
from the supplies as they are shipped over the term of the INKlusive agreement. Deferred
revenue consists principally of billings on INKlusive contracts prior to shipping supplies
to fulfill those contracts.

Cash flow generated by the INKlusive
program is a function of the net number of printer placements in the program. During the
three and nine months ended March 31, 2006, there was an increase in the net number of
printers placed in the program. This resulted in an increase in deferred revenues during
those periods, and therefore contributed positively to our cash flow.

The cash we used in investing
activities for the nine months ended March 31, 2006 included the purchase of equipment and
tooling in the amount of $1.08 million. In addition to these expenditures, we plan
additional capital expenditures of approximately $0.25 million through June 30, 2006,
which we plan to finance through internal cash generation. We plan to rent additional
equipment through operating leases, under our equipment lease line of credit.

---

We have a revolving line of credit
which provides for maximum borrowings of $3 million. As of March 31, 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 maturity date by one year to November 30, 2007. The Amendments also modified certain
financial covenants, which are described below.

On March 17, 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 $4,167. 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.

On July 27, 2005, we entered into an
equipment lease line of credit with $1 million in availability with the bank. Borrowings
bear interest at a rate of approximately 1% over the banks 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 rent
payments of $3,453, 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. The proceeds
were used to finance the leasehold improvements to our new 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 has the Company 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 been subject to several
significant increases in raw materials costs over the last 18 months, primarily resulting
from increases in energy costs. We have embarked on a program to improve our procurement
of raw materials and to optimize our processes to increase our manufacturing yields.
Through these efforts we have been able to offset the increases in raw material costs. We
believe we will be able to offset any near-term inflation in operating costs through
increased productivity.

# SEASONALITY

While we do not experience any
significant quarter to quarter seasonality, we do experience some seasonality within
certain quarters.

---

# ITEM 3. CONTROLS AND
PROCEDURES

# Disclosure 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 Rules 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 as described below, in the Companys internal control over financial reporting
(as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal
quarter ended March 31, 2006 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.

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.

On March 15, 2006, the Company hired
a Chief Financial Officer, with substantial Sarbanes-Oxley compliance experience. 
With the hiring of its Chief Financial Officer, the Company is developing a detailed plan
to address compliance with Section 404 of the Sarbanes-Oxley Act of 2002.  In
mid-March, the Company initiated and since then has made progress on several projects
focused on assessing potential risks, better understanding and documenting its processes,
and implementing certain preventative or detective controls to address key risks. These
are important first steps toward designing and implementing an effective compliance
plan.  As a non-accelerated filer with a fiscal year end of June 30, the Company must
first begin to comply with the requirements of Section 404 for the fiscal year ending June
30, 2008.

As part of its risk assessment, the
Company undertook an extensive review of its tax compliance efforts and the controls
associated with its tax accounting process. As a result of new processes and controls
implemented during the quarter, the Company identified errors in previously filed tax
returns that contributed to errors in the Companys tax accounting for the years
ended June 30, 2003 and prior years. These errors and their effects are discussed further
in Note 1A to the condensed consolidated
financial statements contained in Item 1 of Part 1 of this quarterly report on Form 10-QSB. In order to ensure continued independence with its registered public
accounting firm, the Company on April 10, 2006 engaged Cipolla Sziklay, LLC (an accounting firm not affiliated with the
Companys independent registered public accounting firm) to provide tax
services.

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

---

# PART II. OTHER
INFORMATION

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

The shareholders of the Company voted
on four items at the Annual Meeting of Shareholders held on January 19, 2006:

|1. |  | the election of seven directors to serve until the next annual meeting and until
          their successors have been duly elected and qualified;
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | ratification of a proposal to amend the Companys 1998 Incentive Plan to
          increase the number of shares of common stock reserved for issuance from 500,000
          to 1,000,000;
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | the ratification of the issuances of employment-issued stock options for 200,000
          shares of common stock; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------

|4. |  | the ratification of the selection of J.H. Cohn
          LLP as our independent registered public accounting firm for the fiscal
year ending June 30, 2006.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

The total shares voted at the meeting
was 7,565,515. The nominees for directors were elected based upon the following votes:

`Withheld
                                                    For         Authority
                                                 ---------      ---------
            1.   Election of directors
                 Michael W. Levin                7,563,015         2,500
                 Frances Blanco                  7,459,815       105,700
                 Paul C. Baker                   7,562,615         2,900
                 Edwin Ruzinsky                  7,562,615         2,900
                 Donald Gunn                     7,459,815       105,700
                 Henry Royer                     7,562,615         2,900
                 Alan Bazaar                     7,563,015         2,500`

The voting results on the other
proposals were:

`For       Against    Abstentions     Non-Votes
                                                                  ---------   ---------   -----------     ---------

            2.   Ratification of amendment to 1998 Incentive      4,563,347     128,966           895     2,872,307
                 Plan
            3.   Ratification of stock option issuances           4,608,426      83,650         1,132     2,872,307
            4.   Ratification of independent registered           7,559,220       5,800           495             0
                 public accounting firm`

# ITEM 5. OTHER INFORMATION

On March 17, 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 $4,167. 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.

We have a revolving line of credit
which provides for maximum borrowings of $3 million. 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 maturity date by one year to
November 30, 2007. The Amendments also modified certain financial covenants, which are
described below.

---

Both the amended revolving
line-of-credit and the five-year term note with the bank entered in March 2005 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | EBITDA
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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 7, 2006, the Board of
Directors voted to cancel 54,577 shares of treasury stock. This action reduces the number
of shares outstanding by 54,577 and has no impact on total shareholders equity. The
treasury stock was cancelled and returned to unissued status.

---

# ITEM 6. EXHIBITS

The following exhibits are filed with
this report:

|                                                                                                                                                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4*
Exhibit 10.5
Exhibit 11*
Exhibit 31.1*
Exhibit 31.2*
Exhibit 32.1*
Exhibit 32.2*
_____
* Filed herewith. |  | Description of Exhibit

Amendment to Loan Documents, dated as of January 23, 2006 (Incorporated by
reference to Exhibit 10.1 of Form 10-QSB filed on February 9, 2006)
Amended and Restated Committed Line of Credit Note, dated January 23, 2006
(Incorporated by reference to Exhibit 10.2 of Form 10-QSB filed on February 9,
2006)
Guaranty and Suretyship Agreement, dated January 23, 2006 (Incorporated by
reference to Exhibit 10.3 of Form 10-QSB filed on February 9, 2006)
Term Note with PNC Bank, dated March 17, 2006, with Security Agreement and
Guarantee
Agreement with Donald Gunn, dated March 31, 2006 (Incorporated by reference to
Exhibit 10.1 of Form 8-K/A filed on April 24, 2006)
Statement re: computation of per share earnings is hereby incorporated by
reference to "Financial Statements" of Part I - Financial Information,
Item 1 - Financial Statements, contained in this Form 10-QSB.
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

---

# 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:  May 15, 2006 | By:/s/ Michael W. Levin
        Michael W. Levin
        Chief Executive Officer and President
|-------------------- | ----------------------------------------------------------------------------------------------

|Dated:  May 15, 2006 | By:/s/ Kevan D. Bloomgren
        Kevan D. Bloomgren
        Chief Financial Officer
|-------------------- | ------------------------------------------------------------------------------------

---