**UNITED
STATES** **SECURITIES
AND EXCHANGE COMMISSION** **Washington,
D.C. 20549**








**FORM
10-KSB/A**




x
    **ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE****SECURITIES
      EXCHANGE ACT OF 1934****For
      the fiscal year ended September 30, 2004,
  or**o
    **TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE****SECURITIES
      EXCHANGE ACT OF 1934****For
      the transition period from********to******




**Commission
File No. 0-26053**






**MDU
COMMUNICATIONS INTERNATIONAL, INC.** (Name
of Small Business Issuer in its charter)




**Delaware**
    
    **84-1342898**(State
      of Incorporation)
    
    (IRS
      Employer ID. No.)




**60-D
Commerce Way, Totowa, New Jersey 07512** (Address
of Principal Executive Offices) (Zip Code)




Issuer's
telephone number, including area code: **(973) 237-9499**




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




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: (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 pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. x




The
issuer's revenues for its most recent fiscal year were $4,490,235.




The
aggregate market value of the common equity held by non-affiliates, computed by
reference to the price at which the issuer's common stock was sold, based on the
average of bid and asked prices on December
13, 2004, was $149,817,756.




As
of December 13, 2004 there were 48,821,400 shares of common stock
outstanding and no other outstanding classes of a common equity security.




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





2


**TABLE
OF CONTENTS**







**PART
      I******
    
    PageITEM
      1.
    Description
      of Business
    3ITEM
      2.
    Description
      of Properties
    11ITEM
      3.
    Legal
      Proceedings
    11ITEM
      4.
    Submission
      of Matters to a Vote of Security Holders
    11PART
      IIITEM
      5.
    Market
      for Common Equity and Related Stockholder Matters
    12ITEM
      6.
    Management’s
      Discussion and Analysis or Plan of Operation
    14ITEM
      7.
    Financial
      Statements
    21ITEM
      8.
    Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
    41ITEM
      8A.
    Controls
      and Procedures
    41PART
      IIIITEM
      9.
    Directors
      and Executive Officers
    42ITEM
      10.
    Executive
      Compensation
    43ITEM
      11.
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    44ITEM
      12.
    Certain
      Relationships and Related Transactions
    45ITEM
      13.
    Exhibits
    45ITEM
      14.
    Principal
      Accountant Fees and Services
    45





**FORWARD-LOOKING
STATEMENTS**





This
Report contains certain forward looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) and information relating
to MDU Communications International, Inc. that is based on the beliefs of our
management, as well as assumptions made by and information currently available
to our management. When used in this Report, the words “estimate,” “project,”
“believe,” “anticipate,” “hope,” “intend,” “expect,” and similar expressions are
intended to identify forward looking statements, although not all forward
looking statements contain these identifying words.





Such
statements reflect our current views with respect to future events and are
subject to unknown risks, uncertainties, and other factors that may cause actual
results to differ materially from those contemplated in such forward looking
statements. Such factors include the risks described in Item 1. Description of
Business; Risk Factors and elsewhere in this Report and, among others, the
following: general economic and business conditions, both nationally,
internationally, and in the regions in which we operate; catastrophic events,
including acts of terrorism; relationships with and events affecting third
parties like DIRECTV; demographic changes; existing government regulations, and
changes in, or the failure to comply with, government regulations; competition;
the loss of any significant numbers of subscribers or viewers; changes in
business strategy or development plans; the cost of pursuing new business
initiatives; technological developments and difficulties; the availability and
terms of capital to fund the potential expansion of our businesses; and other
factors referenced in this Report. Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of the date
hereof. We do not undertake any obligation to publicly release any revisions to
these forward looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.





*The
words “MDU Communications,” “the Company,” “we,” “our,” and “us” refer to MDU
Communications International, Inc. together with its subsidiaries, where
appropriate.*





**PART
I**




**Note:
Restated Financial Statements**
 
 The
Company, its Audit Committee and its independent registered public accounting
firm have determined that certain of the Company’s issued and outstanding
stock options that are subject to variable plan accounting treatment under
applicable accounting standards were not correctly accounted for due to an error
in calculation, and, accordingly, previously unrecognized noncash compensation
expense should have been recognized in certain of the Company’s
previously issued financial statements under the Financial Accounting Standards
Board’s Interpretation 44, “Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25” (Issue date 3/00).
Accordingly, management has restated the Company’s financial statements for the
year ended September 30, 2004 and the quarters ended December 31, 2003, March
31, 2004 and June 30, 2004. The reasons for, and financial impact of, the
adjustments are described in Note 16 to the Notes to Financial Statements set
forth herein and in Item 6 “Management’s Discussion and Analysis of Plan of
Operation.” Previously issued financial statements for such periods should not
be relied upon.


**Item
1.** **** **Description
of Business**





**BUSINESS
OF THE COMPANY**





MDU
Communications International, Inc. concentrates exclusively on installing
and delivering state-of-the-art digital satellite television and high-speed
Internet solutions to the United States multi-dwelling unit (“MDU”) residential
market—estimated to include 26 million residences. MDUs include apartment
buildings, condominiums, gated communities, universities, nursing homes,
hospitals, hotels, motels and other properties having multiple units located
within a defined area. Multi-family properties present unique technological,
management and marketing challenges, as compared to single-family homes -
challenges we have a certain experience and expertise in overcoming. We seek to
differentiate ourselves from other multi-family service providers through a
unique strategy of balancing the information and communication needs of today’s
MDU residents with the technology concerns of property managers and owners and
providing the best overall service to both. To accomplish this objective, we
have partnered with DIRECTV, Inc. and have been working with large property
owners and real estate investment trusts (REITs) such as AvalonBay Communities,
Trammell Crow Residential, Roseland Property Company, KSI Services, as well as
many others, to understand and meet the technology needs of these groups.




3


Our
Canadian operating company, MDU Communications Inc. (“MDU Canada”), was
incorporated in March 1998. In November 1998, MDU Canada’s
shareholders sold all of their MDU Canada stock to Alpha Beta
Holdings, Ltd., an inactive U.S. public reporting company, in exchange for
Alpha Beta stock, and renamed it “MDU Communications International, Inc.”
Alpha Beta had been incorporated in Colorado in July 1995, but never
conducted any significant business activities and was essentially inactive in
November 1998. In April 1999, we reincorporated MDU Communications
International, Inc. in Delaware and MDU Canada became a wholly owned
subsidiary that at its peak, had over 15,000 subscribers and seven offices
across Canada. In March 2000, we formed MDU Communications (USA) Inc.,
a Washington corporation (“MDU USA”) to conduct business in the United States.
 In early 2001, the Company made a fundamental re-assessment of its
business plan and determined that the most profitable markets lay in densely
populated areas of the United States. The Company changed its corporate focus
and business strategy from serving the entire North American MDU market, to
several key U.S. markets, beginning with the Northeast United States. To further
this change, in 2001, we completed an agreement with Star Choice Television
Network, Inc., for the sale of certain of our Canadian satellite television
assets. As a result, by May 30, 2001, the Company relocated its operations
and certain key employees to our New York Metro Area office in Totowa, New
Jersey. MDU Communications International, Inc. now operates essentially as a
holding company with MDU Canada and MDU USA as our wholly owned operating
subsidiaries.





The
Company earns its revenue through the sale of digital satellite television
programming and high-speed Internet services to owners and residents of MDUs. We
negotiate long-term access agreements with the owners and managers of MDU
properties allowing us the right to provide digital satellite television and
high-speed Internet services, and potentially other services, to their
residents.





Our
common stock trades under the symbol “MDTV” on the OTC Bulletin Board. Our
principal executive offices are located at 60-D Commerce Way, Totowa, New Jersey
07512 and our telephone number is (973) 237-9499. Our website is located at *www.mduc.com.*





**OUR
STRENGTHS**





In
addition to the high quality of our digital satellite television programming,
our high-speed (broadband) Internet solution and the wide range of choices that
our products offer to MDU owners and residents, we believe that our access
agreements and our strategic alliances represent significant competitive and
business strengths.





**Access
Agreements**





Our
access agreements with the owners of MDU properties generally grant us exclusive
rights to provide digital satellite television services, and in some cases video
services altogether, for terms of seven to ten years, and in many cases a right
of first refusal for other new telecommunications services. Most access
agreements provide for marketing services by the owner or manager on our behalf,
and in many cases, these marketing arrangements are exclusive. These access
agreements are in the name of the Company and provide us with revenue streams
either directly from property owners in bulk properties or from individual
subscribers in choice or exclusive properties.





**Strategic
Alliance With DIRECTV**





In
May of 2000, we entered into a long-term proprietary System Operator
Agreement with DIRECTV. Under this agreement we are able to establish and
maintain MDU distribution systems in non-rural states of the United States (as
identified in the agreement) and act as a commissioned sales agent for the
marketing of DIRECTV programming to residents of MDU properties. We only incur
costs associated with the implementation of our services and do not pay any of
DIRECTV’s programming or broadcasting costs. On September 29,
2003, the Company entered into a new System Operator Agreement with DIRECTV,
which replaced the System Operator Agreement previously executed by the Company,
which was due to initially expire on May 19, 2005. The Company considers
the following contractual changes as material:





•
    The
      upfront activation commission (the “commission”) that the Company receives
      from DIRECTV for each new subscriber will now be paid to the Company on
      “gross” subscriber additions instead of “net” subscriber additions in a
      given month and in an accelerated fashion. Commission is being paid on
      “gross” subscriber additions rather than “net” subscriber additions.





•
    The
      Company must obtain an annual (twelve month) commitment from a subscriber
      for DIRECTV programming in order to receive the commission.





•
    The
      commission can be proportionally “charged back” by DIRECTV only if a
      subscriber disconnects within the annual commitment period (i.e., if a
      subscriber disconnects after six months, the Company forfeits 50% of the
      commission). After twelve months, no portion of the commission can be
      “charged back.”




4




•
    The
      monthly residual payment paid to the Company by DIRECTV, which is based
      upon the monthly programming revenue to DIRECTV from a subscriber, has
      been increased.





•
    The
      new agreement has an initial term of three years with two, two-year
      automatic renewal periods upon the Company’s achievement of certain
      subscriber growth goals, for a total term of seven years.





•
    The
      agreement has an automatic extension of the entire agreement to coincide
      with the expiration date of the Company’s latest property access
      agreement.





Under
the DIRECTV agreement, we may not solicit sales or provide equipment for any
other direct-to-home digital satellite television service in the United States.
Consequently, we are totally dependent on DIRECTV for our digital set-top
programming in the United States. We are not, however, prohibited from
contracting with other program providers in connection with our private cable
services. During the fiscal year ended September 30, 2004, revenues from
DIRECTV direct-to-home (“DTH”) were 24% of our total revenues. DIRECTV is not
required to use us on an exclusive basis and could either contract with others
to install distribution systems and market programming in MDUs or undertake such
activities directly through retail stores, as it does for single-family
television households.





DIRECTV
offers in excess of 800 entertainment channels of digital quality video and
compact disc quality audio programming. DIRECTV currently transmits via five
high power Ku band satellites and has two spare satellites in orbit. We believe
that DIRECTV’s extensive line up of pay per view movies and events and sports
packages, including the exclusive “NFL Sunday Ticket,” have enabled DIRECTV to
capture a majority market share of existing direct broadcast service (“DBS”)
subscribers and will continue to drive strong subscriber growth for DIRECTV
programming in the future.  Through our strategic relationship with
DIRECTV, we expect to capitalize on the significant name recognition that
DIRECTV creates and maintains as well as their immense advertising budget and
advertised programming specials. Additionally, we benefit from the large-scale
national marketing campaigns that are continuously run by DIRECTV.





**MARKET**





The
United States MDU market represents a large niche market of potential
telecommunications customers. There are over 26 million MDU television
households out of a total of 100 million U.S. television households with
the most densely populated MDU areas in the Northeast. Our short-term goal is to
become a significant provider of bundled MDU products and services to the over
8 million MDUs in the Northeastern United States marketplace. During the
year ended September 30, 2004, we expanded into the greater Chicago metropolitan
area and the Southeast, which we also anticipate will be high growth centers.





Historically,
the MDU market has been served by local cable television operators. Generally,
these providers used analog technology and MDU residents could not access
digital or competitive services, although many cable companies have now begun
the process of upgrading to a digital signal. More importantly, the relationship
between the property owners and managers that control access to these MDU
properties and the cable operator have been significantly strained over the past
15 years due to the monopolistic sentiment of the cable operator.





We
believe that today’s MDU market offers us a very good business opportunity
because:





•
    Advances
      in communication and information technology have created demand for new
      state-of-the-art services such as digital satellite television and high
      definition television (HDTV).





•
    Regulatory
      changes in the United States authorizing the provision of digital
      satellite television services and local channels has given television
      viewers the opportunity to choose the provider of their television
      programming based on quality of signal, cost and variety of programming.





•
    Our
      marketing program focuses on the choice and benefits of using satellite
      television programming over cable programming, including cost savings.





•
    A
      number of MDUs are underserved by cable television providers or digital
      satellite television private cable providers. In addition, the market has
      only been enhanced by the recent pull back by many competitors, leaving
      the residential MDU community with very little choice among alternative
      service providers.





•
    To
      date, DIRECTV and other digital satellite television program providers
      have focused primarily on the single-family residence market because of
      the lower cost of deployment and fewer technical difficulties than those
      incurred in MDU properties and are now gearing to capitalize on the MDU
      market.




5


**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, wireless cable and off-air broadcasters:





*Hardwired
Franchised Cable Systems.* Cable
companies currently dominate the market in terms of subscriber penetration, the
number of programming services available, audience ratings and expenditures on
programming. The traditional cable companies serve an estimated 68% of U.S.
television households. However, satellite services are gaining market share and
DTH providers like us have a window of opportunity in which to acquire and
consolidate a significant subscriber base by providing a higher quality signal
over a vast selection of video and audio channels at a comparable or reduced
price to most cable operators’ current service.





*Other
Operators.* Our
next largest competitor is 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 other national 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 at the customer’s property. 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.





*Wireless
Cable Systems (Multi-Channel Multi-Point Distribution Services (“MMDS”)).* MMDS
systems are a hybrid of cable transmission and off-air broadcasting. MMDS was
developed as an alternative where hard-wired cable systems are unavailable or
not possible. MMDS programming is transmitted by local cable operators in a
scrambled form through the air via microwave frequencies to a small microwave
dish at the subscriber’s property, which converts the signal to a frequency band
used by standard cable services. However, this system generally requires a
direct “line-of-sight” from the transmission facility to the subscriber’s
receiving dish, which limits its range and capability of being received. There
are very few MMDS providers operating in the U.S. and they serve regional
markets only.





**GOVERNMENTAL
REGULATION**





*Federal
Regulation.* In
February 1996, Congress passed the Telecommunications Act, which
substantially amended the Federal Communications Act of 1934, as amended
(“Communications Act”). This legislation has altered and will continue to alter
federal, state, and local laws and regulations affecting the communications
industry, including certain of the services we provide. 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. In other
important statutory amendments of significance to satellite carriers and
television broadcasters, the law 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 the
Communications Act 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 the applicable Communications Act provisions and FCC rules governing the
retransmission of such “local” broadcast television stations to satellite
service subscribers. Noncompliance with the Communications Act and/or FCC
requirements could subject a satellite carrier to liability for copyright
infringement. We are subject to certain provisions of SHVIA. SHIVIA was
essentially extended and re-enacted. The new law, the Satellite Home Viewer
Extension and Reauthorization Act (SHVERA) was signed in December of
2004.





We
are not directly subject to rate regulation or certification requirements by the
Federal Communications Commission (FCC), the Telecommunications Act of 1996 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 resale agent for DIRECTV, we are not subject to
regulation as a direct broadcast satellite (DBS) provider, but rely upon DIRECTV
to procure all necessary re-transmission consents and other programming rights
under the Communications Act of 1934 and the Copyright Act. To the extent that
we may also elect to provide our MDU customers with transmission of signals not
currently available via satellite, our offering of these services may be subject
to compulsory copyright filings with the U.S. Copyright Office, although we do
not expect the licensing fees to have a material adverse effect on our business.
Our systems do not use or traverse public rights-of-way and thus are exempt from
the comprehensive regulation of cable systems under the Communications Act of
1934. Because we are subject to minimal federal regulation, have fewer
programming restrictions, greater pricing freedom and are not required to serve
any customer whom we do not choose to serve, we have significantly more
competitive flexibility than do the franchised cable systems. We believe that
these regulatory advantages help to make our satellite television systems
competitive with larger franchised cable systems.




6


*State
and Local Cable System Regulation.* We
do not anticipate that our deployment of satellite television 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 Rights.* 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
state and federal level suggest that the future enforceability of these
provisions may be uncertain. The FCC has recently issued an order prohibiting
telecommunications service providers from negotiating exclusive contracts with
owners of commercial MDU properties, though it deferred determination in a
pending rulemaking whether to render existing exclusive access agreements
unenforceable, or to extend this prohibition to residential MDUs due to an
inadequate administrative record. Although it is open to question whether the
FCC has statutory and constitutional authority to compel mandatory access, there
can be no assurance that it will not attempt to do so. Any such action may
undermine the exclusivity provisions of our rights of entry on the one hand, but
would 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 prohibit MDU owners from entering
into exclusive agreements, any of which could have a material adverse effect on
our business.





*Regulation
of our High-Speed Internet Business.* Information
service providers (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.





**EMPLOYEES**





The
Company had 64 employees, all full-time, as of September 30, 2004. None of
the Company’s employees are represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are good.





**RISK
FACTORS**





The
Company faces a number of risks and uncertainties that could cause actual
results or events to differ materially from those contained in any
forward-looking statement. Additional risks and uncertainties not presently
known to the Company or that are currently deemed to be immaterial may also
impair the Company’s business operations. Factors that could cause or contribute
to such differences include, but are not limited to, the following:





***The
Company has incurred losses since inception and may incur future
losses.***




To
date, the Company has not shown a profit in its operations. As of the Company’s
year end September 30, 2004, it has accumulated losses of approximately
$26,265,000 (as restated). The Company does not expect to have profitable
operations until sometime in fiscal year 2005, and it cannot assure that it will
ever achieve or attain profitability. If it cannot achieve operating
profitability, the Company may not be able to meet its working capital
requirements, which could have a material adverse effect on its business and may
impair its ability to continue as a going concern.





***The
Company has a limited operating history.***




The
Company commenced operations in August 1998 and was not active in the U.S.
market until May of 2000. Accordingly, it has a limited operating history and
its business strategy may not be successful. The Company’s failure to implement
its business strategy or an unsuccessful business strategy could materially
adversely affect its business, financial condition and operating
losses.




7


***The
Company depends upon its relationship with DIRECTV.***




On
September 29, 2003, the Company entered into a new System Operator Agreement
with DIRECTV to install and maintain distribution systems in MDU properties.
Under the Company’s agreement with DIRECTV, the Company may not maintain or
market direct-to-home satellite broadcast services for others. Consequently, the
Company is totally dependent upon DIRECTV for its set-top direct broadcast
satellite programming. During the year ended September 30, 2004, revenues from
DIRECTV were 24% of the Company’s total revenues. DIRECTV is not required to use
the Company on an exclusive basis for marketing its programming to MDUs. The
Company’s contract with DIRECTV can be terminated under various circumstances,
including, in particular an uncured material breach by the Company of the
contract. Any such termination may have material affect on the Company’s
business.




Because
the Company is an intermediary for DIRECTV, events the Company does not control
at DIRECTV could adversely affect the Company. One of the most important of
these is DIRECTV’s ability to provide programming that appeals to mass
audiences. DIRECTV generally does not produce its own programming; it purchases
programming from third parties. DIRECTV’s success - and accordingly the
Company’s - depends in large part on DIRECTV’s ability to select popular
programming sources and acquire access to this programming on favorable terms.
The Company has no control or influence over this. If DIRECTV is unable to
retain access to its current programming, the Company cannot assure you that
DIRECTV would be able to obtain substitute programming, or that such substitute
programming would be comparable in quality or cost to its existing programming.
If DIRECTV is unable to continue to provide desirable programming, the Company
would be placed at a competitive disadvantage and may lose subscribers and
revenues. Additionally, any potential sale of DIRECTV, as a company, may have a
material affect on the Company’s business.





***The
Company may be unable to meet its future capital expansion
requirements.***




The
Company may require additional capital to finance expansion or growth at levels
greater than its current business plan. Because of the uncertainties in raising
additional capital, there can be no assurance that the Company will be able to
obtain the necessary capital to finance its growth initiatives. Insufficient
capital may require the Company to delay or scale back its proposed development
activities.





***The
Company’s management and operational systems might be inadequate to handle its
potential growth.***




The
Company is experiencing rapid growth that could place a significant strain upon
its management and operational systems and resources. Failure to manage the
Company’s growth effectively could have a material adverse effect upon its
business, results of operations and financial condition and could force it to
halt its planned continued expansion, causing the Company to lose its
opportunity to gain significant market share. The Company’s ability to compete
effectively as a provider of digital
satellite television and high-speed Internet products and services and
to manage future growth will require the Company to continue to improve its
operational systems, its organization and its financial and management controls,
reporting systems and procedures. The Company may fail to make these
improvements effectively. Additionally, the Company’s efforts to make these
improvements may divert the focus of its personnel.




The
Company must integrate its key executives into a cohesive management team to
expand its business. If new hires perform poorly, or if it is unsuccessful in
hiring, training and integrating these new employees, or if it is not successful
in retaining its existing employees, the Company’s business may be harmed. To
manage the expected growth of the Company’s operations and personnel, the
Company will need to increase its operational and financial systems, procedures
and controls. This is a special challenge when the Company acquires new
operations with different systems. The Company’s current and planned personnel,
systems, procedures and controls may not be adequate to support its future
operations. The
Company may not be able to effectively manage such growth, and failure to do so
could have a material adverse effect on its business, financial condition and
results of operations.





***The
Company’s business could be adversely affected if it fails to integrate its
acquisitions successfully.***




The
Company has during the year consummated the acquisition of Direct Satellite,
Inc. and PCM Acquisitions Corp. In
addition, the Company may engage in one or more smaller acquisitions in order to
address potential growth in its subscriber base. The Company may not be able to
successfully integrate the acquired businesses or any potential future acquired
businesses into its existing business in a timely and non-disruptive manner or
at all. The Company may have to devote a significant amount of time and
resources to do so. Even with this investment of time and resources, the
acquisitions may not produce the revenues, earnings or business synergies that
the Company anticipates. If the Company fails to integrate the acquired business
effectively or if key employees of that business leave, the anticipated benefits
of the acquisitions would be jeopardized. The time, capital, management and
other resources spent on an acquisition that fails to meet the Company’s
expectations could cause its business and financial condition to be materially
and adversely affected. Additionally, acquisitions can involve non-recurring
charges and impairment of significant amounts of goodwill that could adversely
affect the Company’s results of operations. The
Company cannot be certain that it will successfully address any of these risks.
If it fails to manage these early stage risks successfully, current evaluations
of its business and prospects may prove to be inaccurate.





***The
Company could face increased competition.***




The
Company faces competition from others who are competing for a share of the MDU
subscriber base including other satellite companies, other DIRECTV system
operators, cable companies and off-air broadcasters. Also, DIRECTV itself could
corporately focus on MDUs. Other companies with substantially greater assets and
operating histories could enter this market. The Company’s competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements and devote greater resources to develop, promote and sell
their products or services. In addition, increased competition could result in
reduced subscriber fees, reduced margins and loss of market share, any of which
could harm the Company’s business. ****** The
Company cannot assure that it can compete successfully against current or future
competitors, many of which have substantially more capital, existing brand
recognition, resources and access to additional financing. All these competitive
pressures may result in increased marketing costs, or loss of market share or
otherwise may materially and adversely affect the Company’s business, results of
operations and financial condition.




8


Cable
television operators have a large, established subscriber base, and many cable
operators have significant investments in, and access to, programming. One of
the competitive advantages of DBS providers is their 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 DBS providers. If competition from cable television operators should
increase in the future, the Company could experience a decrease in its number of
subscribers or increased difficulty in obtaining new subscriptions.





***The
Company depends on key personnel to maintain its
success.***




The
Company’s success depends substantially on the continued services of its
executive officers and key employees, in particular Sheldon Nelson and certain
other executive officers. The loss of the services of any of the Company’s key
executive officers or key employees could harm its business. None of the
Company’s key executive officers or key employees currently has a contract that
guarantees their continued employment with the Company. There can be no
assurance that any of these persons will remain employed by the Company or that
these persons will not participate in businesses that compete with it in the
future.





***Corporate
governance-related issues.***




At
present, the Company’s President and Chief Executive Officer, Sheldon Nelson, is
also acting as the Company’s Chief Financial Officer. Accordingly, Mr. Nelson is
required to devote attention to both positions, thereby diverting attention from
his position as CEO. Further, because both the CEO and CFO positions are
currently held by a single person, outside of the Board of Directors and the
audit committee, no independent oversight of the CEO or the CFO function
currently exist within the Company’s management structure. In addition, although
the Company is in the process of developing and implementing policies and
practices relating to corporate governance, including reviewing and monitoring
the implementation of the corporate governance guidelines, to date the Company
does not yet have an Audit Committee Expert. The Company does intend to be
Sarbanes-Oxley compliant by the end of fiscal 2005.




***System
disruptions could affect the Company.***




The
Company’s ability to attract and retain subscribers depends on the performance,
reliability and availability of its services and infrastructure. The Company may
experience periodic service interruptions caused by temporary problems in its
own systems or in the systems of third parties upon whom it relies to provide
service or support. Fire, floods, hurricanes, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems and interrupt the Company’s services. Service disruptions could
adversely affect the Company’s revenue and, if they were prolonged, would
seriously harm its business and reputation. The Company does not carry business
interruption insurance to compensate for losses that may occur as a result of
these interruptions. Any of these problems could adversely affect its business.
If any of the DIRECTV satellites are damaged or stop working partially or
completely, although DIRECTV has a contingency satellite plan, DIRECTV may not
be able to continue to provide its subscribers with programming services. The
Company would in turn likely lose subscribers, which could materially and
adversely affect its operations and financial performance. DBS technology is
highly complex and is still evolving. As with any high technology product or
system, it may not function as expected.





***The
market for the Company’s products and service are subject to technological
change.***




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 technological developments. These new standards
and developments could make the Company’s existing or future products or
services obsolete. Keeping pace with the introduction of new standards and
technological developments 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 the
Company’s services could harm its ability to attract and retain
users.





***The
Company may be affected if the United States participates in wars or military or
other action; the Company may be affected 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) the Company’s inability to effectively market and distribute its products
or (iv) its inability to access capital markets, the Company’s business and
results of operations could be materially and adversely affected. The Company is
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 its business,
results of operations, or financial condition.




9


***The
Company may issue preferred stock and Common Stock in the
future.***




The
Company’s Board of Directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any vote or
action by the Company’s common stockholders. The rights of the holders of the
Common Stock will be subject to, and could be materially adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing flexibility in
connection with corporate purposes, could have the effect of delaying, deferring
or preventing a change in control, discouraging tender offers for the Common
Stock, and materially adversely affecting the voting rights and market price of
the Common Stock.




The
Company’s certificate of incorporation authorizes the issuance of 70,000,000
shares of common stock. The
future issuance of Common Stock may result in dilution in the percentage of the
Company’s Common Stock held by its existing stockholders. Also, any stock the
Company sells in the future may be valued on an arbitrary basis by it and the
issuance of shares of Common Stock for future services, acquisitions or other
corporate actions may have the effect of diluting the value of the shares held
by existing shareholders.





***Provisions
in the Company’s charter documents and Delaware law could prevent or delay a
change in control, which could reduce the market price of the Company’s Common
Stock.***




Provisions
in the Company’s certificate of incorporation and bylaws may have the effect of
delaying or preventing a change of control or changes in the Company’s
management. Pursuant to the Company’s certificate of incorporation the Company
has a staggered Board of Directors whereby the directors are elected to serve
three-year terms, are separated into three classes and each class is elected in
a different year. The staggered Board of Directors may prevent or frustrate
stockholder attempts to replace or remove current Board members as they will
have to wait until each class of directors is up for election before the
directors can be voted out of office. The Company’s certificate of incorporation
authorizes the issuance of up to 5,000,000 shares of preferred stock with such
rights and preferences as may be determined from time to time by the Board of
Directors. The Board of Directors may, without shareholder approval, issue
preferred stock with dividends, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Company’s common stock. The ability of the Board to issue preferred stock
may prevent or frustrate shareholder attempts to replace or remove current
management. In
addition, certain provisions of Delaware law may discourage, delay or prevent
someone from acquiring or merging with the Company. These provisions could limit
the price that investors might be willing to pay in the future for shares of the
Company’s Common Stock.





***Absence
of dividends on Common Stock.***




The
Company has never declared or paid any dividends on its Common Stock. The
declaration and payment in the future of any cash or stock dividends on the
Common Stock will be at the discretion of the Board of Directors of the Company
and will depend upon a variety of factors, including the ability of the Company
to service its outstanding indebtedness, if any, and to pay dividends on
securities ranking senior to the Common Stock, the Company’s future earnings, if
any, capital requirements, financial condition and such other factors as the
Company’s Board of Directors may consider to be relevant from time to time.
Earnings of the Company, if any, are expected to be retained for use in
expanding the Company’s business. Accordingly, the Company does not expect to
declare or pay any dividends on its Common Stock in the foreseeable future.





***The
price of the Company’s securities may be volatile and subject to wide
fluctuations.***




The
market price of the Company’s securities may be volatile and subject to wide
fluctuations. If the Company’s revenues do not grow or grow more slowly than it
anticipates, or, if operating or capital expenditures exceed its expectations
and cannot be adjusted accordingly, or if some other event adversely affects the
Company, the market price of the Company’s securities could decline. If
securities analysts alter their financial estimates of the Company’s financial
condition it could effect the price of the Company’s securities. Some other
factors that could affect the market price of the Company’s securities include
announcements of new product or service offerings, technological innovations and
competitive developments. In addition, if the market for stocks in the Company’s
industry or the stock market in general experiences a loss in investor
confidence or otherwise fails, the market price of the Company’s securities
could fall for reasons unrelated to its business, results of operations and
financial condition. The market price of the Company’s stock also might decline
in reaction to conditions, trends or events that affect other companies in the
market for digital satellite television and high-speed Internet products and services even
if these conditions, trends or events do not directly affect the Company. In the
past, companies that have experienced volatility in the market price of their
stock have been the subject of securities class action litigation. If the
Company were to become the subject of securities class action litigation, it
could result in substantial costs and a diversion of management’s attention and
resources.





***The
public trading market for the Company’s Common Stock is limited and may not be
developed or sustained.***




There
is a limited trading market for the Company’s Common Stock. The Common Stock has
been traded under the symbol “MDTV” on the Over The Counter Bulletin Board, a
NASDAQ-sponsored and operated inter-dealer automated quotation system for equity
securities. There can be no assurance that an active and liquid trading market
will develop or, if developed that it will be sustained.





**Item
2.** **** **Description
of Properties**





Our
headquarters are in Totowa, New Jersey, where we centralize our corporate
administrative functions. The office houses our senior management, accounting
and billing functions, call center and subscription management system. We
currently hold a lease in Totowa, New Jersey of 6,983 square feet at a current
monthly cost of $8,147, expiring July 31, 2006. We believe that this space
is adequate to suit our needs for the foreseeable future, although we have an
option on additional adjacent space. The Company also entered into a lease
agreement for its office and warehouse location In Chicago that runs through May
31, 2006. The rent is fully abated through November 30, 2005 and then increases
to $2,500 per month. This space is adequate to suit our needs for the
foreseeable future in the Chicago metropolitan area. In addition, we carry short
term warehouse lease space in Connecticut, Florida, Massachusetts and Maryland.
The Company is in the process of looking for a larger office and warehouse in
the South Florida area.




10


**Item
3.** **** **Legal
Proceedings**





From
time to time, we may be subject to legal proceedings, which could have a
material adverse effect on our business.





The
Company had previously been named as a defendant in a lawsuit by Whistler Cable
Television captioned *Whistler
Cable Television Ltd. vs. MDU Communications Inc.* ,
in British Columbia, Canada, claiming damages for conversion, the return of
personal property, an injunction and costs. Although the case was still pending
on September 30, 2004, it was subsequently settled on or about October 28, 2004
for $10,000 (CDN).





During
the year ended September 30, 2004, the Company also settled, on July 12, 2004,
previously reported litigation captioned *SCO
Financial Group LLC v. MDU Communications International, Inc.*relating to
an aged account payable. As material consideration for the settlement and
outstanding payable, the Company paid to SCO Financial $33,000 in cash and
issued to it 100,000 shares of common stock.





**Item
4.** **** **Submission
of Matters to a Vote of Security Holders**





On
August 5, 2004, the Company held its Annual General Meeting of Shareholders in
Totowa, New Jersey. Five issues were put forth to the shareholders; (i) election
of directors, (ii) ratification of appointment of Independent Registered Public
Accounting Firm; (iii) approval of an amendment to the Company’s Articles of
Incorporation for an increase in the number of authorized shares from 50,000,000
to 70,000,000; (iv) approval of an increase in the number of shares available
under the 2001 Employee Stock Purchase Plan from 2,000,000 to 2,800,000; and (v)
approval of an increase in the number of shares available under the 2001 Stock
Option Plan from 4,000,000 to 5,600,000.





On
the issue of election of directors, out of the 38,116,724 shares voted on this
issue, 38,038,359 shares voted in favor of each of the


director
nominees, 0 shares against, with 78,365 abstaining. All directors were elected
for their respective terms. For a list of directors and short biography of each,
please reference the Proxy Statement mailed to stockholders on or about July 5,
2004 and filed with the Securities and Exchange on July 1, 2004.





On
the issue of voting on the appointment of the Independent Registered Public
Accounting Firm, out of the 38,116,724 shares voted on this issue, 37,988,484
shares voted in favor, 75,380 shares against, with 52,860 abstaining. The
Independent Registered Public Accounting Firm was appointed for fiscal
2005.





On
the issue of amending the Articles of Incorporation to increase the number of
authorized shares, out of the total outstanding number of shares, 41,959,331 as
of the record date, 23,150,660 shares voted in favor, 3,202,550 shares against,
with 61,150 abstaining. Pursuant to Delaware law, a majority of all outstanding
shares of the Company is needed for passage. The amendment passed.





On
the issue of increasing the number of shares available for issuance under the
2001 Employee Stock Purchase Plan, out of the 26,414,360 shares voted on this
issue, 24,005,425 shares voted in favor, 2,349,335 shares against, with 59,600
abstaining. The issue passed.





On
the issue of increasing the number of shares available for issuance under the
2001 Stock Option Plan, out of the 26,414,360 shares voted on this issue,
22,188,064 shares voted in favor, 3,169,996 shares against, with 1,056,300
abstaining. The issue passed.


****


11


**PART
II**





**Item
5.  Market for Common Equity and Related Stockholder Matters**





**A.** **** **Market
for Common Stock**





The
Company’s common stock is not traded on a national securities exchange or the
NASDAQ Stock Market. The common stock has been quoted on the OTC Bulletin Board
under the symbol “MDTV” since December 2, 1998. The range of high and low
bid prices on the OTC Bulletin Board during each fiscal quarter for the past two
years, as reported by Bloomberg L.P., is as follows:







**Quarter
      Ended**
    
    
    **High**
    
    
    **Low**December 31,
      2002
    
    $
    0.34
    
    $
    0.15March 31,
      2003
    
    $
    0.31
    
    $
    0.17June 30,
      2003
    
    $
    0.55
    
    $
    0.22September 30,
      2003
    
    $
    0.84
    
    $
    0.41December 31,
      2003
    
    $
    2.01
    
    $
    0.71March 31,
      2004
    
    $
    3.05
    
    $
    1.75June 30,
      2004
    
    $
    3.01
    
    $
    1.98September 30,
      2004
    
    $
    2.60
    
    $
    2.15








These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.





**“Penny
Stock” Rules**





The
Company’s common stock is a “penny stock” which is subject to Rule 15g-9
under the Securities Exchange Act of 1934. It is considered penny stock because
it is not listed on a national exchange or NASDAQ, its bid price is below $5.00
per share, has net tangible assets of less than $5,000,000, and average annual
revenue has not exceeded $6,000,000 in the past three years.  As
a result, broker-dealers must comply with additional sales practices
requirements. Broker-dealers must determine that the investment is suitable for
the buyer and receive the buyer’s written agreement to the transaction before
they can sell the Company’s common stock to buyers who are not the
broker-dealer’s established customers or institutional accredited investors. In
addition, broker-dealers must deliver to the buyer before the transaction a
disclosure schedule which explains the penny stock market and its risks,
discloses the commissions to be paid to the broker-dealer, discloses the stock’s
bid and offer quotations, and discloses if the broker-dealer is the sole market
maker in the stock.





**B.** **** **Holders
of Record**





As
of December 13, 2004, the Company had 135 holders of record of its shares
of common stock, excluding shares held by broker-dealers, with an approximate
total of 2,100 shareholders.





**C.** **** **Dividends**





We
have not paid any cash dividends and we do not anticipate that we will pay cash
dividends on our common stock in the foreseeable future.  Payment of cash
dividends is within the discretion of our Board of Directors and will depend,
among other factors, upon our earnings, financial condition and capital
requirements.  There are no restrictions on the payment of dividends.





**D.** **** **Securities
Authorized for Issuance under Equity Compensation Plans**





12


**EQUITY
COMPENSATION PLAN INFORMATION**


**(September 30,
2004)**





**Plan
      category**
    
    **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
      plans**Equity
      compensation plans approved by security holders
    
    2,463,191
      shares
    (1)
    $
    0.77
    
    1,809,000Equity
      compensation plans not approved by security holders
    
    76,115
      shares
    (2)
    $
    1.23
    
    0







(1)  2001
Stock Option Plan, approved by the shareholders on May 10, 2001, see Note
4(a), contained herein. On August 5, 2004, the stockholders approved an increase
in the number of shares available under the 2001 Stock Option Plan from a total
of 4,000,000 to 5,600,000 common shares.





(2)  Supplier
Stock Option Plan, see Note 4(a), contained herein.


**E.** **** **Recent
Sales of Unregistered Securities Sales**





**Preferred
Stock**





There
were no sales or issuances of these securities during the fiscal year ended
September 30, 2004.





**Common
Stock**




On
October 1, 2002, 92,308 shares of unregistered common stock were issued to
Dean Taylor as part of his Termination Agreement. These shares were issued
without registration under the Securities Act of 1933, as amended ("1933 Act").
 
 On
June 10, 2003 the Company began offering unregistered securities pursuant
to a private placement Confidential Offering Memorandum.  The offering
consisted of up to 11 units at a purchase price of $75,000 per unit. Each unit
consisted of: (i) 300,000 common shares, par value $.001, and (ii) five-year
warrants to purchase an aggregate of 300,000 common shares of the Company at an
exercise price of  $0.33 per share, subject to adjustment, for a total
issuance of 3,300,00 shares and 3,900,000 warrants. The units were offered by
the Company through Casimir Capital L.P. on a “best efforts - no minimum
basis.”  The units were offered and sold only to “accredited investors,” as
that term is defined in Rule 501(a) of Regulation D promulgated under the
Securities Act of 1933, and were offered pursuant to exemptions provided by
Section 4(2) of the Securities Act and Rule 506 of Regulation D and certain
state securities laws.  The offering was fully closed on June 30, 2003
with the Company receiving net proceeds of $664,000. Casimir received a fee of
$75,000 and 600,000 warrants as described above. The shares and warrants were
subsequently registered on August 28, 2003 on Form SB-2, which was declared
effective by the Securities and Exchange Commission on October 1, 2003.
 
 On
July 23, 2003, the Company converted a promissory term note of
$100,000 and $1,644 in interest held by an investor into 254,110 restricted
common shares at a price of $0.40 per share. The shares are unregistered.
 
 On
July 23, 2003, the Company converted a promissory term note of 
$75,000 and $2,301 in interest held by an investor into 193,253 restricted
common shares at a price of $0.40 per share.  The shares are unregistered.
   On
November 14, 2003, the Company began offering unregistered securities
pursuant to a private placement Confidential Offering Memorandum.  The
offering consisted of up to 22 units at a purchase price of $150,000 per unit.
Each unit consisted of (i) 100,000 common shares, par value $.001, and (ii) a
three-year warrant to purchase an aggregate of 50,000 common shares of the
Company at an exercise price of  $1.75 per share, subject to adjustment,
for a total issuance of 2,200,00 shares and 1,100,001 warrants. The units were
offered by the Company on a “best efforts - no minimum basis.”  The units
were offered and sold only to “accredited investors,” as that term is defined in
Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, and
were offered pursuant to exemptions provided by Section 4(2) of the
Securities Act and Rule 506 of Regulation D and certain state securities
laws.  The offering was fully closed on November 25, 2003 with the
Company receiving net proceeds of $3,300,000. The shares and warrants were to be
subsequently registered on Form SB-2 within 120 days of closing. The
Registration Statement on Form SB-2 was declared effective by the Securities and
Exchange Commission on March 24, 2004.





On
April 6, 2004, the Company issued 250,000 shares of unregistered common stock to
PDI Communications Inc. pursuant to an agreement executed on February 12, 2004
for assistance in establishing the Company’s presence in the Southeast
multi-dwelling unit market. These shares were subsequently registered in a
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission on July 26, 2004 and subsequently declared effective on August 30,
2004.





On
May 7, 2004, the Company issued 250,000 shares of unregistered common stock to
B.A.A.M. LLC pursuant to an agreement executed on February 12, 2004 for
assistance in establishing the Company’s presence in the Southeast
multi-dwelling unit market. These shares were subsequently registered in a
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission on July 26, 2004 and subsequently declared effective on August 30,
2004.





On
May 27, 2004, the Company closed the offering of unregistered securities
pursuant to a private placement Confidential Offering Memorandum.  The
offering consisted of up to 1,314,532 units at a purchase price of $4.20 per
unit. Each unit consisted of (i) two common shares, par value $.001, and (ii)
one three-year warrant to purchase one share of common stock of the Company at
an exercise price of $2.46 per share, subject to adjustment, for a total
issuance of 2,629,064 shares and 1,314,532 warrants. The units were offered by
the Company on a “best efforts - no minimum basis.”  The units were offered
and sold only to “accredited investors,” as that term is defined in Rule 501(a)
of Regulation D promulgated under the Securities Act of 1933, and were offered
pursuant to exemptions provided by Section 4(2) of the Securities Act and
Rule 506 of Regulation D and certain state securities laws.  The offering
was fully closed on May 27, 2004 with the Company receiving net proceeds of
$5,000,000. The shares and warrants were to be subsequently registered on Form
SB-2 within 120 days of closing. The Registration Statement on Form SB-2 was
declared effective by the Securities and Exchange Commission on August 30,
2004.





13


On
June 2, 2004, the Company issued 178,690 shares of unregistered common stock to
Cablecom/Spacelink in return for future consulting services for a two year
period in the Chicago market. These shares were subsequently registered in a
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission on July 26, 2004 and subsequently declared effective on August 30,
2004.


On July 13, 2004, the Company issued 100,000 shares of unregistered common
stock to SCO Financial Group, LLC as part of a settlement agreement for an
outstanding account payable. These shares were subsequently registered in a
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission on July 26, 2004 and subsequently declared effective on August 30,
2004.

The
Company issued 40,135 shares of common stock during the year ended September 30,
2004 with a fair value of $28,094 pursuant to agreements for settlements of
outstanding trade accounts payable and recognized a gain of
$22,432.





**Warrants**





See
above for issued warrants to purchase unregistered shares of common stock
associated with the November 25, 2003 and May 27, 2004 private placements.





On
February 12, 2004, the Company issued warrants to purchase 250,000 unregistered
shares of common stock to each of PDI Communications Inc. and B.A.A.M., LLC
pursuant to an agreement executed on February 12, 2004 for assistance in
establishing the Company’s presence in the Southeast multi-dwelling unit market.
These underlying shares were subsequently registered in a Registration Statement
on Form SB-2 filed with the Securities and Exchange Commission on July 26, 2004
and subsequently declared effective on August 30, 2004.





**Options**





There
were no issuances of options to purchase unregistered common stock during the
fiscal year ended September 30, 2004.


****


**F.** **Purchases
of Equity Securities**





None





**Item
6.  Management’s Discussion and Analysis or Plan of Operation**




The
Management’s Discussion and Analysis or Plan of Operation for the year ended
September 30, 2004 presented below reflects certain restatements to the
Company’s previously reported results of operation for this period. See Note 16
to the Notes to Financial Statements for a discussion of these
restatements.


The
following discussion of the financial condition and results of operations of the
Company should be read in conjunction with the consolidated financial statements
and related notes, which are included herein. This report contains
forward-looking statements that involve risks and uncertainties. The Company’s
actual results could differ materially from those indicated in the
forward-looking statements.





**OVERVIEW**





*In
this discussion, the words “MDU Communications,” “the Company,” “we,” “our,” and
“us” refer to MDU Communications International, Inc. together with its
subsidiaries, where appropriate.*





MDU
Communications International, Inc. concentrates exclusively on delivering
state-of-the-art digital satellite television and high-speed Internet solutions
to the United States multi-dwelling unit (“MDU”) residential market, estimated
to include 26 million residences. MDUs include apartment buildings,
condominiums, gated communities, universities, nursing homes, hospitals and
other properties having multiple units located within a defined area. We seek to
differentiate ourselves from other service providers through a unique strategy
of balancing the information and communication needs of today’s MDU residents
with the technology concerns of property managers and owners and providing the
best overall service to both. To accomplish this objective, we have partnered
with DIRECTV, Inc. and have been working with large U.S. property owners and
real estate investment trusts (“REITs”) such as AvalonBay Communities, Trammell
Crow Residential, Roseland Property Company, KSI Services, The Related
Companies, as well as many others, to understand and meet the technology needs
of these groups.





The
Company earns its revenue through the sale of digital satellite television
programming and high-speed Internet services to owners and residents of MDUs. We
negotiate long-term access agreements with the owners and managers of MDU
properties allowing us the right to provide digital satellite television and
high-speed Internet services, and potentially other services, to their
residents, resulting in monthly annuity-like revenue streams. We offer two types
of digital satellite television service. First, we offer Direct Broadcast
Satellite (“DBS”), which uses an in-suite set-top digital receiver for residents
to receive state-of-the-art digital satellite and local channel programming. For
DBS, we exclusively offer DIRECTV programming packages.  From our DBS
offerings we receive the following revenue; (i) a substantial upfront subscriber
commission from DIRECTV for each new subscriber, (ii) a percentage of the fees
charged by DIRECTV to the subscriber each month for programming, (iii) a per
subscriber monthly digital access fee we bill subscribers for rental of the
set-top box and connection to the property satellite network system, and (iv)
occasional other marketing incentives from DIRECTV. Second, we offer Private
Cable service, where digital satellite television programming can be tailored to
the needs of an individual property and received through normal cable-ready
televisions. Our net revenues from Private Cable result from the difference
between the wholesale price charged to us by television program providers and
the price we charge subscribers for the private cable programming package. We
provide the DBS and Private Cable services on an individual subscriber basis,
but in many properties we provide these services in bulk, directly to the
property owner, resulting in one invoice and thus minimizing churn, collection
and bad debt exposure. On occasion, we derive revenue from installation services
to building owners and managers for property wiring and the installation of
equipment to allow for telecommunications services. Most of our services can be
installed to receive high definition television (“HDTV”). From subscribers to
our Internet service, we earn a monthly Internet access service fee. 
Again, in many properties, we provide this service in bulk.





14


Industry-wide,
demand for digital satellite television is outpacing traditional cable. The
Television Bureau of Advertising recently reported that franchised cable
penetration rates are at a six-year low.  Nielson Media Research has
reported that wired cable has fallen from 69.2% of American homes to 68.9% in
the year 2002. During the same period, digital satellite television increased
its penetration from 12.3% of American homes to 14.4%.  For the period
September 2002 to September 2003, CNNMoney reports that the cable industry lost
another 1% of subscribers, while the satellite industry increased its subscriber
base by 12%. The trend is expected to continue. The Carmel Group is forecasting
a 0.6% annual decline in subscribers to wired cable, whereas satellite
television is expected to grow at a rate of 8.2% per year, through 2008. We
believe that this trend will continue.





Fiscal
2004 has been a year of great accomplishment for the Company. First, the Company
has solidified its financial future by closing two private placement equity
financings to accelerate its growth plans. The Company completed a $3.3 million
financing on November 25, 2003 and $5.5 million financing on May 27, 2004. In
addition, subsequent to the fiscal 2004 year end, on November
24, 2004, the Company completed a $16.25 million private placement. Sold to
accredited investors only, the Company offered up to 6,063,440 units, consisting
of one share of common stock and three-tenths of one three-year warrant to
purchase one share of common stock at an exercise price of $3.40. The Company
closed on all 6,063,440 units at a per unit price of $2.68, for $16,250,000 in
gross proceeds. After the payment of fees and expenses, the Company received net
proceeds of just over $15.0 million. CRT Capital Group LLC acted as placement
agent for the financing.





Second,
with a strong balance sheet, the Company expanded its operational footprint into
two of the largest multi-family markets in the United States; the Southeast,
with a concentration in the Florida area, and the Midwest, with a concentration
in the greater Chicago metropolitan area. During the third quarter, the Company
acquired the business assets of Chicago based Direct Satellite, Inc. (“DSI”).
DSI was primarily a private cable operator serving approximately 4,400 video and
400 high-speed Internet subscribers in fifteen “Class A” multi-family
properties. A majority of these agreements are for the delivery of services on a
bulk or exclusive basis. DSI also has a backlog of approximately 4,800 units in
eight properties in the Chicago metropolitan market. DSI was founded in 1997 by
Tom Looney, who along with a number of his key employees, have become employees
of the Company. The MDU Communications Chicago office is located at 3825 N.
Elston Ave., Chicago, Illinois and the office currently has 7 Company
employees.





In
the fourth quarter of fiscal 2004, the Company acquired the business assets of
South Florida based PCM Acquisition Corp. (“PCM”) in its continued expansion
into the Southeast multi-family residential market. PCM was primarily a private
cable operator serving approximately 3,150 private cable subscribers in ten
“Class A” multi-family properties. A majority of these agreements are for the
delivery of video services on a bulk or exclusive basis, however, many of the
agreements also allow for the provision of broadband and other related services
directly to the residents of the properties. The Company currently has 3
employees in Florida and
is expecting to sign a lease for office space in the South Florida area in
January of 2005.





Not
only are these acquisitions immediately accretive to the Company in terms of
subscribers and revenues, but each have provided the Company with certain key
employees and modest backlogs of properties. The Company’s expansion philosophy
is to immediately establish itself in a new region through a mid-sized critical
mass acquisition. Once integrated, these acquisitions and regional operations
will begin to greatly increase the Company’s organic growth.





Third,
the Company has seen almost 100% growth in its subscriber base during fiscal
2004, from 12,589 total subscribers as of September 30, 2003 to 24,738
total subscribers in approximately 300 properties as of September 30, 2004. More
importantly, as of September 30, 2004, the Company reported a backlog of
approximately 117,000 units in over 330 properties. The Company defines its
backlog as (i) the number of units within properties that are currently being
installed with systems (work in progress), (ii) units under executed access
agreement in properties where work in progress has not yet begun, (iii) units in
properties where we have an executed letter of intent, and (iv) units in
properties where we are completing our economic and technical due diligence to
determine on what terms we would proceed, but with a reasonable expectation to
proceed. The Company’s actual work in process at September 30, 2004 involved
20,330 units.





The
Company is working diligently and efficiently to timely deploy service to these
117,000 new units, and to that end, the Company has almost doubled the number of
employees during the year from 38 to 64.





15


Financially,
a t
September 30, 2004, the Company had cash and cash equivalents of $4,705,722. Its
revenues for the year ended September 30, 2004 were $4,490,235.  For the
year ended September 30, 2004, the Company reports negative earnings before
interest, taxes, depreciation, amortization and non cash stock option charges
(“EBITDA”) of $693,319. The Company uses the common performance gauge of EBITDA
to evidence earnings exclusive of mainly non cash events, as is common in the
technology, and particularly the cable and telecommunications, industries. We
believe that EBITDA is important because investors who follow our industry
frequently use it as a measure of financial performance.  The most directly
comparable GAAP reference is simply the removal of - in the Company’s case -
interest, depreciation, amortization and non cash charges related to its
warrants and stock options. EBITDA is not, and should not be considered, an
alternative to income from operations, net income, net cash provided by
operating activities, or any other measure for determining our operating
performance or liquidity, as determined under accounting principles generally
accepted in the Unites States of America. EBITDA also does not necessarily
indicate whether our cash flow will be sufficient to fund working capital,
capital expenditures or to react to changes in our industry or the economy
generally. The following table reconciles the comparative EBITDA of the Company
to our consolidated net loss as computed under accounting principles generally
accepted in the United States of America:







**Years
      Ended****September
      30,****2004(as
      restated)**
    
    **2003**EBITDA
    
    $
    (693,319
    )
    $
    913,791Interest
      Expense
    
    (2,755,115
    )
    (988,659
    )Depreciation
      and Amortization
    
    (1,620,164
    )
    (1,264,792
    )Warrants
      issued for consulting services
    
    
    (313,040
    )
    
    0Effect
      of Variable Accounting for Option Plans
    
    (2,801,682
    )
    (714,130
    )Amortization
      of Unearned Compensation
    
    (757,815
    )
    (63,917
    )Net
      Loss
    
    $
    (8,941,135
    )
    $
    (2,117,707
    )





Fiscal
2005 has already started off with success. In addition to the $16.25 million
private placement closed on November 24, 2004, the Company has signed
significant long-term access agreements to provide services to the Fort Ord, La
Mesa Village and Fort Belvoir military family communities. The Company has also
recently entered into an agreement with DIRECTV, Inc. to deploy a new satellite
video program developed specifically for the multi-dwelling unit market, the
Bulk/Choice Advantage, which the Company believes will dramatically increase
penetration rates in multi-family properties and will also significantly
increase its revenues from high-speed Internet services as the Company bundles
high-speed with the Bulk/Choice Advantage program and is offered in the growing
backlog of bulk and exclusive properties. In addition, the Company will be
evaluating other acquisitions and other technologies, such as VoIP, during the
year as well as evaluating its move to a recognized market
exchange.





Our
common stock trades under the symbol “MDTV” on the OTC Bulletin Board. Our
principal executive offices are located at 60-D Commerce Way, Totowa, New Jersey
07512 and our telephone number is (973) 237-9499. Our website is located at *www.mduc.com.*





**Critical
Accounting Policies and Estimates**





Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates. We base our
estimates on historical experience and on other assumptions that are believed to
be reasonable under the circumstances. Accordingly, actual results could differ
from these estimates under different assumptions or conditions. This section
summarizes the critical accounting policies and the related judgments involved
in their application.





*(a)* ** *Revenue
recognition with respect to initial service or connection:*





New
subscriber activation subsidies from the satellite programming provider, prior
to September 29, 2003, are recognized as revenue on a straight-line basis over
the estimated average period that a customer will remain a subscriber to a
maximum of four years. The expected customer relationship is estimated based on
the historical relationship with similar type customers. Any significant
variations to these historical relationships would cause an increase or decrease
in the expected term of the customer relationship, which would have a converse
effect on the amount of revenue recognized.





On
September 29, 2003, the Company entered into a new System Operator Agreement
with DIRECTV, Inc. for the delivery of DIRECTV digital satellite programming.
The new agreement contains several material contractual changes from the
previous agreement that significantly affect how the Company accounts for this
revenue. First, the upfront activation commission that the Company receives from
DIRECTV for each new subscriber will now be paid to the Company based on “gross”
subscriber additions instead of “net” subscriber additions in a given month.
However, the Company must obtain an annual commitment from a subscriber for
DIRECTV programming in order to receive the commission. Second, due to this
change, the commission can be proportionally “charged back” by DIRECTV only if a
subscriber disconnects within the annual commitment period. Because after twelve
months no portion of the commission can be “charged back,” as of October 1,
2003, the Company began recognizing this revenue over one year instead of four
years.




16


*(b)* ** *Allowance
for doubtful accounts:*





We
provide an allowance for doubtful accounts equal to the estimated collection
losses based on our historical experience coupled with a review of the current
status of existing receivables. Any significant variations in our historical
experience or status of our existing accounts receivable could have a material
impact on our statement of operations.





*(c)*  *Fair
value of equity instruments:*





We
account for stock options issued to employees using the intrinsic value method
in accordance with Accounting Principles Board Opinion 25, “Accounting for Stock
Options issued to Employees”. We estimate the fair value of options issued to
employees for pro-forma disclosure purposes using an option-pricing model
(generally, the Black Scholes model) that meets the criteria set forth in
Statement of Financial Accounting Standards No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”) and common stock using the market
value of our stock. In accordance with SFAS 123, all other issuances of
common stock, stock options, warrants or other equity instruments to employees
and non-employees as consideration for goods or services received by us are
accounted for based on the fair value of the consideration received or the fair
value of the equity instrument, whichever is more readily measurable. Such fair
value is measured at an appropriate date pursuant to the guidance in the
consensus reached for EITF Issue No. 96-18 (generally, the earlier of the
date the other party becomes committed to provide goods or services or the date
the performance by the other party is complete) and capitalized or expensed as
if we had paid cash for the goods or services. For purposes of determining the
fair value of options and warrants using the Black-Scholes option pricing model,
we have used the following assumptions in the years ended September 30,
2004 and 2003:





2004
    
    
    2003Expected
      volatility
    
    
    68
    %
    
    127
    %Risk-free
      interest rate
    
    
    4.00
    %
    
    4.75
    %Expected
      years of option life
    
    
    1
      to 5
    
    
    1
      to 5Expected
      dividends
    
    
    0
    %
    
    0
    %








Given
an active trading market for our common stock, we estimate the volatility of our
stock based on week ending closing prices over a historical period of not less
than one year. As a result, depending on how the market perceives any news
regarding us or our earnings, as well as market conditions in general, it could
have a material impact on the volatility we use in computing the value we place
on these equity instruments.





*(d)*  *Valuation
of deferred tax assets:*





We
regularly evaluate our ability to recover the reported amount of our deferred
income tax assets considering several factors, including our estimate of the
likelihood that we will generate sufficient taxable income in future years in
which temporary differences reverse. Due to the uncertainties related to, among
other things, the extent and timing of future taxable income, we offset our net
deferred tax assets by an equivalent valuation allowance as of
September 30, 2004.





*(e)*  *Valuation
of long-lived assets:*





We
assess the recoverability of long-lived tangible and intangible assets whenever
we determine that events or changes in circumstances indicate that their
carrying amount may not be recoverable. Our assessment is primarily based upon
our estimate of future cash flows associated with these assets. Although there
has been a sustained weakness in our operating results through
September 30, 2004, we continue to project income in the future.
Accordingly, we have determined that there has not been an impairment of any of
our long-lived assets. However, should our operating results deteriorate, we may
determine that some portions of our long-lived tangible or intangible assets are
impaired. Such determination could result in non-cash charges to income that
could materially affect our consolidated financial position or results of
operations for that period.





**RESULTS
OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003**





***Net
Loss.*** As
a result of the discussion below, we reported a net loss of $8,941,135 for the
year ended September 30, 2004 compared to a net loss of $2,117,707 for the
year ended September 30, 2003.




17


***Revenues.*** Revenue
for the year ended September 30, 2004 of $4,490,235 increased 9% from
September 30, 2003 revenue of $4,124,394. Revenue for the years ended
September 30, 2004 and 2003 was comprised of:




2004
    
    
    2003Private
      cable
    
    
    37
    %
    
    32
    %Programming
      revenue
    
    
    51
    %
    
    54
    %Internet
      access fees
    
    
    8
    %
    
    10
    %Wiring,
      equipment and other sales
    
    
    4
    %
    
    4
    %








The
revenue increase is attributable to the increase in number of subscribers over
the prior year due to (i) organic growth in subscribers, and (ii) the
acquisition of the subscribers of Direct Satellite, Inc. (“DSI”) during the year
increased our revenue $374,601 (See Note 8). We expect an increase in revenues
as our subscriber growth continues.





***Direct
Costs.*** Direct
costs are primarily comprised of private cable programming, monthly recurring
Internet T-1 line connections and costs relating to installation services and
are 31% of revenue for the year ended September 30, 2004 compared to 26%
for the same period in the prior year. Direct costs increased to $1,391,464 as
of September 30, 2004 from $1,060,198 in the year ended September 30,
2003. This increase was primarily due to a shift in product mix during the year.
We anticipate direct costs will increase proportionally with planned growth
during 2005.





***Sales
Expenses.*** Sales
expenses consist mainly of salaries, commissions, marketing materials, trade
shows, advertising and promotion. Sales expenses increased to $884,523 as of
September 30, 2004 from $353,980 in the year ended September 30, 2003. ****** The
increase in sales expenses primarily results from new marketing initiatives to
increase our subscriber base. We expect an increase in sales expenses as our
subscriber growth continues **.** **** However,
we anticipate there will be economies of scale and that the sales expense as a
percent of revenue in 2005 should decline.





***Customer
Service Expenses.*** Customer
service expenses consist mainly of call center and customer technical services.
Customer service expenses were $1,268,694 for the year ended September 30,
2004 compared to $1,075,255 for the year ended September 30, 2003. This
increase is primarily the result of positioning the Company to continue to
expand its services to a larger subscriber base in the future. We expect an
increase in customer service expenses with achieved subscriber growth during
2005 .
As with the sales expense, certain expenses are fixed and as a result, the
customer service expense as a percent of revenue is expected to
decline. ****





***General
and Administrative Expenses.*** General
and administrative expenses increased to $5,561,102 in 2004 from $2,278,818 in
the year ended September 30, 2003. The increase is primarily the result of
noncash charges of $4,004,276 in 2004 compared to noncash charges of $835,168 in
2003. The noncash charges are attributable to $2,801,682 for the effects of
variable accounting for stock options, $757,815 for the amortization of unearned
compensation related to the fair value of options and warrants issued for
services, $313,040 for the issuance of options and warrants in exchange for
services and a provision for doubtful accounts of $131,739. Excluding these
noncash charges, general and administrative expenses were $1,556,826, an
increase of 8% from September 30, 2003, primarily the result of increased
professional fees. We do expect general and administrative expense to increase
in 2005 as a result of, subscriber growth, the addition of an executive(s) and
costs related to efforts to be Sarbanes-Oxley compliant by the end of fiscal
2005.





***Other
Income.*** There
was a gain on sale of customers of $869,259 in 2003 and no such gain in
2004.





***Other
Non-Cash Charges.*** Interest
expense for the year ended September 30, 2004 was $2,755,115 compared to
interest expense for September 30, 2003 of $998,659. Of these amounts,
$2,735,796 and $914,779 were respectively non-cash interest expense items
related to amortization of the fair value of warrants and the beneficial
conversion feature related to the issuance of convertible notes issued during
the year ended September 30, 2003.





***Settlement
of Liabilities*** . During
the years ended September 30, 2004 and 2003, we settled certain outstanding
trade payables and recognized a gain of $33,840 and $175,011, respectively. During
the year ended September 30, 2003, we incurred noncash charges in the
amount of $174,472 relating to the conversions of promissory notes into common
stock, with no similar charges being incurred during the year ended
September 30, 2004.





**OUTLOOK**





The
Company has incurred operating losses since inception. However, with
consolidated operations in the most profitable U.S. markets, expansion into the
military segment and efforts to position the Company to increase its subscriber
base, the Company expects to be EBITDA positive in fiscal year 2005.


****


18


**LIQUIDITY
AND CAPITAL RESOURCES**





During
the years ended September 30, 2004 and 2003, we recorded a net loss of
$8,941,135 and $2,117,707, respectively. We had negative cash flows from
operating activities of $703,162 during the year ended September 30, 2004,
and we had positive cash flows from operating activities of $663,123 during the
year ended September 30, 2003. At September 30, 2004, we had an
accumulated deficit of $24,990,326.





Due
to the Company’s increased cash position as of the year ended September 30,
2004, primarily from the private placements and the exercise of warrants and
options, as well as, the private placement in November 2004, the Company
believes that it has adequate financial resources at least through September 30,
2005 and therefore believes there is no longer substantial doubt about the
entity’s ability to continue as a going concern.





On
November 24, 2004, the Company completed a $16.25 million private equity
placement, pursuant to which the Company sold 6,063,400 units. Each unit
consisted of one share of common stock and three-tenths of one three-year
warrant to purchase one share of common stock at an exercise price of $3.40 per
share, to accredited investors at a per unit price of $2.68. After the payment
of fees and expenses, the Company received net proceeds of
$15,045,445.





The
following table displays payments for our contractual obligations outstanding at
September 30, 2004:




**Total**
    
    **Less thanone
      year**
    
    **Greater thanone
      year**Capital
      Lease Obligations
    
    $
    107,895
    
    $
    58,280
    
    $
    49,615Operating
      Lease Obligations
    
    
    100,762
    
    
    100,762
    
    
    115,762Total
    
    $
    208,657
    
    $
    159,042
    
    $
    165,377






***Cash
Position.*** At
September 30, 2004, we had cash and cash equivalents of $4,705,722 compared
to $507,775 at September 30, 2003. The
increase in our cash position was primarily due to the net proceeds of the
November and May equity private placements.





***Operating
Activities.***  Our
operations used net cash of $703,162 during the year ended September 30, 2004,
including an $86,300 decrease in our accounts payable and accrued liabilities
during the period. Additionally, during the year ended September 30, 2004, the
net increase in accounts receivable, before the addition of $102,821 in accounts
receivable purchased from PCM, was $487,499.  Our net loss of $8,941,135
for the same period was offset by net noncash charges associated primarily with
depreciation and amortization, charges to interest expense for amortization of
deferred finance costs, debt discount and other non-cash charges associated with
stock options and warrants of $8,360,236.




***Investing
Activities.***  During
the year ended September 30, 2004, we purchased $2,132,351 of equipment relating
to subscriber additions during the period and paid $319,232 for the acquisition
of new subscribers. Additionally, on June 1, 2004, the Company purchased
$819,159 in equipment and $1,695,841 for the acquisition of subscribers from DSI
for a total of $2.5 million. DSI was primarily a private cable operator serving
approximately 4,400 video and 400 high-speed Internet subscribers in fifteen
“Class A” multi-family properties.




On
September 20, 2004, the Company purchased $102,821 in accounts receivable,
$779,121 in equipment and $611,249 for the acquisition of subscribers from PCM
for a total of $1.5 million and increased the Company’s presence in the
Southeast United States. PCM was primarily a private cable provider serving
approximately 3,200 subscribers in eleven multi-dwelling
properties.





***Settlement
of Accounts Payable*** .    During
the year ended September 30, 2004, we settled certain outstanding trade
payables for a gain of $33,840. Additionally, the Company issued 100,000 shares of common stock with a fair value of $230,000
to SCO Financial Group LLC to pay an account payable and settle litigation
therefrom.





***Financing
Activities.*** During
the year ended September 30, 2004, certain of the financing activity were
non-cash items and did not utilize cash. We used $91,721 for the repayment of
certain notes payable.  In addition, we, (i) issued 78,314 shares of common
stock in connection with conversion of notes payable and accrued interest
thereon in the amount of $25,844, (ii) issued 103,353 shares of common stock for
accrued salaries of $79,134, (iii) issued 40,135 shares of common stock with a
fair value of $28,094 as settlement of a trade accounts payable, (iv) converted
one trade account payable in the total amount of $19,367 into a short term note
payable, (v) issued 7,997,067 common shares upon the exercise of warrants to
purchase common shares, which resulted in net proceeds to the Company of
$2,586,326, (vi) issued 1,091,069 common shares upon the exercise of options,
which resulted in net proceeds to the Company of $606,100, and  (vii)
Warrants to purchase 950,000 common shares were exercised pursuant to cashless
provisions with 821,971 shares being issued and 128,029 warrants cancelled in
exchange for the exercise price.




19


On
November 14, 2003, the Company began offering up to 22 units in a private
placement pursuant to a Confidential Offering Memorandum, with each unit
consisting of 100,000 common shares and 50,000 warrants to purchase common
shares.  The price of the common shares and the exercise price of the
warrants to purchase common shares were set as of the offering date at $1.50 and
$1.75 per share, respectively.  On November 24, 2003, the Company closed on
all 22 units for $3,300,000 in net proceeds.





On
May 20, 2004, the Company began offering up to 1,314,532 units in a private
placement pursuant to a Confidential Offering Memorandum, with each unit
consisting of two common shares and one three-year warrant to purchase common
shares. The price of the common shares and the exercise price of warrants to
purchase common shares were set as of the offering date at $2.10 and $2.46 per
share, respectively. On May 27, 2004, the Company closed a private placement of
its securities pursuant to a Confidential Offering Memorandum. The placement was
made up of 1,314,532 units with each consisting of two common shares and one
three-year warrant to purchase common shares at an exercise price of $2.46 per
share. The Company received net proceeds of $5,049,614 and issued all 2,629,064
common shares at $2.10 per share, and 1,314,532 warrants to purchase common
shares.





***Working
Capital*** As
at September 30, 2004, we had working capital of $3,910,911, compared to a
working capital deficiency of $424,912 as at September 30, 2003. As a result of
the re-classing of certain deferred revenue into current liabilities, the
working capital amount changed from the deficiency of $51,399 previously
reported for the year ended September 30, 2003.





***Capital
Commitments and Contingencies.*** We
have access agreements with the owners of multiple dwelling unit properties to
supply our satellite television viewing systems and services to the residents of
those properties. However, we have no obligation to build out those properties
and no penalties will accrue if we elect not to do so.





***Future
Capital Requirements.***  We
believe that we have sufficient cash resources to cover current levels of
operating expenses and working capital needs for at least through September 30,
2005. However, this is a capital-intensive business and continued growth is
dependent partially on raising additional financing. There is no assurance that
we will be successful in any of these initiatives.





***Other
Subsequent Events.*** On
November 18, 2004, the Company and PDI Communications Inc. executed an agreement
to the termination of the Memorandum of Understanding for a Strategic
Partnership (“Agreement”) executed on February 12, 2004. As final compensation,
PDI will (i) return to MDU for cancellation the original stock certificate
representing 250,000 shares of common stock, (ii) return to the Company for
cancellation the original warrant agreement representing 250,000 shares of
common stock exercisable at $1.84 per share, and (iii) execute a standard
release for any and all causes of actions under the Agreement. In return, the
Company shall (i) re-issue to PDI a stock certificate for 50,000 registered
shares of common stock, and (ii) agree that PDI shall remain the Company’s
preferred equipment provider for a period of one (1) year.





****** On
November 24, 2004, the Company completed a $16.25 million private equity
placement, pursuant to which the Company sold 6,063,400 units. Each unit
consisted of one share of common stock and three-tenths of one three-year
warrant to purchase one share of common stock at an exercise price of $3.40 per
share, to accredited investors at a per unit price of $2.68. After the payment
of fees and expenses, the Company received net proceeds of
$15,045,445.




20


**Item
7.**  **Financial
Statements**





**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
of Directors and Stockholders


MDU
Communications International, Inc.





We
have audited the accompanying consolidated balance sheets of MDU Communications
International, Inc. and Subsidiaries as of September 30, 2004 and
2003, and the related consolidated statements of operations, stockholders’
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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 that 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 MDU Communications
International, Inc. and Subsidiaries as of September 30, 2004 and
2003, and their results of operations and cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States
of America.





As discussed in Note 16 to the
consolidated financial statements, the Company has restated its
consolidated financial statements as of September 30, 2004 and for the year then
ended.


/s/
      J. H. Cohn LLPRoseland,
      New Jersey
      December 9,
      2004, except for Note 16 which is as of May 9,
2005




21





**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**
      **Consolidated
      Balance Sheets**
      **September
      30, 2004 and 2003**




**September
      30,**
    
    **September
      30,****2004**
    
    **2003**(as
      restated)**ASSETS**
    
    
    ****CURRENT
      ASSETS
    
    
    ****Cash
      and cash equivalents
    
    $
    4,705,722
    
    $
    507,775Accounts
      receivable- trade, net of allowance of $76,319 and $72,605
    
    
    938,652
    
    
    348,332Prepaid
      expenses and deposits
    
    
    98,834
    
    
    463,314TOTAL
      CURRENT ASSETS
    
    
    5,743,208
    
    
    1,319,421Telecommunications
      equipment inventory
    
    
    325,218
    
    
    255,878Property
      and equipment, net of accumulated depreciation of $2,771,311 and
      $1,633,234
    
    
    6,401,833
    
    
    3,736,680Intangible
      assets, net of accumulated amortization of $1,407,621 and $925,534
    
    
    3,226,217
    
    
    1,081,982TOTAL
      ASSETS
    
    $
    15,696,476
    
    $
    6,393,961**LIABILITIES
      and STOCKHOLDERS’ EQUITY**CURRENT
      LIABILTIESAccounts
      payable
    
    $
    609,115
    
    $
    489,275Other
      accrued liabilities
    
    
    548,907
    
    
    700,171Current
      portion of notes payable, net of debt discount of $14,645
    
    
    
    
    
    86,653Current
      portion of deferred revenue
    
    
    615,995
    
    
    373,513Current
      portion of capital lease obligations
    
    
    58,280
    
    
    94,721TOTAL
      CURRENT LIABILITIES
    
    1,832,297
    
    1,744,333Deferred
      revenue, net of current portion
    
    43,700
    
    
    206,428Capital
      lease obligations, net of current portion
    
    49,615
    
    
    —TOTAL
      LIABILITIES
    
    
    1,925,612
    
    
    1,950,761COMMITMENTS
      AND CONTINGENCIES******STOCKHOLDERS’
      EQUITY**Preferred
      stock, par value $0.001; 5,000,000 shares authorized
    
    —
    
    —Common
      stock, par value $0.001; 70,000,000 and 50,000,000 shares authorized,
      42,672,671 and 27,751,479 shares issued and outstanding
    
    42,673
    
    
    27,750Additional
      paid-in capital
    
    42,122,896
    
    
    21,822,509Unearned
      compensation
    
    (2,129,844
    )
    
    (83,333
    )Accumulated
      deficit
    
    (26,264,861
    )
    
    (17,323,726
    )TOTAL
      STOCKHOLDERS’ EQUITY
    
    
    13,770,864
    
    
    4,443,200TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    $
    15,696,476
    
    $
    6,393,961





See
accompanying notes to the consolidated financial statements





22




**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**
      **Consolidated
      Statements of Operations**
      **Years
      Ended September 30, 2004 and 2003**




**2004**
    
    
    **2003**(as
      restated)REVENUE
    
    $
    4,490,235
    
    $
    4,124,394OPERATING
      EXPENSESDirect
      costs
    
    
    1,391,464
    
    
    1,060,198Sales
      expenses
    
    
    884,523
    
    
    353,980Customer
      service expenses
    
    
    1,268,694
    
    
    1,075,255General
      and administrative expenses(including
      non-cash charges of $4,004,276 and$835,168
      )
    
    
    5,561,102
    
    
    2,278,818Depreciation
      and amortization
    
    
    1,620,164
    
    
    1,264,792TOTALS
    
    
    10,725,947
    
    
    6,033,043OPERATING
      LOSS
    
    
    (6,235,712
    )
    
    (1,908,649
    )Other
      income (expense)Gain
      on sale of customers
    
    
    —
    
    
    869,259Gain
      on settlement of accounts payable
    
    
    33,840
    
    
    175,011Loss
      on extinguishment of notes
    
    
    —
    
    
    (174,472
    )Interest
      income
    
    
    48,033
    
    
    4,746Interest
      expense (including non-cash interest charges of$2,735,796
      and $914,779 )
    
    
    (2,755,115
    )
    
    (998,659
    )Minority
      interest
    
    
    —
    
    
    (84,943
    )Other
    
    
    (32,181
    )
    
    —NET
      LOSS
    
    $
    (8,941,135
    )
    $
    (2,117,707
    )BASIC
      AND DILUTED LOSS PER COMMON SHARE
    
    $
    (0.24
    )
    $
    (0.09
    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
    
    
    37,607,929
    
    
    22,788,924









See
accompanying notes to the consolidated financial statements




23





**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**
      **Condensed
      Consolidated Statements of Stockholders’ Equity**
      **Years
      Ended September 30, 2004 and 2003**
      **as restated**




**Common
      stock**
    
    **Additional**
    
    **Unearned**
    
    **Accumulated****Shares**
    
    **Amount**
    
    **paid-in
      capital**
    
    **compensation**
    
    **deficit**
    
    **Total****Balance,
      October 1, 2002**
    ****
    19,539,136
    
    $
    19,539
    
    $
    18,506,291
    
    
    
    
    $
    (15,206,019
    )
    $
    3,319,811
    ****Conversion
      of notes payable and accrued interest
    
    3,447,506
    
    
    3,447
    
    
    1,165,545
    
    
    
    
    
    
    
    
    1,168,992Issuance
      of common stock for accrued compensation
    
    944,559
    
    
    945
    
    
    197,896
    
    
    
    
    
    
    
    ****
    198,841Issuance
      of common stock as partial settlement of accounts payable
    
    140,000
    
    
    140
    
    
    26,460
    
    
    
    
    
    
    
    
    26,600Issuance
      of warrants in connection with issuance of notes payable
    
    
    
    
    
    
    
    89,550
    
    
    
    
    
    
    
    ****
    89,550Issuance
      of warrants in connection with extinguishment of notes
    payable
    
    
    
    
    
    
    
    174,472
    
    
    
    
    
    
    
    
    174,472Issuance
      of common stock through private placement
    
    3,300,000
    
    
    3,300
    
    
    660,637
    
    
    
    
    
    
    
    ****
    663,937Effect
      of variable accounting for options
    
    
    
    
    
    
    
    714,130
    
    
    
    
    
    
    
    
    714,130Issuance
      of common stock for warrants exercised
    
    94,653
    
    
    93
    
    
    8,507
    
    
    
    
    
    
    
    
    8,600Issuance
      of common stock for options exercised
    
    285,625
    
    
    286
    
    
    131,771
    
    
    
    
    
    
    
    ****
    132,057Issuance
      of options and warrants in exchange for services
    
    
    
    
    
    
    
    147,250
    
    
    (147,250
    )
    
    
    
    
    -Amortization
      of unearned compensation
    
    
    
    
    
    
    
    
    
    
    63,917
    
    
    
    
    ****
    63,917Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,117,707
    )
    ****
    (2,117,707
    )**Balance,
      September 30, 2003**
    
    27,751,479
    
    
    27,750
    
    
    21,822,509
    
    
    (83,333
    )
    
    (17,323,726
    )
    
    4,443,200Conversion
      of notes payable and accrued interest
    
    78,314
    
    79
    
    25,765
    
    
    
    
    
    25,844Issuance
      of common stock as settlement of accounts payable
    
    40,135
    
    40
    
    28,054
    
    
    
    
    
    28,094Issuance
      of common stock for accrued compensation
    
    103,353
    
    103
    
    79,031
    
    
    
    
    
    79,134Issuance
      of common stock for compensation
    
    182,190
    
    182
    
    413,284
    
    (405,626
    )
    
    
    7,840Issuance
      of common stock for services
    
    100,000
    
    100
    
    229,900
    
    
    
    
    
    230,000Issuance
      of common stock and warrants in connection with private placement
    
    4,829,064
    
    4,829
    
    8,344,785
    
    
    
    
    
    8,349,614Issuance
      of common stock for warrants exercised, including effects of cashless
      exercises
    
    7,997,067
    
    7,998
    
    5,299,477
    
    
    
    
    
    5,307,475Issuance
      of common stock for options exercised, including effects of cashless
      exercises
    
    1,091,069
    
    1,092
    
    605,009
    
    
    
    
    
    606,101Effect
      of variable accounting for options
    
    
    
    
    
    2,801,682
    
    
    
    
    
    2,801,682Issuance
      of common stock, options and warrants in exchange for services
      (restated)
    
    500,000
    
    500
    
    2,473,400
    
    (2,398,700
    )
    
    
    75,200Amortization
      of unearned compensation
    
    
    
    
    
    
    
    757,815
    
    
    
    757,815Net
      loss
    
    
    
    
    
    
    
    
    
    (8,941,135
    )
    (8,941,135
    )**Balance,
      September 30, 2004 (restated)**
    
    42,672,671
    
    $
    42,673
    
    $
    42,122,896
    
    $
    (2,129,844
    )
    $
    (26,264,861
    )
    $
    13,770,864










See
accompanying notes to the consolidated financial statements


24





**MDU
      COMMUNICATIONS INTERNATIONAL, INC.**
      **Consolidated
      Statements of Cash Flows**
      **Years
      ended September 30, 2004 and 2003**




**For
      the year ended****September
      30,****2004**
    
    **2003**(as
      restated)OPERATING
      ACTIVITIESNet
      loss
    
    $
    (8,941,135
    )
    $
    (2,117,707
    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Provision
      for doubtful accounts
    
    
    131,739
    
    
    57,121Depreciation
      and amortization
    
    
    1,620,164
    
    
    1,264,792Amortization
      of unearned compensation
    
    
    757,815
    
    
    63,917Effect
      of variable accounting for stock options
    
    
    2,801,682
    
    
    714,130Issuance
      of common stock, options and warrants in exchange of services
    
    
    313,040
    
    
    —Charge
      to common stock, interest expense for amortization of deferred finance
      costs and debt discount
    
    
    14,645
    
    
    914,779Charge
      to interest expense from cashless exercise of warrants
    
    
    2,721,151
    
    
    —Minority
      interest
    
    
    —
    
    
    84,943Gain
      on settlement of accounts payable
    
    
    (33,840
    )
    
    (175,011
    )Loss
      on extinguishment of notes payable
    
    
    —
    
    
    174,472Gain
      on sale of customers
    
    
    —
    
    
    (869,259
    )Changes
      in operating assets and liabilities:Accounts
      receivable
    
    
    (618,957
    )
    
    635,240Prepaid
      expenses and deposits
    
    
    364,480
    
    
    18,336Accounts
      payable
    
    
    157,866
    
    
    (15,943
    )Other
      accrued liabilities
    
    
    (71,566
    )
    
    242,067Deferred
      revenue
    
    
    79,754
    
    
    (328,754
    )Net
      cash provided by (used in) operating activities
    
    
    (703,162
    )
    
    663,123INVESTING
      ACTIVITIESPurchase
      of property and equipment
    
    
    (2,132,351
    )
    
    (1,465,853
    )Proceed
      from sale of customers and property and equipment
    
    
    —
    
    
    1,443,522Acquisition
      of other assets
    
    
    (319,232
    )
    
    —Acquisition
      of Direct Satellite, Inc.
    
    
    (2,515,000
    )
    
    —Acquisition
      of PCM, Inc.
    
    
    (1,455,691
    )
    
    —Contributions
      to joint venture
    
    
    —
    
    
    (73,589
    )Distributions
      from joint venture
    
    
    —
    
    
    27,300Purchase
      of remaining interest in joint venture
    
    
    —
    
    
    (319,625
    )Net
      cash used in investing activities
    
    
    (6,422,274
    )
    
    (388,245
    )FINANCING
      ACTIVITIESPayments
      of notes payable
    
    
    (91,721
    )
    
    (793,045
    )Proceeds
      from issuance of notes payable
    
    
    —
    
    
    250,000Proceeds
      from private placements of common stock and warrants
    
    
    8,349,614
    
    
    663,937Proceeds
      from options exercised
    
    
    606,100
    
    
    132,057Proceeds
      from warrants exercised
    
    
    2,586,328
    
    
    8,600Payments
      of capital lease obligations
    
    
    (126,938
    )
    
    (127,929
    )Net
      cash provided by financing activities
    
    
    11,323,383
    
    
    133,620**NET
      INCREASE IN CASH AND CASH EQUIVALENTS**
    
    
    4,197,947
    
    
    408,498**CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR**
    
    
    507,775
    
    
    99,277**CASH
      AND CASH EQUIVALENTS, END OF YEAR**
    
    $
    4,705,722
    
    $
    507,775





25


**2004**
    ****
    ****
    ****
    **2003****SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND****FINANCING
      ACTIVITIES:**Conversion
      of notes payable and accrued interest into 78,314 and 3,447,506 shares
      ofcommon
      stock
    
    $
    25,844
    
    
    $
    1,168,992Issuance
      of 103,353 and 944,559 shares of common stock for accrued
      compensation
    
    $
    79,134
    
    
    $
    198,841Issuance
      of 40,135 and 140,000 shares of common stock as settlement of
      accountspayable
    
    $
    28,094
    
    
    $
    26,600Issuance
      of 1,807,450 and 74,653 shares of common stock for cashlessexercises
    
    $
    2,721,151
    
    
    $
    0**SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION**Interest
      paid
    
    $
    19,319
    
    
    $
    83,880





See
accompanying notes to the consolidated financial statements


26


**MDU
COMMUNICATIONS INTERNATIONAL, INC.**


**Notes
to Consolidated Financial Statements**





**1.** **** **BUSINESS**





MDU
Communications International, Inc. and its subsidiaries (the “Company”)
provide delivery of digital satellite television programming and high-speed
(broadband) Internet service to residents of multi-dwelling unit properties
(“MDUs”) such as apartment buildings, condominiums, gated communities, hotels
and universities.





**2.** **** **SIGNIFICANT
ACCOUNTING POLICIES**





These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and reflect the
significant accounting polices described below:





*(a)
Use of Estimates*





The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates are used for, but
not limited to, revenue recognition with respect to a new subscriber activation
subsidy, allowance for doubtful accounts, fair value of equity instruments and
valuation of deferred tax assets and long lived assets. Actual results could
differ from those estimates.





*(b)
Principles of Consolidation*
**
The
consolidated financial statements include the accounts of the Company and its
subsidiaries, MDU Communications Inc., MDU Communications (USA) Inc.
and Avalon Digital Joint Venture (the “Joint Venture”). All inter-company
balances and transactions are eliminated.


*(c)
Property and Equipment*





Telecommunications
equipment inventory consists of receivers and other supplies that will either be
sold or installed by the Company under subscription agreements and, accordingly,
is not depreciated. Such inventory is stated at the lower of cost or market. The
cost of inventory sold or transferred to telecommunications equipment upon
installation in connection with subscription agreements is determined on a
first-in, first-out basis.





Property
and equipment are recorded at cost less accumulated depreciation and
amortization. Direct costs of placing telecommunications equipment into service
and major improvements are capitalized. Costs of connecting and disconnecting
service are expensed. Depreciation and amortization of property and equipment is
provided using the straight-line method over the estimated useful lives as
follows:







Telecommunications
      equipment, installed
    
    
    7
      yearsComputer
      equipment
    
    
    5
      yearsFurniture
      and fixtures
    
    
    5
      yearsVehicles
    
    
    5
      years





*(d)
Investment in Joint Venture*





During
the fourth quarter of the year ended September 30, 2003, the percentage of the
Company’s ownership interest in the Joint Venture increased from 50% to
100%.  The acquisition of the controlling interest was accounted for
retroactively as of the beginning of the year ended September 30, 2003 pursuant
to the purchase method and, accordingly, the Joint Venture became a consolidated
subsidiary of the Company effective October 1, 2002 instead of an investment
accounted for pursuant to the equity method. The accompanying consolidated
financial statements for the year ended September 30, 2003 have been
retroactively restated for the effects of the allocation of the purchase price
of approximately $320,000 to the fair value of the net assets acquired as of
October 1, 2002 which increased/(decreased) the consolidated balance sheet as of
that date as follows:




27


Cash
      and cash equivalents
    
    $
    15,672Accounts
      receivable, net
    
    
    285,637Property
      and equipment, net
    
    
    751,762Investment
      in joint venture
    
    
    (311,466
    )Total
    
    $
    741,605Accounts
      payable
    
    $
    282,184Other
      accrued liabilities
    
    
    20,243Deferred
      revenue
    
    
    127,596Minority
      interest
    
    
    311,582Total
    
    $
    741,605


**


**


*(e)
Intangible Assets*





Intangible
assets consist of acquired building access agreements and subscriber lists and
are being amortized on the straight-line basis over five years.





*(f)
Long-lived Assets*





The
Company performs a review for the impairment of long-lived assets with
definitive lives whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Under Statement of Financial
Accounting Standards (“SFAS”) 144 “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of,” an impairment loss is
recognized when estimates of future undiscounted cash flows expected to result
from the use of an asset and its eventual disposition are less than its carrying
amount. No impairment losses were identified by the Company for the years ended
September 30, 2004 and 2003.





*(g)
Revenue Recognition*





The
Company recognizes revenue for satellite programming and other services to
customers in the period the related services are provided when the amount of
revenue is determinable and collection is reasonably assured.





The
Company offers installation services to building owners and managers for the
construction of wiring and installation of equipment to allow for
telecommunications services, including the sale of related equipment. Revenue
from the sale of equipment is recognized when title transfers and installation
revenue is recognized in the period that the services are performed when the
amount of revenue is determinable and collection is reasonably assured.





In
certain arrangements with suppliers of satellite programming or other services,
the Company does not bear inventory or credit risk in connection with the
service provided to the customer.  For those arrangements where the Company
does not act as a principal in the transaction, such revenue is recorded on the
net basis and, accordingly, the amount of revenue is equivalent to the
contractual commission earned by the Company. Revenues from providing services
under contracts where the Company acts as a principal in the transaction,
exercises pricing control and bears the risk of collection are recorded based on
the gross amount billed to the customer when the amount is determinable.





On
September 29, 2003, the Company entered into a new System Operator Agreement
with DIRECTV, Inc. for the delivery of DIRECTV digital satellite programming.
The new agreement contains several material contractual changes from the
previous agreement that significantly affect how the Company accounts for this
revenue. First, the upfront activation commission that the Company receives from
DIRECTV for each new subscriber will now be paid to the Company based on “gross”
subscriber additions instead of “net” subscriber additions in a given month.
However, the Company must obtain an annual commitment from a subscriber for
DIRECTV programming in order to receive the commission. Second, due to this
change, the commission can be proportionally “charged back” by DIRECTV only if a
subscriber disconnects within the annual commitment period. Because after twelve
months no portion of the commission can be “charged back,” as of October 1,
2003, the Company began recognizing this revenue over one year instead of the
four year period used prior to the new agreement.





The
Company provides an allowance for doubtful accounts equal to the estimated
collection losses based on historical experience coupled with a review of the
current status of existing receivables.





*(h)
Loss Per Common Share*





The
Company presents “basic” earnings (loss) per share and, if applicable, “diluted”
earnings per share pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, “Earnings per Share.” Basic earnings (loss) per
share is
computed by dividing the net income or loss by the weighted average number of
common shares outstanding for the period. The
calculation of diluted earnings per share is similar to that of basic earnings
per share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potentially
dilutive common shares, such as those issueable upon the exercise of stock
options and warrants, and the conversion of promissory notes, were issued during
the period and other related adjustments were made.





28


For
the year ended September 30, 2004 and 2003, basic and diluted loss per common
share are the same as the Company had net losses for these periods and the
effect of the assumed exercise of options or warrants would be anti-dilutive. As
of September 30, 2004, the Company had options and warrants that were
exercisable (or potentially exercisable) into 6,765,654 shares of common stock
(4,226,348 from warrants and 2,539,306 from options). There
were 12,360,677 potentially dilutive common shares (9,467,363 from warrants;
2,815,000 from options; 78,314 from convertible notes) as of September 30,
2003.





*(i)
Foreign Exchange*





Effective
September 30, 2001, the Company adopted the United States dollar as its
functional and reporting currency since a majority of the Company’s revenues,
expenses, assets and liabilities are in the United States and the focus of the
Company’s operations is in that country. Previously, the Company’s functional
and reporting currency was Canadian dollars. Assets and liabilities in foreign
currencies (primarily Canadian dollars) are translated using the exchange rate
at the balance sheet date. Revenues and expenses are translated at average rates
of exchange during the year. Gains and losses from foreign currency transactions
and translation for the years ended September 30, 2004 and 2003 and
cumulative translation gains and losses as of September 30, 2004 and 2003
were not material.





*(j)
Stock-Based Compensation*





As
permitted under SFAS 123, “Accounting for Stock-Based
Compensation,”(“SFAS 123”) the Company has accounted for employee and
director stock options using the intrinsic value method in accordance with
Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to
Employees,” (“APB 25”) and has made the pro forma disclosures required by
SFAS 123 in Note 4. Under APB 25, compensation charges arise from
those situations where options are granted to employees and directors at an
exercise price lower than the quoted market price of the underlying common
shares. These amounts are amortized as a charge to operations over the vesting
periods of the related stock options.





For
stock options with cashless exercise provisions and options that have been
re-priced that are subject to variable plan accounting, the Company recognizes a
charge or credit to compensation expense for the increase or decrease in the
intrinsic value of the option in each period. The intrinsic value is represented
by the excess of the market price of the Company’s stock over the exercise price
of the option.





Stock-based
compensation charges to other than employees are recorded over the period that
the related stock option or warrant is earned. The amount of the compensation is
based on the fair value of the option or warrant at the applicable measurement
date.





*(k)
Cash and Cash Equivalents*





Cash
and cash equivalents consist of bank deposits and short-term notes with original
maturities at the date of acquisition of 90 days or less that have
insignificant interest rate risk.





*(l)
Fair Value of Financial Instruments*





The
fair value of the Company’s cash and cash equivalents, accounts receivable,
accounts payable, other accrued liabilities, notes payable and capital lease
obligations at September 30, 2004 and 2003 are estimated to approximate
their carrying values due to the relative liquidity or short-term nature of
these instruments.





*(m)
Credit Concentration*





Financial
instruments that potentially subject the Company to a concentration of credit
risk consist principally of cash and cash equivalents and accounts receivable.





The
Company places its cash and cash equivalents with high credit quality
institutions.  At September 30, 2004, the Company has cash balances
that exceed Federally insured limits in the amount of approximately
$4,959,000.  Accounts
receivable from DIRECTV (see Note 6) at September 30, 2004 and 2003,
respectively, represented 28% and 25% of total trade accounts receivable.
Revenues realized from DIRECTV represented 24% and 18% of total revenues in the
years ended September 30, 2004 and 2003, respectively. Management believes
the Company has an adequate allowance for potential losses from such
concentration.





*(n)
Income Taxes*





The
Company accounts for income taxes pursuant to the asset and liability method
which requires deferred income tax assets and liabilities to be computed
annually for temporary differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The income tax provision or credit is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.




29


*(o)
Impact of Recently Issued Accounting Standards*





The
Financial Accounting Standards Board and the Emerging Issues Task Force (the
“EITF”) have issued certain accounting pronouncements as of September 30,
2004 that will become effective in subsequent periods; however, management of
the Company does not believe that any of those pronouncements would have
significantly affected the Company’s financial accounting measurements or
disclosures had they been in effect during 2004 and 2003, and it does not
believe that any of those pronouncements will have a significant impact on the
Company’s consolidated financial statements at the time they become effective.





*(p)
Reclassifications*





Certain
prior year amounts have been reclassified to conform to the presentations in the
consolidated financial statements as of and for the year ended
September 30, 2004.





**3.** **** **NOTES
PAYABLE**





There
were no notes payable outstanding as of September 30, 2004.





Notes
payable under term loans and convertible promissory notes payable outstanding as
of September 30, 2003 consisted of the following:





6.5%
      note under term loan due in installments through March 3, 2004(a)
    
    $
    9,23911%
      note under term loan due in installments through February 15, 2004(b)
    
    8,5219%
      note under term loan due in installments through October 10, 2003(c)
    
    2,32212%
      note under term loan due in installments through May 15, 2004(d)
    
    39,5419%
      note under term loan due in installments through September 30,
      2004(e)
    
    15,0859%
      convertible notes due in installments through January 24, 2004, net
      of unamortized debt discount of $14,645(f)
    
    10,3559%
      note under term loan due in installments through October 1, 2003(g)
    
    1,590Total,
      net of unamortized debt discount of  $14,645
    
    $
    86,653





______________


(a)
    On
      February 24, 2003, the Company entered into a Term Loan and
      Promissory Note Agreement with a supplier for $22,174. The note had a term
      of one year with twelve equal monthly payments of principal and earned
      interest at a stated rate of 6.5%.





(b)
    On
      February 20, 2003, the Company entered into a Term Loan and
      Promissory Note Agreement with a supplier for $21,724. The note had a term
      of one year with twelve equal monthly payments of principal and earned
      interest at a stated rate of 11%.





(c)
    On
      January 10, 2003, the Company entered into a Term Loan and Promissory
      Note Agreement with a supplier for $23,215. The note had a term of ten
      months with ten equal monthly payments of principal and earned interest at
      a stated rate of 9%.





(d)
    On
      May 15, 2003, the Company entered into a Term Loan and Promissory
      Note Agreement with a supplier for $59,311. The note had a term of twelve
      months with twelve equal monthly payments of principal and earned interest
      at a stated rate of 12%.





(e)
    On
      September 30, 2002, the Company entered into a Term Loan and
      Promissory Note Agreement with a supplier for $30,165. The note had a term
      of two years with eight equal quarterly payments of principal and earned
      interest at a stated rate of 9%. The note was secured by certain assets
      and equipment.





(f)
    On
      January 24, 2002, the Company entered into a Convertible Promissory
      Note and Loan Agreement with Roselink Investors, LLC (“Roselink”) for
      $100,000. The Promissory Note was for two years at a stated interest rate
      of 9%, with quarterly repayment of principal and earned interest. If the
      Company did not make the quarterly payment of principal and earned
      interest, it automatically converted to common stock at a conversion price
      of $0.33 per share. Because payments were not made, they
      automatically converted. A total of 78,314 and 166,825 common shares were
      issued for this obligation during the years ended September 30, 2004
      and 2003, respectively.





30


(g)
    On
      August 8, 2003, the Company entered into a Term Loan and Promissory
      Note Agreement with a consultant for $4,770. The note had a term of three
      months with three equal monthly payments of principal and earned interest
      at a stated rate of 9%.





On
December 30, 2002, the Company entered into a Term Loan and Promissory Note
Agreement with a supplier for $55,000 on an outstanding invoice of $95,000. As
additional consideration, the Company issued 140,000 shares of common stock with
a fair value of $26,600. As of September 30, 2003, all payments of
principal and interest had been made and the Company had no further obligation
under the terms of the note.





On
February 28, 2003, the Company entered into a Term Loan and Promissory Note
Agreement for $125,000. The note had an original term of 90 days with interest
at a stated rate of 16%.  On May 28, 2003, the Company renegotiated
and extended the term to 180 days and as additional compensation, issued
warrants to purchase 40,000 shares of common stock at $.33 per share through
May 28, 2006. Such warrants had a fair value of $10,800 using a
Black-Scholes option pricing model  which was initially recorded as a debt
discount with an offsetting increase to additional paid-in capital. As of
September 30, 2003, all payments of principal and interest had been made
and the Company had no further obligation under the terms of the note.





On
February 28, 2003, the Company entered into a Term Loan and Promissory Note
Agreement for $125,000. The note had an original term of 90 days with interest
at a stated rate of 16%. In connection therewith, warrants to purchase 25,000
shares of common stock at an exercise price of $.33 per share through
February 28, 2006 were issued. Such warrants had a fair value of $5,500
using a Black-Scholes option pricing model which was initially recorded as a
debt discount with an offsetting increase to additional paid-in capital. 
On May 28, 2003, the Company renegotiated and extended the term to 180 days
and as additional compensation, issued warrants to purchase 25,000 shares of
common stock at $0.33 per share through May 28, 2006. Such warrants had a
fair value of  $6,750 using a Black-Scholes option pricing model which was
initially recorded as a debt discount with an offsetting increase to additional
paid-in capital. As of September 30, 2003, all payments of principal and
interest had been made and the Company had no further obligation under the terms
of the note.





**4.** **** **SHARE
CAPITAL**





***Preferred
Shares:***





As
of September 30, 2004, the Company was authorized to issue up to 5,000,000
shares of preferred stock with a par value of $.001 per share. The preferred
stock may be issued in one or more series with dividend rates, conversion
rights, voting rights and other terms and preferences to be determined by the
Company’s Board of Directors, subject to certain limitations set forth in the
Company’s Articles of Incorporation. However, there were no shares of preferred
stock outstanding as of September 30, 2004.





***Common
Shares (unearned compensation):***




On
April 6, 2004 and May 7, 2004, respectively, the Company issued 250,000 shares
of common stock to each of PDI Communications Inc. (“PDI”) and B.A.A.M., LLC
pursuant to an agreement executed on February 12, 2004 for future assistance
over the next three years in establishing the Company's presence in the
Southeast multi-dwelling unit market (see Note 15). The market value of the
shares was $1,100,000 on the date of issuance, which resulted in a charge to
unearned compensation and an increase in additional paid-in capital in that
amount. The fair value of the shares of common stock is being amortized to
expense over three years.




On
June 2, 2004, the Company issued 178,690 shares of common stock to
Cablecom/Spacelink in return for future consulting services over the next two
year period in establishing the Company’s presence in the Chicago multi-dwelling
unit market. The market value of the shares was $405,626 on the date of
issuance, which resulted in a charge to unearned compensation and an increase in
additional paid-in capital in that amount. The fair value of the shares of
common stock is being amortized to expense over two years.




***Stock
Option Plans:***





**(a)** **** **Suppliers’
Stock Option Plan (“Suppliers’ Plan”):**





On
December 31, 1998, the Company established a stock option plan pursuant to
which certain key suppliers of the Company will be granted options on completion
of specified activities. Under the terms of the Suppliers’ Plan, eligible
suppliers can earn options to purchase an aggregate of 250,000 common shares of
the Company. As of September 30, 2003, all 250,000 options had been
granted.  During the year ended September 30, 2003, the Board repriced
75,000 of the supplier options from $1.50 per share to $0.33 per share. As a
result of such repricing, the Company is subject to variable accounting for such
options and, accordingly has recognized a non-cash charge (credit) of $118,750
and ($500) during the years ended September 30, 2004 and 2003 respectively,
based on changes in the fair value of the options subsequent to the date of
repricing. As of September 30, 2004, there remain 76,115 options outstanding
under the Suppliers’ Plan.





31




**(b)**  **Employee
Stock Option Plans (“Employee Plans”):**





On
November 24, 1998, the Company established Employee Plans whereby certain
employees, officers and directors were granted options to purchase up to an
aggregate of 600,000 common shares of the Company. On February 5, 2000, the
Company approved the 2000 Incentive Stock Option Plan (“2000 Option Plan”).
Under the 2000 Option Plan, the Company was authorized to grant certain
employees, consultants, officers and directors of the Company and its affiliates
options to purchase up to 4,000,000 common shares of the Company at $5.00 per
share. The options have vesting periods ranging from immediate to three years
after the grant date. Of the options originally authorized as part of the
November 24, 1998 Employee Plans, 90,276 were redesignated to be included
in the 2000 Option Plan.





On
April 11, 2001, the Board of Directors approved the 2001 Stock Option Plan
(“2001 Option Plan”) to replace the 2000 Option Plan. The 2001 Option Plan is in
all respects identical to the 2000 Option Plan, which had not been approved by a
vote of the stockholders within one year of its adoption by the Board and
therefore became ineffective. The 2001 Option Plan was approved by a vote of the
stockholders at the Annual General Meeting on May 10, 2001.  In
October 2000, the Board of Directors of the Company approved the
re-pricing, at $2.00 per share, of the exercise price of all options previously
granted at $5.00 per share under the 2000 Option Plan. On March 9, 2001,
the Board of Directors approved the re-pricing, at $0.60 per share, of these
same options. On April 11, 2001, the Board of Directors of the Company
approved the re-pricing, at $0.60 per share, of all options previously granted
to directors at $2.50 per share under the 2000 Option Plan.  During the
year ended September 30, 2003, the Board of Directors approved the
repricing of certain options previously granted to directors, officers,
employees and consultants from $0.60 per share to $0.33 per share.  As of
September 30, 2003, a total of 1,925,624 of the 2,565,000 shares subject to
outstanding options under the 2001 Stock Option Plan had been repriced to $0.33
per share.  As a result of such repricing, the Company is subject to
variable-plan accounting for such options and, accordingly, it recognized
non-cash charges for compensation expense of $2,801,682 and $714,630 during the
years ended September 30, 2004 and 2003, respectively, based on the net
increases in the market value of the options subsequent to the respective dates
of repricing.





On
December 5, 2003, the Board of Directors of the Company granted a total of
135,000 options pursuant to the 2001 Option Plan to employees. These options
have a five-year term and an exercise price of $1.35 per share (market price as
of that date). On December 17, 2003, the Board of Directors of the Company
granted certain independent Board member additional options as compensation for
sitting on the Board for the next two years. Douglas Hooper and J.E. “Ted” Boyle
each received 100,000 fully vested options at an exercise price of $1.28 per
share, exercisable for five years. On June 4, 2004, the Board of Directors
granted a total of 245,000 options pursuant to the 2001 Option Plan to
employees.  These options have a five-year term and an exercise price
ranging from $2.05 to $2.29 per share. On August 6, 2004, the Board of Directors
granted a total of 141,000 options pursuant to the 2001 Option Plan to
employees.  These options have a five-year term and an exercise price of
$2.20 per share.





On
August 5, 2004, the stockholders voted at the Annual General Meeting to increase
the number of shares available under the 2001 Option Plan from 4.0 million to
5.6 million.





The
Company accounts for its stock-based employee compensation plans under the
intrinsic value method per APB 25 whereby compensation cost is initially
recorded for the excess, if any, of the quoted market price of the common shares
over the exercise price at the date of grant for all employee stock options
issued. In addition, the Company is also required to record compensation charges
and credits for stock options subject to variable plan accounting.





Since
the Company has elected to continue to use the provisions of APB 25 in
accounting for stock options granted to employees, it is required by
SFAS 123 and SFAS 148, “Accounting for Stock-Based Compensation —
Transition and Disclosure,” to present additional pro forma information showing
effects on its historical results of operations of the use of a method that
estimates the fair value of the options at the grant date and then amortizes the
fair value to expense over the options’ vesting period. Had the Company elected
to recognize compensation expense based upon the fair value at the grant dates
for awards under these plans, net loss and loss per common share would have been
increased to the pro forma amounts shown in the table below.  The fair
value of each grant was estimated on the date of grant using the Black-Scholes
option pricing model and the assumptions set forth in Note 4(d).




**Years
      ended September 30,****2004**
    
    
    **2003**(restated)Net
      loss as reported
    
    $
    (8,941,135
    )
    $
    (2,117,707
    )Add:
      stock-based employee compensation expense included in net loss, net of
      related tax effects
    
    
    2,682,932
    
    
    714,630Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method for all awards, net of related tax effects
    
    
    (385,320
    )
    
    (135,892
    )Pro
      forma net loss
    
    $
    (6,643,523
    )
    $
    (1,538,969
    )Basic
      and diluted net loss per share:As
      reported
    
    $
    (0.24
    )
    $
    (0.09
    )Pro
      forma
    
    $
    (0.18
    )
    $
    (0.07
    )





32





**(c)** **Issuance
of Options to Consultants:**





On
February 28, 2003, the Company granted five-year options to purchase a
total of 25,000 shares of common stock under the 2001 Option Plan to a
consultant in exchange for services. The options were originally granted at an
exercise price of $0.60 per share but were repriced on July 23, 2003 at
$0.33 per share. The fair value of the options, as calculated using a
Black-Scholes option pricing model in accordance with SFAS 123 (See Note
4(d)), was $3,750, which was charged to general and administrative expenses in
the year ended September 30, 2003.





On
January 17, 2003, the Company granted options to purchase a total of
150,000 shares of common stock under the 2001 Option Plan to a consultant in
exchange for services. Options to purchase 75,000 shares became vested
immediately and exercisable at $0.60 per share and options to purchase the
remaining 75,000 shares vest over one year and are exercisable at $1.00 per
share.  All of these options expire in two years from the date of grant.
The fair value of the options, as calculated using a Black-Scholes option
pricing model in accordance with SFAS 123 (See Note 4(d)) was $18,750,
which was charged to general and administrative expenses in the year ended
September 30, 2003.


****


**(d)**  **Other
Stock Option Activity:**





The
Employees’ Plans were initially authorized to issue a total of 4,000,000 shares
and the Suppliers’ Plan was authorized to issue a total of 250,000 shares. The
following table summarizes all of the Company’s stock option activity during the
years ended September 30, 2004 and 2003:







**Options**
      **Available**
      **For
      Issuance**
    
    **Number
      of**
      **Options**
      **Outstanding**
    
    **Options**
      **Exercised**
    
    **Weighted
      Avg.**
      **Exercise**
      **Price
      Per Share**Outstanding
      at Sept. 30, 2002
    
    
    1,302,250
    
    
    2,822,750
    
    
    125,000
    
    $
    0.68Granted
      (weighted average fair value of $0.34 per share)
    
    
    (390,000
    )
    
    390,000
    
    
    —
    
    $
    0.33Cancelled
      (A)
    
    
    2,000,624
    
    
    (2,000,624
    )
    
    
    
    
    0.83Granted
      (A)
    
    
    (2,000,624
    )
    
    2,000,624
    
    
    
    
    
    0.36Expired
    
    
    112,125
    
    
    (112,125
    )
    
    
    
    
    0.60Exercised
      (C)
    
    
    —
    
    
    (285,625
    )
    
    285,625
    
    $
    0.46Outstanding
      at Sept. 30, 2003
    
    
    1,024,375
    
    
    2,815,000
    
    
    410,625
    
    $
    0.44Granted
      (weighted average fair value of $1.70 per share) (B)
    
    
    (821,000
    )
    
    821,000
    
    
    —
    
    $
    1.62Expired
    
    
    5,625
    
    
    (5,625
    )
    
    
    
    
    0.33Exercised
      (C)
    
    
    —
    
    
    (1,091,069
    )
    
    1,091,069
    
    $
    0.56Increase
      in available shares
    
    
    1,600,000
    
    
    --Outstanding
      at Sept. 30, 2004 (D)
    
    
    1,809,000
    
    
    2,539,306
    
    
    1,501,694
    
    $
    0.77


_______________





(A)
- Includes options to purchase 1,769,624 shares of common stock that were
re-priced from an exercise price of $0.60 per share to an exercise price of
$0.33 per share; options to purchase 206,000 shares that were re-priced from an
exercise price of $2.50 to an exercise price of $0.60 per share; and options to
purchase 25,000 shares of common stock that were re-priced from an exercise
price of $1.50 per share to an exercise price of $0.33 per share.





(B)
- The
intrinsic value of these options, which were granted to directors and employees,
of $288,700 was initially charged to unearned compensation with a corresponding
increase in additional paid-in capital. The intrinsic  value will be
amortized to expense over the respective periods of service.





(C)
- T he
Company received cash payments of $606,100 and $132,057 for the years ended
September 30, 2004 and 2003, respectively, upon the exercise of these options.





(D)
- A s
discussed above, the Company re-priced certain options, and as a result, such
options were subject to variable accounting provisions.  Accordingly,
during the years ended September 30, 2004 and 2003, the Company recognized
charges to general and administrative expenses of $2,801,682 and $714,130,
respectively, for the increase in market price per share of the Company’s common
stock.





33




As
at September 30, 2004, the following stock options were outstanding:





**Exercise**
      **Prices**
    
    **Number**
      **Outstanding**
    
    **Number**
      **Exercisable**
    
    **Weighted-**
      **Average**
      **Remaining**
      **Contractual**
      **Life
      (years)**$0.33
    
    
    1,552,191
    
    
    1,351,356
    
    
    1.660.60
    
    
    150,000
    
    
    150,000
    
    
    .330.65
    
    
    100,000
    
    
    50,000
    
    
    4.251.28
    
    
    325,000
    
    
    222,917
    
    
    4.251.75
    
    
    12,375
    
    
    12,375
    
    
    .502.00
    
    
    13,740
    
    
    13,740
    
    
    .502.05
    
    
    145,000
    
    
    12,083
    
    
    4.752.20
    
    
    141,000
    
    
    -0-
    
    
    4.922.29
    
    
    100,000
    
    
    8,333
    
    
    4.77Total
    
    
    2,539,306
    
    
    1,820,804





***Warrants
Issued:***





During
the years ended September 30, 2004 and 2003, the Company issued warrants to
purchase 3,085,985 and 5,287,363 shares of common stock at a weighted average
exercise price of $2.08 and $0.33 per share, respectively.





The
following table summarizes all of the Company’s warrant activity during the
years ended September 30, 2004 and 2003:







**Number
      of**
      **Warrants**
      **Outstanding**
    
    **Weighted
      Avg. Exercise**
      **Price
      Per Share ($)**Outstanding
      at September 30, 2002
    
    
    4,577,500
    
    
    0.42Granted
      (B)
    
    
    5,287,363
    
    
    0.33Expired
    
    
    (165,000
    )
    
    1.00Cancelled
      (A)
    
    
    (137,847
    )
    
    .43Exercised
      (A)
    
    
    (94,653
    )
    
    0.43Outstanding
      at September 30, 2003
    
    
    9,467,363
    
    
    0.37Granted
      (C)
    
    
    3,085,985
    
    
    2.08Cancelled
      (D)
    
    
    (329,933
    )
    
    0.33Exercised
      (D)
    
    
    (7,997,067
    )
    
    0.40Outstanding
      at September 30, 2004
    
    
    4,226,348
    
    
    1.57


____________________


(A)
    Certain
      of the warrants issued to investors contain cashless exercise provisions.
      During the year ended September 30, 2003, certain investors exercised
      warrants to purchase 232,500 shares of common stock pursuant to the
      cashless provision, therefore warrants to purchase 137,847 shares were
      canceled as payment for the exercise price of the 94,653 shares
      issued.  As the fair value of the warrants at the date of grant
      exceeded the fair value of the shares issued upon exercise, no additional
      compensation was recorded in the accompanying consolidated financial
      statements.





(B)
    The
      Company granted the following warrants during the year ended
      September 30, 2003:





**Warrant
      Holder**
    
    **Number
      of**
      **Warrants**
    
    **Exercise**
      **Price
      ($)**
    
    **Expiry
      Date**William
      Begley (1)
    
    
    200,000
    
    
    0.25
    
    
    11/26/05Lloyd
      Berhoff (1)
    
    
    150,000
    
    
    0.25
    
    
    11/26/05Steve
      Mazur (1)
    
    
    25,000
    
    
    0.33
    
    
    2/28/06David
      Lyall (1)
    
    
    40,000
    
    
    0.33
    
    
    5/28/06Steve
      Mazur (1)
    
    
    25,000
    
    
    0.33
    
    
    5/28/06Steve
      Mazur (2)
    
    
    250,000
    
    
    0.33
    
    
    6/10/08MH
      Holdings (2)
    
    
    250,000
    
    
    0.33
    
    
    6/10/08June 30,
      2003
      Private
      Placement
      Warrant
      Holders (3)
    
    
    3,900,000
    
    
    0.33
    
    
    6/24/08William
      Begley (1)
    
    
    254,110
    
    
    0.40
    
    
    7/23/08Lloyd
      Berhoff (1)
    
    
    193,253
    
    
    0.40
    
    
    7/23/08


****


34


**____________________**


(1)
These warrants were issued in connection with notes payable.


(2)
These warrants were issued pursuant to consulting agreements.  The fair
value of such warrants of $125,000 as determined using a Black-Scholes option
pricing model was initially charged to unearned compensation with an offsetting
credit to additional paid-in capital.


(3)
See description of private placement below.


____________________


(C)
    In
      connection with the November 24, 2003 private placement described below,
      the Company issued warrants to purchase 1,100,001 shares of common stock
      at an exercise price of $1.75 per share that expire on November 24, 2006.





The
Company issued warrants to purchase 40,000 shares of common stock for consulting
services that had been provided by JRJ Capital. The warrants have an exercise
price of $0.65 per share and expire on October 1, 2006. The fair value of the
warrants was $75,200 on the date of grant, as calculated using a Black-Scholes
option pricing model, which resulted in a charge to compensation expense and an
increase in additional paid-in capital in that amount.





In
connection with certain agreements, the Company issued warrants to purchase
500,000 shares of common stock at an exercise price of $1.84 per share that
expire on February 12, 2008. These warrants vest quarterly over three years. The
fair value of the warrants was $1,010,000 on the date of grant, as calculated
using a Black-Scholes option pricing model, which resulted in a charge to
unearned compensation and an increase in additional paid-in capital in that
amount.





In
connection with the May 27, 2004 private placement described below, the Company
issued warrants to purchase 1,314,532 shares of common stock at an exercise
price of $2.46 per share that expire on May 27, 2007. In addition, the Company
issued similar warrants to purchase 131,452 shares of common stock to the
placement agent as partial consideration for the placement fee.





(D)
    During
      the year ended September 30, 2004, certain investors exercised warrants to
      purchase 2,072,117 shares of common stock with an exercise price of $0.33
      per share, 4,017,500 shares of common stock with an exercise price of
      $0.43 per share, and 100,000 shares of common stock with an exercise price
      of $1.75 per share, and as a result, the Company received cash proceeds of
      $2,586,328.





Certain
of the warrants issued to investors contain cashless exercise provisions. During
the year ended September 30, 2004, certain investors exercised warrants to
purchase 1,987,383 shares of common stock with an exercise price of $0.33 per
share and 150,000 shares of common stock with an exercise price of $0.31 per
share. Pursuant to the cashless provisions, warrants to purchase 329,933 shares
were canceled as payment for the exercise price based on agreements with the
investors and 1,807,450 shares were issued. In addition, the excess of the fair
value of the shares issued at the date of exercise over the fair value of the
warrants at the date of grant of $2,721,151 was recorded as a charge to interest
expense.





***Assumptions
Used in Determining Fair Value of Stock Options and Warrants:***





The
fair value of the warrants issued in connection with the issuances of notes
payable, the fair value of the options issued to employees used in connection
with the computation of pro forma net loss and loss per common share and the
fair value of the options and warrants issued to non-employees in exchange for
consulting, marketing and financial services were estimated using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for 2004 and 2003:




35


2004
    
    
    2003Expected
      volatility
    
    
    68
    %
    
    127
    %Risk-free
      interest rate
    
    
    4.00
    %
    
    4.75
    %Expected
      years of option life
    
    
    1
      to 5
    
    
    1
      to 5Expected
      dividends
    
    
    0
    %
    
    0
    %







***Stock
Purchase Plan:***





On
October 23, 2001, the Company established, and the Board of Director’s
approved, the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) whereby
certain employees (i) whose customary employment is greater than
20 hours per week, (ii) are employed for at least six consecutive
months, and (iii) do not own five percent or more of any class of Company
stock can participate in the Purchase Plan and invest from one percent to fifty
percent of their net pay, through payroll deduction, in Company common stock. In
addition, participating employees can invest from one percent to one hundred
percent of any Company bonus in Company common stock. Employees are limited to a
maximum investment per calendar year of $25,000.





The
maximum number of shares of Company common stock reserved under the Purchase
Plan was originally 2,000,000 shares. On August 5, 2004, the stockholders voted
to increase the number of shares available under the Purchase Plan to 2,800,000
shares. The Purchase Plan shall terminate in five years or (i) upon the
maximum number of shares being issued, or (ii) sooner terminated per the
discretion of the administrator. The purchase price per share under the Purchase
Plan is equal to 85% of the fair market value of a share of Company common stock
at the beginning of the purchase period or on the exercise date (the last day in
a purchase period) whichever is lower.





During
the years ended September 30, 2004 and 2003, the Company issued 42,703 and
424,875 shares respectively, to employees under the Purchase Plan. The aggregate
purchase price for those shares of $41,531 and $83,976, respectively, was paid
by the employees through the offset of the amount they owed for the shares
against an equivalent amount the Company owed them for accrued salaries or
severance. Funds derived from the employee purchase of Company common stock
under the Purchase Plan can be used for general corporate purposes.





***Shares
Issued in Lieu of Salary of Executive Officer:***





On
January 29, 2003, the Company issued 169,533 shares to an executive officer
to pay $50,250 of salary accrued as of September 30, 2002.





On
August 5, 2003, the Company issued 207,843 shares to an executive officer
to pay $36,000 of salary accrued during the year ending September 30, 2003.





On
September 30, 2003, the Board of Directors authorized the grant of a $50,000
year-end bonus to the Chief Executive Officer with the option to take the bonus
in cash or common shares at the purchase price used for the Employee Stock
Purchase Plan.  The Chief Executive Officer elected to take the net effect
of the bonus in common shares.  The Company issued 60,650 shares for this
obligation on February 6, 2004.





***Shares
Issued for Settlement of Accounts Payable:***





Pursuant
to a settlement agreement with Direct Focus, a supplier, the Company issued
140,000 shares of common stock during the year ended September 30, 2003
with a fair value of $26,600 as partial settlement of an outstanding trade
payable and recognized a gain of approximately $36,000, which is included in the
gain on settlement of accounts payable of $175,011 in the accompanying
consolidated statement of operations.





The
Company issued 40,135 shares of common stock during the year ended September 30,
2004 with a fair value of $28,094 pursuant to agreements for settlements of
outstanding trade accounts payable and recognized a gain of $33,840. The Company
also issued 100,000 shares with a fair value of $229,900 to SCO Financial Group,
LLC as settlement of an account payable and resulting litigation
therefrom.





***Shares
Issued Pursuant to Private Placement:***





On
June 10, 2003, the Company began offering 11 units of common stock and
warrants at $75,000 per unit to raise up to $825,000 through a Confidential
Offering Memorandum with Casimir Capital L.P. as placement agent.  Each
unit consisted of 300,000 common shares and warrants to purchase 300,000 common
shares at an exercise price of $0.33 per share through June 2008. The
Company closed the sale of all 11 units on June 30, 2003 and received
proceeds of approximately $664,000, net of fees and expenses of approximately
$161,000. The Company also issued 600,000 warrants to the placement agent for
services in connection with the offering of the equity securities.  The
Company issued 3,300,000 common shares for this obligation on June 30,
2003.





36


On
November 24, 2003, the Company closed a private placement of its securities
pursuant to a Confidential Offering Memorandum.  The placement was made up
of 22 units with each unit consisting of 100,000 common shares and 50,000
warrants to purchase common shares at an exercise price of $1.75 per
share.  The Company received net proceeds in the amount of $3,300,000 and
issued 2,200,000 common shares at effectively $1.50 per share, and 1,100,001
warrants to purchase common shares.





On
May 27, 2004, the Company closed a private placement of its securities pursuant
to a Confidential Offering Memorandum. The placement was made up of 1,314,532
units with each unit consisting of two common shares and one three-year warrant
to purchase common shares at an exercise price of $2.46 per share. The Company
received net proceeds of $5,049,584 and issued 2,629,064 common shares at
effectively $2.10 per share, and 1,314,532 warrants to purchase common
shares.








**5.** **** **COMMITMENTS
AND CONTINGENCIES**





***(a)*** ****** ***Litigation***





The
Company had previously been named as a defendant in a lawsuit by Whistler Cable
Television captioned *Whistler
Cable Television Ltd. vs. MDU Communications Inc.* ,
in British Columbia, Canada, claiming damages for conversion, the return of
personal property, an injunction and costs. Although the case was still pending
on September 30, 2004, it was subsequently settled on or about October 28, 2004
for $10,000 Canadian.





During
the year ended September 30, 2004, the Company also settled, on July 12, 2004,
previously reported litigation captioned *SCO
Financial Group LLC v. MDU Communications International, Inc.* As
settlement, MDU paid $33,000 in cash, issued them 100,000 shares. As a result,
the Company recorded a total charge of $230,000 in connection with the
settlement.





***(b)*** ****** ***Contracts***





The
Company has previously entered into a management agreement with a senior
executive that provides for annual compensation, excluding bonuses, of $200,000.
The Company can terminate this agreement at any time upon reasonable notice and
the payment of an amount equal to 24 months of salary. In the event of a change
in control of the Company, either party may, during a period of 12 months from
the date of the change of control, terminate the agreement upon reasonable
notice and the payment by the Company of an amount equal to 36 months of salary.





***(c)*** ****** ***Operating
Leases***





The
Company is required to make future minimum rental payments of $100,762 during
the year ending September 30, 2005 under a non-cancelable lease for its
facilities. Rent expense under all operating leases amounted to $134,422 and
$129,888, respectively, for the years ended September 2004 and
2003.





**6.    STRATEGIC
ALLIANCE WITH DIRECTV**





In
May 2000, the Company entered into a long-term System Operator Agreement
with DirecTV, Inc. (“DIRECTV”), a California company. On September 29,
2003, the Company entered into a new System Operator Agreement with DIRECTV,
which replaced the System Operator Agreement previously executed by the Company
and was due to initially expire on May 19, 2005.  The Company’s
contract with DIRECTV gives the Company a share of monthly net subscriber
receipts, depending upon the number of active subscribers, from the sale of
DIRECTV programming services, plus a commission for each new subscriber
addition. The Company incurs only the costs associated with the implementation
of its services and will not share any of DIRECTV’s programming or broadcasting
costs.





**7.   
CAPITAL LEASE OBLIGATIONS**





The
Company finances certain equipment acquisitions through capital lease agreements
that expire through 2007. During the year ended September 30, 2004, the Company
entered into lease agreements for new equipment having a cost basis of
$92,418.  In addition, the Company assumed capital leases for equipment
with a remaining cost basis of $47,693. The following is a schedule by years of
future minimum payments required under capital leases as of September 30, 2004:




37


**Year
      Ending September 30,**
    
    **Amount**2005
    
    $
    68,4082006
    
    
    43,0072007
    
    
    11,927Total
      minimum lease payments
    
    
    123,342Less
      amount representing interest
    
    
    15,447Present
      value of net minimum lease payments
    
    
    107,895Less
      current portion
    
    
    58,280Long-term
      portion
    
    $
    49,615





The
net book value of equipment under capital leases as of September 30, 2004
was $193,240 and is included in property and equipment.





**8.** **** **ACQUISITIONS
OF BUSINESSES, SUBSCRIBERS AND EQUIPMENT**





On
June 1, 2004, the Company acquired Direct Satellite, Inc. (“DSI”) for $2.4
million in cash plus $115,000 of closing costs. DSI was primarily a private
cable operator serving approximately 4,400 video and 400 high-speed Internet
subscribers in 15 “Class A” multi-family properties signed to long term access
agreements in the greater Chicago metropolitan area. The acquisition was
accounted for under the purchase method and the assets, liabilities, revenues
and expenses related to DSI were consolidated with the accounts of the Company
effective June 1, 2004. Acquisition costs were allocated to the fair value of
the net assets assumed as set forth below:





Property
      and equipment
    
    $
    819,159Amortizable
      intangible assets
    
    
    1,695,841Total
      Acquisition Cost
    
    $
    2,515,000





The
intangible assets were attributable to the building access agreements and
customer lists. The intangible assets acquired are being amortized over five
years. The Company also entered into a consulting agreement with
Cablecom/Spacelink for the development of the company’s presence in the area
(see Note 3).





On
September 20, 2004, the Company acquired PCM Acquisitions Corporation for
$1,380,691 in cash plus $112,500 of closing costs. PCM was primarily a private
cable operator serving approximately 3,200 subscribers. The acquisition included
the accounts receivable and a pro-rated revenue and cost amount for the month of
September 2004. Acquisition
costs were allocated to the fair value of the net assets assumed as set forth
below:





Accounts
      receivable
    
    $
    102,821Property
      and equipment
    
    
    779,121Amortizable
      intangible assets
    
    
    611,249Total
    
    $
    1,493,191





The
intangible assets were attributable to the building access agreements and
customer lists. The intangible assets acquired are being amortized over five
years.





The
following table presents the unaudited pro forma results of operations for
informational purposes for the years ended September 30, 2004 and 2003, assuming
that the Company had acquired DSI and PCM at the beginning of the year ended
September 30, 2003:




**2004**
    
    
    **2003**(restated)Total
      Revenue
    
    $
    5,716,785
    
    $
    5,818,007Net
      loss
    
    
    (8,821,988
    )
    
    (2,200,972
    )Net
      loss per common share
    
    $
    (0.23
    )
    $
    (0.10
    )


****


The
pro forma results of operations give effect to certain adjustments including
amortization of purchased intangibles. This information may not necessarily be
indicative of the future combined results of operations of the
Company.
  38


**9.** **** **INVESTMENT
IN AND TRANSACTIONS WITH AVALONBAY JOINT VENTURE**





As
part of an acquisition on April 30, 2001, the Company acquired a 50%
interest in a joint venture agreement with AvalonBay Cable I, Inc. (the “Joint
Venture”), an affiliate of AvalonBay Communities, Inc., for the purpose of
managing, owning and otherwise operating systems and equipment to provide
digital satellite television services to certain of AvalonBay’s residential
communities. The Company’s 50% investment in the Joint Venture had been
accounted for pursuant to the equity method and, accordingly, the Company’s
proportionate interest in the net earnings of the Joint Venture has been
reflected separately in the Company’s consolidated statement of operations
through June 30, 2003.





During
the fourth quarter of the year ended September 30, 2003, the percentage of
the Company’s ownership interest in the Joint Venture increased from 50% to
100%.  The acquisition of the controlling interest was accounted for
retroactively as of October 1, 2002, the beginning of the year ended September
30, 2003, pursuant to the purchase method and, accordingly, the Joint Venture
became a consolidated subsidiary of the Company effective October 1, 2002.
The accompanying consolidated financial statements for the year ended September
30, 2003 have been retroactively restated for the effects of the allocation of
the purchase price of approximately $320,000 to the fair value of the net assets
as of October 1, 2002 which increased/(decreased) the consolidated balance sheet
as of that date as follows:





Cash
      and cash equivalents
    
    $
    15,672Accounts
      receivable, net
    
    
    285,637Property
      and equipment, net
    
    
    751,762Investment
      in joint venture
    
    
    (311,466
    )Total
    
    $
    741,605Accounts
      payable
    
    $
    282,184Other
      accrued liabilities
    
    
    20,243Deferred
      revenue
    
    
    127,596Minority
      interest
    
    
    311,582Total
    
    $
    741,605





On
July 30, 2003, the Joint Venture sold 1,273 digital satellite television
subscribers in five properties to CSC Holdings, Inc. (“CSC Holdings”) for $1,200
per subscriber. The total sales price, including amounts applicable to the sale
of certain related equipment, was $1,557,600.  Approximately $381,000 of
the sales price was held in escrow for 80 days to confirm the number of
subscribers and after September 30, 2003, $32,400 was returned to CSC Holdings
from escrow due to subscriber fluctuations. After certain transactional
deductions, including a negotiated recoupment by the Company of approximately
$150,000 of the $320,000 purchase price for the Company’s additional 50%
interest in the Joint Venture described above, the net proceeds from the sale
will flow 50% to the Company with the other 50% apportioned to each of the other
owner entities of the five properties involved in the CSC Holdings sale. 
At September 30, 2003, the Company has accrued approximately $550,000
representing 50% of the net proceeds due its former partners.  Accordingly,
the accompanying consolidated statement of operations for the year ended
September 30, 2003 includes a gain on sale of customers to CSC Holdings of
approximately $703,000, which is net of the write-off of the remaining net book
value of tangible and intangible assets the Company will no longer
use.





**10.** **** **PROPERTY
AND EQUIPMENT**





The
components of property and equipment are set forth below:







**September 30,****2004**
    
    
    **2003**Telecommunications
      equipment, installed
    
    $
    8,624,653
    
    $
    4,875,749Computer
      equipment
    
    
    396,540
    
    
    339,732Furniture
      and fixtures
    
    
    127,017
    
    
    105,412Vehicles
    
    
    24,954
    
    
    24,9549,173,164
    
    
    5,345,847Less:
      Accumulated depreciation
    
    
    (2,771,331
    )
    
    (1,609,167
    )$
    6,401,833
    
    $
    3,736,680





Depreciation
expense amounted to $1,138,077 and $845,656 for the years ended
September 30, 2004 and 2003, respectively.





**11.** **** **INTANGIBLE
ASSETS**





The
components of intangible assets are set forth below:




39




**September 30,****2004**
    
    
    **2003**Building
      access agreements and subscriber lists
    
    $
    4,633,838
    
    $
    2,007,516Less:
      Accumulated amortization
    
    
    (1,407,621
    )
    
    (925,534
    )$
    3,226,217
    
    $
    1,081,982





Amortization
expense amounted to $482,087 and $419,136 for the years ended September 30,
2004 and 2003, respectively. Amortization of intangibles in years subsequent to
September 30, 2004 is as follows:





**Year**
    
    **Amortization**
      **Amount**2005
    
    $
    860,6762006
    
    
    856,0362007
    
    
    597,7142008
    
    
    520,9602009
    
    
    390,831




**12. OTHER ACCRUED
LIABILITIES**
 
 Other
accrued liabilities consist of the following:
 
 2004
    
    2003Accrued
      costs and expenses
    
    $
    348,111
    
    $
    89,490Accrued
      liabilities to former joint venture partner
    
    
    —
    
    
    533,952Other
    
    
    200,796
    
    
    76,729Totals
    
    $
    548,907
    
    $
    700,171
 ****
 **13.** **** **INCOME
TAXES**





The
Company had pre-tax losses but did not record any credits for Federal or other
income taxes for the years ended September 30, 2004 and 2003. The Company
did not record Federal income tax benefits at the statutory rate of 34% and
state income tax credits because (a) it has incurred losses in each period
since its inception and cannot carry back any of its losses against previously
recorded income tax expense and (b) although such losses, among other
things, have generated future potential income tax benefits, there is
significant uncertainty as to whether the Company will be able to generate
income in the future to enable it to realize any of those benefits and,
accordingly, it has had to take valuation reserves against those potential
benefits as shown below.





As
of September 30, 2004 and 2003, the Company had net deferred tax assets,
which generate potential future income tax benefits that consisted of the
effects of temporary differences attributable to the following:







**2004**
    
    
    **2003**Deferred
      tax assets:Benefits
      from net operating loss carryforwards:United
      States
    
    $
    6,630,463
    
    $
    3,866,000Canada
    
    
    3,244,000
    
    
    3,199,000Depreciation
      of property and equipmentAmortization
      of intangible assets
    
    
    394,000
    
    
    274,000Other
    
    
    334,000
    
    
    63,000Totals
    
    
    10,092,000
    
    
    7,402,000Deferred
      tax liabilities—depreciation of property and equipment
    
    
    (712,000
    )
    
    (450,000
    )Net
      deferred tax assets
    
    
    9,890,000
    
    
    6,952,000Less
      valuation allowance
    
    
    (9,890,000
    )
    
    (6,952,000
    )Totals
    
    $
    —
    
    $
    —





At
September 30, 2004 and 2003, the Company had net operating loss carry
forwards of approximately $15,301,000 and $9,666,000, respectively, available to
reduce future Federal taxable income and net operating loss carryforwards of
approximately $7,129,000 and $7,030,000, respectively, available to reduce
future Canadian taxable income. As of September 30, 2004, the Federal tax
loss carry forwards will expire from 2005 through 2024 and the Canadian tax loss
carryforwards will expire from 2006 through 2010. However, the Company
terminated substantially all of its Canadian operations in the year ended
September 30, 2002.





The
deferred tax valuation allowance increased by $2,428,000 and $1,121,000 in the
years ended September 30, 2004 and 2003, respectively.





**14.** **** **SEGMENT
AND RELATED INFORMATION**





The
Company operates in one industry segment. The Company’s operations are comprised
of providing delivery of home entertainment and information technology to
multi-unit dwellings.




40


**15.********SUBSEQUENT
EVENTS**

On
November 18, 2004, MDU and PDI executed an agreement to the termination of the
Memorandum of Understanding for a Strategic Partnership (“Agreement”) executed
on February 12, 2004. As final compensation, PDI will (i) return to MDU for
cancellation the original stock certificate representing 250,000 shares of
common stock, (ii) return to the Company for cancellation the original warrant
agreement representing 250,000 shares of common stock exercisable at $1.84 per
share, and (iii) execute a standard release for any and all causes of actions
under the Agreement. In return, the Company shall (i) re-issue to PDI a stock
certificate for 50,000 registered shares of common stock, and (ii) agree that
PDI shall remain the Company’s preferred equipment provider for a period of one
year.


On
November 24, 2004, the Company completed a $16.25 million private equity
placement, pursuant to which the Company sold 6,063,400 units. Each unit
consisted of one share of common stock and three-tenths of one three-year
warrant to purchase one share of common stock at an exercise price of $3.40 per
share, to accredited investors at a per unit price of $2.68. After the payment
of fees and expenses, the Company received net proceeds of approximately $15.0
million.




**16.** **RESTATEMENT
OF FINANCIAL INFORMATION**
 
 In
connection with its review of our financial statements for the quarter ended
March 31, 2005, J.H. Cohn LLP, our independent registered public accounting
firm, brought to the attention of the Company that certain issued and
outstanding stock options that are subject to variable plan accounting treatment
under applicable accounting standards had not been correctly accounted for due
to an error in calculation, and, accordingly, previously unrecognized noncash
compensation expense should have been recognized in certain of the
Company’s previously issued financial statements under the Financial Accounting
Standards Board’s Interpretation 44, “Accounting for Certain Transactions
Involving Stock Compensation - an interpretation of APB Opinion No. 25” (Issue
date 3/00). Under variable plan accounting, compensation expense is increased or
decreased as a result of changes in the market price of the Company’s common
stock. After reviewing the matter with its current independent registered public
accounting firm, the Company has identified certain adjustments that
necessitates the restatement of its financial statements for the year ended
September 30, 2004 and the quarters ended December 31, 2003, March 31, 2004 and
June 30, 2004 .
 
 The
restatement adjustments to the Company’s financial statements made by management
for the year ended September 30, 2004 and the quarters ended December 31, 2003,
March 31, 2004 and June 30, 2004 are summarized as follows:
 
 41
 **MDU
      COMMUNICATIONS INTERNATIONAL, INC.**
      **Restated
      Condensed Consolidated Statements of Operations**
      **For
      the Quarter Ended December 31,
2003**
  **As
      Previously****Reported
      For****the
      Qtr Ended****12/31/2003**
    
    
    **RestatementAdjustmentFor
      the QtrEnded12/31/2003**
    
    
    **As
      Restated For****the
      Qtr Ended12/31/2003**REVENUE
    
    $
    870,052
    
    $
    —
    
    $
    870,052OPERATING
      EXPENSESDirect
      costs
    
    
    215,119
    
    
    —
    
    
    215,119Sales
      expenses
    
    
    90,858
    
    
    —
    
    
    90,858Customer
      service expenses
    
    
    273,218
    
    
    —
    
    
    273,218General
      and administrative expenses
    
    
    2,077,845
    
    
    (467,660
    )
    
    1,610,185Depreciation
      and amortization
    
    
    309,337
    
    
    —
    
    
    309,337TOTALS
    
    
    2,966,377
    
    
    (467,660
    )
    
    2,498,717OPERATING
      LOSS
    
    
    (2,096,325
    )
    
    467,660
    
    
    (1,628,665
    )Other
      income (expense)Gain
      on sale of customers
    
    
    —
    
    
    
    
    
    —Gain
      on settlement of accounts payable
    
    
    4,443
    
    
    
    
    
    4,443Interest
      income
    
    
    2,683
    
    
    
    
    
    2,683Interest
      expense
    
    
    (255,985
    )
    
    
    
    
    (255,985
    )Other
    
    
    (32,182
    )
    
    
    
    
    (32,182
    )NET
      INCOME (LOSS)
    
    $
    (2,377,366
    )
    $
    467,660
    
    $
    (1,909,706
    )BASIC
      AND DILUTED LOSS PER COMMON SHARE
    
    $
    (0.08
    )
    
    
    
    $
    (0.06
    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
    
    
    31,626,321
    
    
    
    
    
    31,626,321Additional
      Paid-in Capital
    
    $
    29,658,711
    
    $
    (467,660
    )
    $
    29,191,051Retained
      Earnings
    
    $
    (19,701,092
    )
    $
    467,660
    
    $
    (19,233,432
    )
  42
 
 **MDU
      COMMUNICATIONS INTERNATIONAL, INC.**
      **Restated
      Condensed Consolidated Statements of Operations**
      **For
      the Quarter Ended March 31, 2004**
  **As
      Previously****Reported
      For****the
      Qtr Ended****3/31/2004**
    
    
    **RestatementAdjustmentFor
      the QtrEnded3/31/2004**
    
    
    **As
      Restated Forthe Qtr Ended3/31/2004**REVENUE
    
    $
    941,767
    
    $
    —
    
    $
    941,767OPERATING
      EXPENSESDirect
      costs
    
    
    308,560
    
    
    —
    
    
    308,560Sales
      expenses
    
    
    140,484
    
    
    —
    
    
    140,484Customer
      service expenses
    
    
    264,696
    
    
    —
    
    
    264,696General
      and administrative expenses
    
    
    1,454,007
    
    
    624,758
    
    
    2,078,765Depreciation
      and amortization
    
    
    339,550
    
    
    —
    
    
    339,550TOTALS
    
    
    2,507,297
    
    
    624,758
    
    
    3,132,055OPERATING
      LOSS
    
    
    (1,565,530
    )
    
    (624,758
    )
    
    (2,190,288
    )Other
      income (expense)Gain
      on sale of customers
    
    
    —
    
    
    
    
    
    —Gain
      on settlement of accounts payable
    
    
    5,054
    
    
    
    
    
    5,054Interest
      income
    
    
    12,903
    
    
    
    
    
    12,903Interest
      expense
    
    
    (1,028,664
    )
    
    
    
    
    (1,028,664
    )Other
    
    
    —
    
    
    
    
    
    —NET
      LOSS
    
    $
    (2,576,237
    )
    $
    (624,758
    )
    $
    (3,200,995
    )BASIC
      AND DILUTED LOSS PER COMMON SHARE
    
    $
    (0.07
    )
    
    
    
    $
    (0.09
    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
    
    
    36,663,641
    
    
    
    
    
    36,663,641Additional
      Paid-in Capital
    
    $
    34,314,337
    
    $
    157,098
    
    $
    34,471,435Retained
      Earnings
    
    $
    (22,277,329
    )
    $
    (157,098
    )
    $
    (22,434,427
    )
  43
 
 **MDU
      COMMUNICATIONS INTERNATIONAL, INC.**
      **Restated
      Condensed Consolidated Statements of Operations**
      **For
      the Quarter Ended June 30, 2004**
  **As
      Previously****Reported
      For****the
      Qtr Ended****6/30/2004**
    
    
    **RestatementAdjustmentFor
      the QtrEnded6/30/2004**
    
    
    **As
      Restated Forthe Qtr Ended6/30/2004**REVENUE
    
    $
    1,193,746
    
    $
    —
    
    $
    1,193,746OPERATING
      EXPENSESDirect
      costs
    
    
    345,200
    
    
    —
    
    
    345,200Sales
      expenses
    
    
    228,304
    
    
    —
    
    
    228,304Customer
      service expenses
    
    
    301,279
    
    
    —
    
    
    301,279General
      and administrative expenses
    
    
    (522,644
    )
    
    1,339,783
    
    
    817,139Depreciation
      and amortization
    
    
    423,080
    
    
    —
    
    
    423,080TOTALS
    
    
    775,219
    
    
    1,339,783
    
    
    2,115,002OPERATING
      LOSS
    
    
    418,527
    
    
    (1,339,783
    )
    
    (921,256
    )Other
      income (expense)Gain
      on sale of customers
    
    
    —
    
    
    
    
    
    —Gain
      on settlement of accounts payable
    
    
    12,935
    
    
    
    
    
    12,935Interest
      income
    
    
    16,367
    
    
    
    
    
    16,367Interest
      expense
    
    
    (648,611
    )
    
    
    
    
    (648,611
    )Other
    
    
    —
    
    
    
    
    
    —NET
      LOSS
    
    $
    (200,782
    )
    $
    (1,339,783
    )
    $
    (1,540,565
    )BASIC
      AND DILUTED LOSS PER COMMON SHARE
    
    $
    (0.01
    )
    
    
    
    $
    (0.04
    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
    
    
    39,746,478
    
    
    
    
    
    39,746,478Additional
      Paid-in Capital
    
    $
    39,574,130
    
    $
    1,496,881
    
    $
    41,071,011Retained
      Earnings
    
    $
    (22,478,111
    )
    $
    (1,496,881
    )
    $
    (23,974,992
    )
 44
 
 **MDU
      COMMUNICATIONS INTERNATIONAL, INC.**
      **Restated
      Condensed Consolidated Statements of Operations**
      **For
      the Year Ended September 30, 2004**
  **As
      Previously****Reported
      For****the
      Year Ended****9/30/2004**
    
    
    **RestatementAdjustmentFor
      the YearEnded9/30/2004**
    
    
    **As
      Restated Forthe Year Ended9/30/2004**REVENUE
    
    $
    4,490,235
    
    $
    —
    
    $
    4,490,235OPERATING
      EXPENSESDirect
      costs
    
    
    1,391,464
    
    
    —
    
    
    1,391,464Sales
      expenses
    
    
    884,523
    
    
    —
    
    
    884,523Customer
      service expenses
    
    
    1,268,694
    
    
    —
    
    
    1,268,694General
      and administrative expenses
    
    
    4,286,567
    
    
    1,274,535
    
    
    5,561,102Depreciation
      and amortization
    
    
    1,620,164
    
    
    —
    
    
    1,620,164TOTALS
    
    
    9,451,412
    
    
    1,274,535
    
    
    10,725,947OPERATING
      LOSS
    
    
    (4,961,177
    )
    
    (1,274,535
    )
    
    (6,235,712
    )Other
      income (expense)Gain
      on sale of customers
    
    
    —
    
    
    
    
    
    —Gain
      on settlement of accounts payable
    
    
    33,840
    
    
    
    
    
    33,840Interest
      income
    
    
    48,033
    
    
    
    
    
    48,033Interest
      expense
    
    
    (2,755,115
    )
    
    
    
    
    (2,755,115
    )Other
    
    
    (32,181
    )
    
    
    
    
    (32,181
    )NET
      LOSS
    
    $
    (7,666,600
    )
    $
    (1,274,535
    )
    $
    (8,941,135
    )BASIC
      AND DILUTED LOSS PER COMMON SHARE
    
    $
    (0.20
    )
    
    
    
    $
    (0.24
    )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
    
    
    37,607,929
    
    
    
    
    
    37,607,929Additional
      Paid-in Capital
    
    $
    40,848,361
    
    $
    1,274,535
    
    $
    42,122,896Retained
      Earnings
    
    $
    (24,990,326
    )
    $
    (1,274,535
    )
    $
    (26,264,861
    )
 45


**Item
8.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure**





None.





**Item
8A.  Controls and Procedures**





**(a)
Evaluation of Disclosure Controls and Procedures**





The
Company, under the supervision and with the participation of its management,
including the Chief Executive Officer, who is also the Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company’s
“disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act) as of the end of
the period covered by this report.  Based on that evaluation, the Chief
Executive Officer, who is also the Chief Financial Officer, concluded that the
Company’s disclosure controls and procedures, as of the end of such period, are
effective, other than as set forth below, in making known to him
information relating to the Company and the Company’s consolidated subsidiaries
required to be disclosed in the Company’s reports filed or submitted under the
Exchange Act on a timely basis.


In
connection with preparation of its unaudited financial statements for the
quarter ended March 31, 2005, the Company identified a material weakness in its
internal controls surrounding the recording and valuation of stock options
subject to variable plan accounting treatment. Such weakness resulted in a
restatement of the Company’s financial statements for the year ended September
30, 2004 and the quarter ended December 31, 2004 to increase by $1.36 million
the amount of noncash compensation expense attributable to stock options for the
five quarters. The Company has already begun to remediate this weakness through
the hiring and appointment of a new Vice President of Finance and Administration
who is also the Chief Accounting Officer and through improvements to training
and enhanced oversight.


**(b)
Changes in Internal Controls**





There
has been no change in the Company’s internal control over financial reporting or
in other factors during the quarter ended September 30, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting subsequent to the date of the evaluation
referred to above.




46




**PART
III**





**Item
9.  Directors and Executive Officers**





The
following are the directors and executive officers of the Company:





**Sheldon
B. Nelson** ,
43, has served as President, Chief Executive Officer and Chairman of the Board
of the Company since November 1998. From 1983 to 1998, he was President of
4-12 Electronics Corporation, a provider of products and services to the
Canadian satellite, cable, broadcasting and SMATV industries. In addition to his
day-to-day responsibilities during his tenure at 4-12 Electronics,
Mr. Nelson developed the Company into one of Canada’s largest private cable
system operators. Mr. Nelson is a graduate of Gonzaga University, in
Spokane, WA. He graduated from the School of Business Administration in 1983,
Magna cum Laude, and was the recipient of the School of Business
Administrations’ Award of Excellence.





**Douglas
G. Hooper** ,
44, joined the Board of Directors in May 2000. He is currently an
acquisitions and finance consultant, who has extensive experience as a venture
capitalist and mergers and acquisition specialist in the mineral exploration,
industrial processing and software industries. He was President and CEO of Sand
River Resources Ltd. from 1995 to 1997. Mr. Hooper was a founder and
President of TelSoft Mobile Data Inc. from 1992 to 1995, now Mobile Data
Solutions, Inc., a wireless communications software company. In that
position, he developed and implemented corporate strategy and was responsible
for raising capital, strategic alliances and mergers and acquisitions.





**John
Edward “Ted” Boyle** ,
58, joined the Board of Directors in May of 2000. He is currently the President
of the cable division of 180 Connect Inc., North America’s largest cable and
satellite installation and service contractor. From 1998 to 2001 he was the
President and CEO of Multivision (Pvt.) Ltd., the cable television provider for
Sri Lanka. From 1996 -1997, Mr. Boyle was the President and CEO of PowerTel TV,
a Toronto based digital wireless cable company. As founding President and CEO of
ExpressVu Inc. (1994 -1996), Mr. Boyle was responsible for taking Canada’s first
Direct-to-Home satellite service from inception to launch. Prior to 1994, Mr.
Boyle held executive positions with Tee-Comm Electronics, Regional Cablesystems
and Canadian Satellite Communications (Cancom). As the founding officer of
Regional Cablesystems at Cancom, and later as Vice-President of Market
Development at Regional, he led the licensing and construction or acquisition of
over 1000 Canadian and American cable systems.





**Edward
L. Huguez** ,
46, joined the Board in October of 2003. He is currently executive vice
president, Starz Entertainment Group. Starz is the largest provider of premium
movie services with up to thirteen digital movie channels and more than 750
movies per month. Starz is a wholly owned subsidiary of Liberty Media
Corporation (NYSE: L, LMCb). Prior to Starz, he was President and CEO of
MidStream Technologies, a privately held company concentrating on Video on
Demand and Network Digital Video Recording.  Prior to joining Midstream, he
served as senior vice president at Akamai Technologies, the leading provider of
global, high performance services for the delivery of interactive Internet
content, streaming media and Internet applications.  He joined Akamai upon
its $2.8 billion acquisition of INTERVU in April 2000.  As chief
operating officer at INTERVU, Mr. Huguez helped drive the evolution of the
company from a start up with about 30 employees and no revenue, to the market
leader with 400 employees and more than 900 customers.  Before INTERVU, Mr.
Huguez spent almost six years at DIRECTV, the nation’s leading digital satellite
television service.  He joined DIRECTV in 1992 and was part of the senior
executive team that launched the service in 1994.  He had two primary
responsibilities while at DIRECTV; first, vice president of programming
acquisition, then, after DIRECTV successfully launched its service and became
the leading television satellite service, he was asked to lead DIRECTV’s newly
formed New Media & Interactive Programming and Platforms Group, where he
assumed the role of vice president and general manager. Mr. Huguez earned his
MBA at UCLA and holds a bachelor’s degree in political science from Arizona
State.





**Patrick
Cunningham** ,
37, has been Vice President of the Company since March 2000.  He has
over fourteen years of management experience focused on the telecommunications
industry. Mr. Cunningham was formerly the Vice President of Distribution and
Sales for SkyView World Media, LLC. At SkyView, he was responsible for the
distribution, sales, marketing and technical service of the SkyView products.
SkyView was one of the leading private providers of television services to the
MDU and ethnic communities with over 100,000 subscribers nationwide. SkyView was
the largest Master Systems Operator for DIRECTV and a leading producer and
distributor of foreign language television programming. Prior to SkyView, and
after some time as a maintenance manager with Schnieder National, Inc., Mr.
Cunningham was an Officer in the U.S. Army where he served as a Battalion
Communications Officer and an M1A1 Tank Platoon Leader. Mr. Cunningham has a
Bachelor of Science from Union College in Schenectady, NY where he majored in
Industrial Economics.





**Michael
Stanway** ,
39, joined MDU Communications in 2000 as Manager and then Director of MIS/IT
Services. Mr. Stanway then assumed the position of Director of Operations and
most recently holds the title of Vice President of Operations. Mr. Stanway has a
post-secondary degree as a Network Specialist with Microsoft and Novell
certifications.





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





Section 16(a)
of the Securities Exchange Act of 1934 requires the Company’s directors,
executive officers and persons who own beneficially more than 10% of the
Company’s common stock to file with the Securities and Exchange Commission
(“SEC”) initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of the Company. Officers, directors and
greater than 10% stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports they file. To the
Company’s knowledge, based solely on review of the copies of such reports
furnished to the Company or advice that no filings were required, during fiscal
year 2004 all officers, directors and greater than 10% beneficial owners
complied with the Section 16(a) filing requirements.





**Audit
Committee**





Our
Board of Directors has established a separately designated, standing Audit
Committee (as defined in and established in accordance with Section 3(a)(58)(A)
of the Exchange Act) to oversee the accounting and financial reporting processes
of the Company and the audits of our financial statements.  The members of
the Audit Committee are Douglas Hooper and John E. Boyle.





Under
the new rules of the SEC brought about by the Sarbanes-Oxley Act, companies are
required to disclose whether their Audit Committees have an "audit committee
financial expert" as defined in Item 401(h) of Regulation S-B under the Exchange
Act and whether that expert is "independent" as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Exchange Act. The Board of Directors has
determined that although the two members of the current audit committee are
"independent" and have ability to understand financial reporting, they may not
fully meet the description of "financial experts" as defined in the Regulation.
The Board of Directors is evaluating qualified candidates to expand the Board at
this time.




47


**Code
of Ethics**




The
Company has adopted a Code of Ethics that applies to our officers (including our
principal executive officer and our principal financial and accounting officer),
management employees and directors.  A copy of our Code of Ethics will be
provided without charge to any person who requests a copy by sending a written
request to:




MDU
Communications International, Inc.


60-D
Commerce Way


Totowa,
New Jersey 07512


Attn:
Corporate Secretary




**Item
10.  Executive Compensation**





**COMPENSATION
OF EXECUTIVE OFFICERS**





The
following table sets forth certain information as of September 30, 2004,
regarding compensation paid during each of the Company’s last three fiscal years
to our chief executive officer and other executive officers whose total annual
salary and bonuses exceeded $100,000 (the “named executive officers”).





**SUMMARY
COMPENSATION TABLE**





**Annual
      Compensation**
    
    
    
    
    
    
    
    **Long
      Term Compensation Awards****Name
      and Principal Position**
    
    **Fiscal
      Year**
    
    **Salary
      ($)**
    
    
    **Bonus ($)**
    
    
    **Other**
      **Compensation(2)**
    
    **Securities
      Underlying
      **Options (in shares,
      **cumulative)******Sheldon
      B. Nelson,(1)
    
    2004
    
    $
    200,000
    
    $
    30,000
    
    $
    -0-
    
    800,000President
      and CEO
    
    2003
    
    $
    192,000
    
    $
    50,000
    
    $
    -0-
    
    800,0002002
    
    $
    181,723
    
    $
    -0-
    
    $
    -0-
    
    800,000Patrick
      Cunningham,(3)
    
    2004
    
    $
    160,000
    
    $
    6,000
    
    $
    6,000
    
    350,000Vice
      President of Marketing
    
    2003
    
    $
    160,000
    
    $
    -0-
    
    $
    6,000
    
    300,0002002
    
    $
    160,000
    
    $
    -0-
    
    $
    6,000
    
    300,000Michael
      Stanway (4)
    
    2004
    
    $
    105,600
    
    $
    -0-
    
    $
    -0-
    
    225,000Vice
      President of Operations







(1)
Mr. Nelson became the President and Chief Executive Officer of the Company
in November 1998. Mr. Nelson’s bonus for 2004 was a partial bonus for
fiscal 2004 accrued as of September 30, 2004 and consisted of $30,000 in cash
which was paid to him on November 1, 2004.





(2)
Auto allowance.





(3)
Mr. Cunningham joined the Company in March 2000 as Vice President.





(4)
Mr. Stanway joined the Company in February of 2000 and became Vice President of
Operations on October 1, 2003.





48


**COMPENSATION
OF DIRECTORS**





*Cash.* Each director who is not an employee or full time consultant of the Company is
paid $1,000 per month and an attendance fee of $1,000, plus out-of-pocket
expenses, for each Board or committee meeting attended.





*Stock.* Prior to the fiscal year ended September 30, 2004, Messrs. Boyle and
Hooper had each received a total of five-year, fully-vested options to purchase
100,000 shares of common stock as additional compensation for two years of Board
service. These options are at an exercise price of $0.33 per share.  During
the fiscal year ended September 30, 2004, Messrs. Boyle and Hooper
each received an additional five-year, fully-vested option to purchase 100,000
shares of common stock as additional compensation for two additional years of
Board service. These options are at an exercise price of $1.28 per share. 
Board member Edward Huguez was also granted a five-year, partially-vested option
to purchase 100,000 shares of common stock as additional compensation for two
years of Board service. These options are currently priced at $0.65 per share.





**DIRECTOR
AND EXECUTIVE OPTIONS GRANTED IN FISCAL YEAR 2004**





During
the fiscal year ending September 30, 2004, stock options were granted to the
following Directors and Executive Officers: (i) on November 21, 2003, new Board
member Edward Huguez was granted 100,000 five year options under the 2001 Stock
Option Plan at an exercise price of $0.65 per share, (ii) on December 17, 2003,
Board members Douglas Hooper and Ted Boyle were each granted 100,000 five year
options under the 2001 Stock Option Plan at an exercise price of $1.28 per share
(based on 60 day trading average); (iii) on December 5, 2003, Vice President of
Sales and Marketing Patrick Cunningham was granted 50,000 five year options
under the 2001 Stock Option Plan at an exercise price of $1.35 per share (market
price on that date). The Company granted no options to any other named executive
officer and director during fiscal year ending September 30, 2004.





**Item
11.  Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters**





The
following table sets forth information with respect to beneficial ownership of
our outstanding stock as of September 30, 2004 by (i) each person
known to the Company to be the beneficial owner of more than 5% of the Company’s
common stock; (ii) each of the Company’s directors; (iii) each
executive officer named in the Summary Compensation Table; and (iv) all of
the Company’s executive officers and directors as a group.





**Shares
      Beneficially**
      **Owned(1)****Name
      of Beneficial Owner**
    
    **Number(2)**
    
    **Percent**Sheldon
      B. Nelson(3)
    
    
    1,681,666
    
    
    3.4
    %Patrick
      Cunningham(4)
    
    
    471,950
    
    
    1.0
    %Michael
      Stanway(5)
    
    
    122,013
    
    
    *
    %J.E.
      (Ted) Boyle (6)
    
    
    158,000
    
    
    *
    %Douglas
      G. Hooper (7)
    
    
    190,000
    
    
    *
    %Edward
      Huguez (8)
    
    
    100,000
    
    
    *
    %Fuller
      & Thaler, et. al. (9)
    
    
    2,848,567
    
    
    5.8
    %SC
      Fundamental, et. al. (10)
    
    
    2,810,000
    
    
    5.8
    %All
      executive officers, directors, beneficial owners as a group (8
      persons)
    
    
    8,382,196
    
    
    17.2
    %





*
less than 1%




(1)
Unless otherwise indicated below, each stockholder had sole voting and sole
investment power with respect to all shares beneficially owned.





(2)
Includes common stock owned and currently exercisable options to purchase shares
of common stock.





(3)
Includes 981,666 shares held of record by 567780 BC Ltd., a British
Columbia corporation wholly owned by the Sheldon Nelson Family Trust whose
trustees are Sheldon Nelson and his sister, Nicole Nelson, 55,000 held
personally and 645,000 shares subject to options exercisable within
60 days.





(4)
Includes 244,450 shares and 227,500 shares subject to options exercisable within
60 days.





(5)
Includes 24,513 shares and 97,500 shares subject to options exercisable within
60 days.





(6)
Includes 58,000 shares and 100,000 shares subject to options exercisable within
60 day.





(7)
Includes 20,000 shares and 170,000 shares subject to options exercisable within
60 days.




49


(8)
Included 100,000 shares subject to options exercisable within 60
days.





(9)
Pursuant to 13G collective filing dated November 24, 2004.





(10)
Pursuant to 13G collective filing dated January 14, 2004.





**Item
12.  Certain Relationships and Related Transactions**





There
have been no such transactions during the past two fiscal years, other than
transactions with the Joint Venture prior to October 1, 2002 when it
becomes a 100% owned entity (see Note 9). Revenue for the year ended
September 30, 2003 includes $280,818 from sales of receivers to Joint
Venture and charges primarily for installation and management fees. The Company
also receives certain payments from DIRECTV on behalf of the Joint Venture. The
Company did not have any material net receivables from or payables to the Joint
Venture at September 30, 2003.





**Item
13.  Exhibits**





**INDEX
TO EXHIBITS**





Exhibits2.1
    Acquisition
      Agreement dated November 2, 1998 between Alpha Beta Holdings, Ltd. and MDU
      Communications Inc. (1)3.1
    Certificate
      of Incorporation (1)3.2
    Amendment
      to Certification of Incorporation (4)3.3
    Bylaws
      (1)3.4
    Amendment
      to Bylaws (2)4.1
    Form
      of Warrant to Purchase Common Stock, dated November 24, 2004, to various
      purchasers in the Company’s November 24, 2004 private placement of units
      (5)4.2
    Form
      of Stock and Warrant Purchase Agreement, dated November 24, 2004, with
      various purchasers in the Company’s November 24, 2004 private placement of
      units (5)4.3
    Form
      of Registration Rights Agreement, dated November 24, 2004, related to the
      Company’s November 24, 2004 private placement of units
  (5)21.1
    Subsidiaries
      of the Company (5)31
    Certification
      by CEO pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002
      (5)32
    Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    (5)___________
      (1)Incorporated
      by reference from Form 10-SB filed on May 12, 1999
      (2)Incorporated
      by reference from Form 10-SB/A, Amendment No. 3 filed on April 14, 2000
      (3)Incorporated
      by reference from the Registrant’s Form SB-2 (Reg. No. 333-87572) as filed
      with the Securities and Exchange Commission on May 3, 2002.
      (4)Incorporated
      by reference from Report on Form 8-K, filed November 17, 2004
      (5) Filed herewith





**Item
14.  Principal Accountant Fees and Services**





J.H.
Cohn LLP has served as the Company’s Principal Accountant since January 1,
2002. Their fees billed to the Company for the past two fiscal years are set
forth below:





**Fiscal
      year ended**
      **September 30,
      2004**
    
    **Fiscal
      year ended**
      **September 30,
      2003**Audit
      Fees
    
    $
    117,057
    
    $
    98,651Audit
      Related Fees
    
    
    —
    
    
    —Tax
      Fees
    
    $
    38,277
    
    
    17,500All
      Other Fees
    
    $
    0
    
    $
    0





As
of September 30, 2004, the Company’s Audit Committee did not have a
pre-approval policy for the fees of the Principal Accountant.  It is in the
process of adopting such a policy.





50


**SIGNATURES**





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this amended report to be signed on its
behalf by the undersigned thereunto duly authorized.








MDU
      COMMUNICATIONS INTERNATIONAL, INC.By:
    /s/  SHELDON
      NELSONSheldon
      Nelson
      *Chief
      Financial Officer*
      May
      12, 2005








Pursuant
to the requirement of the Securities Exchange Act of 1934, 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**
    
    **Title**
    
    **Date**/s/  SHELDON
      B. NELSONSheldon
      B. Nelson
    
    Principal
      Executive Officer and Director
    
    May
      12, 2005/s/  DOUGLAS
      G. HOOPERDouglas
      G. Hooper
    
    Director
    
    May
      12, 2005/s/  JOHN
      EDWARD BOYLEJohn
      Edward Boyle
    
    Director
    
    May
      12, 2005/s/  EDWARD
      HUGUEZEdward
      Huguez
    
    Director
    
    May
      12, 2005





51