**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-KSB**




x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
                1934




For
      the
      fiscal year ended December 31, 2007




o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      transition period from ____________ to ____________




Commission
      file number: 000-52862





**MSTI
      Holdings, Inc.**


(Name
      of
      Small Business Issuer in Its Charter)




Delaware
            
            26-0240347(State
                or Other Jurisdiction of Incorporation
              or
                Organization)
            
            (I.R.S.
                Employer Identification No.)259-263
                Goffle Road
              Hawthorne,
                New Jersey
            
            07506(Address
                of Principal Executive Offices)
            
            (Zip
                Code)




(973)
                304-6080(Issuer’s
                Telephone Number)




Securities
      registered under Section 12(b) of the Exchange Act:





Title of Each Class
            
            Name of Each Exchange on Which RegisteredNone
            
            None





Securities registered under Section 12(g) of the Exchange Act:





Common Stock, par
      value $0.001 per share


(Title
      of
      Class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  o




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by referenced in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x





The
      issuer’s revenues for the fiscal year ended December 31, 2007, were
      $2,675,750.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the closing price of $0.40 on April
      9,
      2008 was $3,766,369.





As
      of
      April 1, 2008, there were 29,816,552 shares of the issuer’s common equity
      outstanding.




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





**MSTI
      HOLDINGS, INC.**


**FORM
      10-KSB**





**Table
      of Contents**





PagePart
                IItem
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            17Item
                3.
            Legal
                Proceedings
            17Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            17Part
                IIItem
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Small
                Business Issuer Purchases of Securities
            17Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operations
            18Item
                7.
            Financial
                Statements
            23Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            23Item
                8A(T).
            Controls
                and Procedures
            23Item
                8B.
            Other
                Information
            24Part
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters, Control Persons and Corporate Governance;
                Compliance With Section 16(a) of the Exchange Act
            24Item
                10.
            Executive
                Compensation
            26Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            28Item
                12.
            Certain
                Relationships and Related Transactions and Director
                Independence
            30Item
                13.
            Principal
                Accounting Fees and Services
            30Item
                14.
            Exhibits
            31








**PART
      I**





**Forward-Looking
      Statements**




This
      Annual Report on Form 10-KSB contains “forward-looking statements” within the
      meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
      amended (the “Exchange Act”). All statements in this Annual Report other than
      statements of historical fact are “forward-looking statements” for purposes of
      these provisions, including any statements of the plan and objectives for future
      operations and any statement of assumptions underlying any of the foregoing.
      Forward-looking statements can be identified by the use of words such as
“expects,” “plans,” “will,” “may,” “anticipates,” believes,” “should,”
“intends,” “estimates,” and other words of similar meaning. These statements are
      subject to risks and uncertainties that cannot be predicted or quantified and,
      consequently, actual results may differ materially from those expressed or
      implied by such forward-looking statements. Such risks and uncertainties are
      outlined in “Risk Factors” below.




**Item
      1.**  **DESCRIPTION
      OF BUSINESS**





**Corporate
      History**





Prior
      to
      May 24, 2007, we were a public shell company, as defined by the Securities
      and Exchange Commission, without material assets or activities. We were
      incorporated in the State of Nevada on February 10, 2006 as Fitness Xpress
      Software, Inc. On May 18, 2007, we merged with and into our wholly-owned
      Delaware subsidiary, for the sole purpose of changing our state of incorporation
      to Delaware. On May 24, 2007, Microwave Acquisition Corp., a newly formed
      wholly-owned subsidiary of ours, merged with and into a private company,
      Microwave Satellite Technologies, Inc. (“MST”), which was incorporated in the
      State of New Jersey in 1982. In January 2006, Frank T. Matarazzo, our Chief
      Executive Officer and then sole stockholder of MST, sold a 90% interest in
      MST
      to Telkonet, Inc.





Upon
      closing of the merger, MST became a wholly-owned subsidiary of ours and we
      succeeded to MST’s line of business as our sole line of business. Following the
      merger, we changed our name from Fitness Xpress Software, Inc. to MSTI Holdings,
      Inc.





In
      May
      2007, we consummated a private placement of units, consisting of 5,597,664
      shares of our common stock and warrants to purchase an additional 2,798,836
      shares of our common stock, and a private placement of 8% secured convertible
      debentures due April 30, 2010 (the “Debentures”), for aggregate gross proceeds
      of approximately $9.1 million.





On
      July
      18, 2007, we acquired substantially all of the assets of Newport
      Telecommunications Co., including approximately 1,900 new
      subscribers.





**Overview**





We
      are a
      carrier class communications technology company that specializes in providing
      true quadruple play (“Quad-Play”) services to multi-tenant unit (“MTU”) and
      multi-dwelling unit (“MDU”) residential, hospitality and commercial properties.
      These Quad-Play services include video, voice, high-speed internet and wireless
      fidelity (“Wi-Fi”) access. We are also a national internet service provider
      (“ISP”) and offer a suite of ancillary services including the design,
      installation and service of satellite and Internet Protocol (“IP”) based video
      conferencing and surveillance systems.





Our
      principal executive offices are located at 259-263 Goffle Road, Hawthorne,
      New
      Jersey 07506 and our telephone number is (973) 304-6080. Our reports filed
      with
      the SEC can be found at our website at www.mst-online.com .
      Information on or accessed through our website is not incorporated into, and
      is
      not a part of, this Annual Report.





*NuVisionsTM*




We
      currently offer digital television service through DISH Network, a national
      satellite television provider, under our private label NuVisionsTM brand of
      services. The NuVisions TV offering includes over 500 channels of video and
      audio programming, with a large high definition (more than 40 channels) and
      ethnic (over 100 channels from 17 countries) offering. We also offer NuVisions
      Broadband high speed internet service and NuVisions Digital Voice telephone
      service to multi-family residences and commercial properties. We deliver
      broadband based services using terrestrial fiber optic links and in February
      2005 began deployment in New York City of a proprietary wireless gigabit network
      that connects properties served in a redundant gigabit ring - a virtual fiber
      optic network in the air.





*Wi-Fi
      Network*





We
      have
      constructed a large NuVisions Wi-Fi footprint in New York City intended to
      create a ubiquitous citywide Wi-Fi network. NuVisions Wi-Fi offers Internet
      access in the southern-half of Central Park, Riverside Park from 60th to 79th
      Streets, Dag Hammarskjold Plaza, and the United Nations Plaza. In addition,
      we
      provide NuVisions Wi-Fi service in and around Trump Tower on Fifth Avenue,
      Trump
      World Tower on First Avenue, the Trump Place properties located on Riverside
      Boulevard, Trump Palace, Trump Parc, Trump Parc East as well as portions of
      Roosevelt Island surrounding the Octagon residential community. We currently
      have plans to deploy additional Wi-Fi “Hot Zones” throughout New York City and
      plan to continue to enlarge our Wi-Fi footprint as new properties are served.


1


*Internet
      Protocol Television (“IPTV”)*





In
      fourth
      quarter of 2006, we invested in an IPTV platform to be deployed in May 2008.
      IPTV is a method of distributing television content over IP that enables a
      more
      user-defined, on-demand and interactive experience than traditional cable or
      satellite television. The IPTV service delivers traditional cable TV programming
      and enables subscribers to surf the Internet, receive on-demand content, and
      perform a host of Internet-based functions via their TV sets.





*PLC
      Technology*




With
      a
      combined set of technology and services solutions, we have created and deliver
      a
      platform of bundled IP services utilizing power line communications technology,
      or PLC. Current services that utilize PLC include high speed Internet and VoIP
      telephone. Our current plans include the further development and deployment
      of
      energy management services and building control solutions, building
      surveillance/security, and eConcierge using PLC technology.





**Customers/Strategy**





Our
      customer base and strategy is to target and cultivate a subscriber base that
      will demand high margin products, including, video, IPTV, VoIP, high-speed
      Internet and Wi-Fi services.




We
      currently maintain service agreements with approximately 22 MDU and MTU
      properties. Generally, under the terms of a service agreement, we provide either
      (i) “bulk services,” which may include one or all of a bundle of products and
      services, at a fixed price per month to the owner of the MDU or MTU property,
      and contract with individual residents for enhanced services, such as premium
      cable channels, for a monthly fee or (ii) contract with individual
      residents of the MDU property for one or more basic or enhanced services for
      a
      monthly fee. These agreements typically include a revenue sharing arrangement
      with property owners, whereby the property owner is entitled to a share of
      the
      revenues derived from subscribers who reside at the MDU/MTU property **.** These **** revenue
      sharing arrangements are either based upon a fixed amount per subscriber or
      based on a percentage, typically between 7-10%, of the monthly revenue we
      receive from subscribers for our services. We believe that our complementary
      products and services allow for future growth and as such are designed and
      integrated with scalability in mind.





**Services**




*Video*




Our
      video
      service currently offers over 500 channels in a variety of packages which are
      tailored to suit specific individual needs. We transmit signals through the
      air
      using microwave/satellite technology, or through a fiber optic network, designed
      to provide superior reception to that of traditional cable TV companies that
      relay signals through coaxial cable. Some important features of our video
      services include:





·
            one
                of the largest selections of HDTV
                programming




·
            large
                ethnic TV offering with over 17 different countries
                represented




·
            custom
                designed channel line-ups




·
            flexible
                pricing plans for basic and premium
                packages




·
            community
                bulletin board channels




·
            building
                closed circuit TV (“CCTV”) surveillance/security
                channels




·
            multiple
                pay-per-view channels




·
            24
                hour a day-365 days a year customer
                service


2




·
            interactive
                TV guide




·
            fully
                addressable system eliminating the need for technicians to gain access
                to
                apartments for service changes




*Internet
      Protocol Television*




In
      addition to traditional video, we currently intend to offer our IPTV platform.
      IPTV is an emerging TV delivery technology that provides an interactive
      experience. We believe that IPTV will offer a virtually unlimited selection
      of
      programming and on-demand content, including HD video. In addition, we believe
      that we will have the ability to offer new value-added and bundled services,
      enabling subscribers to surf the Internet, receive on-demand content, and
      perform a host of Internet-based functions via their TV sets, as these services
      become available without having to re-engineer the network.




IPTV
      covers both live TV (multicasting) as well as stored video (video on
      demand-VOD). The playback of IPTV requires either a personal computer or a
      “set-top box” connected to a TV.




An
      IP-based platform provides the opportunity for an interactive and personalized
      TV viewing experience. We may, for example, include an interactive program
      guide
      that allows viewers to search for content by title or actor’s name, or a
      picture-in-picture functionality that allows them to “channel surf” without
      leaving the program they are watching. Viewers may be able to look up a player’s
      stats while watching a sports game, or control the camera angle. They also
      may
      be able to access photos or music from their PC on their television, use a
      wireless phone to schedule a recording of their favorite show, or even adjust
      parental controls so their child can watch a documentary for a school report,
      while they’re away from home.




Our
      roll-out, currently planned for second quarter of 2008, of an IP-based network
      also provides us the opportunity for integration and convergence. Converged
      services imply interaction of existing services in a seamless manner to create
      new value added services. An example of such integration and conversion is
      On-Screen Caller ID, getting Caller ID on TV and the ability to process (send
      to
      voice mail, etc.). IP-based services will help us provide consumers
      anytime-anywhere access to content over their televisions, PCs and cell phones,
      and to integrate services and content. Within businesses and institutions,
      IPTV
      may eliminate the need to run a parallel infrastructure to deliver live and
      stored video services.




We
      presently purchase all of our video programming from EchoStar Satellite, LLC
      (“EchoStar”). We pay EchoStar a monthly license fee based on the number of our
      customers, subject to volume discounts and monthly programming costs. We may
      enter into agreements with other program suppliers in the future in connection
      with the deployment of IPTV.





In
      connection with the roll out of IPTV, we currently expect to enter into an
      agreement with a leading content aggregator and IPTV transport company to
      aggregate video and audio channel programming from cable television satellite
      transmissions and re-transmit them to our facilities for a monthly fee based
      upon the number of our IPTV customers.





*Digital
      Voice/VoIP*




Our
      digital voice service offering utilizes the underlying VoIP protocol but does
      not traverse the Internet in the same manner as traditional VoIP providers.
      No
      special equipment or Internet connection is required to use our digital voice
      service. A customer’s ordinary analog phone and existing copper wires in the
      building are utilized with the conversion of analog to IP taking place in a
      building’s main telephone room. The traffic is carried “on network” to NuVisions
      voice partners. Customers are provided with utmost functionality typically
      found
      in traditional regional Bell operating company (RBOC) architecture. Unlike
      many
      other VoIP providers, since our service does not rely on the public Internet,
      NuVisions Digital Voice can fully control quality of service in the
      network.




We
      currently offer one consumer voice service and have plans to offer in the future
      a business VoIP service. Special features of NuVisions Digital
      Voice include:




·
            ability
                to retain existing phone number;




·
            many
                free features including Voicemail, Call Waiting, 3-Way Calling, Caller
                ID
                with Name, and call forwarding;




·
            web-portal
                with unified messaging, voicemail to email, custom call
                handling;




·
            24/7
                online account management;




·
            new
                VIDEO phone service that uses broadband Internet
                connection;


3




·
            unlimited
                calls to anywhere in the United States for a low monthly
                fee;




·
            competitive
                international rates;




·
            sound
                quality indistinguishable from a traditional phone
                service.




*Wi-Fi,
      Wireless Hot Zones and Metropolitan Wide Area Wireless Network*




Through
      a
      joint venture with Global Transport Logistics, Inc. (“GTLI”), we formed
      Interactivewifi.com to build and operate a large Wi-Fi network in New York
      City
      in 2006 and have deployed several new wide-areas “Hot Zones” in 2007. We
      currently plan to continue to expand “Hot Zone” coverage around the City.
      Consumers pay an hourly or monthly fee for internet access in these
      Interactivewifi.com wireless “Hot Zones,” or have free access to selected New
      York City government websites.




Under
      this joint venture arrangement, we contributed capital for purchase and
      deployment of network control equipment and wireless access points, as well
      as
      for development and deployment of the software system by which users access
      the
      Wi-Fi network, pay for service via credit card, and by which we control
      bandwidth utilization and hours of usage by individual subscribers. Under the
      joint venture, Interactivewifi.com pays us a fee for the bandwidth utilized
      by
      users of the Wi-Fi network, which we deliver to Interactivewifi.com over our
      Metropolitan Wide Area Network. In addition, our NuVisions high speed internet
      subscribers are given free access to the Interactivewifi.com “Hot
      Zones.”




The
      Interactivewifi.com Wi-Fi network currently offers Internet access in the
      southern-half of Central Park, Riverside Park from 60 th to
      79 th Streets,
      Dag Hammarskjold Plaza, and the United Nations Plaza. In addition, Wi-Fi service
      is available in and around Trump Tower on Fifth Avenue, Trump World Tower on
      First Avenue, the Trump Place properties owned by Equity Residential and Extell
      Corporation located on Riverside Boulevard, Trump Palace, Trump Parc, Trump
      Parc
      East as well as portions of Roosevelt Island surrounding the Octagon residential
      community.




Our
      Metropolitan Wide Area Network, a gigabit network that connects the MTU/MDU
      properties that we serve in a redundant gigabit ring within New York City,
      delivers our NuVisions internet, telephone and, in the near future, IPTV
      services, to these properties. This Network is built with carrier grade Gigabit
      Ethernet microwave equipment and is the foundation of a resilient network which
      delivers broadband signals from building-to-building, and connects to broadband
      networks, including Telkonet PLC technology, installed within the building.
      From
      each property that we connect in our Metropolitan Wide Area Network,
      Interactivewifi.com deploys wireless access points, offering Wi-Fi access in
      the
      common areas and geographic areas surrounding these properties, which expands
      the Wi-Fi network’s coverage.




Expansion
      of the Metropolitan Wide Area Network and the Interactivewifi.com network within
      New York City allows us to offer consumers paid-for access and value-added
      features, bringing us one step closer to our goal of digital convergence. We
      offer our customer freedom from the traditional wired connections offered by
      many of our competitors. Not only does our NuVisions high-speed Internet
      subscription give mobility within a home or property by allowing connection
      to
      any electrical outlet in the property for Internet service, it also gives
      subscribers free access to the Internet in the expanding Wi-Fi network
      throughout New York City. We currently plan to deploy additional “Hot-Zones” in
      and around New York City, which will allow Wi-Fi Internet access to the network
      within the parks, common areas and properties served by our NuVisions brand.
      High speed wireless “Hot Zones” will provide **** Internet
      connections at speeds 100 times greater than 56k modem, without busy signals
      and
      disconnects during peak usage times.




In
      addition, Interactivewifi.com has agreements with premier wireless network
      aggregators including iPass and Boingo. Pursuant to these agreements, customers
      of the wireless network aggregators can gain access to the Interactivewifi.com
      network using their account with the wireless network aggregator. Each time
      one
      of their customers connects to our network Interactivewifi.com charges the
      wireless aggregator a fixed fee per connection and Interactivewifi.com pays
      us a
      fee for the bandwidth utilized by the customer of the wireless
      aggregator.




*Power
      Line Communications (PLC)*




Using
      PLC
      technology products allows us to provide connectivity over a property’s existing
      electrical wiring and infrastructure without costly installation of additional
      wiring or major disruption of business activity.




The
      benefits of PCL include:




·
            secure
                data transmission;




·
            Secure
                Telkonet iBridgeTM- to-Gateway architecture ensures no user can see other
                users on the network;




·
            data
                is secure from outside intrusion;




4




·
            data
                is encrypted with 56-bit Data Encryption
                Standard;




·
            no
                wireless connectivity or RF interference issues;
                and




·
            the
                convenience of wireless with the security of a wired
                solution




Through
      a
      co-marketing agreement, we leverage PLC technology from Telkonet in our
      properties to deliver our diverse range of services through the properties’
existing electrical infrastructure. We currently expect to enter into a new
      agreement with Telkonet that will give us the right to offer its PLC
      technology in the New York metropolitan area on terms favorable to
      us.




*eConcierge*




Our
      eConcierge service was launched in January 2008, and will be marketed under
      our
      eConcierge brand name. The eConcierge solution will enable seamless
      communication between residents and building management, provide information
      about neighborhood services and offer access to amenities through a computer
      or
      simple touch-screen tablet interface. The system can also be utilized for
      internal control of individual apartment systems and functions such as lighting,
      temperature, and other IP enabled devices and systems. Advertising
      space  on
      the
      portal will be offered to local merchants and residents that register on the
      portal will be given a card that can be used to receive discounts from merchant
      advertisers.




Other
      eConcierge service features may include:




·
            messaging
                system and chat among residents and
                staff




·
            exclusive
                local and online discounts for building
                residents




·
            calendar
                of local events and building news




·
            lists
                and reviews of service providers such as tutors, babysitters and
                housekeepers




·
            building
                marketplace





·
            butler
                service for instant requests to
                staff




·
            online
                building services sign-up




·
            community
                based/ building specific




·
            advertising
                revenue w/real time back-end




·
            unique
                to our service/tied to building
                management




·
            discount
                cards/ ID cards




*Energy
      Management*




Energy
      management services are also implemented as part of a suite of bundled managed
      services giving building owners, managers, and residents the capabilities to
      monitor, control and adjust energy usage throughout a building using the same
      PLC technology that is currently being used to deliver the other services
      offered in residential, commercial, and hotel properties. We have installed
      one
      energy management system at the Octagon, a 500-unit luxury apartment complex
      on
      New York City’s Roosevelt Island. This service is still in its early stages and
      requires further development.




**Competition**




The
      home
      entertainment and video programming industry is competitive, and we expect
      competition to intensify in the future. We face our most significant competition
      from the franchised cable operators. In addition, our competition includes
      other
      satellite providers, telecom providers and off-air
      broadcasters.


5


*Hardwired
      Franchised Cable System*





Cable
      companies currently dominate the market in terms of subscriber penetration,
      the
      number of programming services available, audience ratings and expenditures
      on
      programming. However, satellite services are gaining market share which we
      believe will provide us with the opportunity to acquire and consolidate a
      subscriber base by providing a high quality signal at a comparable or reduced
      price to many cable operators' current service.





*Other
      Operators*





Our
      next
      largest competitors are other operators who build and operate communications
      systems such as satellite master antenna television systems, commonly known
      as
      SMATV, or private cable headend systems, which generally serve condominiums,
      apartment and office complexes and residential developments. We also compete
      with national direct broadcast satellite (DBS) operators such as
      EchoStar.





*Off-Air
      Broadcasters*





A
      majority of U.S. households that are not serviced by cable operators are
      serviced only by broadcast networks and local television stations (“off-air
      broadcasters”). Off-air broadcasters send signals through the air, which are
      received by traditional television antennas. Signals are accessible to anyone
      with an antenna and programming is funded by advertisers. Audio and video
      quality is limited and service can be adversely affected by weather or by
      buildings blocking a signal.





*Traditional
      Telephone Companies*




Traditional
      telephone companies such as Verizon and AT&T have recently diversified their
      service offerings to compete with traditional franchised cable companies in
      a
      triple-play market. Although their subscriber growth is currently smaller than
      franchise cable companies, these traditional phone companies are developing
      video offerings such as Verizon's FIOS product. These phone companies have
      in
      the past also been resellers of DIRECTV and EchoStar video programming, however,
      rarely in the multi-dwelling unit market. In the future, video offerings from
      traditional phone companies may become a significant competitor in the MDU
      market.





**Market**




Cable
      television began in 1948 as an alternate television service to households where
      reception of over-the-air TV signals was poor and has since expanded into a
      multi-billion dollar industry. Once simply considered a conveyer of video
      programming, cable’s broadband infrastructure may provide a pipeline for
      delivery of new advanced services, including digital networks, video-on-demand,
      interactive television, high-speed Internet access and telephony.





*Video
      Marketplace*




The
      American television consumer can choose from a variety of multichannel video
      providers, from the local cable operator to national direct broadcast satellite
      providers and, in many markets, newer facilities-based broadband companies
      that
      offer a full range of telecommunications services. In addition, we believe
      that
      a number of the nation’s largest RBOCs are currently planning to offer video
      services in the future.





*High-Speed
      Internet Marketplace*




As
      the
      cost of high-speed Internet service declined and connection speeds became more
      important, high-speed service overtook dial-up in market share for the first
      time, according to the J.D. Power and Associates 2006 ISP Residential Customer
      Satisfaction Study. The study found that 56% of residential ISP customers
      subscribe to high-speed Internet service, an increase of 11% from 2005.
      Correspondingly, market share of dial-up service has dropped from 55% in 2005
      to
      44% in 2006. We believe this trend is expected to continue, as according to
      J.D.
      Power, the intent to switch service providers among dial-up customers has
      increased by 3% from 2005 to 21% in 2006, while switching intent among
      high-speed customers has essentially remained flat since 2003 at
      11%.




The
      average amount subscribers report spending per month for high-speed Internet
      service has steadily decreased since 2004, down by $1.99 to $42.13 in 2006.
      During the same time period, the average amount dial-up service subscribers
      report spending has also declined, however, less significantly from $0.69 in
      2004 to $18.45 per month in 2006, according to J.D. Power.




Although
      high-speed Internet service is still generally considerably more expensive
      than
      dial-up, we believe bundling high-speed with other products, such as telephone
      and video service, has made it an increasingly attractive option for many
      customers. However, dial-up still holds a significant portion of the market.
      We
      believe customers may be willing to pay more for faster Internet speeds,
      provided they receive other services for less.


6


We
      believe that the future will bring even more choice for consumers, including
      new
      broadband over power line (BPL) service that allows the delivery of IP-based
      broadband using the communications capabilities of the national utilities
      companies via the power grid. According to the United Telecom Council, there
      are
      a number of trials underway nationwide, and a small number of commercial
      deployments have been launched. Many cable operators have responded to this
      competitive marketplace by offering consumers a bundled package of their
      services, which has enabled them to attract new customers and retain existing
      subscribers.





*Cable
      Industry Capital Expenditures*




We
      believe that the cable industry is facing a fundamental change in industry
      dynamics due to accelerating capital expenditures, service saturation and
      slowing subscriber growth to increased competition and out-of-home media
      explosion, though such change may not be evident for several years.




We
      believe cable operators must add bandwidth capacity and speed to stay
      competitive since bundled high-speed data, digital video and VoIP services
      are
      attractively priced by telephone, satellite and other rival providers. We
      believe there is significant consumer demand for peer-to-peer communications,
      file-sharing and other tools for producing and delivering broadband video,
      and
      that if high-definition channel availability doubles over the next year, cable
      operators will need to create more room through advanced video compression,
      switched broadcast and node splitting.




After
      passage of the 1996 Telecommunications Act, cable operators aggressively tapped
      into capital markets to accelerate a nationwide broadband infrastructure
      upgrade. The cable industry’s new interactive digital service is the result of a
      substantial investment in state-of-the-art fiber optic networks.





**Governmental
      Regulation**





*Federal
      Regulation*




Our
      systems do not use or traverse public rights-of-way and thus are exempt
      from the comprehensive regulation of cable systems under the Federal
      Communications Act of 1934, as amended (the “Communications Act”). Because our
      systems are subject to minimal federal regulation, we have greater pricing
      freedom and are not required to serve any customer whom we do not choose to
      serve, and we believe that we have significantly more competitive
      flexibility than do the franchised cable systems. We believe that these
      regulatory advantages help to make our private systems competitive with larger
      franchised cable systems.





On
      October 5, 1992, Congress enacted the Cable Consumer Protection and Competition
      Act of 1992 (the “1992 Cable Act”), which imposed additional regulation on
      traditional franchised cable operators and permits regulation of rates in
      markets in which there is no “effective competition”, as defined in the 1992
      Cable Act, and directed the FCC to adopt comprehensive new federal standards
      for
      local regulation of certain rates charged by traditional franchised cable
      operators. Conversely, the legislation also provides for deregulation of
      traditional hardwire cable in a given market where effective competition is
      shown to exist. Rates charged by private cable operators, typically already
      lower than traditional franchise cable rates, are not subject to regulation
      under the 1992 Cable Act.





In
      February 1996, Congress passed the Telecommunications Act of 1996 (the “1996
      Act”), which substantially amended the Communications Act. The 1996 Act contains
      provisions intended to increase competition in the telephone, radio, broadcast
      television, and hardwire and wireless cable television businesses. This
      legislation has altered, and we believe it will continue to alter, federal,
      state, and local laws and regulations affecting the communications industry,
      including certain of the services we provide.





Under
      the
      federal copyright laws, permission from the copyright holder generally must
      be
      secured before a video program may be retransmitted. Section 111 of the
      Copyright Act establishes the cable compulsory license pursuant to which certain
      “cable systems” are entitled to engage in the secondary transmission of
      broadcast programming without the prior permission of the holders of copyrights
      in the programming. In order to do so, a cable system must secure a compulsory
      copyright license. Such a license may be obtained upon the filing of certain
      reports with and the payment of certain licensing fees to the U.S. Copyright
      Office. Private cable operators, such as MSTI, may rely on the cable compulsory
      license with respect to the secondary transmission of broadcast programming.
      We
      do not expect the licensing fees to have a material adverse effect on our
      business.





Under
      the
      retransmission consent provisions of the 1992 Cable Act, multichannel video
      programming distributors, including, but not limited to, franchised and private
      cable operators, seeking to retransmit certain commercial television broadcast
      signals, notwithstanding the cable compulsory license, must first obtain the
      permission of the broadcast station in order to retransmit the station’s signal.
      However, private cable systems, unlike franchised cable systems, are not
      required under the FCC’s “must carry” rules to retransmit local television
      signals. Although there can be no assurances that we will be able to obtain
      requisite broadcaster consents, we believe, in most cases, we will be able
      to do
      so for little or no additional cost.


7


On
      November 29, 1999, Congress enacted the Satellite Home Viewer Improvement Act
      of
      1999 (“SHVIA”), which amended the Satellite Home Viewer Act. SHVIA permits DBS
      operators to transmit local television signals into local markets. SHVIA
      generally seeks to place satellite operators on an equal footing with cable
      television operators in regards to the availability of television broadcast
      programming. SHVIA amends the Copyright Act and other applicable laws and
      regulations in order to clarify the terms and conditions under which a DBS
      operator may retransmit local and distant broadcast television stations to
      subscribers. The law was intended to promote the ability of satellite services
      to compete with cable television systems and to resolve disputes that had arisen
      between broadcasters and satellite carriers regarding the delivery of broadcast
      television station programming to satellite service subscribers. As a result
      of
      SHVIA, television stations are generally entitled to seek carriage on any DBS
      operator's system providing local service in their respective markets. SHVIA
      creates a statutory copyright license applicable to the retransmission of
      broadcast television stations to DBS subscribers located in their markets.
      Although there is no royalty payment obligation associated with this license,
      eligibility for the license is conditioned on the satellite carrier's compliance
      with applicable laws, regulations and FCC rules governing the retransmission
      of
      such “local” broadcast television stations to satellite service subscribers.
      Noncompliance with such laws, regulations and/or FCC requirements could subject
      a satellite carrier to liability for copyright infringement. SHVIA was extended
      and re-enacted by the Satellite Home Viewer Extension and Reauthorization Act
      (“SHVERA”) in December of 2004.





We
      are
      not directly subject to rate regulation or certification requirements by the
      FCC
      or state public utility commissions because our equipment installation and
      sales
      agent activities do not constitute the provision of common carrier or cable
      television services. As a private cable operator, we are not subject to
      regulation as a DBS provider, but primarily rely upon our third-party
      programming aggregators to procure all necessary re-transmission consents and
      other programming rights under the Communications Act and the Copyright Act.





*State
      and Local Cable System Regulation*




We
      do not
      anticipate that our deployment of video programming services will be subject
      to
      state or local franchise laws primarily due to the fact that our facilities
      do
      not use or traverse public rights-of-way. Although we may be required to comply
      with state and local property tax, environmental laws and local zoning laws,
      we
      do not anticipate that compliance with these laws will have any material adverse
      impact on our business.





*State
      Mandatory Access Laws*




A
      number
      of states have enacted mandatory access laws that generally require, in exchange
      for just compensation, the owners of rental apartments (and, in some instances,
      the owners of condominiums) to allow the local franchise cable television
      operator to have access to the property to install its equipment and provide
      cable service to residents of the MDU. Such state mandatory access laws
      effectively eliminate the ability of the property owner to enter into an
      exclusive right of entry with a provider of cable or other broadcast services.
      In addition, some states have anti-compensation statutes forbidding an owner
      of
      an MDU from accepting compensation from whomever the owner permits to provide
      cable or other broadcast services to the property. These statutes have been
      and
      are being challenged on constitutional grounds in various states. These state
      access laws may provide both benefits and detriments to our business plan should
      we expand significantly in any of these states.





*Preferential
      Access Right*




We
      generally negotiate exclusive rights to provide satellite services singularly
      or
      in competition with competing cable providers, and also negotiate, where
      possible, “rights-of-first-refusal” to match price and terms of third-party
      offers to provide other communication services in buildings where we have
      negotiated broadcast access rights. We believe that these preferential rights
      of
      entry are generally enforceable under applicable law. However, current trends
      at
      the state and federal level suggest that the future enforceability of these
      provisions may be uncertain. In 2001, the FCC issued an order prohibiting
      telecommunications service providers from negotiating exclusive contracts with
      owners of commercial MDU properties. The FCC recently extended this prior action
      to prohibit carriers from entering into contracts with residential MDU owners
      that grant carriers exclusive access for the provision of telecommunications
      services to residents in those MDUs. The ban applies retroactively to existing
      contracts as well as to any future agreements. The FCC has also banned
      agreements that provide exclusive access for video services to MDUs. This ban
      applies retroactively to existing contracts as well as to any future agreements.
      The ban on exclusive video agreements does not currently apply to non-franchised
      entities such as ours; however, the FCC is currently considering extending
      the
      ban to such entities. While limitations on exclusivity may undermine the
      exclusivity provisions of our rights of entry on the one hand, they may also
      open up many other properties to which we could provide a competing service.
      There can be no assurance that future state or federal laws or regulations
      will
      not restrict our ability to offer access payments, limit MDU owners' ability
      to
      receive access payments or enter into exclusive agreements, any of which could
      have a material adverse effect on our business.





*Regulation
      of the High-Speed lnternet and Wi-Fi Business*




ISPs,
      including Internet access providers, are largely unregulated by the FCC or
      state
      public utility commissions at this time (apart from federal, state and local
      laws and regulations applicable to business in general). However, there can
      be
      no assurance that this business will not become subject to regulatory
      restraints. Also, although the FCC has rejected proposals to impose additional
      costs and regulations on ISPs to the extent they use local exchange telephone
      network facilities, such change may affect demand for Internet related services.
      No assurance can be given that changes in current or future regulations adopted
      by the FCC or state regulators or other legislative or judicial initiatives
      relating to Internet services would not have a material adverse effect on our
      business.


8


*Regulation
      of the VoIP Business*




IP-based
      voice services are currently exempt from the reporting and pricing restrictions
      placed on common carriers by the FCC. However, there are several state and
      federal regulatory proceedings further defining what specific service offerings
      qualify for this exemption. Due to the growing acceptance and deployment of
      VoIP
      services, the FCC and a number of state public service commissions are
      conducting regulatory proceedings that could affect the regulatory duties and
      rights of entities that provide IP-based voice applications. There is regulatory
      uncertainty as to the imposition of traditional retail, common carrier
      regulation on VoIP products and services.





**Backlog**





Our
      subscriber portfolio includes approximately 22 MDU properties with bulk service
      agreements and/or access licenses to service the individual subscribers in
      metropolitan New York. The remaining terms of the access agreements provide
      us
      access rights from 7 to 15 years with the final agreement expiring in 2016
      and
      the revenues to be recognized under non-cancelable bulk agreements provide
      a
      minimum of $2,100,000 in revenue through 2013.





**Employees**





As
      of
      March 31, 2008, the Company had a total of 36 full time employees. The Company
      anticipates that in 2008 it may need to hire additional staff in the areas
      of
      customer support, engineering, sales and marketing, and administration.





**Risk
      Factors**





The
      Company’s results of operations, financial condition and cash flows can be
      adversely affected by various risks. These risks include, but are not limited
      to, the principal factors listed below and the other matters set forth in this
      annual report on Form 10-KSB. You should carefully consider all of these
      risks before making an investment decision.





**Risks
      Relating to Our Business**




***We
      have a history of operating losses and expect to incur losses for the
      foreseeable future.***




We
      have
      had a loss from operations of $8,442,412 and $3,630,495 for the fiscal years
      ended December 31, 2007 and 2006, respectively, and expect to incur
      additional losses in the foreseeable future. Our losses to date have resulted
      principally from:





·
            costs
                and expenses associated with building out our network and the expansion
                of
                the services that we offer;


·
            costs
                and expenses associated with distribution and marketing of our
                products;


·
            general
                and administrative costs relating to our operations; and


·
            interest
                expense related to our outstanding
                indebtedness.




Our
      ability to achieve profitability will depend primarily on our ability to expand
      the number of our commercial multi-tenant unit and residential multi-dwelling
      unit customers. However, we may never generate enough funds through operations
      to support our business.





***Our
      independent auditors have expressed substantial doubt about our ability to
      continue as a going concern, which may hinder our ability to obtain future
      financing.***





In
      their
      report dated April 14, 2008, our independent auditors stated that our financial
      statements for the year ended December 31, 2007 were prepared assuming that
      we
      would continue as a going concern, and that they have substantial doubt about
      our ability to continue as a going concern.  Our auditors’ doubts are
      based on our incurring net losses and deficits in cash flows from
      operations.  We continue to experience net operating
      losses.  Our ability to continue as a going concern is subject to our
      ability to generate a profit and/or obtain necessary funding from outside
      sources, including by the sale of our securities, or obtaining loans from
      financial institutions, where possible.  Our continued net operating
      losses and our auditors’ doubts increase the difficulty of our meeting such
      goals and our efforts to continue as a going concern may not prove
      successful.





***We
      will need additional financing to execute our business plan and fund operations,
      which additional financing may not be available. Without additional funding,
      we
      may not be able to continue to operate our business.***




Even
      with
      the proceeds of the May 2007 private placement and issuance of debentures,
      we
      may not be able to execute our current business plan and fund business
      operations long enough to achieve profitability. The funds raised in the private
      placement may not be adequate to complete our current business plan. Our
      ultimate success will depend upon our ability to raise additional capital.
      There
      can be no assurance that additional funds will be available when needed from
      any
      source or, if available, will be available on terms that are favorable to or
      acceptable to us.


9


Hiring
      qualified management and key employees, maintaining compliance with applicable
      laws, marketing activities, administrative requirements, such as salaries,
      insurance expenses and general overhead expenses, legal compliance costs and
      accounting expenses, will all require a substantial amount of additional capital
      and our cash flow from operations may not be adequate for such purposes. We
      will
      need to obtain significant additional financing in the event that our plans
      require significant expenditures not presently contemplated, such as for capital
      expenditures, or to cover operating expenses from expanded services, to service
      future indebtedness or to be competitive or expand into new markets or
      services.




We
      may be
      required to pursue sources of additional capital through various means,
      including joint venture projects, debt financing, equity financing or other
      means. There is no assurance that we will be successful in locating a suitable
      financing transaction in a timely fashion or at all. In addition, there is
      no
      assurance that we will be successful in obtaining the capital we require by
      any
      other means.




To
      execute our business strategy, we may issue additional equity securities in
      public or private offerings, potentially at a price lower than the initial
      public offering price or the market price at the time of such issuance. Future
      financings through equity investments are likely to be dilutive to the existing
      stockholders. We may seek debt financing, and may be forced to incur significant
      interest expense. Also, the terms of securities we may issue in future capital
      transactions may be more favorable for our new investors and less favorable
      to
      existing investors. Newly issued securities may include preferences, superior
      voting rights, the issuance of warrants or other derivative securities, and
      the
      issuances of incentive awards under equity employee incentive plans, which
      may
      have additional dilutive effects. Further, we may incur substantial costs in
      pursuing future capital and/or financing, including investment banking fees,
      legal fees, accounting fees, printing and distribution expenses and other costs.
      We may also be required to recognize non-cash expenses in connection with
      certain securities we may issue, such as convertible notes and warrants, which
      will adversely impact our financial condition.




Our
      ability to obtain needed financing may be impaired by such factors as the
      capital markets, both generally and specifically in the telecommunications
      industry, the fact that we are not profitable, which could impact the
      availability or cost of future financings. If we cannot secure sufficient
      funding we may be forced to forego strategic opportunities or delay, scale
      back
      or eliminate network deployments, operations, acquisitions and investments.
      If
      the amount of capital we are able to raise from financing activities, together
      with our revenues from operations, is not sufficient to satisfy our capital
      needs, even to the extent that we reduce our operations accordingly, we may
      be
      required to cease operations.




***Our
      obligations to the holders of our debentures are secured by all of our assets,
      so if we default on those obligations, the debenture holders could foreclose
      on
      our assets.***




The
      holders of our debentures have a security interest in all of our assets and
      those of our subsidiary. As a result, if we default under our obligations to
      the
      debenture holders, the debenture holders could foreclose their security
      interests and liquidate some or all of these assets, which may cause us to
      cease
      operations.




***The
      success of our business depends on the continuing contributions of our key
      personnel, the loss of which could have a material adverse effect on our
      operations.***




We
      rely
      heavily on the services of Frank T. Matarazzo, our Chief Executive Officer,
      and
      Keith Scarzafava, our Chief Technology Officer. Loss of the services of either
      individual could adversely impact our operations. In addition, we rely on our
      technical personnel for reliability of our networks and systems. We believe
      our
      future success will depend upon our ability or retain these key employees and
      our ability to attract and retain other skilled engineering, technical,
      managerial, and sales personnel, including outsourced personnel. Employees
      may
      not remain employed by us for any definite period of time. The loss of key
      personnel could have a material adverse effect on our business and results
      of
      operations.




***Our
      outstanding debentures state that if our current chief executive officer ceases
      to hold that office, we would be in default under the debentures and may
      need to cease operations.***





On
      February 11, 2008, our debentures were amended to state that if Frank T.
      Matarazzo ceases to be our Chief Executive Officer during the term of the
      debenture, we would be in default and the debenture holders could foreclose
      their security interest and liquidate our assets, which may cause us to cease
      operations.




***The
      communication industry is intensely competitive and rapidly evolving. Our
      failure to compete effectively could lead to less demand for our products,
      loss
      of market share and damage our operating results.***




We
      operate in a highly competitive, quickly changing environment, and our future
      success will depend on our ability to develop and introduce new services and
      service enhancements that achieve broad market acceptance in the commercial
      multi-tenant unit sector and the residential multi-dwelling unit sector. We
      will
      also need to respond effectively to new product announcements by our competitors
      by quickly introducing competitive products.




Delays
      in
      product development and introduction could result in:





·
            loss
                of or delay in revenue and loss of market
                share;


·
            negative
                publicity and damage to our reputation and brand;
                and


10


·
            decline
                in the selling price of our products and
                services.





Our
      competitors consist of other satellite companies, direct broadcast satellite
      system operators, cable companies, traditional phone companies and off-air
      broadcasters. Some of these competitors have been engaged in our industry for
      substantially longer periods of time and may have access to greater resources
      than we do. Large companies, including Direct TV, DISH Network, Time Warner,
      Cablevision and Verizon, are active in our market of providing and distributing
      broadband and video services. These companies may have greater success in the
      recruitment and retention of qualified employees, as well as in conducting
      their
      operations, which may give them a competitive advantage.




Competing
      cable television operators have large, established subscriber bases, and many
      cable operators have significant investments in, and access to, programming.
      One
      of the competitive advantages of direct broadcast satellite system providers
      such as us has been the ability to provide subscribers with more channels and
      a
      better quality digital signal than traditional analog cable television systems.
      Many cable television operators have made significant investments to upgrade
      their systems from analog to digital, significantly increasing the number and
      variety of channels and the quality of the transmission they can provide to
      their subscribers. As a result of these upgrades, cable television operators
      have become better able to compete with direct broadcast satellite system
      providers. Increased competition could result in price reductions, reduced
      margins or loss of market share and greater competition for qualified technical
      personnel. There can be no assurance that we will be able to compete
      successfully against current and future competitors. If we are unable to compete
      effectively, or if competition results in a deterioration of market conditions,
      our business and results of operations would be adversely affected.




***The
      market for our products and services are subject to technological change. Our
      failure to keep pace with technological changes could lead to less demand for
      our products and services, loss of market share and reduced
      revenues.***




The
      market for digital satellite television and high-speed Internet products and
      services is characterized by rapid change, evolving industry standards and
      frequent introductions of new technologies. These new standards and technologies
      could make our existing or future products or services obsolete. Keeping pace
      with the introduction of new standards and technologies could result in
      additional costs or prove difficult or impossible. The failure to keep pace
      with
      these changes and to continue to enhance and improve the responsiveness,
      functionality and features of our services could harm our ability to attract
      and
      retain users.




***We
      rely on a limited number of third party suppliers, including Telkonet,
      Bridgewater and EchoStar. If these companies fail to perform or experience
      delays, shortages, or increased demand for their products or services, we may
      face shortages, increased costs, and may be required to suspend deployment
      of
      certain products and services.***




We
      depend
      on a limited number of third party suppliers to provide the equipment required
      to deliver our cable and broadband services and cable television programming
      and
      other services. If these providers fail to perform their obligations under
      our
      agreements with them or we are unable to renew these agreements on favorable
      terms or at all, we may be forced to suspend the deployment of our broadband
      and
      cable services and enrollment of new subscribers, which would have an adverse
      effect on our business, prospects, financial condition and operating
      results.




***We
      are not large enough to negotiate cable television programming contracts as
      favorable as some of our larger competitors, which may put us at a competitive
      disadvantage or negatively impact our results of
      operations.***




Programming
      costs are generally directly related to the number of subscribers to which
      the
      programming is provided, with discounts available to large traditional cable
      operators and direct broadcast satellite providers based on their high
      subscriber levels. As a result, larger cable and direct broadcast satellite
      systems generally pay lower per subscriber programming costs. We have attempted
      to obtain volume discounts from our suppliers. Despite these efforts, we believe
      that our per subscriber programming costs are significantly higher than large
      cable operators and direct broadcast satellite system providers with which
      we
      compete in some of our markets. This may make it difficult for us to remain
      competitive with prices offered by these providers while maintaining our
      operating results.




In
      addition, as programming agreements come up for renewal, we may not be able
      to
      renew these agreements on comparable or favorable terms. If we are unable to
      reach agreement with a programmer on terms that we believe are reasonable,
      we
      may be forced to remove that programming from our offerings, which could result
      in a loss of customers.




***Programming
      costs have risen in past years and are expected to continue to rise, which
      may
      adversely affect our financial results.***




The
      cost
      of acquiring programming is a significant portion of the operating costs for
      our
      cable television business. These costs have increased each year and we expect
      them to continue to increase, especially the costs associated with sports
      programming. Many of our programming contracts cover multiple years and provide
      for future increases in the fees we must pay. Historically, we have absorbed
      increased programming costs in large part through increased prices to our
      customers. However, competitive and other marketplace factors may not permit
      us
      to continue to pass these costs through to customers. In order to minimize
      the
      negative impact that increased programming costs may have on our margins, we
      may
      pursue a variety of strategies, including offering some programming at premium
      prices or moving some programming from our analog service to our premium digital
      services. Despite our efforts to manage programming expenses and pricing, the
      rising cost of programming may adversely affect our results of operations.


11


***Any
      acquisitions we make could result in difficulties in successfully managing
      our
      combined business and consequently harm our financial
      condition.***




We
      may
      seek to expand by acquiring competing businesses in our current or other
      geographic markets. We cannot accurately predict the timing, size and success
      of
      our acquisition efforts and the associated capital commitments that might be
      required. We expect to face competition for acquisition candidates, which may
      limit the number of acquisition opportunities available to us and may lead
      to
      higher acquisition prices. We may not be able to identify, acquire or profitably
      manage additional businesses or successfully integrate acquired businesses,
      if
      any, into our company, without substantial costs, delays or other operational
      or
      financial difficulties. In addition, acquisitions involve numerous other risks,
      including:





·
            failure
                of the acquired businesses to achieve expected
                results;


·
            diversion
                of management’s attention and resources to
                acquisitions;


·
            failure
                to retain key customers or personnel of the acquired
                businesses;


·
            disappointing
                quality or functionality of acquired equipment and people;
                and


·
            risks
                associated with unanticipated events, liabilities or
                contingencies.





Customer
      dissatisfaction or performance problems at an acquired business could negatively
      affect our reputation. The inability to acquire businesses on reasonable terms
      or successfully integrate and manage acquired companies, or the occurrence
      of
      performance problems at acquired companies, could result in dilution,
      unfavorable accounting treatment or one-time charges and difficulties in
      successfully managing our business.




***Our
      inability to obtain capital, use internally generated cash or debt, or use
      shares of our common stock to finance future acquisitions could impair the
      growth and expansion of our business*** **.**




Reliance
      on internally generated cash or debt to finance our operations or complete
      acquisitions could substantially limit our operational and financial
      flexibility. The extent to which we will be able or willing to use shares of
      our
      common stock to consummate acquisitions will depend on our market value which
      will vary, and liquidity, which may be limited, and the willingness of potential
      sellers to accept our common stock as full or partial payment. Using shares
      of
      our common stock for this purpose also may result in significant dilution to
      our
      stockholders. We may not be able to obtain the necessary capital to finance
      any
      acquisitions or our other cash needs. If we are unable to obtain additional
      capital on acceptable terms, we may be required to reduce the scope of any
      expansion or redirect resources committed to internal purposes. In addition
      to
      requiring funding for acquisitions, we may need additional funds to implement
      our internal growth and operating strategies or to finance other aspects of
      our
      operations. Our failure to: (i) obtain additional capital on acceptable terms;
      (ii) use internally generated cash or debt to complete acquisitions because
      it
      significantly limits our operational or financial flexibility; or (iii) use
      shares of our common stock to make future acquisitions, may hinder our ability
      to actively pursue any acquisition program.




***Our
      indebtedness and restrictive debt covenants could limit our financing options
      and liquidity position, which would limit our ability to grow our business.***




The
      terms
      of our outstanding debentures could have negative consequences to us, such
      as:




·
            we
                may be unable to obtain additional financing to fund working capital,
                operating losses, capital expenditures or acquisitions on terms acceptable
                to us, or at all;


·
            we
                may be unable to refinance our indebtedness on terms acceptable to
                us, or
                at all; and


·
            we
                may be more vulnerable to economic downturns and limit our ability
                to
                withstand competitive
                pressures.





Additionally,
      covenants in the securities purchase agreement governing the debentures impose
      operating and financial restrictions on us. These restrictions prohibit or
      limit
      our ability, and the ability of our subsidiaries, to, among other things:




·
            pay
                cash dividends to our stockholders;


·
            incur
                additional indebtedness;


·
            permit
                liens on assets or conduct sales of assets;
                and


·
            engage
                in transactions with affiliates.





These
      restrictions may limit our ability to obtain additional financing, withstand
      downturns in our business or take advantage of business opportunities. Moreover,
      additional debt financing we may seek may contain terms that include more
      restrictive covenants, may require repayment on an accelerated schedule or
      may
      impose other obligations that limit our ability to grow our business, acquire
      needed assets, or take other actions we might otherwise consider appropriate
      or
      desirable.




***Our
      management and operational systems might be inadequate to handle our potential
      growth.***




We
      may
      experience growth that could place a significant strain upon our management
      and
      operational systems and resources. Failure to manage our growth effectively
      could have a material adverse effect upon our business, results of operations
      and financial condition. Our ability to compete effectively as a service
      provider and to manage future growth will require us to continue to improve
      our
      operational systems, organization and financial and management controls,
      reporting systems and procedures. We may fail to make these improvements
      effectively. Additionally, our efforts to make these improvements may divert
      the
      focus of our personnel.


12


We
      must
      integrate our key executives into a cohesive management team to expand our
      business. If new hires perform poorly, or if we are unsuccessful in hiring,
      training and integrating these new employees, or if we are not successful in
      retaining our existing employees, our business may be harmed. To manage the
      growth we will need to increase our operational and financial systems,
      procedures and controls. Our current and planned personnel, systems, procedures
      and controls may not be adequate to support our future operations. We may not
      be
      able to effectively manage such growth, and failure to do so could have a
      material adverse effect on our business, financial condition and results of
      operations.




***If
      we fail to establish and maintain an effective system of internal control,
      we
      may not be able to report our financial results accurately or to prevent fraud.
      Any inability to report and file our financial results accurately and timely
      could harm our business and adversely impact the trading price of our common
      stock.***




Effective
      internal control is necessary for us to provide reliable financial reports
      and
      prevent fraud. If we cannot provide reliable financial reports or prevent fraud,
      we may not be able to manage our business as effectively as we would if an
      effective control environment existed, and our business and reputation with
      investors may be harmed. As a result, our small size and any current internal
      control deficiencies may adversely affect our financial condition, results
      of
      operation and access to capital. We have not performed an in-depth analysis
      to
      determine if past failures of internal controls exist, and may in the future
      discover, areas of our internal control that need improvement.




***We
      may be unable to protect our intellectual property, which could reduce the
      value
      of our services and our brand.***




Our
      ability to compete effectively depends on our ability to protect our proprietary
      technologies, network designs, and processes. We may not be able to safeguard
      and maintain our proprietary rights. We rely on trademarks and policies and
      procedures related to confidentiality to protect our intellectual property.
      Some
      of our intellectual property, however, is not covered by any of these
      protections. Any infringement by third parties on our intellectual property
      could have a negative impact on our business. In addition, in order to protect
      our intellectual property, we may be required to initiate legal proceedings
      against persons we deem are violating our rights. Any such proceedings would
      be
      expensive, and we may not have the funds available to pay for the costs and
      expenses of such proceedings, and therefore we may be limited in our ability
      to
      protect our rights.




***We
      could be subject to claims that we have infringed on the proprietary rights
      of
      others, which claims would likely be costly to defend, could require us to
      pay
      damages and could limit our ability to use necessary technologies in the
      future.***




Patent
      technologies or processes that are substantially equivalent or superior to
      our
      processes or products and services, or products or services of our vendors
      used
      in our business, could result in claims that our services and products infringe
      on these patents or proprietary rights of others. Defending against infringement
      claims, even meritless claims, is time consuming, distracting, and costly.
      If we
      are found to be infringing proprietary rights of a third party, we could be
      enjoined from using such third party’s rights and be required to pay substantial
      royalties and damages, and may no longer be able to use the intellectual
      property on acceptable terms or at all. Failure to obtain licenses to
      intellectual property could delay or prevent the development, manufacture,
      or
      sale of our products or services and could cause us to establish reserves that
      would impact our profitability, and expend significant resources to develop
      or
      acquire non-infringing intellectual property.




***If
      our data security measures are breached, subscribers may perceive our network
      and services as not secure, which may expose us to liability or harm our
      reputation and our results of operations*** **.**




Network
      security and the authentication of the subscriber’s credentials are designed to
      protect unauthorized access to data on our broadband and wireless networks.
      Because techniques used to obtain unauthorized access to or to sabotage networks
      change frequently and may not be recognized until launched against a target,
      we
      may be unable to anticipate or implement adequate preventive measures against
      unauthorized access or sabotage. Consequently, unauthorized parties may overcome
      our encryption and security systems and obtain access to data on our network,
      including on a device connected to our network. In addition, because we operate
      and control our network and our subscribers’ Internet connectivity, unauthorized
      access or sabotage of our network could result in damage to our network and
      to
      the computers or other devices used by our subscribers. An actual or perceived
      breach of network security, regardless of whether the breach is our fault,
      could
      harm public perception of the effectiveness of our security measures, adversely
      affect our ability to attract and retain subscribers, expose us to significant
      liability and adversely affect our business prospects.




***Interruption
      or failure of our information technology and communications systems could impair
      our ability to provide our services, which could damage our reputation and
      harm
      our operating results.***




Our
      services depend on the continuing operation of our information technology and
      communications systems. Any damage to or failure of our systems could result
      in
      interruptions in our service. Our systems are vulnerable to damage or
      interruption from earthquakes, terrorist attacks, floods, fires, power loss,
      telecommunications failures, computer viruses, computer denial of service
      attacks, and other attempts to harm our systems, and similar causes. Some of
      our
      systems are not fully redundant, and our disaster recovery planning may not
      be
      adequate. The occurrence of a natural disaster or unanticipated problems at
      our
      network centers or equipment could ** result
      in
      lengthy interruptions in our service and adversely affect our business,
      prospects, financial condition and results of operations.




We
      have
      experienced unscheduled service interruptions in the past, caused by temporary
      problems in our systems or in the systems of third parties that we rely on,
      in
      the past and may experience such service interruptions or system failures in
      the
      future. Any unscheduled service interruption adversely affects our ability
      to
      operate our business and could result in an immediate loss of revenues. If
      we
      experience frequent or persistent system or network failures, our reputation
      could be permanently harmed. We may make significant capital expenditures to
      increase the reliability of our systems, but these capital expenditures may
      not
      achieve the results we expect.


13


***If
      we are unable to attract, train and retain highly qualified personnel, the
      quality of our services may decline and we may not successfully execute our
      growth strategies.***




Our
      success depends in large part upon our ability to continue to attract, train,
      motivate and retain highly skilled and experienced technical employees.
      Qualified technical employees periodically are in great demand and may be
      unavailable in the time frame required to satisfy our customers’ requirements.
      While we currently have available technical expertise sufficient for the
      requirements of our business, expansion of our business could require us to
      employ additional highly skilled technical personnel. We expect competition
      for
      such personnel to increase as the markets for cable, broadband Voice over
      Internet Protocol (VoIP) and wireless services expand. We may not be able to
      attract and retain sufficient numbers of highly skilled technical employees
      in
      the future. The loss of technical personnel or our inability to hire or retain
      sufficient technical personnel at competitive rates of compensation could impair
      our ability to attract and retain customers and could harm our
      business.




***Potential
      fluctuations in operating results could have a negative effect on the value
      of
      our common stock.***




Our
      operating results may fluctuate significantly in the future as a result of
      a
      variety of factors, most of which are outside of our control,
      including:





·
            the
                level of use of the Internet;


·
            the
                demand for “bundled” video, voice, Internet and Wi-Fi
                services;


·
            the
                amount and timing of capital expenditures and other costs relating
                to the
                expansion of our operations;


·
            price
                competition or pricing changes in the
                industry;


·
            technical
                difficulties or system downtime;


·
            economic
                conditions specific to the Internet and communications industry;
                and


·
            general
                economic conditions.





Our
      quarterly results may also be significantly impacted by certain accounting
      treatment of acquisitions, financing transactions or other matters. Such
      accounting treatment could have a material impact on our results of operations
      and have a negative impact on the price of our common stock.




***We
      may be affected if the United States participates in wars or military or other
      action or by international terrorism.***




Involvement
      in a war or other military action or acts of terrorism may cause significant
      disruption to commerce throughout the world. To the extent that such disruptions
      result in (i) delays or cancellations of customer orders, (ii) a general
      decrease in consumer spending on video broadcast and information technology,
      (iii) our inability to effectively market and distribute our services or
      products or (iv) our inability to access capital markets, our business, results
      of operations or financial condition could be materially and adversely affected.
      We are unable to predict whether the involvement in a war or other military
      action will result in any long-term commercial disruptions or if such
      involvement or responses will have any long-term material adverse effect on
      our
      business, results of operations, or financial condition.




**Risks
      Relating to Our Industry**




***The
      industry in which we operate is continually evolving, which makes it difficult
      to evaluate our future prospects and increases the risk of an investment in
      our
      company. Our services may become obsolete, and we may not be able to develop
      competitive products or services on a timely basis or at
      all.***




The
      broadband and video services industries are characterized by rapid technological
      change, competitive pricing, frequent new service introductions, and evolving
      industry standards and regulatory requirements. We believe that our success
      depends on our ability to anticipate and adapt to these challenges and to offer
      competitive services on a timely basis. We face a number of difficulties and
      uncertainties associated with our reliance on technological development, such
      as:





·
            competition
                from service providers using more traditional and commercially proven
                means to deliver similar or alternative
                services;


·
            competition
                from new service providers using more efficient, less expensive
                technologies, including products not yet invented or
                developed;


·
            uncertain
                consumer acceptance;


·
            realizing
                economies of scale;


·
            responding
                successfully to advances in competing technologies in a timely and
                cost-effective manner;


·
            requirements
                for capital expenditures to deploy new technologies;
                and


·
            existing,
                proposed or undeveloped technologies that may render wireless broadband
                and VoIP telephone services less profitable or
                obsolete.


14


As
      the
      services offered by us and our competitors develop businesses and consumers
      may
      not accept our services as a commercially viable alternative to other means
      of
      delivering broadband and video services. This could negatively impact our
      financial condition and results of operations.




***We
      are subject to government regulation, which may adversely impact our
      business.***




Our
      business is regulated by federal, state and local governmental entities. A
      number of other federal, state and local privacy, security, and consumer laws
      also apply to our business. These laws and regulations and their application
      are
      subject to continual change as new legislation, regulations or amendments to
      existing laws and regulations are adopted from time to time by governmental
      or
      regulatory authorities, including as a result of judicial interpretations of
      such laws and regulations. Regulations or interpretations of those regulations
      that are favorable to our competitors could adversely affect our competitive
      position. Our ability to compete successfully will depend on the nature and
      timing of these legislative changes, regulations and interpretations, and
      whether they are favorable to us or our competitors.




To
      maintain the quality of our network and user experience, we may manage the
      bandwidth used by our subscribers’ applications, in part by restricting the
      types of applications that may be used over our network. If the Federal
      Communications Commission (FCC) or other regulatory authorities were to adopt
      regulations that constrain our ability to employ bandwidth management practices,
      excessive use of bandwidth-intensive applications would likely reduce the
      quality of our services for all subscribers. Such decline in the quality of
      our
      services could harm our business.




The
      scope
      of the regulations that may apply to VoIP telephone services providers and
      the
      impact of such regulations on providers’ competitive position are presently
      unknown and could be detrimental to our business and prospects.




***The
      failure of the Internet to continue as an accepted medium for business commerce
      could have a negative impact on our results of operations.***




Our
      long-term viability is substantially dependent upon the continued widespread
      acceptance and use of the Internet as a medium for business commerce. The
      Internet has experienced, and is expected to continue to experience, significant
      growth in the number of users. However, the Internet infrastructure may not
      continue to be able to support the demands placed on it by this continued
      growth. In addition, delays in the development or adoption of new standards
      and
      protocols to handle increased levels of Internet activity or increased
      government regulation could slow or stop the growth of the Internet as a viable
      medium for business commerce. Moreover, critical issues concerning the
      commercial use of the Internet (including security, reliability, accessibility
      and quality of service) remain unresolved and may adversely affect the growth
      of
      Internet use or the attractiveness of its use for business commerce. The failure
      of the necessary infrastructure to further develop in a timely manner or the
      failure of the Internet to continue to develop rapidly as a valid medium for
      business would have a negative impact on our results of operations.




**Risks
      Relating to Our Organization**




***We
      are a holding company that depends on cash flow from our wholly-owned subsidiary
      to meet our obligations.***




After
      the
      reverse merger with MST, we became a holding company with no material assets
      other than the stock of MST. Accordingly, all our operations will be conducted
      by MST. We currently expect that we will be required to retain the earnings
      and
      cash flow of our subsidiary for use by us in our operations, including servicing
      any debt obligations we may have now or in the future.




***Our
      largest stockholder can exert significant control over our business and affairs
      and may have actual or potential interests that depart from our other
      stockholders.***




Our
      largest stockholder, Telkonet, owns or controls approximately 62% of the issued
      and outstanding shares of our common stock, which percentage may increase in
      the
      event that any of the outstanding warrants that are held by Telkonet are
      exercised, any warrants in the future are granted to them, or the exercise
      of
      any convertible securities or the acquisition of additional shares of our common
      stock by them. Their interests may differ from the interests of other
      stockholders. Such stockholder will have significant control over all corporate
      actions requiring stockholder approval, irrespective of how our other
      stockholders may vote, including the following actions:





·
            election
                of our directors;


·
            amendment
                of our Certificate of Incorporation or By-laws;
                and


·
            mergers,
                sale of assets or other corporate
                transactions.





Also,
      concentrations of stock ownership in one stockholder may discourage a potential
      acquirer from making a tender offer or otherwise attempting to obtain control
      of
      our company, which in turn could reduce our stock price or prevent our
      shareholders from realizing a premium over our stock price.




***Public
      company compliance may make it more difficult to attract and retain officers
      and
      directors.***




Sarbanes-Oxley
      and new rules subsequently implemented by the Securities and Exchange Commission
      have required changes in corporate governance practices of public companies.
      We
      expect these new rules and regulations to increase our compliance costs and
      to
      make certain activities more time consuming and costly. We also expect that
      these new rules and regulations may make it more difficult for us to attract
      and
      retain qualified persons to serve on our board of directors or as executive
      officers.


15


***Because
      we are not yet required to comply with rules requiring the adoption of certain
      corporate governance measures, our stockholders have limited protections against
      interested director transactions, conflicts of interest and similar matters.***




The
      Sarbanes-Oxley Act, as well as rule changes proposed and enacted by the
      Securities and Exchange Commission, the New York and American Stock Exchanges
      and the Nasdaq Stock Market as a result of Sarbanes-Oxley, require the
      implementation of various measures relating to corporate governance. These
      measures are designed to enhance the integrity of corporate management and
      the
      securities markets and apply to securities that are listed on those exchanges.
      Because we are not presently required to comply with many of the corporate
      governance provisions, we have not yet adopted these measures.





**Risks
      Relating to Our Common Stock**





***Our
      stock price may be volatile in response to various factors, some of which are
      out of our control*** **.**




The
      market price of our common stock is likely to be highly volatile and could
      fluctuate widely in price in response to various factors, many of which are
      beyond our control, including the following:





·
            changes
                in the communications technology industry and
                markets;


·
            volume
                and timing of subscriptions from major
                customers;


·
            competitive
                pricing pressures;


·
            our
                ability to obtain working capital
                financing;


·
            technological
                innovations or new competitors in our
                market;


·
            additions
                or departures of key personnel;


·
            our
                ability to execute our business
                plan;


·
            operating
                results that fall below
                expectations;


·
            loss
                of any strategic relationship;


·
            industry
                or regulatory developments;


·
            economic
                and other external factors; and


·
            period-to-period
                fluctuations in our financial
                results.





In
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are unrelated to the operating performance
      of
      particular companies. These market fluctuations may also materially and
      adversely affect the market price of our common stock.





***Our
      common stock may be deemed a “penny stock”, which would make it more difficult
      for our investors to sell their shares.***




Our
      common stock may be subject to the “penny stock” rules adopted under Section
      15(g) of the Securities Exchange Act of 1934, as amended. The penny stock rules
      apply to non-Nasdaq listed companies whose common stock trades at less than
      $5.00 per share or that have tangible net worth of less than $5,000,000
      ($2,000,000 if the company has been operating for three or more years). These
      rules require, among other things, that brokers who trade penny stock to persons
      other than “established customers” complete specified documentation, make
      suitability inquiries of investors and provide investors with specified
      information concerning trading in the security, including a risk disclosure
      document and quote information under some circumstances. Many brokers have
      decided not to trade penny stocks because of the requirements of the penny
      stock
      rules and, as a result, the number of broker-dealers willing to act as market
      makers in these securities is limited. If we remain subject to the penny stock
      rules for any significant period, that could have an adverse effect on the
      market, if any, for our securities. If our securities are subject to the penny
      stock rules, investors will find it more difficult to dispose of our
      securities.




***Offers
      or availability for sale of a substantial number of shares of our common stock
      may cause the price of our common stock to decline.***




Since
      our
      stockholders could sell substantial amounts of our common stock in the public
      market, upon the expiration of statutory holding periods, under Rule 144, or
      upon expiration of lock-up periods applicable to outstanding shares, or issued
      upon conversion of debentures or the exercise of outstanding options or
      warrants, this could create a circumstance commonly referred to as an “overhang”
and in anticipation of which the market price of our common stock could fall.
      The existence of an overhang, whether or not sales have occurred or are
      occurring, also could make more difficult our ability to raise additional
      financing through the sale of equity or equity-related securities in the future
      at a time and price that we deem reasonable or appropriate.




***We
      have not paid dividends in the past and do not expect to pay dividends in the
      future. Any return on investment may be limited to the value of our common
      stock.***




We
      have
      never paid cash dividends on our common stock and do not anticipate doing so
      in
      the foreseeable future. The payment of dividends on our common stock will depend
      on earnings, financial condition and other business and economic factors
      affecting it at such time as the board of directors may consider relevant.
      In
      addition, restrictive covenants contained in our debentures prevent us from
      paying dividends to our stockholders. If we do not pay dividends, our common
      stock may be less valuable because a return on your investment will only occur
      if our stock price appreciates.


16


**ITEM
      2.    DESCRIPTION OF PROPERTY.**





We
      lease
      approximately 12,600 square feet of office and warehouse space in Hawthorne,
      New
      Jersey for approximately $6,897 per month. The current lease term expires on
      April 30, 2010, at which time we have the option to extend the lease for an
      additional five-year period. The Company also rents office space from 25 River
      Drive South Urban Renewal Co. for approximately $2,500 per month. This lease
      will expire in December 2009.





We
      lease
      approximately 64 square feet at a collocation facility located in New York
      City
      for our telecommunications and video equipment, at a monthly rent of
      $1,664.




We
      have a
      license to maintain a major point-of-presence at the Trump International Hotel
      and Tower Condominium located at Columbus Circle in New York City. Pursuant
      to
      the license agreement, we have the right to install antennas and other equipment
      on the building’s rooftop and in certain equipment storage areas for a license
      fee of $3,800 per month. The term of the agreement expires on June 30,
      2012.





We
      believe our current facilities are adequately covered by insurance, and are
      adequate for our immediate and near-term needs. Additional space may be required
      as we expand our activities. We do not currently foresee any significant
      difficulties in obtaining any required additional facilities.





**ITEM
      3.     LEGAL PROCEEDINGS.**





There
      are
      no legal proceedings pending, and we are not aware of any proceeding that a
      governmental authority is contemplating, against us.





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





No
      matter
      was submitted during the fourth quarter of the fiscal year ended December 31,
      2007, to a vote of security holders through the solicitation of proxies or
      otherwise .




**PART
      II**





**ITEM
      5.     MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
      AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.**





**Market
      Information**





Since
      June 1, 2007, our common stock has been listed for trading on the OTC Bulletin
      Board under the ticker symbol “MSHI.OB.” As of April 1, 2008, we had 101
      stockholders of record and 29,816,552 shares of common stock issued and
      outstanding. Prior to that date, there was no active market for our common
      stock.




The
      following table documents the high and low bid prices for our common stock
      on
      the OTC Bulletin Board for the period beginning June 1, 2007 through December
      31, 2007. The quotations reflect inter-dealer prices, without retail mark-up,
      mark-down or commission and may not represent actual transactions.





**High**
            
            **Low****Year
                Ended December 31, 2007**Second
                Quarter, beginning June 1, 2007
            
            $
            1.95
            
            $
            1.10Third
                Quarter
            
            $
            1.45
            
            $
            0.45Fourth
                Quarter
            
            $
            1.35
            
            $
            0.40





**Dividend
      Policy**





In
      the
      past, we have not declared or paid cash dividends on our common stock, and
      we do
      not intend to pay any cash dividends on our common stock. Rather, we intend
      to
      retain future earnings (if any) to fund the operation and expansion of our
      business and for general corporate purposes. In addition, our debentures
      prohibit us from paying any cash dividends so long as any portion of the
      debentures remains outstanding.


17


**Securities
      Authorized for Issuance Under Equity Compensation Plans**





As
      of
      December 31, 2007, we have made the following grants under our 2007 Incentive
      Stock Plan.





**Equity
      Compensation Plan Information**





Number of securities
              to be issued upon
              exercise of
              outstanding options,
              warrants and rights
            
            Weighted-average
              exercise price of
              outstanding
              options, warrants
              and rights
            
            Number of securities
              remaining available for
              future issuance under
              equity compensation
              plansEquity compensation
                plans approved by security holders
            
            
            13,235,626
            
            $
            0.89
            
            
            222,000Equity
                compensation plans not approved by security holders
            
            
            0
            
            
            0
            
            
            0Total
            
            
            13,235,626
            
            $
            0.89
            
            
            222,000





**Recent
      Sales of Unregistered Securities**





None.




**ITEM
      6.     MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATIONS.**





Prior
      to
      May 24, 2007, we were a public shell company without material assets or
      liabilities. On May 24, 2007, MST completed a reverse merger with our
      subsidiary, pursuant to which MST became our wholly-owned subsidiary, we
      succeeded to the business of MST as our sole line of business, and the former
      security holders of MST became our controlling stockholders. For financial
      reporting purposes, MST, and not us, is considered the accounting acquirer
      in
      the reverse merger. Accordingly, the historical financial statements presented
      and the discussion and analysis or plan of operations below are those of MST
      and
      do not include our historical financial results. All costs associated with
      the
      reverse merger were expensed as incurred.





**Overview**





We
      are a
      communications service provider offering Quad-Play services to MTU and MDU
      residential, hospitality and commercial properties. These Quad-Play services
      include video, voice, high-speed internet and Wi-Fi access. In addition, we
      currently offer or plan to offer a variety of next-generation telecommunications
      solutions and services, including satellite installation, video conferencing,
      surveillance/security and energy management, and other complementary
      professional services. Our net sales in 2007 were $2,675,750.





**Critical
      Accounting Policies and Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires us to make estimates
      and assumptions that affect the amounts reported in the consolidated financial
      statements and accompanying notes. On an ongoing basis, we evaluate significant
      estimates used in preparing our financial statements, including those related
      to
      revenue recognition, guarantees and product warranties and stock based
      compensation. We base our estimates on historical experience, underlying run
      rates and various other assumptions that we believe to be reasonable, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities. Actual results could differ from these estimates.
      The
      following are critical judgments, assumptions, and estimates used in the
      preparation of the consolidated financial statements.





**Revenue
      Recognition**





For
      revenue from product sales, the Company recognizes revenue in accordance with
      Staff Accounting Bulletin No. 104, *Revenue Recognition* (“SAB104”), which superceded Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements* (“SAB101”). SAB 101 requires that four basic criteria must be met before revenue
      can be recognized: (1) persuasive evidence of an arrangement exists; (2)
      delivery has occurred; (3) the selling price is fixed and determinable; and
      (4)
      collectibility is reasonably assured. Determination of criteria (3) and (4)
      are
      based on management's judgments regarding the fixed nature of the selling prices
      of the products delivered and the collectibility of those amounts. Provisions
      for discounts and rebates to customers, estimated returns and allowances, and
      other adjustments are provided for in the same period the related sales are
      recorded. The Company defers any revenue for which the product has not been
      delivered or is subject to refund until such time that the Company and the
      customer jointly determine that the product has been delivered or no refund
      will
      be required. SAB 104 incorporates Emerging Issues Task Force 00-21 (“EITF
      00-21”), *Multiple-Deliverable Revenue Arrangements.* EITF
      00-21 addresses accounting for arrangements that may involve the delivery or
      performance of multiple products, services and/or rights to use
      assets.


18


The
      Company accounts for the revenue, costs and expense related to residential
      cable
      services as the related services are performed in accordance with SFAS
      No. 51, Financial Reporting by Cable Television Companies. Installation
      revenue for residential cable services is recognized to the extent of direct
      selling costs incurred. Direct selling costs have exceeded installation revenue
      in all reported periods. Generally, credit risk is managed by disconnecting
      services to customers who are delinquent. The capitalized cost of this equipment
      is depreciated from three to ten years, on a straight-line basis down to the
      Company's original estimate of the projected value of the equipment at the
      end
      of the scheduled lease term.





**Stock
      Based Compensation**





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
      requires the measurement and recognition of compensation expense for all
      share-based payment awards made to employees and directors including employee
      stock options based on estimated fair values. SFAS 123(R) supersedes the
      Company’s previous accounting under Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
      beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission
      issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
      123(R). The Company has applied the provisions of SAB 107 in its adoption of
      SFAS 123(R).




The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of January 1,
      2006,
      the first day of the Company’s fiscal year 2006. The Company’s Consolidated
      Financial Statements as of and for the year ended December 31, 2007 and 2006
      reflect the impact of SFAS 123(R). In accordance with the modified prospective
      transition method, the Company’s Consolidated Financial Statements for prior
      periods have not been restated to reflect, and do not include, the impact of
      SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R)
      for
      the year ended December 31, 2007 and 2006, was $308,634 and $0, respectively,
      net of tax effect.




**Long-Lived
      Assets**





The
      Company has adopted Statement of Financial Accounting Standards No. 144 (“SFAS
      144”). The Statement requires that long-lived assets and certain identifiable
      intangibles held and used by the Company be reviewed for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Events relating to recoverability may include
      significant unfavorable changes in business conditions, recurring losses, or
      a
      forecasted inability to achieve break-even operating results over an extended
      period. The Company evaluates the recoverability of long-lived assets based
      upon
      forecasted discounted cash flows. Should impairment in value be indicated,
      the
      carrying value of intangible assets will be adjusted, based on estimates of
      future discounted cash flows resulting from the use and ultimate disposition
      of
      the asset. SFAS No. 144 also requires assets to be disposed of be reported
      at
      the lower of the carrying amount or the fair value less costs to sell. The
      Company determined that the value of our capitalized cable and related equipment
      has been impaired based upon our assessment of forecasted discounted cash flow
      from subscribers revenue and has written off $493,512 of its value, based on
      the
      lower of the carrying amount or the fair value less costs to sell, for the
      year
      ended December 31, 2007.





**Goodwill
      and Other Intangibles**





Goodwill
      represents the excess of the cost of businesses acquired over fair value or
      net
      identifiable assets at the date of acquisition. Goodwill is subject to a
      periodic impairment assessment by applying a fair value test based upon a
      two-step method. The first step of the process compares the fair value of the
      reporting unit with the carrying value of the reporting unit, including any
      goodwill. The Company utilizes a discounted cash flow valuation methodology
      to
      determine the fair value of the reporting unit. If the fair value of the
      reporting unit exceeds the carrying amount of the reporting unit, goodwill
      is
      deemed not to be impaired in which case the second step in the process is
      unnecessary. If the carrying amount exceeds fair value, the Company performs
      the
      second step to measure the amount of impairment loss. Any impairment loss is
      measured by comparing the implied fair value of goodwill, calculated per SFAS
      No. 142, with the carrying amount of goodwill at the reporting unit, with
      the excess of the carrying amount over the fair value recognized as an
      impairment loss. The
      Company determined that the value of goodwill has been impaired based upon
      managements assessment operating results and forecasted discounted cash flow
      and
      has written off the entire $1,958,198 of its value during the year ended
      December 31, 2007.





**Results
      of Operations**





***Year
      Ended December 31, 2007 Compared to Year Ended December 31,
      2006***





**Revenue** .
      Our
      revenue consists of providing subscriber (recurring) services and the delivery
      of product and services in the MTU/MDU markets. The subscriber revenue consists
      of Quad-Play services provided to a subscriber portfolio of properties with
      bulk
      service agreements and/or access licenses to service the individual subscribers
      in metropolitan New York. The product and services revenue consists of
      equipment, installations and ancillary services provided to customers
      independent of the subscriber portfolio. The total revenue for the year ended
      December 31, 2007, increased by $779,304 compared to 2006.





The
      recurring revenue for the subscriber base increased by approximately $757,148
      for the year ended December 31, 2007 compared to 2006. Our subscriber portfolio
      includes approximately 22 MDU properties with bulk service agreements and/or
      access licenses to service the individual subscribers in metropolitan New York.
      Additionally, we added approximately 1,900 internet and telephone subscribers
      through the acquisition of Newport Telecommunications Co. in July 2007. We
      anticipate an increasing trend in subscriber revenue through the installation
      of
      new buildings under contract and the subsequent subscriptions sold, as well
      as
      through acquisitions similar to Newport.


19


The
      table
      below outlines product and services versus subscriber (recurring) revenues
      for
      comparable periods:




Year ended December 31,2007
                
                2006
                
                VarianceRevenue:Product
                    and services
                
                $
                393,208
                
                
                15
                %
                $
                371,052
                
                
                20
                %
                $
                22,156
                
                
                6
                %Subscriber
                
                
                2,282,542
                
                
                85
                %
                
                1,525,394
                
                
                80
                %
                
                757,148
                
                
                50
                %Total
                
                
                2,675,750
                
                
                100
                %
                $
                1,896,446
                
                
                100
                %
                
                779,304
                
                
                41
                %





**Cost
      of Sales.** The
      product costs primarily consist of equipment and installation labor for
      installation and ancillary services provided to customers.





The
      subscriber costs increased by $1,152,802 for the year ended December 31, 2007
      compared to 2006.  These costs consist of customer support,
      programming and amortization of the capitalized costs to support the subscriber
      revenue.  Although our programming fees are a significant portion of
      the cost, we continue to pursue competitive agreements and volume discounts
      in
      conjunction with the anticipated growth of the subscriber base. The customer
      support costs include build-out of the support services necessary to develop
      and
      support the build-out of the Quad-Play subscriber base in metropolitan New
      York.
      The capitalized costs are amortized over the lease term and include equipment
      and installation labor.  Additionally, the recurring costs increased
      due to the addition of the Newport subscribers in July 2007.


Year ended December 31,2007
              
              2006
              
              VarianceCost
                  of Sales:Product
                  and Services
              
              $
              298,690
              
              
              76
              %
              $
              392,341
              
              
              106
              %
              $
              (93,651
              )
              
              (24
              )%Subscriber
              
              
              3,106,909
              
              
              136
              %
              
              1,954,107
              
              
              128
              %
              
              1,152,802
              
              
              59
              %Total
              
              
              3,405,599
              
              
              127
              %
              $
              2,346,448
              
              
              124
              %
              
              1,059,151
              
              
              45
              %





**Gross
      Profit.** The
      gross profit decreased by $279,847 for the year ended December 31, 2007 compared
      to 2006, primarily due to increased programming costs and expenses related
      to
      the addition of the existing infrastructure. We anticipate that we will increase
      our gross profit through expanding our subscriber base and reducing programming
      costs through the IPTV platform. The subscriber (recurring) revenue contributed
      approximately 36% of a negative gross profit margin for the year ended December
      31, 2007.




Year
                  ended December 31,2007
              
              2006
              
              VarianceGross
                  Profit:Product
                  and services
              
              $
              94,518
              
              
              24
              %
              $
              (21,289
              )
              
              (6
              )%
              $
              115,807
              
              
              544
              %Subscriber
              
              
              (824,367
              )
              
              (36
              )%
              
              (428,713
              )
              
              (28
              )%
              
              (395,654
              )
              
              (92
              )%Total
              
              
              (729,849
              )
              
              (27
              )%
              
              (450,002
              )
              
              (24
              )%
              
              (279,847
              )
              
              (62
              )%





**Operating
      Expenses.** Operating expenses, which consists of sales and marketing expenses, depreciation
      and general and administrative costs, totaled $7,712,563 during the year ended
      December 31, 2007 as compared to $3,180,493 for 2006. The Company recorded
      a
      non-cash impairment write down of its goodwill and long lived assets to the
      amount of $1,958,198 and $493,512, respectively, against its operating
      income for the year ended December 31, 2007. Additionally, there were increased
      costs associated with investor relations and professional services as well
      as
      non-cash stock compensation expense of $308,634 associated with stock options
      and $378,000 for common share issuances to employees and
      consultants.





**Selling,
      General and Administrative Expenses.** Selling,
      general, and administrative expenses which consist of commissions, salaries,
      advertising, professional service fees, investor relations services and overhead
      expenses, totaled $4,108,077 during the year ended December 31, 2007 as compared
      to $2,856,631 for 2006. This
      increase is primarily attributable to professional fees and investor relations
      services of approximately $434,000 and $423,000, respectively, in connection
      with the merger of MST was a public shell corporation. In addition,
      administrative costs increased approximately $395,000 mainly due to the
      acquisition of Newport Telecommunications Co. Our
      management believes that our expenses will continue to increase as sales
      continue to grow and additional staff is added to support our growth
      initiatives.





**Depreciation
      and Amortization** .
      Depreciation expenses for the year ended December 31, 2007 increased by $142,280
      compared to 2006. **** This **** was
      primarily due to the addition of Newport Telecommunications and the addition
      of
      infrastructure costs. The amortization expenses increased by $139,115 for the
      year ended December 31, 2007 compared to 2006 and this was a result of the
      addition of the Newport Telecommunications subscriber list.


20


**Off
      Balance Sheet Arrangements**





None.





**Liquidity
      and Capital Resources**





Our
      working capital increased by $3,927,109 during the year ended December 31,
      2007
      from a working capital deficit of $(6,481,388) at December 31, 2006 to a working
      capital deficit of $(2,554,279) at December 31, 2007. The increase in working
      capital for the year ended December 31, 2007, resulted in a net increase in
      cash
      of $908,497. The primary reason for the increase was the private placement
      and
      sale of debentures for net proceeds of approximately $2,694,000 and $5,303,000,
      respectively. The most significant uses and proceeds of cash were as
      follows:





·
            Approximately
                $3,446,000 of cash consumed directly in operating
                activities;




·
            Approximately
                $1,655,000 was expended on net purchases of cost of cable equipment
                and
                installations and other fixed assets;·
            Approximately
                $863,000 was a repayment, net of any advances, of inter-company loans
                from
                Telkonet, Inc., our parent company and majority owner;
                and




·
            Approximately
                $1,118,000 was expended for the acquisition of Newport Telecommunications
                assets.




As
      of
      December 31, 2007 and December 31, 2006, we had cash and cash equivalents of
      $1,022,965 and $114,468, respectively. As of March 31, 2008, we had
      approximately $263,930 of cash available to use as working capital.




As
      of
      December 31, 2007 and 2006, we had a balance due to Telkonet, Inc., in the
      amount of $1,270,287 and $5,603,310, respectively. The loans between the
      companies relate to acquisition related consideration, professional fees, shared
      administrative and other operating matters. In connection with the Merger,
      $5,000,000 of such indebtedness was converted into 5,000,000 shares of our
      common stock at a conversion price of $1.00 per share. The loan balance as
      of
      December 31, 2007, includes the $1,530,000 consideration of Telkonet, Inc.
      common stock transferred to us in conjunction with the acquisition of Newport
      Telecommunications Co. on July 18, 2007. The loans are unsecured and bear
      interest at the prime rate calculated monthly.





*Private
      Placement of Common Stock*





On
      May 24, 2007, we completed a private placement of units, pursuant to which
      5,597,664 shares of common stock and five-year warrants to purchase 2,798,836
      shares of common stock at an exercise price of $1.00 per share were issued,
      for
      total net proceeds of $2,694,020.





*Convertible
      Senior Debentures*





We
      also
      sold senior convertible debentures for total gross proceeds of
      $6,050,000.  The debentures bear interest at a rate of 8% per annum,
      commencing on the first anniversary of the original issue date of the
      debentures, payable quarterly in cash or common stock, at our option, and mature
      on April 30, 2010. The debentures are not callable and are convertible at a
      price of $0.65 per share into 10,117,462 shares of common stock.  In
      addition, holders of the debentures received five-year warrants to purchase
      an
      aggregate of 5,058,730 shares of our common stock at an exercise price of $1.00
      per share.





*Registration
      Rights Liquidated Damages*





We
      agreed
      to file a “resale” registration statement with the SEC within 60 days after the
      final closing of the private placement and the issuance of the debentures
      covering all shares of common stock sold in the private placement and underlying
      the debentures, as well as the warrants issued in connection therewith. We
      agreed to use our best efforts to have such “resale” registration statement
      declared effective by the SEC as soon as possible and, in any event, within
      120
      days after the initial closing of the private placement and the issuance of
      the
      debentures.





In
      addition, with respect to the shares of common stock sold in the private
      placement and underlying the warrants, the Company agreed to maintain the
      effectiveness of the “resale” registration statement from the effective date
      until the earlier of (i) 18 months after the date of the closing of the private
      placement or (ii) the date on which all securities registered under the
      registration statement (a) have been sold, or (b) are otherwise able to be
      sold
      pursuant to Rule 144, at which time exempt sales may be permitted for purchasers
      of the units, subject to the Company’s right to suspend or defer the use of the
      registration statement in certain events.


21


On
      September 21, 2007, we received approval from the requisite number of purchasers
      of the units and the convertible debentures to extend the deadline for causing
      the “resale” registration statement to be declared effective by the SEC to
      November 21, 2007.





In
      the
      event that such registration statement was not declared effective by the SEC
      on
      or before November 21, 2007, we were obligated to pay liquidated damages to
      the
      purchasers of the units and the convertible debentures equal 1% of their
      $9,128,717 purchase price for each month of delinquency, commencing from
      the original effectiveness date of September 21, 2007, with respect to the
      units
      and September 22, 2007, with respect to the convertible debentures.





We
      received waivers from the debenture holders, as of January 31, 2008, and from
      the unit holders, as of March 31, 2008, whereby they waived all rights to
      liquidated damages due to the registration statement not being declared
      effective by the SEC in a timely manner.




In
      accordance with EITF 00-19-2, the Company evaluated the likelihood of achieving
      registration statement effectiveness.  Accordingly, the Company has
      accrued $500,000 as of December 31, 2007, to account for potential liquidated
      damages until the expected effectiveness of the registration statement is
      achieved or the damages are waived. Such damages have since been
      waived.





We
      will
      need to raise additional capital in the future to fund our operating needs.
      We
      expect that the funds from the Private Placement and the issuance of the
      Debentures will fund our operations through the first half of the year, assuming
      the Company is not required to pay the liquidated damages. Our operating needs
      include the planned costs to operate our business, including amounts required
      to
      fund working capital and capital expenditures. Our future capital requirements
      and the adequacy of our available funds will depend on many factors, including,
      our ability to successfully commercialize our services, competing technological
      and market developments and the need to enter into collaborations with other
      companies or acquire other companies or technologies to enhance or complement
      our product and service offerings.





*Cash
      flow analysis*





Cash
      utilized in operating activities was $3,445,698 during the year ended December
      31, 2007 compared to $2,306,687 during the year ended December 31, 2006.




We
      utilized cash for investing activities of $2,773,485 and $2,835,363 during
      the
      year ended December 31, 2007 and 2006, respectively. The
      cash
      portion for the acquisition of Newport Telecommunications in July 2007 was
      $1,118,294 including acquisition costs.  Additionally, cost of cable
      equipment and installation amounted to $1,541,491 and $2,800,446 for the year
      ended December 31, 2007 and 2006. Also,
      purchases of property and equipment amounted to $113,700 and $34,917 for the
      year ended December 31, 2007 and 2006, respectively.





We
      raised
      $5,303,238 through the sale of debentures, and $2,694,020 through the sale
      of
      common stock, during the year ended December 31, 2007. In 2006, we received
      $5,603,310 from Telkonet, our parent company and payments of $363,092 and $6,555
      were made towards our notes payable.





Our
      registered independent certified public accountants have stated in their report
      dated April 14, 2008, that we have incurred operating losses in the past years,
      and that we are dependent upon management's ability to develop profitable
      operations. These factors among others may raise substantial doubt about our
      ability to continue as a going concern.




Additional
      financing is required in order to meet our current and projected cashflow
      requirements from operations. Additional investments are being sought, but
      we
      cannot guarantee that we will be able to obtain such investments. Financing
      transactions may include the issuance of equity or debt securities, obtaining
      credit facilities, or other financing mechanisms. However, the trading price
      of
      our common stock and the downturn in the U.S. stock and debt markets could
      make
      it more difficult to obtain financing through the issuance of equity or debt
      securities. Even if we are able to raise the funds required, it is possible
      that
      we could incur unexpected costs and expenses, fail to collect significant
      amounts owed to us, or experience unexpected cash requirements that would force
      us to seek alternative financing. Further, if we issue additional equity or
      debt
      securities, stockholders may experience additional dilution or the new equity
      securities may have rights, preferences or privileges senior to those of
      existing holders of our common stock. If additional financing is not available
      or is not available on acceptable terms, we will have to curtail our
      operations.





**Acquisition
      or Disposition of Plant and Equipment**





During
      the year ended December 31, 2007, fixed assets increased approximately
      $2,773,000, which included the addition of the Newport assets acquired in July
      2007 and equipment purchased for our cable build-out. The remainder is related
      to computer equipment and peripherals used in day-to-day operations. We
      anticipate significant expenditures as we continue to build-out the head-end
      equipment, IPTV infrastructure and other related infrastructure.





We
      lease
      approximately 12,600 square feet of office and warehouse space in Hawthorne,
      New
      Jersey for approximately $6,897 per month. The current lease term expires on
      April 30, 2010 at which time we have the option to extend the lease for an
      additional five-year period. We also rent office space from 25 River Drive
      South
      Urban Renewal Co. for approximately $2,500 per month. This lease will expire
      in
      December 2009.


22


We
      lease
      approximately 64 square feet at a collocation facility located in New York
      City
      for our telecommunications and video equipment, at a monthly rent of
      $1,664.




We
      have a
      license to maintain a major point-of-presence at the Trump International Hotel
      and Tower Condominium located at Columbus Circle in New York City. Pursuant
      to
      the license agreement, we have the right to install antennas and other equipment
      on the building’s rooftop and in certain equipment storage areas for a license
      fee of $3,800 per month. The term of the agreement expires on June 30,
      2012.





**New
      Accounting Pronouncements**





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
      to measure many financial instruments, and certain other items, at fair value.
      SFAS 159 applies to reporting periods beginning after November 15, 2007. The
      adoption of SFAS 159 is not expected to have a material impact on the Company’s
      financial position, results of operations or cash flows.





In
      December 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      141(R), “Business Combinations” (“Statement 141(R)”) and Financial Accounting
      Standards No. 160, “Noncontrolling Interests in Consolidated Financial
      Statements” (“Statement 160”). Statements 141(R) and 160 require most
      identifiable assets, liabilities, noncontrolling interests and goodwill acquired
      in a business combination to be recorded at “full fair value” and require
      noncontrolling interests (previously referred to as minority interests) to
      be
      reported as a component of equity.  Both statements are effective for
      fiscal years beginning after December 15, 2008.  Statement 141(R) will
      be applied to business combinations occurring after the effective
      date.  Statement 160 will be applied prospectively to all
      noncontrolling interests, including any that arose before the effective
      date.  The Company has not determined the effect, if any, the adoption
      of Statements 141(R) and 160 will have on the Company’s financial position,
      results of operations or cash flows.





**ITEM
      7.     FINANCIAL STATEMENTS.**





See
      the
      Financial Statements and Notes thereto commencing on Page F-1.





**ITEM
      8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE.**





None.





**ITEM
      8A(T).     CONTROLS AND PROCEDURES.**




***Evaluation
      of Disclosure Controls and Procedures*** **.**





Under
      the
      supervision and with the participation of our management, including our chief
      executive officer and principal financial officer, we evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934 (the “Exchange Act”)). Disclosure controls and
      procedures include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed by an issuer in the reports
      that it files or submits under the Exchange Act is accumulated and communicated
      to the issuer’s management, including its principal executive and principal
      financial officers, or persons performing similar functions, as appropriate
      to
      allow timely decisions regarding required disclosure. Our Chief Executive
      Officer and Vice President of Finance concluded that our disclosure controls
      and
      procedures are effective, as of the year ended December 31, 2007, in ensuring
      that material information that we are required to disclose in reports that
      we
      file or submit under the Exchange Act is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission rules and forms.





Our
      conclusion on the effectiveness of internal control over financial reporting
      did
      not include the internal controls of Newport Telecommunications Co., which
      was
      acquired in 2007 and which is included in our 2007 consolidated financial
      statements.





***Changes
      in Internal Control over Financial Reporting*** **.**





During
      the fourth quarter of 2007, there was no change in our internal control over
      financial reporting (as such term is defined in Rule 13a-15(f) under the
      Exchange Act) that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.




***Management
      Annual Report on Internal Control over Financial
      Reporting.***





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting
      is
      defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process
      designed by, or under the supervision of, a company’s principal executive and
      principal financial officers and effected by a company’s board of directors,
      management and other personnel, to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with accounting principles generally
      accepted in the United States of America. Our internal control over financial
      reporting includes those policies and procedures that:


23




·
            pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of our
                assets;





·
            provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with accounting
                principles generally accepted in the United States of America, and
                that
                our receipts and expenditures are being made only in accordance with
                authorization of management and directors;
                and





·
            provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of our assets that could
                have
                a material effect on the financial
                statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with policies or procedures may deteriorate.




We
      have
      excluded from this assessment the operations of Newport Telecommunications
      Co.,
      which constituted $2,598,148 and $2,471,926 of total and net assets,
      respectively, as of December 31, 2007, and $668,942 of net sales for the year
      then ended.





Our
      management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. This assessment was based on criteria
      established in the framework in *Internal Control-Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on our assessment, management concluded that our internal control over financial
      reporting was effective as of December 31, 2007.




This
      annual report does not include an attestation report of our registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permit us to provide only management’s report in this
      annual report.





**ITEM
      8B.     OTHER INFORMATION.**





None.




**PART
      III**





**ITEM
      9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL
      PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
      ACT.**





The
      following table furnishes the information concerning our directors and executive
      officers for the fiscal year ended December 31, 2007. Our directors are elected
      every year and serve until their successors are duly elected and qualified.
      Officers are elected annually by the board and serve at the discretion of the
      board.





Name
            
            Age
            
            TitleRonald
                W. Pickett
            
            60
            
            President
                and DirectorFrank
                T. Matarazzo
            
            46
            
            Chief
                Executive Officer, Director and SecretaryKeith
                V. Scarzafava
            
            44
            
            Chief
                Technology Officer and Director of OperationsRichard
                J. Leimbach
            
            39
            
            Vice
                President FinanceWarren
                V. Musser
            
            81
            
            Chairman
                of the Board of DirectorsThomas
                C. Lynch
            
            65
            
            DirectorDr.
                Thomas M. Hall
            
            56
            
            Director




**Ronald
      W. Pickett,** *President
      and Director*





Mr.
      Pickett has served as our President and as a director since May 24, 2007. Mr.
      Pickett has been a director of MST since January 2006. Mr. Pickett was the
      principal investor and co-founder of Telkonet (AMEX: TKO) and was its president
      from January 2003, until his resignation in December 2007. Subsequent to his
      resignation, he was appointed as Vice Chairman of the Board of Directors of
      Telkonet. He also was the founder, and for twenty years served as chairman
      of
      the board of directors and president of Medical Advisory Systems, Inc., a
      company providing international medical services and pharmaceutical
      distribution, until its merger with Digital Angel Corporation (AMEX: DOC) in
      March 2002.


24


**Frank
      T. Matarazzo,** *Chief
      Executive Officer, Secretary and Director*





** Mr.
      Matarazzo has served as our Chief Executive Officer and as a director since
      May
      24, 2007. Mr. Matarazzo has been a director and Chief Executive Officer of
      MST
      since its inception in 1982. From 1982 until May 2007, he also held the office
      of President of MST. He is in charge of directing our growth and development.
      Mr. Matarazzo designed and constructed the first private cable television
      systems operated by us and continues to be involved in all technology deployed
      by us. Mr. Matarazzo’s experience includes employment for Conrac Avionics from
      1980 to 1982, as a prototype design engineer, working on the development of
      the
      guidance/navigation systems for military fighter planes as well as the
      development and construction of the FM communication systems and engine
      interface units for the Space Shuttle Columbia. Mr. Matarazzo is known in the
      private cable television industry, having both written articles for trade
      publications and served as a technical consultant to municipalities in the
      area
      of satellite delivered information systems.





**Keith
      V. Scarzafava,**  *Chief
      Technology Officer and Director of Operations*





Mr.
      Scarzafava has served as our Chief Technology Officer and Director of Operations
      since May 24, 2007. From June 2000 to July 2006, Mr. Scarzafava served as
      the Director of Technology and Research Design at the Warwick Valley Telephone
      Company (NASDAQ GM: WWVY), an independent telephone company located in upstate
      New York. During his service at Warwick Valley Telephone Company, Mr. Scarzafava
      engineered and constructed an Internet division to encompass several counties
      and to serve three states, making Warwick the first independent telephone
      company in the United States to successfully operate as an ISP. In addition,
      Mr.
      Scarzafava directly assisted Warwick in becoming the first independent telephone
      company to construct a high capacity optical network, including a complete
      IPTV
      head-end, to distribute Warwick’s Digital TV service over DSL technology. Mr.
      Scarzafava then deployed one of the first fiber to home deployments in the
      United States.





**Richard
      J. Leimbach,** *Vice
      President of Finance*





Mr.
      Leimbach has served as our Vice President of Finance since July 2007 and as
      financial consultant to the company since February 2006. He is the Chief
      Financial Officer at Telkonet and also served as Telkonet’s Vice President of
      Finance and Controller from January 2004 until December 2007. Mr. Leimbach
      is a
      certified public accountant with over fifteen years of public accounting and
      private industry experience. Prior to joining Telkonet, from October 2001 to
      January 2004, Mr. Leimbach was the Controller with Ultrabridge, Inc., an
      applications solution provider. Mr. Leimbach also served as Corporate Accounting
      Manager for Snyder Communications, Inc., a global provider of integrated
      marketing solutions, from July 1998 to August 2001.





**Warren
      V. Musser,** *Chairman
      of the Board of Directors*





Mr.
      Musser has served as our Chairman since May 24, 2007 and has been the Chairman
      of the Board of MST since January 2006. Mr. Musser has been the Chairman of
      the
      Board of Telkonet since January 2003. He is the founder and chairman emeritus
      of
      Safeguard Scientifics, Inc. (NYSE: SFE), a high-tech venture capital company,
      formerly known as Safeguard Industries, Inc. Since 2001, Mr. Musser has been
      the
      managing director of The Musser Group, a business consulting firm, and the
      founder and president of Musser and Company, Inc., an investment banking
      firm. In addition, Mr. Musser is a director of Internet Capital Group, Inc.,
      a
      business-to-business venture capital company, and is a director and vice
      chairman of Nutri/System, Inc., a weight management company, and a co-chairman
      of Eastern Technology Council, a business advisory firm. Mr. Musser serves
      on a
      variety of civic, educational and charitable boards of directors, and serves
      as
      vice president of development, Cradle of Liberty Council, Boy Scouts of America,
      vice chairman of The Eastern Technology Council, and chairman of the
      Pennsylvania Partnership on Economic Education.





**Thomas
      C. Lynch,**  *Director*





Mr.
      Lynch
      has served as a director since May 24, 2007. Mr. Lynch has been a director
      of
      Telkonet since October 2003 and is senior vice president and director of The
      Staubach Company’s Federal Sector, a real estate management and advisory
      services firm in the Washington, D.C. area. Mr. Lynch joined The Staubach
      Company in November 2002 after six years as senior vice president at Safeguard
      Scientifics, Inc. (NYSE: SFE), a high-tech venture capital company. While at
      Safeguard, he served nearly two years as president and chief operating officer
      at CompuCom Systems, a Safeguard subsidiary. After a 31-year career of naval
      service, Mr. Lynch retired in the rank of Rear Admiral. Mr. Lynch’s naval
      service included Chief, Navy Legislative Affairs, command of the Eisenhower
      Battle Group during Operation Desert Shield, Superintendent of the United States
      Naval Academy from 1991 to 1994 and Director of the Navy Staff in the Pentagon
      from 1994 to 1995. Mr. Lynch presently serves as a Director of Pennsylvania
      Eastern Technology Council, Armed Forces Benefit Association, Catholic
      Leadership Institute, National Center for the American Revolution at Valley
      Forge, and Mikros Systems (OTCBB: MKRS OB).


25


**Thomas
      M. Hall, M.D,** *Director*





Dr.
      Hall **** has
      served as a director since May 24, 2007. Dr. Hall **** has
      been
      a director of Telkonet since April 2004. Dr. Hall is the managing director
      of
      Marrell Enterprises LLC, an international business development company, since
      its founding in September 2003. From 2002 until November 2006, he served as
      Executive Medical Director at Digital Angel Corp. For 12 years (until it was
      acquired in 2002), Dr. Hall was the chief executive officer of Medical Advisory
      Systems, Inc., an international medical services and pharmaceutical distribution
      company. Dr. Hall holds a bachelor of science and a medical degree from the
      George Washington University and a master of international management degree
      from the University of Maryland.  He is a member of the American College of
      Occupational and Environmental Medicine.





There
      are
      no family relationships among our directors and executive officers.





**Board
      Committees**




*Audit
      Committee*




We
      intend
      to establish an audit committee of the board of directors, which will consist
      of
      independent directors, of which at least one director will qualify as a
      qualified financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B.
      The audit committee’s duties would be to recommend to our board of directors the
      engagement of independent auditors to audit our financial statements and to
      review our accounting and auditing principles. The audit committee would review
      the scope, timing and fees for the annual audit and the results of audit
      examinations performed by the internal auditors and independent public
      accountants, including their recommendations to improve the system of accounting
      and internal controls. The audit committee would at all times be composed
      exclusively of directors who are, in the opinion of our board of directors,
      free
      from any relationship which would interfere with the exercise of independent
      judgment as a committee member and who possess an understanding of financial
      statements and generally accepted accounting principles.





*Compensation
      Committee*




We
      intend
      to establish a compensation committee of the board of directors. The
      compensation committee would review and approve our salary and benefits
      policies, including compensation of executive officers. The compensation
      committee would also administer our stock option plans and recommend and approve
      grants of stock options under such plans.





*Code
      of Ethics*





The
      Board
      has approved, and we have adopted, a Code of Ethics that applies to all of
      our
      directors, officers and employees. We will provide a copy of the Code of Ethics
      free of charge upon request to any person submitting a written request to our
      Chief Executive Officer.





**SECTION
      16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





Based
      solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to
      us,
      none of our directors, officers or beneficial owners of more than 10% of our
      common stock failed to file on a timely basis any reports required by Section
      16(a) of the Exchange Act during the year ended December 31, 2007.





**ITEM
      10.     EXECUTIVE COMPENSATION.**





**Summary
      Compensation Table**





The
      following table sets forth certain information with respect to compensation
      for
      services in all capacities for the years ended December 31, 2007 and 2006
      paid to our Chief Executive Officer (principal executive officer) and the two
      other most highly compensated executive officers who were serving as such as
      of
      December 31, 2007 (the “Named Executive Officers”).





**Summary
      Compensation Table**





**Name and Principal**
              **Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)**
            
            **Stock**
              **Awards**
              **($)**
              **(5)**
            
            **Option**
              **Awards**
              **($)**
              **(5)**
            
            **All Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**Ronald W. Pickett
            
            
            2007
            
            $
            37,788
            
            $
            0
            
            $
            0
            
            $
            455,300
            
            $
            0
            
            $
            493,088President (1)Frank
                T. Matarazzo
            
            
            2007
            
            $
            281,780
            
            $
            0
            
            $
            0
            
            $
            910,600
            
            
            0
            (6)
            $
            1,192,380Chief
                Executive
            
            
            2006
            
            $
            229,539
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            30,497
            
            $
            260,036Officer
                (2)Keith
                Scarzafava
            
            
            2007
            
            $
            145,558
            
            $
            2,788
            
            $
            40,500
            (4)
            $
            49,172
            
            $
            0
            
            $
            238,018Chief
                Technology
            
            
            2006
            
            $
            61,346
            
            $
            2,788
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            64,134Officer
                (3)


26


(1)
        Mr.
        Pickett was appointed as President of MSTI on May 24, 2007.


(2)
      Mr.
      Matarazzo was appointed Chief Executive Officer on May 24, 2007. Mr. Matarazzo
      has been the Chief Executive Officer of MST since its inception in
      1982.


(3)
      Mr.
      Scarzafava was appointed Chief Technology Officer and Director of Operations
      on
      May 24, 2007.


(4)
      Mr.
      Scarzafava received 30,000 shares of our common stock for facilitating the
      Newport Telecommunications purchase.


(5)
      Our
      assumptions made in the valuation of share-based payments are contained in
      Note
      J of our December 31, 2007 Financial Statements.


(6)
      Perquisites and other personal benefits received by Mr. Matarazzo did not exceed
      $10,000.





**Stock
      Incentive Plans**




Prior
      to
      the consummation of the reverse merger, our board of directors and stockholders
      adopted the 2007 Incentive Stock Plan. The purpose of the 2007 Incentive Stock
      Plan is to provide an incentive to attract and retain directors, officers,
      consultants, advisors and employees whose services are considered valuable,
      to
      encourage a sense of proprietorship and to stimulate an active interest of
      such
      persons in our development and financial success. Under the 2007 Incentive
      Stock
      Plan, we are authorized to issue incentive stock options intended to qualify
      under Section 422 of the Code, non-qualified stock options and restricted stock.
      The 2007 Incentive Stock Plan is administered by our board of directors. Upon
      consummation of the merger, Mr. Matarazzo and Mr. Pickett were granted ten-year
      options to purchase 2,000,000 shares and 1,000,000 shares of our common stock,
      respectively, exercisable at $0.65 per share, under the 2007 Incentive Stock
      Plan. Such options vest in equal monthly installments over 48 months.





**Outstanding
      Equity Awards at Fiscal Year-End**




The
      following table sets forth certain information concerning outstanding stock
      awards held by the Named Executive Officers as of December 31,
      2007:





**Outstanding
      Equity Awards at Fiscal Year-end**





**Option Awards****Name**
            
            **Number Of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options**
              **(#)**
              **Exercisable**
            
            **Number Of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options**
              **(#)**
              **Unexercisable**
            
            **Option**
              **Exercise**
              **Price**
              **($)**
            
            **Option**
              **Expiration**
              **Date**Ronald W. Pickett (1)
            
            
            187,500
            
            
            812,500
            
            $
            0.65
            
            
            5/31/2011Frank T. Matarazzo (2)
            
            
            375,000
            
            
            1,625,000
            
            $
            0.65
            
            
            5/31/2011Keith V. Scarzafava (3)
            
            
            27,000
            
            
            81,000
            
            $
            0.65
            
            
            5/31/2010





(1)
            On
                May 24, 2007, Mr. Pickett was granted a stock option to purchase
                1,000,000
                shares of our common stock, with monthly vesting over four
                years.


(2)
            On
                May 24, 2007, Mr. Matarazzo was granted a stock option to purchase
                2,000,000 shares of our common stock, with monthly vesting over four
                years.


(3)
            On
                May 24, 2007, Mr. Scarzafava was granted a stock option to purchase
                108,000 shares of our common stock, with monthly vesting over three
                years.





All
      stock
      options were granted in accordance with our stock option plan.





**Employment
      Agreements**





MST
      entered into an employment agreement with Mr. Matarazzo, our Chief Executive
      Officer, that provided, among other things, for an annual salary of $250,000.
      The agreement had a three-year term which expires on December 31, 2008.
      Upon the closing of the reverse merger, we amended Mr. Matarazzo’s employment
      agreement to provide for an annual base salary of $300,000 and to extend the
      term of the agreement to December 31, 2011. The Agreement also provides
      that Mr. Matarazzo will not, directly or indirectly, engage in any business
      activities that compete with the business of our company during his term of
      employment and for one year thereafter in New York City or any major
      metropolitan area where we or Telkonet conducts or has committed to conduct
      business, without the prior consent of Telkonet and us.


27


**Director
      Compensation**





We
      currently compensate our directors with equity pursuant to our stock option
      plan. We reimburse our directors for reasonable expenses incurred in connection
      with their service as directors. The following table sets forth certain
      information regarding compensation awarded to our directors during the fiscal
      year ended December 31, 2007:





**Director
      Compensation Table**





**Name**
            
            **Fees**
              **Earned****or**
              **Paid in**
              **Cash**
              **($)**
            
            **Stock**
              **Awards**
              **($)**
            
            **OptionAwards**
              **($) (4)**
            
            **Total**
              **($)**Warren
                V. Musser
            
            
            -
            
            
            -
            
            $
            14,424
                (1
            )
            $
            14,424Thomas
                M. Hall
            
            
            -
            
            
            -
            
            $
            14,424
                (2
            )
            $
            14,424Thomas
                C. Lynch
            
            
            -
            
            
            -
            
            $
            14,424
                (3
            )
            $
            14,424





(1)
            At
                December 31, 2007, Mr. Musser had outstanding options to purchase
                144,000
                shares of our common stock vesting over three years, of which an
                aggregate
                of 36,000 were currently exercisable.


(2)
            At
                December 31, 2007, Mr. Hall had outstanding options to purchase 144,000
                shares of our common stock vesting over three years, of which an
                aggregate
                of 36,000 were currently exercisable.


(3)
            At
                December 31, 2007, Mr. Lynch had outstanding options to purchase
                144,000
                shares of our common stock vesting over three years, of which an
                aggregate
                of 36,000 were currently
                exercisable.


(4)
            Based
                upon the aggregate grant date fair value calculated in accordance
                with the
                Financial Accounting Standards Board (“FASB”) Statement of Financial
                Accounting Standard (FAS”) No. 123R, Share Based Payment. Our policy and
                assumptions made in the valuation of share based payments are contained
                in
                the Note J to our December 31, 2007 financial
                statements.





**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





The
      following table sets forth, as of March 30, 2008, the beneficial ownership
      of
      our common stock by:





(1)
      each
      person or entity who is known by us to beneficially own more than five percent
      (5%) of our common stock;





(2)
      each
      of our directors;





(3)
      each
      Named Executive Officer; and





(4)
      all
      of our directors and executive officers as a group.





The
      percentages of common stock beneficially owned are reported on the basis of
      regulations of the Securities and Exchange Commission governing the
      determination of beneficial ownership of securities. Under the rules of the
      Securities and Exchange Commission, a person is deemed to be a beneficial owner
      of a security if that person has or shares voting power, which includes the
      power to vote or to direct the voting of the security, or investment power,
      which includes the power to dispose of or to direct the disposition of the
      security. Unless otherwise indicated, each of the stockholders named in the
      table below has sole voting and investment power with respect to such shares
      of
      common stock. Except as otherwise indicated, the address of each 5% stockholder
      listed below is: c/o 259-263 Goffle Road, Hawthorne, New Jersey 07506. Shares
      of
      common stock subject to options, warrants, or other rights currently exercisable
      or exercisable within 60 days of March 30, 2008, are deemed to be beneficially
      owned and outstanding for computing the share ownership and percentage of the
      stockholder holding such options and warrants, but are not deemed outstanding
      for computing the percentage of any other stockholder.





**Name of Beneficial Owner**
            
            **Amount and**
              **Nature of**
              **Beneficial**
              **Ownership(1)**
            
            
            
            **Percent of**
              **Common**
              **Stock(2)****DIRECTORS
                AND NAMED EXECUTIVE OFFICERS:**Warren
                V. Musser
            
            
            36,000
            
            
            (3
            )
            
            *Frank
                T. Matarazzo
            
            
            2,014,860
            
            
            (4
            )
            
            6.7
            %Ronald
                W. Pickett
            
            
            327,360
            
            
            (5
            )
            
            1.1
            %Thomas
                C. Lynch
            
            
            172,364
            
            
            (6
            )
            
            *Thomas
                M. Hall, M.D.
            
            
            175,860
            
            
            (7
            )
            
            *Keith
                V. Scarzafava
            
            
            57,000
            
            
            (8
            )
            
            ***All
                executive officers and directors as a group (7 persons) (3) – 
                (9)**
            
            
            **2,814,944**
            
            
            
            
            
            9.4
            %**5%
                STOCKHOLDERS:**Telkonet,
                Inc.
              20374
                Seneca Meadows Parkway
              Germantown,
                Maryland 20876
            
            
            18,500,000
            
            
            (10
            )
            
            62.0
            %


28


*  Represents
      less than 1%.





(1)
      Unless otherwise indicated, includes shares owned by a spouse, minor children,
      and relatives sharing the same home, as well as entities owned or controlled
      by
      the named beneficial owner. Unless otherwise noted, shares are owned of record
      and beneficially by the named beneficial owner.




(2)
      Based
      on 29,816,552 shares of common stock issued and outstanding as of March 30,
      2008.




(3)
      Includes 36,000 shares of common stock issuable upon the exercise of stock
      options within 60 days.




(4)
      Includes 46,420 shares of common stock issuable upon the exercise of warrants
      within 60 days. Includes 375,000 shares of common stock issuable upon the
      exercise of stock options within 60 days.




(5)
      Includes 46,420 shares of common stock issuable upon the exercise of warrants
      within 60 days. Includes 187,500 shares of common stock issuable upon the
      exercise of stock options within 60 days.




(6)
      Includes 45,455 shares of common stock issuable upon the exercise of warrants
      within 60 days. Includes 36,000 shares of common stock issuable upon the
      exercise of stock options within 60 days.




(7)
      Includes 46,420 shares of common stock issuable upon the exercise of warrants
      within 60 days. Includes 36,000 shares of common stock issuable upon the
      exercise of stock options within 60 days.





(8)
      Includes 27,000 shares of common stock issuable upon the exercise of stock
      options within 60 days.





(9)
      Includes 31,500 shares of common stock issuable to Richard Leimbach, our Vice
      President of Finance, upon the exercise of stock options within 60
      days.





(10)
      Excludes shares to be issued as repayment for Telkonet’s payment in their stock
      of $1,530,000 towards the acquisition of Newport Telecommunications assets
      in
      July 2007.





**Securities
      Authorized for Issuance Under Equity Compensation Plan.**





The
      following table provides information pertaining to compensation plans under
      which equity securities are authorized for issuance pursuant to equity
      compensation plans previously approved and not previously approved by our
      stockholders as of December 31, 2007.





**Equity
      Compensation Plan Information**





**Number of securities to be**
              **issued upon exercise of**
              **outstanding options,**
              **warrants and rights**
              **(a)**
            
            **Weighted -average exercise**
              **price of outstanding options,**
              **warrants and rights**
              **(b)**
            
            **Number of securities remaining**
              **available for future issuance**
              **under equity compensation plans**
              **(excluding securities reflected in**
              **column (a))**
              **(c)****Equity
                compensation plans approved by security holders**
            
            
            13,235,626
            
            $
            0.89
            
            
            222,000**Equity
                compensation plans not approved by security
                holders**
            
            
            -
            
            
            -
            
            
            -**Total**
            
            
            13,235,626
            
            $
            0.89
            
            
            222,000


29


**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSATIONS AND DIRECTOR
      INDEPENDENCE.**





We
      hold a
      50% membership interest in Interactivewifi.com, which is 50%, owned by Global
      Transport Logistics, Inc. Global Transport Logistics, Inc. is 100% owned by
      Eileen Matarazzo, the sister-in-law of Frank T. Matarazzo, our Chief Executive
      Officer. Our joint venture with Global Transport Logistics, Inc. does not
      contain a non-competition restriction.




We
      also
      have a one-year professional services agreement with Global Transport Logistics,
      Inc., which expires February 1, 2009, for the provision of marketing and
      business development consulting services, for which Global Transport Logistics,
      Inc. is paid a fee of $10,000 per month. For
      the
      years ended December 31, 2007 and 2006, the Company paid and expensed $110,000
      and $90,000, respectively.




Laura
      Matarazzo, our Chief Administrative Officer, is our Chief Executive Officer’s
      sister and has been employed by us since 1982. Ms. Matarazzo receives an annual
      base salary of $133,987, including a car allowance.




On
      August
      17, 2005, we issued a non-interest bearing demand promissory note in the amount
      of $100,000 to Frank T. Matarazzo, our Chief Executive Officer, evidencing
      his
      $100,000 loan to us. On May 10, 2007 we issued an additional non-interest
      bearing demand promissory note in the amount of $60,000 to him, evidencing
      an
      additional loan by him in the amount of $60,000. As of May 24, 2007, both notes
      were repaid in full.




We
      have a
      co-marketing agreement with Telkonet, Inc., which owns approximately 62% of
      our
      outstanding common stock. We have made payments of $19,060 and $136,035 to
      Telkonet pursuant to the terms of this agreement in the years ended December
      31,
      2007 and 2006, respectively.




Telkonet,
      Inc. has made approximately $7,004,000 in unsecured loans to MST, bearing
      interest at approximately 8% per annum and $5,000,000 of such indebtedness
      was
      converted at the time of the reverse merger into 5,000,000 shares of our common
      stock at a conversion price of $1.00 per share. Additionally, on July 18, 2007,
      Telkonet issued unregistered shares of its common stock worth approximately
      $1,530,000 as consideration for the acquisition of substantially all of the
      assets of Newport Telecommunications Co. As of December 31, 2007 we had an
      inter-company balance due to Telkonet, Inc. in the amount of $1,270,287 for
      loans made to us. The loans between the companies relate to advances from
      Telkonet, Inc. of shares of its common stock equal to $1,530,000 in conjunction
      with the Newport Telecommunications, Inc. acquisition on July 18, 2007, and
      net
      of inter-company advances of $259,713 which also includes certain shared
      services for professional fees, administrative and other operating matters.
      The
      loans are unsecured and bear interest at the prime rate calculated
      monthly.





**Director
      Independence**





Our
      board
      of directors is comprised of Warren Musser, Ronald Pickett, Thomas Lynch, Thomas
      Hall and Frank Matarazzo. We believe that Warren Musser, Thomas Lynch and Thomas
      Hall are “independent directors” as that term is defined by NASDAQ Stock
      Marketplace Rule 4200(a)(15). We were not a party to any transactions,
      relationships or arrangements with any of our “independent directors” that would
      be considered in the determination of such directors independence.


**Item
        13. Principal Accountant Fees and Services**
 
 RBSM
        LLP
        has served as our independent registered public accounting firm since July
        2007.
        RBSM LLP was also MST’s independent registered public accounting firm prior to
        the Merger on May 24, 2007.
 
 **(1)
        Audit Fees**
  RBSM
        LLP
        has billed us audit fees in the aggregate amounts of $83,501 and $0 during
        2007
        and 2006, respectively. These fees relate to the audit of our annual
        consolidated financial statements and the review of the interim consolidated
        financial statements included
        in quarterly reports and services in connection with statutory and regulatory
        filings or engagements.
  **(2)
        Audit-Related Fees**
 
 RBSM
        LLP
        billed us audit-related fees in the aggregate amount of $90,175 during 2007.
        These fees relate primarily to the auditors review of our registration
        statements and related consents, audit of acquired companies assets and audit
        related consulting.
 
 **(3)
        Tax Fees**
 
 No
        fees
        of this sort were billed by RBSM LLP during 2006 and 2007.
 
 **(4)
        All Other Fees**
 
 No
        fees
        of this sort were billed by RBSM LLP during 2006 and 2007.
  30


**Item
      14. Exhibits**





**Exhibit No**.
            
            **Description**2.1
            
            Agreement
                of Merger and Plan of Reorganization, dated as of May 22, 2007, by
                and among Fitness Xpress Software, Inc., Microwave Satellite Technologies,
                Inc., and Microwave Acquisition Corp. (Incorporated herein by reference
                to
                Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the
                Securities and Exchange Commission on May 29, 2007 (the “May 29, 2007
                8-K”))2.2
            
            Delaware
                Certificate of Merger, dated May 22, 2007, between Microwave
                Satellite Technologies, Inc. and Microwave Acquisition Corp. (Incorporated
                herein by reference to Exhibit 2.2 to the May 29, 2007
                8-K)2.3
            
            New
                Jersey Certificate of Merger, dated May 22, 2007, between Microwave
                Satellite Technologies, Inc. and Microwave Acquisition Corp., effective
                May 24, 2007 (Incorporated herein by reference to Exhibit 2.3 to the
                May 29, 2007 8-K)3.1
            
            Certificate
                of Incorporation (Incorporated herein by reference to Exhibit 3.1
                to the
                Company’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on May 24, 2007)3.2
            
            By-laws
                (Incorporated herein by reference to Exhibit 3.2 to the Company’s Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                filed
                on May 24, 2007)3.3
            
            Certificate
                of Amendment to Certificate of Incorporation, dated May 24, 2007
                (Incorporated herein by reference to Exhibit 3.3 to the May 29, 2007
                8-K)


31





10.1
            
            Form
                of Unit Subscription Agreement (Incorporated herein by reference
                to
                Exhibit 10.1 to the May 29, 2007 8-K)10.2
            
            Form
                of Unit Subscription Addendum (Incorporated herein by reference to
                Exhibit
                10.2 to the May 29, 2007 8-K)10.3
            
            Form
                of Unit Registration Rights Agreement (Incorporated herein by reference
                to
                Exhibit 10.3 to the May 29, 2007 8-K)10.4
            
            Form
                of Unit Registration Rights Addendum (Incorporated herein by reference
                to
                Exhibit 10.4 to the May 29, 2007 8-K)10.5
            
            Form
                of Investor Warrant (Incorporated herein by reference to Exhibit
                10.5 to
                the May 29, 2007 8-K)10.6
            
            Form
                of Unit Lockup Agreement (Incorporated herein by reference to Exhibit
                10.6
                to the May 29, 2007 8-K)10.7
            
            Securities
                Purchase Agreement for 8% Senior Convertible Debentures, dated
                May 25, 2007, by and among the Company and signatories thereto
                (Incorporated herein by reference to Exhibit 10.7 to the May 29,
                2007
                8-K)10.8
            
            Form
                of 8% Secured Convertible Debenture due April 30, 2010 (Incorporated
                herein by reference to Exhibit 10.8 to the May 29, 2007
                8-K)10.9
            
            Form
                of Debenture Warrant (Incorporated herein by reference to Exhibit
                10.9 to
                the May 29, 2007 8-K)10.10
            
            Form
                of Debenture Registration Rights Agreement (Incorporated herein by
                reference to Exhibit 10.10 to the May 29, 2007 8-K)10.11
            
            Form
                of Debenture Lockup Agreement (Incorporated herein by reference to
                Exhibit
                10.11 to the May 29, 2007 8-K)10.12
            
            Form
                of Security Agreement (Incorporated herein by reference to Exhibit
                10.12
                to the May 29, 2007 8-K)10.13
            
            Placement
                Agent Agreement, dated May 15, 2007, between Microwave Satellite
                Technologies, Inc. and Palladium Capital Advisors, LLC (Incorporated
                herein by reference to Exhibit 10.13 to the May 29, 2007
                8-K)10.14
            
            Placement
                Agent Agreement, dated May 9, 2007, between Microwave Satellite
                Technologies, Inc. and WFG Investments, Inc. (Incorporated herein
                by
                reference to Exhibit 10.14 to the May 29, 2007 8-K)10.15
            
            Placement
                Agent Agreement, dated May 22, 2007, between Microwave Satellite
                Technologies, Inc. and Granite Financial Group, LLC (Incorporated
                herein
                by reference to Exhibit 10.15 to the May 29, 2007 8-K)10.16
                *
            
            Form
                of Directors and Officers Indemnification Agreement (Incorporated
                herein
                by reference to Exhibit 10.16 to the May 29, 2007 8-K)10.17
                *
            
            Company’s
                2007 Incentive Stock Plan (Incorporated herein by reference to Exhibit
                10.17 to the May 29, 2007 8-K)





10.18
                *
            
            Form
                of 2007 Incentive Stock Option Agreement (Incorporated herein by
                reference
                to Exhibit 10.18 to the May 29, 2007 8-K)10.19
                *
            
            Form
                of 2007 Non-Qualified Stock Option Agreement (Incorporated herein
                by
                reference to Exhibit 10.19 to the May 29, 2007 8-K)10.20
            
            Agreement
                of Conveyance, Transfer and Assignment of Assets and Assumption of
                Obligations, made as of May 24, 2007, by Fitness Xpress Software,
                Inc. and FXS Holdings, Inc. (Incorporated herein by reference to
                Exhibit
                10.26 to the Company’s Current Report on Form 8-K/A filed with the
                Securities and Exchange Commission on May 30,
                2007)10.21
            
            Stock
                Purchase Agreement, dated May 24, 2007, by and between the Company
                and Ron Bell (Incorporated herein by reference to Exhibit 10.20 to
                the
                Company’s Current Report on Form 8-K/A filed with the Securities and
                Exchange Commission on May 30, 2007)10.22
                *
            
            Resignation
                letter from Ron Bell, dated May 24, 2007 (Incorporated herein by
                reference to Exhibit 10.23 to the Company’s Current Report on Form 8-K/A
                filed with the Securities and Exchange Commission on May 30,
                2007)


32





10.23
                *
            
            Employment
                Agreement, dated January 31, 2006, between Microwave Satellite
                Technologies, Inc. and Frank T. Matarazzo (Incorporated herein by
                reference to Exhibit 10.21 to the May 29, 2007 8-K)10.24
                *
            
            Amendment
                to Employment Agreement, dated May 24, 2007, between Microwave
                Satellite Technologies, Inc. and Frank T. Matarazzo (Incorporated
                herein
                by reference to Exhibit 10.22 to the Company’s Current Report on Form
                8-K/A filed with the Securities and Exchange Commission on May 30,
                2007)10.25
            
            Telecommunications
                Space License Agreement, dated as of February 20, 2006, between
                Microwave Satellite Technologies, Inc. and Rudin Management Company,
                Inc.
                (Incorporated herein by reference to Exhibit 10.24 to the May 29,
                2007
                8-K)10.26
            
            Access
                Agreement entered into in June 2006 between the Company and
                Cablevision of Oakland LLC and Cablevision Lightpath-NJ, Inc.
                (Incorporated herein by reference to Exhibit 10.25 to the May 29,
                2007
                8-K)10.27
            
            Program
                Service Agreement, dated June 2, 2007, by and between Microwave Satellite
                Technologies, Inc. and CSI Digital, Inc. (Incorporated herein by
                reference
                to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
                with the Securities and Exchange Commission on June 7,
                2007)10.28
            
            Asset
                Purchase Agreement, dated July 16, 2007, by and among Microwave Satellite
                Technologies, Inc., Newport Telecommunications Co. and Telkonet,
                Inc.
                (Incorporated herein by reference to Exhibit 10.1 to the Company’s Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                July 24, 2007)10.29
            
            Escrow
                Agreement, dated July 16, 2007, by and among Microwave Satellite
                Technologies, Inc., Newport Telecommunications Co. and U.S. Bank
                National
                Association (Incorporated herein by reference to Exhibit 10.2 to
                the
                Company’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on July 24, 2007)10.30
            
            Form
                of Letter Agreement by and among the Company and the purchasers of
                the
                Units (Incorporated herein by reference to Exhibit 10.4 to the Company’s
                Current Report on Form 8-K filed with the Securities and Exchange
                Commission on September 24, 2007)10.31
            
            Form
                of Letter Agreement by and among the Company and the purchasers of
                the
                Debentures (Incorporated herein by reference to Exhibit 10.5 to the
                Company’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on September 24, 2007)10.32
            
            Form
                of Letter Agreement by and among the Company and the purchasers of
                the
                Debentures (Incorporated herein by reference to Exhibit 10.1 to the
                Company’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on January 31, 2008)10.33
            
            Form
                of Letter Agreement by and among the Company and the purchasers of
                the
                Debentures (Incorporated herein by reference to Exhibit 10.1 to the
                Company’s Current Report on Form 8-K filed with the Securities and
                Exchange Commission on February 12, 2008)21.1
            
            List
                of Subsidiaries (Incorporated herein by reference to Exhibit 21.1
                to the
                Company’s Registration Statement on Form SB-2 filed with the Securities
                and Exchange Commission on July 23, 2007 (File No.
                333-144786)





31.1
            
            Section
                302 Certification of Principal Executive Officer31.2
            
            Section
                302 Certification of Principal Financial Officer32.1
            
            Section
                906 Certification of Principal Executive Officer and Principal Financial
                Officer




*
      A
      management contract or compensatory plan or arrangement.


33





**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant
      caused this report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized.






**MSTI
                HOLDINGS, INC.**Date:
                April 15, 2008
            
            /s/
                Frank T. Matarazzo*Frank
                T. Matarazzo, Chief Executive
                Officer*





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




**Signature**
            
            **Capacity**
            
            **Date**/s/Warren
                V. Musser
            
            Chairman
                of the Board of Directors
            
            April
                15, 2008Warren
                V. Musser/s/Frank
                T. Matarazzo
            
            Chief
                Executive Officer and Director (Principal
            
            April
                15, 2008Frank
                T. Matarazzo
            
            Executive
                Officer)/s/Ronald
                W. Pickett
            
            President
                and Director
            
            April
                15, 2008Ronald
                W. Pickett/s/Richard
                J. Leimbach
            
            Vice President of Finance (Principal Financial and
            
            April
                15, 2008Richard
                J. Leimbach
            
            Accounting
                Officer)/s/Thomas
                C. Lynch
            
            Director
            
            April
                15, 2008Thomas
                C. Lynch/s/Thomas
                M. Hall, M.D.
            
            Director
            
            April
                15, 2008Thomas
                M. Hall, M.D.


34





**FINANCIAL
      STATEMENTS AND SCHEDULES**





**DECEMBER
      31, 2007 AND 2006**





**FORMING
      A PART OF ANNUAL REPORT**


**PURSUANT
      TO THE SECURITIES EXCHANGE ACT OF 1934**





**MSTI
      HOLDINGS, INC.**


F-1





**MSTI
      HOLDINGS, INC.**





**Index
      to Financial Statements**








Report
                of independent registered Certified Public Accounting Firm
            F-3Consolidated
                Balance Sheets at December 31, 2007 and 2006
            F-4Consolidated
                Statements of Losses for the Years ended December 31, 2007 and
                2006
            F-5Consolidated
                Statements of Stockholders’ Equity for the Years ended December 31, 2007
                and 2006
            F-6Consolidated
                Statements of Cash Flows for the Years ended December 31, 2007 and
                2006
            F-7Notes
                to Consolidated Financial Statements
            F-9


F-2




**RBSM
        LLP**
 **CERTIFIED
        PUBLIC ACCOUNTANTS**
 
 **REPORT
        OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
        FIRM**
 
 Board
        of
        Directors
 MSTI
        Holdings, Inc.
 Hawthorne,
        New Jersey
 
 We
        have
        audited the accompanying consolidated balance sheets of MSTI Holdings, Inc.
        and
        its subsidiaries (the "Company") as of December 31, 2007 and 2006 and the
        related consolidated statements of losses, stockholders' equity, and cash
        flows
        for each of the two years in the period ended December 31, 2007. These
        financial statements are the responsibility of the Company's management.
        Our
        responsibility is to express an opinion on these financial statements based
        upon
        our audit.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States of America). Those standards require
        that we plan and perform the audit to obtain reasonable assurance about whether
        the financial statements are free of material misstatements. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe our audits
        provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of MSTI Holdings, Inc. and
        its
        subsidiaries as of December 31, 2007 and 2006, and the results of its operations
        and its cash flows for each of the two years in the period ended
        December 31, 2007, in conformity with accounting principles generally
        accepted in the United States of America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        the
        Company will continue as a going concern. As discussed in Note A to the
        consolidated financial statements, the Company has incurred significant
        operating losses in current year and also in the past. These factors, among
        others, raise substantial doubt about the Company's ability to continue as
        a
        going concern. The financial statements do not include any adjustments that
        might result from the outcome of this uncertainty.
 
 /s/
                  RBSM LLPCertified
                  Public Accountants
 
 New
        York,
        New York
 April
        14,
        2008
  F-3
  **MSTI
        HOLDINGS, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **DECEMBER
        31, 2007 AND 2006**
  2007
              
              2006**ASSETS****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              1,022,965
              
              $
              114,468Accounts
                  receivable, net of allowance for doubtful accounts of $10,000 at
                  December
                  31, 2007 and December 31, 2006
              
              
              241,487
              
              
              100,146Deferred
                  income tax - current
              
              
              -
              
              
              261,517Other
                  current assets
              
              
              222,872
              
              
              76,056Total
                  current assets
              
              
              1,487,324
              
              
              552,187**Property
                  and equipment, at cost**(Note D):Furniture
                  and equipment
              
              
              382,214
              
              
              268,514Less:
                  accumulated depreciation
              
              
              82,385
              
              
              37,683Total
                  property and equipment, net
              
              
              299,829
              
              
              230,831**Cable
                  equipment and installations, at cost**(Note E):Cable
                  equipment and installations, at cost
              
              
              5,286,580
              
              
              3,684,237Less:
                  accumulated depreciation
              
              
              930,607
              
              
              344,045Total
                  Cable equipment and installations, net
              
              
              4,355,973
              
              
              3,340,192**Other
                  assets:**Intangible
                  assets, net of accumulated amortization of $703,764 and $282,325
                  atDecember
                  31, 2007 and December 31, 2006, respectively (Note C)
              
              
              3,740,350
              
              
              2,181,602Goodwill
                  (Note B)
              
              
              -
              
              
              1,958,198Financing
                  costs, net of accumulated amortization of $168,353
              
              
              697,461
              
              
              -Investment
                  in affiliates (Note F)
              
              
              54,803
              
              
              54,803Deposits
              
              
              12,600
              
              
              12,600Total
                  other assets
              
              
              4,505,214
              
              
              4,207,203**Total
                  Assets**
              
              $
              10,648,340
              
              $
              8,330,413**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable and accrued liabilities
              
              $
              1,862,918
              
              $
              955,803Current
                  portion of long-term debt (Note H)
              
              
              547
              
              
              6,555Registration
                  rights liability (Note G)
              
              
              500,000
              
              
              -Note
                  Payable officer
              
              
              -
              
              
              80,444Income
                  tax refund due to officer (Note K)
              
              
              291,000
              
              
              291,000Due
                  to Parent Company (Note K)
              
              
              1,270,287
              
              
              5,603,310Deferred
                  revenue
              
              
              116,851
              
              
              96,463Total
                  current liabilities
              
              
              4,041,603
              
              
              7,033,575**Long-term
                  liabilities:**Long-term
                  debt - less current portion (Note G and H)
              
              
              4,432,344
              
              
              547Total
                  long-term liabilities
              
              
              4,432,344
              
              
              547**Total
                  Liabilities**
              
              
              8,473,947
              
              
              7,034,122**Commitments
                  and contingencies**(Note N)
              
              
              -
              
              
              -**Stockholders’
                  equity**(Note I)Preferred
                  stock, par value $.001 per share; 10,000,000 shares authorized; none
                  issued and outstanding at December 31, 2007 and December 31,
                  2006
              
              
              -
              
              
              -Common
                  stock, $0.001 par value, 90,000,000 shares authorized; 29,816,552
                  and
                  15,000,000 shares issued and outstanding as of December 31, 2007
                  and
                  December 31, 2006
              
              
              29,817
              
              
              15,000Additional
                  paid-in capital
              
              
              14,377,130
              
              
              3,502,961Accumulated
                  deficit
              
              
              (12,232,554
              )
              
              (2,221,670
              )Total
                  Stockholders’ equity
              
              
              2,174,393
              
              
              1,296,291**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              10,648,340
              
              $
              8,330,413
 
 See
        accompanying notes to consolidated financial statements
  F-4
  **MSTI
        HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF LOSSES**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007 AND 2006**
 
 Predecessor
              
              Successor
              
              SuccessorYear Ended
                December 31,
              
              Month Ended
                January 31,
              
              February 1 to
                December 31,
              
              Year Ended
                December 31,2007
              
              2006
              
              2006
              
              2006Revenue,
                  net
              
              $
              2,675,750
              
              $
              140,643
              
              $
              1,755,803
              
              $
              1,896,446Cost
                  of Sales
              
              
              3,405,599
              
              
              136,139
              
              
              2,210,309
              
              
              2,346,448Gross
                  Profit (Loss)
              
              
              (729,849
              )
              
              4,504
              
              
              (454,506
              )
              
              (450,002
              )Operating
                  Expenses:Selling,
                  General and Administrative
              
              
              4,108,077
              
              
              544,190
              
              
              2,312,441
              
              
              2,856,631Impairment
                  write-down in Goodwill
              
              
              1,958,198Impairment
                  write-down in Long Lived Assets
              
              
              493,512Non-Employee
                  stock based compensation
              
              
              337,500Employee
                  stock based compensation
              
              
              40,500Employee
                  stock options
              
              
              308,634
              
              
              -
              
              
              -
              
              
              -Depreciation
                  and Amortization
              
              
              466,142
              
              
              3,854
              
              
              320,008
              
              
              323,862Total
                  Operating Expense
              
              
              7,712,563
              
              
              548,044
              
              
              2,632,449
              
              
              3,180,493Loss
                  from Operations
              
              
              (8,442,412
              )
              
              (543,540
              )
              
              (3,086,955
              )
              
              (3,630,495
              )Other
                  Income (Expense):Registration
                  rights liquidated damage
              
              
              (500,000
              )
              
              -
              
              
              -
              
              
              -Interest
                  Income
              
              
              71,480
              
              
              -
              
              
              1,503
              
              
              1,503Interest
                  Expense
              
              
              (1,139,952
              )
              
              (4,359
              )
              
              (206,595
              )
              
              (210,954
              )Total
                  Other (Expenses)
              
              
              (1,568,472
              )
              
              (4,359
              )
              
              (205,092
              )
              
              (209,451
              )Loss
                  Before Provision for Income Taxes
              
              
              (10,010,884
              )
              
              (547,899
              )
              
              (3,292,047
              )
              
              (3,839,946
              )Provision
                  for Income Taxes
              
              
              -
              
              
              924,162
              
              
              (1,070,377
              )
              
              (146,215
              )Net
                  Loss
              
              $
              (10,010,884
              )
              $
              (1,472,061
              )
              $
              (2,221,670
              )
              $
              (3,693,731
              )Loss
                  per common share (basic and diluted)
              
              
              ($0.43
              )
              
              ($0.10
              )
              
              (0.15
              )
              
              (0.25
              )Weighted
                  average common shares for computation
              
              
              23,439,567
              
              
              15,000,000
              
              
              15,000,000
              
              
              15,000,000
 
 See
        accompanying notes to consolidated financial statements
  F-5
  **MSTI
        HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007 AND 2006**
   Common
                Shares
                Issued
              
              
              Common
                Stock
                Amount
              
              
              Additional
                Paid-In
                Capital
              
              
              Accumulated
                Earnings
                (Deficit )
              
              
              TotalBalance
                  at December 31, 2005
              
              
              15,000,000
              
              $
              15,000
              
              $
              (89,000
              )
              $
              788,877
              
              $
              714,877Net
                  loss at January 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              (1,472,061
              )
              
              (1,472,061
              )Equity
                  adjustments related to push down accounting (Telkonet
                  acquisition)
              
              
              -
              
              
              -
              
              
              2,691,961
              
              
              683,184
              
              
              3,375,145Balance
                  at January 31, 2006 (Predecessor period)
              
              
              15,000,000
              
              
              15,000
              
              
              2,602,961
              
              
              0
              
              
              2,617,961Equity
                  adjustments related to push down accounting (Telkonet
                  acquisition)
              
              
              
              
              
              
              
              
              900,000
              
              
              
              
              
              900,000Net
                  loss – February to December 2006
              
              
              
              
              
              
              
              
              
              
              
              (2,221,670
              )
              
              (2,221,670
              )Balance
                  at December 31, 2006
              
              
              15,000,000
              
              
              15,000
              
              
              3,502,961
              
              
              (2,221,670
              )
              
              1,296,291Public
                  shares of FXS converted to MSTI
              
              
              3,788,888
              
              
              3,789
              
              
              (3,789
              )
              
              -Loan
                  conversion from Parent Company
              
              
              5,000,000
              
              
              5,000
              
              
              4,995,000
              
              
              -
              
              
              5,000,000Issuance
                  of shares for private placement
              
              
              5,597,664
              
              
              5,598
              
              
              2,688,422
              
              
              -
              
              
              2,694,020Warrants
                  attached to debentures
              
              
              -
              
              
              -
              
              
              931,465
              
              
              -
              
              
              931,465Beneficial
                  Conversion Feature
              
              
              -
              
              
              -
              
              
              1,457,815
              
              
              -
              
              
              1,457,815Warrants
                  issued for placement services
              
              
              -
              
              
              -
              
              
              119,052
              
              
              -
              
              
              119,052Stock
                  based compensation to consultants
              
              
              400,000
              
              
              400
              
              
              337,100
              
              
              
              
              
              337,500Stock
                  based compensation to employee
              
              
              30,000
              
              
              30
              
              
              40,470
              
              
              
              
              
              40,500Stock
                  based compensation
              
              
              -
              
              
              -
              
              
              308,634
              
              
              -
              
              
              308,634Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              (10,010,884
              )
              
              (10,010,884
              )Balance
                  at December 31, 2007
              
              
              29,816,552
              
              $
              29,817
              
              $
              14,377,130
              
              $
              (12,232,554
              )
              $
              2,174,393
 
 See
        accompanying footnotes to consolidated financial statements
  F-6
  **MSTI
        HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007 AND 2006**
 
 Predecessor
              
              Successor
              
              SuccessorTwelve Months
                Ended
              
              Twelve Months EndedDecember 31,
              
              January 31,
              
              February 1 to
                December 31,
              
              January 1 to
                December 31,2007
              
              2006
              
              2006
              
              2006**Increase
                  (Decrease) In Cash and Equivalents****Cash
                  Flows from Operating Activities:**Net
                  loss
              
              $
              (10,010,884
              )
              $
              (1,472,061
              )
              $
              (2,221,670
              )
              $
              (3,693,731
              )Adjustments
                  to reconcile net loss to cash provided by (used in) operating
                  activities:Investment
                  in affiliate
              
              
              -
              
              
              4,948
              
              
              -
              
              
              4,948Impairment
                  of Fixed Assets
              
              
              493,512
              
              
              -
              
              
              -
              
              
              -Impairment
                  of Goodwill
              
              
              1,958,198
              
              
              -
              
              
              -
              
              
              -Registration
                  rights liquidated damages
              
              
              500,000
              
              
              -
              
              
              -
              
              
              -Amortization
                  of the beneficial conversion feature of the convertible notes and
                  warrants
              
              
              464,586
              
              
              -
              
              
              -
              
              
              -Amortization
                  of OID interest
              
              
              307,038
              
              
              -
              
              
              -
              
              
              -Stock
                  options and warrants issued in exchange of service
              
              
              308,634
              
              
              -
              
              
              -
              
              
              -Common
                  stock issued in exchange for services
              
              
              337,500
              
              
              -
              
              
              -
              
              
              -Stock
                  based compensation issued to employees
              
              
              40,500
              
              
              -
              
              
              -
              
              
              -Amortization
                  of financing costs
              
              
              168,353
              
              
              -
              
              
              -
              
              
              -Depreciation,
                  including Cable equipment and installations
              
              
              744,953
              
              
              25,691
              
              
              389,476
              
              
              415,167Amortization
              
              
              421,494
              
              
              353
              
              
              282,325
              
              
              282,678Due
                  to/from affiliate
              
              
              -
              
              
              19,936
              
              
              -
              
              
              19,936Increase
                  / decrease in:Accounts
                  receivable, trade and other
              
              
              (141,341
              )
              
              77,928
              
              
              (67,234
              )
              
              10,694Prepaid
                  expenses and deposits
              
              
              144,184
              
              
              71,086
              
              
              178,198
              
              
              249,284Customer
                  deposits
              
              
              6,000
              
              
              -
              
              
              -
              
              
              -Income
                  tax payable, net of receivable
              
              
              -
              
              
              147,971
              
              
              38,915
              
              
              186,886Deferred
                  income tax and other, net
              
              
              -
              
              
              1,067,191
              
              
              (1,109,292
              )
              
              (42,101
              )Deferred
                  revenue
              
              
              20,388
              
              
              (5,535
              )
              
              22,140
              
              
              16,605Accrued
                  Payroll
              
              
              15,780
              
              
              -
              
              
              -
              
              
              -Accounts
                  payable, accrued expenses, net
              
              
              775,412
              
              
              178,939
              
              
              64,008
              
              
              242,947**Net
                  Cash Provided by (Used In) Operating Activities**
              
              
              (3,445,698
              )
              
              116,447
              
              
              (2,423,134
              )
              
              (2,306,687
              )**Cash
                  Flows From Investing Activities:**Costs
                  of Cable equipment and installations
              
              
              (1,541,491
              )
              
              (111,591
              )
              
              (2,688,855
              )
              
              (2,800,446
              )Purchase
                  of Newport assets
              
              
              (1,118,294
              )
              
              -
              
              
              -
              
              
              -Purchase
                  of property and equipment, net
              
              
              (113,700
              )
              
              (13,744
              )
              
              (21,173
              )
              
              (34,917
              )**Net
                  Cash Used In Investing Activities**
              
              
              (2,773,485
              )
              
              (125,335
              )
              
              (2,710,028
              )
              
              (2,835,363
              )**Cash
                  Flows From Financing Activities:**Proceeds
                  from (Repayment of) line of credit
              
              
              -
              
              
              45,963
              
              
              (409,055
              )
              
              (363,092
              )Advances
                  from Parent Company, net
              
              
              (863,023
              )
              
              -
              
              
              5,603,310
              
              
              5,603,310Proceeds
                  from sale of common stock, net of costs
              
              
              2,694,020
              
              
              -
              
              
              -
              
              
              -Proceeds
                  from issuance of convertible debentures, net of costs
              
              
              6,050,000
              
              
              -
              
              
              -
              
              
              -Financing
                  costs
              
              
              (746,762
              )
              
              -
              
              
              -
              
              
              -Repayments
                  of Notes Payable
              
              
              (6,555
              )
              
              (546
              )
              
              (6,009
              )
              
              (6,555
              )**Net
                  Cash Provided By Financing Activities**
              
              
              7,127,680
              
              
              45,417
              
              
              5,188,246
              
              
              5,233,663Net
                  Increase In Cash and Cash Equivalents
              
              
              908,497
              
              
              36,529
              
              
              55,084
              
              
              91,613Cash
                  and cash equivalents at the beginning of the period
              
              
              114,468
              
              
              22,855
              
              
              59,384
              
              
              22,855Cash
                  and cash equivalents at the end of the period
              
              $
              1,022,965
              
              $
              59,384
              
              $
              114,468
              
              $
              114,468
 
 See
        accompanying notes to consolidated financial statements
  F-7
  **MSTI
        HOLDINGS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS (Continued)**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007 AND 2006**
  Predecessor
              
              SuccessorTwelve months
                ended
              
              Twelve months endedDecember 31
                2007
              
              January 31,
                2006
              
              February 1
                to December 31,
                2006
              
              January 1
                to December 31,
                2006Supplemental
                  Disclosures of Cash Flow Information:Cash
                  transactions:Cash
                  paid during the period for interest
              
              $
              199,976
              
              $
              4,363
              
              $
              417
              
              $
              4,780Income
                  taxes paid
              
              
              -
              
              
              -
              
              
              -
              
              
              -Non-cash
                  transactions:Amortization
                  expense of the beneficial conversion feature
              
              
              464,586
              
              
              -
              
              
              -
              
              
              -Amortization
                  expense of warrants issued
              
              
              307,038
              
              
              -
              
              
              -
              
              
              -Conversion
                  of Parent Company Loan
              
              
              5,000,000
              
              
              -
              
              
              -
              
              
              -Acquisition
                  by Telkonet, Inc. (Note B):Subscriber
                  list - intangible asset
              
              
              -
              
              
              -
              
              
              2,463,927
              
              
              2,463,927Goodwill
              
              
              -
              
              
              -
              
              
              1,958,198
              
              
              1,958,198Investment
                  by Telkonet, Inc.
              
              
              -
              
              
              -
              
              
              4,379,259
              
              
              4,379,259Acquisition
                  of Newport:Subscriber
                  list - intangible asset
              
              
              1,980,187
              
              
              -
              
              
              -
              
              
              -Fixed
                  assets acquired
              
              
              668,107
              
              
              -
              
              
              -
              
              
              -Common
                  stock of parent company
              
              
              (1,530,000
              )
              
              -
              
              
              -
              
              
              -Direct
                  acquisition costs
              
              
              (98,294
              )
              
              -
              
              
              -
              
              
              -Cash
                  paid for acquisition
              
              
              (1,020,000
              )
              
              -
              
              
              -
              
              
              -
 
 See
        accompanying notes to consolidated financial statements
  F-8
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
  **NOTE
        A-SUMMARY OF ACCOUNTING POLICIES**
 
 General
  A
        summary
        of the significant accounting policies applied in the preparation of the
        accompanying financial statements follows.
 
 Business
        and Basis of Presentation
 
 MSTI
        Holdings, Inc. (“the Company ”), is a carrier class communications technology
        company that specializes in providing true Quad-Play services including video,
        voice, high-speed internet and Wi-Fi to Multiple Tenant Units (MTUs) and
        Multiple Dwelling Units (MDUs).
 
 In
        July
        2007, the Company through its wholly-owned subsidiary, Microwave Satellite
        Technologies, Inc., acquired substantially all of the assets of Newport
        Telecommunications Co., a New Jersey general partnership. Pursuant to the
        terms
        of the acquisition, the total consideration paid was $2,550,000, consisting
        of
        unregistered shares of Telkonet’s common stock, equal to $1,530,000, and
        $1,020,000 in cash, subject to adjustments. The total consideration will
        be
        increased or decreased depending on the number of subscriber accounts acquired
        in the acquisition that were in good standing at that time. The consideration
        from escrow was released in October 2007 and a subscriber account adjustment
        was
        not required.
 
 Business
        Combination and Corporate Restructure
 
 On
        May
        24, 2007, the Company completed a merger transaction with Fitness Xpress,
        Inc.
        ("FXS"), an inactive publicly registered shell corporation with no significant
        assets or operations. As a result of the merger, there was a change in
        control of the public entity. In accordance with SFAS No. 141, the Company
        was
        the acquiring entity. While the transaction is accounted for using the purchase
        method of accounting, in substance the merger is a recapitalization of the
        Company's capital structure.
 
 For
        accounting purposes, the Company accounted for the transaction as a reverse
        acquisition and the Company is the surviving entity. The Company did not
        recognize goodwill or any intangible assets in connection with the transaction.
        From February 10, 2006 until the date of the merger, FXS was an inactive
        corporation with no material assets, liabilities or operations. In connection
        with the acquisition, 23,788,888 shares of common stock of the Company were
        issued including; (a) 15,000,000 shares issued to existing shareholders of
        the
        Company (b) 5,000,000 shares issued to settle indebtedness to parent company,
        and (c) 3,788,888 shares that were retained by the FXS
        shareholders.
 
 Effective
        with the merger, all previously outstanding shares of common and preferred
        stock
        owned by the Company's shareholders were exchanged for an aggregate of
        15,000,000 shares of FXS’s common stock. The value of the stock that was issued
        was the historical cost of the FXS net tangible assets, which did not differ
        materially from their fair value.
 Effective
        with the merger, FXS changed its name to MSTI Holdings, Inc., and increased
        its
        authorized shares of $.001 par value common stock to 90,000,000.
 
 All
        references to common stock, share and per share amounts have been retroactively
        restated to reflect the exchange ratio of 120,000 shares of FXS common stock
        for
        1 share of the acquirer's common stock outstanding immediately prior to the
        merger as if the exchange had taken place as of the beginning of the earliest
        period presented.
 
 The
        accompanying financial statements present the historical financial condition,
        results of operations and cash flows of the Company prior to the merger with
        FXS. In accordance with the merger, the Company will maintain a calendar
        year-end.
 
 During
        the short-year (seven months) ended December 31, 2006, the Company transitioned
        from a development stage company to an operating company.
 
 The
        accompanying consolidated financial statements present on a consolidated
        basis
        the accounts of the Company and its wholly owned subsidiaries. All significant
        intercompany accounts and transactions have been eliminated in
        consolidation.
  F-9
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 New
        Basis of Accounting
 
 In
        January 2006, Telkonet, Inc., a Utah corporation (“Telkonet”) whose stock is
        listed for trading on the American Stock Exchange under the symbol (“TKO”),
        acquired a 90% interest in MST.
 
 In
        accordance with Emerging Issues Task Force Issue No. D-97, *Push
        Down Accounting* , as a
        result of the change in control of us that occurred on January 31, 2006,
        the
        Company applied “push down” accounting, which requires that the proportionate
        basis of the assets acquired and liabilities assumed be “pushed down” to us
        based upon their estimated fair market values. The Company makes estimates
        and
        judgments in determining the fair value of the acquired assets and liabilities.
        The Company bases its determination on independent appraisal reports, as
        well as
        internal judgments based upon the existing facts and circumstances. If the
        Company were to use different judgments or assumptions, the amounts assigned
        to
        the individual assets or liabilities could be materially different.
 
 The
        primary changes to the balance sheet reflect:
 **•**
              
              the
                  recording of the fair value of the Company’s subscriber
                  list;**•**
              
              the
                  recording of the fair value of goodwill;**•**
              
              elimination
                  of the accumulated earnings; and**•**
              
              an
                  increase in additional paid-in capital from these
                  adjustments.
 
 Although
        Microwave Satellite Technologies, Inc. continued as the same legal entity
        after
        the acquisition, the application of push down accounting represents the
        termination of the old accounting entity and the creation of a new one. As
        a
        result, the accompanying consolidated statements of operations, cash flows
        and
        stockholders’ equity are presented for two periods: Predecessor and Successor,
        which relate to the period preceding the acquisition and the period succeeding
        the acquisition, respectively. The Company refers to the operations of Microwave
        Satellite Technologies, Inc. for both the Predecessor and Successor
        periods.
 
 Going
        Concern
 
 The   accompanying   consolidated   financial   statements
        have been prepared in conformity with accounting principles generally
        accepted in the United States of
        America, which contemplate continuation of the Company as a going
        concern. However, the Company has reported a net loss and negative cash
        flows from operating activities of $10,010,884 and $3,445,698, respectively
        for
        the year ended December 31, 2007; accumulated deficit of $12,232,554 and a
        working capital deficit of $2,554,279 as of December 31, 2007.
 
 The
        Company believes that anticipated revenues from operations will be insufficient
        to satisfy its ongoing capital requirements for at least the next 12
        months.  If financial resources are insufficient, the
        Company will require additional financing in order to execute its
        operating plan and continue as a going concern. The Company cannot predict
        whether this additional financing will be in the form of equity or
        debt, or be in another form. The Company may not be able to obtain the
        necessary additional capital on a
        timely basis, on acceptable terms, or at
        all.  In any of these events, the Company may be unable to
        implement its plan for expansion,
        repay its debt obligations as they become due,
        or respond to competitive pressures, any of which would
        have a material adverse effect on its business, financial condition and results
        of operations.
 
 The
        Company plans to take the following steps that it believes will be sufficient
        to provide it with the ability to continue as a
        going concern. The Company intends to raise capital through asset-based
        financing and/or the sale of its stock in private placements.  The
        Company believes that with this financing, it will be able to generate
        additional revenues that will allow it to continue as a
        going concern.
  F-10
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 Concentrations
        of Credit Risk
  Financial
        instruments and related items, which potentially subject the Company to
        concentrations of credit risk, consist primarily of cash and cash equivalents.
        The Company places its cash and temporary cash investments with credit quality
        institutions. At times, such investments may exceed the FDIC insurance limit.
        The allowance for doubtful accounts was $10,000 at December 31, 2007 and
        December 31, 2006, respectively.
 
 Cash
        and Cash Equivalents
 
 For
        purposes of the Statements of Cash Flows, the Company considers all highly
        liquid debt instruments purchased with a maturity date of three months or
        less
        to be cash equivalents.
 
 Property
        and Equipment
 
 Property
        and equipment is stated at cost. Depreciation is calculated using the
        straight-line method over the estimated useful lives of the assets. The
        estimated useful life ranges from 5 to 15 years.
 
 Long-Lived
        Assets
 
 The
        Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS
        144). The Statement requires that long-lived assets and certain identifiable
        intangibles held and used by the Company be reviewed for impairment whenever
        events or changes in circumstances indicate that the carrying amount of an
        asset
        may not be recoverable. Events relating to recoverability may include
        significant unfavorable changes in business conditions, recurring losses,
        or a
        forecasted inability to achieve break-even operating results over an extended
        period. The Company evaluates the recoverability of long-lived assets based
        upon
        forecasted discounted cash flows. Should impairment in value be indicated,
        the
        carrying value of intangible assets will be adjusted, based on estimates
        of
        future discounted cash flows resulting from the use and ultimate disposition
        of
        the asset. SFAS No. 144 also requires assets to be disposed of be reported
        at
        the lower of the carrying amount or the fair value less costs to sell. The
        Company determined
        that the value of its capitalized cable and related equipment has been impaired
        based upon its assessment of forecasted discounted cash flow from subscribers
        revenue and wrote off $493,512 of its value, based on the lower of the carrying
        amount or the fair value less costs to sell, for the year ended December
        31,
        2007 (Note E).
 
 Goodwill
        and Other Intangibles
 
 Goodwill
        represents the excess of the cost of businesses acquired over fair value
        or net
        identifiable assets at the date of acquisition. Goodwill is subject to a
        periodic impairment assessment by applying a fair value test based upon a
        two-step method. The first step of the process compares the fair value of
        the
        reporting unit with the carrying value of the reporting unit, including any
        goodwill. The Company utilizes a discounted cash flow valuation methodology
        to
        determine the fair value of the reporting unit. If the fair value of the
        reporting unit exceeds the carrying amount of the reporting unit, goodwill
        is
        deemed not to be impaired in which case the second step in the process is
        unnecessary. If the carrying amount exceeds fair value, the Company performs
        the
        second step to measure the amount of impairment loss. Any impairment loss
        is
        measured by comparing the implied fair value of goodwill, calculated per
        SFAS
        No. 142, with the carrying amount of goodwill at the reporting unit, with
        the excess of the carrying amount over the fair value recognized as an
        impairment loss. The
        Company determined that the value of goodwill has been impaired based upon
        management’s assessment of operating results and forecasted discounted cash flow
        and has written off the entire $1,958,198 of its value during the year ended
        December 31, 2007 (Note C).
 
 Income
        Taxes
 
 The
        Company has implemented the provisions on Statement of Financial Accounting
        Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires
        that income tax accounts be computed using the liability method. Deferred
        taxes
        are determined based upon the estimated future tax effects of differences
        between the financial reporting and tax reporting bases of assets and
        liabilities given the provisions of currently enacted tax laws.
  In
        June
        2006, the FASB issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
        No. 109* ("FIN
        48"). FIN 48 prescribes a recognition threshold and measurement attribute
        for
        the financial statement recognition and measurement of a tax position taken
        or
        expected to be taken in a tax return. FIN 48 also provides guidance on
        derecognition, classification, treatment of interest and penalties, and
        disclosure of such positions. Effective January 1, 2007, the Company
        adopted the provisions of FIN 48, as required. As a result of implementing
        FIN
        48, there has been no adjustment to the Company’s financial statements and the
        adoption of FIN 48 did not have a material effect on the Company’s consolidated
        financial statements for the year ending December 31, 2007.
  F-11
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
  Use
        of
        Estimates
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect certain reported amounts and disclosures. Accordingly, actual results
        could differ from those estimates.
 
 Revenue
        Recognition
 
 For
        revenue from product sales, the Company recognizes revenue in accordance
        with
        Staff Accounting Bulletin No. 104, *Revenue Recognition* (“SAB104”), which superceded Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements* (“SAB101”). SAB 101 requires that four basic criteria must be met before revenue
        can be recognized: (1) persuasive evidence of an arrangement exists; (2)
        delivery has occurred; (3) the selling price is fixed and determinable; and
        (4)
        collectibility is reasonably assured. Determination of criteria (3) and (4)
        are
        based on management's judgments regarding the fixed nature of the selling
        prices
        of the products delivered and the collectibility of those amounts. Provisions
        for discounts and rebates to customers, estimated returns and allowances,
        and
        other adjustments are provided for in the same period the related sales are
        recorded. The Company defers any revenue for which the product has not been
        delivered or is subject to refund until such time that the Company and the
        customer jointly determine that the product has been delivered or no refund
        will
        be required. SAB 104 incorporates Emerging Issues Task Force 00-21 (“EITF
        00-21”), *Multiple-Deliverable Revenue Arrangements.* EITF
        00-21 addresses accounting for arrangements that may involve the delivery
        or
        performance of multiple products, services and/or rights to use
        assets.
 
 The
        Company accounts for revenue, costs and expenses related to its residential
        cable services as the related services are performed in accordance with SFAS
        No. 51, Financial Reporting by Cable Television Companies. Installation
        revenue for residential cable services is recognized to the extent of direct
        selling costs incurred. Direct selling costs have exceeded installation revenue
        in all reported periods. Generally, credit risk is managed by disconnecting
        services to customers who are delinquent. The capitalized cost of this equipment
        is depreciated from three to ten years, on a straight-line basis down to
        the
        Company's original estimate of the projected value of the equipment at the
        end
        of the scheduled lease term.
 
 Advertising
 
 The
        Company expenses advertising costs as incurred. The Company incurred $236,436
        and $187,093 in advertising costs during the years ended December 31, 2007
        and
        2006, respectively.
 
 Liquidity
 
 As
        shown
        in the accompanying financial statements, the Company incurred a net loss
        of
        $10,010,884 and $3,693,731for the years ended December 31, 2007 and 2006,
        respectively. As of December 31, 2007, the Company’s current liabilities exceed
        its current assets by $2,554,279, with cash and cash equivalents representing
        $1,022,965.
 
 Comprehensive
        Income
 
 Statement
        of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
        Income," establishes standards for reporting and displaying of comprehensive
        income, its components and accumulated balances. Comprehensive income is
        defined
        to include all changes in equity except those resulting from investments
        by
        owners and distributions to owners. Among other disclosures, SFAS 130 requires
        that all items that are required to be recognized under current accounting
        standards as components of comprehensive income be reported in a financial
        statement that is displayed with the same prominence as other financial
        statements. The Company does not have any items of comprehensive income in
        any
        of the periods presented.
  F-12
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 Registration
        Payment Arrangements
 
 The
        Company accounts for registration payment arrangements under Financial
        Accounting Standards board (FASB) Staff Position EITF 00-19-2, “Accounting for
        Registration Payment Arrangements” (FSP EITF 00-19-2). FSP EITF 00-19-2
        specifies that the contingent obligation to make future payments under a
        registration payment arrangement should be separately recognized and measured
        in
        accordance with SFAS No. 5, Accounting for Contingencies. FSP EITF 00-19-2
        was
        issued in December, 2006.  As of December 31, 2007, the Company
        accrued an estimated penalty of $500,000 (see Note G).
 
 Reclassifications
 
 Certain
        reclassifications have been made in prior year's financial statements to
        conform
        to classifications used in the current year.
 
 Stock
        Based Compensation
 
 On
        January 1, 2006, the Company adopted Statement of Financial Accounting Standards
        No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which
        requires the measurement and recognition of compensation expense for all
        share-based payment awards made to employees and directors including employee
        stock options based on estimated fair values. SFAS 123(R) supersedes the
        Company’s previous accounting under Accounting Principles Board Opinion
        No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
        beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission
        issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
        123(R). The Company has applied the provisions of SAB 107 in its adoption
        of
        SFAS 123(R).
  The
        Company adopted SFAS 123(R) using the modified prospective transition method,
        which requires the application of the accounting standard as of January 1,
        2006,
        the first day of the Company’s fiscal year 2006. The Company’s Consolidated
        Financial Statements as of and for the year ended December 31, 2006 reflect
        the
        impact of SFAS 123(R). In accordance with the modified prospective transition
        method, the Company’s Consolidated Financial Statements for prior periods have
        not been restated to reflect, and do not include, the impact of SFAS 123(R).
        Stock-based compensation expense recognized under SFAS 123(R) for the years
        ended December 31, 2007 and 2006 was $308,634 and $0, respectively, net of
        tax
        effect. ****
 
 New
        Accounting Pronouncements
 
 In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities.” SFAS 159 permits entities to choose
        to measure many financial instruments, and certain other items, at fair value.
        SFAS 159 applies to reporting periods beginning after November 15, 2007.
        The
        adoption of SFAS 159 is not expected to have a material impact on the Company’s
        financial position, results of operations or cash flows.
 
 In
        December 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        141(R), “Business Combinations” (“Statement 141(R)”) and Financial Accounting
        Standards No. 160, “Noncontrolling Interests in Consolidated Financial
        Statements” (“Statement 160”). Statements 141(R) and 160 require most
        identifiable assets, liabilities, noncontrolling interests and goodwill acquired
        in a business combination to be recorded at “full fair value” and require
        noncontrolling interests (previously referred to as minority interests) to
        be
        reported as a component of equity.  Both statements are effective for
        fiscal years beginning after December 15, 2008.  Statement 141(R) will
        be applied to business combinations occurring after the effective
        date.  Statement 160 will be applied prospectively to all
        noncontrolling interests, including any that arose before the effective
        date.  The Company has not determined the effect, if any, the adoption
        of Statements 141(R) and 160 will have on the Company’s financial position,
        results of operations or cash flows.
 
 Other
        recent accounting pronouncements issued by the FASB (including its Emerging
        Issues Task Force), the AICPA, and the SEC did not, or are not believed by
        management to, have a material impact on the Company’s present or future
        consolidated financial statements.
  F-13
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 **NOTE
        B - ACQUISITIONS**
 
 Acquisition
        by Telkonet, Inc..
  On
        January 31, 2006, Telkonet acquired a 90% interest in the Company from Frank
        Matarazzo, the sole stockholder, in exchange for $1.8 million in cash and 1.6
        million unregistered shares of Telkonet’s common stock for an aggregate purchase
        price of $9,000,000. The purchase price of $9,000,000 was increased by $117,822
        for direct costs related to the acquisition. These direct costs included
        legal,
        accounting and other professional fees. The cash portion of the purchase
        price was paid in two installments, $900,000 at closing and $900,000 in February
        2007. The stock portion is payable from Telkonet shares held in escrow, 400,000
        Telkonet shares at closing and the remaining 1,200,000 “purchase price
        contingency” Telkonet shares issued based on the achievement of 3,300 “Triple
        Play” subscribers over a three year period. In the year ended December 31, 2006,
        Telkonet issued 200,000 shares of the purchase price contingency valued at
        $900,000 as an adjustment to Goodwill.
  The
        acquisition by Telkonet was accounted for using the purchase method of
        accounting in accordance with SFAS 141, “Business Combinations.” The value of
        Telkonet common stock issued as a part of the acquisition was determined
        based
        on the average price of Telkonet common stock for several days before and
        after
        the acquisition.
 
 The
        components of the purchase price were as follows:
 
 As Reported
              
              Including
                Purchase Price
                Contingency (*)Telkonet
                  Common stock
              
              $
              2,700,000
              
              $
              7,200,000Cash
              
              
              1,800,000
              
              
              1,800,000Direct
                  acquisition costs
              
              
              117,822
              
              
              117,822Net
                  Purchase price
              
              $
              4,617,822
              
              $
              9,117,822
  In
        accordance with Financial Accounting Standard (SFAS) No. 141, Business
        Combinations, the total purchase price was allocated to the estimated fair
        value
        of assets acquired and liabilities assumed. The fair value of the assets
        acquired was based on the Company’s best estimates. The purchase price was
        allocated to the fair value of assets acquired and liabilities assumed as
        follows:
 
 As Reported
              
              Including
                Purchase Price
                Contingency (*)Cash
                  and other current assets
              
              $
              346,548
              
              $
              346,548Equipment
                  and other assets
              
              
              1,310,125
              
              
              1,310,125Subscriber
                  lists
              
              
              2,463,927
              
              
              2,463,927Goodwill
                  and other intangible assets
              
              
              1,958,198
              
              
              6,458,198Subtotal
              
              
              6,078,798
              
              
              10,578,798Current
                  liabilities
              
              
              1,460,976
              
              
              1,460,976Total
              
              $
              4,617,822
              
              $
              9,117,822
 
 (*)
        At
        the date of the acquisition, the effect of the “purchase price contingency”
shares valued at approximately $5.4 million had not been recorded in accordance
        with FAS 141. In the third quarter of 2006, Telkonet issued 200,000 shares
        of
        the purchase price contingency valued at $900,000 as an adjustment to
        Goodwill.
 
 Goodwill
        and other intangible assets represent the excess of the purchase price over
        the
        fair value of the net tangible assets acquired. The Company used a discounted
        cash flow model to determine the value of the intangible assets and to allocate
        the excess purchase price to the intangible assets and goodwill as appropriate.
        In this model, expected cash flows from subscribers were discounted to their
        present value at a rate of return of 20% (incorporating the risk-free rate,
        expected inflation, and related business risks) over a period of eight years.
        Expected costs such as income taxes and cost of sales were deducted from
        expected revenues to arrive at after tax cash flows. In accordance with SFAS
        142, goodwill is not amortized and will be tested for impairment at least
        annually. The subscriber list was valued at $2,463,927 with an estimated
        useful
        life of eight years.
  The
        acquisition of MST resulted in the valuation of MST’s subscriber lists as
        intangible assets. This intangible asset is amortized over eight years, and
        amortization from the date of the acquisition through December 31, 2007,
        was
        taken as a charge against income in the statement of operations. In accordance
        with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
        the intangible asset subject to amortization was reviewed for impairment
        at
        December 31, 2007. Goodwill of $1,958,198, excluding the remaining purchase
        price contingency, represented the excess of the purchase price over the
        fair
        value of the net tangible and intangible assets acquired.
  F-14
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 Pursuant
        to the impairment test performed by us at December 31, 2007 on the goodwill
        and
        intangibles acquired, the Company determined that there were no changes in
        the
        carrying value of intangibles acquired. However, based on the Company’s
        assessment of its operating results and the forecasted discounted cash flow
        the
        goodwill was classified as impaired and the entire balance of $1,958,198
        was
        written off during the year ended December 31, 2007.
 
 Acquisition
        of Newport Telecommunications Co.
  On
        July
        18, 2007, Microwave Satellite Technologies, Inc., the wholly-owned subsidiary
        of
        MSTI Holdings Inc., acquired substantially all of the assets of Newport
        Telecommunications Co., a New Jersey general partnership (“NTC”), relating to
        NTC’s business of providing broadband internet and telephone services at certain
        residential and commercial properties in the development known as Newport
        in
        Jersey City, New Jersey. Pursuant to the terms of the NTC acquisition, the
        total
        consideration paid was $2,550,000, consisting of (i) 866,856 unregistered
        shares
        of Telkonet’s common stock, equal to $1,530,000 (which is based on the average
        closing prices for Telkonet common stock for the ten trading days immediately
        prior to the closing date), and (ii) $1,020,000 in cash, subject to adjustments.
        The total consideration will be increased or decreased depending on the number
        of subscriber accounts acquired in the NTC acquisition that were in good
        standing at that time. The stock certificates representing Telkonet common
        stock, and $510,000 of the cash consideration were paid to an escrow agent
        to be
        released after the final determination of the number of subscriber accounts
        in
        good standing acquired at closing. The consideration from escrow was released
        in
        October 2007.
 
 The
        acquisition of Newport was accounted for using the purchase method in accordance
        with SFAS 141, “Business Combinations.” The value of Telkonet’s common stock
        issued as a part of the acquisition was determined based on the average closing
        prices for Telkonet common stock for the ten trading days immediately prior
        to
        the closing date. The results of operations for Newport have been included
        in
        the Consolidated Statements of Operations since the date of acquisition. 
The components of the purchase price were as follows:
 
 As ReportedTelkonet’s
                  Common stock
              
              $
              1,530,000Cash
              
              
              1,020,000Direct
                  acquisition costs
              
              
              98,294Total
                  Purchase Price
              
              $
              2,648,294
 
 In
        accordance with SFAS No. 141, the total purchase price was allocated to the
        estimated fair value of assets acquired and liabilities assumed. The fair
        value
        of the assets acquired was based on management’s best estimates. The purchase
        price was allocated to the fair value of assets acquired and liabilities
        assumed
        as follows:
  Cable
                  equipment and installations
              
              $
              668,107Subscriber
                  lists
              
              
              1,980,187Total
                  assets acquired
              
              
              2,648,294Total
                  liabilities assumed
              
              
              -Net
                  assets acquired
              
              $
              2,648,294
 
 Goodwill
        and other intangible assets represent the excess of the purchase price over
        the
        fair value of the net tangible assets acquired. Due to its recent date of
        acquisition, the purchase price allocation to Intangibles and Goodwill is
        based
        upon preliminary data that is subject to adjustment and could change
        significantly pending the completion of management’s valuation to accurately
        evaluate this allocation. In accordance with SFAS 142, goodwill is not amortized
        and will be tested for impairment at least annually. The subscriber list
        was
        valued and could also change significantly pending the completion of
        management’s appraisal at $1,980,187 with an estimated useful life of eight
        years.
  F-15
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 The
        following unaudited condensed combined pro forma results of operations reflect
        the pro forma combination of the MST and NTC businesses as if the combination
        had occurred at the beginning of the periods presented compared with the
        actual
        results of operations of MST for the same period. The unaudited pro forma
        condensed combined results of operations do not purport to represent what
        the
        companies’ combined results of operations would have been if such transaction
        had occurred at the beginning of the periods presented, and are not necessarily
        indicative of MST’s future results.
  **Years Ended****December 31,****Proforma**
              
              **Proforma****2007**
              
              **2006**Total
                  revenues
              
              $
              3,777,779
              
              $
              3,747,581Net
                  (loss)
              
              $
              (10,033,634
              )
              $
              (3,627,728
              )Basic
                  (loss) per share
              
              $
              (0.43
              )
              $
              (0.24
              )Diluted
                  (loss) per share
              
              $
              (0.41
              )
              $
              (0.24
              )
  **NOTE
        C - INTANGIBLE ASSETS**
 
 At
        December 31, 2007, intangible assets are stated at their estimated fair market
        value (determined June 8, 2006), less amortization from January 31, 2006,
        to December 31, 2007. This valuation was obtained in connection with the
“push
        down” accounting performed as a result of the change in control of the
        Company.
 
 Total
        identifiable intangible assets acquired and their carrying values at December
        31, 2006, are:
   Gross
                  Carrying
                  Amount
                
                Accumulated
                  Amortization
                
                Net
                
                Residual
                  Value
                
                AmortizationPeriod(Years)Amortized
                    Identifiable Intangible Assets:Subscriber
                    lists
                
                $
                2,463,927
                
                $
                (282,325
                )
                $
                2,181,602
                
                $
                -
                
                8.0Total
                    Amortized Identifiable Intangible Assets
                
                
                2,463,927
                
                
                (282,325
                )
                
                2,181,602
                
                
                -Unamortized
                    Identifiable Intangible Assets:
                
                
                NoneTotal
                
                $
                2,463,927
                
                $
                (282,325
                )
                $
                2,181,602
                
                $
                -
 Total
        identifiable intangible assets acquired and their carrying values at December
        31, 2007 are:
  Gross
                Carrying
                Amount
              
              Accumulated
                Amortization
              
              Net
              
              Residual
                Value
              
              Amortization
                Period(Years)Amortized
                  Identifiable Intangible Assets:Subscriber
                  lists - Newport
              
              $
              1,980,187
              
              $
              (113,448
              )
              $
              1,866,739
              
              $
              -
              
              8.0Subscriber
                  lists - Telkonet
              
              
              2,463,927
              
              
              (590,316
              )
              
              1,873,611
              
              
              -
              
              8.0Total
                  Amortized Identifiable Intangible Assets
              
              
              4,444,114
              
              
              (703,764
              )
              
              3,740,350
              
              
              -Unamortized
                  Identifiable Intangible Assets:
              
              
              NoneTotal
              
              $
              4,444,114
              
              $
              (703,764
              )
              $
              3,740,350
              
              $
              -
  F-16
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 Total
        amortization expense charged to operations for the years ended December 31,
        2007 and 2006 was $421,494 and $282,325, respectively.
 
 Estimated
        amortization expense as of December 31, 2007, is as follows:
  2008
              
              $
              555,5142009
              
              
              555,5142010
              
              
              555,5142011
              
              
              555,5142012
              
              
              555,514Thereafter
              
              
              962,780Total
              
              $
              3,740,350
 
 The
        Company maintained intangible assets of $42,688, net of $20,812 accumulated
        amortization until January 31, 2006. The amortization expense for January
        2006
        amounted to $353. The asset was amortized over a 15 year period and subsequently
        included in the value of the subscriber list asset as of the January 31,
        2006,
        acquisition by Telkonet.
  Goodwill
        Impairment
 
 Based
        on
        management’s assessment of the Company’s operating results and its forecasted
        discounted cash flow, goodwill was classified as impaired and the entire
        balance
        of $1,958,198 was written off during the year ended December 31,
        2007.
 
 **NOTE
        D - PROPERTY, PLANT AND EQUIPMENT**
 
 The
        Company’s property and equipment at December 31, 2007, and December 31, 2006,
        consists of the following:
 
 2007
              
              2006Leasehold
                  Improvements
              
              $
              264,169
              
              $
              169,636Office
                  Fixtures and Furniture
              
              
              118,045
              
              
              98,878Total
              
              
              382,214
              
              
              268,514Accumulated
                  Depreciation
              
              
              (82,385
              )
              
              (37,683
              )Net
                  of property and equipment
              
              $
              299,829
              
              $
              230,831
 
 Depreciation
        expense was $44,702 and $34,735 for the years ended December 31, 2007 and
        2006,
        respectively. At January 31, 2006, the Telkonet acquisition date, the Company
        adjusted the property, plant and equipment to net book value resulting in
        a
        write-down of accumulated depreciation (see Note A).
 
 **NOTE
        E - CABLE EQUIPMENT AND INSTALLATIONS**
 
 The
        Company currently maintain service agreements with approximately twenty two
        (22)
        MDU and MTU properties and the equipment is capitalized under Cable Equipment
        and Installations. Generally, under the terms of a service agreement, the
        Company provides (i) “bulk services,” which may include one or all of a bundle
        of products and services, at a fixed price per month to the owner of the
        MDU or
        MTU property, and contract with individual residents for enhanced services,
        such
        as premium cable channels, for a monthly fee or (ii) contract with
        individual residents of the MDU property for one or more basic or enhanced
        services for a monthly fee.
 
 Equipment
        maintained for customers under Cable Equipment and Installations is recorded
        at
        cost and is depreciated on the straight line basis to its estimated residual
        value. Estimated useful lives are three to ten years. Cable equipment and
        installations at December 31, 2007, and 2006 consist of the
        following:
  F-17
 
 **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
  December 31,
                2007
              
              December 31,
                2006Cable
                  equipment and installations
              
              $
              5,286,580
              
              $
              3,684,237Less:
                  accumulated depreciation
              
              
              (930,607
              )
              
              (344,045
              )Capitalized
                  cable equipment and installations, net of accumulated
                  depreciation
              
              $
              4,355,973
              
              $
              3,340,192
 
 Impairment
        of Long-Lived Assets
 
 The
        Company evaluated its long-lived assets for impairment whenever events or
        change
        in circumstances indicate that the carrying amount of such assets may not
        be
        recoverable. Recoverability of assets to held and used is measured by comparison
        of the carrying amount of the asset to the future net undiscounted cash flows
        expected to be generated by the asset.
 
 The
        Company determined that the value of the capitalized equipment has been impaired
        based on its assessment of the forecasted undiscounted cash flow from the
        subscribers revenue and has written off $493,512 of its value, based on the
        lower of the carrying amount or the fair value less costs to sell, for the
        year
        ended December 31, 2007.
 
 Depreciation
        expense was $700,251 and $487,570 for the years ended December 31, 2007 and
        2006, respectively. At January 31, 2006, the Telkonet acquisition date, the
        Company adjusted the cable equipment and installations to net book value
        resulting in a write-down of accumulated depreciation (see Note A).
 
 The
        following is a schedule of minimum future rentals under bulk services of
        non-cancelable operating agreements as of December 31, 2007:
  2008
              
              $
              512,8142009
              
              
              484,9142010
              
              
              456,9722011
              
              
              315,9342012
              
              
              256,925Thereafter
              
              
              75,305Total
              
              $
              2,102,864
 
 **NOTE
        F - LONG-TERM INVESTMENTS**
  Interactivewifi.com,
        LLC
  The
        Company has investment in Interactivewifi.com, LLC a privately held company.
        This investment represents an equity interest of approximately 50% at December
        31, 2007. Interactivewifi.com is engaged in providing internet and related
        services to customers throughout metropolitan New York through a joint venture
        with us. The Company accounted for this investment under the cost method,
        as we
        do not have the ability to exercise significant influence over operating
        and
        financial policies of the investee. The Company reviewed the assumptions
        underlying the operating performance and cash flow forecasts in assessing
        the
        carrying values of the investment. The fair value of the Company’s investment in
        Interactivewifi.com amounted to $54,803 as of December 31, 2007 and
        2006.
 
 **NOTE
        G – SENIOR CONVERTIBLE DEBENTURES**
 
 A
        summary
        of convertible promissory notes payable at December 31, 2007, and December
        31,
        2006, is as follows:
 
 **2007**
              
              **2006**Senior
                  Convertible Debentures, accrue interest at 8% per annum commencing
                  on the
                  first anniversary of the original issue date of the debentures,
                  payable
                  quarterly in cash or common stock, at The Company’s option, and mature on
                  April 30, 2010
              
              $
              6,576,350
              
              $
              -Original
                  Issue Discount - net of accumulated amortization of $307,037 and
                  $0 at
                  December 31, 2007, and December 31, 2006, respectively.
              
              
              (219,312
              )
              
              -Debt
                  Discount - beneficial conversion feature, net of accumulated amortization
                  of $283,464 and $0 at December 31, 2007, and December 31, 2006,
                  respectively.
              
              
              (1,174,351
              )Debt
                  Discount - value attributable to warrants attached to notes, net
                  of
                  accumulated amortization of $181,122 and $0 at December 31, 2007,
                  and
                  December 31, 2006, respectively.
              
              
              (750,343
              )
              
              -Total
              
              $
              4,432,344
              
              $
              -Less:
                  current portion
              
              
              -
              
              
              -$
              4,432,344
              
              $
              -
  F-18
  Aggregate
        maturities of long-term debt as of December 31, 2007, are as
        follows:
 
 Amount2008
              
              $
              -2009
              
              
              -2010
              
              
              6,576,350Total
              
              $
              6,576,350
 
 During
        the year ended December 31, 2007, the Company issued senior convertible
        debentures (the "Debentures") having a principal value of $6,576,350 to
        investors, including an original issue discount of $526,350, in
        exchange for $6,050,000 from investors, exclusive of placement fees. The
        original issue discount to the Debentures is amortized over 12 months. The
        Debentures accrue interest at 8% per annum commencing on the first anniversary
        of the original issue date of the Debentures, payable quarterly in cash or
        common stock, at the Company’s option, and mature on April 30, 2010. The
        Debentures are not callable and are convertible at a conversion price of
        $0.65
        per share into 10,117,462 shares of MSTI Holdings Inc. common stock, subject
        to
        certain limitations. Additionally, the holders of the debentures have a security
        interest in all of the Company’s assets and those of its subsidiaries. As a
        result, if the Company defaults under its obligations to the Debenture holders,
        the Debenture holders could foreclose its security interest and liquidate
        some
        or all of these assets.
 
 In
        accordance with Emerging Issues Task Force Issue 98-5, Accounting for
        Convertible Securities with a Beneficial Conversion Features or Contingently
        Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
        beneficial conversion feature present in the notes. The Company allocated
        a
        portion of the proceeds equal to the intrinsic value of that feature to
        additional paid in capital included in the Company’s minority interest. The
        Company recognized and measured an aggregate of $1,457,815 of the proceeds,
        which is equal to the intrinsic value of the imbedded beneficial conversion
        feature, to additional paid in capital and a discount against the Notes issued
        during the year ended December 31, 2007. The debt discount attributed to
        the
        beneficial conversion feature is amortized over the Notes maturity period
        (three
        years) as interest expense.
  In
        connection with the placement of the Debentures, MSTI Holdings Inc. also
        agreed
        to issue to the Noteholders, five-year warrants to purchase an aggregate
        of
        5,058,730 shares of its common stock at an exercise price of $1.00 per share.
        MSTI Holdings Inc. valued the warrants in accordance with EITF 00-27 using
        the
        Black-Scholes pricing model and the following assumptions: contractual terms
        of
        5 years, an average risk free interest rate of 5.00%, a dividend yield of
        0%,
        and volatility of 54%. The $931,465 of debt discount attributed to the value
        of
        the warrants issued is amortized over the Notes maturity period (three years)
        as
        interest expense.
 
 In
        connection with the issuance of the Debentures, MSTI Holdings Inc. incurred
        placement fees of $423,500. Additionally, the Company issued to such agents
        five-year warrants to purchase 708,222 shares of MSTI Holdings Inc. common
        stock
        at an exercise price of $1.00.
 
 The
        Company amortizes the original issue discount, the beneficial conversion
        feature
        and the value of the attached warrants, and recorded non-cash interest expense
        in the amount of $307,038, $283,464, and $181,122, respectively, for the
        year
        ended December 31, 2007.
  F-19
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 Registration
        Rights Liquidated Damages
 
 On
        May 24, 2007, the Company’s majority-owned subsidiary, MSTI Holdings, Inc.
        completed a private placement, pursuant to which 5,597,664 shares of common
        stock and five-year warrants to purchase 2,798,836 shares of common stock
        were
        issued at an exercise price of $1.00 per share, for total proceeds of
        $2,694,020.  Additionally, MSTI Holdings, Inc. also sold senior
        convertible debentures for total proceeds of $6,050,000.  The
        debentures bear interest at a rate of 8% per annum, commencing on the first
        anniversary of the original issue date of the debentures, payable quarterly
        in
        cash or common stock, at the Company’s option, and mature on April 30,
        2010. The debentures are not callable and are convertible at a price of $0.65
        per share into 10,117,462 shares of common stock.  In addition,
        holders of the debentures received five-year warrants to purchase an aggregate
        of 5,058,730 shares of MSTI Holdings, Inc. common stock at an exercise price
        of
        $1.00 per share.
 
 The
        Company agreed to file a “resale” registration statement with the SEC within 60
        days after the final closing of the private placement and the issuance of
        the
        debentures covering all shares of common stock sold in the private placement
        and
        underlying the debentures, as well as the warrants attached to the private
        placement. The Company has agreed to its best efforts to have such “resale”
registration statement declared effective by the SEC as soon as possible
        and, in
        any event, within 120 days after the initial closing of the private placement
        and the issuance of the debentures.
 
 In
        addition, with respect to the shares of common stock sold in the private
        placement and underlying the warrants, the Company agreed to maintain the
        effectiveness of the “resale” registration statement from the effective date
        until the earlier of (i) 18 months after the date of the closing of the private
        placement or (ii) the date on which all securities registered under the
        registration statement (a) have been sold, or (b) are otherwise able to be
        sold
        pursuant to Rule 144, at which time exempt sales may be permitted for purchasers
        of the Units, subject to the Company’s right to suspend or defer the use of
        the registration statement in certain events.
 
 The
        registration rights agreement requires the payment of liquidated damages
        to the
        investors of approximately 1% per month of the aggregate proceeds of $9,128,717,
        or the value of the unregistered shares at the time that the liquidated damages
        are assessed, until the registration statement is declared effective, payable
        at
        the option of MSTI Holdings, Inc.  In accordance with EITF 00-19-2,
        the Company evaluated the likelihood of achieving registration statement
        effectiveness.  Accordingly, the Company has accrued an estimate of
        $500,000 as of December 31, 2007, to account for these potential liquidated
        damages until the expected effectiveness of the registration statement is
        achieved.
 
 Waiver
        from certain holders
  On
        February 11, 2008, the Purchasers executed a letter agreement (the “Letter
        Agreement”) with us containing, among other things, the following:
 
 (i)
              The
                  Purchasers waived any non-compliance with the Securities Purchase
                  Agreement, along with any and all related penalties, damages and
                  claims,
                  in connection with the Company’s issuance of (A) $3 million of shares of
                  common stock to Telkonet, Inc., (B) shares of common stock in connection
                  with acquisitions or strategic transactions approved by the Company’s
                  directors, but not including a transaction where the shares are
                  being
                  issued primarily for the purpose of raising capital or to an entity
                  whose
                  primary business is investing in securities, and (C) 2,000,000
                  shares of
                  common stock to employees and consultants under the Company’s 2007 Stock
                  Incentive Plan at an exercise price of no less than $0.65 per
                  share;
 
 (ii)
              The
                  Purchasers waived any non-compliance with the Registration Right
                  Agreement, along with any default, breach or threatened breach,
                  arising
                  under the Registration Rights Agreement, the Debentures or the
                  Warrants,
                  and waiving any Liquidated Damages, in each case resulting or that
                  could
                  result from the Company’s failure to have the Registration Statement
                  declared effective by the SEC by the Effectiveness Date. In exchange
                  for the investors waiving their rights to Liquidated Damages, the
                  Company
                  agreed to reduce the exercise price of the Warrants from $1.00
                  to
                  $0.65;
 
 (iii)
              If
                  Frank Matarazzo ceases being the Company’s Chief Executive Officer, that
                  would be an event of default under the Debentures;
                  and
 
 (iv)
              The
                  exercise price of all of the Company’s outstanding options and warrants
                  was set at $0.65 per share.
  F-20
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 Also,
        the
        Company has received waivers from a majority of the unit investors, in a
        letter
        dated February 12, 2008, whereby they waived among other things all rights
        to
        liquidated damages due to the registration statement not being declared
        effective by the SEC in a timely manner. The Company agreed to reduce the
        exercise price of the Warrants from $1.00 to $0.65.
 
 **NOTE
        H – NOTE PAYABLE**
 
 The
        following are the maturities of note payable at December 31:
 
 2007
              
              2006
              
              Maturity DateNote
                  payable in monthly installments of $547 with no interest. The note
                  is
                  collateralized by transportation equipment.
              
              $
              547
              
              $
              7,102
              
              
              January
                  2008Less:
                  current portion
              
              
              547
              
              
              6,555Amount
                  Due After One Year
              
              $
              -
              
              $
              547
 
 **NOTE
        I - CAPITAL STOCK**
 
 The
        Company has authorized 10,000,000 shares of preferred stock, par value $0.001
        per share. As of December 31, 2007 and December 31, 2006, the Company had
        no
        preferred stock issued and outstanding. The Company has authorized 90,000,000
        shares of common stock, par value $0.001 per share. As of December 31, 2007
        and
        2006, the Company had 29,816,552 and 15,000,000 shares of common stock issued
        and outstanding, respectively.
 
 On
        May
        22, 2007, MST entered into a Merger Agreement, whereby it was merged into
        Fitness Xpress, and MST, as the surviving corporation, became a wholly-owned
        subsidiary of Fitness Xpress. Pursuant to the Merger Agreement, Fitness Xpress’
name was changed to MSTI Holdings, Inc (“MSTI”).
 
 Pursuant
        to the terms and conditions of the Merger Agreement:
 
 §
              Each
                  share of MST common stock issued and outstanding immediately prior
                  to the
                  closing of the Merger was converted into 120,000 shares of MSTI
                  common
                  stock; a total 15,000,000 shares of common stock were
                  issued.
 
 §
              $5,000,000
                  of outstanding indebtedness of MST to Telkonet, Inc., MST's 90%
                  shareholder prior to the Merger, was converted at $1.00 per share
                  into
                  5,000,000 shares of MSTI common stock.
 
 §
              The
                  remaining shares of the common stock of Fitness Xpress were converted
                  to
                  3,788,888 shares of MSTI common
                  stock.
 
 Additionally,
        5,597,664 shares of MSTI common stock were issued pursuant to a private
        placement. These shares were valued at $0.55 per share for a purchase price
        of $
        $2,694,020, net of $384,696 in placement fees and other costs. The Company
        also
        issued warrants to purchase 2,798,836 shares of its common stock at an exercise
        price of $1.00 per share in this private placement transaction. In connection
        with this private placement, the Company issued the placement agent five-year
        warrants to purchase an aggregate of 391,838 shares of common stock at an
        exercise price of $1.00 per share.
  F-21
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 **NOTE
        J - STOCK OPTIONS AND WARRANTS**
 
 Employee
        Stock Options
  The
        following table summarizes the changes in options outstanding and the related
        prices for the shares of the Company’s common stock issued to its employees
        under a non-qualified employee stock option plan.
 
 Options Outstanding
              
              
              
              Options ExercisableExercise Prices
              
              Number
                Outstanding
              
              Weighted Average
                Remaining
                Contractual
                Life (Years)
              
              Weighted
                Average
                Exercise Price
              
              Number
                Exercisable
              
              Weighted
                Average
                Exercise Price$0.65
              
              
              4,278,000
              
              
              9.4
              
              $
              0.65
              
              
              675,000
              
              $
              0.654,278,000
              
              
              9.4
              
              $
              0.65
              
              
              675,000
              
              $
              0.65
 
 Transactions
        involving stock options issued to employees are summarized as
        follows:
  Number of Shares
              
              Weighted
                Average
                Price Per ShareOutstanding
                  at January 1, 2007
              
              
              -
              
              $
              -Granted
              
              
              4,278,000
              
              
              0.65Exercised
              
              
              -
              
              
              -Canceled
                  or expired
              
              
              -
              
              
              -Outstanding
                  at December 31, 2007
              
              
              4,278,000
              
              $
              0.65
  The
        weighted-average fair value of stock options granted to employees during
        the
        period ended December 31, 2007, and 2006 and the weighted-average significant
        assumptions used to determine those fair values, using a Black-Scholes option
        pricing model are as follows:
 
 2007
              
              2006Significant
                  assumptions (weighted-average):Risk-free
                  interest rate at grant date
              
              
              5.0
              %
              
              -Expected
                  stock price volatility
              
              
              54.0
              %
              
              -Expected
                  dividend payout
              
              
              -
              
              
              -Expected
                  option life-years
              
              
              10.0
              
              
              -Expected
                  forfeiture rate
              
              
              -
              
              
              -Fair
                  value per share of options granted
              
              $
              0.46
              
              $
              -
 
 The
        expected life of awards granted represents the period of time that they are
        expected to be outstanding. Upon issuance of the above stock options, the
        Company had no historical experience with which to establish a basis for
        determining an expected life of these awards. Therefore, the Company only
        gave
        consideration to the contractual terms and do not consider the vesting
        schedules, exercise patterns and pre-vesting and post-vesting forfeitures
        significant to the expected life of the option award.
  F-22
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 The
        Company estimated the volatility of its common stock by evaluating peer group
        companies. Peer group companies are chosen based on industry, size and annual
        revenue. Based on these criteria, the Company identified 20 companies in
        the
        peer group. These peer group companies include Comcast Corp., Time Warner,
        Viacom, Shaw Communications, Lodgenet Entertainment, Crown Media, Speedus
        Corp.
        and The Players Network. The Company has taken an average of the historical
        volatility of each of the peer group companies’ common stock to establish the
        expected volatility of its common stock over the life of the option
        awards.
  The
        Company bases the risk-free interest rate used in the Black-Scholes-Merton
        option valuation model on the implied yield currently available on U.S. Treasury
        zero-coupon issues with an equivalent remaining term equal to the expected
        life
        of the award.
  The
        Company has not paid any cash dividends on its common stock and do not
        anticipate paying any cash dividends in the foreseeable future. Consequently,
        the Company used an expected dividend yield of zero in the Black-Scholes
        option
        valuation model.
 
 Total
        stock-based compensation expense related to stock options recognized in the
        consolidated statement of losses for the year ended December 31, 2007, was
        $308,634, net of tax effect. The aggregate intrinsic value of options
        outstanding and unvested at December 31, 2007, is $0. At December 31, 2007,
        total unrecognized stock-based compensation expense related to non-vested
        stock
        options was $2,485,926.
 
 Warrants
 
 The
        following table summarizes the changes in warrants outstanding and the related
        prices for the shares of the Company’s common stock issued to non-employees.
        These warrants were granted in lieu of cash compensation for services performed
        or financing expenses in connection with the private placement of common
        stock
        and convertible debentures.
 Warrants Outstanding
                
                
                
                Warrants ExercisableExercise Prices
                
                Number
                  Outstanding
                
                Weighted Average
                  Remaining
                  Contractual
                  Life (Years)
                
                Weighed
                  Average
                  Exercise Price
                
                Number
                  Exercisable
                
                Weighted
                  Average
                  Exercise Price$
                1.00
                
                
                8,957,626
                
                
                4.9
                
                $
                1.00
                
                
                8,957,626
                
                $
                1.008,957,626
                
                
                4.9
                
                $
                1.00
                
                
                8,957,626
                
                $
                1.00
 
 Transactions
        involving warrants are summarized as follows:
  Number of
                    Shares
                  
                  Weighted
                    Average Price
                    Per ShareOutstanding
                      at January 1, 2007
                  
                  
                  -
                  
                  $Granted
                  
                  
                  8,957,626
                  
                  
                  1.00Exercised
                  
                  
                  -
                  
                  
                  -Canceled
                      or expired
                  
                  
                  -
                  
                  
                  -Outstanding
                      at December 31, 2007
                  
                  
                  8,957,626
                  
                  $
                  1.00
  F-23
 **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 On
        May 24, 2007, the Company completed a private placement, pursuant to which
        we issued 5,597,664 shares of common stock and five-year warrants to purchase
        2,798,836 shares of common stock at an exercise price of $1.00 per share,
        for
        net proceeds of $2,694,020. In connection with this private placement, we
        incurred placement agent fees of approximately $215,510, and issued the
        placement agent five-year warrants to purchase an aggregate of 391,838 shares
        of
        common stock at an exercise price of $1.00 per share. In addition, we incurred
        other professional fees and expenses totaling approximately $336,800 in
        connection with the reverse merger and private placement.
 
 On
        May 24, 2007, and May 25, 2007, the Company also sold senior
        convertible debentures in the aggregate principal amount of $6,050,000 (plus
        an
        8% original issue discount added to such principal amount). The debentures
        bear
        8% interest per annum, commencing on the first anniversary of the original
        issue
        date of the debentures, payable quarterly in cash or common stock, at the
        Company’s option, and mature on April 30, 2010. The debentures are not
        callable and are convertible at a price of $0.65 per share into 10,117,462
        shares of common stock, subject to certain limitations. In addition, holders
        of
        the debentures received five-year warrants to purchase an aggregate of 5,058,730
        shares of the Company’s common stock at an exercise price of $1.00 per
        share.
 
 In
        connection with the issuance of the debentures, we incurred placement agent
        fees
        totaling approximately $423,500, and issued to such placement agents five-year
        warrants to purchase 708,222 shares of common stock at an exercise price
        of
        $1.00 per share. The warrants issued to the placement agent were valued at
        $119,052, using the Black-Scholes pricing model and the following assumptions:
        contractual term of 5 years, an average risk-free interest rate of 5.0% a
        dividend yield of 0% and volatility of 54%.
 
 **NOTE
        K - RELATED PARTY TRANSACTIONS**
 
 The
        Company has a co-marketing agreement with Telkonet. The Company made payments
        of
        $19,060 and $136,035 to Telkonet pursuant to the terms of this agreement
        in the
        years ended December 31, 2007, and 2006, respectively.
 
 As
        of
        December 31, 2007, and 2006, we have a balance due to Telkonet, Inc., in
        the
        amount of $1,270,287 and $5,603,310, respectively, for loans made to us.
        The
        loans between the companies relate to advances from Telkonet, Inc. for their
        common stock equal to $1,530,000 in conjunction with the Newport
        Telecommunications, Inc. acquisition on July 18, 2007 and net of inter-company
        advances of $259,713 which also includes certain shared services for
        professional fees, administrative and other operating matters. The loans
        are
        unsecured and bear interest at the prime rate calculated monthly. In connection
        with the Merger, $5,000,000 of such indebtedness was converted into 5,000,000
        shares of the Company’s common stock at a conversion prime of $1.00 per
        share.
  On
        August
        17, 2005, we issued a non-interest bearing demand promissory note in the
        amount
        of $100,000 due to Frank Matarazzo, the Company’s Chief Executive Officer,
        evidencing his $100,000 loan to the Company. On May 10, 2007, we issued an
        additional non-interest bearing demand promissory note in the amount of $60,000
        to Mr. Matarazzo, evidencing an additional loan by him in such amount. Both
        notes were repaid in full in July 2007. An estimated $291,000 income tax
        receivable due to us for certain carry-back tax losses of MST for the period
        prior to the Company’s acquisition is payable to Frank Matarazzo.
 
 In
        February 2006, the Company entered into a one-year professional services
        agreement with Global Transport Logistics, Inc. (“GTI”), for consulting services
        for which GTI is paid a fee of $10,000 per month. GTI is 100% owned by Eileen
        Matarazzo, the sister-in-law of MST’s Chief Executive Officer. The agreement has
        been extended through February 2009. For
        the
        years ended December 31, 2007 and 2006, the Company paid and expensed $110,000
        and $90,000, respectively.
 
 The
        Company’s Chief Administrative Officer is the sister of the Chief Executive
        Officer of MST and receives an annual base salary of approximately $134,000
        with
        bonuses and benefits based upon the Company’s internal policies.
  **NOTE
          L - INCOME TAXES**
 
 The
          Company has adopted Financial Accounting Standard No. 109 which requires
          the
          recognition of deferred tax liabilities and assets for the expected future
          tax
          consequences of events that have been included in the financial statement
          or tax
          returns. Under this method, deferred tax liabilities and assets are determined
          based on the difference between financial statements and tax bases of assets
          and
          liabilities using enacted tax rates in effect for the year in which the
          differences are expected to reverse.
 
 For
          the
          successor period February 1 to December 31, 2006, the Company was included
          in
          the consolidated tax return of Telkonet, Inc. and Subsidiaries. For purposes
          of
          preparing separate financial statements, the Company has elected to use
          the
          separate return method of allocating tax expense.
 
 F-24
 **MSTI
            HOLDINGS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2007 AND 2006**
  Significant
          components of the provision (benefit) for income taxes for the following
          years
          are as follows:
 
 Period
                    Ended
                  December
                    31, 2007
                
                Successor
                  February
                    1 to
                  December
                    31, 2006
                
                Predecessor
                  January
                    31, 2006Current:Federal
                
                $
                ---
                
                $
                ---
                
                $
                (143,109
                )State
                
                
                ---
                
                
                ---
                
                
                -----
                
                
                ---
                
                
                (143,109
                )Deferred:Federal
                
                
                ---
                
                
                (896,219
                )
                
                913,201State
                
                
                ---
                
                
                (174,158
                )
                
                154,070$
                ---
                
                $
                (1,070,377
                )
                $
                1,067,191Total
                    income tax expense (benefit)
                
                $
                ---
                
                $
                (1,070,377
                )
                $
                924,162
  A
          reconciliation of tax expense computed at the statutory federal tax rate
          on loss
          from operations before income taxes to the actual income tax expense is
          as
          follows:
  Period
                    Ended
                  December
                    31, 2007
                
                Successor
                  February
                    1 to
                  December
                    31, 2006
                
                Predecessor
                  January
                    31, 2006Tax
                    provision computed at the statutory rate
                
                $
                (3,403,701
                )
                $
                (1,118,519
                )
                $
                845,258Deferred
                    state income taxes, net of federal income tax benefit
                
                
                
                
                
                (256,935
                )
                
                (20,168
                )Payment
                    to shareholder
                
                
                
                
                
                
                
                
                98,940Stock
                    Compensation
                
                
                216,117
                
                
                --
                
                
                --Goodwill
                    Impairment
                
                
                665,787
                
                
                --
                
                
                --Book
                    expenses not deductible for tax purposes
                
                
                114,013
                
                
                7,454
                
                
                132Change
                    in valuation allowance for deferred tax assets
                
                
                2,407,784
                
                
                297,623
                
                
                --Income
                    tax expense
                
                $
                ---
                
                $
                (1,070,377
                )
                $
                924,162
  F-25
 **MSTI
            HOLDINGS, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2007 AND 2006**
 Deferred
          income taxes include the net tax effects of net operating loss (“NOL”)
          carryforwards and the temporary differences between the carrying amounts
          of
          assets and liabilities for financial reporting purposes and the amounts
          used for
          income tax purposes. Significant components of the Company's deferred tax
          assets
          are as follows:
 
 2007
                
                2006**Deferred
                    Tax Assets:**Net
                    operating loss carryforwards
                
                $
                3,403,140
                
                $
                1,211,995Property
                    and equipment
                
                
                281,913
                
                
                --Reserve
                
                
                214,065
                
                
                --Other
                
                
                43,478
                
                
                20,438Total
                    deferred tax assets
                
                
                3,942,595
                
                
                1,232,433**Deferred
                    Tax Liabilities:**Property
                    and equipment, principally due to differences in
                    depreciation
                
                
                
                
                
                (14,678
                )Acquired
                    intangibles
                
                
                (781,837
                )
                
                (913,570
                )Beneficial
                    Conversion
                
                
                (502,774
                )
                
                --Other
                
                
                (3,490
                )
                
                (6,562
                )Total
                    deferred tax liabilities
                
                
                (1,288,101
                )
                
                (934,810
                )Valuation
                    allowance
                
                
                (2,654,494
                )
                
                (297,623
                )Net
                    deferred tax assets
                
                $
                ---
                
                $
                --
 
 The
          Company has provided a valuation allowance against the full amount of its
          net
          deferred tax assets at December 31, 2006 and December 31, 2007, because
          in the
          opinion of management, it is more likely than not that these tax assets
          will not
          be realized.
 
 At
          December 31, 2007 and December 31, 2006, the Company has net operating
          loss
          carryforwards of approximately $8.0 million and $2.8 million, respectively,
          for
          federal income tax purposes which will expire beginning in 2027. Federal
          NOLs
          generated prior to the acquisition date are to be carried back to
          pre-acquisition tax periods. The
          NOL
          deferred tax asset does not include any pre-FAS
          123R implementation excess tax benefits. None of
          the
          NOLs at December 31, 200 7 and
          December 31, 200 6 relate
          to stock option expense for which subsequently recognized tax benefits
          will be
          allocated to capital in excess of par value. No tax deduction benefit from
          the
          exercise of stock options was recorded to capital in excess of par value
          for the
          years ended December 31, 200 7
          and 200 6 .
  The
          Company has established a contingency reserve related to income taxes in
          accordance with SFAS No. 5. These reserves predominantly relate to the
          tax treatment of compensation from Microwave Satellite Technologies, Inc.’s
          pre-acquisition period. This reserve was recorded through
          book expense in a prior period .
 
 The
          Company’s post-acquisition NOL may be significantly limited under Section 382 of
          the Internal Revenue Code (IRC). NOLs are limited under Section 382 when
          there
          is a significant “ownership change” as defined in the IRC. Subsequent to the
          acquisition in 2006, the Company may have experienced such an ownership
          change.
          Since NOLs generated prior to the acquisition are carried back to a
          pre-acquisition period, a section 382 limitation would not apply to their
          utilization.
  The
          limitation imposed by Section 382 would place an annual limitation on the
          amount
          of NOL and tax credit carryovers that can be utilized. When the Company
          completes the necessary studies, the amount of NOL carryovers available
          may be
          reduced significantly. However, since the valuation allowance fully reserves
          for
          all available carryovers, the effect of the reduction would be offset by
          a
          reduction in the valuation allowance.
 F-26
 **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
  **NOTE
        M – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**
 
 Accounts
        payable and accrued liabilities at December 31, 2007, and 2006 are as
        follows:
 
 2007
              
              2006Accounts
                  payable
              
              $
              1,036,684
              
              $
              473,760Accrued
                  payroll and payroll taxes
              
              
              98,605
              
              
              60,471Other
              
              
              727,629
              
              
              421,572Total
              
              $
              1,862,918
              
              $
              955,803
 
 **NOTE
        N - COMMITMENTS AND CONTINGENCIES**
 
 Office
        Leases Obligations
 
 The
        Company leases approximately 12,600 square feet of office and warehouse space
        in
        Hawthorne, New Jersey for approximately $6,897 per month. The current lease
        term
        expires on April 30, 2010 at which time the Company will have the option
        to
        extend the lease for an additional five-year period. The Company also rents
        office space from 25 River Drive South Urban Renewal Co. for approximately
        $2,500 per month. This lease will expire in December 2009.
 
 The
        Company leases approximately 64 square feet at a collocation facility located
        in
        New York City for its telecommunications and video equipment, at a monthly
        rent
        of $1,664.
  The
        Company has a license to maintain a major point-of-presence at the Trump
        International Hotel and Tower Condominium located at Columbus Circle in New
        York
        City. Pursuant to the license agreement, the Company has the right to install
        antennas and other equipment on the building’s rooftop and in certain equipment
        storage areas for a license fee of $3,800 per month. The term of the agreement
        expires on June 30, 2012.
 
 The
        Company believes its current facilities are adequately covered by insurance,
        and
        are adequate for its immediate and near-term needs. Additional space may
        be
        required as the Company expands its activities. The Company does not currently
        foresee any significant difficulties in obtaining any required additional
        facilities.
 
 Effective
        January 1, 2007, the Company entered into a license and right of entry agreement
        with Hudson Conduit Associates, LLC for the right use a certain conduit.
        In
        accordance with the agreement, the Company shall pay annual license fees
        of
        $30,000 for the initial term of the agreement. The initial term of this
        agreement shall expire on December 31, 2016, with the option to renew and
        extend
        the term for two additional five year periods.
 
 Commitments
        for minimum rentals under non cancelable leases at December 31, 2007, are
        as
        follows:
  2008
              
              $
              177,0562009
              
              
              169,6262010
              
              
              57,5882011
              
              
              30,000Thereafter
              
              
              150,000Total
              
              $
              584,270
 
 Rental
        expenses charged to operations for the year ended December 31, 2007, and
        2006
        are $106,485 and $77,264, respectively.
  F-27
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 Contingencies
  Comcast
        of Jersey City LLC has petitioned the City of Jersey City Board of Public
        Utilities (“BPU”) for access to certain buildings that currently receive
        telephone and internet services from the Company. In prior years, BPU has
        adopted decisions granting such access to various buildings served by the
        Company. Newport Associates Development Co. has appealed these decisions;
        however, Comcast has been a second supplier of internet service in certain
        buildings since 2003. In March 2007, BPU in two separate decisions granted
        Comcast access to two additional buildings known as Pacific and Abraham
        Lincoln.
 
 The
        owners of other buildings served by the Company have received written requests
        from Comcast for access to said buildings to construct and install facilities
        to
        serve the residents therein.
  The
        Company is subject to other litigation in the normal course of business.
        Management does not believe these matters will have a material adverse effect
        on
        the financial position or results of operations.
 
 Senior
        Convertible Debentures
 
 On
        February 11, 2008, the Purchasers executed a letter agreement with MSTI
        containing, among other things, in the event Frank Matarazzo ceases being
        the
        Chief Executive Officer of MSTI that would be an event of default under the
        Debentures.
 
 Employment
        and Consulting Agreements
 
 The
        Company’s Chief Executive Officer is employed pursuant to an employment
        agreement that provides for an annual salary of $300,000 and expires December
        31, 2011.
 
 The
        Company has employment agreements with certain of its key employees which
        include non-disclosure and confidentiality provisions for protection of the
        Company’s proprietary information.
 
 The
        Company has consulting agreements with outside contractors to provide marketing
        and financial advisory services. The Agreements are generally for a term
        of 12
        months from inception and renewable automatically from year to year unless
        either we or Consultant terminates such engagement by written
        notice.
 
 **NOTE
        O - 401K PROFIT SHARING PLAN**
 
 The
        Company maintains a defined contribution profit sharing plan for employees
        (the
“401(k)”), administered by a committee of trustees appointed by the Company. All
        Company employees are eligible to participate upon the completion of
        three months of employment, subject to minimum age requirements. Each year
        the Company makes a contribution to the 401(k) without regard to current or
        accumulated net profits of the Company. These contributions are allocated
        to
        participants in amounts of 100% of the participants’ contributions up to 1% of
        each participant’s gross pay, then 10% of the next 5% of each participant’s
        gross pay (a higher contribution percentage may be determined at the Company’s
        discretion). In addition, the Company makes a one-time, annual contribution
        of
        3% of each participant’s gross pay to each participant’s contribution account in
        the 401(k) plan. Participants become vested in equal portions of their Company
        contribution account for each year of service until full vesting occurs upon
        the
        completion of six years of service. Distributions are made upon retirement,
        death or disability in a lump sum or in installments. The expense for these
        benefits was $65,812 for the year ended December 31, 2007.
  **NOTE
        P - SUBSEQUENT EVENTS**
 
 Amendment
        to Securities Purchase Agreement
 
 In
        the
        Company’s May 2007 private offering of convertible debentures (the “Debentures”)
        and warrants (the “Warrants”), the Company entered into (a) a Securities
        Purchase Agreement with the purchasers of the Debentures and Warrants (the
        “Purchasers”), which prohibited the Company from issuing shares of common stock
        or common stock equivalents until 90 days after a registration statement
        registering all of the common stock underlying the Debentures and Warrants
        (the
“Registration Statement”) is declared effective by the Securities and Exchange
        Commission (the “SEC”), subject to certain limited exceptions, and (b) a
        Registration Rights Agreement with the Purchasers, which stated that if the
        Registration Statement was not declared effective by the SEC on or before
        November 21, 2007 (the “Effectiveness Date”), the Company would be required to
        pay to each Purchaser, for each month in which the Registration Statement
        had
        not been declared effective, an amount in cash equal to 1% of the aggregate
        purchase price paid by such Purchaser for any unregistered securities then
        held
        by such Purchaser (“ Liquidated
        Damages ”).
  F-28
  **MSTI
        HOLDINGS, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2007 AND 2006**
 
 On
        February 11, 2008 the Purchasers executed a “Letter Agreement” with the Company
        containing among other things to waive clause (a) and (b) above The Company
        agreed to reduce the exercise price of the Warrants from $1.00 to
        $0.65.
 
 Also,
        the
        Company received waivers from a majority of the Unit Investors, in a letter
        dated February 12, 2008, whereby they waived among other things all rights
        to
        liquidated damages due to the registration statement not being declared
        effective by the SEC in a timely manner. The Company agreed to reduce the
        exercise price of the Warrants from $1.00 to $0.65.
 
 Amendment
        to Private Placement Agreement
 
 In
        connection with the Company’s May 2007 private offering of shares of common
        stock (the “Shares”) and warrants to purchase common stock (the “Warrants”), the
        Company entered into a Registration Rights Agreement, as amended, with the
        purchasers of the Shares and Warrants (the “Purchasers”), which stated that if
        the Registration Statement was not declared effective by the SEC on or before
        November 21, 2007 (the “Effectiveness Date”), the Company would be required to
        pay to each Purchaser, for each month in which the Registration Statement
        had
        not been declared effective, an amount in cash equal to 1% of the aggregate
        purchase price paid by such Purchaser for any unregistered securities then
        held
        by such Purchaser (“Liquidated Damages”).
 
 On
        March
        31, 2008, the Purchasers executed a letter agreement (the “Letter Agreement”)
        containing, among other things, the following:
 
 (i)
              The
                  Purchasers waived any non-compliance with the registration requirements
                  discussed above, along with any default, breach or threatened breach,
                  arising under the Registration Rights Agreement and any other documents,
                  including the Warrants and related subscription agreements, and
                  waiving
                  any Liquidated Damages, in each case resulting or that could result
                  from
                  the Company’s failure to have the Registration Statement declared
                  effective by the SEC by the Effectiveness Date. In exchange for
                  the
                  investors waiving their rights to Liquidated Damages, the Company
                  agreed
                  to reduce the exercise price of the Warrants from $1.00 to $0.65;
                  and
 
 (ii)
              The
                  exercise price of all of the Company’s outstanding options and warrants
                  was set at $0.65 per share.






F-29