Summary of MSGI SECURITY SOLUTIONS, INC

Item 6. Management's Discussion and Analysis or Plan of Operations

Critical Accounting Policies

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. This should be read in conjunction with the financial statements, and notes thereto, included in this Form 10-KSB. The following is a brief description of the more significant accounting policies and methods used by the Company.

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company believes that the estimates, judgments and assumptions upon which the Company relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

· Revenue Recognition

· Costs of Product Shipped to Customers for which revenue has not been recognized

· Accounts Receivable and Allowance for Doubtful Accounts

· Accounting for Income Taxes

· Use of Estimates

· Equity based compensation

· Debt instruments and the features / instruments contained therein

· Investments in non-consolidated entities

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed the Company's critical accounting policies and related disclosures with our Audit Committee. See Notes to Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.

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 upon the completion of a transaction that meets the following criteria:
(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. Since the Company has a limited number of revenue transactions, that are each unique to each customer, the Company reviews each transaction to determine that all revenue criteria are met.

The majority of our revenues are derived from the shipment of product, without installation or maintenance requirements by us, and accordingly revenue is recognized upon shipment, when the above criteria have been met. Revenue for maintenance contracts are deferred and recognized over the term of the maintenance period. There was no deferred revenue as of June 30, 2008.

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 due to certain revenue recognition criteria not being met as of June 30, 2008, related to the assurance of collectibility among other factors. These transactions will be recognized as revenue in the period in which all the revenue recognition criteria, as noted above, has been fully met. Therefore, there is no revenue or related accounts receivable recorded for these transactions in 2008. 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 June 30, 2008, the Company has capitalized the expense recognition of approximately $5.4 million in product costs for goods that were shipped to customers as of June 30, 2008 but for which revenue has not yet been recognized. The Company has also recorded a reserve against these product costs in the amount of approximately $1.4 million. This reserve estimates the potential costs that may be unrecoverable. The remaining product costs will be recognized as costs of goods sold by the Company at such time as the associated revenues are recognized upon completion of all the revenue recognition criteria, which is expected to be upon receipt of payment from the customers, or when product is returned or these product costs are considered unrealizable and are written off.

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, and 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.

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 asset and 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.

The Company follows the provisions of Financial Standards Accounting Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109" (FIN 48). FIN 48 provides recognition criteria and a related measurement model for uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 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. The adoption did not have an effect on the consolidated financial statements and there is no liability related to unrecognized tax benefits at June 30, 2008.

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:

We follow Statement of Financial Accounting Standards No. 123 Revised 2004 (SFAS 123R), "Share-Based Payment". 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 in accordance with Accounting Principles Board No. 14 ("APB 14"), "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants". The fair value of the warrants is 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 June 30, 2008.

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 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.

Overview

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

Hyundai

In September and October of 2006, the Company entered into various agreements with Hyundai Syscomm Corp, a California Corporation, ("Hyundai"). Under the License Agreement and the Subscription agreement, the Company provided for the sale of 900,000 shares of the Company's common stock upon receipt of a $500,000 fee under the License Agreement. The three-year Sub -Contracting Agreement with Hyundai 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. There have been no business transactions under the Sub-Contract or License agreements to date.

Apro Media

On May 10, 2007, the Company entered into an exclusive sub-contract and distribution agreement with Apro Media Corp. 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 the contract, MSGI will 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. MSGI is to establish and operate a 24/7/365 customer support facility in the Northeastern United States. Apro will 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.

CODA

On April 1, 2007 the Company entered into a non-exclusive license agreement with CODA Octopus, Inc. (CODA) whereby the Company will receive a royalty on sales of products using the Innalogic proprietary technology. In connection with such transaction, CODA assumed certain development and operations responsibilities of the Innalogic entity.

Major financing transactions

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 to fulfill the contract referred to us by Apro.

On January 10, 2008, the Company issued (i) 5,000,000 shares of the Company's Series H Convertible Preferred Stock (ii) a Put Option agreement and (iii) warrants exercisable for 5,000,000 shares of Common Stock at an exercise price of $2.50 per share. The Buyers paid a total of $5,000,000 for securities issued in the Preferred Stock Transaction. From the Total Purchase Price, $2,000,000 was used to purchase the securities of Current Technology and $1,800,000 was placed in a restricted cash account to be used as collateral for the Company's obligations under the Put Option Agreement.

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. Under this agreement, at June 30, 2008, the Company has invested a total of $2 million and owns 20 million shares of the common stock of Current Technology, which represents approximately 15% ownership of their outstanding common stock. In addition, the Company held warrants to purchase 20 million additional shares of common stock. As of June 30, 2008, the Company has an option to invest an additional $500,000 under the original agreement terms. Subsequent to year end, the 20 million warrants were assigned to a third party as part of a Securities Exchange Agreement involving the Company's Preferred Stock.

As a result of the certain conversion transactions of a portion of the 8% and 6% Callable Secured Convertible Notes, anti-dilution provisions of the remaining outstanding convertible notes were triggered. The conversion price of all the remaining convertible Notes was reduced to $0.50 per share. In addition, certain warrants had their exercise price reduced to $0.50. As a result of these transactions, there was additional beneficial conversion charges recognized to interest expense, as well as certain charges to record an additional discount to these notes with an offsetting charge to additional paid in capital. See Notes 5 and 6 to the Consolidated Financial Statements.

Results of Operations Fiscal 2008 Compared to Fiscal 2007

As of the year ended June 30, 2008 (the Current Period), the Company realized revenues in the amount of approximately $3.8 million from the sales of products through our relationship with Apro Media Corp., a $100,000 royalty fee / referral fee income generated from the CODA Octopus Group, Inc., and $128,000 for consulting services. To date, our product sales have been relatively large shipments of components to a relatively small number of customers, with each product sale invoice ranging from $350,000 to $2,000,000. The Company had additional shipments and corresponding billings to various customers in the aggregate of approximately $6.5 million, which have not been recognized as revenues in fiscal 2008 as a result of issues surrounding collectibility. In addition, the billings have been reversed and are not reflected as of June 30, 2008. Of these shipments, approximately $1.6 million were from shipments of products through our relationship with Apro and approximately $4.9 million were from shipments to other customers referred to us by Apro. These additional shipments will be recognized as revenues by the Company when and if payment is received from the customers and collectibility is thus assured. We expect revenues to increase in the future through our relationship with Apro as well as from other pending business relationships.

As of the year ended June 30, 2007 (the Prior Period), the Company realized revenues in the amount of approximately $78,000 from the sales of Innalogic products and for a $100,000 royalty fee / referral fee income generated from CODA.

Costs of goods sold of approximately $4.2 million in the Current Period and approximately $50,000 in the Prior Period consisted primarily of the expenses related to acquiring the components required to provide the specific technology applications ordered by each individual customer. The Company classified as an asset approximately $5.4 million in costs associated with the product shipped during the Current Period due to the revenue recognition criteria on these transactions have not been met. The Company recorded a reserve for potential loss of approximately $1.4 million in recognition of potential recovery issues for certain of such transactions, which is included in costs of goods sold for the Current Period. The Company had a negative gross profit margin of (3%) for the Current Period. The gross profit realized on individual commercial sales averaged 26% for transactions for product shipments, with the revenue for the referral and consulting fee raising the overall gross profit to the 30%. This was offset with the reserve against the product costs, which created the negative gross margin since there was no revenue recognized in fiscal 2008 against these transactions. The remaining product costs will be recognized as costs of goods sold as the revenues associated with the shipments are recognized in future periods, product is returned or these product costs are considered unrealizable and are written off.

Research and development expenses were approximately $88,000 in the Current Period and related to the development of RFID technologies. Such costs were approximately $2.5 million in the Prior Period and were associated with executing the sub-contract relationship with Apro. These Prior Period expenses represented the costs associated with development of technologies specifically for a particular Fortune 100 client, which resulted in product shipments in fiscal 2008.

Salaries and benefits of approximately $2.3 million in the Current Period increased by approximately $0.2 million or 8% from salaries and benefits of approximately $2.1 million in the Prior Period. Salaries and benefits increased even though overall headcount decreased due to accruals of additional payroll taxes, penalties and interest that are expected to be incurred by the Company as a result of non-timely payment of payroll related taxes to various jurisdictions.

Selling, general and administrative expenses of approximately $4.5 million in the Current Period increased by approximately $1.6 million or 55% over comparable expenses of $2.9 million in the Prior Period. The increase is due primarily to the value of shares issued and to be issued to Apro in connection with the Company's sub-contract agreement, which resulted in an expense of $1,052,336. Additional expense increases were related to travel, investor relations and consulting fees. Travel expenses increased by approximately $71,000 as a result of travel related to the Apro and Hyundai relationships. Investor relations expenses increased by approximately $516,000, which was mainly attributable to the fair value of stock and warrants issued to these firms. Consulting fees increased by approximately $207,000 primarily as a result of Sarbanes-Oxley compliance consulting services provided to the Company.

During the Current Period, the Company recorded depreciation and amortization expense of approximately $27,000 compared to expenses of approximately $132,000 in the Prior Period. Most of the long-lived assets of the Company were fully amortized during the Prior Period.

During the Prior Period, the Company recorded a loss from impairment on the investment in Excelsa of approximately $1.7 million. As of the year ended June 30, 2007, this investment has been fully impaired. There was no such loss in the Current Period.

During the Prior Period, the Company recorded a loss from the issuance of shares of its common stock (settlement of liability) to CODA Octopus Group, Inc. as repayment of advances and operating expenses paid by CODA on behalf of Innalogic, totaling approximately $812,000, representing the excess fair value of the shares issued as compared to the obligations due CODA. There was no such loss in the Current Period.

During the Current Period, the Company realized a non-cash expense of approximately $1.6 million for the change in fair value of outstanding put option agreements issued in connection with the Convertible Preferred Series H shares. The expense is the result of marking the instrument to estimated fair value and will be impacted by changes in the quoted value of the Company's stock. The Put Option Agreement was terminated during the first quarter of fiscal 2009 as part of a Securities Exchange Agreement. There was no such expense in the Prior Period.

Interest expense of approximately $11.6 million in the Current Period is primarily due to debt transactions entered into during the Current Period, the effect of certain reprice transactions during the year other debt instruments and the adjustments to the values of certain equity instruments granted to note holders. Interest expense was approximately $2.3 million in the Prior Period. The non-cash component of interest expense was approximately $9.8 million in the Current Period as compared to $1.6 million in the Prior Period. The cash portion of interest expense increased as a result of additional borrowings as well as certain increases in interest rates to a higher default rate on certain instruments.

Our provision for income taxes is minimal and primarily due to 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, the Company incurred a net loss of approximately $20.2 million in the Current Period, which increased by $7.8 million over a comparable loss of $12.4 in the Prior Period.

In the Prior Period the Company recognized undeclared dividends on preferred stock of approximately $15,000. 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. This obligation, although not yet declared by the Board of Directors of the Company, still exists although all of the shares of Series F preferred stock has been converted to common stock.

As a result of the above, net loss attributable to common stockholders of approximately $20.2 million in the Current Period increased by approximately $7.8 million from comparable net loss of $12.4 million in the Prior Period.

Off-Balance Sheet Arrangements

Financial Reporting Release No. 61, which was released by the SEC, requires all companies to include a discussion to address, among other things, liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. The Company currently does not maintain any off-balance sheet arrangements.

Liquidity and Capital Resources

Historically, the Company has funded its operations, capital expenditures and acquisitions primarily through private placements of equity and debt transactions. The Company currently has limited capital resources, has incurred significant historical losses and negative cash flows from operations and has limited current revenues. At June 30, 2008, the Company had approximately $0.2 million in cash and $1.8 million in restricted cash as well as approximately $0.1 million in accounts receivable. The Company believes that 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 convertible notes and promissory notes for the next twelve months. Further, there is uncertainty as to timing, volume and profitability of transactions that may arise from our relationship with Hyundai, Apro and others. Further, there can be no assurance as to the timing of when we will receive amounts due to us for products shipped to customers prior to June 30, 2008. 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. 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.

The transactions described below were entered into after June 30, 2008, and will impact our liquidity:

On August 22, 2008, the Company entered into an Exchange Agreement with Enable Growth Partners, LP (Enable), an existing institutional investor of MSGI and as of that date, holder of 100% of MSGI's Series H Convertible Preferred Stock pursuant to which MSGI shall retire all outstanding shares of the Series H Preferred, warrants issued in connection with the preferred stock, exercisable . . .