MSGI TECHNOLOGY SOLUTIONS, INC - FORM 10-Q/A

Attached files

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EX-31.1 - MSGI TECHNOLOGY SOLUTIONS, INC	v212162_ex31-1.htm
EX-32.1 - MSGI TECHNOLOGY SOLUTIONS, INC	v212162_ex32-1.htm
EX-32.2 - MSGI TECHNOLOGY SOLUTIONS, INC	v212162_ex32-2.htm
EX-31.2 - MSGI TECHNOLOGY SOLUTIONS, INC	v212162_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment 1

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2009

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-16730

MSGI TECHNOLOGY SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada		88-0085608
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

One Market Street
Spear Tower, 36th Floor
San Francisco, CA		94105
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 415-293-8551

575 Madison Ave, New York, NY 10022

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

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

Yes ¨ No x

State number of shares outstanding of each of the issuer’s classes of common equity as of the latest practical date:

As of February 13, 2010 there were 52,961,038 shares of the Issuer’s Common Stock, par value $.01 per share outstanding.

Explanatory Note

We are filing this Amended Interim Report on Form 10-Q/A (the “Amended Filing” or “Form 10-Q/A”) to our Interim Report on Form 10-Q for the period ended December 31, 2009 (the “Original Filing”) to amend and restate our unaudited financial statements and related disclosures for the three and six months ended December 31, 2009 as discussed in Note 2 to the accompanying restated unaudited financial statements.

Except for the items noted below, no other information included in the Original Filings is being amended by this Amended Filing. The Amended Filing continues to speak as of the date of the Original Filing and we have not updated the filing to reflect events occurring subsequently to the Original Filing date other than those associated with the restatement of the Company’s financial statements. Accordingly, this Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing.

Background of the Restatement:

During the audit of the annual financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2010, our independent accounts brought to the attention of management that, beginning in July 2009, the Company had convertible debt, accrued interest, contractually issuable shares, options and warrants that, if converted into common stock shares, would exceed the amount of the Company’s authorized common shares. From July 2009 through December 31, 2009, and beyond, the Company continued to issue new shares of its common stock and new instruments convertible or exercisable into shares of its common stock. At each period of time that one of these instruments was issued, the amount of common shares, which potentially exceeded the Company’s issuable shares above its authorized common shares increased. When the Company’s issuable shares exceeds its authorized common share then derivative liability accounting is required.

In accordance with the guidance on accounting for derivatives, the Company properly valued and recorded a derivative liability that resulted from a number of its shares being issuable in excess of its authorized share capital at June 30, 2010.

After the audit was completed and the Form 10K was filed, management analyzed the impact of the guidance on accounting for embedded derivatives associated with the excess shares for each of the interim periods, previously reported, ended September 30, 2009, December 31, 2009 and March 31, 2010. On or about November 19, 2010, management determined that the derivative issue had an immaterial effect on the interim period ended September 30, 2009, but that the effect on the interim periods ended December 31, 2009 and March 31, 2010 was material. Management discussed their conclusions with the audit committee on December 7, 2010. The audit committee concurred with management’s conclusions. Management and the Company’s audit committee of the board of directors have also discussed this matter with the Company’s new independent registered public accounting firm.

As a result, management and the audit committee determined that the Company should restate its financial statements for the three and six months period ended December 31, 2009. Accordingly, this filing restates the Company’s previously issued financial statements for the three and six month periods ended December 31, 2009.

In accordance with the guidance on accounting for derivatives, the Company has valued and recorded a derivative liability that resulted from these shares issuable in excess of its authorized share capital at December 31, 2009.

Restatement of Other Financial Statements:

In addition to the filing of this Form 10-Q/A, we will be filing an amendment to our Interim Report on Form 10-Q for the quarterly period ended March 31, 2010 for the same reason as this filing is being restated.

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q/A REPORT

DECEMBER 31, 2009

			Page

PART I - FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets as of
		December 31, 2009 (unaudited) and June 30, 2009	5

		Condensed Consolidated Statements of Operations for the
		three and six months ended December 31, 2009 and 2008 (unaudited)	6

		Condensed Consolidated Statement of Stockholders’
		Deficit for the six months ended December 31, 2009 (unaudited)	7

		Condensed Consolidated Statements of Cash Flows for the
		six months ended December 30, 2009 and 2008 (unaudited)	8

		Notes to Condensed Consolidated Financial Statements (unaudited)	9-27

	Item 2.	Management’s Discussion and Analysis of Financial
		Condition and Results of Operations	28-40

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40

	Item 4.	Controls and Procedures	40-41

PART II- OTHER INFORMATION

	Item 1.	Legal Proceedings	42

	Item 6.	Exhibits	42

	SIGNATURES		43

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2009			June 30, 2009
	(Unaudited)			*
ASSETS

Current assets:
Cash	$	1,188		$	689

Total current assets		1,188			689

Investments in Current Technology Corporation		1,500,000			1,500,000
Property and equipment, net		25,859			32,299
Deposits on technology licenses		-			175,000
Other assets, principally deferred financing costs, net		159,877			338,223

Total assets	$	1,686,924		$	2,046,211

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:
Accounts payable-trade	$	2,701,197		$	2,723,392
Derivative liability for excess shares		674,041			-
Accrued expenses and other current liabilities		5,475,760			4,684,192
Advances from strategic partner		276,950			276,950
Advances from corporate officer		753,077			167,062
Other advances		60,000			60,000
Convertible notes payable		3,350,004			3,110,000
6% Callable convertible notes payable, net of discount of $828,390 and $1,942,430, respectively		1,171,610			57,570
8% callable convertible notes payable, net of discount of $3,635,146 and $3,980,109, respectively		4,364,854			4,019,891

Total current liabilities		18,827,493			15,099,057

Commitments and contingencies

Stockholders’ deficit:
Common stock - $.01 par value; 100,000,000 shares authorized; 51,278,700 and 24,932,967 shares issued; 51,261,038 and 24,915,305 shares outstanding as of December 31, 2009 and June 30, 2009, respectively		512,786			249,329
Additional paid-in capital		273,050,759			272,057,383
Accumulated deficit		(289,310,404	)		(283,965,848	)
Less: 17,662 shares of common stock in treasury, at cost		(1,393,710	)		(1,393,710	)
Total stockholders’ deficit		(17,140,569	)		(13,052,846	)

Total liabilities and stockholders’ deficit	$	1,686,924		$	2,046,211

* Derived from audited financial statements

See Notes to Condensed Consolidated Financial Statements.

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	December 31						December 31

	2009			2008			2009			2008

Total revenue	$	-		$	-		$	-		$	-
Cost of revenue/products sold, including write-down of $4,066,646 in 2008		-			4,066,646			-			4,066,646
Gross loss		-			(4,066,646	)		-			(4,066,646	)
Operating costs and expenses:
Salaries, benefits, and payroll taxes		170,269			353,117			349,737			728,564
Research and development		120,000			-			535,004			-
Selling, general and administrative (including non-cash expenses (credit) for shares to be issued to Apro Media of $0 and ($7,248) for the three months for 2009 and 2008 and $0 and ($33,342) for the six months for 2009 and 2008, respectively)		1,167,524			303,714			1,749,515			913,728
Depreciation and amortization		3,220			4,006			6,440			7,933
Total operating costs and expenses		1,461,013			660,837			2,640,696			1,650,225

Loss from Operations		(1,461,013	)		(4,727,483	)		(2,640,696	)		(5,716,871	)

Other income (expense):
Non-cash expense for revaluation of put options to fair value		-			-			-			(150,000	)
Gain on securities exchange agreement		-			-			-			1,700,000
Gain on change in derivative liability		825,580			-			825,580			-
Miscellaneous income		10,000			-			10,000			-
Non-cash loss on debt guarantee		-			-			(170,000	)		-
Interest income		-			-			-			13,124
Interest expense		(1,464,187	)		(382,680	)		(3,357,440	)		(1,353,410	)
Total other income (expense)		(628,607	)		(382,680	)		(2,691,860	)		209,714

Net loss before provision for income taxes		(2,089,620	)		(5,110,163	)		(5,332,556	)		(5,507,157	)
Provision for income taxes		6,000			6,657			12,000			6,657

Net loss	$	(2,095,620	)	$	(5,116,820	)	$	(5,344,556	)	$	(5,513,814	)

Basic and diluted loss per share:	$	(0.04	)	$	(0.22	)	$	(0.13	)	$	(0.24	)

Weighted average common shares outstanding basic and diluted		49,627,384			23,465,060			40,428,606			23,041,723

See Notes to Condensed Consolidated Financial Statements

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED DECEMBER 31, 2009

(Unaudited)

	Common Stock										Treasury Stock
					Additional Paid			Accumulated
	Shares		Amount		in Capital			Deficit			Shares			Amount			Totals

Balance June 30, 2009		24,932,967	$	249,329	$	272,057,383		$	(283,965,848	)		(17,662	)	$	(1,393,710	)	$	(13,052,846	)

Exchange of shares of common stock for warrants in Exchange Agreement		7,700,000		77,000		946,000												1,023,000

Non-cash compensation expenses						2,744												2,744

Issuance of shares under terms of various consulting and services agreements		17,053,333		170,533		1,355,517												1,526,050

Issuance of shares for debt guarantee		1,000,000		10,000		160,000												170,000

Issuance of shares under terms of a certain loan agreement		500,000		5,000		15,000												20,000

Issuance of shares of common stock under Addendum to term notes payable		92,400		924		6,783												7,707

Fair value of warrants issued under Addendums to term notes payable						6,953												6,953

Derivative value of shares of common stock in excess of authorized total						(1,499,621	)											(1,499,621	)

Net loss for the six months ended December 31, 2009									(5,344,556	)								(5,344,556	)

Balance December 31, 2009		51,278,700	$	512,786	$	273,050,759		$	(289,310,404	)		(17,662	)	$	(1,393,710	)	$	(17,140,569	)

See Notes to Condensed Consolidated Financial Statements.

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED DECEMBER 31,

(unaudited)

	2009			2008

Operating activities:
Net loss	$	(5,344,556	)	$	(5,513,814	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		6,440			7,933
Gain on securities exchange agreement		-			(1,700,000	)
Amortization of deferred financing costs		178,346			392,793
Non-cash compensation expense		2,744			226,790
Non-cash expense for put option revaluation to fair value		-			150,000
Non-cash interest expense		2,321,663			363,984
Non-cash loss on guarantee of debt		170,000			-
Non-cash expense (credit) for shares to be issued to Apro		-			(33,342	)
Non-cash value of shares issued for services		1,526,050			-
Gain on change in derivative liability		(825,580	)		-
Reserve on deferred costs of products shipped		-			4,066,646
Changes in assets and liabilities:
Accounts receivable		-			128,000
Other current assets		-			(6,000	)
Other assets		175,000			(1,000	)
Accounts payable - trade		(22,195	)		39,720
Accrued expenses and other liabilities		986,568			742,627

Net cash used in operating activities		(825,520	)		(1,135,663	)

Investing activities:
Purchases of property and equipment		-			(1,860	)

Net cash from (used in) investing activities		-			(1,860	)

Financing activities:
Proceeds from promissory note		240,004			-
Cash advances from corporate officer		586,015			187,087
Release of restricted cash to Company		-			1,800,000
Cash paid from restricted stock in Securities Exchange Agreement		-			(1,000,000	)
Net cash provided by financing activities		826,019			987,087

Net increase in cash		499			(150,436	)

Cash at beginning of period		689			150,624

Cash at end of period	$	1,188		$	188

Non-cash Transactions:
Deferred financing charges accrued in connection with
Securities Exchange Agreement	$	-		$	20,000

See Notes to Condensed Consolidated Financial Statements.

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of MSGI Security Solutions, Inc. and its Subsidiaries, Future Developments America, Inc (FDA) and Innalogic, LLC (Innalogic), Nanobeak Inc. (Nanobeak) and Andromeda Energy Inc. (Andromeda), (in combination MSGI or the Company). These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company's Form 10-K for the fiscal year ended June 30, 2009 and the historical consolidated financial statements and related notes included therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals (except for the derivative liability as described in Note 7), necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company. Certain information and footnote disclosure normally included in financial statements prepared in conformity with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. Operating results for the three and six month periods ended December 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2010.

Going concern:

Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through private placements of equity, debt transactions and related party advances. The Company currently has limited capital resources, has incurred significant historical losses and negative cash flows from operations and has no current period revenues. At December 31, 2009, the Company had $1,188 in cash and no accounts receivable. The Company believes that funds on hand combined with funds that will be available from its various operations will not be adequate to finance its operations requirements and enable the Company to meet any of its financial obligations, including its payments under convertible notes and promissory notes for the next twelve months. Certain promissory notes in the amount of $960,000 were due February 28, 2009, was $1,500,000 due March 31, 2009, was $250,000 due on June 17, 2009 and was $240,004 due on August 31, 2009. These notes are technically in default as of the date of this filing, but none of the lenders have made a claim of default and the Company is in the process of negotiating extended terms for each of the debt instruments. Other promissory notes in the amount of $1,000,000 were due on December 13, 2009 and $400,000 was due on December 31, 2009. All other convertible notes are due prior to June 30, 2010 and the Company does not have the funds to repay such notes. Further, there is uncertainty as to timing, volume and profitability of transactions, if any, which may arise from our relationship with The National Aeronautics and Space Administrations (NASA) and others. There can be no assurance as to the timing of when or if we will receive amounts due to us for products shipped to customers prior to June 30, 2008, which transactions have not yet been recognized as revenue. As of the date of this filing, the Company has ceased its business relationship with both Hyunda1 Syscomm Corp. (Hyundai) and Apro Media Corp. (Apro or Apro Media) and a legal action has been filed in the State of California naming both, among others, as defendants. There are no assurances that any further capital raising transactions will be consummated. Although certain financing related transactions have been successfully closed, failure of our operations to generate sufficient future cash flow and failure to consummate our strategic transactions or raise additional financing could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives.These conditions raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to raise additional funds, it may be forced to further reduce, or cease operations, liquidate assets, renegotiate terms with lenders and others of which there can be no assurance of success, or file for bankruptcy protection. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern.

As of December 31, 2009, we are authorized to issue 100,000,000 shares of common stock. If the holders of the convertible promissory notes outstanding elect to convert their holdings into common stock, and the holders of the stock options and warrants outstanding elect to exercise their rights to purchase common stock, the Company is obligated to have issued approximately 122,000,000 shares of common stock, which is in excess of what we currently have authorized. We plan to ask the Company’s shareholders to authorize the issuance of additional shares at our annual meeting. However there is no guarantee that we will be able to obtain the votes needed to obtain the additional authorized shares.

Summary of significant recent financing transactions:

During the six-month period ended December 31, 2009, the Company received net proceeds of approximately $586,000 from a certain corporate officer, which has no stated interest rate or maturity date. It is expected that this certain corporate officer will provide further cash advances to the Company through the three month period to end March 31, 2010, but that these advances will end upon any successful funding event or transaction completed by the Company.

In July 2009, the Company executed a NASA Funding Promissory Note in the amount of $240,004 with a lender who also holds a promissory note from December 2007. The new promissory note was executed in order to enable the Company to meet its obligations under a certain Space Act Agreement, which had been entered into with NASA. The note bears interest at 25% and matured on August 30, 2009. In addition, the Company was obligated to issue 500,000 shares of common stock to the lender as additional consideration to enter into the note agreement. The shares were issued to the lender in September 2009. As of the date of this filing, the principal balance and accrued interest has not yet been paid to the lender. Although the note is technically in default as of the date of this filing, the lender has not made any claim of default and the Company is currently in negotiations with the lender for an extension to the terms of the note. There can be no assurance that the Company will be successful in securing any extension to the note.

2.	RESTATEMENT OF FINANCIAL STATEMENTS

The Company did not originally record a derivative liability at December 31, 2009 financial statements for the three and six months period ended December 31, 2009 as it should have.

In accordance with the guidance on accounting for derivatives, the Company has valued a derivative liability that resulted from these shares issuable in excess of its authorized share capital at December 31, 2009 and has restated these financial statements to record and correct for the accounting for derivatives. (See footnote 7 for a more detailed discussion of this issue). This correction resulted in adjustments to the following line items of the financial statements as of and for the periods indicated:

	Three months ended									Six months ended
	December 31, 2009									December 31, 2009
	As									As
	Previously						As			Previoulsy					As
	Reported			Adjustments			Restated			Reported			Adjustments		Restated
Statement of Operations:
Gain on change in derivative liability	$	-		$	825,580		$	825,580		$	-		$	825,580	$	825,580
Total other income (expense)	$	(1,454,187	)	$	825,580		$	(628,607	)	$	(3,517,440	)	$	825,580	$	(2,691,860	)
Net loss before income taxes	$	(2,915,200		$	825,580		$	(2,089,620	)	$	(6,158,136	)	$	825,580	$	(5,332,556	)
Net loss	$	(2,921,200	)	$	825,580		$	(2,095,620	)	$	(6,170,136	)	$	825,580	$	(5,344,556	)
Basic and diluted loss pre share	$	(0.06	)	$	0.02		$	(0.04	)	$	(0.15	)	$	0.02	$	(0.13	)

As of December 31, 2009
Balance Sheet:
Derivative liability for excess shares	$	-		$	674,041		$	674,041
Total current liabilities	$	18,153,452		$	674,040		$	18,827,493
Additional paid in capital	$	274,550,380		$	(1,499,621	)	$	273,050,759
Accumulated deficit	$	(290,135,984	)	$	(825,580	)	$	(289,310,404	)
Total stockholders’ deficit	$	(16,466,528	)	$	(674,041	)	$	(17,140,569	)

Statement of cash flows:
Net loss	$	(6,170,136	)	$	(825,580	)	$	(5,344,556	)
Gain on change in derivative liability	$	-		$	(825,580	)	$	(825,580	)

The cumulative effect of the adjustment for derivative liabilities was a $1.5 million increase in additional paid in capital, a $0.8 million decrease in accumulated deficit and a $0.7 million increase in derivative liabilities.

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB.” The FASB sets generally accepted accounting principles (GAAP) that we follow to ensure that we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC. The Codification is effective for periods ending after September 15, 2009.

A summary of the major accounting policies followed by the Company in the preparation of the accompanying financial statements is set forth below.

Principles of Consolidation:

The consolidated financial statements include the accounts of MSGI and its majority owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The Company believes it has only one reporting segment.

Fair Value of Financial Instruments:

The carrying value of accounts payable, notes payable, accrued expenses and advances approximate their respective fair values because of their short term nature.

Revenue Recognition:

Revenues are reported upon the completion of a transaction that meets the prescribed criteria when (1) persuasive evidence of an arrangement exists; (2) delivery of our services has occurred; (3) our price to our customer is fixed or determinable; and (4) collectibility of the sales price is reasonably assured.

There was no revenue reported for the three and six months ended December 31, 2009 and 2008.

The Company had certain shipments of products to various customers during fiscal 2008 in the aggregate of approximately $6.5 million that were not recognized as revenue in fiscal 2008, fiscal 2009, or fiscal 2010 to date, due to certain revenue recognition criteria not being met in these periods, related to the assurance of collectibility among other factors. These transactions will only be recognized as revenue in the period in which all the revenue recognition criteria, as noted above, have been fully met. Inventory costs related to these transactions for which revenue has not been recognized had been reported on the balance sheet in “Costs of product shipped to customers for which revenue has not been recognized” as of June 30, 2008, but have been fully reserved and expensed to the statement of operations as costs of goods sold during the year ended June 30, 2009.

Costs of product shipped to customers for which revenue has not been recognized

As of December 31, 2009, the Company has capitalized approximately $5.4 million in product costs for goods that were shipped to customers during fiscal 2008 but for which revenue has not yet been recognized in either fiscal 2008, fiscal 2009, or to date in fiscal 2010. The Company has also recorded a full reserve against these product costs in the aggregate amount of approximately $5.4 million, all of which was recorded during the years ended June 30, 2009 and 2008. This reserve estimates the potential costs that may be unrecoverable. The Company is currently engaged in vigorous collection activities regarding the various amounts due which are related to these costs, which have now been fully reserved. The Company has filed legal action against various parties involved in the business operations to recover certain payments through court action or potential settlement. However, there can be no assurances that this will occur.

Deferred Financing and other debt-related Costs:

Deferred financing costs are amortized over the term of the associated debt instruments. The Company evaluates the terms of the debt instruments to determine if any embedded derivatives or beneficial conversion features exist. The Company allocates the aggregate proceeds of the notes payable between the warrants and the notes based on their relative fair values in accordance with FASB ASC 470-20 “Debt with Conversion and Other Options.” The fair value of the warrants issued to note holders or placement agents are calculated utilizing the Black-Scholes option-pricing model. The Company is amortizing the resultant discount or other features over the term of the notes through its earliest maturity date using the effective interest method. Under this method, the interest expense recognized each period will increase significantly as the instrument approaches its maturity date. If the maturity of the debt is accelerated because of defaults or conversions, then the amortization is accelerated. The Company’s debt instruments do not contain any embedded derivatives at December 31, 2009 and June 30, 2009.

Investments in non-consolidated companies:

The Company accounts for its investments in non-consolidated companies under the cost basis method of accounting if the investment is less than 20% of the voting stock of the investee, or under the equity method of accounting if the investment is greater than 20% of the voting stock of the investee. Investments accounted for under the cost method are recorded at their initial cost, and any dividends or distributions received are recorded in income. For equity method investments, the Company records its share of earnings or losses of the investee during the period. Recognition of losses will be discontinued when the Company’s share of losses equals or exceeds its carrying amount of the investee plus any advances made or commitments to provide additional financial support.

An investment in non-consolidated companies is considered impaired if the fair value of the investment is less than its cost on an other-than-temporary basis. Generally, an impairment is considered other-than-temporary unless (i) the Company has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss is recognized equal to the difference between the investment’s cost and its fair value.

Research and Development Costs:

The Company recognizes research and development costs associated with certain product development activities. The Company recorded expenses of $535,004 during the six months ended December 31, 2009 for costs associated with product development under the Company’s agreement with NASA. The Company recorded expenses of $415,004 during the prior three month period ended September 31, 2009.

Income Taxes:

The Company recognizes deferred taxes for differences between the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates and laws for the years in which the differences are expected to reverse. The Company uses the asset and liability method of accounting for income taxes, as set forth in FASB ASC 740 “Income Taxes.” As prescribed by FASB ASC 740, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities and net operating loss carry-forwards, all calculated using presently enacted tax rates. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company has established a full valuation allowance due to the uncertainty of recognizing future income.

On July 1, 2007, the Company adopted the provisions of FASB ASC 740-10. FASB ASC 740-10 prescribes recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. FASB ASC 740-10 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. There is no liability related to unrecognized tax benefits at December 31, 2009 and June 30, 2009.

Earnings (Loss) Per Share:

In accordance with FASB ASC 260, “Earnings Per Share,” basic earnings per share is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per share gives effect to all potentially dilutive common shares that were outstanding during the reporting period; however, such potentially dilutive common shares are excluded from the calculation of earnings (loss) per share if their effect would be anti-dilutive. In addition, stock options and warrants with exercise prices above average market price in the amount of 10,086,284 and 22,068,724 shares for the periods ended December 31, 2009 and 2008, respectively were not included in the computation of diluted earnings per share as they are anti-dilutive.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying amount of long lived assets, deferred tax valuation allowance, valuation of stock options, warrants and debt features and the allowance for doubtful accounts. Actual results could differ from those estimates.

Subsequent events:

In accordance with ASC 855-10, “Subsequent Events,” the Company evaluated all events or transactions that occurred after December 31, 2009 up through February 22, 2010. During this period no material subsequent events came to our attention.

Summary of Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset de-recognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations or cash flows of the Company.

In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.

In October 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This update addressed the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than a combined unit and will be separated in more circumstances that under existing US GAAP. This amendment has eliminated the residual method of allocation. Effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2009-13 to have a material effect on the financial position, results of operations or cash flows of the Company.

In September 2009, the FASB issued Accounting Standards Update 2009-12, Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update provides amendments to Topic 820 for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). It is effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been issued. The Company does not expect the provisions of ASU 2009-12 to have a material effect on the financial position, results of operations or cash flows of the Company.

In June 2009, the Financial Accounting Standards Board (FASB) issued its final Statement of Financial Accounting Standards (SFAS) No. 168 – The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162. SFAS No. 168 made the FASB Accounting Standards Codification (the Codification or ASC) the single source of U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The Codification supersedes all existing non-SEC accounting and reporting standards and was effective for the Company beginning July 1, 2009. Following SFAS No. 168, FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right; these updates will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. In the description of Significant Accounting Policies that follows, references in “italics” relate to Codification Topics and Subtopics, and their descriptive titles, as appropriate

In June 2008, the FASB issued new accounting guidance as codified in ASC 815-40 on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This guidance also addresses how to assess whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock for purposes of determining whether the appropriate accounting treatment falls under the scope of ASC 815 “Derivatives and Hedging.” This guidance was effective for the Company July 1, 2009, the adoption of which did not have a material impact on the Company’s consolidated financial statements.

4. SECURITIES EXCHANGE TRANSACTION

On March 16, 2009, the Company entered into a Warrant Exchange Agreement with a group of investors (Enable). Under this agreement Enable has been granted the right to exchange all warrants held into 10,000,000 shares of common stock of the Company, provided, however, that at no time shall any Holder beneficially own more than the Beneficial Ownership Limitation of 9.99% of the Common Stock issued and outstanding from time to time. The original warrants carry exercise prices ranging from $0.50 to $2.50 and represent a total of 14,642,852 shares available to purchase. As of December 31, 2009, 8,200,000 shares of common stock have been issued under this exchange agreement and 1,800,000 shares remain to be issued under the Warrant Exchange Agreement. A liability of $90,000 has been recorded by the Company to recognize the fair value of the remaining shares to be issued at a market price of $0.05 per share at December 31, 2009. For the three and six months ended December 31, 2009, approximately $(150,000) and $828,000, respectively, was recorded as interest expense on the accompanying consolidated statements of operations, representing the value of shares issued during the three and six months then ended, in addition to the value of the change in accrual for the three and six months then ended.

5. DEPOSITS ON TECHNOLOGY LICENSES

During the year ended June 30, 2009, the Company expended $175,000 as a non-refundable deposit with NASA for the rights to license technologies. During the six month period ended December 31, 2009, the Company executed certain Space Act Agreements with NASA and expended an additional $360,004 as a reimbursement of research and development costs incurred by NASA under these agreements. The $175,000, which was previously categorized as a deposit, was also expensed as research and development under these agreements. As of December 31, 2009, the aggregate total expended for such research and development reimbursed to NASA is $535,004.

6. INVESTMENTS

Current Technology Corporation

On January 10, 2008, the Company entered into a Subscription Investment Agreement with Current Technology Corporation, a corporation formed under the laws of the Canada Business Corporation Act. The agreement provided for the Company to purchase from Current Technology a total of 25,000,000 shares of its common stock, and common stock purchase warrants exercisable for 25,000,000 million shares of its common stock, for an aggregate purchase price of $2,500,000. Payment of the $2,500,000 was to be made in five installments of $500,000 between January 4, 2008 and April 15, 2008. The common stock purchase warrants were immediately exercisable at an exercise price of $.15 per share and they expire on January 9, 2013. The warrants contain anti-dilution and adjustment provisions, which allow for adjustment to the exercise price and/or the number of shares should there be a change in the number of outstanding shares of common stock through a declaration of stock dividends, a recapitalization resulting in stock splits or combinations or exchange of such shares.

The Company currently has a $1,500,000 investment in Current Technology Corporation. The Company owns 15 million shares of the common stock of Current Technology, which represents approximately 9.0% ownership of its outstanding common stock. The Company has historically recorded the investment on a cost method of accounting.

Pursuant to the original share purchase transaction, the Company held warrants to purchase 20,000,000 additional shares of common stock of Current Technology Corporation with an exercise price of $0.15 per share. In August 2008, MSGI entered into a Securities Exchange Agreement with holders of the Company’s Series H Preferred stock and other instruments. In connection with this exchange, the warrants to purchase 20,000,000 additional shares of common stock of Current Technology were assigned to the parties to this agreement.

Pursuant to a junior guarantee provided by the Company under a certain bridge loan agreement, which was entered into by Mr. J. Jeremy Barbera, Chief Executive Officer and Chairman of MSGI, the Company surrendered 5,000,000 shares of common stock of its holdings in Current Technology Corporation at a carrying value of $500,000. The Company has no further guarantee obligations under the bridge loan agreement.

In addition, as part of this investment transaction, Current Technology is to outsource 25% of its business to MSGI through Celevoke, Inc. (an entity in which Current Technology holds a 59% ownership interest). No such transactions between MSGI and Celevoke have occurred during the six months ended December 31, 2009 or to date.

7. DERIVATIVE LIABILITY FOR EXCESS SHARES

Beginning in July 2009, the Company had convertible debt, accrued interest, contractually issuable shares, options and warrants that, if converted into common stock shares, would exceed the amount of the Company’s authorized common shares. From July 2009 through December 31, 2009 the Company continued to issue new shares of its common stock and new instruments convertible or exercisable into shares of its common stock. At each period of time that one of these instruments was issued, the amount of common shares, which potentially exceeded the Company’s issuable shares above its authorized common shares increased. As of December 31, 2009, the Company had approximately 22,000,000 shares of common stock issuable upon exercise or conversion in excess of its authorized capital.

At various points of time when the amount of excess shares increased, and at each subsequent reporting date, the Company used a Black-Scholes model with the following range of assumptions to value the derivative liability that resulted from these shares issuable in excess of its authorized share capital. Liabilities recorded each time the amount of excess shares increased were recorded with a corresponding entry to additional paid in capital. Any change to the amount of liability after it was initially recorded impacted the statements of operations as income or expense.:

	Low			High
Underlying stock price:	$	0.04		$	0.17
Exercise/conversion price:	$	0.25		$	0.51
Term until expiration:	1 year			1 year
Dividend yield:		0.00	%		0.00	%
Risk free rate:		0.32	%		0.49	%
Volatility:		272	%		298	%

The Company used a Black-Scholes model with the following range of assumptions to value the derivative liability at December 31, 2009:

	Low			High
Underlying stock price:	$	0.05		$	0.05
Exercise/conversion price:	$	0.20		$	0.51
Term until expiration:	1year			1 year
Dividend yield:		0.00	%		0.00	%
Risk free rate:		0.47	%		0.47	%
Volatility:		272	%		272	%

At December 31, 2009, the resulting liability from the approximately 22,000,000 excess shares was $674,041. The change in the liability from July 1, 2009 to December 31, 2009 of $825,580 was recorded in the line item “gain on change in derivative liability” in the statement of operations.

8. 8% CALLABLE CONVERTIBLE NOTES PAYABLE

The 8% Callable Convertible Notes Payable consist of the following as of December 31, 2009:

Instrument	Maturity	Face Amount		Discount		Carrying Amount at December 31, 2009, net of discount		Carrying Amount at June 30, 2009, net of discount
8% Debentures	May 21, 2010	$	4,000,000	$	3,635,146	$	364,854	$	19,891
8% Notes	May 21, 2010		4,000,000		—		4,000,000		4,000,000
Total		$	8,000,000	$	3,635,146	$	4,364,854	$	4,019,891

8% Debentures

On May 21, 2007, MSGI entered into a private placement with several institutional investors and issued 8% convertible debentures in the aggregate principal amount of $5,000,000 (the 8% Debentures), of which $4,000,000 is currently outstanding with the remaining principal balance having been converted into shares of common stock during fiscal 2008. There were no conversions during fiscal 2009 or during the six months ended December 31, 2009.

The 8% Debentures have a maturity date of May 21, 2010 and accrue interest at a rate of 8% per annum. Payments of principal and interest under the Debentures are not due until the maturity date. The investors can convert the principal amount of the 8% Debentures into common stock of the Company, provided certain conditions are met, and each conversion is subject to certain volume limitations. The conversion price of the 8% Debentures is currently at $0.25.

In connection with this debt, the note holders have warrants for the purchase of up to 7,142,852 shares of common stock, exercisable over a five-year period at an exercise price of $0.50. These warrants could be exchanged by the holder for shares of common stock of the Company per the Warrant Exchange Agreement dated March 16, 2009 (see Note 3). The shares will be issued to the holders of the exchanged warrants over time.

The Company allocated the aggregate proceeds of the 8% Debentures between the warrants and the Debentures based on their fair value and calculated a beneficial conversion feature and warrant discount in an amount in excess of the $5 million in proceeds received. Therefore, the total discount was limited to $5 million. The discount on the Debentures was allocated from the gross proceeds and recorded as additional paid-in capital. The discount is being amortized to interest expense over the three-year maturity date. Should the 8% Debentures be converted or paid prior to the payment terms, the amortization of the discount will be accelerated. On March 16, 2009, the Company entered into certain convertible promissory notes, which effected the anti-dilution provision of these Debentures. The conversion price of the Debentures was reduced from $0.50 to $0.25. No additional beneficial conversion expense was recorded related to the conversion price change due to the immaterial effect of this adjustment to the financial results of the Company as of December 31, 2009.

The 8% Debentures and the Warrants have anti-dilution protections. The Company has also entered into a Security Agreement with the investors in connection with the closing, which grants security interests in certain assets of the Company and the Company’s subsidiaries to the investors to secure the Company’s obligations under the 8% Debentures and Warrants.

Total interest expense, including debt discount amortization, for the six months ended December 31, 2009 and 2008 in connection with this note was approximately $634,000 and $288,000, respectively.

8% Notes

On August 22, 2008, the Company entered into a Securities Exchange Agreement with Enable Growth Partners, an existing institutional investor of MSGI. In connection with that Agreement, MSGI entered into an 8% convertible note in the aggregate principal amount of $4,000,000 (the 8% Notes).

The 8% Notes have a maturity date of May 21, 2010 and accrue interest at a rate of 8% per annum. Payments of principal and interest under the Notes are not due until the maturity date. The investors can convert the principal amount of the 8% Notes into common stock of the Company, provided certain conditions are met, and each conversion is subject to certain volume limitations. The conversion price of the 8% Notes is currently at $0.25.

Total interest expense, including debt discount amortization, for the six months ended December 31, 2009 and 2008 in connection with this note was approximately $168,000 and $118,000, respectively.

9. 6% CALLABLE CONVERTIBLE NOTES PAYABLE

Instrument	Maturity	Face Amount		Discount		Carrying Amount at December 31, 2009, net of discount		Carrying Amount at June 30, 2009, net of discount
6% Notes	December 13, 2009	$	1,000,000	$	—	$	1,000,000	$	45,940
6% April Notes	April 4, 2010		1,000,000		828,390		171,610		11,630
Total		$	2,000,000	$	828,390	$	1,171,610	$	57,570

The 6% Callable Convertible Notes Payable consist of the following as of December 30, 2009:

6% Notes

On December 13, 2006, pursuant to a Securities Purchase Agreement between the Company and several institutional investors, MSGI issued $2,000,000 aggregate principal amount of Callable Secured Convertible Notes (the 6% Notes) and stock purchase warrants exercisable for 3,000,000 shares of common stock in a private placement for an aggregate offering price of $2,000,000, of which $1,000,000 is currently outstanding with the remaining principal balance having been converted into shares of common stock during fiscal 2008. There were no conversions during fiscal 2009 or the six months ended December 31, 2009.

The 6% Notes have a single balloon payment of $1,000,000, which was due on the maturity date of December 13, 2009 and accrued interest at a rate of 6% per annum. As of December 31, 2009, the Company has not repaid the debt and the 6% Notes are now technically in default, although no formal default has been claimed, nor a notice been produced, by the lender. The 6% Notes are now earning a default interest rate of 15% per annum. The Investors can convert the principal amount of the 6% Notes into common stock of the Company, provided certain conditions are met, and each conversion is subject to certain volume limitations. The conversion price of the 6% Notes is currently at $0.25. The payment obligations under the Notes accelerate if payments under the Notes are not made when due or upon the occurrence of other defaults described in the Notes. The warrants are exercisable through December 2013. The exercise price of the warrants is $0.50 per share. These warrants could be exchanged by the holder for shares of common stock of the company per the Warrant Exchange Agreement dated March 16, 2009 (see Note 3). The shares will be issued to the holders of the exchanged warrants over time.

The 6% Notes and the warrants have anti-dilution protections. The Company has also entered into a Security Agreement and an Intellectual Property Security Agreement with the Investors in connection with the closing, which grants security interests in certain assets of the Company and the Company’s subsidiaries to the Investors to secure the Company’s obligations under the 6% Notes and warrants.

The Company allocated the aggregate proceeds of the 6% Notes between the warrants and the Notes based on their fair values and calculated a beneficial conversion feature and warrant discount in an amount in excess of the $1 million in proceeds received. Therefore, the total discount was limited to $1 million. The Company is amortizing this discount over the remaining term of the 6% Notes through December 2009. Should the 6% Notes be converted or paid prior to the payment terms, the amortization of the discount will be accelerated. On March 16, 2009, the Company entered into certain convertible promissory notes, which effected the anti-dilution provision of these Notes. The conversion price of the Notes was reduced from $0.50 to $0.25. No additional beneficial conversion expense was recorded related to the conversion price change due to the immaterial effect of this adjustment to the financial results of the Company.

On October 3, 2007, a $1.0 million portion of the Notes outstanding were purchased by certain third-party institutional investors, from the original note holders. The Company did not receive any cash as a result of these transactions and was not a party to the transaction. These institutional investors converted $1.0 million of the note balance as well as interest expense of $40,086 into an aggregate of 2,080,172 shares of the Company’s common stock. In connection with the conversion, the discount was accelerated for the related portion of the note in an amount of $736,111. In addition, as part of the conversion transaction, the Company allowed the note holders to convert at a rate of $0.50, which was lower than the stated conversion price under the note agreement. Therefore, in connection with this lower conversion rate, the Company recognized an additional beneficial conversion charge on the principal and interest converted of approximately $299,200 upon conversion.

As a result of the conversion transaction of the Callable Secured Convertible 8% Notes above and the 6% Notes converted, anti-dilution provisions of the remaining 6% Notes were triggered. The conversion price of the remaining 6% Notes was reduced from the variable conversion rate noted above to a fixed rate of $0.50. As a result, the Company recognized an additional beneficial conversion discount of approximately $263,900 which was recorded as a discount to the note and allocated to additional paid in capital. This additional discount was amortized over the remaining term of the note.

Total interest expense, including debt discount amortization, for the six months ended December 31, 2009 and 2008 in connection with this note was approximately $1,010,000 and $63,000, respectively.

6% April Notes

On April 5, 2007, pursuant to a Securities Purchase Agreement between the Company and several institutional investors, MSGI issued $1.0 million aggregate principal amount of Callable Secured Convertible Notes (the 6% April Notes) and stock purchase warrants exercisable for 1,500,000 shares of common stock in a private placement for an aggregate offering price of $1.0 million. The 6% April Notes have a single balloon payment of $1.0 million due on the maturity date of April 4, 2010 and will accrue interest at a rate of 6% per annum. The Investors can convert the principal amount of the 6% April Notes into common stock of the Company, provided certain conditions are met, and each conversion is subject to certain volume limitations. The warrants have an exercise price of $1.00 and are exercisable for a term of 7 years. These warrants can be exchanged by the holder for shares of common stock of the company per the Warrant Exchange Agreement dated March 16, 2009 (see Note 3). The shares will be issued to the holders of the exchanged warrants over time.

As a result of a conversion transaction of the Callable Secured Convertible 8% Notes and the 6% Notes converted above, anti-dilution provisions of the April 6% Notes were triggered. The conversion price of the April 6% Notes was reduced from a variable conversion rate noted above to a fixed rate of $0.50. As a result, the Company recognized an additional beneficial conversion discount of approximately $166,700, which was recorded as a discount to the note and allocated to additional paid in capital. This additional discount will be amortized over the remaining term of the note.

The Company allocated the aggregate proceeds of the 6% April Notes between the warrants and the Notes based on their fair values and calculated a beneficial conversion feature and warrant discount in an amount in excess of the $1 million in proceeds received. Therefore, the total discount was limited to $1 million. The Company is amortizing this discount to interest expense over the remaining term of the 6% April Notes through April 2010. Should the 6% April Notes be converted or paid prior to the payment terms, the amortization of the discount will be accelerated. On March 16, 2009, the Company entered into certain convertible promissory notes, which effected the anti-dilution provision of these April Notes. The conversion price of the April Notes was reduced from $0.50 to $0.25. No additional beneficial conversion expense was recorded related to the conversion price change due to the immaterial effect of this adjustment to the financial results of the Company.

The payment obligation under the April Notes may accelerate if payments under the April Notes are not made when due or upon the occurrence of other defaults described in the April Notes.

The 6% April Notes and the warrants have anti-dilution protections. The Company has also entered into a Security Agreement and an Intellectual Property Security Agreement with the Investors in connection with the closing, which grants security interests in certain assets of the Company and the Company’s subsidiaries to the Investors to secure the Company’s obligations under the 6% April Notes and warrants.

Total interest expense, including debt discount amortization, for the six months ended December 31, 2009 and 2008 in connection with this note was approximately $212,000 and $57,000, respectively.

10. OTHER NOTES PAYABLE AND ADVANCES

Other Notes Payable consists of the following as of December 31, 2009:

Instrument	Maturity	Face Amount		Discount		Carrying Amount at December 31, 2009, net of discount		Carrying Amount at June 30, 2009, net of discount
Convertible Term Notes – short term	February 28, 2009	$	960,000	$	-	$	960,000	$	960,000
Convertible Term Notes – short term	March 31, 2009		1,500,000		-		1,500,000		1,500,000
Convertible Term Notes – short term	December 31, 2009		400,000		-		400,000		400,000
10% Convertible Term Notes – short term	June 17, 2009		250,000		-		250,000		250,000
25% Convertible Term Notes – short term	August 31, 2009		240,004		-		240,004		-
Total		$	3,350,004	$	-	$	3,350,004	$	3,110,000

Convertible Term Notes payable

On December 13, 2007, the Company entered into four short-term notes with private institutional lenders. These promissory notes provided proceeds totaling $2.86 million to the Company. The proceeds of these notes were used to purchase inventory. The notes carry a variable rate of interest based on the prime rate plus two percent. These notes had an original maturity date of April 15, 2008. These notes were not repaid on this date and the terms were amended at several different dates to extend them to maturity dates of February 28, 2009, March 31, 2009, and December 31, 2009. While two of the notes payable are technically in default at this time, neither of the lenders have claimed default on the notes and the Company is presently in discussions with these lenders regarding extended terms for these notes payable. There are no guarantees that the Company will successfully execute the proposed addendum extensions with the two lenders.

Warrants to purchase up to an aggregate of 100,000 shares of common stock of the Company were issued to the lenders in conjunction with these notes. The warrants have a term of 5 years and carry an exercise price of $1.38 per share. The Company allocated the aggregate proceeds of the term notes payable between the warrants and the Notes based on their fair values, which resulted in a discount of $80,208, which was fully amortized in fiscal 2008.

Between April 30, 2008 and April 1, 2009, the Company executed a series of Amendments to the Term Notes, which extended the payment terms for the term notes through February 28, 2009 for one lender, March 31, 2009 for one lender, and December 31, 2009 for the remaining two lenders. Due to the default event, commencing on April 15, 2008, the interest rate is now at the default interest rate of 18%. Also, two of the holders now have the right to convert the note at a rate of $0.51 per share, and the other two holders have the right to convert the note at a rate of $0.25 per share.

In addition, the terms of certain of the Amendments to the Loan Agreements called for the Company to issue five-year warrants to purchase shares of common stock of the Company to certain group lenders each week beginning May 1, 2008 and continuing for each week that the principal balance of the term notes remains outstanding. These warrants are to be issued with an exercise price set at the greater of market value on the date of issuance or $0.50 per share. As of June 30, 2008, a total of 284,717 warrants were issued to the note holders, 33,218 warrants with an exercise price at $0.60 per share and the remaining at an exercise price of $0.50 per share. These warrants were subsequently cancelled with the October 2008 addendum and replaced with other warrants and stock issued. In addition, there were 520,000 shares of common stock issued in fiscal 2008 in connection with these addendums.

During the three months ended September 30, 2008, a total of 715,283 additional warrants were issued to the note holders, all with an exercise price of $0.50. These warrants were subsequently cancelled with the October 2008 addendum, as noted below. In addition, other group lenders received shares of common stock of the Company instead of warrants under the Amendments.

Effective October 1, 2008, the Company entered into additional addendum agreements with three out of four lenders with regard to their respectively held Notes, which terminated all warrants to purchase common stock issued under previous addendum agreements, which aggregated 1,000,000 warrants issued under those previous addendum agreements, and, in their place, issued new warrants and additional shares of common stock. At execution of the addendums, the Company issued 378,000 shares of common stock and warrants to purchase an additional 378,000 shares of common stock at an exercise price of $0.50. The Company issued an additional 252,000 shares of common stock and warrants to purchase an additional 252,000 shares of common stock, at an exercise price of $0.50, between the date of the agreement and December 31, 2008.

Effective January 1, 2009, the Company entered into additional addendum agreements with three out of four lenders with regard to their respectively held Notes, which issued new warrants and additional shares of common stock and extended the maturity date to March 31, 2009. The Company issued an additional 204,420 shares of common stock and warrants to purchase an additional 204,420 shares of common stock, at an exercise price of the greater of $0.50 or market value on the date of grant. Effective February 1, 2009, the Company entered into an additional addendum agreement with the fourth lender with regard to its held Note, which issued 400,000 shares of common stock to the lender and extended the maturity date of this Note to February 28, 2009. Effective April 1, 2009, the Company entered into additional addendum agreements with two out of four lenders with regard to their respectively held Notes, which issued new warrants and additional shares of common stock and extended the maturity date to December 31, 2009. The Company issued an additional 221,195 shares of common stock and warrants to purchase an additional 221,195 shares of common stock, at an exercise price of the greater of $0.25 or market value on the date of the grant for the period April 1, 2009 through June 30, 2009.

During the six months ended December 31, 2009, the Company issued 92,400 warrants at an exercise price of $0.25 and 92,400 shares of common stock. The stock was determined to have a fair value of $7,707, based upon the fair market value of the common stock on each date issued. The warrants were determined to have a value of $6,953. The warrants were fair valued, at each warrant issuance, using the Black-Scholes model. The warrant and stock values were recorded as additional interest expense on the note during the six months ended December 31, 2009.

The following assumptions were used in the Black-Scholes model for the warrants for the three months ended December 31, 2009:

Expected term (years)		3
Dividend yield		0	%
Expected volatility		215% - 235	%
Risk-Free interest rate		1.23%-1.70	%
Weighted average fair value	$	0.06

Expected volatility is based solely on historical volatility of our common stock over the period commensurate with the expected term of the stock options. We rely solely on historical volatility because our traded options do not have sufficient trading activity to allow us to incorporate the mean historical implied volatility from traded options into our estimate of future volatility. The expected term calculation for stock options is based on the “simplified” method described in SEC Staff Accounting Bulletin No. 107, Share−Based Payment. The risk−free interest rate is based on the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield of zero is based on the fact that we have never paid cash dividends on our common stock, and we have no present intention to pay cash dividends.

Total interest expense, including value of warrants and stock issued above, for the six months ended December 31, 2009 and 2008 in connection with this note was approximately $274,000 and $618,000, respectively.

10% Convertible Term Notes payable

On March 16, 2009, the Company entered into three convertible promissory notes with Enable which provided the Company with gross proceeds of $250,000. The notes bear interest at a rate of 10% annually and are convertible into shares of common stock of the Company at a conversion rate of $0.25 per share. The notes had a maturity date of June 17, 2009. As an inducement to Enable to enter into the Convertible Term Notes, the Company entered into a Warrant Exchange Agreement with Enable (see Note 3). The remaining terms of the 10% notes carry the same provisions as the 8% Debentures in Note 6. Due to the default event, commencing on June 17, 2009, the interest rate is now at the default rate of 18%. While the notes are technically in default at September 30, 2009, the lender has made no claim of default and the Company is currently in negotiations with the lender for an extension to the terms of the notes. There can be no assurance that the Company will be successful in securing the extensions.

Total interest expense for the six months ended December 31, 2009 in connection with this note was approximately $23,000.

25% Convertible Term Notes payable

In July 2009, the Company executed a NASA Funding Promissory Note in the amount of $240,004 with a lender who also holds a promissory note from December 2007. The new promissory note was executed in order to enable the Company to meet its obligations under a certain Space Act Agreement, which had been entered into with The National Aeronautics and Space Administration. The note bears interest at 25% and matured on August 30, 2009. In addition, the Company issued 500,000 shares of common stock to the lender as additional consideration to enter into the note agreement. The shares were issued to the lender in September 2009. As of the date of this filing, the principal balance and accrued interest has not yet been paid to the lender. Although the note is technically in default as of the date of this filing, the lender has not made any claim of default and the Company is currently in negotiations with the lender for an extension to the terms of the note. There can be no assurance that the Company will be successful in securing any extension to the note.

Total interest expense for the six months ended December 31, 2009 in connection with this note was approximately $25,000.

Advances

During the six months ended December 31, 2009, the Company received net funding in the amount of approximately $586,000 from a certain corporate officer. During the year ended June 30, 2009, the Company received net funding in the amount of approximately $167,000 from this same corporate officer. As of December 31, 2009, the total net amount received from the officer is approximately $753,000. There is no interest expense associated with this advanced funding and this is to be repaid upon the closing of any adequately successful funding event or upon the collection of the Apro Media related accounts receivable, which has not yet occurred. It is also noted by the Company that this certain corporate officer is owed approximately $451,000 in back due compensation as of the six months ended December 31, 2009.

During the year ended June 30, 2008, the Company received funding in the amount of $200,000 from Apro Media. These funds were advanced to the Company against expected collections of accounts receivable generated under the Apro sub-contract agreement. During the year ended June 30, 2009, the Company received an additional $6,950 from Apro Media, bringing the aggregate to $206,950. There is no interest expense associated with this advanced funding and this is to be repaid to Apro upon collection of the related accounts receivable, which has not yet occurred.

During the year ended June 30, 2009, the Company received funding in the amount of approximately $70,000 from Current Technology Corp. There is no interest expense associated with this advanced funding and this is to be repaid upon collection of the Apro Media related accounts receivable, which has not yet occurred.

During the year ended June 30, 2009, the Company received funding in the amount of approximately $60,000 from certain third parties. There is no interest expense associated with these advanced fundings and they are to be repaid upon collection of the Apro Media related accounts receivable, which has not yet occurred.

11. STOCK BASED COMPENSATION, COMMON STOCK AND WARRANTS

Stock Options:

The Company maintains a qualified stock option plan (the 1999 Plan) for the issuance of up to 1,125,120 shares of common stock under qualified and non-qualified stock options. The 1999 Plan is administered by the compensation committee of the Board of Directors which has the authority to determine which officers and key employees of the Company will be granted options, the option price and vesting of the options. In no event shall an option expire more than ten years after the date of grant.

The Company accounts for employee stock-based compensation under FASB ASC 718, “Compensation – Stock Compensation,” which requires all share−based payments to employees, including grants of employee stock options, to be recognized in the financial statement at their fair values. The expense is being recognized on a straight−line basis over the vesting period of the options. The Company did not record a tax benefit related to the share−based compensation expense since the Company has a full valuation allowance against deferred tax assets.

There were no stock options granted during the six months ended December 31, 2009 or 2008. As of December 31, 2009, 1,025,000 options are outstanding, of which 1,016,666 options are exercisable. The stock based compensation expense related to stock options for the six months ended December 31, 2009 and 2008 was approximately $2,700 and $216,000, respectively. As of December 31, 2009, there is no intrinsic value for these outstanding options. The non-cash compensation expense is included in salaries and benefits as a component of operating costs on the statements of operations. As of December 31, 2009, non-vested compensation cost that has not yet been recognized was approximately $1,800, which is expected to be recognized over a weighted average period of approximately 0.5 years.

Warrants:

As of December 31, 2009, the Company has 9,061,284 warrants outstanding for the purchase shares of common stock at prices ranging from $0.25 to $8.25, all of which are currently exercisable. The major transactions involving the warrants for the current period are below:

During the six months ended December 31, 2009, a total of 493,340 warrants which had been issued during November and December of 2004 reached their maturity dates per their individual terms and thus expired.

During the six months ended December 31, 2009, the Company issued 92,400 five-year warrants to certain lenders in relationship to the addendum agreements. These warrants carry an exercise price of $0.25. A fair market value of $6,953 for these warrants was calculated using the Black-Scholes method and was expensed to interest expense in the period ended December 31, 2009.

During the six month period ended December 31, 2009, 11,269,824 warrants were exchanged for 7,700,000 shares of common stock under the Warrant Exchange Agreement (see Note 3).

Common Stock Transactions:

During the six month period ended December 31, 2009, the Company issued 92,400 shares of its common stock to a certain private institutional lender with relation to a series of addendums executed to that lender’s short term loan agreement. The shares carried a fair market value of $7,707 and this amount was expensed as additional non-cash interest during the period.

During the six months ended December 31, 2009, the Company issued 7,700,000 shares of common stock to a certain lender with relation to a Warrant Exchange Agreement (see Note 4). The shares were valued at their market rate as of the date of exchange and carried an aggregate fair market value of $1,023,000, which was expensed as additional non-cash interest expense during the period.

During the six months ended December 31, 2009, the Company issued 500,000 shares of common stock to a certain lender in relation to the 25% Convertible term note payable (see Note 10). These shares were valued at market price on the date of execution of the note payable and carried a fair market value of $20,000, which was expensed as additional non-cash interest expense during the period.

During the six months ended December 31, 2009, the Company issued 17,053,333 shares of common stock to various consulting and legal service providers. The shares were issued to the service providers in lieu of cash compensation for services to be provided. The shares were valued at market price as of the date of obligation and carried an aggregate fair market value of $1,526,050, which was expensed to consulting and legal fees during the period.

During the six months ended December 31, 2009, the Company issued 1.0 million shares of common stock as an additional default penalty associated pursuant to a certain bridge loan agreement, which was entered into by Mr. J. Jeremy Barbera, Chief Executive Officer and Chairman of MSGI. The proceeds of this loan were used primarily for payments due under the NASA relationship and for general operating expenses of the Company. The Company has no further obligations under this bridge loan agreement.

12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

Accrued expenses as of December 31, 2009 and June 30, 2009 consist of the following:

	December 31,		June 30,
	2009		2009
Salaries and benefits	$	740,251	$	397,558
Payroll taxes and penalties		1,487,007		1,489,450
Warrant exchange liability (see Note 4)		90,000		285,000
Audit and tax preparation fees		189,755		214,755
Interest		2,684,229		1,953,706
Taxes		54,907		42,907
Board fees		91,000		80,000
Rent		89,055		97,910
Consulting and legal fees		11,250		10,670
Other		18,306		92,236
Total	$	5,455,760	$	4,664,192

The Company has not filed or paid payroll taxes from September 2006 to date.

13. CERTAIN KEY RELATIONSHIPS

Relationship with Hyundai Syscomm Corp.

Beginning September 11, 2006, the Company entered into several Agreements with Hyundai Syscomm Corp. (Hyundai). The Company currently has executed a License Agreement, Subscription Agreement and a Sub-Contract with Hyundai and in prior periods received in consideration a one-time $500,000 fee for the License and the Company issued 900,000 shares of the Company's common stock to Hyundai, in connection with all the agreements, of which 35,000 shares of common stock remain to be issued at December 31, 2009. The Company does not anticipate that these remaining shares will be issued.

The initial term of the Sub-Contracting Agreement is three years, with subsequent automatic one-year renewals unless the Sub-Contracting Agreement is terminated by either party under the terms allowed by the Agreement.

On February 7, 2007, the Company issued to Hyundai a warrant to purchase up to a maximum of 24,000,000 shares of common stock in exchange for a maximum of $80,000,000 in revenue, which was expected to be realized by the Company over a maximum period of four years. The vesting of the Warrant will take place quarterly over the four-year period based on 300,000 shares for every $1,000,000 in revenue realized by the Company from contracts referred to us by Hyundai. The revenue is subject to the sub-contracting agreement between Hyundai and the Company dated October 25, 2006. No transactions under this agreement have occurred as of and through December 31, 2009 or to date and therefore there have been no warrants vested under this agreement. As such, the various agreements with Hyundai are deemed by the company to be null and void as of December 31, 2009. In May 2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View, California to represent the Company in legal action against Hyundai Syscomm Corp, as well as several other related entities and individuals, for alleged breach of contract.

Relationship with Apro Media Corporation

On May 10, 2007, the Company entered into an exclusive sub-contract and distribution agreement with Apro for at least $105 million of expected sub-contracting business over seven years to provide commercial security services to a Fortune 100 defense contractor and/or other customers. Under the terms of contract, MSGI would acquire components from Korea and deliver fully integrated security solutions at an average expected level of $15 million per year for the length of the seven-year engagement. In accordance with the Agreement, MSGI was to establish and operate a 24/7/365 customer support facility in the Northeastern United States. Apro was to provide MSGI with a web-based interface to streamline the ordering process and create an opportunity for other commercial security clients to be acquired and serviced by MSGI. The contract calls for gross profit margins estimated to be between 26% and 35% including a profit sharing arrangement with Apro Media, which will initially take the form of unregistered MSGI common stock, followed by a combination of stock and cash and eventually just cash. In the aggregate, assuming all the stated revenue targets are met over the next seven years, Apro Media would eventually acquire approximately 15.75 million shares of MSGI common stock. MSGI was referred to Apro Media by Hyundai as part of a general expansion into the Asian security market; however revenue under the Apro contract does not constitute revenue under the existing Hyundai warrant to acquire common stock of MSGI.

Per the terms of the sub-contract agreement with Apro, the Company was to compensate Apro with 3,000,000 shares of the Company’s common stock when the sub-contract transactions result in $10.0 million of GAAP recognized revenue for the Company. In December 2007, the Company elected to issue 1,000,000 shares of common stock to Apro under that agreement. The Company computed a fair value for a pro rata share of the remaining shares to be issued under that agreement, which was $62,336 at June 30, 2008, and has been reflected as a liability in our consolidated balance sheet. As discussed below, such revenue is never expected to be recognized by the Company, and therefore this accrual was reversed out during the year ended June 30, 2009.

For the year ended June 30, 2008, the Company had shipped product to various customers in the aggregate of approximately $1.6 million under the Apro sub-contract agreement. These shipments have not been recognized as revenue in fiscal 2008 or to date. In addition inventory costs related to these transactions had been reported on the balance sheet in Costs of product shipped to customers for which revenue has not been recognized as of June 30, 2008 and these costs have been fully reserved and written off as of December 31, 2008.

On August 22, 2008, MSGI negotiated an acceleration of both its sub-contracting agreements with Hyundai and Apro, through Hirsch Capital Corp., the San Francisco based private equity firm operating Hyundai Syscomm and Apro Media. Under the accelerated terms, MSGI would endeavor to build up to a platform with the potential to generate approximately $100 million in expected annual gross revenue supporting several of the largest commercial businesses in Korea (see Daewoo sub-contract below). Based upon its commitment to expand MSGI to a potential run rate of $100 million in annual gross revenue, Hirsch Capital will have the right to earn shares of MSGI as indicated under the Apro sub-contracting and distribution agreement referenced above. There have not yet been any business transactions under this new contract, and the Company considers the contract to be null and void.

In May 2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View, California to represent the Company in legal action against Apro Media Corporation, as well as several other related entities and individuals, for alleged breach of contract. As such, the sub-contract with Apro is deemed by the Company to be null and void as of December 31, 2009.

Daewoo / Hankook relationships

On September 17, 2008, the Company executed a new contract with Hankook Semiconductor, a division of Samsung Electronics, to manufacture and supply advanced technology displays and other electronic products for commercial security purposes for Daewoo International. Under the terms of the new contract, MSGI will subcontract to Hankook the right to manufacture certain Hi-definition display systems, which will be supplied to Daewoo for its existing customers. MSGI has similarly entered into an agreement to supply Daewoo with these products based upon Daewoo specifications from its customers. There have not yet been any business transactions under this new contract.

In May 2009, the Company engaged the law firm of GCA Law Partners LLP of Mountain View, California to represent the Company in legal action against Hankook Semiconductor, as well as several other related entities and individuals, for alleged breach of contract. As such, the contract with Hankook and Daewoo is deemed by the Company to be null and void as of December 31, 2009.

Relationship with CODA Octopus Group

On April 1, 2007, the Company entered into a non-exclusive license agreement with CODA Octopus, Inc. (CODA) whereby the Company will receive a referral fee on sales of products using the Innalogic proprietary technology. No such revenue has been recognized during the six month period ended December 31, 2009.

Relationship with the National Aeronautics and Space Administration

In August 2009, the Company announced that it had executed a Space Act Agreement with NASA forming a partnership between MSGI and the Ames Research Center (ARC) located in Moffet Field, California. The purpose of this collaboration between MSGI and NASA is to commercialize various revolutionary technologies developed by NASA in the fields of nanotechnology and alternative energy. The Company’s initial area of focus is to be on the use of chemical sensors or nano-sensing technology. These wired and wireless detection systems were first developed for space exploration in 2007 and 2008 for experiments carried out on the Space Shuttle Endeavor. The Company intends to form a number of majority owned subsidiaries, each of which will hold the rights to a specific technology and also serve as the vehicle for investment capital.

In August 2009, the Company announced that it had formed its first subsidiary for NASA based technology. This new subsidiary, named Nanobeak Inc., is a nanotechnology company focused on carbon based chemical sensing for gas and organic vapor detection – effectively electronic sniffing. NASA developed these Nano Chemical Sensors for space missions to increase scientific measurement capabilities with less mass and lower power requirements. The potential space and terrestrial applications include cabin air monitoring onboard the Space Shuttle, surveillance of global weather, forest fire monitoring, radiation detection, and various other mission critical capabilities. This technology was developed at the NASA Ames Research Center located in Moffet Field, California. The commercial applications of these Nano Chemical Sensors relate specifically to Homeland Security and Defense, Medical Diagnoses, Environmental Monitoring and Process Control. Nanobeak seeks to offer products in each of these sectors beginning in the fiscal year ending June 30, 2010, but timing of these efforts can not be assured. The Company subsequently reported the launching of its first product derived from NASA technology, a handheld test for Diabetes, which uses breath instead of blood. Nanobeak will take the prototype handheld sensor, which measures acetone levels with a simple breath, out of the laboratory and into the marketplace. Nanobeak will undertake product testing which will be done in conjunction with a major hospital network in the United States, followed by licensing discussions with the top pharmaceutical companies.

In September 2009, the Company announced that it had formed its second subsidiary for NASA based technology. The subsidiary is named Andromeda Energy Inc. and it is a nanotechnology company focused on scalable alternative energy solutions that operate more efficiently, and therefore yield significantly lower electricity cost per watt than conventional energy sources. The Company is in receipt of several expressions of interest for partnerships in the planned deployment of this new technology from major corporations located in the People’s Republic of China. The Company has also been asked to consider a dual listing on the Hong Kong Stock Exchange.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Special Note Regarding Forward-Looking Statements

Some of the statements contained in this Report on Form 10-Q discuss our plans and strategies for our business or state other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995 including, but not limited to, statements regarding our near-term objectives and long-term strategies, expectations of short-term and long-term liquidity requirements and needs, statements that are not historical facts, and/or statements containing words such as "anticipate(s)," "expect(s)," "intend(s)," "plan(s)," "target(s)," "project(s)," "will," "believe(s)," “may,” “would,” "seek(s)," "estimate(s)" and similar expressions. These statements are based on management's current expectations, beliefs and assumptions and are subject to a number of known and unknown risks, uncertainties and other factors that could lead to actual results materially different from those described in the forward-looking statements. The Company can give no assurance that its expectations will be attained. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; industry capacity; industry trends; demographic changes; competition; the loss of any significant customers; changes in business strategy or development plans; availability and successful integration of acquisition candidates; availability, terms and deployment of capital; advances in technology; retention of clients not under long-term contract; quality of management; business abilities and judgment of personnel; availability of qualified personnel; changes in, or the failure to comply with, government regulations; and technology and telecommunication costs.

Introduction

This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the six-month periods ended December 31, 2009 and 2008. This should be read in conjunction with the financial statements, and notes thereto, included in this Report on Form 10-Q and the Company’s financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2009.

The following is a brief description of the more significant accounting policies and methods used by the Company.

Revenue Recognition:

There was no revenue reported for the six-month period ended December 31, 2009.

The Company had certain shipments to various customers during fiscal 2008 in the aggregate of approximately $6.5 million that were not recognized as revenue in fiscal 2008 or to date due to certain revenue recognition criteria not being met in these periods, related to the assurance of collectibility among other factors. Through December 31, 2009, these factors have not been met. These transactions will only be recognized as revenue in the period in which all the revenue recognition criteria, as noted above, have been fully met. Inventory costs related to these transactions for which revenue has not been recognized are reported on the balance sheet in Costs of product shipped to customers for which revenue has not been recognized.

Costs of product shipped to customers for which revenue has not been recognized:

As of December 31, 2009, the Company had capitalized the expense recognition of approximately $5.4 million in product costs for goods that were shipped to customers associated with our Apro relationships as of June 30, 2008 but for which revenue has not yet been recognized. The Company had also recorded a reserve against these product costs in full during the fiscal years ended June 30, 2009 and 2008. The Company has instituted a lawsuit to recover some of the damages that we suffered as a result of such transactions. However, there can be no assurance that this will occur.

Accounting for Income Taxes:

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates and assumptions made in the preparation of the consolidated financial statements relate to the carrying amount and amortization of long lived assets, deferred tax valuation allowance, valuation of stock options, warrants and debt features and the allowance for doubtful accounts. Actual results could differ from those estimates.

Equity Based Compensation:

The Company follows FASB ASC 718 in accounting for all share-based payments to employees, directors or others. This Statement requires that the cost resulting from all share−based payment transactions are recognized in the financial statements of the Company. That cost will be measured based on the fair market value of the equity or liability instruments issued.

Debt instruments, and the features/instruments contained therein:

Deferred financing costs are amortized over the term of its associated debt instrument. The Company evaluates the terms of the debt instruments to determine if any embedded derivatives or beneficial conversion features exist. The Company allocates the aggregate proceeds of the notes payable between the warrants and the notes based on their relative fair values, calculated utilizing the Black-Scholes option-pricing model. The Company is amortizing the resultant discount or other features over the term of the notes through its earliest maturity date using the effective interest method. Under this method, the interest expense recognized each period will increase significantly as the instrument approaches its maturity date. If the maturity of the debt is accelerated because of defaults or conversions, then the amortization is accelerated. The Company’s debt instruments do not contain any embedded derivatives at December 31, 2009 and June 30, 2009.

Investments in Non-Consolidated Entities:

The Company accounts for its investments under the cost basis method of accounting if the investment is less than 20% of the voting stock of the investee, or under the equity method of accounting if the investment is greater than 20% of the voting stock of the investee. Investments accounted for under the cost method are recorded at their initial cost, and any dividends or distributions received are recorded in income. For equity method investments, the Company records its share of earnings or losses of the investee during the period. Recognition of losses will be discontinued when the Company’s share of losses equals or exceeds its carrying amount of the investee plus any advances made or commitments to provide additional financial support.

An investment in non-consolidated companies is considered impaired if the fair value of the investment is less than its cost on another-than-temporary basis. Generally, an impairment is considered other-than-temporary unless (i) the Company has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss is recognized equal to the difference between the investment’s cost and its fair value. Management’s judgment is necessary to evaluate these factors. Changes in our estimates or any of our assumptions used in our analysis could result in a different conclusion.

Significant Events:

To facilitate an analysis of MSGI operating results, certain significant events should be considered:

In July 2009, the Company executed a NASA Funding Promissory Note in the amount of $240,004 with a lender who also holds a promissory note from December 2007. The new promissory note was executed in order to enable the Company to meet its obligations under a certain Space Act Agreement, which had been entered into with The National Aeronautics and Space Administration. The note bears interest at 25% and matured on August 30, 2009. In addition, the Company was obligated to issue 500,000 shares of common stock to the lender as additional consideration to enter into the note agreement. The shares were issued to the lender in September 2009. As of the date of this filing, the principal balance and accrued interest has not yet been paid to the lender. Although the note is technically in default as of the date of this filing, the lender has made no formal claim of default and the Company is currently in negotiations with the lender for extension of the terms.

In August 2009, the Company announced that it had formed its first subsidiary for NASA based technology. This new subsidiary, named Nanobeak Inc., is a nanotechnology company focused on carbon based chemical sensing for gas and organic vapor detection – effectively electronic sniffing. NASA developed these Nano Chemical Sensors for space missions to increase scientific measurement capabilities with less mass and lower power requirements. The potential space and terrestrial applications include cabin air monitoring onboard the Space Shuttle, surveillance of global weather, forest fire monitoring, radiation detection, and various other mission critical capabilities. This technology was developed at the NASA Ames Research Center located in Moffet Field, California. The commercial applications of these Nano Chemical Sensors relate specifically to Homeland Security and Defense, Medical Diagnoses, Environmental Monitoring and Process Control. Nanobeak seeks to offer products in each of these sectors beginning in the fiscal year ending June 30, 2010, but timing of these efforts cannot be assured. The Company subsequently reported the launching of its first product derived from NASA technology, a handheld test for Diabetes, which uses breath instead of blood. Nanobeak will take the prototype handheld sensor, which measures acetone levels with a simple breath, out of the laboratory and into the marketplace. Nanobeak will undertake product testing which will be done in conjunction with a major hospital network in the United States, followed by licensing discussions with the top pharmaceutical companies.

During the six month period ended December 31, 2009, the Company entered into several business development, investor relations and consulting and advisory agreements with separate service providers. Under the terms of these agreements, the Company has committed to issue shares of common stock in lieu of cash in consideration for the valuable services provided and to be provided by these individual firms. As December 31, 2009, the Company has issued approximately 17.1 million shares of common stock in lieu of various categories of cash compensation for services rendered and to be rendered by the firms. Such services include, but are not be limited to, investor relations, identification of potential providers of equity or hybrid financing, the identification of strategic or joint-venture and licensing partners, the identification of merger and/or acquisition candidates, the provision of general business advice, the overview of governmental procurement programs, the preparation of disclosure, marketing and promotional materials.

Results of Operations for the Three Months Ended December 31, 2009, Compared to the Three Months Ended December 31, 2008

There were no reported revenues during the three months ended December 31, 2009 (the Current Period), nor were there any reported in the three months ended December 31, 2008 (the Prior Period).

There were no reported costs of goods sold in the Current Period. Costs of goods sold in the amount of $4.1 million were realized during the Prior Period. These costs represented a reserve against certain product costs. This reserve estimated the potential costs that the Company deemed to be unrecoverable.

Research and development expenses of approximately $120,000 were realized during the Current Period. These expenses were paid to NASA as reimbursement for research and development costs incurred by NASA under certain Space Act Agreements, which have been executed with the Company. There were no such costs in the Prior Period.

Salaries and benefits of approximately $170,000 in the Current Period decreased by approximately $183,000 from salaries and benefits of approximately $353,000 in the Prior Period. This reduction results primarily from a reduction in non-cash compensation for the expense related to stock options issued to officers and directors.

Selling, general and administrative expenses of approximately $1,168,000 in the Current Period increased by approximately $864,000 or 284% from comparable expenses of $304,000 in the Prior Period. This increase is due primarily to an increase in consulting fees of approximately $1.2 million related to the costs of the fair value of shares issued to various consultants as compensation for fees, offset by reductions in travel and entertainment related expenses of approximately $43,000, rents of approximately $69,000, accounting and legal fees of approximately $108,000, investor relations of approximately $95,000 and telephone communication costs of approximately $17,000.

Depreciation and amortization expenses of approximately $3,000 were realized in the Current Period and represent a decrease of approximately $1,000 from comparable expenses during the Prior Period.

As a result of the above, loss from operations of approximately $1,461,000 in the Current Period decreased by approximately $3,266,000 from comparable loss from operations of $4,727,000 in the Prior Period.

During the Current Period, the Company realized miscellaneous income of $10,000 related to the reversal of an accrual for unbilled shipping fees from the prior fiscal year. These accrued shipping fees were related to the former relationship with Apro Media and, as such, are no longer required to be carried by the Company.

Interest expense of approximately $1.5 million in the Current Period represents an increase of approximately $1.1 million from expenses of approximately $383,000 in the Prior Period. This increase is due primarily the increase in non-cash interest expenses derived from the amortization of certain debt discounts as well as from interest accrued on new debt instruments issued during the Current Period.

During the Current Period, the Company realized a gain on change in certain derivative liabilities of approximately $826,000. This gain represents an adjustment to the derivative liability related to the number of common stock shares, which would exceed the authorized number of common stock shares, if convertible debt and equity instruments were exercised and converted into common stock, based on fair value calculated by Black-Scholes as of December 31, 2009. There was no such gain realized in the Prior Period.

As a result of the above, net loss of approximately $2.1 million in the Current Period decreased by approximately $3.0 million from comparable net loss of approximately $5.1 million in the Prior Period.

Results of Operations for the Six Months Ended December 31, 2009, Compared to the Six Months Ended December 31, 2008

There were no reported revenues during the six months ended December 31, 2009 (the Current Period), nor were there any reported in the six months ended December 31, 2008 (the Prior Period).

Research and development expenses of approximately $535,000 were realized during the Current Period. These expenses were paid to NASA as reimbursement for research and development costs incurred by NASA under certain Space Act Agreements, which have been executed with the Company. There were no such costs in the Prior Period.

Salaries and benefits of approximately $350,000 in the Current Period decreased by approximately $379,000 from salaries and benefits of approximately $729,000 in the Prior Period. This reduction results primarily from a reduction in non-cash compensation for the expense related to stock options issued to officers and directors.

Selling, general and administrative expenses of approximately $1.8 million in the Current Period increased by approximately $0.9 million or 100% from comparable expenses of $0.9 million in the Prior Period. This increase is due primarily to an increase in consulting fees of approximately $1.2 million related to the costs of the fair value of shares issued to various consultants as compensation for fees, offset by reductions rents of approximately $69,000, accounting and legal fees of approximately $109,000, investor relations of approximately $95,000 and telephone communication costs of approximately $24,000.

Depreciation and amortization expenses of approximately $6,000 were realized in the Current Period and represent a decrease of approximately $2,000 from comparable expenses during the Prior Period.

As a result of the above, loss from operations of approximately $2,641,000 in the Current Period decreased by approximately $3,076,000 from comparable loss from operations of $5,717,000, in the Prior Period.

During the Prior Period, the Company recognized expenses for adjustments to the fair market value of certain put options of $150,000. These expenses represent the adjustment to the fair market value of the put options as of August 22, 2008 on which date the put options were redeemed and subsequently cancelled. As such, there were no such expenses in the Current Period.

During the Prior Period, the Company recognized a gain on the securities exchange agreement of $1.7 million. This gain is the result of the redemption and subsequent cancellation of all put options, Series H Preferred Stock and certain related warrants held by Enable on August 22, 2008 and the related issuance by us of the new $4 million convertible note, a $1 million cash payment and the issuance of 20 million warrants for shares of common stock of Current Technology Corporation. There was no such gain recognized in the Current Period.

The Company realized interest income of approximately $13,000 during the Prior Period as a result of earnings on restricted cash on hand during such period. There was no such income in the Current Period.

Interest expense of approximately $3.4 million in the Current Period represents an increase of approximately $2.1 million from expenses of approximately $1.4 million in the Prior Period. This increase is due primarily the increase in non-cash interest expenses derived from the amortization of certain debt discounts as well as from interest accrued on new debt instruments issued during the Current Period.

The non-cash loss on debt guarantee realized during the Current Period was the result of the issuance of shares of the Company’s common stock to the note holder of a certain bridge loan agreement, which was entered into by Mr. J. Jeremy Barbera, Chief Executive Officer and Chairman of MSGI, and for which a portion of the proceeds were used to advance funds to the Company. The Company issued 1,000,000 shares of its common stock at a market value of $170,000 on the date of issuance. The Company has no further guarantee obligations under the bridge loan agreement.

As a result of the above, net loss of approximately $5.3 million in the Current Period increased by approximately $0.2 million from comparable net loss of approximately $5.5 million in the Prior Period.

Capital Resources and Liquidity

Liquidity:

Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through private placements of equity and debt transactions, and related party advances. The Company currently has limited capital resources, has incurred significant historical losses and negative cash flows from operations and has no current period revenues. At December 31, 2009, the Company had $1,188 in cash and no accounts receivable and a working capital deficit of $16.5 million. The Company believes that funds on hand combined with funds that will be available from its various operations will not be adequate to finance its operations requirements and enable the Company to meet any of its financial obligations and payments including those under its convertible notes and promissory notes for the next twelve months. Certain promissory notes in the amount of $960,000 were due February 28, 2009, $1,500,000 due March 31, 2009, $250,000 due on June 17, 2009 and $240,004 due on August 31, 2009. These notes are technically in default as of the date of this filing, but none of the lenders have made a claim of default and the Company is in the process of negotiating extended terms for each of the debt instruments. Other promissory notes in the amount of $400,000 were due on December 31, 2009. All other convertible notes are due prior to June 30, 2010 and the Company does not have the funds to repay such notes. Further, there is uncertainty as to timing, volume and profitability of transactions, if any, that may arise from our relationship with The National Aeronautics and Space Administration (NASA) and others. There can be no assurance as to the timing of when or if we will receive amounts due to us for products shipped to customers prior to June 30, 2008, which transactions have not yet been recognized as revenue. As of the date of this filing, the Company has ceased its business relationship with both Hyundai and Apro and a legal action has been filed in the State of California naming both, among others, as defendants. There are no assurances that any further capital raising transactions will be consummated. Although certain transactions have been successfully closed, failure of our operations to generate sufficient future cash flow and failure to consummate our strategic transactions or raise additional financing could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to raise additional funds, it may be forced to further reduce, or cease operations, liquidate assets, or renegotiate terms with lenders and others of which there can be no assurance of success. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern.

As of December 31, 2009, we are authorized to issue 100,000,000 shares of common stock. If the holders of the convertible promissory notes outstanding elect to convert their holdings into common stock, and the holders of the stock options and warrants outstanding elect to exercise their rights to purchase common stock, the Company is obligated to have issued approximately 122,000,000 shares of common stock, which is in excess of what we currently have authorized. We plan to ask the Company’s shareholders to authorize the issuance of additional shares of our common stock at our annual meeting. However there is no guarantee that we will be able to obtain the votes needed to obtain the additional authorized shares.

The Company recognized a net loss of approximately $5.3 million for the six month period ended December 31, 2009. Cash used in operating activities was approximately $826,000. Cash used in operating activities principally resulted from our operating loss, offset by increases in accrued liabilities, the fair value of shares issued for services, and non-cash interest expenses. Cash used in operating activities in the Prior Period was approximately $1.1 million.

A use of cash for investing activities of approximately $2,000 was realized in the Prior Period for purchased of property and equipment. There was no such use of cash or source of cash from investing activities in the Current Period.

In the Current Period, net cash of approximately $826,000 was provided by financing activities. Net cash provided by financing activities consisted of funds received that were advanced from a certain corporate officer as well as cash provided by proceeds from a promissory note. In the Prior Period there was $987,000 provided by financing activities.

Debt

The Company does not have any credit facilities as of December 31, 2009. Debt obligations as of December 31, 2009 are summarized as follows:

Instrument	Maturity	Face Amount		Discount		Carrying Amount at December 31, 2009, net of discount		Carrying Amount at June 30, 2009, net of discount
6% Notes	December 13, 2009	$	1,000,000		-	$	1,000,000	$	45,940
6% April Notes	April 4, 2010		1,000,000		828,390		171,610		11,630
8% Debentures	May 21, 2010		4,000,000		3,635,146		364,854		19,891
8% Notes	May 21, 2010		4,000,000		—		4,000,000		4,000,000
Convertible Term Notes – short term	February 28, 2009		960,000		—		960,000		960,000
Convertible Term Notes – short term	March 31, 2009		1,500,000		—		1,500,000		1,500,000
Convertible Term Notes – shot term	December 31, 2009		400,000		—		400,000		400,000
10% Convertible Term Notes – short term	June 17, 2009		250,000		—		250,000		250,000
25% Convertible Term Notes – short term	August 31, 2009		240,004		—		240,004		-
Total		$	13,350,004	$	4,793,536	$	8,556,468	$	7,187,461

As of December 31, 2009, the Company has the following debt commitments outstanding:

8% Debentures

8% Notes

6% Notes

The 6% Notes have a single balloon payment of $1,000,000, which was due on the maturity date of December 13, 2009 and accrued interest at a rate of 6% per annum to that date. As of December 31, 2009 the Company has not made the balloon payment and the 6% Notes are technically in default, although the lenders have made no formal claim of default as of the date of this filing. The 6% Notes currently earn a default rate of 15% per annum. The Investors can convert the principal amount of the 6% Notes into common stock of the Company, provided certain conditions are met, and each conversion is subject to certain volume limitations. The conversion price of the 6% Notes is currently at $0.25. The payment obligations under the Notes accelerate if payments under the Notes are not made when due or upon the occurrence of other defaults described in the Notes. The warrants are exercisable through December 2013. The exercise price of the warrants is $0.50 per share. These warrants could be exchanged by the holder for shares of common stock of the company per the Warrant Exchange Agreement dated March 16, 2009 (see Note 3). The shares will be issued to the holders of the exchanged warrants over time.

6% April Notes

On April 5, 2007, pursuant to a Securities Purchase Agreement between the Company and several institutional investors, MSGI issued $1.0 million aggregate principal amount of Callable Secured Convertible Notes (the 6% April Notes) and stock purchase warrants exercisable for 1,500,000 shares of common stock in a private placement for an aggregate offering price of $1.0 million. The 6% April Notes have a single balloon payment of $1.0 million due on the maturity date of April 4, 2010 and will accrue interest at a rate of 6% per annum. The Investors can convert the principal amount of the 6% April Notes into common stock of the Company, provided certain conditions are met, and each conversion is subject to certain volume limitations. The warrants have an exercise price of $1.00 and are exercisable for a term of 7 years. These warrants can be exchanged by the holder for shares of common stock of the company per the Warrant Exchange Agreement dated March 16, 2009 (see Note 4). The shares will be issued to the holders of the exchanged warrants over time.

The Company allocated the aggregate proceeds of the 6% April Notes between the warrants and the Notes based on their fair values and calculated a beneficial conversion feature and warrant discount in an amount in excess of the $1 million in proceeds received. Therefore, the total discount was limited to $1 million. The Company is amortizing this discount to interest expense over the remaining term of the 6% April Notes through April 2010. Should the 6% April Notes be converted or paid prior to the payment terms, the amortization of the discount will be accelerated. On March 16, 2009, the Company entered into certain convertible promissory notes, which effected the anti-dilution provision of these April Notes. The conversion price of the April Notes was reduced from $0.50 to $0.25. No additional beneficial conversion expense was recorded related to the conversion price change due to the apparent immaterial effect of this adjustment to the financial results of the Company as of December 31, 2009.

The payment obligation under the April Notes may accelerate if payments under the April Notes are not made when due or upon the occurrence of other defaults described in the April Notes.

Convertible Term Notes payable

On December 13, 2007, the Company entered into four short-term notes with private institutional lenders. These promissory notes provided proceeds totaling $2.86 million to the Company. The proceeds of these notes were used to purchase inventory. The notes carry a variable rate of interest based on the prime rate plus two percent. These notes had an original maturity date of April 15, 2008. These notes were not repaid on this date and the terms were amended at several different dates to extend them to maturity dates of February 28, 2009, March 31, 2009, and December 31, 2009. While these notes payable are technically in default at this time, none of the lenders have claimed default on the notes and the Company is presently in discussions with these lenders regarding extended terms for these notes payable. There are no guarantees that the Company will successfully execute the proposed addendum extensions with the lenders.

10% Convertible Term Notes payable

On March 16, 2009, the Company entered into three convertible promissory notes with Enable which provided the Company with gross proceeds of $250,000. The notes bear interest at a rate of 10% annually and are convertible into shares of common stock of the Company at a conversion rate of $0.25 per share. Total interest expense was approximately $7,000 for the year ended June 30, 2009. The notes had a maturity date of June 17, 2009. As an inducement to Enable to enter into the Convertible Term Notes, the Company entered into a Warrant Exchange Agreement with Enable (see Note 4). The remaining terms of the 10% notes carry the same provisions as the 8% Debentures in Note 5. While the notes are technically in default at September 30, 2009, the lender has made no claim of default and the Company is currently in negotiations with the lender for an extension to the terms of the notes. There can be no assurance that the Company will be successful in securing the extensions.

25% Convertible Term Notes payable

In July 2009, the Company executed a NASA Funding Promissory Note in the amount of $240,004 with a lender who also holds a promissory note from December 2007. The new promissory note was executed in order to enable the Company to meet its obligations under a certain Space Act Agreement, which had been entered into with The National Aeronautics and Space Administration. The note bears interest at 25% and matures on August 30, 2009. In addition, the Company is obligated to issue 500,000 shares of common stock to the lender as additional consideration to enter into the note agreement. The shares were issued to the lender in September 2009. As of the date of this filing, the principal balance and accrued interest has not yet been paid to the lender. Although the note is technically in default as of the date of this filing, the lender has not made any claim of default and the Company is currently in negotiations with the lender for an extension to the terms of the note. There can be no assurance that the Company will be successful in securing any extension to the note.

Advances

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

Item 4. Controls and Procedures.

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including Jeremy Barbera, the Company's Chairman and Chief Executive Officer and Richard J. Mitchell III, the Company’s Chief Accounting Officer, of the effectiveness of the Registrant's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that evaluation, Mr. Barbera and Mr. Mitchell have identified several material weaknesses and, as a result, have concluded that the Company's disclosure controls and procedures as of December 31, 2009 were not effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission's rules and forms.

It is noted by the Company that on November 13, 2009, certain of these material weaknesses were communicated to the Company by our independent registered public accounting firm. See the Form 10-K file for the year ended June 30, 2009 for the disclosure of these material weaknesses. A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Remediation of Material Weaknesses

The Company intends to take action to hire additional staff, implement stronger financial reporting systems and software and develop the adequate policies and procedures with said enhanced staff to ensure all noted material weaknesses are addressed and resolved. The Company has also retained a third party consulting services to assist in developing and maintaining adequate internal control over financial reporting. However, due to the Company’s cash flow constraints, the timing of implementing the above has not yet been determined.

There were no other changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II- OTHER INFORMATION

Item 1. Legal Proceedings

Certain legal actions in the normal course of business are pending to which the Company is a party. The Company does not expect that the ultimate resolution of any pending legal matters will have a material effect on the financial condition, results of operations or cash flows of the Company.

In May 2009, the Company engaged the law firm of GCA Law Partners LLP, of Mountain View, California, to represent us in possible action against Hyundai Syscomm Corp., Apro Media Corp., Hirsch Capital Corp. and other entities and individuals. Subsequently, the Company filed suit in United States District Court, Northern District of California, alleging, among other faults, fraud, breach of contract and unfair business practices. The Company seeks financial relief and compensation for the alleged actions of the parties named in the action. The engagement agreement calls for GCA to be compensated for all fees incurred on a contingent basis, pending outcome of the lawsuit, and, further, calls for the Company to issue 50,000 shares of common stock of the Company to each of the two partners managing the legal proceedings. These shares were issued to the respective partners during the six-month period ended December 31, 2009.

Item 6. Exhibits

(a)

Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification.
31.2	Rule 13a-14(a)/15d-14(a) Certification.
32.1	Section 1350 Certification.
32.2	Section 1350 Certification.

SIGNATURES

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

	MSGI SECURITY SOLUTIONS, INC.
	(Registrant)

Date: February 22, 2011	By:	/s/ J. Jeremy Barbera
		J. Jeremy Barbera
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Richard J. Mitchell III
		Richard J. Mitchell III
		Chief Accounting Officer
		(Principal Financial Officer)

Attached files

MSGI TECHNOLOGY SOLUTIONS, INC Reports

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