---





UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 1O-QSB



(Mark One)

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



For the quarterly period ended September 30, 2003



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

EXCHANGE ACT



For the transition
period from to



Commission file number 000-17510



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MEGA GROUP, INC.

(Exact name of small business issuer as specified in its
charter)



|NEW YORK (State or other jurisdiction of incorporation or organization) |  | 14-1653446 (IRS Employer Identification No.)
|----------------------------------------------------------------------- |  | --------------------------------------------



1730 Rhode Island
Ave., N.W. Suite 415, Washington, DC 20036

(Address of principal executive offices)



(202) 296-9594

(Issuers telephone number)



N/A

(Former name, former address and former fiscal year, if changed since last report)



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



State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 9,539,303 shares of common stock (including 75,302 shares held of record by our
wholly-owned subsidiary), as of November 1, 2003.



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





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PART I FINANCIAL INFORMATION



|ITEM 1. |  | FINANCIAL STATEMENTS.
|------- |  | ---------------------



MEGA GROUP, INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEET (Unaudited)



---



|                                                |  | September 30,2003 |        
|----------------------------------------------- |  | ----------------- | -------
|Assets                                          |  |                   |        
|Current assets                                  |  |                   |        
|Cash                                            |  | $                 | 45     
|Marketable securities                           |  |                   | 4,560  
|Accounts receivable                             |  |                   | 44,367 
|Loans receivable                                |  |                   | 22,796 
|Deposits                                        |  |                   | 2,099  
|                                                |  |                   |        
|Total current assets                            |  |                   | 73,867 
|                                                |  |                   |        
|Property and equipment, at cost                 |  |                   |        
|Office furniture and equipment                  |  |                   | 25,663 
|Less: Accumulated depreciation and amortization |  |                   | (18,724
|                                                |  |                   |        
|Net property and equipment                      |  |                   | 6,939  
|                                                |  |                   |        
|Total assets                                    |  | $                 | 80,806 
|                                                |  |                   |        



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



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2



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MEGA GROUP, INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEET (Unaudited)



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|                                                                                                                        |  | September 30, 2003 |           
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------
|Liabilities and Deficiency in Stockholders Equity                                                                      |  |                    |           
|                                                                                                                        | 
|Current liabilities                                                                                                     |  |                    |           
|                                                                                                                        | 
|Bank overdraft                                                                                                          |  | $                  | 2,457     
|Current portion of long-term debt                                                                                       |  |                    | 1,156,536 
|Accounts payable and accrued expenses                                                                                   |  |                    | 804,610   
|Accrued wages                                                                                                           |  |                    | 662,171   
|Accrued interest                                                                                                        |  |                    | 333,424   
|Due to stockholder                                                                                                      |  |                    | 150,824   
|                                                                                                                        |  |                    |           
|Total current liabilities                                                                                               |  |                    | 3,110,022 
|                                                                                                                        |  |                    |           
|                                                                                                                        | 
|Commitments and contingencies                                                                                           |  |                    |           
|                                                                                                                        | 
|Deficiency in stockholders equity                                                                                      |  |                    |           
|                                                                                                                        | 
|Preferred stock, cumulative 8%, $1 par value per share, 400,000 shares authorized, 10,000 shares issued and
outstanding |  |                    | 10,000    
|Common stock, $0.16 par value per share, 25,000,000 shares authorized, 9,539,303 shares issued and outstanding          |  |                    | 149,749   
|Additional paid-in-capital                                                                                              |  |                    | 245,849   
|Accumulated deficit                                                                                                     |  |                    | (3,436,885
|Accumulated other comprehensive income                                                                                  |  |                    | 2,071     
|                                                                                                                        |  |                    |           
|                                                                                                                        | 
|Total deficiency in stockholders equity                                                                                |  |                    | (3,029,216
|                                                                                                                        |  |                    |           
|                                                                                                                        | 
|Total liabilities and deficiency in stockholders equity                                                                |  | $                  | 80,806    
|                                                                                                                        |  |                    |           



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



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3



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MEGA GROUP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



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|                                                                                           |  | Three Months EndedSeptember 30, 2002 |           |   | Three Months EndedSeptember 30, 2003 |           |   | Nine Months EndedSeptember 30, 2002 |   |           | Nine Months EndedSeptember 30, 2003 | 
|------------------------------------------------------------------------------------------ |  | ------------------------------------ | --------- | - | ------------------------------------ | --------- | - | ----------------------------------- | - | --------- | ----------------------------------- | 
|REVENUE                                                                                    |  | $                                    |          |   |                                      | 14,000    |   |                                     | $ |          |                                     | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|                                                                                           |  |                                      |           |  
|OPERATING EXPENSES                                                                         |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|Compensation and benefits                                                                  |  |                                      | 50,000    |   |                                      | 75,000    |   |                                     |   | 125,000   |                                     | 
|Other selling, general and administrative expenses                                         |  |                                      | 135,397   |   |                                      | 100,497   |   |                                     |   | 209,745   |                                     | 
|Depreciation and amortization                                                              |  |                                      | 4,025     |   |                                      | 712       |   |                                     |   | 5,408     |                                     | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|                                                                                           |  |                                      |           |  
|TOTAL OPERATING EXPENSES                                                                   |  |                                      | 189,422   |   |                                      | 176,209   |   |                                     |   | 340,153   |                                     | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|                                                                                           |  |                                      |           |  
|LOSS FROM OPERATIONS                                                                       |  |                                      | (189,422  | ) |                                      | (162,209  | ) |                                     |   | (340,153  | )                                   | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|                                                                                           |  |                                      |           |  
|OTHER INCOME (EXPENSE)                                                                     |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|Interest income                                                                            |  |                                      |          |   |                                      | 95        |   |                                     |   | 220       |                                     | 
|Interest expense                                                                           |  |                                      | (36,427   | ) |                                      | (43,488   | ) |                                     |   | (96,074   | )                                   | 
|Realized loss on sale of marketable securities                                             |  |                                      |          |   |                                      |          |   |                                     |   | (487      | )                                   | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|TOTAL                                                                                      |  |                                      | (36,427   | ) |                                      | (43,393   | ) |                                     |   | (96,341   | )                                   | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|                                                                                           |  |                                      |           |  
|NET LOSS                                                                                   |  | $                                    | (225,849  | ) |                                      | (205,602  | ) |                                     | $ | (436,494  | )                                   | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|BASIC NET LOSS PER COMMON SHARE                                                            |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|Basic and diluted net loss per common share                                                |  | $                                    | (0.03     | ) |                                      | (0.02     | ) |                                     | $ | (0.05     | )                                   | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 
|Basic and diluted weighted average common shares used to compute net loss per common share |  |                                      | 8,864,738 |   |                                      | 9,359,303 |   |                                     |   | 8,468,676 |                                     | 
|                                                                                           |  |                                      |           |   |                                      |           |   |                                     |   |           |                                     | 



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



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4



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MEGA GROUP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) (Unaudited)



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|                                                                            |  | Three Months EndedSeptember 30, 2002 |          |   | Three Months EndedSeptember 30, 2003 |   |          | Nine Months EndedSeptember 30, 2002 |  |   | Nine Months EndedSeptember 30, 2003 |  
|--------------------------------------------------------------------------- |  | ------------------------------------ | -------- | - | ------------------------------------ | - | -------- | ----------------------------------- |  | - | ----------------------------------- | -
|NET LOSS                                                                    |  | $                                    | (225,849 | ) |                                      | $ | (205,602 | )                                   |  | $ | (436,494                            | )
|                                                                            |  |                                      |          |   |                                      |   |          |                                     |  |   |                                     |  
|DECREASE (INCREASE) IN UNREALIZED LOSS ON MARKETABLE SECURITIES, NET OF TAX |  |                                      | 248      |   |                                      |   | 439      |                                     |  |   | 32                                  |  
|                                                                            |  |                                      |          |   |                                      |   |          |                                     |  |   |                                     |  
|                                                                            |  |                                      |          |  
|OTHER COMPREHENSIVE INCOME (LOSS)                                           |  |                                      | 248      |   |                                      |   | 439      |                                     |  |   | 32                                  |  
|                                                                            |  |                                      |          |   |                                      |   |          |                                     |  |   |                                     |  
|COMPREHENSIVE LOSS                                                          |  | $                                    | (225,601 | ) |                                      | $ | (205,163 | )                                   |  | $ | (436,462                            | )
|                                                                            |  |                                      |          |   |                                      |   |          |                                     |  |   |                                     |  



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



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5



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MEGA GROUP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



---



|                                                                           |  | Nine MonthsEndedSeptember 30,2002 |          |   | Nine MonthsEndedSeptember 30,2003 |  
|-------------------------------------------------------------------------- |  | --------------------------------- | -------- | - | --------------------------------- | -
|Cash flows from operating activities                                       |  |                                   |          |   |                                   |  
|Net loss                                                                   |  | $                                 | (436,494 | ) |                                   | $
|                                                                           |  |                                   |          |   |                                   |  
|Adjustments to reconcile net loss to net cash used by operating activities |  |                                   |          |   |                                   |  
|Depreciation and amortization                                              |  |                                   | 5,408    |   |                                   |  
|Interest paid by stockholder on Companys behalf                           |  |                                   |          |   |                                   |  
|Realized loss on disposition of marketable securities                      |  |                                   | 487      |   |                                   |  
|Common stock issued for payment of membership dues                         |  |                                   | 1,000    |   |                                   |  
|Common stock issued for payment of professional services                   |  |                                   | 50,000   |   |                                   |  
|(Increase) decrease in                                                     |  |                                   |          |   |                                   |  
|Accounts receivable                                                        |  |                                   |          |   |                                   |  
|Deposits                                                                   |  |                                   |          |   |                                   |  
|Increase (decrease) in                                                     |  |                                   |          |   |                                   |  
|Bank overdraft                                                             |  |                                   |          |   |                                   |  
|Accounts payable and accrued expenses                                      |  |                                   | (54,032  | ) |                                   |  
|Accrued wages                                                              |  |                                   | 125,000  |   |                                   |  
|Accrued interest                                                           |  |                                   | 76,678   |   |                                   |  
|                                                                           |  |                                   |          |   |                                   |  
|                                                                           |  |                                  
|Net cash used by operating activities                                      |  |                                   | (231,953 | ) |                                   |  
|                                                                           |  |                                   |          |   |                                   |  
|                                                                           |  |                                  
|Cash flows from investing activities                                       |  |                                   |          |   |                                   |  
|Purchase of property and equipment                                         |  |                                   |          |   |                                   |  
|Advances made on loans receivable                                          |  |                                   |          |   |                                   |  
|Repayments made on loans receivable                                        |  |                                   |          |   |                                   |  
|Purchases of marketable securities                                         |  |                                   | (323     | ) |                                   |  
|Loan made to stockholder, net                                              |  |                                   | (53,995  | ) |                                   |  
|Loan made to affiliates, net                                               |  |                                   | (877     | ) |                                   |  
|                                                                           |  |                                   |          |   |                                   |  
|                                                                           |  |                                  
|Net cash used from investing activities                                    |  |                                   | (55,195  | ) |                                   |  
|                                                                           |  |                                   |          |   |                                   |  
|                                                                           |  |                                  
|Cash flows from financing activities                                       |  |                                   |          |   |                                   |  
|Principal payments on debt                                                 |  |                                   | (80,700  | ) |                                   |  
|Debt proceeds                                                              |  |                                   | 321,930  |   |                                   |  
|Loans from stockholder                                                     |  |                                   | 33,345   |   |                                   |  
|                                                                           |  |                                   |          |   |                                   |  
|                                                                           |  |                                  
|Net cash provided by financing activities                                  |  |                                   | 274,575  |   |                                   |  
|                                                                           |  |                                   |          |   |                                   |  
|                                                                           |  |                                  
|Net decrease in cash                                                       |  |                                   | (12,573  | ) |                                   |  
|                                                                           |  |                                  
|Cash, beginning of period                                                  |  |                                   | 17,100   |   |                                   |  
|                                                                           |  |                                   |          |   |                                   |  
|                                                                           |  |                                  
|Cash, end of period                                                        |  | $                                 | 4,527    |   |                                   | $
|                                                                           |  |                                   |          |   |                                   |  



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



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6



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MEGA GROUP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



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|                                                                        |  | Nine Months Ended September 30,2002 |        | Nine Months Ended September 30,2003
|----------------------------------------------------------------------- |  | ----------------------------------- | ------ | -----------------------------------
|Supplemental cash flow information:                                     |  |                                     |        |                                    
|Actual cash payments for interest                                       |  | $                                   | 19,396 |                                    
|                                                                        |  |                                    
|Noncash investing and financing activities                              |  |                                     |        |                                    
|Payment made by a shareholder on notes payable on behalf of the Company |  | $                                   |        |                                    
|                                                                        |  |                                     |        |                                    
|                                                                        |  |                                    
|Loan financing costs accrued but not paid                               |  | $                                   |        |                                    
|                                                                        |  |                                     |        |                                    
|                                                                        |  |                                    
|Common Stock issued for payment of loan financing costs                 |  | $                                   | 10,000 |                                    
|                                                                        |  |                                     |        |                                    
|                                                                        |  |                                    
|Common stock issued for payment of accrued wages                        |  | $                                   | 41,543 |                                    
|                                                                        |  |                                     |        |                                    
|                                                                        |  |                                    
|Marketable securities exchanged for payment of accrued wages            |  | $                                   | 84     |                                    
|                                                                        |  |                                     |        |                                    



The accompanying Notes
to Financial Statements are an integral part of these financial statements.



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7



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MEGA GROUP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



---



|1. Nature of Business             |  | The consolidated financial statements include the accounts of the Mega Group, Inc., a New York corporation and its wholly owned subsidiary, Small Business Investment Corporation
of America, Inc. (SBICOA), an Oregon corporation (collectively, the Company). All significant inter-company transactions and accounts have been eliminated in the consolidated financial statements. The Companys current business plan is to
provide diversified financial services to ethnic communities and faith-based entities in the United States and to operate as a specialized financial institution providing loans and investments for businesses in low and moderate income
communities.                                                                                                                                                                                                              
|--------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                  | 
|2. Interim Financial Presentation |  | The consolidated financial statements have been prepared by the Company without audit and are subject to year-end adjustment. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated
interim statements should be read in conjunction with the most recent audited consolidated financial statements filed by the Company on Form 10-KSB with the Securities and Exchange Commission. The consolidated financial statements reflect all
adjustments (which include only normal recurring adjustments) which, in the opinion of management are necessary to present fairly the Companys financial position, results of operations and cash flows.
|                                  | 
|                                  |  | Results of operations for the nine and three months ended September 30, 2003 are not necessarily indicative of results to be achieved for the full fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                  | 
|3. Notes Payable                  |  | On August 6, 2003, the maturity date of the $500,000 working capital loan facility with Matah Holdings, LLC (Matah) was extended until March 31, 2004. In addition, the Company
executed an unconditional commitment letter with Matah to extend an additional credit facility of $300,000. This facility is due and payable on March 31, 2004. As of September 30, 2003, the Company has $40,000 remaining under its $500,000 working
capital loan facility with Matah and has taken no advances on the $300,000 facility.                                                                                                                                                                                                                                                                                                                                                                           



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8



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MEGA GROUP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



---



|4. Financial Condition |  | The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As of September 30, 2003, the Company has a deficiency in
stockholders equity of approximately $3,029,000 and a working capital deficiency of approximately $3,036,000. In addition, the Company is in default on certain notes payable and other obligations and is involved in significant litigation
involving past business dealings. The intent of the Companys management is to direct it into new business lines providing financial services to currently underserved ethnic minorities through alliances with churches and other organizations
serving those groups. The Company intends in the near term to obtain additional equity funding to pursue these new lines of business. The Company currently is conducting a best-efforts, no minimum registered public offering of 1,500,000 units, each
unit consisting of one share of its common stock and a warrant to purchase one additional share of its common stock, representing 35% of its equity fully diluted, at an offering price currently estimated at $6.00 per unit.
|---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       | 
|                       |  | On October 11, 2000, as a condition of the reverse acquisition of Mega by SBICOA, Megas president, Steven Gregory, agreed to indemnify the Company, SBICOA, and its
respective directors, shareholders, affiliates, and certain other associated persons (collectively, the Indemnity Group) and to hold the Indemnity Group harmless from and against all claims or liabilities relating to its business, including all
litigation claims then being asserted against the Company (other than the Adler claim described in Note 8). Mr. Gregorys agreement is subject to certain conditions, among them that (i) it is effective until not later than October 11, 2004,
(ii) it is contingent on the successful completion of a securities offering by the Company, and (iii) his obligation shall be satisfied only by his delivery to the Company of such number of its common shares owned by him, valued for this purpose at
$2.50 per share, as shall be equal to the amount of any claim settled or finally determined. Mr. Gregory has granted the Indemnity Group a security interest in his shares to secure his obligation.                         



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9



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MEGA GROUP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



---



|4. Financial Condition (continued) |  | The Companys ability to continue as a going concern is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis until the offering
can be completed. The Company has taken steps to reduce its cash expenditures including: deferring the payment of its officers salaries, negotiating favorable terms in order to defer payments to certain vendors, and minimizing its general and
administrative expenses. This plan assumes no subsequent unfavorable changes in the terms of the Companys notes payable in which the Company is currently in default. To the extent that any of the note holders pursue their rights under the
notes, the Companys cash flow position could be materially affected. As of September 30, 2003, the Company has $40,000 remaining under its working capital loan facility with Matah. In addition, the maturity date of the $500,000 facility has
been extended until March 31, 2004. Finally, on August 6, 2003, the Company executed an unconditional commitment letter with Matah to extend an additional credit facility of $300,000. This facility is due and payable on March 31, 2004. Management
believes that these actions will enable the Company to generate sufficient cash flow to meet its obligations on a timely basis until the offering can be completed, but no assurances can be given in this regard.
|---------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                   | 
|5. Related Party Transactions      |  | Due to stockholder: The Company owes its president $150,824 at September 30, 2003. The obligation is the result of payments made by the president on the Companys behalf.
Such payments covered certain debt requirements as well as operating expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



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10



---

MEGA GROUP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



---



|6. Stock Options |  | In accounting for stock options to employees, the Company follows the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, as opposed to the fair value method prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB Statement No. 123:
|---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Nine Months Ended September 30,2002


Nine Months Ended September 30,2003Net loss, as reported

$
(436,494
)

$
(617,634
)Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects






Pro-forma net loss

$
(436,494
)

$
(617,634
)Earnings per share:Basic and dilutive  as reported

$
(0.05
)

$
(0.07
)Basic and dilutive  pro forma

$
(0.05
)

$
(0.07
)




This disclosure
is in accordance with Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure that the Company has adopted in these financial statements.



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11



---

MEGA GROUP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



---



|7. |  | Net loss per share |  | The following table sets forth the computation of basic and diluted net loss per share for the nine month periods ended September 30, 2003 and 2002:
|-- |  | ------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



Nine MonthsEndedSeptember 30,2002


Nine MonthsEndedSeptember 30,2003Net loss, as reported

$
(436,494
)

$
(617,634
)Preferred stock dividends






Net loss  basic

$
(436,494
)

$
(617,634
)Weighted average shares  basic


8,468,676



9,359,303Common shares issuable upon exercise of stock options






Weighted average shares diluted


8,468,676



9,359,303Basic and diluted net loss per share

$
(0.05
)

$
(0.07
)




For the nine
month periods ended September 30, 2003 and 2002, 280,000 common shares issuable upon exercise of stock options were excluded from the dilutive calculation because the effect was anti-dilutive.



---



12



---

|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
|------- |  | ----------------------------------------------------------



SOME OF THE STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. STATEMENTS ABOUT OUR EXPECTATIONS, BELIEFS, PLANS, OBJECTIVES, ASSUMPTIONS, OR FUTURE EVENTS OR PERFORMANCE ARE NOT HISTORICAL FACTS AND MAY BE
FORWARD-LOOKING. FORWARD-LOOKING STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE THROUGH THE USE OF WORDS OR PHRASES LIKE ANTICIPATE, ESTIMATE, PLANS, PROJECTS, CONTINUING, ONGOING,
EXPECTS, MANAGEMENT BELIEVES, WE BELIEVE, WE INTEND, AND SIMILAR WORDS OR PHRASES. ACCORDINGLY, THESE STATEMENTS INVOLVE ESTIMATES, ASSUMPTIONS, AND UNCERTAINTIES. ANY FORWARD-LOOKING STATEMENTS ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE FACTORS, INCLUDING RISK FACTORS, DISCUSSED IN THIS REPORT OR INCORPORATED BY REFERENCE. BECAUSE THE FACTORS DISCUSSED IN THIS REPORT OR INCORPORATED BY REFERENCE COULD CAUSE ACTUAL RESULTS OR OUTCOMES
TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN FORWARD-LOOKING STATEMENTS, YOU SHOULD NOT OVER-RELY ON FORWARD-LOOKING STATEMENTS. FURTHER, EACH FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE ON WHICH IT IS MADE, AND WE UNDERTAKE NO OBLIGATION
TO UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT LATER EVENTS OR CIRCUMSTANCES AS THEY OCCUR.



We believe that our financial condition and results of operations included in this report are not indicative of our future prospects. During the nine
months ended September 30, 2003, we commenced the implementation of a new business plan and operation.



Our business plan is to offer diversified financial services to ethnic communities and faith-based entities in the United States. Our operations will
initially include:



Business and Community Development Lending



We propose to operate as a specialized financial
institution, known as a Community and Individual Investment Corporation (CIIC), under an initiative of the U.S. Department of Housing and Urban Development (HUD). CIICs are for-profit, resident-owned, non-bank
banks that, in the words of HUD, serve an important function by making business and housing loans in low- and moderate-income communities. CIICs may use HUD funds to provide community development and business loans, business
start-up or expansion loans, and rental housing rehabilitation loans.



We propose to acquire, or become licensed to operate as, a Small Business Investment Company (SBIC) or a New Markets Venture Capital Company (NMVCC), under initiatives of the U.S. Small Business Administration
(SBA). SBICs and NMVCCs provide SBA-guaranteed debt financing or equity capital to small-business concerns and developmental venture capital financing to concerns in low-income areas.



We propose to support community-based financing, through other financial
institutions, by making direct investments, providing loan guarantees and other credit enhancements, and purchasing loans. We intend to provide technical assistance to lenders and borrowers and to assist banks in complying with the requirements of
the Community Reinvestment Act.



Investment Referral Services



We expect to package, service, and advise closed-end
investment companies and other savings and investment programs that will permit community- and faith-based equity participation in these efforts.



Business Strategic Planning and Financial Consulting Services



Finally, we propose to provide fee-based financial consulting services to local governments throughout the United States.



Our business plan referred to above calls for a capitalization of at least
$30,000,000. Accordingly, we are now undercapitalized. We intend to satisfy any liquidity needs during the foreseeable future by engaging in one or more public or non-public equity financings. The nature of our business and proposed business
does not require any significant product research and development, purchase or sale of plant and equipment, or changes in the number of employees. In the event that we are unable to raise significant funds, we may be unable to make required payments
as they become due and may be unable to fully execute our business plan.



Since October 11, 2000, through SBICOA, we have sustained our operations substantially through private borrowings. On July 15, 2002, together with SBICOA, we entered into a loan and security agreement with Matah
Holdings, L.L.C., a nonaffiliated lender. The agreement provided us with a working capital facility under which we had the right to borrow up to $500,000, of which $460,000 is currently in use. The borrowings are evidenced by promissory notes due,
together with interest at 12% per annum, on March 31, 2004 and are personally guaranteed by our chairman of the board of directors, chief executive officer, and principal shareholder, John H. Brown, and by our secretary-treasurer, director, and
principal shareholder, Joyce L. Brown.



We believe that our
financial condition and results of operations included in this report are not indicative of our future prospects. During the past two years we have been in transition. We discontinued our insurance agency business and acquired the Small Business
Investment Corporation of America, Inc. (SBICOA). Our planned operations will initially include:



Business and Community Development Lending



We propose to operate as a specialized financial institution, known as a Community and Individual Investment Corporation (CIIC), under an initiative of the U.S. Department of Housing and Urban Development
(HUD). CIICs are for-profit, resident-owned, non-bank banks that, in the words of HUD, serve an important function by making business and housing loans in low- and moderate-income communities. CIICs may use HUD
funds to provide community development and business loans, business start-up or expansion loans, and rental housing rehabilitation loans.



We propose to acquire, or become licensed to operate as, a Small Business Investment Company (SBIC) or a New Markets Venture Capital Company
(NMVCC), under initiatives of the U.S. Small Business Administration (SBA). SBICs and NMVCCs provide SBA-guaranteed debt financing or equity capital to small-business concerns and developmental venture capital financing to
concerns in low-income areas.



We propose to support
community-based financing, through other financial institutions, by making direct investments, providing loan guarantees and other credit enhancements, and purchasing loans. We intend to provide technical assistance to lenders and borrowers and to
assist banks in complying with the requirements of the Community Reinvestment Act.



Investment Referral Services



We expect to
package, service, and advise closed-end investment companies and other savings and investment programs that will permit community- and faith-based equity participation in these efforts.



Business Strategic Planning and Financial Consulting Services



Finally, we propose to provide fee-based financial consulting services to local governments throughout the United States.



13



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Liquidity and Capital Resources



Since October 11, 2000, through SBICOA, we have sustained our operations substantially through private borrowings. On
July 15, 2002, we entered into a loan and security agreement with Matah Holdings, L.L.C. (Matah), a nonaffiliated lender. The agreement provided us with a working capital facility under which we had the right to borrow up to
$500,000 and as of December 31, 2002 we had borrowed $300,000. In January 2003, the Company obtained an additional loan from Matah for $100,000 and was granted an extension on the existing loans until April 15, 2003. The agreement also called for
50,000 shares of the Companys common stock to be issued to Matah as additional consideration for the $100,000 loan. The Company has accrued $47,500 of loan financing costs related to these shares based on their fair market value at the date of
the agreement. The shares were not issued as of September 30, 2003. In April 2003, the Company obtained an additional loan from Matah for $60,000 and was granted an extension on the existing loans until July 15, 2003. By agreement dated August 6,
2003, the Company was granted a further extension on the existing loans until March 31, 2004. These loans are subject to the same terms and conditions as the original Loan and Security Agreement dated July 15, 2002, as amended, as disclosed in the
Companys 2002 annual financial statements. The borrowings are personally guaranteed by our chairman of the board of directors, chief executive officer, and principal shareholder, John H. Brown, and by our secretary-treasurer, director, and
principal shareholder, Joyce L. Brown.



We estimate that we
have sufficient liquidity to satisfy our cash requirements until at least March 2004 due primarily to a $300,000 unconditional loan commitment letter issued on August 6, 2003 by Matah which expires on March 31, 2004. We expect to satisfy any
liquidity needs during the foreseeable future by engaging in one or more public or non-public equity financings. The Company currently is conducting a best-efforts, no minimum registered public offering of 1,500,000 units, each unit consisting of
one share of its common stock and a warrant to purchase one additional share of its common stock, representing 35% of its equity fully diluted, at an offering price currently estimated at $6.00 per unit.



As of September 30, 2003, we had a deficiency in stockholders equity of
approximately $3,029,000 and a working capital deficiency of approximately $3,036,000. In addition, we are in default on certain notes payable and other obligations and are involved in significant litigation involving past business dealings.
Although interest rates and the amount outstanding under our credit facility may vary, based on current interest rates and assuming that our debt levels do not change from the date of completion of our current public offering, servicing all of our
outstanding debt at September 30, 2003 set forth below, will require first-year payments of approximately $294,576.



In 2004, the Company is obligated under a defaulted $60,000 note payable, unsecured, bearing interest at 12.5%, due June 2003, to make principal and
accrued interest payments of approximately $77,000. In 2004, the Company also is obligated to make principal and interest payments in the aggregate amount of $136,000 pursuant to note payable in default to an individual for a cash loan, unsecured,
bearing interest at 12%. In addition, during 2004, the Company is obligated to make principal and interest payments of approximately $22,000 under an unsecured note payable in default to a stockholder and officer bearing interest at 15%, due
December 2003.



On October 11, 2000, as a condition of its
acquisition of SBICOA, its president, Steven Gregory, agreed to indemnify the Company, SBICOA, and its respective directors, shareholders, affiliates, and certain other associated persons (collectively, the Indemnitee Group) and to hold
the Indemnitee Group harmless from and against all claims or liabilities relating to its business, including all litigation claims then being asserted against the Company (other than the Herman Adler v. Mega Group, et al., claim described in the
Legal Proceedings disclosure in our 10-KSB filed March 7, 2003). Mr. Gregorys agreement is subject to certain conditions, among them that (i) it is effective until not later than October 11, 2004, (ii) it is contingent on the
successful completion of a securities offering by the Company, and (iii) his obligation shall be satisfied only by his delivery to the Company of such number of its common shares owned by him, valued for this purpose at $2.50 per share, as shall be
equal to the amount of any claim settled or finally determined. Mr. Gregory has granted the Indemnitee Group a security interest in his shares to secure his obligation.







14



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The intent of our management is to direct Mega Group into new business lines providing financial services
to currently underserved ethnic minorities through alliances with churches and other organizations serving those groups. We intend in the near term to obtain additional equity funding and to obtain additional debt financing to pursue these new lines
of business and to provide the funds to satisfy its current obligations. The extent to which we can raise additional equity and financing and achieve profitable operations from new business activities will determine if we can continue as a going
concern.



Management believes it will be successful in
obtaining additional equity and debt financing, but no assurances can be given in this regard. As a result of our deficiencies in stockholders equity and working capital and default on certain of our obligations, our independent accountants
have qualified our audited financials to indicate that these conditions raise substantial doubt about our ability to continue as a going concern.



Results of Operations



Nine Months Ended September 30, 2003



During the nine months ended September 30, 2003, our cash position decreased from $4,031 at December 31, 2002 to $45 at September 30, 2003. During the same nine-month period ended September 30, 2003, we realized a net
loss of $617,634 after revenue of $28,500, ongoing operating expense in the total amount of $518,244, interest expenses of $128,133 and interest income of $243.



Three Months Ended September 30, 2003



During the three months ended September 30, 2003, we realized a net loss of $205,602 after revenues of $14,000, ongoing operating expenses in the total
amount of $176,209, interest expense of $43,488, and interest income of $95.



|ITEM 3. |  | CONTROLS AND PROCEDURES.
|------- |  | ------------------------



Within the 90 days prior to the filing date of this quarterly report, our principal executive officer and principal financial officer evaluated the
effectiveness of the design and operation of our disclosure controls and procedures. They have advised us that, based on that evaluation, they concluded that our disclosure controls and procedures are effective to ensure that material information
relating to us, and our consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared. There have been no significant changes in our internal controls or
in other factors that could significantly affect our internal controls since the date of their evaluation. Our principal executive officer and principal financial officer identified no significant deficiencies and material weaknesses requiring
corrective action.





15



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PART II OTHER INFORMATION



|ITEM 1. |  | LEGAL PROCEEDINGS.
|------- |  | ------------------



We are a respondent in a civil action, for confirmation of an arbitration award captioned Herman Adler v. Mega Group, Inc., et al., which commenced
on November 15, 1999, in the Supreme Court for the County of Albany, New York. The petitioner, now deceased, was the former owner of an insurance agency which we purchased in 1985. He claimed that the Company failed to honor the payment terms of the
agency purchase agreement. On December 15, 1999, an arbitrator rendered, and on March 7, 2000 the arbitrator modified, an award in favor of the petitioner and against the Company in the amount of $157,381. On January 8, 2001, the Supreme Court
confirmed the arbitration award and entered judgment against the Company for $168,808 including costs and interest. Judgment was also entered as against various individuals who had guaranteed the Companys obligation to petitioner. The judgment
creditor restrained the Company from making any sale, assignment, transfer, or interference with any property in which the Company has an interest until the judgment is satisfied or vacated.



We are the defendant in a civil action for money damages, for breach of a
computer financing agreement, captioned First State Bank v. Mega Group, Inc., in the Supreme Court for the County of Saratoga, New York. On December 14, 2000, the Supreme Court entered judgment against the Company in the amount of $48,000. The
judgment creditor restrained the Company from making any sale, assignment, transfer, or interference with any property in which the Company has an interest until the judgment is satisfied or vacated. The judgment amount is included in the current
portion of long-term debt on the accompanying September 30, 2003 Balance Sheet.



We are a defendant in a civil action for money damages captioned Verizon Yellow Pages v. Mega Group, Inc., which commenced on January 31, 2003, and is pending in the Supreme Court for the County of Albany, New York.
The plaintiff seeks to recover $20,000 for past due advertisement charges, attorneys fees, costs and interest. We vigorously dispute the charges, and a motion for summary judgment has been asserted by the plaintiff.



We commenced an action on March 13, 2003, against our former counsel,
attorney Stephen Pechenik, and his law firm, Pechenik & Curro, PC, which is pending in the Supreme Court for the County of Saratoga, New York. In our complaint, we allege professional malpractice in relation to the entry of judgment in a matter
captioned Halton v. Mega which was litigated in the Supreme Court for the County of Saratoga, New York, and for certain material misrepresentations which were made by our former counsel at the time of the sale of certain of our assets to Mega
Personal Lines. The defendants answer was served in May 2003. Discovery has commenced.



We are one of several defendants in a civil action for money damages captioned Mega Personal Lines, Inc. v Mega Group, Inc., et al., which was commenced on March 27, 2003. In this action commenced by Mega Personal
Lines (MPL), as against Mega Group, Inc., Stephen Pechenik and Pechenik & Curro, PC, MPL seeks to recover based upon material misrepresentations which were made at the time of the sale of certain Mega Group assets to MPL. The same
allegations of negligent misrepresentation have been made against both Mega Group and its former counsel. We anticipate an answer which (1) denies any wrongdoing, (2) asserts a counterclaim for unjust enrichment and (3) cross-claims against
co-defendants Steve Pechenik and Pechenik & Curro, PC for indemnification.



We are a defendant in other pending lawsuits which, in the view of our management, are not material to our financial statements or the results of our operations.



|ITEM 2. |  | CHANGES IN SECURITIES.
|------- |  | ----------------------



None.



|ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES.
|------- |  | --------------------------------



None.



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



None.



|ITEM 5. |  | OTHER INFORMATION.
|------- |  | ------------------



None.



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.
|------- |  | ---------------------------------



(a) EXHIBITS.



31.1Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 305 of the Sarbanes-Oxley Act of
2002.



31.2Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 305 of the Sarbanes-Oxley Act of 2002.



32.1Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.



(b) REPORTS ON FORM
8-K.



We did not file any reports on Form 8-K during the
period covered by this report.



16



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                        |  |  |  | MEGA GROUP, INC.
|----------------------- |  |  |  | ----------------
|                        |  |  | 
|Date: November 13, 2003 |  |  |  | By:             
|                        |  |  |  |                 
|                        |  |  |  |                 
|                        |  |  |  |                 
|                        |  |  |  |                 
|                        |  |  |  |                 
|Date: November 13, 2003 |  |  |  | By:             
|                        |  |  |  |                 
|                        |  |  |  |                 



17