MARKETING SERVICES GROUP INC
10QSB, 1998-02-17
BUSINESS SERVICES, NEC
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               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 December 31, 1997
                                      OR
         [ ] 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

                        MARKETING SERVICES GROUP, 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)

333 Seventh Avenue, 20th Floor
      New York, New York                                     10001
      ------------------                                     -----
(Address of principal executive offices)                  (Zip Code)

          Issuer's telephone number, including area code: (212)594-7688


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

Check  whether  the Issuer  (1) has filed all  reports  required  to be filed by
Section 13 or 15(d) of the Securities  Exchange Act of 1934 during the preceding
12 months (or for such shorter  period that the  Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
                                  Yes [X]    No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

State number of shares  outstanding  of each of the  issuer's  classes of common
equity as of the latest  practical  date:  As of February 13,  1998,  there were
13,085,288  shares  of the  Issuer's  Common  Stock,  par  value  $.01 per share
outstanding.

Traditional Small Business Disclosure Format (check one):   Yes [X]   No [ ]


<PAGE>




               MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES

                              TABLE OF CONTENTS

                              FORM 10-QSB REPORT
                              DECEMBER 31, 1997



PART I - FINANCIAL INFORMATION                                     Page

     Item 1 Interim Condensed Consolidated Financial 
               Statements (unaudited)

            Condensed Consolidated Balance Sheet 
                December 31, 1997                                    3 
            Condensed Consolidated Statements of Operations
                Three and six months ended December 31,
                1997 and 1996                                        4 
            Condensed Consolidated Statements of Cash Flows
                Six months ended December 31, 1997 and 1996         5-6
            Notes to Interim Condensed Consolidated
                Financial Statements                                7-10

     Item 2 Management's Discussion and Analysis of Financial
            Condition and Results of Operations                    10-15


PART II - OTHER INFORMATION

     Item 6 Exhibits and Reports on Form 8-K                        15

     Signatures                                                     16



<PAGE>

                         PART I - FINANCIAL INFORMATION
    Item 1 - Interim Condensed Consolidated Financial Statements (unaudited)
                 MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                   (unaudited)

                                                        December 31, 1997
                                                        -----------------
ASSETS
Current assets:
  Cash and cash equivalents                                $ 8,801,519
  Accounts receivable billed, net of allowance for
    doubtful accounts of $203,040                           14,500,526
  Accounts receivable unbilled                               1,867,368
  Other current assets                                         431,243
                                                           -----------
   Total current assets                                     25,600,656

Property and equipment at cost, net                          1,113,474
Intangible assets at cost, net                              24,537,326
Other assets                                                   186,163
                                                           -----------
   Total assets                                            $51,437,619
                                                           ===========

LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
  Short-term borrowings                                    $ 1,892,328
  Trade accounts payable                                    13,417,406
  Accrued salaries and wages                                   505,646
  Other accrued expenses                                       985,775
  Current portion of long-term obligations                   1,533,604
  Related party payable                                        425,000
                                                           -----------
   Total current liabilities                                18,759,759

Long-term obligations                                          966,667
Related party payable                                          425,000
Other liabilities                                              366,926
                                                           -----------
  Total liabilities                                         20,518,352
                                                           -----------
Commitments and contingencies
Redeemable convertible preferred stock, $.01 par 
  value; 50,000 shares authorized consisting of 
  50,000 shares of Series D Convertible Preferred
  Stock issued and outstanding                              13,641,774
                                                           -----------
Stockholders' equity:
  Common stock - authorized 36,250,000 shares of
  $.01 par value 12,956,893 shares issued                      129,569
  Additional paid-in capital                                29,767,151
  Accumulated deficit                                      (12,483,758)
  Less 11,800 shares of common stock in treasury, at cost     (135,469)
                                                           -----------
   Total stockholders' equity                               17,277,493
                                                           -----------
   Total liabilities and stockholders' equity              $51,437,619
                                                           ===========

See Notes to Condensed Consolidated Financial Statements.


<PAGE>

                  MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
                                   (unaudited)

<TABLE>
<CAPTION>
                                                             Three Months Ended           Six Months Ended
                                                                 December 31,               December 31,
                                                              1997         1996          1997         1996
                                                          -----------   -----------  -----------   -----------
<S>                                                       <C>           <C>          <C>           <C>
Revenues                                                  $10,673,770   $ 5,913,649  $17,928,389   $ 9,845,679
                                                          -----------   -----------  -----------   -----------
Operating costs and expenses:
   Salaries and benefits                                    4,217,802     3,523,811    8,656,116     6,827,310
   Non-recurring compensation expense
      on option grants                                                                               1,650,000
   Direct costs                                             5,854,550     1,796,590    7,461,557     1,941,820
   Selling, general and administrative                      1,108,750       914,481    2,033,857     1,589,218
   Depreciation and amortization                              346,669       276,142      667,017       409,874
                                                          -----------   -----------  -----------   -----------
      Total operating costs and expenses                   11,527,771     6,511,024   18,818,547    12,418,222
                                                          -----------   -----------  -----------   -----------
      Loss from operations                                   (854,001)     (597,375)    (890,158)   (2,572,543)
                                                          -----------   -----------  -----------   -----------
Other income (expense):

   Interest and other income                                   21,008         4,974       37,774       104,556
   Interest expense                                          (114,734)     (133,247)    (239,024)     (248,164)
                                                          -----------   -----------  -----------   -----------
      Total                                                   (93,726)    (128,273)    (201,250)     (143,608)
                                                          -----------   -----------  -----------   -----------

   Loss before income taxes                                  (947,727)     (725,648)  (1,091,408)   (2,716,151)
   Benefit (provision) for income taxes                        63,243       (19,961)     110,246       (23,939)
                                                          -----------   -----------  -----------   -----------
      Net loss                                            $  (884,484)  $  (745,609) $  (981,162)  $(2,740,090)
                                                          ===========   ===========  ===========   =========== 
                             
      Net loss attributable to common stockholders*       $(4,269,665) $(10,154,049) $(4,366,343) $(12,566,610)
                                                          ===========   ===========  ===========   ===========

Net loss per common share - basic and diluted                $(0.33)      $(1.87)       $(0.34)      $(2.91)
                                                             ======       ======        ======       ======
Weighted average common shares outstanding                 12,934,993     5,423,871   12,698,613     4,319,377
                                                          ===========   ===========  ===========   =========== 
</TABLE>

* The three and six  months  ended  December  31,  1997  includes  the impact of
  dividends  on stock  for (a)  non-cash,  non-recurring  beneficial  conversion
  feature of $3,214,400;  (b) $149,446 from  adjustment of the conversion  ratio
  for certain  issuances of common stock and  exercises  of stock  options;  (c)
  $17,260 in cumulative undeclared dividends;  and (d) $4,075 of period non-cash
  accretions on preferred stock.

  The six months ended  December 31, 1996  includes the impact of  non-recurring
  dividends  on  preferred  stock  for (a) $8.5  million  non-cash  dividend  on
  conversion of Series B Preferred Stock; (b) $573,000 on repurchase of Series C
  Preferred Stock; and (c) periodic non-cash accretions on preferred stock.

See Notes to Condensed Consolidated Financial Statements.


<PAGE>


               MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
               CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
                                 (unaudited)


                                                         1997         1996
                                                      -----------  ----------- 
Operating activities:
   Net loss                                            $ (981,162) $(2,740,090)
   Adjustments to reconcile loss to net cash 
      provided by (used in) operating activities:
     Gain from sale of land                                            (90,021)
     Depreciation                                         168,597      106,078
     Amortization                                         498,420      303,796
     Option issuances to former executive officers                   1,650,000
     Warrant and option issuances to consultants           12,643       76,000
     Accrued interest on convertible securities                        128,264
     Accretion of discounts on convertible securities      45,430       11,428
   Changes in assets and liabilities, net of
      acquisitions:
     Accounts receivable                                 (919,335)     259,558
     Other current assets                                 (98,767)    (113,287)
     Other assets                                         (58,384)     (25,252)
     Trade accounts payable                               854,436       (1,122)
     Accrued expenses and other liabilities              (640,995)    (364,228)
                                                      -----------  ----------- 
   Net cash used in operating activities               (1,119,117)    (798,876)
                                                      -----------  ----------- 


Investing activities:
   Net proceeds from sale of land                                      860,443
   Purchase of property and equipment                    (204,421)    (340,703)
   Acquisition of MMI, net of cash acquired
      of $340,55                                       (5,691,172)
   Acquisition of Metro, net of cash acquired
      of $349,446                                                      207,335
   Acquisition of Pegasus, net of cash acquired
      of $43,811                                         (277,692)
                                                      -----------  ----------- 
     Net cash provided by (used in) investing  
       activities                                      (6,173,285)     727,075
                                                      -----------  ----------- 
Financing activities:
   Proceeds from sale of convertible preferred
     stock, net of issue costs of $936,307             14,063,693
   Net proceeds from credit facilities                     80,618      375,000
   Payments on deferred registration costs                            (532,798)
   Repayment of land option                                           (150,000)
   Repayment of capital lease obligation                  (11,062)     (13,163)
   Repayments of notes payable other                     (163,397)
   Proceeds from issuances of warrants and
     option exercises                                       3,390        5,000
   Repayment of acquisition debt                         (808,333)    (233,333)
                                                      -----------  ----------- 
   Net cash provided by (used in) financing
     activities                                        13,164,909     (549,294)
                                                      -----------  ----------- 
Net increase (decrease) in cash and cash equivalents    5,872,507     (621,095)
   Cash and cash equivalents at beginning of period     2,929,012    1,393,044
                                                      -----------  ----------- 
   Cash and cash equivalents at end of period         $ 8,801,519  $   771,949
                                                      ===========  ===========

See Notes to Condensed Consolidated Financial Statements.

Supplemental schedule of non cash investing and financing activities:

As a result of the sale of $15,000,000 of redeemable convertible preferred stock
and warrants to General Electric Capital Corporation, as more fully described in
Note 6, the Company has recorded the following non-cash  preferred  dividends as
of December 31, 1997: (a) non-cash,  non-recurring beneficial conversion feature
of $3,214,400;  (b) $149,446 from adjustment of the conversion ratio for certain
issuances  of common  stock and  exercises  of stock  options;  (c)  $17,260  in
cumulative undeclared dividends; and (d) $4,075 of period non-cash accretions on
preferred stock.

Effective  December 1, 1997,  the Company  issued  222,222  shares of its common
stock and paid  $6,000,000  in cash to acquire 100% of the  outstanding  capital
stock of Media Marketplace,  Inc. and Media Marketplace Media Division,  Inc. At
acquisition, assets acquired and liabilities assumed, less payments made for the
acquisition, were:

         Working capital, other than cash            $    85,928
         Liabilities incurred for acquisition             87,475
         Property and equipment                         (204,436)
         Costs in excess of net assets of 
            acquired companies                        (6,691,964)
         Non-current liabilities                          31,825
         Common stock issued                           1,000,000
                                                     -----------
                                                     $(5,691,172)
                                                     =========== 

During the six months ended December 31, 1997, the Company recognized $45,430 of
non-cash accretion on discounts of convertible securities.

During  December  1997, the Company  entered into a capital lease  agreement for
computer equipment totaling $73,505.

On November 21, 1997, the Company  increased  intangible  assets by $91,112 upon
finalizing  its  computation  of an earn-out  payment due to the former owner of
SD&A for SD&A's achievement of defined results of operations for the fiscal year
ended June 30, 1997. The earn-out was paid in full in January, 1998.

During the six months  ended  December  1997,  the  Company  issued  options and
warrants to acquire 22,500 shares of common stock for consulting services valued
at $19,500, of which $12,643 had been earned by December 31, 1997.

On July 1, 1997,  the Company issued 600,000 shares of its common stock and paid
$200,000 in cash to acquire 100% of the outstanding  stock of Pegasus  Internet,
Inc. At acquisition, assets acquired and liabilities assumed, less payments made
for the acquisition, were:

         Working capital, other than cash             $  102,214
         Property and equipment                          (53,834)
         Costs in excess of net assets of 
            acquired companies                        (2,126,072)
         Common stock issued                           1,800,000
                                                      ----------
                                                      $ (277,692)
                                                      ========== 
In August  1996,  7,925 net  additional  shares of common stock were issued upon
exercise of stock options for 15,000 shares,  using 7,075 outstanding  shares as
payment of the exercise price.

In September  1996, the Company issued 96,748 shares of common stock,  valued at
$425,000,  as an earn out  payment  to the  former  owner of SD&A for  achieving
certain targeted earnings for the fiscal year ended June 30, 1996.

In October 1996,  the Company  issued  1,814,000  shares of its common stock and
$1,000,000 face value in debt to acquire 100% of the outstanding  stock of Metro
Services Group, Inc. The debt was discounted to $920,000.

On December 23, 1996,  the Company issued  3,168,857  shares of its common stock
and $1,000,000 face value in debt as part of a recapitalization. 6,200 shares of
Redeemable Series B Preferred Stock were converted into 2,480,000 common shares;
2,000  shares of  Redeemable  Series C  Preferred  Stock  were  repurchased  for
$1,000,000;  warrants for 3,000,000  shares were  exchanged  for 600,000  common
shares and $145,753 in accrued interest was converted into 88,857 common shares.


See Notes to Condensed Consolidated Financial Statements.


<PAGE>



               MARKETING SERVICES GROUP, INC. AND SUBSIDIARIES
         NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 (unaudited)


1.  BASIS OF PRESENTATION

The accompanying  unaudited Interim Condensed  Consolidated Financial Statements
include the accounts of Marketing Services Group, Inc. and Subsidiaries  ("MSGI"
or the "Company"). They have been prepared in accordance with generally accepted
accounting   principles  for  interim   financial   information   and  with  the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they
do not include  all of the  information  and  footnotes  required  by  generally
accepted accounting principles for complete financial statements. In the opinion
of  management,  all  adjustments  (consisting  of  normal  recurring  accruals)
considered  necessary  for a fair  presentation  have been  included.  Operating
results  for the three and six month  periods  ended  December  31, 1997 are not
necessarily  indicative  of the results that may be expected for the fiscal year
ending  June 30,  1998.  For  further  information,  refer  to the  consolidated
financial  statements  and footnotes  thereto  included in the Company's  annual
report on Form  10-KSB/A  for the  fiscal  year  ended  June 30,  1997.  Certain
reclassifications have been made in the fiscal 1997 interim financial statements
to conform with the fiscal 1998 presentation.

2.  ACQUISITIONS

Effective  December 1, 1997,  MSGI  entered into a stock  purchase  agreement to
acquire all of the issued and outstanding  capital stock (the "Shares") of Media
Marketplace,  Inc. and Media  Marketplace  Media  Division,  Inc.  (collectively
"MMI").  In consideration  of the purchase of the Shares and other  transactions
contemplated  in the  agreement,  the  sellers  received  the  aggregate  sum of
$6,000,000  and an  aggregate  of 222,222  restricted  shares of common stock of
MSGI, par value $.01 per share, at an agreed upon price of $4.50 per share.  The
purchase  price  has  been  allocated  on a  preliminary  basis  and  pro  forma
information relating to the acquisition will be filed in a subsequent Form 8-K.

As part of the acquisition,  the agreement includes an earn-out payment of up to
$1,000,000 a year for each year beginning  January 1st and ending  December 31st
for the years of 1998,  1999 and 2000,  adjustable  forward to apply to the next
calendar  year if no earn out  payment  is due for one such  year.  The earn out
payments are contingent upon MMI meeting (a) targeted earnings as defined in the
agreement and (b) targeted  billings of MSGI  subsidiaries  and  affiliates  for
electronic data processing services for clients originally introduced by MMI.

MMI was founded in 1973 and  specializes  in  providing  list  management,  list
brokerage and media planning  services to national  publishing  and  fundraising
clients in the direct marketing industry, including magazines, continuity clubs,
membership groups and catalog buyers.

Effective July 1, 1997,  MSGI acquired all of the  outstanding  common shares of
Pegasus Internet, Inc. ("Pegasus").  In exchange for all of the then outstanding
shares of Pegasus,  the Company issued 600,000 shares of its Common Stock valued
at $1,800,000 plus cash of $200,000. The Company's Chief Executive Officer owned
25% of Pegasus,  for which he received 25% of the  consideration  paid.  Pegasus
provides  Internet  services  including web site planning and development,  site
hosting,  on-line ticketing,  system development,  graphic design and electronic
commerce.

Effective  October 1, 1996, the Company  acquired all of the outstanding  common
shares of Metro Services Group, Inc., to be renamed Metro Direct, Inc.("Metro").

These  acquisitions  were accounted for using the purchase method of accounting.
Accordingly,  the operating  results of these  acquisitions  are included in the
results of operations  from the date of  acquisition.  The purchase  prices were
allocated to assets acquired based on their  estimated fair value.  For Pegasus,
this treatment  resulted in approximately $2.0 million of costs in excess of net
assets acquired,  after recording proprietary software of $100,000.  Such excess
is being  amortized  over the  expected  period of  benefit  of ten  years.  The
software is amortized over its expected benefit period of three years.

Effective  July 1, 1997,  the  Company  entered  into  agreements  to extend the
covenants-not-to-compete  with the former Metro  principals  from three years to
six years. Accordingly, the amortization period was extended prospectively.  The
impact of the extended amortization was a reduction of $62,000 of expense in the
six months ended December 31, 1997.

3.  CREDIT FACILITIES

In August,  1997,  the Company's  subsidiary,  Stephen Dunn &  Associates,  Inc.
("SD&A")  entered into a two-year  renewable credit facility with a lender for a
line of credit commitment of up to a maximum of $2,000,000 collateralized by its
accounts  receivable.  Interest  is  payable  monthly  at  the  Chase  Manhattan
reference rate (8 1/2% at December 31, 1997),  plus 1 1/2% with a minimum annual
interest  requirement  of $80,000.  The  facility has an annual fee of 1% of the
available  line.  It has tangible net worth and working  capital  covenants.  In
August,  1997, the  outstanding  balances on SD&A's  previous bank line and note
payable were fully paid from  borrowings  on the new  facility.  At December 31,
1997, the amount outstanding on the line totaled $952,000.

4.  6% CONVERTIBLE NOTES

In April,  1997, the Company obtained  $2,046,000,  net of fees from the private
placement of 6% convertible  notes,  with a face value of $2,200,000.  The notes
are payable with interest on April 15, 1999, if not  previously  converted.  The
notes are convertible into shares of the Company's Common Stock at the lesser of
$2.50 per share or 83% of the  average  closing  bid price of the  Common  Stock
during the last five  trading  days prior to  conversion.  During the six months
ended December 31, 1997, $1,700,000 face value of the notes, plus interest, were
converted into 694,412 shares of Common Stock.

5.  INCOME TAXES

In the three months ended December 31, 1997 and 1996, the net income tax benefit
(provision)  totaled  $63,000  and  ($20,000).  In the six month  periods  ended
December 31, 1997 and 1996, the income tax benefit  (provision) totaled $110,000
and ($24,000),  respectively.  The Company recognizes  provisions resulting from
state and local taxes  incurred on taxable  income at the  operating  subsidiary
level which can not be offset by losses  incurred  at the  corporate  level.  In
September  1997, the Company  determined that it qualified to file as a combined
entity in a certain  state for the fiscal  years  beginning  July 1,  1996.  The
Company had estimated its state income tax for such state on a standalone  basis
for each  subsidiary for the year ended June 30, 1997. The impact on the quarter
ended  September 30, 1997,  due to the change in tax reporting  status created a
benefit of approximately $70,000.

6.  REDEEMABLE CONVERTIBLE PREFERRED STOCK

On December 24, 1997, the Company and General Electric Capital  Corporation ("GE
Capital") entered into a purchase agreement (the "Purchase Agreement") providing
for the  purchase  on that day by GE Capital  of (i)  50,000  shares of Series D
redeemable  convertible  preferred  stock,  par  value  $0.01  per  share,  (the
"Convertible  Preferred Stock"),  and (ii) warrants to purchase up to 10,670,000
shares of Common Stock (the "Warrants"),  all for an aggregate purchase price of
$15,000,000.  The  Convertible  Preferred  Stock is  convertible  into shares of
Common Stock at a conversion rate,  subject to antidilution  adjustments.  As of
December  31,  1997,  the  conversion  rate  was  88.9791816,  resulting  in the
beneficial  ownership by GE Capital of 4,444,959  shares of Common Stock.  On an
as-converted basis, the Convertible Preferred Stock represents approximately 24%
of the  issued  and  outstanding  shares  of  Common  Stock.  The  Warrants  are
exercisable in November 2001 and are subject to reduction or cancellation  based
on the Company's  meeting  certain  financial goals set forth in the Warrants or
upon occurrence of a qualified secondary offering, as defined.

The  Company  has  recorded  the  Convertible  Preferred  Stock at a discount of
approximately  $1,362,000,  to  reflect an  allocation  of the  proceeds  to the
estimated  value of the warrants and is being amortized into dividends using the
"interest  method"  over the  redemption  period.  Approximately  $4,000 of such
discount  was  included as  dividends  for the three and six month  period ended
December 31, 1997. In addition,  the Company recorded a non-cash,  non-recurring
dividend of approximately  $3,200,000  representing  the difference  between the
conversion price of the Convertible Preferred Stock and the fair market value of
the common stock as of the date of the agreement.

The  Convertible  Preferred  Stock is convertible at the option of the holder at
any time and at the option of the  Company  (a) at any time the  current  market
price,  as defined,  equals or exceeds $8.75 per share,  subject to adjustments,
for at least 20 days during a period of 30 consecutive business days or (b) upon
the occurrence of a qualified secondary offering, as defined.

Dividends are cumulative  and accrue at the rate of 6% per annum,  adjusted upon
event of default. The Convertible Preferred Stock is mandatorily  redeemable for
$300 per share,  if not previously  converted,  on the sixth  anniversary of the
original  issue date and is  redeemable  at the  option of the  holder  upon the
occurrence  of an organic  change in the  Company,  as  defined in the  Purchase
Agreement.

The  Purchase  Agreement  contains,  among other  provisions,  requirements  for
maintaining certain minimum tangible net worth, as defined,  and other financial
ratios and restrictions on payment of dividends.

7.  RELATED PARTY TRANSACTIONS

In July,  1997,  the Company  repaid  $300,000 and $100,000  face value of notes
payable  to the  President  of Metro and the Chief  Operating  Officer of Metro,
respectively.  In January, 1998, the Company repaid $500,000 face value of notes
payable to its Chief Executive Officer.

During the current period,  the Chief  Executive  Officer of the Company forgave
all  interest due him on notes  payable  from July 1, 1997 through  December 31,
1997, and forgave an increase in his annual salary from May 27, 1997 to December
31, 1997. The impact on the quarters  ended  September 30, 1997 and December 31,
1997,  is  approximately  $41,000 per quarter.  In  consideration  for this,  on
November 6, 1997,  the Board of Directors  granted the Chief  Executive  Officer
options to acquire 50,000 shares of Common Stock at the then current fair market
price.

8.  EARNINGS PER SHARE

In February,  1997, the Financial  Accounting  Standards  Board ("FASB")  issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 establishes  standards for computing and presenting earnings per
share  ("EPS") and is  effective  for  financial  statements  issued for periods
ending after December 15, 1997.  This statement  eliminates the  presentation of
primary EPS and requires the presentation of basic EPS (the principal difference
being that common stock equivalents will not be considered in the computation of
basic EPS).  It also  requires the  presentation  of diluted EPS which will give
effect to all dilutive  potential common shares that were outstanding during the
period.  The Company  adopted the  provisions of SFAS 128 as of October 1, 1997,
and earnings per share for all prior periods presented have been restated.

The following  schedule  lists the effect of securities  that could  potentially
dilute  basic  EPS in the  future.  Such  securities  were not  included  in the
computation of diluted EPS, as they are  antidilutive  as a result of net losses
during the periods presented.
                                       Three months ended    Six months ended
                                           December 31          December 31
                                        1997       1996       1997      1996
                                     ---------  ---------  ---------  ---------
   Convertible preferred stock       4,449,259             4,449,259
   Options and warrants with 
     exercise prices below average
     market price computed using
     the treasury stock method       1,345,804  2,076,221  1,127,405  2,115,340

   Convertible notes and interest      208,547               208,547

Options  and  warrants  outstanding  to purchase  117,412 and 437,412  shares of
common  stock at exercise  prices  above the average  market price of the common
stock during the three and six months ended  December 31, 1997 were not included
in the above table, as the effect would always be antidilutive.

9.  SUBSEQUENT EVENTS
In January 1998, the Company exchanged 139,178 shares of common stock, which had
been  reserved  for  issuance as of June 30,  1997,  valued at $425,000 and paid
$425,000  cash as an earn out payment to the former owner of SD&A for  achieving
certain targeted earnings for the fiscal year ended June 30, 1997.

In January 1998, MMI obtained a $750,000 line of credit with a bank. The line is
repayable upon demand, bears interest payable monthly at prime plus 1/4% (8 3/4%
as of December 31, 1997) and is collateralized by certain assets of MMI.


Item 2 - Management's Discussion and Analysis of Financial Condition and
         Results of Operations
- ------------------------------------------------------------------------
Introduction
- ------------
This discussion  summarizes the significant  factors  affecting the consolidated
operating  results,  financial  condition  and cash flows of the Company for the
three and six month  periods  ended  December 31,  1997.  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-KSB/A for the year ended June
30, 1997 (the "1997 10-KSB/A").

From April 25,  1995,  through  September  30, 1996,  the Company  operated as a
direct  marketing  services  provider  with  its  initial   concentration  in  a
telemarketing and  telefundraising  company that specializes in direct marketing
services for the arts,  educational  and other cultural  organizations.  As more
fully described in Note 3 to the consolidated  financial  statements included in
the Company's 1997 10-KSB/A,  in October 1996 the Company  purchased 100% of the
stock of Metro  Services  Group,  Inc.  ("Metro").  The results of operations of
Metro are reflected in the consolidated  financial statements using the purchase
method of accounting  from the date of  acquisition.  Metro develops and markets
information-based  services used  primarily in direct  marketing by a variety of
commercial and not-for-profit organizations.

As  more  fully  dscribed  in  Note 2 to the  condensed  consolidated  financial
statements included in this Form 10-QSB, effective December 1, 1997, the Company
acquired all of the  outstanding  capital stock of Media  Marketplace,  Inc. and
Media  Marketplace Media Division,  Inc.  (collectively  "MMI").  The results of
operations of MMI are reflected in the consolidated  financial  statements using
the purchase  method of accounting  from the date of  acquisition.  MMI provides
list management, list brokerage and media planning services.

As more  fully  described  in  Note 2 to the  condensed  consolidated  financial
statements  included in this Form 10-QSB,  effective  July 1, 1997,  the Company
acquired  all of  the  outstanding  common  shares  of  Pegasus  Internet,  Inc.
("Pegasus").  The  results  of  operations  of  Pegasus  are  reflected  in  the
consolidated  financial  statements using the purchase method of accounting from
the date of acquisition.  Pegasus provides Internet services, including web site
planning and development,  site hosting, on-line ticketing,  system development,
graphic design and electronic commerce.


Results of Operations for the Three Months Ended December 31, 1997, Compared
to the Three Months Ended December 31, 1996
- ----------------------------------------------------------------------------
Revenues  of  $10,674,000  in the three  months  ended  December  31,  1997 (the
"current  period")  increased by  $4,760,000  over revenues of $5,914,000 in the
three months  ended  December 31, 1996 (the "prior  period").  Of the  increase,
$4,293,000  and $165,000 are  attributable  to the inclusion of MMI and Pegasus,
respectively.  Revenues from on-site telemarketing and telefundraising campaigns
at SD&A totaled $2,590,000 and $2,367,000,  respectively, or 78% and 75% of SD&A
revenues  in the current  and prior  periods,  respectively.  The  increase  was
principally due to a special capital fundraising campaign in the current period.
Revenues from off-site campaigns totaled $741,000 and $811,000, respectively, or
22% and 25% of revenues,  respectively,  in the current and prior periods.  List
and data  processing  revenues  at Metro of  $2,885,000  in the  current  period
improved by $149,000 over revenues of $2,736,000 in the prior period.

Salaries and benefits of $4,218,000 in the current period  increased by $694,000
over the  prior  period  total of  $3,524,000.  Of the  increase,  $243,000  and
$119,000 are  attributable  to the  inclusion of MMI and Pegasus,  respectively.
On-site  telemarketing sales labor expense at SD&A increased by $143,000, or 7%,
in the current period, but decreased as a percent of on-site revenues,  from 83%
in the prior  period to 82% in the  current  period,  primarily  due to improved
contract  pricing.  In addition,  administrative  and sales salaries at SD&A and
Metro  increased by  $327,000,  the  majority of which was  attributable  to the
hiring of  additional  administrative  and sales staff to manage the  increasing
growth of the  Company.  These  increases  were  partially  offset by a $138,000
reduction in parent  company  administrative  salaries in the current  period as
compared to the prior period due to reductions in head count.

Direct costs of $5,855,000 in the current  period  increased by $4,058,000  over
direct costs of $1,797,000 in the prior period. Of the increase,  $3,838,000 and
$25,000 are  attributable  to the  inclusion of MMI and  Pegasus,  respectively.
Consistent  with its  revenue  increases,  direct  costs at Metro  increased  by
$144,000  and consist  principally  of list  commissions  paid to use  marketing
lists.  Direct costs at SD&A increased by $51,000,  principally due to increased
advertising  for sales agents to fulfill  on-site  growth  requirements.  Direct
costs as a percentage  of sales for Metro and SD&A combined were 32% and 30% for
the current and prior periods, respectively.

Selling, general and administrative expenses of $1,109,000 in the current period
increased by $195,000 over comparable  expenses of $914,000 in the prior period.
The  inclusion of MMI and Pegasus  resulted in increases of $57,000 and $31,000,
respectively.  Administrative  expenses at SD&A and Metro increased by $103,000,
primarily due to a one-time  settlement of a labor dispute and increased  health
insurance  expenses and travel and entertainment  costs as a result of expansion
in staffing and marketing efforts. Parent company expenses increased by $4,000.

Depreciation  and  amortization  of $347,000 in the current period  increased by
$71,000  over  expenses of $276,000 in the prior  period.  The  inclusion in the
current period of MMI and Pegasus  resulted in increases of $18,000 and $68,000,
respectively. These increases were offset by a decrease in amortization of Metro
intangibles  of $31,000 due to  extensions  of covenants not to compete with the
former Metro  principals.  The remaining net increase of $16,000 was principally
attributable to increased depreciation due to computer upgrades at Metro.

Interest expense of $115,000 in the current period decreased by $18,000 compared
to $133,000 in the prior period. Interest expense at SD&A and Metro increased by
$63,000,  due to borrowings on their respective  credit lines to pay down seller
debt and for  working  capital.  Interest  expense at the parent  company  level
decreased by $81,000,  principally due to conversions of convertible  securities
and principal payments on the SD&A seller debt.

The income tax  benefit of  $63,000  in the  current  period  changed by $83,000
compared to a provision of $20,000 in the prior period.  In the prior year,  the
Company recognized net provisions  resulting from state and local taxes incurred
on taxable income at the operating  subsidiary level,  which could not be offset
by losses  incurred at the parent  company  level.  In the current  year,  a net
benefit resulted from net pre-tax losses at the operating subsidiary level.


Results of Operations for the Six Months Ended December 31, 1997, Compared to
the Six Months Ended December 31, 1996
- -----------------------------------------------------------------------------
Revenues of  $17,928,000 in the six months ended December 31, 1997 (the "current
period")  increased by $8,082,000  over revenues of $9,846,000 in the six months
ended December 31, 1996 (the "prior  period").  Of the increase,  $4,293,000 and
$311,000 are  attributable  to the  inclusion of MMI and Pegasus,  respectively.
Revenues  from  on-site  telemarketing  and  telefundraising  campaigns  at SD&A
totaled $6,538,000 and $5,783,000, respectively, or 85% and 81% of SD&A revenues
in the current and prior periods, respectively. Revenues from off-site campaigns
totaled  $1,186,000 and  $1,327,000,  respectively,  or 15% and 19% of revenues,
respectively,  in the current  and prior  periods.  During the six months  ended
December 31, 1997 and 1996, the Company's margins relating to off-site campaigns
were generally higher than margins relating to on-site campaigns.  Revenues from
Metro  totaled  $5,600,000  and  $2,736,000  in the current  and prior  periods,
respectively,  with the increase  principally due to the inclusion of six months
of operations in the current period versus three months in the prior period.
Metro was acquired effective October 1, 1996.

Salaries  and  benefits  of  $8,656,000  in  the  current  period  increased  by
$1,829,000 over the prior period total of $6,827,000. Of the increase,  $243,000
and $221,000 are attributable to the inclusion of MMI and Pegasus, respectively.
On-site telemarketing sales labor expense at SD&A increased by $451,000, or 10%,
in the current period, but decreased as a percent of on-site revenues,  from 75%
in the prior  period to 73% in the  current  period,  primarily  due to improved
contract pricing.  Off-site and  administrative  salaries at SD&A increased by a
net of  $98,000,  the  majority  of which  was  attributable  to the  hiring  of
additional  administrative  staff  to  manage  the  increasing  on-site  growth.
Salaries and benefits at Metro  increased by $1,009,000  in the current  period,
from  $543,000  to  $1,551,267,  due to the full six months of  expenses  in the
current period, against three months in the prior period, as well as an increase
in head count to manage  anticipated  growth.  These  increases  were  partially
offset by a $193,000 reduction in parent company administrative  salaries in the
current period as compared to the prior period due to reductions in head count.

In the prior period,  the Company incurred a  non-recurring,  non-cash charge of
$1,650,000 to  compensation  expense  relating to options  granted to two former
principal  executive  officers.  Such charge was  incurred  because the exercise
price of each such  option,  which was based upon the market price of the common
stock on May 30, 1996 (the date which the Company  intended as the effective day
of the grant)  rather than the market  price on  September  26, 1996 (the actual
effective  date of the  grant),  was lower than the  market  price of the common
stock on September 26, 1996.

Direct costs of $7,462,000 in the current  period  increased by $5,520,000  over
direct costs of $1,942,000 in the prior period. Of the increase,  $3,838,000 and
$46,000 are  attributable  to the  inclusion of MMI and  Pegasus,  respectively.
Direct costs at Metro, which consist principally of list commissions paid to use
marketing  lists,  increased by $1,550,000,  principally due to the inclusion of
the full six months of  expense  in the  current  period.  Direct  costs at SD&A
increased by $86,000,  principally due to increased advertising for sales agents
to fulfill on-site growth requirements.

Selling, general and administrative expenses of $2,034,000 in the current period
increased  by  $445,000  over  comparable  expenses of  $1,589,000  in the prior
period.  The  inclusion of MMI and Pegasus  resulted in increases of $57,000 and
$67,000, respectively. Administrative expenses at SD&A increased by $102,000 and
at Metro by $397,000.  Corporate  administration decreased by $178,000. At SD&A,
the net  increase in the  current  period  generally  resulted  from  $71,000 of
administrative  cost increases incurred in developing and managing the growth in
on-site  business.  This  included  relocation  costs  for a  senior  executive,
increases in payroll and related tax  processing  fees and printing of marketing
brochures,  as well as  increased  property  taxes as a  result  of the move and
expansion  of  the  Berkeley  Calling  Center  during  the  prior  fiscal  year.
Additionally,  $31,000  was  incurred  to settle a labor  dispute  at SD&A.  The
increase at Metro was  primarily  due to the inclusion of the full six months of
expense in the  current  period.  At the parent  company,  the net  decrease  of
$178,000  generally  resulted from cost  reduction  steps  implemented  upon the
change in management of the Company in April 1997.  Professional  fees decreased
by  $50,000,  principally  due to the  value  ascribed  to  warrants  issued  to
consultants in the prior period.  Public relations expenses decreased by $21,000
due to termination  of the firm used in the prior period.  Parent company travel
and meal  expenses  decreased by $30,000 as a result of the  management  change.
Directors  fees of $16,000 were incurred for a September  1996 meeting;  no such
fees were  incurred in the current  period.  Further  net  decreases  of $61,000
resulted from reductions in director and officer insurance  premiums,  telephone
charges,  office  expenses,  dues,  fees and rent  associated with the change in
management and resulting headcount reductions.

Depreciation  and  amortization  of $667,000 in the current period  increased by
$257,000 over expenses of $410,000 in the prior period. Of the increase, $18,000
and $134,000 are  attributable to the inclusion in the current period of MMI and
Pegasus,  respectively.  Amortization  of the goodwill  associated with the SD&A
acquisition  increased  by $10,000 in the  current  period due to an increase in
goodwill for payments due to the former owner of SD&A resulting from achievement
of defined results of operations of SD&A for the year ended June 30, 1997. Metro
depreciation  and  amortization  increased  by $157,000  due to inclusion of six
months of  expense in the  current  period.  This was  offset by a  decrease  of
$62,000  reduction in amortization due to extensions of covenants not to compete
with the former principals of Metro.

Interest  expense of $239,000 in the current period decreased by $9,000 compared
to $248,000 in the prior period.  Interest  expense at SD&A increased by $54,000
due to a change in borrowing relationship in August 1997, resulting in expansion
of their credit line from $875,000 to $2,000,000 and increased  drawdowns to pay
down the SD&A seller debt. Interest expense at Metro increased by $63,000 due to
current  period  borrowings  on its line of credit  which was  obtained in April
1997.  Interest  expense at the  parent  company  level  decreased  by  $126,000
principally due to conversions of convertible  securities and principal payments
on the SD&A seller debt.

The income tax benefit of $110,000  in the  current  period  changed by $134,000
compared to a net provision of $24,000 in the prior  period.  During the current
period, the Company determined that it qualified to file as a combined entity in
a certain  state for the fiscal years  beginning  July 1, 1996.  The Company had
estimated  its state  income tax for such state on a stand  alone basis for each
subsidiary  for the year ended June 30, 1997.  The impact on the current  period
for this change in estimate resulted in a benefit of approximately  $70,000. The
remaining benefit resulted  principally from state and local taxes on net losses
at operating subsidiaries,  which are expected to be recovered by June 30, 1998.
In the prior year, the Company  recognized  net provisions  resulting from state
and local taxes  incurred on taxable income at the operating  subsidiary  level,
which could not be offset by losses incurred at the parent company level.


Capital Resources and Liquidity
- -------------------------------
At December 31, 1997,  the Company had cash and cash  equivalents  of $8,802,000
and accounts receivable net of allowances of $14,501,000.

The Company  generated  losses from operations of $890,000 in the current period
and  used  net  cash in  operating  activities  of  $1,119,000.  The  usage  was
principally  due to  final  payments  made  on the  Company's  withdrawn  public
offering  liabilities and a seasonal decrease in accrued salaries at SD&A during
the current quarter.

In the current period, net cash of $6,173,000 was used in investing  activities.
The  Company  paid  $5,691,000  in the  acquisition  of MMI and  $278,000 in the
acquisition  of  Pegasus,  net of  cash  acquired.  Purchases  of  property  and
equipment of $204,000  were  principally  comprised of computer  equipment.  The
Company intends to continue to invest in computer technology.

In the current period,  financing activities provided  $13,165,000.  On December
24, 1997,  the Company sold 50,000  shares of  convertible  preferred  stock for
$15,000,000,  less  $936,000 of  placement  fees and related  costs.  During the
period, SD&A entered into a two-year renewable credit facility with a lender for
a line of credit  commitment of up to a maximum of $2,000,000  collateralized by
its  accounts  receivable.  In August,  SD&A drew upon the facility to fully pay
down the  outstanding  balance of  $746,000  on its  previous  bank line and the
$104,000  remaining on its bank note.  At December  31,  1997,  SD&A had amounts
outstanding of $952,000 on the line.

The Company had $1.8 million  available on its lines of credit at Metro and SD&A
as of December 31, 1997.

In January 1998, MMI obtained a $750,000 line of credit with a bank. The line is
repayable upon demand,  bears interest payable monthly at prime plus 1/4% and is
collateralized by certain assets of MMI.

During the current period the Company repaid $808,000 of its  acquisition  debt,
comprised  of $400,000  to the former  principals  of Metro and  $408,000 to the
former principal of SD&A.

The Company believes that funds on hand, funds available from its operations and
from its unused  lines of credit,  should be adequate to finance its  operations
and capital  expenditure  requirements,  and enable the Company to meet interest
and debt  obligations,  for the next  twelve  months.  In  conjunction  with the
Company's acquisition and growth strategy,  additional financing may be required
to complete any such acquisitions and to meet potential  contingent  acquisition
payments.

Except for historical  information  contained  herein,  the matters discussed in
this report contain certain forward-looking  information that involves risks and
uncertainties that could cause results to differ materially,  including changing
market conditions and other risks detailed in this report,  the Company's Annual
Report  on Form  10-KSB/A  and other  documents  filed by the  Company  with the
Securities and Exchange Commission from time to time.


Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits

Exhibit #                              Item                              Notes
- ---------                              ----                              -----
    2.1   Stock Purchase Agreement among Marketing Services Group,Inc.,
          Stephen M. Reustle and Thomas R. Kellogg                         A
   10.1   Purchase agreement dated as of December 24, 1997, by and
          between the Company and GE Capital                               B
   10.2   Stockholders Agreement by and among the Company, GE Capital
          and certain existing stockholders of the Company, dated as
          of December 24, 1997                                             B
   10.3   Registration Rights Agreement by and among the Company and
          GE Capital, dated as of December 24, 1997                        B
   10.4   The Amended Certificate of Designation, Preferences and
          Relative, Participating and Optional and Other Special Rights
          of Preferred Stock and Qualifications, Limitations and
          Restrictions Thereof for the Series D Convertible Preferred
          Stock                                                            D
   10.5   Warrant, dated as of December 24, 1997, to purchase shares of
          Common Stock of the Company                                      B
   10.6   Form of Employment Agreement by and among Marketing Services
          Group, Inc. and Stephen M. Reustle                               B
   20.1   Press Release dated December 26, 1997, reporting completion
          of private financing                                             C
   20.2   Press Release dated January 6, 1998, reporting details of
          the financing arrangement with GE Capital                        C
   20.3   Press Release dated December 30, 1997, reporting the
          acquisition of Media Marketplace, Inc.                           A
   27     Financial Data Schedule                                          D

Notes relating to Exhibits:
A  Incorporated  by reference to the  Company's  Report on Form 8-K  reporting a
   stock  purchase  agreement,  dated  December 8, 1997  between the Company and
   Media Marketplace, Inc. and Media Marketplace Media Division, Inc.
B  Incorporated  by reference to the Company's  Schedule 13-D,  filed by General
   Electric  Capital  Corporation,  reporting an event occurring on December 24,
   1997.
C  Incorporated  by reference to the Company's  Report on Form 8-K reporting the
   Purchase  Agreement dated as of December 24, 1997, by and between the Company
   and GE Capital.
D  Filed herewith.

b) Reports on Form 8-K

  1.On or about  January 13, 1998,  the Company  filed a Current  Report on Form
    8-K regarding the Purchase  Agreement  dated as of December 24, 1997, by and
    between the Company and GE Capital.

  2.On or about January 9, 1998,  the Company filed a Current Report on Form 8-K
    regarding  a  stock  purchase   agreement  between  the  Company  and  Media
    Marketplace, Inc. and Media Marketplace Media Division, Inc.


                                  SIGNATURES

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

                                    MARKETING SERVICES GROUP, INC.
                                    (Registrant)


Date:  February 13, 1998            By: /s/ J. Jeremy Barbera
                                       -------------------------------
                                       Chairman of the Board and Chief
                                       Executive Officer


Date:  February 13, 1998            By: /s/ Scott Anderson
                                       ----------------------------------
                                       Chief Financial Officer (Principal
                                       Financial and Accounting Officer)
                             



                                                                    Exhibit 10.4

                 AMENDMENT TO THE CERTIFICATE OF DESIGNATION,
              PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
                 AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK
                     AND QUALIFICATIONS, LIMITATIONS AND
                             RESTRICTIONS THEREOF


            The undersigned hereby certify that they are the duly elected and
acting President and Secretary of Marketing Services Group, Inc., a Nevada
corporation (the "Company"), and pursuant to Nev. Rev. Stat. Section 78.1955, DO
HEREBY CERTIFY:

     I. That, a  certificate  of  designation  creating  Preferred  Stock of the
Company  designated as Series D Convertible  Preferred  Stock was filed with the
Nevada Secretary on December 19, 1997 (the "Original Designation"). The Original
Designation is as follows:


                 CERTIFICATE OF DESIGNATION, PREFERENCES AND
                 RELATIVE, PARTICIPATING, OPTIONAL AND OTHER
                    SPECIAL RIGHTS OF PREFERRED STOCK AND
                       QUALIFICATIONS, LIMITATIONS AND
                             RESTRICTIONS THEREOF


            The undersigned hereby certify that they are the duly elected and
acting President and Secretary of Marketing Services Group, Inc., a Nevada
corporation (the "Company"), and pursuant to Nev. Rev. Stat. Section 78.1955, DO
HEREBY CERTIFY:

            That,  pursuant  to  the  authority  conferred  upon  the  Board  of
Directors  of the Company by Article VI of the  Company's  Amended and  Restated
Articles  of  Incorporation  (the  "Articles"),  the Board of  Directors  of the
Company,  by unanimous  written  consent  dated  December 15, 1997,  adopted the
following  resolution  creating a series of Preferred Stock designated  SERIES D
CONVERTIBLE PREFERRED STOCK.

                   WHEREAS, the Board of Directors of the Company is authorized,
within  the   limitations  and   restrictions   stated  in  the  Certificate  of
Incorporation,  to fix by resolution or resolutions the designation of preferred
stock and the powers, preferences and relative participating,  optional or other
special  rights  and  qualifications,   limitations  or  restrictions   thereof,
including,  without limiting the generality of the foregoing, such provisions as
may be desired  concerning  voting,  redemption,  dividends,  dissolution or the
distribution  of assets,  conversion  or  exchange,  and such other  subjects or
matters as may be fixed by resolution or  resolutions  of the Board of Directors
under the General Corporation Law of Nevada; and

                   WHEREAS,  it is the desire of the Board of  Directors  of the
Company,  pursuant to its authority as aforesaid, to authorize and fix the terms
of the preferred stock to be designated the Series D Convertible Preferred Stock
of the Company and the number of shares constituting such preferred stock;

                   NOW,  THEREFORE,   BE  IT  RESOLVED,  that  there  is  hereby
authorized  the Series D Convertible  Preferred  Stock on the terms and with the
provisions herein set forth:


                  TERMS, PREFERENCES, RIGHTS AND LIMITATIONS
                                      of
                     SERIES D CONVERTIBLE PREFERRED STOCK
                                      of
                        MARKETING SERVICES GROUP, INC.

                   The relative  rights,  preferences,  powers,  qualifications,
limitations and restrictions granted to or imposed upon the Series D Convertible
Preferred Stock or the holders thereof are as follows:

            1.  Definitions.  For purposes of this Designation, the following
definitions shall apply:

      "Affiliate" and "Associate" shall have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.

      "Board" shall mean the Board of Directors of the Company.

      "Business Day" shall mean any day other than a Saturday,  Sunday, or a day
on which  banking  institutions  in the  State of New  York  are  authorized  or
obligated by law or executive order to close.

      "Common Stock" shall mean the Common Stock, $.01 par value per share, of
the Company.

      "Company" shall mean Marketing Services Group, Inc., a Nevada
corporation.

      "Conversion  Price"  shall  mean  the  amount  computed  by  dividing  the
Liquidation  Preference  by the number of shares of Common  Stock into which one
share of Convertible Preferred Stock is convertible at the Conversion Ratio.

      "Conversion  Ratio"  shall  mean  the  amount  computed  by  dividing  the
Liquidation Preference by $3.397.

      "Convertible   Preferred   Stock"  shall  refer  to  shares  of  Series  D
Convertible Preferred Stock, $0.01 par value per share, of the Company.

      "Current Market Price," when used with reference to shares of Common Stock
or other  securities  on any date,  shall mean the  average of the daily  market
prices for 30 consecutive Business Days commencing 45 days before such date. The
daily market  price for each such  Business Day shall be (i) the last sale price
on such day on the principal  stock  exchange or the Nasdaq  National  Market or
Small Cap  Market on which  such  Common  Stock is then  listed or  admitted  to
trading, (ii) if no sale takes place on such day on any such exchange or market,
the average of the last  reported  closing  bid and asked  prices on such day as
officially  quoted on any such exchange or market,  (iii) if the Common Stock is
not then listed or admitted to trading on any stock exchange or such market, the
average of the last  reported  closing  bid and asked  prices on such day in the
over-the-counter  market,  as  furnished  by  Nasdaq or the  National  Quotation
Bureau,  Inc.,  (iv) if neither such  corporation  at the time is engaged in the
business of reporting such prices, as furnished by any similar firm then engaged
in such business, or (v) if there is no such firm, as furnished by any member of
the National Association of Securities Dealers ("NASD") selected mutually by the
Required  Holders and the Company or, if they cannot agree upon such  selection,
as selected by two such  members of the NASD,  one of which shall be selected by
the Required Holders and one of which shall be selected by the Company.

      "Dividend Rate" shall mean 6% per annum;  provided,  however, (i) upon the
occurrence  and during the  continuance of an Event of Default the Dividend Rate
shall be 8% per  annum,  and (ii) if the  Company  fails to make the  redemption
required by Section 6(a)(ii)  hereof,  the Dividend Rate shall be 15% per annum,
calculated  on a 360 day per year  basis,  based on the  actual  number  of days
elapsed.

      "Event of Default" shall have the meaning assigned to it in the
Purchase Agreement.

      "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar Federal statute,  and the rules and regulations of the Securities
and Exchange  Commission  thereunder,  all as the same shall be in effect at the
time.  Reference to a particular section of the Securities Exchange Act of 1934,
as amended,  shall include reference to the comparable  section,  if any, of any
such similar Federal statute.

      "Fair Market  Value" shall mean the amount which a willing buyer would pay
a willing seller in an  arm's-length  transaction,  with neither being under any
compulsion to buy or sell.

      "GAAP" shall mean generally accepted  accounting  principles in the United
States of America as in effect from time to time.

      "Liquidation Preference" shall mean $300 per share.

      "Organic  Change"  shall  mean  (A) any  sale,  lease,  exchange  or other
transfer of all or substantially  all of the property and assets of the Company,
(B) any liquidation, dissolution or winding up of the Company, whether voluntary
or involuntary,  (C) any merger or consolidation to which the Company is a party
or (D) any Person or group of Persons (as such term is used in Section  13(d) of
the Exchange  Act),  other than General  Electric  Capital  Corporation  and its
Affiliates,  shall beneficially own (as defined in Rule 13d-3 under the Exchange
Act) securities of the Company representing 50% or more of the voting securities
of the Company then outstanding. For purposes of the preceding sentence, "voting
securities" shall mean securities,  the holders of which are ordinarily,  in the
absence of contingencies,  entitled to elect the corporate directors (or Persons
performing similar functions).

      "Original  Issue  Date"  shall mean the date of the  original  issuance of
50,000 shares of Convertible Preferred Stock.

      "Person" shall mean any individual, firm, corporation or other entity, and
shall include any successor (by merger or otherwise) of such entity.

      "Purchase  Agreement"  shall  mean  the  Purchase  Agreement,  dated as of
December __, 1997, by and between the Company and the purchasers  named therein,
as it may be  amended  from  time to  time,  a copy of  which  is on file at the
principal office of the Company.

      "Qualified  Secondary Offering" means a sale of the Company's Common Stock
pursuant to a public offering of the Company's  Common Stock on Form S-1 (or any
other appropriate  general or short  registration form) under the Securities Act
of 1933, as amended,  pursuant to which the Common Stock is offered  (whether or
not for the  Company's  account)  for at  least  $8.75  per  share,  subject  to
appropriate  adjustment if any of the events set forth in Section  7(f)(i) shall
occur.

      "Redemption  Date" shall mean the date on which any shares of  Convertible
Preferred Stock are redeemed by the Company.

      "Redemption Price" has the meaning set forth in Section 6(a)(i) of this
Certificate of Designation.

      "Required Holders" shall mean the holders of at least of a majority of the
outstanding shares of Convertible Preferred Stock.

      "Subsidiary"  of any Person means any corporation or other entity of which
a  majority  of the  voting  power or the  voting  equity  securities  or equity
interest is owned, directly or indirectly, by such Person.

      "Trading  Day" shall mean a Business Day or, if the Common Stock is listed
or admitted to trading on any national securities  exchange, a day on which such
exchange is open for the transaction of business.

            2. Designation:  Number of Shares.  The designation of the preferred
stock  authorized by this  resolution  shall be "Series D Convertible  Preferred
Stock" and the number of shares of Convertible Preferred Stock authorized hereby
shall be 50,000 shares.

            3.  Dividends.

            (a) So long as any shares of  Convertible  Preferred  Stock shall be
outstanding,  dividends  shall  accrue  thereon,  whether or not declared by the
Board of  Directors  of the Company,  at the  Dividend  Rate on the  Liquidation
Preference  hereunder,  compounded  quarterly on the first  Business Day of each
calendar  quarter.  Such dividends  shall be cumulative and begin to accrue from
the Original Issue Date,  whether or not declared and whether or not there shall
be net profits or net assets of the Company legally available for the payment of
those dividends. Such dividends shall accrue and shall not be payable in cash or
otherwise by the Company without the consent of the Required Holders,  except in
connection with a liquidation or redemption pursuant to Sections 4 and 6 hereof.

            (b) So long as any shares of  Convertible  Preferred  Stock shall be
outstanding,  (i) no  dividend  whatsoever  shall  be paid or  declared,  and no
distribution  shall be made, on account of any Common Stock or on account of any
class or series of the Company's preferred or other capital stock ranking junior
to or pari passu with the  Convertible  Preferred  Stock,  and (ii) no shares of
Common  Stock or of any  class or  series of the  Company's  preferred  or other
capital stock  ranking  junior to or pari passu with the  Convertible  Preferred
Stock shall be purchased, redeemed or acquired by the Company and no funds shall
be paid into or set aside or made available for a sinking fund for the purchase,
redemption or acquisition  thereof,  other than any non-vested  shares purchased
from  employees of the Company  pursuant to a stock option plan  approved by the
Board of Directors of the Company.

            4.  Liquidation Rights of Convertible Preferred Stock.

            (a) In the event of any  liquidation,  dissolution  or winding up of
the  Company,  whether  voluntary  or  involuntary,  the holders of  Convertible
Preferred Stock then outstanding  shall be entitled to be paid out of the assets
of the Company  available for  distribution  to its  stockholders,  whether such
assets are capital,  surplus or earnings,  before any payment or declaration and
setting  apart for payment of any amount  shall be made in respect of any shares
of  Common  Stock or any share of any  other  class or  series of the  Company's
preferred stock ranking junior to the  Convertible  Preferred Stock with respect
to  the  payment  of  dividends  or   distribution  of  assets  on  liquidation,
dissolution  or winding up of the Company,  an amount  equal to the  Liquidation
Preference plus all accrued and unpaid  dividends in respect of any liquidation,
dissolution or winding up consummated.

            (b) If  upon  any  liquidation,  dissolution  or  winding  up of the
Company,  whether  voluntary or involuntary,  the assets to be distributed among
the holders of Convertible  Preferred  Stock shall be insufficient to permit the
payment to such stockholders of the full preferential  amounts  aforesaid,  then
the entire assets of the Company to be distributed shall be distributed  ratably
among the holders of Convertible Preferred Stock, based on the full preferential
amounts  for the number of shares of  Convertible  Preferred  Stock held by each
holder.

            (c) After payment to the holders of Convertible  Preferred  Stock of
the amounts set forth in Section 4(a) hereof,  the entire  remaining  assets and
funds of the  Company  legally  available  for  distribution,  if any,  shall be
distributed  first among the holders of  securities  senior to the Common Stock,
pro rata  based on the  number  of shares  of such  securities  held by them and
second  among the holders of Common Stock pro rata based on the number of shares
of Common Stock then held by each.

            5. Voting Rights.  In addition to any voting rights provided by law,
the holders of shares of  Convertible  Preferred  Stock shall have the following
voting rights:

            (a)  So  long  as  any  of  the   Convertible   Preferred  Stock  is
outstanding,  each share of Convertible Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by the holders of Common  Stock,  voting
together as a single class with other shares entitled to vote at all meetings of
the  stockholders  of the Company.  With respect to any such vote, each share of
Convertible  Preferred Stock shall entitle the holder thereof to cast the number
of votes  equal to the  number  of votes  which  could be cast in such vote by a
holder of the number of shares of Common  Stock of the  Company  into which such
share of Convertible  Preferred Stock is convertible on the record date for such
vote.

            (b) The affirmative vote of the Required Holders, voting together as
a class,  in person or by proxy,  at a special or annual meeting of stockholders
called for the purpose,  or pursuant to a written consent of stockholders  shall
be necessary to

               (i) authorize,  adopt or approve an amendment to the  Certificate
            of  Incorporation  of the Company which would alter or change in any
            manner  the terms,  powers,  preferences  or  special  rights of the
            shares of Convertible Preferred Stock;

               (ii) issue any shares of the capital stock of the Company ranking
            senior  to, or pari  passu  with  (either  as to  dividends  or upon
            voluntary or involuntary liquidation, dissolution or winding up) the
            Convertible Preferred Stock;

               (iii)  take any action which is in violation of Article V of
            the Purchase Agreement; or

               (iv)  effect an Organic Change.

            (c) So long as there are at least 20% of the  shares of  Convertible
Preferred Stock issued pursuant to the Purchase Agreement  outstanding,  (i) the
Board of Directors of the Company  shall  consist of eight  directors,  (ii) the
holders of shares of Convertible  Preferred Stock shall have, in addition to the
other voting rights set forth herein, the exclusive right,  voting separately as
a single  class,  to elect two directors of the Company and (iii) the holders of
shares of Common Stock and  Convertible  Preferred Stock shall have, in addition
to the other rights set forth  herein,  the right,  voting  together as a single
class, to elect five directors of the Company; provided, however, so long as the
holders  of shares of  Convertible  Preferred  Stock  have the right to elect an
additional  director pursuant to Sections 5(d) or 6(d)(i) hereof,  the number in
clause (ii) shall be  increased  by one and the number in clause  (iii) shall be
decreased by one. At least one member of any Committee of the Board of Directors
(including any Executive Committee,  Audit Committee or Compensation  Committee)
shall be the director elected solely by the holders of the Convertible Preferred
Stock,  if any of such  committees are  established by the Board of Directors of
the Company, unless such right is waived in writing by the Required Holders.

            (d) If, on any date,  an Event of Default shall have occurred and be
continuing,  then the  holders of shares of  Convertible  Preferred  Stock shall
have, in addition to their other voting  rights set forth herein,  the exclusive
right,  voting separately as a single class, to elect an additional  director of
the Company in accordance  with this Section 5 and one of the directors  elected
pursuant  to clause  (iii) of Section  5(c) shall  resign or be removed  without
cause.

            (e) (i) The  foregoing  rights of holders  of shares of  Convertible
Preferred  Stock  to take any  actions  as  provided  in this  Section  5 may be
exercised  at any annual  meeting  of  stockholders  or at a special  meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof or pursuant to any written consent of stockholders.

               (ii) If (A) the annual meeting of  stockholders of the Company is
not,  for any reason,  held within the time fixed in the by-laws of the Company,
or (B) vacancies shall exist in the offices of directors  elected by the holders
of Convertible  Preferred Stock, or (C) the holders of the Convertible Preferred
Stock have the right to elect  three  additional  directors  pursuant to Section
6(d)(i),  a proper  officer  of the  Company,  upon the  written  request of the
holders  of  record  of at least  twenty  five  percent  (25%) of the  shares of
Convertible Preferred Stock then outstanding,  addressed to the Secretary of the
Company,  shall  call a  special  meeting  in  lieu  of the  annual  meeting  of
stockholders or a special meeting of the holders of Convertible Preferred Stock,
for the purpose of  electing  or, if  necessary,  removing  directors.  Any such
meeting  shall be held at the  earliest  practicable  date at the  place for the
holding of the annual  meetings of  stockholders.  If such meeting  shall not be
called by the  proper  officer  of the  Company  within  ninety  (90) days after
personal  service of said written request upon the Secretary of the Company,  or
within  ninety  (90) days after  mailing  the same  within the United  States by
certified  mail,  addressed  to the  Secretary  of the Company at its  principal
executive  offices,  then the holders of record of at least  twenty five percent
(25%) of the outstanding shares of Convertible  Preferred Stock may designate in
writing one of their  number to call such meeting at the expense of the Company,
and such  meeting  may be called by the  person so  designated  upon the  notice
required  for the annual  meetings of  stockholders  of the Company and shall be
held at the place for holding the annual meetings of stockholders. Any holder of
Convertible  Preferred  Stock so  designated  shall have  access to the lists of
stockholders to be called pursuant to the provisions hereof.

            (f) Any vacancy  occurring in the office of director  elected by the
holders of Convertible  Preferred Stock or any additional director to be elected
pursuant to Section 6(d)(i) may be filled by the remaining  director(s)  elected
by the holders of  Convertible  Preferred  Stock  unless and until such  vacancy
shall be filled by the  holders  of  Convertible  Preferred  Stock.  The term of
office of the directors  elected by the holders of Convertible  Preferred  Stock
shall  terminate  upon  the  election  of their  successors  at any  meeting  of
stockholders held for the purpose of electing directors.

            (g) The  directors  elected by the holders of shares of  Convertible
Preferred  Stock voting  separately as a single class may be removed from office
with or without  cause by the vote of the  holders of at least a majority of the
outstanding  shares of Convertible  Preferred  Stock.  A special  meeting of the
holders of shares of  Convertible  Preferred  Stock may be called in  accordance
with the procedures set forth in subparagraph (e) of this Section 5.

            6.  Redemption of Convertible Preferred Stock.

            (a)(i) Optional Redemption. (A) If any Organic Change occurs, at the
option of any holder of outstanding  Convertible  Preferred  Stock (as exercised
pursuant to subparagraph (B) below), the Company shall redeem, at the redemption
price equal to the sum of the  Liquidation  Preference  per share plus an amount
equal to all accrued and unpaid  dividends per share (the  "Redemption  Price"),
those  outstanding  shares of Convertible  Preferred  Stock which the holders of
such  Convertible  Preferred  Stock have elected to redeem,  such  redemption to
occur  immediately  prior to or  simultaneously  with the  consummation  of such
Organic Change. If the Required Holders so elect in connection with such Organic
Change by written  notice to the Company  within the Notice  Period  referred to
below,  the Company shall redeem all of the  outstanding  shares of  Convertible
Preferred Stock.

                   (B) The  Company  will give  written  notice  of any  Organic
Change,  stating the substance and intended date of  consummation  thereof,  not
more than sixty (60) Business Days nor less than twenty (20) Business Days prior
to the date of  consummation  thereof,  to each holder of Convertible  Preferred
Stock.  The holders of the  Convertible  Preferred Stock shall have fifteen (15)
Business Days (the "Notice  Period") from the date of the receipt of such notice
to demand (by written  notice  mailed to the Company)  redemption  of all or any
portion of the shares of Convertible Preferred Stock held by such holder. If, by
the  expiration of the Notice  Period,  the Required  Holders have so elected to
demand  redemption of all of the  outstanding  shares of  Convertible  Preferred
Stock as provided in paragraph (A) above,  the Company shall give prompt written
notice of such  election to each other  holder of  Convertible  Preferred  Stock
within five (5) Business Days after the expiration of the Notice Period.

               (ii) Mandatory Redemption.  (A) The Company shall redeem, and the
holders  of the  outstanding  Convertible  Preferred  Stock  shall  sell  to the
Company, at the Redemption Price, all of the outstanding  Convertible  Preferred
Stock on the sixth anniversary of the Original Issue Date.

                   (B) At least  twenty  (20)  Business  Days and not more  than
sixty (60) Business Days prior to the date fixed for the mandatory redemption of
the Convertible  Preferred Stock, written notice (the "Redemption Notice") shall
be  mailed,  postage  prepaid,  to each  holder  of  record  of the  Convertible
Preferred  Stock at its post  office  address  last shown on the  records of the
Company. The Redemption Notice shall state:

                     (1) the number of shares of Convertible Preferred Stock
                         held by the holder that the Company intends to redeem;

                     (2) the date fixed for redemption and the Redemption
                         Price; and

                     (3) that the holder is to surrender to the Company, in the
                         manner and at the place designated, its certificate or
                         certificates representing the shares of Convertible
                         Preferred Stock to be redeemed.

               (iii)  On  or  before  the  Redemption   Date,   each  holder  of
Convertible  Preferred  Stock shall  surrender the  certificate or  certificates
representing such shares of Convertible  Preferred Stock to the Company,  in the
manner and at the place designated in the Redemption  Notice,  and thereupon the
Redemption Price for such shares shall be payable in cash on the Redemption Date
to the person  whose name appears on such  certificate  or  certificates  as the
owner thereof, and each surrendered  certificate shall be cancelled and retired.
In the  event  that  less  than  all  of  the  shares  represented  by any  such
certificate are redeemed,  a new certificate  shall be issued  representing  the
unredeemed shares.

            (b)  Unless  the  Company  defaults  in the  payment  in full of the
Redemption  Price,  dividends  on the  Convertible  Preferred  Stock  called for
redemption  shall cease to accumulate on the Redemption Date, and the holders of
such shares redeemed shall cease to have any further rights with respect thereto
on the  Redemption  Date,  other than to receive the  Redemption  Price  without
interest.

            (c) If, at the time of any  redemption  pursuant to this  Section 6,
the  funds of the  Company  legally  available  for  redemption  of  Convertible
Preferred  Stock are  insufficient to redeem the number of shares required to be
redeemed,  those funds which are legally  available  shall be used to redeem the
maximum possible number of such shares, pro rata based upon the number of shares
to be redeemed.  At any time  thereafter  when  additional  funds of the Company
become legally available for the redemption of Convertible Preferred Stock, such
funds  shall  immediately  be  used to  redeem  the  balance  of the  shares  of
Convertible  Preferred  Stock which the Company has become  obligated  to redeem
pursuant to this subparagraph, but which it has not redeemed; or, in the case of
a redemption  pursuant to Section  6(a)(i) if a person other than the Company is
the surviving or resulting corporation in any Organic Change, such person shall,
at the consummation of such Organic Change, redeem such balance of the shares of
Convertible  Preferred Stock (and the Company shall so provide in its agreements
with such person relating to such Organic Change).

            (d)  If the  Company  fails  to  make  the  redemption  required  by
paragraph  6(a)(ii)  above,  whether or not by reason of the  absence of legally
available  funds  therefor,  then  (i) the  holders  of  shares  of  Convertible
Preferred  Stock shall have,  in addition to their other voting rights set forth
herein,  the exclusive right,  voting separately as a single class, to elect one
additional  director of the Company in accordance  with Section 5 and one of the
directors  elected  pursuant to clause  (iii) of Section 5(c) shall resign or be
removed without cause, and (ii) the Dividend Rate shall be 15% per annum.

            (e)  The  Company  may  not  otherwise   redeem  or  repurchase  the
Convertible Preferred Stock.

            7.  Conversion.   (a)  Subject  to  the  provisions  for  adjustment
hereinafter  set forth,  (i) each share of Convertible  Preferred Stock shall be
convertible  at any time and from  time to time,  at the  option  of the  holder
thereof  (such  conversion,  an  "Optional  Conversion")  and (ii) all shares of
Convertible  Preferred  Stock shall be  convertible at the option of the Company
(x) at any time after the Current  Market  Price of the Common  Stock  equals or
exceeds $8.75 per share (subject to appropriate adjustment, if any of the events
set forth in Section  7(f)(i)  shall occur) for at least 20 days during a period
of 30  consecutive  Business  Days,  or (y) upon the  occurrence  of a Qualified
Secondary Offering (such conversion, a "Company Conversion"),  in each case into
fully paid and  nonassessable  shares of Common  Stock.  The number of shares of
Common Stock  deliverable  upon  conversion of a share of Convertible  Preferred
Stock,  adjusted  as  hereinafter  provided,  shall  be  one  multiplied  by the
Conversion  Ratio plus that number of shares  equal to the  accrued  dividend in
respect of such shares of  Convertible  Preferred  Stock  divided by the Current
Market  Price  on the  date of  such  conversion.  The  Conversion  Ratio  shall
initially  be  88.31224,  subject to  adjustment  from time to time  pursuant to
paragraph (f) of this Section 7 and for adjustments for increases in the accrued
and unpaid  dividends.  No fractional shares shall be issued upon the conversion
of any  shares of  Convertible  Preferred  Stock.  All  shares  of Common  Stock
(including fractions thereof) issuable upon conversion of more than one share of
Convertible Preferred Stock by a holder thereof shall be aggregated for purposes
of determining whether conversion would result in the issuance of any fractional
share. If, after the aforementioned aggregation,  the conversion would result in
the issuance of a fraction of a share of Common  Stock,  the Company  shall,  in
lieu of issuing any fractional share, pay the holder otherwise  entitled to such
fraction a sum in cash equal to the Current Market Price of such fraction on the
date of conversion.

               (b) (i) An Optional Conversion of the Convertible Preferred Stock
may be  effected by any such  holder  upon the  surrender  to the Company at the
principal  office  of  the  Company  of the  certificate  for  such  Convertible
Preferred  Stock to be converted  accompanied  by a written  notice stating that
such holder  elects to convert all or a specified  number of such shares  (which
may be fractional  shares) in accordance  with the  provisions of this Section 7
and specifying the name or names in which such holder wishes the  certificate or
certificates  for shares of Common Stock to be issued.  A Company  Conversion of
the Convertible Preferred Stock may be effected by the Company sending notice to
the  holders,  specifying  the event  that gave rise to the  Company's  right to
exercise a Company  Conversion  and the number of shares to be converted,  which
shall be applied on a pro-rata basis for all holders. A Company Conversion shall
be deemed to have been made at the close of  business  on the date of giving the
written notice referred to in the immediately  preceding  sentence.  Each holder
shall surrender to the Company the certificate  for such  Convertible  Preferred
Stock converted pursuant to a Company Conversion accompanied by a written notice
specifying  the name or names in which such  holder  wishes the  certificate  or
certificates  for shares of Common  Stock to be  issued.  Until such time as the
holder  surrenders  its  certificate  pursuant  to  a  Company  Conversion,  the
certificates  representing  the  Convertible  Preferred Stock to be so converted
shall represent the number of shares of Common Stock issuable upon conversion of
such  certificate.  Upon any conversion of any shares of  Convertible  Preferred
Stock, all accrued and unpaid dividends shall be similarly converted.

                   (ii) In case the written notice  specifying the name or names
in which such holder wishes the certificate or certificates for shares of Common
Stock to be issued shall specify a name or names other than that of such holder,
such notice shall be  accompanied  by payment of all transfer taxes payable upon
the  issuance of shares of Common  Stock in such name or names.  Other than such
taxes,  the Company will pay any and all issue and other taxes (other than taxes
based on income)  that may be payable  in  respect of any issue or  delivery  of
shares of Common Stock on conversion of  Convertible  Preferred  Stock  pursuant
hereto.  As promptly as practicable,  and in any event within five Business Days
after the surrender of such  certificate or certificates and the receipt of such
notice  relating  thereto and, if applicable,  payment of all transfer taxes (or
the  demonstration  to the satisfaction of the Company that such taxes have been
paid),  the Company  shall  deliver or cause to be  delivered  (i)  certificates
representing  the number of validly issued,  fully paid and  nonassessable  full
shares of Common  Stock to which the holder of shares of  Convertible  Preferred
Stock being converted shall be entitled and (ii) if less than the full number of
shares of Convertible  Preferred Stock evidenced by the surrendered  certificate
or certificates is being converted,  a new certificate or certificates,  of like
tenor,  for the number of shares  evidenced by such  surrendered  certificate or
certificates less the number of shares being converted.

                   (iii) In the case of an Optional Conversion,  such conversion
shall be deemed to have been made at the close of business on the date of giving
the written notice referred to in the first sentence of (b)(i) above and of such
surrender  of  the  certificate  or  certificates  representing  the  shares  of
Convertible  Preferred  Stock to be  converted  so that the rights of the holder
thereof as to the shares  being  converted  shall cease  except for the right to
receive shares of Common Stock in accordance  herewith,  and the person entitled
to receive  the shares of Common  Stock  shall be treated  for all  purposes  as
having become the record holder of such shares of Common Stock at such time.

               (c) In case any shares of Convertible  Preferred  Stock are to be
redeemed  pursuant  to  Section  6, all  rights of  conversion  shall  cease and
terminate as to the shares of Convertible  Preferred Stock to be redeemed at the
close of  business  on the  Business  Day next  preceding  the  date  fixed  for
redemption  unless the Company  shall  default in the payment of the  Redemption
Price.

               (d) The Conversion Ratio shall be subject to adjustment from time
to time in certain instances as hereinafter provided.

               (e) The Company shall at all times  reserve,  and keep  available
for issuance upon the conversion of the Convertible Preferred Stock, such number
of its authorized but unissued  shares of Common Stock as will from time to time
be sufficient to permit the conversion of all outstanding  shares of Convertible
Preferred  Stock,  and shall take all action required to increase the authorized
number of shares of Common Stock if necessary  to permit the  conversion  of all
outstanding shares of Convertible Preferred Stock.

               (f) The Conversion  Ratio will be subject to adjustment from time
to time as follows:

                  (i) In case the Company shall at any time or from time to time
               after  the  Original  Issue  Date (A) pay a  dividend,  or make a
               distribution, on the outstanding shares of Common Stock in shares
               of Common Stock,  (B) subdivide the outstanding  shares of Common
               Stock, (C) combine the outstanding  shares of Common Stock into a
               smaller number of shares or (D) issue by  reclassification of the
               shares  of  Common  Stock  any  shares  of  capital  stock of the
               Company,  then, and in each such case,  the  Conversion  Ratio in
               effect  immediately  prior  to  such  event  or the  record  date
               therefor,  whichever  is  earlier,  shall be adjusted so that the
               holder of any shares of Convertible  Preferred  Stock  thereafter
               surrendered  for  conversion  shall be  entitled  to receive  the
               number  of  shares of  Common  Stock or other  securities  of the
               Company  which such holder would have owned or have been entitled
               to receive  after the  happening  of any of the events  described
               above,  had such  shares  of  Convertible  Preferred  Stock  been
               surrendered for conversion  immediately prior to the happening of
               such event or the record date therefor,  whichever is earlier. An
               adjustment   made  pursuant  to  this  clause  (i)  shall  become
               effective (x) in the case of any such  dividend or  distribution,
               immediately  after the close of  business  on the record date for
               the  determination  of holders of shares of Common Stock entitled
               to receive such dividend or  distribution,  or (y) in the case of
               such subdivision,  reclassification or combination,  at the close
               of business on the day upon which such  corporate  action becomes
               effective.  No  adjustment  shall be made pursuant to this clause
               (i) in connection  with any  transaction  to which  paragraph (g)
               applies.

                  (ii) In case the Company  shall issue  shares of Common  Stock
               (or rights,  warrants  or other  securities  convertible  into or
               exchangeable for shares of Common Stock) after the Original Issue
               Date,  other than  issuances  covered  by clause (i) above,  at a
               price per share (or having an  exercise,  conversion  or exchange
               price per share) less than the Conversion Price as of the date of
               issuance  of such  shares or of such  rights,  warrants  or other
               convertible or  exchangeable  securities,  then, and in each such
               case, the  Conversion  Price shall be reduced (but not increased)
               to a price  determined by dividing (A) an amount equal to the sum
               of  (x)  the  number  of  shares  of  Common  Stock   outstanding
               immediately  prior to such issue  multiplied by the then existing
               Conversion Price, plus (y) the consideration, if any, received by
               Company  upon such  issue,  by (B) the total  number of shares of
               Common Stock  outstanding  immediately  after such issue or sale.
               The Conversion  Ratio shall be adjusted to equal the  Liquidation
               Preference  [plus  accrued and unpaid  dividends]  divided by the
               Conversion   Price.   For  the   purpose   of   determining   the
               consideration  received  by  the  Company  upon  any  such  issue
               pursuant to clause (y) above,  if the  consideration  received by
               the Company is other than cash, its value will be deemed its Fair
               Market  Value,  as  determined  in good  faith  by the  Board  of
               Directors of the Company.

                  (iii) An  adjustment  made pursuant to clause (ii) above shall
               be made on the next  Business Day following the date on which any
               such  issuance  is made  and  shall  be  effective  retroactively
               immediately  after  the  close  of  business  on such  date.  For
               purposes of clause (ii), the aggregate  consideration received by
               the Company in  connection  with the issuance of shares of Common
               Stock or of rights,  warrants or other securities exchangeable or
               convertible  into  shares of Common  Stock  shall be deemed to be
               equal  to the sum of the  aggregate  offering  price  of all such
               Common Stock and such rights,  warrants, or other exchangeable or
               convertible securities plus the minimum aggregate amount, if any,
               receivable  upon exchange or conversion of any such  exchangeable
               or convertible securities into shares of Common Stock.

                  (iv) In case the  Company  shall  at any time or from  time to
               time after the Original Issue Date declare,  order, pay or make a
               dividend or other distribution  (including,  without  limitation,
               any  distribution  of stock or other  securities  or  property or
               rights or warrants to subscribe for  securities of the Company or
               any of its  Subsidiaries  by way of dividend or spinoff),  on its
               Common Stock,  other than dividends or distributions of shares of
               Common  Stock  which  are  referred  to in  clause  (i)  of  this
               paragraph  (f) or made in  compliance  with  Section 3(b) hereof,
               then,  and in each  such  case,  the  Conversion  Ratio  shall be
               adjusted  so  that  the  holder  of  each  share  of  Convertible
               Preferred Stock shall be entitled to receive, upon the conversion
               thereof,  the  number of shares of  Common  Stock  determined  by
               multiplying  (1)  the  applicable  Conversion  Ratio  on the  day
               immediately  prior to the record date fixed for the determination
               of stockholders entitled to receive such dividend or distribution
               by (2) a fraction,  the  numerator  of which shall be the Current
               Market Price per share of Common  Stock at such record date,  and
               the  denominator  of which shall be such Current Market Price per
               share of Common Stock less the Fair Market Value of such dividend
               or distribution per share of Common Stock. No adjustment shall be
               made  pursuant  to  this  clause  (iv)  in  connection  with  any
               transaction to which paragraph (g) applies.

                  (v) For purposes of this  paragraph  (f), the number of shares
               of Common  Stock at any time  outstanding  shall not  include any
               shares of Common  Stock then owned or held by or for the  account
               of the Company or any of its subsidiaries.

                  (vi) If the Company  shall take a record of the holders of its
               Common  Stock for the  purpose  of  entitling  them to  receive a
               dividend or other  distribution,  and shall thereafter and before
               the distribution to stockholders thereof legally abandon its plan
               to pay or deliver such dividend or distribution,  then thereafter
               no  adjustment  in the number of shares of Common Stock  issuable
               upon  exercise  of  the  right  of  conversion  granted  by  this
               paragraph (f) or in the Conversion  Ratio then in effect shall be
               required by reason of the taking of such record.

                  (vii)   Anything  in  this   paragraph  (f)  to  the  contrary
               notwithstanding, the Company shall not be required to give effect
               to any  adjustment in the  Conversion  Ratio unless and until the
               net  effect of one or more  adjustments  (each of which  shall be
               carried  forward),  determined  as  above  provided,  shall  have
               resulted  in a  change  of  the  Conversion  Ratio  by  at  least
               one-tenth of one share of Common Stock,  and when the  cumulative
               net effect of more than one adjustment so determined  shall be to
               change the Conversion Ratio by at least one-tenth of one share of
               Common Stock,  such change in Conversion Ratio shall thereupon be
               given effect.

                  (viii)  If any  option  or  warrant  expires  or is  cancelled
               without  having been  exercised,  then,  for the  purposes of the
               adjustments  set forth above,  such option or warrant  shall have
               been  deemed  not to have been  issued and the  Conversion  Ratio
               shall be adjusted  accordingly.  No holder of Common  Stock which
               was previously  issued upon  conversion of Convertible  Preferred
               Stock  shall  have any  obligation  to redeem or cancel  any such
               shares  of  Common  Stock as a result  of the  operation  of this
               paragraph (viii).

               (g) In case of any  Organic  Change,  each  share of  Convertible
Preferred  Stock  then  outstanding,  other  than  those  shares to be  redeemed
pursuant to Section 6 hereof,  shall thereafter be convertible  into, in lieu of
the Common Stock issuable upon such  conversion  prior to  consummation  of such
Organic Change,  the kind and amount of shares of stock and other securities and
property  receivable  (including  cash) upon the  consummation  of such  Organic
Change by a holder of that number of shares of Common Stock into which one share
of Convertible Preferred Stock was convertible immediately prior to such Organic
Change  (including,  on a pro rata  basis,  the  cash,  securities  or  property
received by holders of Common  Stock in any tender or  exchange  offer that is a
step in such Organic  Change).  In case securities or property other than Common
Stock shall be issuable or deliverable  upon  conversion as aforesaid,  then all
references in this Section 7 shall be deemed to apply, so far as appropriate and
nearly as may be, to such other securities or property.

               (h) In case at any time or from  time to time the  Company  shall
pay any stock dividend or make any other non-cash distribution to the holders of
its Common Stock, or shall offer for subscription pro rata to the holders of its
Common Stock any additional  shares of stock of any class or any other right, or
there  shall be any capital  reorganization  or  reclassification  of the Common
Stock of the  Company or  consolidation  or merger of the  Company  with or into
another  corporation,  or any sale or conveyance to another  corporation  of the
property of the Company as an entirety or substantially as an entirety, or there
shall be a voluntary or  involuntary  dissolution,  liquidation or winding up of
the Company,  then, in any one or more of said cases,  the Company shall give at
least 20 days' prior written notice to the registered holders of the Convertible
Preferred Stock at the addresses of each as shown on the books of the Company as
of the date on which (i) the books of the Company  shall close or a record shall
be taken for such stock dividend,  distribution  or subscription  rights or (ii)
such   reorganization,   reclassification,   consolidation,   merger,   sale  or
conveyance, dissolution, liquidation or winding up shall take place, as the case
may be,  provided that in the case of any Organic Change to which  paragraph (g)
applies  the  Company  shall  give at least 30 days'  prior  written  notice  as
aforesaid.  Such notice  shall also  specify the date as of which the holders of
the Common Stock of record shall  participate in said dividend,  distribution or
subscription  rights or shall be  entitled to exchange  their  Common  Stock for
securities   or   other   property   deliverable   upon   such   reorganization,
reclassification,  consolidation,  merger,  sale or conveyance or participate in
such dissolution, liquidation or winding up, as the case may be. Failure to give
such notice shall not invalidate any action so taken.

            8. Reports as to Adjustments.  Upon any adjustment of the Conversion
Ratio then in effect and any  increase  or  decrease  in the number of shares of
Common Stock  issuable upon the operation of the conversion set forth in Section
7, then,  and in each such case,  the  Company  shall  promptly  deliver to each
holder of the Convertible Preferred Stock, a certificate signed by the President
or a Vice  President  and by the  Treasurer  or an  Assistant  Treasurer  or the
Secretary or an Assistant  Secretary of the Company  setting forth in reasonable
detail  the  event  requiring  the  adjustment  and the  method  by  which  such
adjustment was  calculated  and  specifying the Conversion  Ratio then in effect
following  such  adjustment  and the  increased  or  decreased  number of shares
issuable  upon the  conversion  granted  by  Section  7, and  shall set forth in
reasonable detail the method of calculation of each and a brief statement of the
facts requiring such adjustment.  Where  appropriate,  such notice to holders of
the Convertible  Preferred Stock may be given in advance and included as part of
the notice required under the provisions of Section 11.

            9. Certain Covenants. Any registered holder of Convertible Preferred
Stock may  proceed  to  protect  and  enforce  its rights and the rights of such
holders by any available remedy by proceeding at law or in equity to protect and
enforce any such rights,  whether for the specific  enforcement of any provision
in this  Certificate  of  Designation  or in aid of the  exercise  of any  power
granted herein, or to enforce any other proper remedy.

            10. No Reissuance of Preferred Stock. No Convertible Preferred Stock
acquired by the Company by reason of redemption, purchase, or otherwise shall be
reissued,  and all such shares shall be cancelled,  retired and eliminated  from
the shares which the Company shall be authorized to issue.

            11. Notices. All notices to the Company permitted hereunder shall be
personally delivered or sent by first class mail, postage prepaid,  addressed to
its principal  office located at 333 Seventh Avenue,  20th Floor,  New York, New
York 10001,  or to such other address at which its  principal  office is located
and as to  which  notice  thereof  is  similarly  given  to the  holders  of the
Convertible  Preferred  Stock at their  addresses  appearing on the books of the
Company.


     II.   That, pursuant to the authority conferred upon the Board of Directors
of the Company by Article VI of the Company's  Amended and Restated  Articles of
Incorporation  (the  "Articles") and Nevada Revised  Statutes  Section  78.1955,
subsection  3, the Board of  Directors  of the  Company,  by  unanimous  written
consent dated December 24, 1997, adopted the following  resolution  amending the
Original Designation is as follows:

            RESOLVED,  that pursuant to the authority  expressly  converted upon
the board of Directors of the Company by ARTICLE 4 of the Company's  Amended and
Restated  Articles of Incorporation and Nevada Revised Statutes Section 78.1955,
subsection  3, the  Original  Designation  is hereby  amended  and  restated  as
follows:

                  TERMS, PREFERENCES, RIGHTS AND LIMITATIONS
                                      of
                     SERIES D CONVERTIBLE PREFERRED STOCK
                                      of
                        MARKETING SERVICES GROUP, INC.

            The   relative   rights,   preferences,    powers,   qualifications,
limitations and restrictions granted to or imposed upon the Series D Convertible
Preferred Stock or the holders thereof are as follows:

            1.  Definitions.  For purposes of this Designation, the following
definitions shall apply:

      "Affiliate" and "Associate" shall have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.

      "Aggregate  Exercised  Amount"  shall mean, as of the date of a conversion
pursuant to Section 7, an amount equal to the sum of all Exercised Amounts based
on all exercises of Scheduled  Operations and Scheduled  Warrants occurring from
the date hereof through and including such date.

      "Board" shall mean the Board of Directors of the Company.

      "Business Day" shall mean any day other than a Saturday,  Sunday, or a day
on which  banking  institutions  in the  State of New  York  are  authorized  or
obligated by law or executive order to close.

      "Common Stock" shall mean the Common Stock,  $.01 par value per share,  of
the Company.

      "Company" shall mean Marketing Services Group, Inc., a Nevada
corporation.

      "Conversion  Price"  shall  mean  the  amount  computed  by  dividing  the
Liquidation  Preference  by the number of shares of Common  Stock into which one
share of Convertible Preferred Stock is convertible at the Conversion Ratio.

      "Conversion  Ratio"  shall  mean  the  amount  computed  by  dividing  the
Liquidation Preference by $3.397.

      "Convertible   Preferred   Stock"  shall  refer  to  shares  of  Series  D
Convertible Preferred Stock, $0.01 par value per share, of the Company.

      "Current Market Price", when used with reference to shares of Common Stock
or other  securities  on any date,  shall mean the  average of the daily  market
prices for 30 consecutive Business Days commencing 45 days before such date. The
daily market  price for each such  Business Day shall be (i) the last sale price
on such day on the principal  stock  exchange or the Nasdaq  National  Market or
Small Cap  Market on which  such  Common  Stock is then  listed or  admitted  to
trading, (ii) if no sale takes place on such day on any such exchange or market,
the average of the last  reported  closing  bid and asked  prices on such day as
officially  quoted on any such exchange or market,  (iii) if the Common Stock is
not then listed or admitted to trading on any stock exchange or such market, the
average of the last  reported  closing  bid and asked  prices on such day in the
over-the-counter  market,  as  furnished  by  Nasdaq or the  National  Quotation
Bureau,  Inc.,  (iv) if neither such  corporation  at the time is engaged in the
business of reporting such prices, as furnished by any similar firm then engaged
in such business, or (v) if there is no such firm, as furnished by any member of
the National Association of Securities Dealers ("NASD") selected mutually by the
Required  Holders and the Company or, if they cannot agree upon such  selection,
as selected by two such  members of the NASD,  one of which shall be selected by
the Required Holders and one of which shall be selected by the Company.

      "Dividend Rate" shall mean 6% per annum;  provided,  however, (i) upon the
occurrence  and during the  continuance of an Event of Default the Dividend Rate
shall be 8% per  annum,  and (ii) if the  Company  fails to make the  redemption
required by Section 6(a)(ii)  hereof,  the Dividend Rate shall be 15% per annum,
calculated  on a 360 day per year  basis,  based on the  actual  number  of days
elapsed.

      "Event of Default" shall have the meaning assigned to it in the
Purchase Agreement.

      "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar Federal statute,  and the rules and regulations of the Securities
and Exchange  Commission  thereunder,  all as the same shall be in effect at the
time.  Reference to a particular section of the Securities Exchange Act of 1934,
as amended,  shall include reference to the comparable  section,  if any, of any
such similar Federal statute.

      "Exercised  Amount" shall mean, with respect to each exercise of Scheduled
Options or Scheduled Warrants,  an amount equal to 0.24 multiplied by (x - y/z),
where x = the number of shares of Common Stock purchased upon such exercise, y =
the aggregate  exercise  price payable upon such  exercise,  and z = the Current
Market Price on the date of such exercise.

      "Fair Market  Value" shall mean the amount which a willing buyer would pay
a willing seller in an  arm's-length  transaction,  with neither being under any
compulsion to buy or sell.

      "GAAP" shall mean generally accepted  accounting  principles in the United
States of America as in effect from time to time.

      "Liquidation Preference" shall mean $300 per share.

      "Organic  Change"  shall  mean  (A) any  sale,  lease,  exchange  or other
transfer of all or substantially  all of the property and assets of the Company,
(B) any liquidation, dissolution or winding up of the Company, whether voluntary
or involuntary,  (C) any merger or consolidation to which the Company is a party
or (D) any Person or group of Persons (as such term is used in Section  13(d) of
the Exchange  Act),  other than General  Electric  Capital  Corporation  and its
Affiliates,  shall beneficially own (as defined in Rule 13d-3 under the Exchange
Act) securities of the Company representing 50% or more of the voting securities
of the Company then outstanding. For purposes of the preceding sentence, "voting
securities" shall mean securities,  the holders of which are ordinarily,  in the
absence of contingencies,  entitled to elect the corporate directors (or Persons
performing similar functions).

      "Original  Issue  Date"  shall mean the date of the  original  issuance of
50,000 shares of Convertible Preferred Stock.

      "Person" shall mean any individual, firm, corporation or other entity, and
shall include any successor (by merger or otherwise) of such entity.

      "Purchase  Agreement"  shall  mean  the  Purchase  Agreement,  dated as of
December 24, 1997, by and between the Company and the purchasers  named therein,
as it may be  amended  from  time to  time,  a copy of  which  is on file at the
principal office of the Company.

      "Qualified  Secondary Offering" means a sale of the Company's Common Stock
pursuant to a public offering of the Company's  Common Stock on Form S-1 (or any
other appropriate  general or short  registration form) under the Securities Act
of 1933, as amended,  pursuant to which the Common Stock is offered  (whether or
not for the  Company's  account)  for at  least  $8.75  per  share,  subject  to
appropriate  adjustment if any of the events set forth in Section  7(f)(i) shall
occur.

      "Redemption  Date" shall mean the date on which any shares of  Convertible
Preferred Stock are redeemed by the Company.

      "Redemption Price" has the meaning set forth in Section 6(a)(i) of this
Certificate of Designation.

      "Required Holders" shall mean the holders of at least of a majority of the
outstanding shares of Convertible Preferred Stock.

      "Scheduled  Options"  shall mean the options to purchase  shares of Common
Stock set forth on Schedule 4.1(b) to the Purchase Agreement.

      "Scheduled  Warrants" shall mean the warrants to purchase shares of Common
Stock set forth on Schedule 4.1(b) to the Purchase Agreement.

      "Subsidiary"  of any Person means any corporation or other entity of which
a  majority  of the  voting  power or the  voting  equity  securities  or equity
interest is owned, directly or indirectly, by such Person.

      "Trading  Day" shall mean a Business Day or, if the Common Stock is listed
or admitted to trading on any national securities  exchange, a day on which such
exchange is open for the transaction of business.

            2. Designation:  Number of Shares.  The designation of the preferred
stock  authorized by this  resolution  shall be "Series D Convertible  Preferred
Stock" and the number of shares of Convertible Preferred Stock authorized hereby
shall be 50,000 shares.

            3.  Dividends.

            (a) So long as any shares of  Convertible  Preferred  Stock shall be
outstanding,  dividends  shall  accrue  thereon,  whether or not declared by the
Board of  Directors  of the Company,  at the  Dividend  Rate on the  Liquidation
Preference  hereunder,  compounded  quarterly on the first  Business Day of each
calendar  quarter,  and  payable  quarterly  on the first  Business  Day of each
calendar  quarter.  Such dividends  shall be cumulative and begin to accrue from
the Original Issue Date,  whether or not declared and whether or not there shall
be net profits or net assets of the Company legally available for the payment of
those dividends.

            (b) So long as any shares of  Convertible  Preferred  Stock shall be
outstanding,  (i) no  dividend  whatsoever  shall  be paid or  declared,  and no
distribution  shall be made, on account of any Common Stock or on account of any
class or series of the Company's preferred or other capital stock ranking junior
to or pari passu with the  Convertible  Preferred  Stock,  and (ii) no shares of
Common  Stock or of any  class or  series of the  Company's  preferred  or other
capital stock  ranking  junior to or pari passu with the  Convertible  Preferred
Stock shall be purchased, redeemed or acquired by the Company and no funds shall
be paid into or set aside or made available for a sinking fund for the purchase,
redemption or acquisition  thereof,  other than any non-vested  shares purchased
from  employees of the Company  pursuant to a stock option plan  approved by the
Board of Directors of the Company.

            4.  Liquidation Rights of Convertible Preferred Stock.

            (a) In the event of any  liquidation,  dissolution  or winding up of
the  Company,  whether  voluntary  or  involuntary,  the holders of  Convertible
Preferred Stock then outstanding  shall be entitled to be paid out of the assets
of the Company  available for  distribution  to its  stockholders,  whether such
assets are capital,  surplus or earnings,  before any payment or declaration and
setting  apart for payment of any amount  shall be made in respect of any shares
of  Common  Stock or any share of any  other  class or  series of the  Company's
preferred stock ranking junior to the  Convertible  Preferred Stock with respect
to  the  payment  of  dividends  or   distribution  of  assets  on  liquidation,
dissolution  or winding up of the Company,  an amount  equal to the  Liquidation
Preference plus all accrued and unpaid  dividends in respect of any liquidation,
dissolution or winding up consummated.

            (b) If  upon  any  liquidation,  dissolution  or  winding  up of the
Company,  whether  voluntary or involuntary,  the assets to be distributed among
the holders of Convertible  Preferred  Stock shall be insufficient to permit the
payment to such stockholders of the full preferential  amounts  aforesaid,  then
the entire assets of the Company to be distributed shall be distributed  ratably
among the holders of Convertible Preferred Stock, based on the full preferential
amounts  for the number of shares of  Convertible  Preferred  Stock held by each
holder.

            (c) After payment to the holders of Convertible  Preferred  Stock of
the amounts set forth in Section 4(a) hereof,  the entire  remaining  assets and
funds of the  Company  legally  available  for  distribution,  if any,  shall be
distributed  first among the holders of  securities  senior to the Common Stock,
pro rata  based on the  number  of shares  of such  securities  held by them and
second  among the holders of Common Stock pro rata based on the number of shares
of Common Stock then held by each.

            5. Voting Rights.  In addition to any voting rights provided by law,
the holders of shares of  Convertible  Preferred  Stock shall have the following
voting rights:

            (a)  So  long  as  any  of  the   Convertible   Preferred  Stock  is
outstanding,  each share of Convertible Preferred Stock shall entitle the holder
thereof to vote on all matters voted on by the holders of Common  Stock,  voting
together as a single class with other shares entitled to vote at all meetings of
the  stockholders  of the Company.  With respect to any such vote, each share of
Convertible  Preferred Stock shall entitle the holder thereof to cast the number
of votes  equal to the  number  of votes  which  could be cast in such vote by a
holder of the number of shares of Common  Stock of the  Company  into which such
share of Convertible  Preferred Stock is convertible on the record date for such
vote.

            (b) The affirmative vote of the Required Holders, voting together as
a class,  in person or by proxy,  at a special or annual meeting of stockholders
called for the purpose,  or pursuant to a written consent of stockholders  shall
be necessary to

            (i) authorize,  adopt or approve an amendment to the  Certificate of
     Incorporation  of the Company which would alter or change in any manner the
     terms,  powers,  preferences or special rights of the shares of Convertible
     Preferred Stock;

            (ii) issue any shares of the capital  stock of the  Company  ranking
     senior to, or pari passu with (either as to dividends or upon  voluntary or
     involuntary  liquidation,   dissolution  or  winding  up)  the  Convertible
     Preferred Stock;

            (iii)  take any action which is in violation of Article V of the
     Purchase Agreement; or

            (iv)  effect an Organic Change.

            (c) So long as there are at least 20% of the  shares of  Convertible
Preferred Stock issued pursuant to the Purchase Agreement  outstanding,  (i) the
Board of Directors of the Company  shall  consist of eight  directors,  (ii) the
holders of shares of Convertible  Preferred Stock shall have, in addition to the
other voting rights set forth herein, the exclusive right,  voting separately as
a single  class,  to elect two directors of the Company and (iii) the holders of
shares of Common Stock and  Convertible  Preferred Stock shall have, in addition
to the other rights set forth  herein,  the right,  voting  together as a single
class, to elect six directors of the Company; provided,  however, so long as the
holders of shares of Convertible  Preferred Stock have the right to elect one or
two  additional   directors   pursuant  to  Sections  5(d)  or  6(d)(i)  hereof,
respectively,  the number in clause (ii) shall be  increased  by one, or two, as
the case may be, and the number in clause  (iii) shall be  decreased  by one, or
two,  as the case may be. At least one member of any  Committee  of the Board of
Directors  (including any Executive  Committee,  Audit Committee or Compensation
Committee)  shall  be  the  director  elected  solely  by  the  holders  of  the
Convertible  Preferred  Stock,  if any of such committees are established by the
Board of Directors of the Company, unless such right is waived in writing by the
Required Holders.

            (d) If, on any date,  an Event of Default shall have occurred and be
continuing,  then the  holders of shares of  Convertible  Preferred  Stock shall
have, in addition to their other voting  rights set forth herein,  the exclusive
right,  voting separately as a single class, to elect an additional  director of
the Company in accordance  with this Section 5 and one of the directors  elected
pursuant  to clause  (iii) of Section  5(c) shall  resign or be removed  without
cause.

            (e) (i) The  foregoing  rights of holders  of shares of  Convertible
Preferred  Stock  to take any  actions  as  provided  in this  Section  5 may be
exercised  at any annual  meeting  of  stockholders  or at a special  meeting of
stockholders held for such purpose as hereinafter provided or at any adjournment
thereof or pursuant to any written consent of stockholders.

            (ii) If (A) the annual  meeting of  stockholders  of the  Company is
not,  for any reason,  held within the time fixed in the by-laws of the Company,
or (B) vacancies shall exist in the offices of directors  elected by the holders
of Convertible  Preferred Stock, or (C) the holders of the Convertible Preferred
Stock have the right to elect  three  additional  directors  pursuant to Section
6(d)(i),  a proper  officer  of the  Company,  upon the  written  request of the
holders  of  record  of at least  twenty  five  percent  (25%) of the  shares of
Convertible Preferred Stock then outstanding,  addressed to the Secretary of the
Company,  shall  call a  special  meeting  in  lieu  of the  annual  meeting  of
stockholders or a special meeting of the holders of Convertible Preferred Stock,
for the purpose of  electing  or, if  necessary,  removing  directors.  Any such
meeting  shall be held at the  earliest  practicable  date at the  place for the
holding of the annual  meetings of  stockholders.  If such meeting  shall not be
called by the  proper  officer  of the  Company  within  ninety  (90) days after
personal  service of said written request upon the Secretary of the Company,  or
within  ninety  (90) days after  mailing  the same  within the United  States by
certified  mail,  addressed  to the  Secretary  of the Company at its  principal
executive  offices,  then the holders of record of at least  twenty five percent
(25%) of the outstanding shares of Convertible  Preferred Stock may designate in
writing one of their  number to call such meeting at the expense of the Company,
and such  meeting  may be called by the  person so  designated  upon the  notice
required  for the annual  meetings of  stockholders  of the Company and shall be
held at the place for holding the annual meetings of stockholders. Any holder of
Convertible  Preferred  Stock so  designated  shall have  access to the lists of
stockholders to be called pursuant to the provisions hereof.

            (f) Any vacancy  occurring in the office of director  elected by the
holders of Convertible  Preferred Stock or any additional director to be elected
pursuant to Section 6(d)(i) may be filled by the remaining  director(s)  elected
by the holders of  Convertible  Preferred  Stock  unless and until such  vacancy
shall be filled by the  holders  of  Convertible  Preferred  Stock.  The term of
office of the directors  elected by the holders of Convertible  Preferred  Stock
shall  terminate  upon  the  election  of their  successors  at any  meeting  of
stockholders held for the purpose of electing directors.

            (g) The  directors  elected by the holders of shares of  Convertible
Preferred  Stock voting  separately as a single class may be removed from office
with or without  cause by the vote of the  holders of at least a majority of the
outstanding  shares of Convertible  Preferred  Stock.  A special  meeting of the
holders of shares of  Convertible  Preferred  Stock may be called in  accordance
with the procedures set forth in subparagraph (e) of this Section 5.

            6.  Redemption of Convertible Preferred Stock.

            (a)(i) Optional Redemption. (A) If any Organic Change occurs, at the
option of any holder of outstanding  Convertible  Preferred  Stock (as exercised
pursuant to subparagraph (B) below), the Company shall redeem, at the redemption
price equal to the sum of the  Liquidation  Preference  per share plus an amount
equal to all accrued and unpaid  dividends per share (the  "Redemption  Price"),
those  outstanding  shares of Convertible  Preferred  Stock which the holders of
such  Convertible  Preferred  Stock have elected to redeem,  such  redemption to
occur  immediately  prior to or  simultaneously  with the  consummation  of such
Organic Change. If the Required Holders so elect in connection with such Organic
Change by written  notice to the Company  within the Notice  Period  referred to
below,  the Company shall redeem all of the  outstanding  shares of  Convertible
Preferred Stock.

            (B) The Company  will give  written  notice of any  Organic  Change,
stating the substance and intended date of consummation  thereof,  not more than
sixty (60)  Business  Days nor less than twenty (20)  Business Days prior to the
date of consummation thereof, to each holder of Convertible Preferred Stock. The
holders of the Convertible Preferred Stock shall have fifteen (15) Business Days
(the "Notice  Period") from the date of the receipt of such notice to demand (by
written  notice  mailed to the Company)  redemption of all or any portion of the
shares of Convertible Preferred Stock held by such holder. If, by the expiration
of the Notice Period,  the Required Holders have so elected to demand redemption
of all of the outstanding  shares of Convertible  Preferred Stock as provided in
paragraph  (A) above,  the  Company  shall give  prompt  written  notice of such
election to each other  holder of  Convertible  Preferred  Stock within five (5)
Business Days after the expiration of the Notice Period.

            (ii)  Mandatory  Redemption.  (A) The Company shall redeem,  and the
holders  of the  outstanding  Convertible  Preferred  Stock  shall  sell  to the
Company, at the Redemption Price, all of the outstanding  Convertible  Preferred
Stock on the sixth anniversary of the Original Issue Date.

            (B) At least twenty (20)  Business Days and not more than sixty (60)
Business  Days  prior to the date  fixed  for the  mandatory  redemption  of the
Convertible  Preferred Stock,  written notice (the "Redemption Notice") shall be
mailed,  postage prepaid, to each holder of record of the Convertible  Preferred
Stock at its post office  address last shown on the records of the Company.  The
Redemption Notice shall state:

               (1) the number of shares of Convertible  Preferred  Stock held by
                   the holder that the Company intends to redeem;

               (2) the date fixed for redemption and the Redemption Price;
                   and

               (3) that the holder is to surrender to the Company, in the manner
                   and at the place designated, its certificate or certificates
                   representing the shares of Convertible Preferred Stock to be
                   redeemed.

            (iii) On or before the Redemption  Date,  each holder of Convertible
Preferred Stock shall  surrender the  certificate or  certificates  representing
such shares of Convertible  Preferred Stock to the Company, in the manner and at
the place  designated in the  Redemption  Notice,  and thereupon the  Redemption
Price for such  shares  shall be payable in cash on the  Redemption  Date to the
person  whose name  appears on such  certificate  or  certificates  as the owner
thereof, and each surrendered certificate shall be cancelled and retired. In the
event that less than all of the shares  represented by any such  certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares.

            (b)  Unless  the  Company  defaults  in the  payment  in full of the
Redemption  Price,  dividends  on the  Convertible  Preferred  Stock  called for
redemption  shall cease to accumulate on the Redemption Date, and the holders of
such shares redeemed shall cease to have any further rights with respect thereto
on the  Redemption  Date,  other than to receive the  Redemption  Price  without
interest.

            (c) If, at the time of any  redemption  pursuant to this  Section 6,
the  funds of the  Company  legally  available  for  redemption  of  Convertible
Preferred  Stock are  insufficient to redeem the number of shares required to be
redeemed,  those funds which are legally  available  shall be used to redeem the
maximum possible number of such shares, pro rata based upon the number of shares
to be redeemed.  At any time  thereafter  when  additional  funds of the Company
become legally available for the redemption of Convertible Preferred Stock, such
funds  shall  immediately  be  used to  redeem  the  balance  of the  shares  of
Convertible  Preferred  Stock which the Company has become  obligated  to redeem
pursuant to this subparagraph, but which it has not redeemed; or, in the case of
a redemption  pursuant to Section  6(a)(i) if a person other than the Company is
the surviving or resulting corporation in any Organic Change, such person shall,
at the consummation of such Organic Change, redeem such balance of the shares of
Convertible  Preferred Stock (and the Company shall so provide in its agreements
with such person relating to such Organic Change).

            (d)  If the  Company  fails  to  make  the  redemption  required  by
paragraph  6(a)(ii)  above,  whether or not by reason of the  absence of legally
available  funds  therefor,  then  (i) the  holders  of  shares  of  Convertible
Preferred  Stock shall have,  in addition to their other voting rights set forth
herein,  the exclusive right,  voting separately as a single class, to elect two
additional  directors of the Company in accordance with Section 5 and two of the
directors  elected  pursuant to clause  (iii) of Section 5(c) shall resign or be
removed without cause, and (ii) the Dividend Rate shall be 15% per annum.

            (e)  The  Company  may  not  otherwise   redeem  or  repurchase  the
Convertible Preferred Stock.

            7.  Conversion.   (a)  Subject  to  the  provisions  for  adjustment
hereinafter  set forth,  (i) each share of Convertible  Preferred Stock shall be
convertible  at any time and from  time to time,  at the  option  of the  holder
thereof  (such  conversion,  a  "Optional  Conversion")  and (ii) all  shares of
Convertible  Preferred  Stock shall be  convertible at the option of the Company
(x) at any time after the Current  Market  Price of the Common  Stock  equals or
exceeds $8.75 per share (subject to appropriate adjustment, if any of the events
set forth in Section  7(f)(i)  shall occur) for at least 20 days during a period
of 30  consecutive  Business  Days,  or (y) upon the  occurrence  of a Qualified
Secondary Offering (such conversion, a "Company Conversion"),  in each case into
fully paid and  nonassessable  shares of Common  Stock.  The number of shares of
Common Stock  deliverable  upon  conversion of a share of Convertible  Preferred
Stock,  adjusted  as  hereinafter  provided,  shall  be  one  multiplied  by the
Conversion  Ratio plus that number of shares  equal to the  accrued  dividend in
respect of such shares of  Convertible  Preferred  Stock  divided by the Current
Market  Price  on the  date of  such  conversion.  The  Conversion  Ratio  shall
initially  be  88.31224,  subject to  adjustment  from time to time  pursuant to
paragraph (f) of this Section 7 and for adjustments for increases in the accrued
and unpaid  dividends.  No fractional shares shall be issued upon the conversion
of any  shares of  Convertible  Preferred  Stock.  All  shares  of Common  Stock
(including fractions thereof) issuable upon conversion of more than one share of
Convertible Preferred Stock by a holder thereof shall be aggregated for purposes
of determining whether conversion would result in the issuance of any fractional
share. If, after the aforementioned aggregation,  the conversion would result in
the issuance of a fraction of a share of Common  Stock,  the Company  shall,  in
lieu of issuing any fractional share, pay the holder otherwise  entitled to such
fraction a sum in cash equal to the Current Market Price of such fraction on the
date of conversion.

            (b) (i) An Optional  Conversion of the  Convertible  Preferred Stock
may be  effected by any such  holder  upon the  surrender  to the Company at the
principal  office  of  the  Company  of the  certificate  for  such  Convertible
Preferred  Stock to be converted  accompanied  by a written  notice stating that
such holder  elects to convert all or a specified  number of such shares  (which
may be fractional  shares) in accordance  with the  provisions of this Section 7
and specifying the name or names in which such holder wishes the  certificate or
certificates  for shares of Common Stock to be issued.  A Company  Conversion of
the Convertible Preferred Stock may be effected by the Company sending notice to
the  holders,  specifying  the event  that gave rise to the  Company's  right to
exercise a Company  Conversion  and the number of shares to be converted,  which
shall be applied on a pro-rata basis for all holders. A Company Conversion shall
be deemed to have been made at the close of  business  on the date of giving the
written notice referred to in the immediately  preceding  sentence.  Each holder
shall surrender to the Company the certificate  for such  Convertible  Preferred
Stock converted pursuant to a Company Conversion accompanied by a written notice
specifying  the name or names in which such  holder  wishes the  certificate  or
certificates  for shares of Common  Stock to be  issued.  Until such time as the
holder  surrenders  its  certificate  pursuant  to  a  Company  Conversion,  the
certificates  representing  the  Convertible  Preferred Stock to be so converted
shall represent the number of shares of Common Stock issuable upon conversion of
such  certificate.  Upon any conversion of any shares of  Convertible  Preferred
Stock, all accrued and unpaid dividends shall be similarly converted.

            (ii) In case  the  written  notice  specifying  the name or names in
which such holder wishes the  certificate or  certificates  for shares of Common
Stock to be issued shall specify a name or names other than that of such holder,
such notice shall be  accompanied  by payment of all transfer taxes payable upon
the  issuance of shares of Common  Stock in such name or names.  Other than such
taxes,  the Company will pay any and all issue and other taxes (other than taxes
based on income)  that may be payable  in  respect of any issue or  delivery  of
shares of Common Stock on conversion of  Convertible  Preferred  Stock  pursuant
hereto.  As promptly as practicable,  and in any event within five Business Days
after the surrender of such  certificate or certificates and the receipt of such
notice  relating  thereto and, if applicable,  payment of all transfer taxes (or
the  demonstration  to the satisfaction of the Company that such taxes have been
paid),  the Company  shall  deliver or cause to be  delivered  (i)  certificates
representing  the number of validly issued,  fully paid and  nonassessable  full
shares of Common  Stock to which the holder of shares of  Convertible  Preferred
Stock being converted shall be entitled and (ii) if less than the full number of
shares of Convertible  Preferred Stock evidenced by the surrendered  certificate
or certificates is being converted,  a new certificate or certificates,  of like
tenor,  for the number of shares  evidenced by such  surrendered  certificate or
certificates less the number of shares being converted.

            (iii) In the case of an Optional  Conversion,  such conversion shall
be deemed to have been made at the close of  business  on the date of giving the
written  notice  referred to in the first  sentence of (b)(i)  above and of such
surrender  of  the  certificate  or  certificates  representing  the  shares  of
Convertible  Preferred  Stock to be  converted  so that the rights of the holder
thereof as to the shares  being  converted  shall cease  except for the right to
receive shares of Common Stock in accordance  herewith,  and the person entitled
to receive  the shares of Common  Stock  shall be treated  for all  purposes  as
having become the record holder of such shares of Common Stock at such time.

            (c) In case any  shares  of  Convertible  Preferred  Stock are to be
redeemed  pursuant  to  Section  6, all  rights of  conversion  shall  cease and
terminate as to the shares of Convertible  Preferred Stock to be redeemed at the
close of  business  on the  Business  Day next  preceding  the  date  fixed  for
redemption  unless the Company  shall  default in the payment of the  Redemption
Price.

            (d) The Conversion Ratio shall be subject to adjustment from time to
time in certain instances as hereinafter provided.

            (e) The Company shall at all times  reserve,  and keep available for
issuance upon the conversion of the Convertible  Preferred Stock, such number of
its authorized but unissued  shares of Common Stock as will from time to time be
sufficient to permit the  conversion of all  outstanding  shares of  Convertible
Preferred  Stock,  and shall take all action required to increase the authorized
number of shares of Common Stock if necessary  to permit the  conversion  of all
outstanding shares of Convertible Preferred Stock.

            (f) The Conversion  Ratio will be subject to adjustment from time to
time as follows:

               (i) In case the  Company  shall at any time or from  time to time
            after  the  Original  Issue  Date  (A)  pay a  dividend,  or  make a
            distribution, on the outstanding shares of Common Stock in shares of
            Common Stock, (B) subdivide the outstanding  shares of Common Stock,
            (C) combine the  outstanding  shares of Common  Stock into a smaller
            number of shares or (D) issue by  reclassification  of the shares of
            Common Stock any shares of capital stock of the Company,  then,  and
            in each such case, the Conversion Ratio in effect  immediately prior
            to such event or the record  date  therefor,  whichever  is earlier,
            shall be  adjusted  so that the holder of any shares of  Convertible
            Preferred  Stock  thereafter  surrendered  for  conversion  shall be
            entitled  to receive  the number of shares of Common  Stock or other
            securities of the Company which such holder would have owned or have
            been  entitled to receive  after the  happening of any of the events
            described above, had such shares of Convertible Preferred Stock been
            surrendered  for  conversion  immediately  prior to the happening of
            such event or the record date  therefor,  whichever  is earlier.  An
            adjustment  made pursuant to this clause (i) shall become  effective
            (x) in the case of any such  dividend or  distribution,  immediately
            after the close of business on the record date for the determination
            of  holders  of shares of Common  Stock  entitled  to  receive  such
            dividend or  distribution,  or (y) in the case of such  subdivision,
            reclassification or combination, at the close of business on the day
            upon which such corporate  action becomes  effective.  No adjustment
            shall be made  pursuant  to this clause (i) in  connection  with any
            transaction to which paragraph (g) applies.

               (ii) In case the Company  shall issue  shares of Common Stock (or
            rights,   warrants   or  other   securities   convertible   into  or
            exchangeable  for shares of Common  Stock) after the Original  Issue
            Date,  other than issuances  covered by clause (i) above, at a price
            per share (or having an exercise,  conversion or exchange  price per
            share) less than the Conversion  Price as of the date of issuance of
            such  shares or of such  rights,  warrants or other  convertible  or
            exchangeable securities, then, and in each such case, the Conversion
            Price shall be reduced (but not increased) to a price  determined by
            dividing  (A) an amount equal to the sum of (x) the number of shares
            of  Common  Stock  outstanding   immediately  prior  to  such  issue
            multiplied  by the  then  existing  Conversion  Price,  plus (y) the
            consideration,  if any,  received by Company upon such issue, by (B)
            the total number of shares of Common Stock  outstanding  immediately
            after such issue or sale. The Conversion  Ratio shall be adjusted to
            equal the Liquidation  Preference  divided by the Conversion  Price.
            For the purpose of  determining  the  consideration  received by the
            Company  upon any such issue  pursuant  to clause (y) above,  if the
            consideration  received by the Company is other than cash, its value
            will be deemed its Fair Market Value, as determined in good faith by
            the Board of Directors of the Company.

               (iii) An  adjustment  made pursuant to clause (ii) above shall be
            made on the next  Business Day  following the date on which any such
            issuance is made and shall be  effective  retroactively  immediately
            after the close of  business  on such date.  For  purposes of clause
            (ii),  the  aggregate  consideration  received  by  the  Company  in
            connection with the issuance of shares of Common Stock or of rights,
            warrants or other securities exchangeable or convertible into shares
            of  Common  Stock  shall  be  deemed  to be  equal to the sum of the
            aggregate  offering  price of all such Common Stock and such rights,
            warrants,  or other exchangeable or convertible  securities plus the
            minimum  aggregate  amount,  if any,  receivable  upon  exchange  or
            conversion of any such  exchangeable or convertible  securities into
            shares of Common Stock.

               (iv) In case the  Company  shall at any time or from time to time
            after the Original Issue Date declare, order, pay or make a dividend
            or  other   distribution   (including,   without   limitation,   any
            distribution  of stock or other  securities or property or rights or
            warrants to subscribe  for  securities  of the Company or any of its
            Subsidiaries  by way of dividend or spinoff),  on its Common  Stock,
            other than  dividends  or  distributions  of shares of Common  Stock
            which are referred to in clause (i) of this paragraph (f) or made in
            compliance  with Section 3(b) hereof,  then,  and in each such case,
            the  Conversion  Ratio  shall be adjusted so that the holder of each
            share of Convertible  Preferred  Stock shall be entitled to receive,
            upon the  conversion  thereof,  the number of shares of Common Stock
            determined by multiplying (1) the applicable Conversion Ratio on the
            day immediately prior to the record date fixed for the determination
            of stockholders entitled to receive such dividend or distribution by
            (2) a fraction,  the numerator of which shall be the Current  Market
            Price  per  share of  Common  Stock  at such  record  date,  and the
            denominator of which shall be such Current Market Price per share of
            Common  Stock  less  the  Fair  Market  Value  of such  dividend  or
            distribution  per share of Common Stock. No adjustment shall be made
            pursuant to this clause (iv) in connection  with any  transaction to
            which paragraph (g) applies.

               (v) For purposes of this  paragraph  (f), the number of shares of
            Common Stock at any time outstanding shall not include any shares of
            Common Stock then owned or held by or for the account of the Company
            or any of its subsidiaries.

               (vi) In lieu of any other adjustment  resulting from the exercise
            of  Scheduled  Options  or  Scheduled   Warrants  pursuant  to  this
            paragraph (f),  whenever  shares of Convertible  Preferred Stock are
            converted in accordance with this Section 7, the number of shares of
            Common stock to be received upon such  conversion  shall be adjusted
            upwards by the Aggregate  Exercised Amount multiplied by a fraction,
            the  numerator  of  which  shall  equal  the  number  of  shares  of
            Convertible  Preferred  stock being  converted on such date, and the
            denominator of which shall equal 50,000.

               (vii) If the  Company  shall take a record of the  holders of its
            Common Stock for the purpose of entitling them to receive a dividend
            or  other   distribution,   and  shall  thereafter  and  before  the
            distribution to stockholders thereof legally abandon its plan to pay
            or  deliver  such  dividend  or  distribution,  then  thereafter  no
            adjustment  in the number of shares of Common  Stock  issuable  upon
            exercise of the right of conversion granted by this paragraph (f) or
            in the  Conversion  Ratio then in effect shall be required by reason
            of the taking of such record.

               (viii)  Anything  in  this   paragraph   (f)  to  the   contrary
            notwithstanding, the Company shall not be required to give effect to
            any  adjustment  in the  Conversion  Ratio  unless and until the net
            effect of one or more  adjustments  (each of which  shall be carried
            forward),  determined  as above  provided,  shall have resulted in a
            change of the Conversion Ratio by at least one-tenth of one share of
            Common Stock,  and when the  cumulative  net effect of more than one
            adjustment so determined  shall be to change the Conversion Ratio by
            at least  one-tenth  of one share of Common  Stock,  such  change in
            Conversion Ratio shall thereupon be given effect.

               (ix) If any option or warrant  expires  or is  cancelled  without
            having been exercised, then, for the purposes of the adjustments set
            forth  above,  such option or warrant  shall have been deemed not to
            have  been  issued  and  the  Conversion  Ratio  shall  be  adjusted
            accordingly.  No holder of Common Stock which was previously  issued
            upon  conversion  of  Convertible  Preferred  Stock  shall  have any
            obligation  to redeem or cancel any such shares of Common Stock as a
            result of the operation of this paragraph (ix).

            (g) In  case  of any  Organic  Change,  each  share  of  Convertible
Preferred  Stock  then  outstanding,  other  than  those  shares to be  redeemed
pursuant to Section 6 hereof,  shall thereafter be convertible  into, in lieu of
the Common Stock issuable upon such  conversion  prior to  consummation  of such
Organic Change,  the kind and amount of shares of stock and other securities and
property  receivable  (including  cash) upon the  consummation  of such  Organic
Change by a holder of that number of shares of Common Stock into which one share
of Convertible Preferred Stock was convertible immediately prior to such Organic
Change  (including,  on a pro rata  basis,  the  cash,  securities  or  property
received by holders of Common  Stock in any tender or  exchange  offer that is a
step in such Organic  Change).  In case securities or property other than Common
Stock shall be issuable or deliverable  upon  conversion as aforesaid,  then all
references in this Section 7 shall be deemed to apply, so far as appropriate and
nearly as may be, to such other securities or property.

            (h) In case at any time or from time to time the  Company  shall pay
any stock dividend or make any other non-cash distribution to the holders of its
Common  Stock,  or shall offer for  subscription  pro rata to the holders of its
Common Stock any additional  shares of stock of any class or any other right, or
there  shall be any capital  reorganization  or  reclassification  of the Common
Stock of the  Company or  consolidation  or merger of the  Company  with or into
another  corporation,  or any sale or conveyance to another  corporation  of the
property of the Company as an entirety or substantially as an entirety, or there
shall be a voluntary or  involuntary  dissolution,  liquidation or winding up of
the Company,  then, in any one or more of said cases,  the Company shall give at
least 20 days' prior written notice to the registered holders of the Convertible
Preferred Stock at the addresses of each as shown on the books of the Company as
of the date on which (i) the books of the Company  shall close or a record shall
be taken for such stock dividend,  distribution  or subscription  rights or (ii)
such   reorganization,   reclassification,   consolidation,   merger,   sale  or
conveyance, dissolution, liquidation or winding up shall take place, as the case
may be,  provided that in the case of any Organic Change to which  paragraph (g)
applies  the  Company  shall  give at least 30 days'  prior  written  notice  as
aforesaid.  Such notice  shall also  specify the date as of which the holders of
the Common Stock of record shall  participate in said dividend,  distribution or
subscription  rights or shall be  entitled to exchange  their  Common  Stock for
securities   or   other   property   deliverable   upon   such   reorganization,
reclassification,  consolidation,  merger,  sale or conveyance or participate in
such dissolution, liquidation or winding up, as the case may be. Failure to give
such notice shall not invalidate any action so taken.

            8. Reports as to Adjustments.  Upon any adjustment of the Conversion
Ratio then in effect and any  increase  or  decrease  in the number of shares of
Common Stock  issuable upon the operation of the conversion set forth in Section
7, then,  and in each such case,  the  Company  shall  promptly  deliver to each
holder of the Convertible Preferred Stock, a certificate signed by the President
or a Vice  President  and by the  Treasurer  or an  Assistant  Treasurer  or the
Secretary or an Assistant  Secretary of the Company  setting forth in reasonable
detail  the  event  requiring  the  adjustment  and the  method  by  which  such
adjustment was  calculated  and  specifying the Conversion  Ratio then in effect
following  such  adjustment  and the  increased  or  decreased  number of shares
issuable  upon the  conversion  granted  by  Section  7, and  shall set forth in
reasonable detail the method of calculation of each and a brief statement of the
facts requiring such adjustment.  Where  appropriate,  such notice to holders of
the Convertible  Preferred Stock may be given in advance and included as part of
the notice required under the provisions of Section 11.

            9. Certain Covenants. Any registered holder of Convertible Preferred
Stock may  proceed  to  protect  and  enforce  its rights and the rights of such
holders by any available remedy by proceeding at law or in equity to protect and
enforce any such rights,  whether for the specific  enforcement of any provision
in this  Certificate  of  Designation  or in aid of the  exercise  of any  power
granted herein, or to enforce any other proper remedy.

            10. No Reissuance of Preferred Stock. No Convertible Preferred Stock
acquired by the Company by reason of redemption, purchase, or otherwise shall be
reissued,  and all such shares shall be cancelled,  retired and eliminated  from
the shares which the Company shall be authorized to issue.

            11. Notices. All notices to the Company permitted hereunder shall be
personally delivered or sent by first class mail, postage prepaid,  addressed to
its principal  office located at 333 Seventh Avenue,  20th Floor,  New York, New
York 10001,  or to such other address at which its  principal  office is located
and as to  which  notice  thereof  is  similarly  given  to the  holders  of the
Convertible  Preferred  Stock at their  addresses  appearing on the books of the
Company.

     III.   That, the shareholder approval requirement contained in Nev. Rev.
Stat. ss. 78.1955, subsection 3, has been satisfied.

            IN WITNESS  WHEREOF,  the Company has caused this  Certificate to be
duly executed in its corporate name on this 24th day of December, 1997.

                                    MARKETING SERVICES GROUP, INC.


                                    By:
                                           ----------------------------
                                    Name:  Jeremy Barbera
                                    Title: President


                                    By:
                                           ----------------------------
                                    Name:  Alan I. Annex
                                    Title: Secretary



STATE OF NEW YORK    )
                     ) ss:
COUNTY OF NEW YORK   )

     This instrument was acknowledged before me on December 24, 1997 by
Jeremy Barbera as President and Alan I. Annex as Secretary of Marketing
Services Group, Inc.

                          Notary Public :
                                         ------------------------------
                         Appointment No.:
                                         ------------------------------
                   My Commission expires:
                                         ------------------------------

<TABLE> <S> <C>

<ARTICLE>                     5
<LEGEND>
                                                                      Exhibit 27

                           Financial Data Schedule

THIS SCHEDULE CONTAINS SUMMARY FINANCIAL  INFORMATION EXTRACTED FROM THE INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF MARKETING SERVICES GROUP, INC. AS
OF AND FOR THE SIX MONTHS  ENDED  DECEMBER  31, 1997  INCLUDED IN THIS REPORT ON
FORM 10-QSB AND IS QUALIFIED  IN ITS  ENTIRETY BY  REFERENCE  TO SUCH  FINANCIAL
STATEMENTS
</LEGEND>

<MULTIPLIER>                                      1
<CURRENCY>                             U.S. Dollars

       
<S>                                    <C>
<PERIOD-TYPE>                          Year
<FISCAL-YEAR-END>                      JUN-30-1998
<PERIOD-START>                         OCT-01-1997
<PERIOD-END>                           DEC-31-1997
<EXCHANGE-RATE>                        1
<CASH>                                 8,801,519
<SECURITIES>                           0
<RECEIVABLES>                          16,570,934
<ALLOWANCES>                           (203,040)
<INVENTORY>                            0
<CURRENT-ASSETS>                       25,600,656
<PP&E>                                 1,673,646
<DEPRECIATION>                         (560,172)
<TOTAL-ASSETS>                         51,437,619
<CURRENT-LIABILITIES>                  18,759,759
<BONDS>                                1,758,593
<COMMON>                               129,569
                  13,641,774
                            0
<OTHER-SE>                             (17,147,934)
<TOTAL-LIABILITY-AND-EQUITY>           51,437,619
<SALES>                                17,928,389
<TOTAL-REVENUES>                       17,928,389
<CGS>                                  7,461,557
<TOTAL-COSTS>                          7,461,557
<OTHER-EXPENSES>                       11,356,990
<LOSS-PROVISION>                       0
<INTEREST-EXPENSE>                     239,024
<INCOME-PRETAX>                        (1,091,408)
<INCOME-TAX>                           (110,246)
<INCOME-CONTINUING>                    (981,162)
<DISCONTINUED>                         0
<EXTRAORDINARY>                        0
<CHANGES>                              0
<NET-INCOME>                           (981,162)
<EPS-PRIMARY>                          (0.34)
<EPS-DILUTED>                          (0.34)

        



</TABLE>


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