-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lt0pL6D/M/PDWjaPCmAzXa7tM4oapYlMe8eSeFOQNT61Svlzac9H+ZHha7Wx5SPv SLjVwxGMeB+8SWbQzORVww== 0001144204-07-004761.txt : 20070201 0001144204-07-004761.hdr.sgml : 20070201 20070201163901 ACCESSION NUMBER: 0001144204-07-004761 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20070201 DATE AS OF CHANGE: 20070201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MSGI SECURITY SOLUTIONS, INC CENTRAL INDEX KEY: 0000014280 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 880085608 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-01768 FILM NUMBER: 07572285 BUSINESS ADDRESS: STREET 1: 575 MADISON AVENUE STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 917-339-7134 MAIL ADDRESS: STREET 1: 575 MADISON AVENUE STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: MEDIA SERVICES GROUP INC DATE OF NAME CHANGE: 20041202 FORMER COMPANY: FORMER CONFORMED NAME: MEDIA SERVICE GROUP INC DATE OF NAME CHANGE: 20040408 FORMER COMPANY: FORMER CONFORMED NAME: MKTG SERVICES INC DATE OF NAME CHANGE: 20020403 10QSB 1 v064141_10qsb.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o 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 SECURITY SOLUTIONS, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)

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

575 Madison Avenue
New York, New York		10022
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (917) 339-7134

_____________________________________________________

(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 o No x

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

Yes o No x

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

As of- January 19, 2007 there were 5,281,537 shares of the Issuer’s Common Stock, par value $.01 per share outstanding.

Transitional Small Business Disclosure Format Yes x No o

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-QSB REPORT

SEPTEMBER 30, 2006

PART I - FINANCIAL INFORMATION			Page

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheet as of
		September 30, 2006 (unaudited)	3

		Condensed Consolidated Statements of Operations for the
		three months ended September 30, 2006 and 2005 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the
		three months ended September 30, 2006 and 2005 (unaudited)	5-6

		Notes to Condensed Consolidated Financial Statements (unaudited)	7-17

	Item 2.	Management’s Discussion and Analysis of Financial
		Condition or Plan of Operations	18-25

	Item 3.	Control and Procedures	26

PART II- OTHER INFORMATION

	Item 6.	Exhibits	27

	SIGNATURES		28

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

	September 30, 2006
	(Unaudited)
ASSETS
Current assets:
Cash	$	-
Accounts receivable, net of allowances of $115,750		-
License fee receivable from Hyundai Syscomm Corp.		500,000
Inventory		50,176
Other current assets		4,375
Total current assets		554,551

Investment in Excelsa S.p.A.		1,650,000
Intangible assets, net		84,436
Property and equipment, net		142,146
Other assets, principally deferred financing costs, net		144,768
Total assets	$	2,575,901

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Bank overdraft	$	21,796
Notes payable, net of debt discount of $229,590		1,586,493
8% callable convertible notes payable		2,574,597
Advances from strategic partner		470,000
Accounts payable-trade		1,855,704
Accrued expenses and other current liabilities		2,072,388
Deferred revenues		59,332
Amounts receivable under licensing agreement		500,000
Abandoned lease obligation		987,348
Total current liabilities		10,127,658

Stockholders’ equity (deficit):
Convertible preferred stock - $.01 par value; 18,750 shares authorized;
1,686 shares of Series F issued and outstanding (liquidation
preference $840,864) at September 30, 2006		17
Common stock - $.01 par value; 9,375,000 shares authorized; 4,351,149
shares issued; 4,333,487 shares outstanding as of
September 30, 2006		43,511
Additional paid-in capital		238,599,830
Accumulated deficit		(244,801,405	)
Less: 17,662 shares of common stock in treasury, at cost		(1,393,710	)
Total stockholders’ equity (deficit)		(7,551,757	)
Total liabilities and stockholders’ equity (deficit)	$	2,575,901

See Notes to Condensed Consolidated Financial Statements.

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

(Unaudited)

	2006			2005
Revenues	$	-		$	66,080
Revenues - Related party		-			50,750
Total revenue		-			116,830

Cost of goods sold		-			34,123

Gross Profit		-			82,707

Operating costs and expenses:
Salaries and benefits		304,476			431,384
Non cash compensation		229,943			469,143
Selling, general and administrative		595,890			726,015
Depreciation and amortization		34,836			35,798

Total operating costs and expenses		1,165,145			1,662,340
Loss from operations		(1,165,145	)		(1,579,633	)
Other income (expense):
Interest income		48			28,148
Interest expense		(211,764	)		(159,096	)
Total other income (expense)		(211,716	)		(130,948	)

Loss from continuing operations
before provision for income taxes		(1,376,861	)		(1,710,581	)
Provision for income taxes		3,000			3,000
Loss from continuing operations		(1,379,861	)		(1,713,581	)

Discontinued operations:
Loss from discontinued operations		-			(391,032	)

Net loss		(1,379,861	)		(2,104,613	)

Undeclared dividends on preferred stock		(11,170	)		(47,643	)

Net loss attributable to common stockholders	$	(1,391,031	)	$	(2,152,256	)

Basic and diluted loss per share attributable
to common stockholders:
Continuing operations	$	(0.32	)	$	(0.46	)
Discontinued operations		-			(0.10	)
Basic and diluted loss per share	$	(0.32	)	$	(0.56	)

Weighted average common shares outstanding
basic and diluted		4,300,950			3,831,878

See Notes to Condensed Consolidated Financial Statements

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED SEPTEMBER 30,

(unaudited)

	2006			2005

Operating activities:
Net loss	$	(1,379,861	)	$	(2,104,613	)
Loss from discontinued operations		-			391,032
Loss from continuing operations		(1,379,861	)		(1,713,581	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation		10,895			5,261
Amortization		23,941			23,941
Amortization of deferred financing costs		81,623			29,773
Non cash compensation		229,942			469,143
Non cash interest expense		144,066			99,757
Changes in assets and liabilities:
Accounts receivable		-			(114,751	)
Inventory		-			(8,594	)
Other current assets		9,110			7,450
Other assets		-			(5,160	)
Accounts payable - trade		319,053			155,266
Accrued expenses and other liabilities		377,746			759,531
Net cash used in continuing operations		(183,485	)		(291,964	)
Net cash provided by discontinued operations		-			(1,085,191	)
Net cash used in operating activities		(183,485	)		(1,377,155	)
Investing activities:
Investment in Excelsa		-			(3,115	)
Increase in related party note receivable		-			(17,569	)
Purchases of property and equipment		-			(11,418	)
Net cash used in continuing operations		-			(32,102	)
Net cash used in discontinued operations		-			(5,000	)
Net cash used in investing activities		-			(37,102	)
Financing activities:
Proceeds from issuance of 8% convertible notes, net		-			3,000,000
Deferred financing costs related to issuance of 8% convertible notes		-			(300,250	)
Costs in connection with registration of stock		-			(5,099	)
Advances from strategic partner		170,000			-
Bank overdraft		13,573			-

Net cash provided by continuing operations		183,573			2,694,651
Net cash provided by discontinued operations		-			165,389
Net cash provided by financing activities		183,573			2,860,040
Change in accumulated other comprehensive income (88) 7,552
Net decrease in cash and cash equivalents		-			1,453,335
Cash and cash equivalents at beginning of period		-			112,649
Cash and cash equivalents at end of period	$	-		$	1,565,984

Noncash Transactions:

Licensing Agreement with Hyundai	$	500,000	$	-
Conversion of 2,345 shares Series F stock to 115,420 shares Common stock	$	23	$	-
Discount on 8% Convertible Note	$	-		($1,471,169	)
Agent warrants issued	$	-		($57,054	)

MSGI SECURITY SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO INTERIM 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”) (in combination "MSGI" or the “Company”). These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company's Annual Report on Form 10-K, as amended, for its fiscal year ended June 30, 2006 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, 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-month period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2007. Certain reclassifications have been made in the fiscal 2006 financial statements to conform to the fiscal 2007 presentation.

Liquidity and Capital Resources:

The Company has limited capital resources, has incurred significant historical losses and negative cash flows from operations and has no current revenues. The Company is also in default of its debt service payments of its notes payable (See Notes 5 and 6). 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 and capital expenditure requirements and enable the Company to meet its financial obligations and payments under its callable secured convertible notes and promissory notes for the next twelve months. The Company is in the process of consummating certain strategic transactions that may provide significant capital for MSGI. The Company has engaged the investment banking firm of HC Wainwright to raise additional capital for our operations. There are no assurances that any capital raising transactions will be consummated. Certain transactions were closed in December 2006 as disclosed in the subsequent events section; however 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. 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 July 14, 2006, the Company was in technical default of the payment terms of the Callable 8% Secured Convertible Notes as well as notes payable with the same investors of $500,000. On December 13, 2006, the Company entered into a letter agreement (the "Letter Agreement") with certain of the investors to amend the notes and warrants previously issued to these investors by the Company, and to waive certain defaults under the notes and warrants (See Note 5).

During the quarter ended September 2006, the Company received funding, in the amount of $170,000 from a certain New York based homeland security firm as an advance in contemplation of a further strategic transaction between the two parties. This firm is also in the security technology business and it is thought that the combined technologies and services would yield a stronger competitive offering to potential customers. These funds brought the aggregate total received from the firm to $470,000 as of September 30, 2006. From October 1, 2006 through December 14, 2006, the Company received an additional $100,000 in such advances. Additionally, since October 1, 2006, this strategic investor has also paid certain costs directly on our behalf in the aggregate total of approximately $116,000, which will be memorialized as additional advances. The advances bear interest at a rate of 8% and interest expense was $7,143 for the quarter ended September 30, 2006. There can be no assurances that a strategic transaction with such entity can or will be completed.

On September 11, 2006 the Company entered into a License Agreement with Hyundai Syscomm Corp. (“Hyundai”) whereby, in consideration of a one-time $500,000 fee, MSGI granted to Hyundai a non-exclusive worldwide perpetual unlimited source, development and support licence, for the use of the technology developed and owned by MSGI’s majority-owned subsidiary, Innalogic, LLC. This license entitles Hyundai to onward develop the source code of the technology to provide wireless transmission and encryption capabilities that work with any other of Hyundai’s products, to use the technology for the purposes of demonstrating the technology to potential customers, sub-licensees and distributors, market the technology world-wide either under its existing name or any name that the Hyundai may decide and to sub-licence the technology to its customers and distributors generally. The License Agreement carries certain intellectual property rights which state that (i) Hyundai will follow all such reasonable instructions as MSGI may give from time to time with regard to the use of trademarks or other indications of the property and other rights of MSGI or its subsidiaries, (ii) warrants that MSGI is the sole proprietary owners of all copyright and intellectual property rights subsisting in the technology and undertakes to indemnify Hyundai at all times against any liability in respect of claims from third parties for infringement thereof and (iii) provides that Hyundai acknowledges that the intellectual property rights of any developments of the technology that are undertaken by MSGI rest and will remain with the Company. See Note 12 for description of subsequent transactions with Hyundai.

Subsequent Event Transactions:

On December 13, 2006, the Company pursuant to a Securities Purchase Agreement between the Company and several institutional investors (the " 2006 Investors") issued $2,000,000 aggregate principal amount of callable secured convertible notes (the "Notes") and stock purchase warrants exercisable for 3,000,000 shares of common stock (the "Warrants") in a private placement for an aggregate offering price of $2,000,000. (See Notes 6 and 12)

On December 20, 2006, MSGI Security Solutions, Inc. filed a certificate of designation with the Secretary of State of the State of Nevada to designate 200 shares of the Company's preferred stock, par value $0.01, as Series G Convertible Preferred Stock ("Series G Preferred Stock") with a stated value of $20,000 per share. The Company has previously entered into subscription agreements (the "Subscription Agreements") with certain vendors, officers and employees of the Company for the issuance of a total of 150 shares of Series G Preferred Stock, in exchange for the cancellation of debt owed by the Company for past due invoices and accrued salary of approximately $3.0 million, and expects to enter into subscription agreements for the remaining 50 shares of Series G Preferred Stock. The Series G Preferred Stock will automatically convert into common stock of the Company once the holders of a majority of the common stock of the Company approve such conversion, at a conversion rate of the higher of $1.00 per share or the market price as of the day the shareholders approve such conversion. This conversion rate may result in a beneficial conversion feature, which would be accounted for at the time such conversion occurs. The holders of the Series G Preferred Stock are entitled to accrued dividends of 5% per annum, and such dividend rate shall be increased to 8% if the approval of the shareholders is not obtained by June 30, 2007. (See Note 12, “Subsequent Events”)

2. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is a relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practices. This Statement is effective for financial statements for fiscal years beginning after November 15, 2007 with earlier application permitted. The Company adopted the provisions of SFAS 157 in the first quarter of fiscal year ended June 30, 2007 and the adoption did not have a significant impact to our financial statements.

In July 2006, the FASB issued FASB Interpretations No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”). The Interpretation establishes criteria for recognizing and measuring the financial statement tax effects of positions taken on a company's tax returns. A two-step process is prescribed whereby the threshold for recognition is a more-likely-than-not test that the tax position will be sustained upon examination and the tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company currently recognizes a tax position if it is probable of being sustained. The Interpretation is effective for the Company beginning July 1, 2007 and will be applicable to all tax positions upon initial adoption. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may continue to be recognized upon adoption of FIN 48. The Company is evaluating the potential effects FIN 48 may have on its consolidated financial position or results of operations, but no material consequence is expected.

3. SUMMARY OF SIGNIFICANT POLICIES

The accounting policies of the Company are contained in the June 30, 2006 Form 10-K/A. The following are the more significant policies.

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. Operations of subsidiaries acquired are included in the MSGI financial statements from the date of the respective acquisition. Operations of any subsidiaries sold are presented as discontinued operations (see Note 8). Investments where the Company has less than a 20% ownership interest and does not exert significant control and influence are recorded on the cost basis. The Company has one reporting segment.

Accounts Receivable and Allowance for Doubtful Accounts:

The Company extends credit to its customers in the ordinary course of business. Accounts are reported net of an allowance for uncollectible accounts. Bad debts are provided on the allowance method based on historical experience and management's evaluation of outstanding accounts receivable. In assessing collectibility the Company considers factors such as historical collections, a customer's credit worthiness, age of the receivable balance both individually and in the aggregate, and general economic conditions that may affect a customer's ability to pay. The Company does not require collateral from customers nor are customers required to make up-front payments for goods and services.

Deferred Financing Costs

Deferred financing costs are amortized over the term of its associated debt instrument. If the maturity of the debt is accelerated because of defaults, then the amortization is accelerated to the default date.

Revenue Recognition:

The Company accounts for revenue recognition in accordance with Staff Accounting Bulletin No. 104, ("SAB 104"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements.

Revenues are reported for the operations of the various subsidiaries of MSGI upon the completion of a transaction that meets the following criteria of SAB 104 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.

Income Taxes:

The Company recognizes deferred taxes for the difference 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 liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes." Under this method, 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.

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, goodwill and intangible assets, deferred tax valuation allowance, valuation of stock options, warrant and debt features and the allowance for doubtful accounts. Actual results could differ from those estimates.

4. EARNINGS (LOSS) PER SHARE

Weighted average shares outstanding- basic and diluted for the quarters ending September 30, 2006 and 2005:

	2006		2005

Weighted average common shares outstanding - basic		4,300,950		3,831,878
Common stock equivalents for options and warrants		-		-
Weighted average common shares outstanding- diluted		4,300,950		3,831,878

Stock options and warrants in the amount of 2,888,731 and 1,440,535 shares, preferred stock convertible into 83,050 and 461,538 shares and 8% convertible notes convertible into 523,292 and 609,756 shares were not included in the computation of diluted loss per share attributable to common stockholders, as they are anti-dilutive as a result of net losses for the three months ended September 30, 2006 and 2005, respectively.

5. 8% CALLABLE CONVERTIBLE NOTES

On July 12, 2005, MSGI closed a Callable Secured Convertible Note financing of $3 million with a New York based institutional investor (the “8% Notes”). Substantially all of the assets of the Company are pledged as collateral to the note holders.

The Note requires repayment over a three-year term with an 8% interest per annum. Repayment shall be made in cash or in registered shares of common stock, or a combination of both, at the option of the Company, and payment commences 90 days after the closing date and is payable monthly in equal principal installments plus interest over the remaining 33 months.

Pursuant to an amendment dated September 21, 2005, the Company has the option to make the monthly payments in registered shares of common stock only if the stock price exceeds $4.92 over a specified period of time. Further, the Holder has the option to convert all or any part of the outstanding principal to common stock if the average daily price, as defined in the agreement, for the preceding five trading days is greater than the defined Initial Market Price of $6.56. The conversion price is $4.92. The Company granted registration rights to the investors for the resale of the shares of common stock underlying the notes and certain warrants that were issued in the transaction.

The Note agreement provides the Company with the option to call the loan and prepay the remaining balance due. If the loan is called early, the Company will be required to pay 125% of the outstanding principal and interest as long as the common stock of the Company is at $6.00 or less. If the stock is higher than $6.00 when the Company exercises the call option, then the amount owed is based upon a calculation, as defined in the agreement, using the average daily price. If in any month a default occurs, the note shall become immediately due and payable at 130% of the outstanding principal and interest.

The Company also issued five-year warrants to the investors for the purchase of up to 75,000 shares of the Company's common stock, $0.01 par value, at an exercise price of $7.50 per share, which are exercisable at any time. The placement agent received three-year warrants for the purchase of 12,195 shares of the Company's common stock, at an exercise price of $7.50 per share exercisable between the period January 12, 2006 and January 11, 2009.

In January 2006, the Chief Executive Officer entered into a guarantee and pledge agreement with the note holders, whereby, the common stock of MSGI owned by the Chief Executive Officer (approximately 190,000 shares) was pledged as additional collateral for these notes.

On June 7, 2006, the Company entered into a waiver and amendment agreement which modified certain payment due dates of the notes to provide for a payment of $395,450 due July 14, 2006 for debt service due from April 2006 through July 2006. Such payment was not made on July 14, 2006. In consideration for the waiver agreement, the Company issued 800,000 warrants to the note holders. Such warrants were ascribed a fair value, as computed under the Black-Scholes model, of $2,224,808 which was recognized as additional interest expense in June 2006. Because of the default of the terms of the notes, the amortization of the deferred financing costs, beneficial conversion costs and interest discount were accelerated to be fully recognized by June 30, 2006. As of July 14, 2006, the Company was in technical default of the payment terms of the 8% Notes. This default was further waived on December 13, 2006 (see below).

On December 13, 2006, the Company finalized negotiations with the lenders and, pursuant to a Securities Purchase Agreement between the Company and the investors, 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 (the "Warrants") in a private placement for an aggregate offering price of $2,000,000. The conversion of the 6% Notes and the exercise of the Warrants are subject to stockholder approval (the "Stockholder Approval"), which the Company is required to use its best efforts to obtain by February 15, 2007. H.C. Wainwright acted as a placement agent for a portion of the offering. The 6% Notes have a maturity date of December 13, 2009 and will accrue interest at a rate of 6% per annum. The Investors can convert the principal amount of the 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 Notes is 75% of the average of the lowest three closing prices of the Company's common stock for the 20 day period prior to such conversion, with a minimum conversion price of $0.50 per share. The payment obligation under the 6% Notes may accelerate if the resale of the shares of common stock underlying the 6% Notes and Warrants are not registered in accordance with the terms of the Registration Rights Agreement entered into simultaneously with the transaction (the "Registration Rights Agreement"), payments under the Notes are not made when due or upon the occurrence of other defaults described in the Notes. The Warrants are exercisable once Stockholder Approval is obtained until seven years from the date of issuance. The exercise price of the Warrants is $1.00 per share. The 6% Notes and the Warrants have anti-dilution protections and the Company has agreed to certain registration rights for the resale of the shares of common stock underlying the 6% Notes, pursuant the Registration Rights Agreement. The Company has also entered into a Security Agreement and an Intellectual Property Security Agreement with the 2006 Investors in connection with the closing, which grants security interests in certain assets of the Company and the Company's subsidiaries to the 2006 Investors to secure the Company's obligations under the 6% Notes and Warrants. The issuance of the 6% Notes and Warrants constituted a private placement and therefore was exempt from registration in accordance with Regulation D of the Securities Act of 1933, as amended. A proxy relating to the required Stockholder Approval is expected to be mailed on or about January 31, 2007 and a meeting is expected to be held on March 6, 2007. H.C. Wainwright received a placement fee of $100,000 and 5 year warrants exercisable for 150,000 shares of common stock at an exercise price of $1.00 per share.

On December 13, 2006, the Company also entered into a letter agreement with certain of the 2006 Investors to amend the 8% Notes and warrants as well as the promissory notes (See Note 6) previously issued to these Investors by the Company, and to waive certain defaults under these notes and warrants. The letter agreement also serves to amend the amortization and payment terms of the 8% Notes, amending the payment provisions there under. Payment will be due on the 8% Notes as of the revised maturity date of December 13, 2009.

6. OTHER NOTES PAYABLE

Other Notes payable consist of the following as of September 30, 2006:

December 2005 Note Payable	$	250,000
January 2006 Note Payable	$	600,000
Notes Payable to vFinance Investment	$	736,493

Total	$	1,586,493

December 2005 Note Payable

During December 2005, the Company entered into a short-term note with a related party in the amount of $250,000. This loan bears interest at a rate of 10% through June 30, 2006 and has an annual imputed interest rate of 18.25%. The total interest due under this note has been fully accrued as of June 30, 2006. There is no further interest to be accrued to this note. This short-term note and interest accrued on the note are to be exchanged for Convertible Preferred Series G shares during the quarter ended December 31, 2006.

January 2006 Note Payable

On January 19, 2006, the Company entered into four short-term notes with the same lenders that also hold the 8% Callable Convertible Notes (See Note 5). The new promissory notes provided proceeds totaling $500,000 to the Company. The notes were due and payable on April 19, 2006 in the aggregate total of $600,000, including imputed interest of $100,000 at an annual interest rate of 80%. In the event of any defined event of default declared by the lenders by written notice to the Company, the notes shall become immediately due and payable and the Company shall incur a penalty of an additional 15% of the amounts due and payable under the notes.

In connection with the waiver and amendment executed for the 8% Callable Convertible notes above, the same agreement also waived and amended the maturity date of these short-term notes to a new maturity date of July 14, 2006. As of July 14, 2006, the Company was in technical default of the payment terms of the promissory notes. On December 13, 2006, the Company entered into a letter agreement with certain of the investors to amend the 8% Notes and warrants as well as these promissory notes and to waive certain defaults under the promissory notes (see Note 5). The letter agreement amends the maturity date of the promissory notes to December 13, 2009. Any and all default provisions under the terms of the original promissory notes were waived and there are no default interest provisions enforced under the terms of the original promissory notes.

vFinance note payable

During the months of February and March 2006, the Company entered into a series of promissory notes with various private lenders. The notes closed in a series of four transactions over the period of February 17, 2006 to March 23, 2006. Gross proceeds in the amount of $799,585 were obtained and the notes carry an aggregate repayment total of $975,103 (which includes imputed interest of $175,518 or 21.95%) which is due and payable upon maturity. The notes carry a maturity date of February 28, 2007.

In addition, warrants for the purchase of up to 585,062 shares of the Company's common stock were issued to the individual lenders. The warrants carry an original exercise price of $6.50 and a term of 5 years. The warrants may be exercised 65 days after the date of issuance. The warrant agreement contains a reprice provision that provides for a change in the exercise price if the Company issues more favorable terms to another party, as defined in the agreement. Due to the 800,000 warrants issued in connection with the 8% Callable Convertible Notes above at an exercise price of $4.50, the exercise price of the warrants issued with the vFinance note payable were modified to $4.50.

The vFinance Agreement also contains a registration rights agreement for the warrants which contains penalty clauses if the underlying warrant shares are not registered per the terms of the agreement. The agreement calls for a Registration Filing Date within 180 days from closing date and a Registration Effective Date within 90 days from the Registration Filing Date. The agreement provides for a cash penalty of approximately 1.5% of the value of the notes for each thirty day period that is exceeded. As of September 30, 2006, the Company has a liability recorded of $63,400 to provide for the expected delay in issuing this registration statement. Each month that the Company is delayed in meeting this requirement, an additional $12,000 liability is incurred.

Placement fees in the amount of $73,133 were paid to vFinance Investments, Inc. as placement agent. In addition to the placement fees, warrants for the purchase of up to 73,134 shares of the Company's common stock were issued to the placement agent and its designees. The agent warrants carry an exercise price of $6.50, a term of 5 years and may be exercised 65 days after the date of issuance. The agent warrants were valued at $176,114 using the Black-Scholes option pricing model and recorded as part of the financing costs. In addition, a third party received a fee equal to 5% of the aggregate offering, in an amount of $40,000, which was recorded as part of the financing costs.

Total financing cost recorded in connection with the Notes was $315,337, with a balance remaining at September 30, 2006 of approximately $109,000, which is included in other assets on the balance sheet, and is being amortized over the term of the Notes. The Company recorded a discount to the note payable of $612,240 which represented the discount allocated to the warrants. The fair value of the warrants was determined using a Black-Scholes option pricing model. The discount on the note was allocated from the gross proceeds and recorded as additional paid-in capital. The discount is being amortized to interest expense over the one-year term of the note. Interest expense for the quarter ended September 30, 2006 in connection with this note discount was approximately $144,000. Should the notes be paid prior to the payment terms, the amortization of the discount will be accelerated.

Advance from Strategic Partner

During the quarter ended September 2006, the company received funding, in the amount of $170,000 from a certain New York based homeland security firm as an advance in contemplation of a further strategic transaction between the two parties. This firm is also in the security technology business and it is thought that the combined technologies and services would yield a stronger competitive offering to potential customers. These funds brought the aggregate total received from the firm to $470,000 as of September 30, 2006. From October 1, 2006 through December 14, 2006, the Company received an additional $100,000 in such advances. Additionally, since October 1, 2006, this strategic investor has also paid certain costs directly on our behalf in the aggregate total of approximately $116,000, which will be memorialized as additional advances. The advances bear interest at a rate of 8% and interest expense amounted to $7,143 for the quarter ended September 30, 2006. There can be no assurances that a strategic transaction with such entity can or will be completed.

7. STOCK BASED COMPENSATION

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 SFAS 123R, “Share-Based Payment” (“SFAS 123R”), which requires all share-based payments to employees to be recognized in the financial statements at their fair values. The fair value of each stock option is estimated on the date of grant using the Black-Scholes method of valuation. The expense is being recognized in non cash compensation 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 three months ended September 30, 2006 or 2005. As of September 30, 2006, 550,000 options are outstanding, of which 348,640 options are exercisable. The weighted average exercise price of all outstanding options is $2.39. Aggregate intrinsic value of the options was $0 as of September 30, 2006. As of September 30, 2006, non-vested compensation cost that has not yet been recognized was approximately $364,000, which is expected to be recognized over a weighted average period of approximately 1 year.

There were no warrants issued during the three months ended September 30, 2006. As of September 30, 2006, the Company has 2,338,731 warrants outstanding to purchase shares of common stock at prices ranging from $4.50 to $8.25, all of which are currently exercisable.

During the quarter ended September 30, 2006, the Company issued 25,000 shares of common stock to an employee, resulting in a non-cash compensation expense of $61,000.

8. DISCONTINUED OPERATIONS

On March 31, 2006, the Company defaulted on certain payment provisions of the Stock Purchase Agreement which provided that, if the Company failed to pay any of the individual installments within 48 hours of the applicable due date, the Stock Purchase Agreement would be terminated and the Company would be obligated to return all acquired equity ownership interests in AONet International Srl. (“AONet”) to the previous owner, forfeiting any and all payments made to that date. As of April 1, 2006, all equity ownership interests reverted back to the previous owner and, as a result, the AONet subsidiary has been deconsolidated from the financial statements of the Company.

The loss from discontinued operations of AONet for the three months ended September 30, 2005 which have been included in loss from discontinued operations for the period ended September 30, 2005 is as follows:

Revenues	$	619,452
Costs of revenues		488,598
Gross profit		130,854
Operating costs and expenses		466,843
Other expenses		49,165
Loss before taxes		(385,154	)
Provision for taxes		5,878
Net loss from discontinued operations	$	(391,032	)

9. INVESTMENTS

MSGI owns approximately 19.5% of the issued and outstanding shares of common stock of Excelsa S.p.A. (“Excelsa”), a corporation organized under the laws of the Republic of Italy. As the Company has less then 20% ownership interest in Excelsa and does not have the ability to exercise significant influence over Excelsa, this investment is accounted for under the cost method. During the three months ended September 30, 2005, MSGI sold approximately $50,000 of product to Excelsa at normal selling terms.

10. INTANGIBLE ASSETS

The gross carrying amount and accumulated amortization of the Company's intangible assets as of September

30, 2006 is as follows:

	September 30, 2006
	Gross Carrying		Accumulated
	Amount		Amortization
Amortized intangible assets
Unpatented technology	$	287,288	$	202,852

Amortization expense recorded for the three months ended September 30, 2006 was $23,941. The estimated remaining amortization expense for the five succeeding years is as follows:

Fiscal Year	Amount
2007 (remaining 9 months)	$	71,822
2008		12,614

11. LICENSING AGREEMENT WITH HYUNDAI SYSCOMM CORP.

On September 11, 2006, the Company entered into a License Agreement with Hyundai Syscomm Corp (“Hyundai”) whereby, in consideration of a one-time $500,000 fee, (300,000 of which was been subsequently collected, with the balances expected to be paid during the quarter ended March 31, 2007), MSGI granted to Hyundai a non-exclusive worldwide perpetual unlimited source, development and support licence, for the use of the technology developed and owned by MSGI’s majority-owned subsidiary, Innalogic, LLC. This license entitles Hyundai to onward develop the source code of the technology to provide wireless transmission and encryption capabilities that work with any other of Hyundai’s products, to use the technology for the purposes of demonstrating the technology to potential customers, sub-licensees and distributors, market the technology world-wide either under its existing name or any name that the Hyundai may decide and to sub-licence the technology to its customers and distributors generally. The License Agreement carries certain Intellectual Property Rights which state that Hyundai will follow all such reasonable instructions as MSGI may give from time to time with regard to the use of trademarks or other indications of the property and other rights of MSGI or its subsidiaries, warrants that MSGI is the sole proprietary owners of all copyright and intellectual property rights subsisting in the technology and undertakes to indemnify Hyundai at all times against any liability in respect of claims from third parties for infringement thereof and provides that Hyundai acknowledges that the Intellectual Property Rights of any developments of the technology that are undertaken by MSGI rest and will remain with the Company. As of September 30, 2006, the $500,000 fee was recorded as a receivable from Hyundai and as a liability in the same amount. See Note 12 for subsequent transactions with Hyundai. As a result of these subsequent transactions, the final accounting considerations with respect to all of the transactions with Hyundai will likely be considered together.

12. SUBSEQUENT EVENTS

On October 19, 2006, the Company entered into a Subscription Agreement with Hyundai for the issuance of 900,000 shares of the Company's common stock. Subject to the terms and conditions set forth in the Subscription Agreement, the Company agreed to issue up to 900,000 shares of common stock contingent upon the Company's receipt of $500,000 received in connection with a certain License Agreement, dated September 11, 2006 (See Note 11), and execution of a certain pending Sub-Contracting Agreement (see below). Under the terms and conditions set forth in the Subscription Agreement, Hyundai agreed that the Company shall not be required to issue, or reserve for issuance at any time in accordance with Nasdaq rule 4350(i), in the aggregate, Common Stock equal to more than 19.99% of the Company's common stock outstanding (on a pre-transaction basis). Therefore the Company issued 865,000 shares of common stock at the initial closing of the transaction, and the remaining 35,000 shares of common stock shall be issued when and if: (a) the holders of a majority of the shares of common stock outstanding vote in favor of Hyundai owning more than 19.99% of the Company's common stock outstanding; or (b) additional issuances of common stock by the Company permit such issuance in accordance with Nasdaq rule 4350(i).

On October 25, 2006, the Company entered into a Sub-Contracting Agreement with Hyundai. The Sub-Contracting Agreement allows for MSGI and its affiliates to participate in contracts that Hyundai and/or its affiliates now have or may obtain hereafter, where the Company's products and/or services for encrypted wired or wireless surveillance systems or perimeter security would enhance the value of the contract(s) to Hyundai or its affiliates. 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. Further, under the terms of the Sub-Contracting Agreement, the Company will provide certain limited product and software warranties to Hyundai for a period of 12 months after the assembly of the Company's products and product components by Hyundai or its affiliates with regard to the product and for a period of 12 months after the date of installation of the software by Hyundai or its affiliate with regard to the software. The Company will also provide training, where required, for assembly, maintenance and usage of the equipment and shall charge it's most favored price for such training services. No title or other ownership of rights in the Company's Firmware or any copy thereof shall pass to Hyundai or its affiliates under this Agreement. Hyundai and its affiliates agree that it shall not alter and notices on, prepare derivative works based on, or reproduce, disassemble or decompile any Software embodied in the Firmware recorded in the Company's products.

On December 5, 2006 the Company announced that it was to issue a new Preferred Class of stock, Series G, in exchange for $3 million in liabilities. The entire staff of the Company will participate in the program by exchanging all unpaid compensation for equity, as will several major creditors and suppliers. The Preferred Series G will convert to common shares upon Stockholder Approval. As of the date of this filing, the Board of Directors of the Company has unanimously approved the designation of the Series G Preferred Stock and such Designation has been filed with the State of Nevada. Approximately 118 shares of the Series G Preferred Stock have been issued as of the date of this report. The remaining approximately 32 shares of Series G Preferred Stock are to be issued to certain officers and employees of the Company upon Stockholder Approval. A proxy relating to the required Stockholder Approval for both the conversion of the Series G Preferred Shares to common stock and the issuance of Series G Preferred Shares to certain officers and employees is expected to be mailed on or about January 31, 2007 and a meeting is expected to be held on March 6, 2007.

From October 1, 2006 through December 14, 2006, the Company received an additional $100,000 in advances from a certain New York based homeland security firm as an advance in contemplation of a further strategic transaction between the two parties. Additionally, since October 1, 2006, this strategic investor has also paid certain costs directly on our behalf in the aggregate total of approximately $116,000, which will be memorialized as additional advances. There can be no assurances that a strategic transaction with such entity can or will be completed.

Item 2. Management's Discussion and Analysis of Financial Condition or Plan 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 three-month periods ended September 30, 2006 and 2005. This should be read in conjunction with the financial statements, and notes thereto, included in this Report on Form 10-QSB and the Company’s financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K, as amended, for the year ended June 30, 2006.

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

Revenue Recognition:

The Company accounts for revenue recognition in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 ("SAB 104"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements.

Revenues will be reported for the operations of Future Developments America, Inc. and for Innalogic, LLC upon the completion of a transaction that meets the following criteria of SAB 104 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.

FDA recognized no revenues during the periods ended September 30, 2006 and 2005.

Revenues derived from the operations of Innalogic, from the sale of equipment and the provision of supporting services if requested by the customer, are realized upon shipment or delivery of the product and/or upon the services being provided and completed. Innalogic may also recognize revenue derived from the licensing of its intellectual property or technology to any independent third party. Such revenues would be realized in accordance with the terms of the specific licensing agreement and over the expected and reasonable life of any such agreement.

Accounts Receivable and Allowance for Doubtful Accounts:

Long-Lived Assets:

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, the Company will recognize impairment when the sum of undiscounted future cash flows (without interest charges) is less than the carrying amount of such assets. The measurement for such impairment loss is based on the fair value of the asset.

Accounting for 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 liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes." Under this method, 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.

Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting prin-ciples 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 accompanying financial position and results of operations for the Company have been prepared in accordance with SFAS 123R, “Share-Based Payment.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statement based on their fair values.

The Company has selected the Black-Scholes method of valuation for share-based compensation and expense is recorded 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.

Investments in Non-Consolidated Companies:

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 other than a 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.

Recent Accounting Pronouncements:

Significant Events:

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

On June 1, 2005, the Company entered into a Stock Purchase Agreement to acquire equity ownership interests in AONet International Srl ("AONet"), a limited liability company organized under the laws of the Republic of Italy, representing 51% of all of AONet's equity ownership interests issued and outstanding as of the date of the Stock Purchase Agreement on a fully diluted basis. On March 31, 2006, the Company defaulted on certain payment provisions of the Stock Purchase Agreement which provided that, if the Company failed to pay any of the individual installments within 48 hours of the applicable due date, the Stock Purchase Agreement would be terminated and the Company would be obligated to return all acquired equity ownership interests in AONet to the previous owner, forfeiting any and all payments made to that date. As of April 1, 2006, all equity ownership interests reverted back to the previous owner and, as a result, the AONet subsidiary has been deconsolidated from the financial statements of the Company and is reflected as discontinued operations for the period ended September 30, 2005.

As of July 14, 2006, the Company was in technical default of the payment terms of the Callable 8% Secured Convertible Notes as well as notes payable with the same investors of $500,000. On December 13, 2006, the Company entered into a letter agreement (the "Letter Agreement") with certain of the Investors to amend the notes and warrants previously issued to these Investors by the Company, and to waive certain defaults under the notes and warrants (See Note 5).

During the quarter ended September 2006, the Company received funding, in the amount of $170,000 from a certain New York based homeland security firm as an advance in contemplation of a further strategic transaction between the two parties. This firm is also in the security technology business and it is thought that the combined technologies and services would yield a stronger competitive offering to potential customers. These funds brought the aggregate total received from the firm to $470,000 as of September 30, 2006. From October 1, 2006 through December 14, 2006, the Company received an additional $100,000 in such advances. Additionally, since October 1, 2006, this strategic investor has also paid certain costs directly on our behalf in the aggregate total of approximately $116,000, which will be memorialized as additional advances. The advances bear interest at a rate of 8% and interest expense was $7,143 for the quarter ended September 30, 2006. There can be no assurances that the strategic transactions can or will be completed.

On September 11, 2006 the Company entered into a License Agreement with Hyundai Syscomm Corp. (“Hyundai”) whereby, in consideration of a one-time $500,000 fee, MSGI granted to Hyundai a non-exclusive worldwide perpetual unlimited source, development and support licence, for the use of the technology developed and owned by MSGI’s majority-owned subsidiary, Innalogic, LLC. This license entitles Hyundai to onward develop the source code of the technology to provide wireless transmission and encryption capabilities that work with any other of Hyundai’s products, to use the technology for the purposes of demonstrating the technology to potential customers, sub-licensees and distributors, market the technology world-wide either under its existing name or any name that the Hyundai may decide and to sub-licence the technology to its customers and distributors generally. The License Agreement carries certain Intellectual Property Rights which state that Hyundai will follow all such reasonable instructions as MSGI may give from time to time with regard to the use of trademarks or other indications of the property and other rights of MSGI or its subsidiaries, warrants that MSGI is the sole proprietary owners of all copyright and intellectual property rights subsisting in the technology and undertakes to indemnify Hyundai at all times against any liability in respect of claims from third parties for infringement thereof and provides that Hyundai acknowledges that the Intellectual Property Rights of any developments of the technology that are undertaken by MSGI rest and will remain with the Company.

On December 13, 2006, the Company pursuant to a Securities Purchase Agreement between the Company and several institutional investors (the "Investors") issued $2,000,000 aggregate principal amount of callable secured convertible notes (the "Notes") and stock purchase warrants exercisable for 3,000,000 shares of common stock (the "Warrants") in a private placement for an aggregate offering price of $2,000,000. (See Notes 6 and 12)

On December 20, 2006, MSGI Security Solutions, Inc. filed a certificate of designation with the Secretary of State of the State of Nevada to designate 200 shares of the Company's preferred stock, par value $0.01, as Series G Convertible Preferred Stock ("Series G Preferred Stock") with a stated value of $20,000 per share. The Company has previously entered into subscription agreements (the "Subscription Agreements") with certain vendors, officers and employees for the issuance of a total of 150 shares of Series G Preferred Stock, in exchange for the cancellation of debt owed by the Company for past due invoices and accrued salary of approximately $3.0 million, and expects to enter into subscription agreements for the remaining 50 shares of Series G Preferred Stock. The Series G Preferred Stock will automatically convert into common stock of the Company once the holders of a majority of the common stock of the Company approve such conversion, at a conversion rate of the higher of $1.00 per share or the market price as of the day the shareholders approve such conversion. This conversion rate may result in a beneficial conversion feature, which would be accounted for at the time such conversion occurs. The holders of the Series G Preferred Stock are entitled to accrued dividends of 5% per annum, and such dividend rate shall be increased to 8% if the approval of the shareholders is not obtained by June 30, 2007. (See Note 12, “Subsequent Events”)

On October 25, 2006 the Company entered into a Sub-Contracting Agreement with Hyundai. The Sub-Contracting Agreement allows for MSGI and its affiliates to participate in contracts that Hyundai and/or its affiliates now have or may obtain hereafter, where the Company's products and/or services for encrypted wired or wireless surveillance systems or perimeter security would enhance the value of the contract(s) to Hyundai or its affiliates. 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. Further, under the terms of the Sub-Contracting Agreement, the Company will provide certain limited product and software warranties to Hyundai for a period of 12 months after the assembly of the Company's products and product components by Hyundai or its affiliates with regard to the product and for a period of 12 months after the date of installation of the software by Hyundai or its affiliate with regard to the software. The Company will also provide training, where required, for assembly, maintenance and usage of the equipment and shall charge it's most favored price for such training services. No title or other ownership of rights in the Company's Firmware or any copy thereof shall pass to Hyundai or its affiliates under this Agreement. Hyundai and its affiliates agree that it shall not alter and notices on, prepare derivative works based on, or reproduce, disassemble or decompile any Software embodied in the Firmware recorded in the Company's products. (See Note 12, “Subsequent Events”)

Results of Operations for the Three Months Ended September 30, 2006, Compared to the Three Months Ended September 30, 2005.

There were no revenues reported for the three months ended September 30, 2006 (the “Current Period”) as compared to revenues of approximately $117,000 during the three months ended September 30, 2005 (the “Prior Period”). The decrease in revenue is the result of business fluctuations due to the timing of when orders are received and shipped, which continues to be somewhat unpredictable for these emerging technologies. Of the approximately $117,000 in revenues reported in the Prior Period, approximately $51,000 resulted from a sale to a related party, Excelsa.

There were no costs of goods sold in the Current Period compared to costs of goods sold of approximately $34,000 in the Prior Period.

Salaries and benefits of approximately $0.3 million in the Current Period decreased by approximately $0.1 million or 29% over salaries and benefits of approximately $0.4 million in the Prior Period. The decrease is primarily attributable to the reduction in corporate management personnel responsible for supporting the Company’s former European operations.

Non cash compensation expenses of approximately $0.2 million in the Current Period decreased by approximately $0.4 million, or 51%, over similar expenses of approximately $0.5 million in the Prior Period. The decrease in expenses realized in the Current Period is attributable to the timing of expense from SFAS 123R due to the vesting of options previously granted becoming fully vested in the previous period.

Selling, general and administrative expenses of approximately $0.6 million in the Current Period decreased by approximately $0.1 million or 18% from comparable expenses of $0.7 million in the Prior Period. The decrease is due primarily to decreases in operating expenses as a result of reduced headcount and related operating costs.

Depreciation and amortization expenses of approximately $35,000 were realized in the Current Period and were in line with the similar costs realized during the Prior Period.

The net provision for income taxes of approximately $3,000 in the Current Period was in line with the similar costs realized during the Prior Period. The Company records provisions for state and local taxes incurred on taxable income or equity at the operating subsidiary level, which cannot be offset by losses incurred at the parent company level or other operating subsidiaries. The Company has recognized a full valuation allowance against the deferred tax assets because it is more likely than not that sufficient taxable income will not be generated during the carry forward period to utilize the deferred tax assets.

As a result of the above, loss from continuing operations of approximately $1.4 million in the Current Period decreased by approximately $0.3 million from comparable loss from continuing operations of $1.7 million in the Prior Period.

The loss from discontinued operations of $391,032 in the Prior Period was the result the operating losses realized by the discontinued operations of AONet International Srl. There are no such losses from discontinued operations to report in the Current Period as we exited that activity as of April 1, 2006.

As a result of the above, net loss of approximately $1.4 million in the Current Period decreased by approximately $0.8 million from comparable net loss of approximately $2.2 million in the Prior Period.

In the Current Period the Company recognized undeclared dividends on preferred stock of approximately $11,000. This pertains to the issuance of the Company's Series F Convertible Preferred Stock. The Company is required to pay an annual dividend of 6% on the Preferred Stock, payable in shares of the Company's common stock. The Company recognized such undeclared dividends on preferred stock of approximately $47,643 in the Prior Period.

As a result of the above, net loss attributable to common stockholders of approximately $1.4 million in the Current Period increased by approximately $0.8 million from comparable net loss of approximately $2.2 million in the Prior Period.

Capital Resources and Liquidity

The Company currently does not maintain any off-balance sheet arrangements.

Our contractual obligations are summarized in the table below

	Payments Due
	(In thousands)
Contractual Obligations	Total		Less than		1 - 3		4 - 5		More Than
			1 year		years		years		5 years


Operating leases (1)		1,120		380		720		20
8% Convertible Notes		2,575		2,575
Other notes		1,586		986		600
Advances from strategic partner		470		470

(1) Of the lease commitments, $1.0 million is for facilities that we no longer occupy and the cost of which was accrued upon abandonment in fiscal 2002.

Debt:

The Company does not have any credit facilities as of September 30, 2006. The Company carries debt related to certain notes payable as described in Notes 5 and 6 above.

Liquidity:

Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through private placements of equity transactions and the issuance of debt. At September 30, 2006, the Company had no cash and cash equivalents and a working capital deficit of approximately $9.6 million.

The Company recognized a net loss of approximately $1.4 million in the Current Period. Cash used in operating activities was approximately $183,000. Cash used in operating activities principally resulted from our operating loss offset by increases in accounts payable and increases in accrued expenses. Cash used in operating activities in the Prior Period was $1.4 million, of which there was cash used in discontinued operations of approximately $1.1 million.

In the Current Period, there was no cash used in investing activities. In the Prior Period, approximately $37,000 of cash was used in investing activities, primarily the result of an increase in a related party note receivable and purchases of fixed assets.

In the Current Period, net cash of approximately $184,000 was provided by financing activities. Net cash provided by financing activities consisted primarily of net proceeds received from a strategic partner. In the Prior Period net cash of $2.9 million was provided by financing activities which consisted primarily the issuance of 8% callable convertible notes receivable of approximately $2.7 million. Of the cash provided by financing activities in the Prior Period, approximately $0.2 million was from discontinued operations.

While the Company has realized significant losses in past periods, it has most recently raised significant working capital through the issuance of the 6% notes and advances from a strategic partner (see Notes 5 and 6.) In addition, the Company’s subsidiary, Innalogic, is expected to begin to earn revenues in the upcoming quarters. The company also looks forward to revenue generation as a result of its new sub-contracting relationship with Hyundai (see Note 12). The Company believes that current funds on hand combined with funds that will be available from its various operations may not be adequate to finance its operations and capital expenditure requirements and enable the Company to meet its financial obligations and payments under its callable secured convertible notes for the next twelve months. Failure of the new operations to generate such sufficient future cash flow could have a material adverse effect on the Company's ability to continue as a going concern and to achieve its business objectives. A future funding event may be required in order to meet the obligations for the next twelve months.

Off-Balance Sheet Arrangements:

The Company currently does not maintain any off-balance sheet arrangements.

Item 3. 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 Company’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 concluded that the Company's disclosure controls and procedures as of September 30, 2006 were not sufficiently 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 December 22, 2006, certain material weaknesses were communicated to the Company by our independent registered public accounting firm. The Company acknowledges that certain weaknesses, as stated and identified in the Form 10-K/A, need to be addressed. Based upon the evaluation, our CEO and principal financial officer have each concluded that, given the current lack of resources available to the Company, our internal controls are currently not sufficiently effective to ensure that all material information relating to the Company and its consolidated subsidiaries is made known to management, including the CEO and principal financial officer. Our CEO and principal financial officer also concluded that our internal controls are currently not sufficiently effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and principal financial officer, to allow timely decisions regarding required disclosures. The primary reason for said deficiencies is a current and temporary lack of adequate resources and personnel. The Company intends to take action to hire additional staff and develop the adequate policies and procedures with said enhanced staff to ensure that adequate internal controls are in place to allow for effective and timely management and reporting.

There were no other changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II- OTHER INFORMATION

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 1, 2007	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)

EX-31.1 2 v064141_ex31-1.htm

Exhibit 31.1

CERTIFICATION

I, J. Jeremy Barbera, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002, that:

(1) I have reviewed this quarterly report on Form 10-QSB of MSGI Security Solutions, Inc.;

(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this quarterly report; and

(4) The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Intentionally omitted.

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

(5) The small business issuer’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial data; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.



Dated: February 1, 2007	By:	/s/ J. Jeremy Barbera
		J. Jeremy Barbera
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

EX-31.2 3 v064141_ex31-2.htm

Exhibit 31.2

CERTIFICATION

I, Richard J. Mitchell III, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act of 2002, that:

(1) I have reviewed this quarterly report on Form 10-QSB of MSGI Security Solutions, Inc.;

(b) Intentionally omitted.

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.



Dated: February 1, 2007	By:	/s/ Richard J. Mitchell III
		Richard J. Mitchell III
		Chief Accounting Officer (Principal Financial Officer)

EX-32.1 4 v064141_ex32-1.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U. S. C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of MSGI Security Solutions, Inc. (the "Company") on Form 10-QSB for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, J. Jeremy Barbera, as Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and

2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated: February 1, 2007	By:	/s/ J. Jeremy Barbera
		J. Jeremy Barbera
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the small business issuer for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2 5 v064141_ex32-2.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U. S. C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of MSGI Security Solutions, Inc. (the "Company") on Form 10-QSB for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard J. Mitchell III, as Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934: and

2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated: February 1, 2007	By:	/s/ Richard J. Mitchell III
		Richard J. Mitchell III
		Chief Accounting Officer (Principal Financial Officer)

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