UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549









FORM
10-K










x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended September 30, 2008, oro
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _______________ to
      ___________________




Commission
File No. 0-26053









MDU
COMMUNICATIONS INTERNATIONAL, INC.


(exact
name of registrant as specified 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 Act:




none




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




Common
Stock, par value $0.001 per share




(Title of
Class)











Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes o No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes o No x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of "large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.


Large accelerated filer o
            Accelerated filer o
            Non-accelerated filer o
            Smaller reporting company  x





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


Yes o No x




The
aggregate market value of the voting and nonvoting common equity (based upon the
closing price on the OTC Bulletin Board on March 31, 2008) held by
non-affiliates was approximately $22 million. The number of shares of common
stock ($0.001 par value) outstanding as of December 22, 2008 was
52,032,013.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the registrant’s Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the registrant’s 2009 Annual
Meeting of Stockholders, to be filed subsequent to the date hereof, are
incorporated by reference into Part III of this Report. Such Definitive Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the conclusion of the registrant’s fiscal year ended
September 30, 2008. Except with respect to information specifically
incorporated by reference in this Form 10-K, the Proxy Statement is not deemed
to be filed as part of this Annual Report on Form 10-K.










TABLE
OF CONTENTS





PagePART
      IITEM
      1.
                  Business
                  3ITEM
      1A.
                  Risk
      Factors
                  8ITEM
      1B.
                  Unresolved
      Staff Comments
                  12ITEM
      2.
                  Properties
                  12ITEM
      3.
                  Legal
      Proceedings
                  13ITEM
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  13PART
      IIITEM
      5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  13ITEM
      6.
                  Selected
      Financial Data
                  14ITEM
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of Operation
                  14ITEM
      7A.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  28ITEM
      8.
                  Financial
      Statements and Supplementary Data
                  29ITEM
      9.
                  Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  51ITEM
      9A(T).
                  Controls
      and Procedures
                  51ITEM
      9B.
                  Other
      Information
                  52PART
      IIIITEM
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  52ITEM
      11.
                  Executive
      Compensation
                  52ITEM
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  52ITEM
      13.
                  Certain
      Relationships and Related Transactions, and Director Independence
                  52ITEM
      14.
                  Principal
      Accounting Fees and Services
                  52PART
      IVITEM
      15.
                  Exhibits,
      Financial Statement Schedules
                  52




2





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





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 1A. 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.





PART
I




Item
      1.
              Business





OVERVIEW





MDU
Communications International, Inc. concentrates exclusively on installing
and delivering state-of-the-art digital satellite television, high-speed
Internet solutions and other information and communication services 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.
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. We earn our revenue through the sale of digital and analog satellite
television programming and high-speed Internet services to owners and residents
of MDUs.





Multi-dwelling
unit properties present unique technological, management and marketing
challenges, as compared to single family homes - challenges we have 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, Post Properties, Roseland Property
Company, Related Companies, as well as many others, to understand and meet the
technology needs of these groups. We operate in only one market
segment.





CORPORATE
HISTORY





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, we made a fundamental re-assessment of our 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 we relocated our operations and certain key
employees to our New York Metro Area office in Totowa, New Jersey. MDU
Communications International, Inc. operates essentially as a holding company
with MDU Canada and MDU USA as its wholly owned operating subsidiaries. MDU
Canada is now inactive. MDU USA operates in fourteen states with regional
offices in the New York, Chicago, Washington, DC and Miami greater metropolitan
areas.




3





REVENUE





We derive
revenue through the sale of digital and analog 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. The Company offers two types of
satellite television service, Direct Broadcast Satellite (“DBS”) (also called
Direct to Home (“DTH”)) and Private Cable (“PC”) programming. The DBS or DTH
service uses a set-top digital receiver for residents to receive
state-of-the-art digital satellite and local channel programming. For DBS, the
Company exclusively offers DIRECTV® programming packages.  From the DBS or
DTH 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 that is billed to subscribers for
rental of the set-top box and connection to the property satellite network
system, and (iv) occasional other marketing incentives from DIRECTV. Secondly,
the Company offers a Private Cable video service, where analog or digital
satellite television programming can be tailored to the needs of an individual
property and received through normal cable-ready televisions. In Private Cable
deployed properties a bundle of programming services is delivered to the
resident’s cable-ready television without the requirement of a set-top digital
receiver in the residence. Net revenues from Private Cable result from the
difference between the wholesale prices charged by programming providers and the
price we charge subscribers for the private cable programming package. We
provide the DBS, Private Cable and Internet 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. These subscribers are referred to in the Company’s
periodic filings as Bulk DTH or Bulk Choice Advantage (“BCA”) type subscribers
in DIRECTV deployed properties or Bulk PC type subscribers in Private Cable
deployed properties. From subscribers to the Internet service, the Company earns
a monthly Internet access service fee.  Again, in many properties, this
service is provided in bulk and is referred to as Bulk ISP.





STRATEGIC
ALLIANCE WITH DIRECTV





The
Company has had a significant strategic relationship with DIRECTV since
May of 2000.  Most recently, the Company entered into a new
System Operator Agreement with DIRECTV (“Agreement”) effective June 1, 2007.
This Agreement has an initial term of three years with two, two-year automatic
renewal periods upon our achievement of certain subscriber growth goals, with an
automatic extension of the entire Agreement to coincide with the expiration date
of the Company’s latest property access agreement.





Under
this Agreement we receive monthly "residual" fees from DIRECTV based upon the
programming revenue DIRECTV receives from subscribers within the Company's
multi-dwelling unit properties. The Company also receives an "activation fee"
for every new subscriber that activates a DIRECTV commissionable programming
package. The activation fee is paid on a gross activation basis in our choice
and exclusive properties and on a one-time basis in our bulk properties.
Additionally, the Company and DIRECTV have agreed to terms allowing DIRECTV a
"first option" to bid on subscribers at fair market value that the Company may
wish to sell.





On
December 14, 2007, the Company signed a letter agreement with DIRECTV that
allows the Company to receive an upgrade subsidy when it completes a high
definition (“HDTV”) system upgrade on certain of its properties to which the
Company currently is providing DIRECTV services. The Company is required to
submit an invoice for this subsidy to DIRECTV within thirty (30) days after the
upgrade of the property and subscribers are complete. This subsidy is treated as
revenue, similar to the “activation fee” referenced above, except that the
entire amount of the subsidy is recognized immediately. This program was renewed
via a letter agreement dated August 15, 2008 that supports the program through
at least July 31, 2009.





Under the
DIRECTV Agreement, we may not solicit sales or provide equipment for any other
DBS 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. During the fiscal year ended September 30, 2008, revenues
from all DIRECTV services were approximately 61% 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.




4





DIRECTV
offers in excess of 800 entertainment channels of digital quality video and
compact disc quality audio programming and currently transmits via ten high
power satellites. This most recent satellite launch is currently delivering 130
national HDTV channels with 150 expected in 2009 giving DIRECTV the distinct
edge in high definition programming. We believe that DIRECTV’s extensive line up
of high definition programming, international programming, 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 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.
Historically, the MDU market has been served by local franchised cable
television operators and 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, high
      definition television, digital video recorders and bundled
      services.





·
            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.





·
            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.




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 and telecom providers:





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 DBS 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.





Traditional Telephone Companies.  Traditional telephone companies such as Verizon and AT&T
have over the past few years diversified their service offerings to compete with
traditional franchised cable companies in a triple play market. Although their
subscriber base is currently very small, these traditional phone companies are
developing video offerings such as Verizon’s FIOS product. These phone companies
have in the past also been resellers of DIRECTV and Echostar video programming,
however, rarely in the MDU market. Video offerings from traditional phone
companies are now becoming a significant competitor in the MDU market.





5





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 Federal Communication
Commission (“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. SHVIA was essentially extended and re-enacted by the Satellite Home
Viewer Extension and Reauthorization Act (SHVERA) signed in December of
2004.




On
October 31, 2007, the FCC banned the use of exclusivity clauses by franchised
cable companies for the provision of video services to MDU properties. The FCC
noted that 30% of Americans live in MDU properties and that competition has been
stymied due to these exclusivity clauses. The FCC maintains that prohibiting
exclusivity will increase choice and competition for consumers residing in MDUs.
Currently this Order only applies to cable companies subject to Section 628 of
the Communications Act, which does not include DBS and private cable operators
("PCOs") that do not cross public rights-of-way, such as the Company. Although
exempt from this Order, the FCC did reserve judgment on exclusivity clauses used
by DBS companies and PCOs until further discussion and comment can be taken and
evaluated. The IMCC (Independent Multi-Family Communications Council), which is
a trade association comprised of DBS, PCOs, MDU owners and the supporting
industry, is lobbying to keep DBS and PCOs, who do not cross public
rights-of-way, exempt from the Order or any future order. The Company is an
active member of IMCC and is providing assistance in the lobbying effort. The
issue is still unsettled.




We are
not directly subject to rate regulation or certification requirements by the
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 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.




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.




6





Preferential Access Rights.   We generally negotiate exclusive rights (or exclusive
rights to inside wire) 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. In addition to the October 2007 order banning exclusive agreements,
the FCC has also issued an order prohibiting telecommunications service
providers from negotiating exclusive contracts with owners of commercial MDU
properties. Although it is open to question whether the FCC has statutory and
constitutional authority to compel mandatory access for other providers, there
can be no assurance that it will not attempt to do so. 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 High-Speed Internet.   Information or Internet 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





We had
119 employees, all full-time, as of September 30, 2008. None of our
employees are represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.





EXECUTIVE
OFFICERS




Our
executive officers serve at the discretion of the Board. The names of our
executive officers and their ages, titles, and biographies as of September 30,
2008 are set forth below:




Executive
      Officers
            
            Age
            
            Position(s)Sheldon
      Nelson
            
            47
            
            President,
      Chief Executive Officer and DirectorPatrick
      Cunningham
            
            40
            
            Vice
      President, Sales and MarketingBrad
      Holmstrom
            
            43
            
            General
      Counsel and Corporate SecretaryCarmen
      Ragusa, Jr.
            
            60
            
            Vice
      President, Finance and AdministrationsJoe
      Nassau
            
            50
            
            Vice
      President, Operations





Sheldon Nelson,
President.Mr. Nelson, 47, has served as President, Chief
Executive Officer and Chairman of the Board of the Company since
November 1998. Mr. Nelson relinquished his title of Chairman of the Board
in June of 2007. 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 that company into one of Canada’s largest private cable system
operators. Mr. Nelson is a 1983 graduate of Gonzaga University in Spokane,
Washington where he graduated from the School of Business Administration, Magna
cum Laude, and was the recipient of the School of Business Administrations’
Award of Excellence.





Patrick Cunningham, Vice President of
Sales and Marketing. Mr. Cunningham, 40, has been a Vice President with
the Company since 2000.  He has over fifteen years of management experience
focused on the telecommunications industry. Mr. Cunningham was formerly the Vice
President of Distribution and Sales for SkyView World Media. 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.




7





Brad Holmstrom, General Counsel and
Corporate Secretary. Mr. Holmstrom, 43, has been with the Company since
2000 serving as the Company’s legal counsel. Prior to joining the Company, Mr.
Holmstrom was partner in the Kansas City, Missouri office of the law firm
Shughart Thomson & Kilroy, PC.





Carmen Ragusa, Jr., Vice President of
Finance and Administration.Mr. Ragusa, 60, has been with the Company
since 2004. He is a CPA, holds an MBA and brought to the Company over
twenty-five years of experience in both the public and private sectors of the
manufacturing and construction industry, with the last ten years in a senior
financial capacities of Vice President of Finance and Chief Financial Officer in
privately held corporations with $40 to $50 million in recurring annual revenue.
Mr. Ragusa has experience not only in the management of all aspects of
accounting and finance departments, but has made significant contributions in
the areas of business development, financial stability and has assisted in the
implementation of operational strategies that support business development and
financial objectives.





Joe Nassau, Vice President of
Operations.  Mr. Nassau, 50, has been with the Company since June
2005 and is responsible for leading and managing the Company’s Call Center
(sales, customer support and tech support), Subscriber Lifecycle Process
Management, Subscriber Operational Support Systems, Training, Dispatch, and Back
Office operations.  He brings over twenty years of experience in the pay
television and broadband industries in a variety of functional and operational
management roles.  In particular, he led and managed the integration,
growth and operation of HBO’s satellite television call center and back office
operations in Chicago that supported sales and service for over 1 million
subscribers.  He also held key leadership roles in the successful planning,
launch, and deployment of Galaxy Latin America’s DIRECTV services in Latin
America, as well as the highly successful launch of EarthLink’s High-Speed
Internet Service throughout Time Warner Cable’s network nationwide.  Mr.
Nassau holds a BA in Communications from Fordham University and an MBA in
Decision and Information Sciences from the University of Florida.  He also
served as an Infantry Officer in the Unites States Army.





INVESTOR
INFORMATION





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.





Item
      1A.
              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
business of the Company may be
adversely affected by the current economic recession.




The
domestic and international economies are experiencing a significant recession.
This recession has been magnified by the tightening of the credit markets. The
domestic markets may remain depressed for an undeterminable period of time which
could have a material adverse effect on the Company’s revenues and
profits.





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, 2008, it has accumulated losses of $51,664,395. Although the
Company may have profitable operations in fiscal 2009 resulting from the sale of
certain subscribers to CSC Holdings, Inc., it cannot assure that it will achieve
or attain profitability beyond fiscal 2009. 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.




8





The
Company depends upon its relationship with DIRECTV.




The
Company has entered into several agreements with DIRECTV since 2000. Under all
of these agreements the Company may not maintain or market DBS services for any
other provider. Consequently, the Company is totally dependent upon DIRECTV for
its set-top DBS programming service. During the year ended September 30, 2008,
revenues from all DIRECTV services were approximately 61% 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 Agreement with DIRECTV can be
terminated under various circumstances, including, in particular, an uncured
material breach by the Company of the Agreement. Any such termination may have a
material effect 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 be assured 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.





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





The
Company may require additional capital to finance expansion or growth. 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 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. 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 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 traditional phone companies. 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.




9





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 cable television systems. Many cable television operators have made
significant investments to upgrade their systems, 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 or traditional phone companies 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 Chief Executive Officer, Sheldon Nelson, is also acting
as the Company’s Chief Financial Officer. 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.




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 by international terrorism or if the United States
participates in wars or other military action.




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.




10





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 stockholders.





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 generally
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 stockholder
approval, issue preferred stock with dividends, liquidation, conversion, voting
or other rights that 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 stockholder 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 nor 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 affect 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.




11





The
Company may default on its revolving line of credit.





On
September 11, 2006, the Company entered into a Loan and Security Agreement with
FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured
$20,000,000 credit facility (“Credit Facility”) to fund the Company’s subscriber
growth. On June 30, 2008, the Company entered into an Amended and Restated Loan
and Security Agreement with FCC, LLC, d/b/a First Capital, and Full Circle
Funding, LP for a senior secured $10 million increase to its original $20
million revolving five year Credit Facility for a total line of $30 million. The
original terms and conditions of the Credit Facility, previously negotiated and
executed on September 11, 2006 have not changed. There are several terms of
default set forth in the Loan and Security Agreement. Should the Company default
on any of the terms, the balance owed under the Loan and Security Agreement may
be accelerated and the Company may not have further access to the Credit
Facility. In such a case, the Company may have to sell assets to repay the
outstanding balance and scale back its growth considerably.





The
Company’s common stock is currently quoted on the OTC Bulletin Board and is
subject to the Penny Stock rules which makes transactions cumbersome and may
reduce the value of an investment in the Company’s stock.





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 and its bid price is below $5.00 per share. 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.Generally, brokers
may be less willing to execute transactions in securities subject to the "penny
stock" rules. This may make it more difficult for investors to dispose of the
Company’s common stock and may cause a decline in the market value of the common
stock.





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.




If
the Company fails to comply with requirements relating to internal controls over
financial reporting under Section 404 of the Sarbanes-Oxley Act, its
business could be harmed and its stock price could decline.




Rules
adopted by the Securities and Exchange Commission pursuant to Section 404
of the Sarbanes-Oxley Act of 2002 require the Company to assess its internal
controls over financial reporting annually. The rules governing the standards
that must be met for management to assess its internal controls over financial
reporting are complex. They require significant documentation, testing, and
possible remediation of any significant deficiencies in and/or material
weaknesses of its internal controls in order to meet the detailed standards
under these rules. Although the Company has evaluated its internal controls over
financial reporting as effective as of September 30, 2008, it may encounter
unanticipated delays or problems in assessing its internal controls as effective
or in completing assessments by required dates. In addition, the Company cannot
assure that its independent registered public accountants will attest the
internal controls as effective in future fiscal years. If the Company cannot
assess its internal controls as effective, investor confidence and share value
may be negatively impacted.





Item
      1B.
              Unresolved
      Staff Comments





Not
required under Regulation S-K for “smaller reporting companies.”





Item
      2.
              Properties





Our
headquarters are outside New York City 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 14,909
square feet at a current monthly cost of $22,425, expiring July 31, 2010.
We believe that this space is adequate to suit our needs for the foreseeable
future.





We
currently hold a lease for office and warehouse space in Chicago, Illinois for
approximately 4,100 square feet that runs through September 30, 2011 at a
monthly cost of $4,291 per month. This space is adequate to suit our needs for
the foreseeable future in the Chicago metropolitan area.




12





We
currently hold a lease for office and warehouse space in Pompano Beach, Florida
for approximately 4,088 square feet that runs through December 31, 2012 at a
monthly cost of $2,385 per month. This space is adequate to suit our needs for
the foreseeable future in the South Florida area.





In
addition, we carry a short term lease for office/warehouse space in Rockville,
Maryland, outside Washington, DC.  The Company is currently exploring
options for a larger space.





Item
      3.
              Legal
      Proceedings





None.





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





None.





PART II





Item
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity
Securities





Market
Information




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
                
                
                LowDecember 31,
      2006
                
                $
                0.88
                
                
                $
                0.57March 31,
      2007
                
                $
                0.97
                
                
                $
                0.70June 30,
      2007
                
                $
                1.02
                
                
                $
                0.76September 30,
      2007
                
                $
                0.89
                
                
                $
                0.74December 31,
      2007
                
                $
                0.80
                
                
                $
                0.34March 31,
      2008
                
                $
                0.58
                
                
                $
                0.30June 30,
      2008
                
                $
                0.48
                
                
                $
                0.35September 30,
      2008
                
                $
                0.41
                
                
                $
                0.30




Holders




On
December 22, 2008, the closing price for the Company’s common stock on the OTC
Bulletin Board was $0.17 per share. As of December 22, 2008, the Company
had 137 holders of record of its shares of common stock, with an
approximate total of 1,000 shareholders of its common stock.





Dividends




The
Company has not paid any cash dividends and does not anticipate that it will pay
cash dividends on its common stock in the foreseeable future.  Payment of
cash dividends is within the discretion of the Board of Directors and will
depend, among other factors, upon earnings, financial condition and capital
requirements.  There are no restrictions on the payment of dividends,
except by the September 11, 2006 Credit Facility described later in this
Report.





13





Securities
Authorized for Issuance under Equity Compensation Plans




EQUITY
COMPENSATION PLAN INFORMATION


(September 30,
2008)





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 plansEquity
      compensation plans approved by security holders (1)
                  2,004,444
      shares(1)
                  
                  $
                  0.94
                  
                  888,238Equity
      compensation plans not approved by security holders
                  0
                  
                  
                  0
                  
                  0







(1)
            The
      2001 Stock Option Plan was approved by the stockholders on May 10,
      2001, see Note 5 to Consolidated Financial Statements, 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 shares of
common.




Recent
Sales of Unregistered Securities





On
September 11, 2006, MDU Communications International, Inc., and its wholly owned
subsidiary MDU Communications (USA) Inc., entered into a Loan and Security
Agreement and ancillary Transaction Documents with FCC, LLC, d/b/a First
Capital, and Full Circle Funding, LP for a senior secured $20 million revolving
five year Credit Facility. In connection therewith, the Company issued to FCC,
LLC, d/b/a First Capital, a five year warrant to purchase 476,190 shares of the
Company’s common stock at an exercise price of $0.82 per share, issued to Full
Circle Funding, LP a five year warrant to purchase 476,191 shares of the
Company’s common stock at an exercise price of $0.82 per share, and issued to
Morgan Joseph & Co. Inc., who acted as advisor and placement agent, a five
year warrant to purchase 47,619 shares of the Company’s common stock at an
exercise price of $0.82 per share. For the term of the warrants, they are
subject to a Registration Rights Agreement that provides for “demand”
registration within one hundred thirty five days of demand and a four (4%)
percent penalty if not effective within that time period. Thereafter, the
penalty accrues at two (2%) percent per thirty days until effective registration
or one year, whichever is earlier.





In
connection with a Amended and Restated Loan and Security Agreement executed on
June 30, 2008 to the Loan and Security Agreement discussed above, the Company
issued to FCC, LLC, d/b/a First Capital a five year warrant to purchase 375,000
shares of the Company's common stock at an exercise price of $0.60 per share and
issued to Full Circle Funding, LP a five year warrant to purchase 375,000 shares
of the Company's common stock at an exercise price of $0.60 per share. The
warrants are subject to the Registration Rights Agreement discussed
above.





The above
warrants were issued pursuant to exemption from registration found in Rule 506
of Regulation D promulgated under the Securities Act of 1933, as amended, as the
above-mentioned entities are “accredited investors” as such term is defined in
Rule 501 of said Regulation D. Through the date of this filing, there has not
been a “demand” for registration and these warrants have not been exercised and,
therefore, there are no proceeds.





Purchases
of Equity Securities by the Issuer





None.





Item
      6.
              Selected
      Financial Data





Not
required under Regulation S-K for “smaller reporting companies.”





Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation




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. The discussion below should be read together with
the risks to our business as described in Item 1A - Risk Factors.





14




RECENT
DEVELOPMENTS




For the
fiscal year ended September 30, 2008, the Company recognized revenue of
$23,650,725, a 42% increase over the prior fiscal year.  The Company’s
average revenue per unit (“ARPU”) across all billable subscriber types was
$29.55 at fiscal year end, a 13% increase over the ARPU of $26.17 realized at
the end of fiscal 2007. ARPU is calculated by dividing average monthly revenues
for the period (total revenues during the period divided by the number of months
in the period) by average subscribers for the period. The average subscribers
for the period is calculated by adding the number of subscribers as of the
beginning of the period and for each quarter end in the current year or period
and dividing by the sum of the number of quarters in the period plus
one.





More
importantly, the Company generated positive EBITDA (as adjusted, and as defined
below) of $4,334,927 for the fiscal year ended September 30, 2008 as compared to
$250,234 for the prior fiscal year ended September 30, 2007 and negative EBITDA
of $(1,447,923) in fiscal 2006. Adjusted for the gain on sale of subscribers
during the fourth quarter (mentioned below), the Company would still have
reported EBITDA (as adjusted) of $2,474,334 for the fiscal year ending September
30, 2008.





For the
past three quarters, the Company developed and has been implementing a
comprehensive plan to upgrade its properties and current DIRECTV HDTV
subscribers to the newly launched MFH-2 platform and expanded line-up of DIRECTV
HDTV services. HDTV customers across the United States have more than doubled
over the past year and this growth is expected to continue.  On
December 14, 2007, the Company signed a letter agreement with DIRECTV that
allows the Company to receive an upgrade subsidy when it completes a HDTV system
upgrade on certain of its properties to which the Company currently is providing
DIRECTV services. During the fiscal year ended September 30, 2008, the Company
upgraded 17,702 units in 88 properties to the new DIRECTV HDTV platform and had
14,284 units in 77 properties that were work in progress at September 30, 2008,
which have now been completed.  The Company estimates that its capital
expenditures for these property upgrades completed in fiscal 2008 were $1.7
million and anticipates that this capital investment generated approximately
$1.5 million in additional revenue in fiscal 2008 and will result in
approximately $8.2 million in additional revenue over the next three to five
years, not including revenue from anticipated increases in penetration
rates.





During
the fourth fiscal quarter, the Company completed negotiations with DIRECTV for a
second round of financial support for property and subscriber HDTV upgrades.
Under the terms of this new letter agreement, DIRECTV will provide assistance
for the upgrade of an additional 55,000 units within the Company’s portfolio of
properties.  The Company is attempting to take full advantage of this
time-sensitive subsidy.  By the end of the first fiscal quarter of
2009, the Company expects that it will have an additional 30,000 units in
approximately 140 properties upgraded or in the process of upgrade. Once
completed, the Company will implement the second phase of its second round
property upgrade program targeting an additional 25,500 units in approximately
180 properties planned for completion in the second and third fiscal quarters of
2009.  These upgrades are resulting in access agreement extensions and
renewals, increased penetration rates, increased sale of advanced services and
an increase in the Company’s DIRECTV subscriber residual, all of which
positively impact the Company’s financial results.





These
property upgrades to the new DIRECTV HDTV platform are essential as subscribers
and property owners demand state-of-the-art technology and want access to
DIRECTV’s unparalleled comprehensive offering of HDTV programming and services.
DIRECTV currently offers over 130 (moving to 150) HDTV national programming
channels and has HDTV local programming in more than 94% of all U.S. markets.
The continued launch and advertising campaign for this new DIRECTV HDTV
programming and associated services will continue to provide incremental revenue
and improved penetration rates within Company properties. Due mainly to the new
HDTV platform and recent price increases, DIRECTV reported an ARPU increase of
6.31% during its third quarter of 2008 to $83.59 per subscriber.




During
fiscal 2008 the Company invested approximately $5.6 million in capital in its
properties, inclusive of the estimated $1.7 million in capital for completed
upgrades during the year. Net of this upgrade capital, the Company invested $3.9
million, a 65% reduction compared to capital expenditures of $11.3 million
invested in fiscal 2007.  In addition, the Company reduced its
subscriber acquisition capital costs during the year and significantly improved
its ability to fund subscriber growth from cash flow, thus becoming less reliant
on its Credit Facility.  The Company expects this trend to continue in
fiscal 2009.




At the
end of the fourth quarter the Company entered into an asset purchase agreement
with CSC Holdings, Inc. On September 30, 2008, 1,686 video subscribers were
transferred for proceeds of $2,529,000, on November 5, 2008, 1,803 subscribers
were transferred for proceeds of $2,705,500, and on December 17, 2008, 2,064
subscribers were transferred for proceeds of $3,096,000.  The number
of subscribers sold was/is contingent on many outside factors including, but not
limited to, termination agreements.  At each closing, 40% of the
proceeds was held in escrow for seventy days. Additional closings may take
place, however, the Company makes no representation as to the likelihood that
such closings will occur, when or in what amounts. The Company did provide
Internet services to a few of these properties, however, it elected to exclude
this equipment from the asset sale and will redeploy it to other properties in
fiscal 2009.


15




The gain
on sale of subscribers to CSC Holdings in the fourth quarter and the
improvements in operating cash flow and EBITDA (as adjusted), combined with
lower capital expenditures, reduced the Company’s Credit Facility borrowing in
the quarter.  As of September 30, 2008, the Company had utilized
$15,840,367 of its Credit Facility (net of proceeds held in escrow from the
September 30, 2008 asset sale closing to be applied to reduce the Credit
Facility) as compared to $17,539,980 on June 30, 2008.  The Company
expects that the outstanding amount on its $30 million long-term and
non-amortizing Credit Facility will reduce to approximately $10 million
following the full receipt of proceeds from these asset sales.




The
Company plans to seek out and review synergistic asset acquisitions that would
expand its subscriber base in fiscal 2009 and believes that many small private
cable and other operators will continue to struggle during this economic
downturn, if they are not properly capitalized, and will seek an exit strategy.
Several opportunities are being evaluated by Company management; however, the
Company is being cautious with respect to its use of capital for acquisitions in
this economic environment.





Regarding
its Voice over Internet (“VoIP”) service, the Company recently deployed this
service to certain of its properties in a ‘soft’ launch, with a more expanded
launch in the latter part of the first and second fiscal quarters of 2009. To
facilitate the bundling of its video, broadband and VoIP services, the Company
is developing plans to ‘bundle’ its services onto a single billing
platform.  The Company is in discussions with DIRECTV for such billing
integration.





The
Company planned for, and expected, slower subscriber growth in fiscal 2008 due
to (i) its significant commitment, both in human and financial resources, to
upgrade its current properties to the new DIRECTV HDTV programming platform,
(ii) its plan to convert its current properties from low margin private cable
services to higher ARPU DIRECTV bulk services, (iii) a focus on improving its
financial returns from previous capital investment in its portfolio of
properties, and (iv) the sale of a certain number of subscribers to CSC
Holdings.  Net of the sale of subscribers and subscribers deactivated
in certain under-performing low margin Internet and bulk Private Cable
properties, the Company added 1,209 net new subscribers during fiscal 2008 to
end the fiscal year with 65,552 subscribers. The Company expects to increase its
rate of subscriber growth later in fiscal 2009 as its HDTV property upgrade
program approaches completion.  A breakdown of the Company’s
subscriber base as of September 30, 2008 is as follows:


Service
      Type
                                  
                                  Subscribers
                                    as of
                                    Sept. 30, 2007
                                  
                                  Subscribers
                                    as of
                                    Dec. 31, 2007
                                  
                                  Subscribers
                                    as of
                                    Mar. 31, 2008
                                  
                                  Subscribers
                                    as of
                                    June 30, 2008
                                  
                                  Subscribers
                                    as of
                                    Sept. 30, 2008Bulk
      DTH -DIRECTV
                                  
                                  
                                  14,196
                                  
                                  14,808
                                  
                                  
                                  15,016
                                  
                                  15,249
                                  
                                  
                                  15,382DTH
      -DIRECTV Choice/Exclusive
                                  
                                  
                                  10,034
                                  
                                  10,650
                                  
                                  
                                  11,269
                                  
                                  11,547
                                  
                                  
                                  10,790Bulk
      Private Cable
                                  
                                  
                                  20,912
                                  
                                  20,564
                                  
                                  
                                  20,084
                                  
                                  20,179
                                  
                                  
                                  17,194Private
      Cable Choice or Exclusive
                                  
                                  
                                  2,684
                                  
                                  3,211
                                  
                                  
                                  3,369
                                  
                                  2,270
                                  
                                  
                                  1,952Bulk
      BCA -DIRECTV
                                  
                                  
                                  7,573
                                  
                                  7,921
                                  
                                  
                                  8,527
                                  
                                  8,687
                                  
                                  
                                  10,337Bulk
      ISP
                                  
                                  
                                  5,403
                                  
                                  5,863
                                  
                                  
                                  6,173
                                  
                                  6,394
                                  
                                  
                                  5,911ISP
      Choice or Exclusive
                                  
                                  
                                  3,541
                                  
                                  3,875
                                  
                                  
                                  4,041
                                  
                                  3,784
                                  
                                  
                                  3,956Voice
                                  
                                  
                                  —
                                  
                                  73
                                  
                                  
                                  39
                                  
                                  32
                                  
                                  
                                  30Total
      Subscribers
                                  
                                  
                                  64,343
                                  
                                  66,965
                                  
                                  
                                  68,518
                                  
                                  68,142
                                  
                                  
                                  65,552




As of
September 30, 2008, the Company had 16 properties and 6,981 units in
work-in-progress (“WIP”). Of the current WIP, 4,361 units are in new
construction properties and 2,620 units are in existing conversion properties.
The Company defines its WIP as the number of units in properties where
construction has begun on a signed access agreement property through the
conclusion of a phase-in schedule or a marketing campaign, at which time the
property exits WIP. WIP is not reduced by the number of units turned billable
during any given quarter.As of September 30, 2008,
the Company had 1,243 “under contract” subscribers in WIP that the Company
expects will become “billable” subscribers in the next few
quarters.





The
Company continues to concentrate its subscriber growth efforts on bulk and
exclusive type service deployments. Bulk contracts (both video, Internet or an
increasingly popular bundle of the two services) provide guaranteed long-term
revenue streams that support regional operations, which in turn, drive future
subscriber growth. The Company’s emphasis on developing this market segment has
resulted in a 18% increase in combined Bulk DTH and Bulk Choice Advantage (BCA)
subscriber growth and a 10% increase in combined Bulk and Choice/Exclusive
broadband ISP subscriber growth over the past fiscal year. The Company will
continue to focus on bulk deployments in fiscal 2009. Property owners seeking
choice or non-exclusive competitive services are generally being provided
proposals that include the owner paying for all or part of the system
installation. The Company believes that this strategy serves two important
purposes, first, it funds certain capital costs, and second, it provides owners
with an incentive to support the Company’s marketing efforts in the properties
as the owners may receive a share of the earned revenue. Collectively, this
emphasis on service types should positively impact ARPU, EBITDA (as adjusted),
subscriber growth and the Company’s subscriber penetration rates, while
maintaining or reducing its subscriber acquisition capital
costs.


16


Use
of Non-GAAP Financial Measures




The
Company uses the common performance gauge of “EBITDA” (as adjusted by the
Company) to evidence earnings exclusive of mainly noncash events, as is common
in the technology, and particularly the cable and telecommunications,
industries. EBITDA (as adjusted) is an important gauge because the Company, as
well as investors who follow this industry, frequently use it as a measure of
financial performance. The most comparable GAAP reference is simply the removal
from net income or loss of - in the Company's case - interest, depreciation,
amortization and noncash charges related to its shares, warrants and stock
options. The Company adjusts EBITDA by then adding back any provision for bad
debt and inventory reserve. EBITDA (as adjusted) 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 (as adjusted) 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 (as
adjusted) of the Company to our consolidated net loss as computed under
accounting principles generally accepted in the United States of
America:




For the years ended September 30,2008
                
                
                2007
                
                
                2006EBITDA  (as
      adjusted)
                
                $
                4,334,927
                
                
                $
                250,234
                
                
                $
                (1,447,923
                )Interest
      expense
                
                
                (1,834,667
                )
                
                
                (863,206
                )
                
                
                (18,141
                )Deferred
      finance costs and debt discount amortization (interest
      expense)
                
                
                (322,968
                )
                
                
                (195,873
                )
                
                
                (7,415
                )Provision
      for doubtful accounts
                
                
                (133,486
                )
                
                
                (191,989
                )
                
                
                (107,044
                )Provision
      for inventory reserve
                
                
                —
                
                
                
                —
                
                
                
                (57,977
                )Depreciation
      and amortization
                
                
                (6,578,842
                )
                
                
                (5,384,562
                )
                
                
                (4,391,640
                )Share-based
      compensation expense - employees
                
                
                (304,732
                )
                
                
                (822,525
                )
                
                
                (1,048,856
                )Compensation
      expense for issuance of common stock through employee stock purchase
      plan
                
                
                (19,327
                )
                
                
                (19,808
                )
                
                
                (50,290
                )Compensation
      expense for issuance of common stock for employee bonuses
                
                
                (39,357
                )
                
                
                (37,240
                )
                
                
                (99,833
                )Compensation
      expense for issuance of common stock for employee services
                
                
                (8,640
                )
                
                
                (33,945
                )
                
                
                (83,634
                )Compensation
      expense accrued to be settled through the issuance of common
      stock
                
                
                (208,585
                )
                
                
                (73,120
                )
                
                
                (299,907
                )Compensation
      expense through the issuance of restricted common stock for services
      rendered
                
                
                (70,206
                )
                
                
                (73,500
                )
                
                
                —Share-based
      compensation expense - nonemployees
                
                
                (13,500
                )
                
                
                (63,125
                )
                
                
                (398,394
                )Net
      loss
                
                $
                (5,199,383
                )
                
                $
                (7,508,659
                )
                
                $
                (8,011,054
                )




RESULTS
OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007





For the year ended
                          September 30, 2008
                        
                        
                        For the year ended
                          September 30, 2007
                        
                        
                        Change
                          ($)
                        
                        
                        Change
                          (%)REVENUE
                        
                        $
                        23,650,725
                        
                        
                        
                        100
                        %
                        
                        $
                        16,658,392
                        
                        
                        
                        100
                        %
                        
                        $
                        6,992,333
                        
                        
                        
                        42
                        %Direct
      costs
                        
                        
                        10,076,041
                        
                        
                        
                        43
                        %
                        
                        
                        7,266,595
                        
                        
                        
                        44
                        %
                        
                        
                        2,809,446
                        
                        
                        
                        39
                        %Sales
      expenses
                        
                        
                        1,266,694
                        
                        
                        
                        5
                        %
                        
                        
                        1,296,570
                        
                        
                        
                        7
                        %
                        
                        
                        (29,876
                        )
                        
                        
                        -2
                        %Customer
      service and operating expenses
                        
                        
                        5,940,525
                        
                        
                        
                        25
                        %
                        
                        
                        4,784,931
                        
                        
                        
                        29
                        %
                        
                        
                        1,155,594
                        
                        
                        
                        24
                        %General
      and administrative expenses
                        
                        
                        4,692,763
                        
                        
                        
                        20
                        %
                        
                        
                        4,292,991
                        
                        
                        
                        26
                        %
                        
                        
                        399,772
                        
                        
                        
                        9
                        %Depreciation
      and amortization
                        
                        
                        6,578,842
                        
                        
                        
                        28
                        %
                        
                        
                        5,384,562
                        
                        
                        
                        32
                        %
                        
                        
                        1,194,280
                        
                        
                        
                        22
                        %OPERATING
      LOSS
                        
                        
                        (4,904,140
                        )
                        
                        
                        -21
                        %
                        
                        
                        (6,367,257
                        )
                        
                        
                        -38
                        %
                        
                        
                        1,463,117
                        
                        
                        
                        -23
                        %Total
      other expense
                        
                        
                        (295,243
                        )
                        
                        
                        -1
                        %
                        
                        
                        (1,141,402
                        )
                        
                        
                        -7
                        %
                        
                        
                        846,159
                        
                        
                        
                        -74
                        %NET
      LOSS
                        
                        $
                        (5,199,383
                        )
                        
                        
                        -22
                        %
                        
                        $
                        (7,508,659
                        )
                        
                        
                        -45
                        %
                        
                        $
                        2,309,276
                        
                        
                        
                        -31
                        %


17


Net
Loss.     Primarily as a result of the matters
discussed below, and noncash charges for the years ended September 30, 2008 and
2007 of $7,699,643 and $6,895,687, respectively, we reported a net loss of
$5,199,383 for the year ended September 30, 2008, compared to a net loss of
$7,508,659 for the year ended September 30, 2007.




Revenues.   Revenue for the year ended September 30, 2008 increased
42% to $23,650,725, compared to revenue of $16,658,392 for the year ended
September 30, 2007. The revenue increase is directly attributable to the (i)
full year of revenue derived from the Multiband subscriber acquisition, (ii)
product shift to subscribers that produce higher recurring revenue streams,
(iii) increase in the number of subscribers to Internet services, and (iv) 145%
increase in installation, wiring and other revenue due mainly to the DIRECTV
HDTV upgrade subsidy that occurred in fiscal 2008. As discussed above, and as a
result of the continuation of the DIRECTV upgrade subsidy into fiscal 2009, and
despite the sale of subscribers and resulting loss of revenue, we expect revenue
to remain constant into fiscal 2009. Revenue for the years ended September 30,
2008 and 2007 was derived, as a percent, from the following
sources:





For the year ended
                    September 30, 2008
                  
                  
                  For the year ended
                    September 30, 2007Private
      cable programming revenue
                  
                  $
                  4,862,851
                  
                  
                  
                  20
                  %
                  
                  $
                  3,878,558
                  
                  
                  
                  23
                  %DTH
      programming revenue and subsidy
                  
                  
                  13,048,076
                  
                  
                  
                  55
                  %
                  
                  
                  9,471,586
                  
                  
                  
                  57
                  %Internet
      access fees
                  
                  
                  2,740,902
                  
                  
                  
                  12
                  %
                  
                  
                  2,084,989
                  
                  
                  
                  13
                  %Installation
      fees, wiring  and other revenue
                  
                  
                  2,998,896
                  
                  
                  
                  13
                  %
                  
                  
                  1,223,259
                  
                  
                  
                  7
                  %Total
      revenue
                  
                  $
                  23,650,725
                  
                  
                  
                  100
                  %
                  
                  $
                  16,658,392
                  
                  
                  
                  100
                  %




The
increase in the DTH programming revenue and subsidy is the result of the Company
continuing to emphasize the conversion of low average revenue Private Cable
subscribers to DIRECTV service subscribers. During the year ended September 30,
2008, approximately 1,500 subscribers were converted from Private Cable to
DIRECTV services. This emphasis is expected to continue in fiscal
2009.





Direct Costs.   Direct costs are comprised of programming costs,
monthly recurring Internet broadband connections and costs relating directly to
installation services. Direct costs increased to $10,076,041 for the year ended
September 30, 2008, as compared to $7,266,595 for the year ended September 30,
2007, primarily as a result of the increase in the number of subscribers over
the twelve months as a whole from the prior period and the impact of recognizing
a full year of programming costs derived from the mostly Private Cable Multiband
subscriber acquisition in July 2007. While we expect a proportionate
increase in direct costs as our subscriber growth continues, direct costs are
linked to the type of subscribers we add and Choice and Exclusive DTH DIRECTV
subscribers, which we are attempting to increase, have no associated programming
cost. Direct costs should continue to decrease as a percent of revenue in fiscal
2009.





Sales Expenses. Sales expenses decreased slightly to $1,266,694 compared to
$1,296,570 for the years ended September 30, 2008 and 2007, respectively,
inclusive of noncash charges in fiscal 2008 of $12,240, nil in fiscal 2007, a 2%
reduction in expense as a percent of revenue. Although new marketing initiatives
to increase our subscriber base and advertise advanced services are continuing,
we expect a decrease in sales expense as a percent of revenue to continue in
fiscal 2009.





Customer Service
and Operating Expenses.   Customer service and operating
expenses are comprised of expenses related to the Company’s call center,
technical support, project management and general operations. Customer service
and operating expenses were $5,940,525 and $4,784,931 for the years ended
September 30, 2008 and 2007, respectively, inclusive of noncash charges of
$4,278 and $61,446, respectively, a 4% decrease as a percent of revenue. These
expenses are expected to increase in dollars in fiscal 2009 primarily as the
result of (i) the launch of new DIRECTV HDTV services in existing and new
properties, (ii) an increase in our customer service quality levels, and (iii)
positioning the Company to expand its services to a larger subscriber base in
the future. Despite this dollar increase, the Company anticipates these expenses
to decrease as a percent of revenue in fiscal 2009. A breakdown of customer
service and operating expenses is as follows:





Year ended
                      September 30, 2008
                    
                    
                    Year ended
                      September 30, 2007Call
      center expenses
                    
                    $
                    1,695,709
                    
                    
                    
                    28
                    %
                    
                    $
                    1,601,111
                    
                    
                    
                    33
                    %General
      operation expenses
                    
                    
                    1,920,822
                    
                    
                    
                    32
                    %
                    
                    
                    1,461,249
                    
                    
                    
                    31
                    %Property
      system maintenance expenses
                    
                    
                    2,323,994
                    
                    
                    
                    40
                    %
                    
                    
                    1,722,571
                    
                    
                    
                    36
                    %Totals
                    
                    $
                    5,940,525
                    
                    
                    
                    100
                    %
                    
                    $
                    4,784,931
                    
                    
                    
                    100
                    %





18


The
increase in property system maintenance expense was due mainly to (i)
significant maintenance work on the approximately 180 properties acquired from
Multiband at the end of fiscal 2007, and (ii) a general increase in service
quality levels.





General and
Administrative Expenses.General and administrative expenses increased
slightly to $4,692,763 from $4,292,991 for the years ended September 30, 2008
and 2007, respectively, with total noncash charges included of $781,315 and
$1,253,806, respectively, described below:





Years ended September 30,2008
                      
                      
                      2007Total
      general and administrative expense
                      
                      $
                      4,692,763
                      
                      
                      $
                      4,292,991Noncash charges:Share
      based compensation - nonemployees
                      
                      
                      13,500
                      
                      
                      
                      63,125Share
      based compensation – employees (1)
                      
                      
                      304,732
                      
                      
                      
                      822,525Compensation
      expense through the issuance of restricted common stock for services
      rendered
                      
                      
                      70,206
                      
                      
                      
                      73,500Excess
      discount for the issuance of stock under stock purchase
    plan
                      
                      
                      19,327
                      
                      
                      
                      19,808Issuance
      of common stock for bonuses
                      
                      
                      36,064
                      
                      
                      
                      11,973Provision
      for compensation expense settled through the issuance of common
      stock
                      
                      
                      204,000
                      
                      
                      
                      70,886Bad
      debt provision
                      
                      
                      133,486
                      
                      
                      
                      191,989Total
      noncash charges
                      
                      
                      781,315
                      
                      
                      
                      1,253,806Total
      general and administrative expense net of noncash charges
                      
                      $
                      3,911,448
                      
                      
                      $
                      3,039,185Percent
      of revenue
                      
                      
                      17
                      %
                      
                      
                      18
                      %





(1)
            The
      Company recognized noncash share-based compensation expense for employees
      based upon the fair value at the grant dates for awards to employees for
      the years ended September 30, 2008 and 2007, amortized over the requisite
      vesting period, of $304,732 and $822,525, respectively. The total
      stock-based compensation expense not yet recognized and expected to vest
      over the next twenty months is approximately
  $110,000.





Excluding
the $781,315 and $1,253,806 in noncash charges from the years ended September
30, 2008 and 2007, respectively, general and administrative expenses were
$3,911,448 (17% of revenue) compared to $3,039,185 (18% of revenue). Although we
anticipate general and administrative expenses to increase in dollars, we expect
these expenses to decrease as a percent of revenue in fiscal
2009.





Other Noncash
Charges.  Depreciation and amortization expenses increased
from $5,384,562 during the fiscal year ended September 30, 2007 to $6,578,842
during the fiscal year ended September 30, 2008.  The increase in
depreciation and amortization is associated with additional equipment being
deployed and other intangible assets that were acquired over the prior
period.  Interest expense included noncash charges of $322,968 for the
amortization of deferred finance costs and debt discount.





Other Income,
Net.On September 30, 2008, we sold 1,686 subscribers to CSC Holdings,
Inc. for $2,529,000. The total gain on the sale of customers and the related
property and equipment was $1,860,593. During the year ended September 30, 2008,
interest expense significantly increased to $2,157,635, due mainly to an
additional $971,461 in interest expense related to the Credit
Facility.





On May
31, 2007, we sold 163 subscribers to the Continental Group Inc. for $80,715. The
total gain on the sale of the customers and the related property and equipment
was $14,245. Additionally, on September 1, 2007, a property acquired from
another service provider containing 536 subscribers terminated their contract
prior to expiration pursuant to a certain provision of Florida condominium law
resulting in a loss of $124,297. During the year ended September 30, 2007,
interest expense increased to $1,059,079 due mainly to $837,917 in interest
expenses related to the Credit Facility.


19


RESULTS
OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2007 AND 2006





For the year ended
                      September 30, 2007
                    
                    
                    For the year ended
                      September 30, 2006
                    
                    
                    Change
                      ($)
                    
                    
                    Change
                      (%)REVENUE
                    
                    $
                    16,658,392
                    
                    
                    
                    100
                    %
                    
                    $
                    13,366,205
                    
                    
                    
                    100
                    %
                    
                    $
                    3,292,187
                    
                    
                    
                    25
                    %Direct
      costs
                    
                    
                    7,266,595
                    
                    
                    
                    44
                    %
                    
                    
                    5,307,770
                    
                    
                    
                    40
                    %
                    
                    
                    1,958,825
                    
                    
                    
                    37
                    %Sales
      expenses
                    
                    
                    1,296,570
                    
                    
                    
                    8
                    %
                    
                    
                    1,629,228
                    
                    
                    
                    12
                    %
                    
                    
                    (332,658
                    )
                    
                    
                    -20
                    %Customer
      service and operating expenses
                    
                    
                    4,784,931
                    
                    
                    
                    29
                    %
                    
                    
                    4,762,336
                    
                    
                    
                    36
                    %
                    
                    
                    22,595
                    
                    
                    
                    0
                    %General
      and administrative expenses
                    
                    
                    4,292,991
                    
                    
                    
                    25
                    %
                    
                    
                    5,389,638
                    
                    
                    
                    40
                    %
                    
                    
                    (1,096,647
                    )
                    
                    
                    -20
                    %Depreciation
      and amortization
                    
                    
                    5,384,562
                    
                    
                    
                    32
                    %
                    
                    
                    4,391,640
                    
                    
                    
                    33
                    %
                    
                    
                    992,922
                    
                    
                    
                    23
                    %OPERATING
      LOSS
                    
                    
                    (6,367,257
                    )
                    
                    
                    -38
                    %
                    
                    
                    (8,114,407
                    )
                    
                    
                    -61
                    %
                    
                    
                    1,747,150
                    
                    
                    
                    -22
                    %Total
      other income (expense)
                    
                    
                    (1,141,402
                    )
                    
                    
                    -7
                    %
                    
                    
                    103,353
                    
                    
                    
                    1
                    %
                    
                    
                    (1,244,755
                    )
                    
                    
                    -1204
                    %NET
      LOSS
                    
                    $
                    (7,508,659
                    )
                    
                    
                    -45
                    %
                    
                    $
                    (8,011,054
                    )
                    
                    
                    -60
                    %
                    
                    $
                    502,395
                    
                    
                    
                    -6
                    %





Net
Loss.     Primarily as a result of the matters
discussed below, and noncash charges for the years ended September 30, 2007 and
2006 of $6,895,687 and $6,537,575, respectively, we reported a net loss of
$7,508,659 for the year ended September 30, 2007, compared to a net loss of
$8,011,054 for the year ended September 30, 2006.




Revenues.   Revenue for the year ended September 30, 2007 increased
25% to $16,658,392 compared to revenue of $13,366,205 for the year ended
September 30, 2006. The revenue increase was directly attributable to the (i)
38% increase in the number of subscribers between the two periods, including
approximately $355,000 in revenue derived from the new Multiband subscribers,
(ii) product shift to subscribers that produce higher recurring revenue streams,
(iii) increase in the number of subscribers to Internet services, and (iv) 39%
increase in installation revenue. Revenue for the years ended September 30,
2007 and 2006 was derived, as a percent, from the following
sources:





For the year ended
                  September 30, 2007
                
                
                For the year ended
                  September 30, 2006Private
      cable programming revenue
                
                $
                3,878,558
                
                
                
                23
                %
                
                $
                3,825,983
                
                
                
                29
                %DTH
      programming revenue and subsidy
                
                
                9,471,586
                
                
                
                57
                %
                
                
                7,150,658
                
                
                
                53
                %Internet
      access fees
                
                
                2,084,989
                
                
                
                13
                %
                
                
                1,508,117
                
                
                
                11
                %Installation
      fees, wiring and other revenue
                
                
                1,223,259
                
                
                
                7
                %
                
                
                881,447
                
                
                
                7
                %Total
      revenue
                
                $
                16,658,392
                
                
                
                100
                %
                
                $
                13,366,205
                
                
                
                100
                %





The shift
between the revenue streams is the result of the Company continuing to emphasize
the conversion of low average revenue Private Cable subscribers to DIRECTV
service subscribers. During the year ended September 30, 2007, approximately
2,000 subscribers were converted from Private Cable to DIRECTV
services.





Direct Costs.   Direct costs are comprised of programming costs,
monthly recurring Internet broadband connections and costs relating directly to
installation services. Direct costs increased to $7,266,595 for the year ended
September 30, 2007, as compared to $5,307,770 for the year ended September 30,
2006, primarily as a result of the increase in the number of subscribers over
the twelve months as a whole from the prior period.





Sales Expenses. Sales expenses were $1,296,570 and $1,629,228 for the years ended
September 30, 2007 and 2006, respectively, a 4% reduction in expense as a
percent of revenue. The decrease in sales expenses primarily resulted from the
elimination of one time charges from previous regional expansion and the
transfer of certain personnel into operational roles during fiscal
2006.





Customer Service
and Operating Expenses.   Customer service and operating
expenses are comprised of expenses related to the Company’s call center,
technical support, project management and general operations. Customer service
and operating expenses were $4,784,931 and $4,762,336 for the years ended
September 30, 2007 and 2006, respectively, inclusive of noncash charges of
$61,446 and $46,229, respectively, a 7% decrease as a percent of revenue.
Certain personnel and expense reduction initiatives were implemented to achieve
positive EBITDA (as adjusted). These expenses remained comparable to the same
period ended September 30, 2006. A breakdown of customer service and operating
expenses is as follows:





20





Year ended
                          September 30, 2007
                        
                        
                        Year ended
                          September 30, 2006Call
      center expenses
                        
                        $
                        1,601,111
                        
                        
                        
                        33
                        %
                        
                        $
                        1,718,168
                        
                        
                        
                        36
                        %General
      operation expenses
                        
                        
                        1,461,249
                        
                        
                        
                        31
                        %
                        
                        
                        1,388,743
                        
                        
                        
                        29
                        %Property
      system maintenance expenses
                        
                        
                        1,722,571
                        
                        
                        
                        36
                        %
                        
                        
                        1,655,425
                        
                        
                        
                        35
                        %Total
      customer service and operating expense
                        
                        $
                        4,784,931
                        
                        
                        
                        100
                        %
                        
                        $
                        4,762,336
                        
                        
                        
                        100
                        %





General and
Administrative Expenses.General and administrative expenses decreased to
$4,292,991 from $5,389,638 for the years ended September 30, 2007 and 2006,
respectively, inclusive of total noncash charges of $1,253,806 and $2,099,706,
described below:




Years ended September 30,2007
                            
                            
                            2006Total
      general and administrative expense
                            
                            $
                            4,292,991
                            
                            
                            $
                            5,389,638Noncash
      charges:Share
      based compensation – nonemployees (1)
                            
                            
                            63,125
                            
                            
                            
                            398,394Share
      based compensation – employees (1)
                            
                            
                            822,525
                            
                            
                            
                            1,048,856Compensation
      expense through the issuance of restricted common stock for services
      rendered
                            
                            
                            73,500
                            
                            
                            
                            —Excess
      discount for the issuance of stock under employee stock purchase
      plan
                            
                            
                            19,808
                            
                            
                            
                            50,290Issuance
      of common stock for bonuses
                            
                            
                            11,973
                            
                            
                            
                            99,833Issuance
      of common stock for wages
                            
                            
                            —
                            
                            
                            
                            83,634Provision
      for compensation expense settled through the issuance of common
      stock
                            
                            
                            70,886
                            
                            
                            
                            253,678Bad
      debt provision
                            
                            
                            191,989
                            
                            
                            
                            107,044Inventory
      reserve provision
                            
                            
                            —
                            
                            
                            
                            57,977Total
      noncash charges
                            
                            
                            1,253,806
                            
                            
                            
                            2,099,706Total
      general and administrative expense, net of noncash charges
                            
                            $
                            3,039,185
                            
                            
                            $
                            3,289,932General
      and administrative expense, net of noncash charges, as a percent of
      revenue
                            
                            
                            18
                            %
                            
                            
                            25
                            %





(1)
            Effective
      October 1, 2005, the Company was required to adopt the provisions of SFAS
      123R which revised SFAS 123 and eliminated the option the Company had been
      using to account for options under the intrinsic value method pursuant to
      APB 25 in its historical financial statements. The pro forma disclosures
      previously permitted under SFAS 123 are no longer an alternative to
      financial statement recognition. As a result of adopting the provisions of
      SFAS 123R, the Company recognized noncash share-based compensation expense
      for employees based upon the fair value at the grant dates for awards to
      employees for the years ended September 30, 2007 and 2006 amortized over
      the requisite vesting period of $822,525 and $1,048,856,
      respectively.





Excluding
$1,253,806 and $2,099,706 in noncash charges from the years ended September 30,
2007 and 2006, respectively, general and administrative expenses were $3,039,185
(18% of revenue), compared to $3,289,932 (25% of revenue).





Other Noncash
Charges.  Depreciation and amortization expenses increased
from $4,391,640 during the fiscal year ended September 30, 2006 to $5,384,562
during the fiscal year ended September 30, 2007.  The increase in
depreciation and amortization is associated with additional equipment being
deployed and other intangible assets that were acquired over the prior
period.  Interest expense included noncash charges of $195,873 for the
amortization of deferred finance costs and debt discount and is higher due to
the new Credit Facility which was entered into on September 11,
2006.





Other Income,
Net.On May 31, 2007, the Company sold 163 subscribers to the Continental
Group Inc. for $80,715. The total gain on the sale of the customers and the
related property and equipment was $14,245. Additionally, on September 1, 2007,
a property acquired from another service provider containing 536 subscribers
terminated their contract prior to expiration pursuant to a certain provision of
Florida condominium law resulting in a loss of $124,297. The Company did not
sell any subscribers in fiscal 2006. During the year ended September 30, 2007,
interest income was $27,729 and interest expense increased to $1,059,079, due
mainly to $837,917 in interest expense related to the Credit Facility. Interest
expense for the year ended September 30, 2006 was $25,556.


21





LIQUIDITY
AND CAPITAL RESOURCES





During
the years ended September 30, 2008, 2007 and 2006, we recorded a net
loss of $5,199,383, $7,508,659, and $8,011,054, respectively. We had negative
cash flows from operating activities of $688,434, $567,402, and $1,992,912
during the years ended September 30, 2008, 2007 and 2006, respectively.
However, the cause for negative cash flow from operating activities for the year
ended September 30, 2008 was primarily a result of the increase in receivables
due to $1,011,600 being held in escrow resulting from the sale of subscribers
and related property and equipment to CSC Holdings, Inc. on September 30, 2008.
At September 30, 2008, we had an accumulated deficit of
$51,664,395.





On
September 11, 2006, the Company entered into a Loan and Security Agreement with
FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured
$20 million revolving five year Credit Facility to fund the Company's subscriber
growth. The Credit Facility was specifically designed to provide a long-term
funding solution to the Company’s subscriber growth capital requirements. The
$20 million Credit Facility (subject to a borrowing base) is a non-amortizing
five-year term facility. The size of the Credit Facility is ultimately
determined by factors relating to the present value of the Company’s future
revenue as determined by its access agreements. Therefore, as the Company’s
subscriber base increases through the signing of new access agreements and
renewal of existing access agreements, the Company’s borrowing base potential
increases concurrently. Given the Company’s focus on both EBITDA (as adjusted)
and subscriber growth, an increasing percentage of future subscriber acquisition
costs should be funded from earnings, despite the availability of more capital
through an increasing borrowing base. On June 30, 2008, the Company entered into
an Amended and Restated Loan and Security Agreement with the same parties for a
$10 million increase to the $20 million Credit Facility. The senior secured
Credit Facility, of now up to $30 million, has a new five-year term under which
the Company will pay interest on actual principal drawn during the full term of
the agreement.




The
Company is under no obligation to draw any of the new increments. To access the
Credit Facility above $20 million, the Company must have (i) positive EBITDA, on
either a trailing 12 month basis or a pro-forma basis, of $1 million, and (ii)
60,000 subscribers. To access the Credit Facility above $25 million, the Company
must have (i) positive EBITDA, on either a trailing 12 month basis or pro-forma
basis, of $3 million, and (ii) 65,000 subscribers. The original material terms
and conditions of the Credit Facility, previously negotiated and executed on
September 11, 2006, have not changed.





The
Credit Facility is secured by the Company’s cash and temporary investments,
accounts receivable, inventory, access agreements and certain property, plant
and equipment. The Credit Facility contains covenants limiting the Company’s
ability to, without the prior written consent of FCC, LLC, d/b/a First Capital,
and Full Circle Funding, LP, among other things:




·
            
            incur
      other indebtedness;




·
            
            incur
      other liens;




·
            
            undergo
      any fundamental changes;




·
            
            engage
      in transactions with affiliates;




·
            
            issue
      certain equity, grant dividends or repurchase
  shares;




·
            
            change
      our fiscal periods;




·
            
            enter
      into mergers or consolidations;




·
            
            sell
      assets; and




·
            
            prepay
      other debt.





Regarding
the sale transactions with CSC Holdings, FCC, LLC, d/b/a First Capital, and Full
Circle Funding, LP provided their written consent.  The Credit
Facility also includes certain events of default, including nonpayment of
obligations, bankruptcy and change of control. Borrowings will generally be
available subject to a borrowing base and to the accuracy of all representations
and warranties, including the absence of a material adverse change and the
absence of any default or event of default.


22


The
Credit Facility has a term of five years with interest payable monthly only on
the principal outstanding and is specially tailored to the Company's needs by
being divided into six $5 million increments. The Company is under no obligation
to draw an entire increment at one time. The first $5 million increment carries
an interest rate of prime rate plus 4.1%, the second $5 million at prime plus
3%, the third $5 million at prime plus 2%, the fourth $5 million at prime plus
1%, and the new $10 million in additional Credit Facility is also divided into
two $5 million increments with the interest rate on these increments being prime
plus 1% to 4%, depending on the Company's ratio of EBITDA to the total
outstanding loan balance. As defined in the Credit Facility, “prime” shall
be a minimum of 7.75%. As of September 30, 2008, the Company had drawn into the
fourth increment and has borrowed a total of $16,851,967 under the Credit
Facility, which is due on June 30, 2013. The Company believes that the
combination of revenues and the remaining available balance under the Credit
Facility will provide it with the needed capital for operations as planned
through September 30, 2009.





Cash Position.   At September 30, 2008, 2007 and 2006 we had cash
and cash equivalents of $60,634, $767,296, and $3,238,939, respectively. As of
September 30, 2008, we have adequate financial resources from our cash position
and from the $30 million Credit Facility to fund operations.




Operating
Activities.    Our operations used net cash of $688,434,
$567,402, and $1,992,912 for the years ended September 30, 2008, 2007 and 2006,
respectively. Net cash used from operating activities included a decrease of
$400,286, an increase of $819,314, and a decrease of $122,878 in our accounts
payable and other accrued liabilities during the years ended September 30, 2008,
2007 and 2006, respectively.  Additionally, during the years ended
September 30, 2008, 2007 and 2006 the net increase in accounts receivable was
$880,089, $931,044, and $186,825, respectively.  The increase in accounts
and other receivables for the year ended September 30, 2008 was primarily the
result of $1,011,600 being held in escrow from the sale of subscribers and
related property and equipment to CSC Holdings, Inc. on September 30, 2008. Our
net losses of $5,199,383, $7,508,659, and $8,011,054 for the years ended
September 30, 2008, 2007 and 2006, respectively, were significantly offset by
net noncash charges associated primarily with depreciation and amortization and
other non-cash charges associated with stock options and warrants of $7,699,643,
$6,895,687, and $6,537,575 for the same periods.





Investing
Activities.  During the year ended September 30, 2008, we
purchased $5,310,235 of equipment, installed, relating to subscriber additions
and paid $267,181 for the acquisition of other intangible assets. Additionally,
we received proceeds of $2,529,000 (net of the $1,011,600 escrowed receivable
being held for seventy days) for the sale of customers and telecommunications
equipment.





During
the year ended September 30, 2007, we purchased $8,053,457 of equipment,
installed, relating to subscriber additions and paid $3,276,742 for the
acquisition of other intangible assets. Additionally, we received proceeds of
$80,715 for the sale of customers and telecommunications equipment.





During
the year ended September 30, 2006, we purchased $7,549,353 of equipment,
installed, relating to subscriber additions and paid $42,864 for the acquisition
of other intangible assets. No assets were sold in fiscal 2006.





Financing
Activities.During the year ended September 30, 2008, we used
$51,719 for the repayment of certain notes payable and $81,039 for capital lease
obligations.  Equity financing activity provided $18,422 from 45,134 shares
of common stock purchased by employees through the Employee Stock Purchase Plan.
Additionally, we incurred $265,000 in deferred finance costs and borrowed
$3,409,524 through the Credit Facility.





During
the year ended September 30, 2007, we used $48,838 for the repayment of certain
notes payable and $73,879 for capital lease obligations.  Equity financing
activity provided $83,504 through the issuance of 401,384 shares of common stock
from the exercise of options and $21,582 from 32,003 shares of common stock
purchased by employees through the Employee Stock Purchase Plan. Additionally,
we incurred $200,000 in deferred finance costs and borrowed $9,562,874 through
the Credit Facility.





During
the year ended September 30, 2006, we used $68,915 for capital lease obligations
and $45,459 for the repayment of certain notes payable and entered into a
capital lease agreement in the amount of $166,533. Regarding equity
financing activities, we (i) issued 350,000 shares of common stock upon the
exercise of warrants to purchase common shares, which resulted in net proceeds
to the Company of $87,500, (ii) received $41,718 in proceeds which resulted in
the issuance of 35,958 shares of common stock through the Employee Stock
Purchase Plan, (iii) issued 50,136 shares of common stock upon the exercise of
options, which resulted in net proceeds of $16,544, (iv) entered into the $20
million Credit Facility and borrowed $3,879,569 from the Credit Facility, and
(v) incurred $444,910 in deferred finance costs.





Working
Capital.As of September 30, 2008 and 2007, we had positive
working capital of $193,091 and negative working capital of $287,192,
respectively. The Credit Facility provided $3,409,524 and $9,562,874 in proceeds
towards working capital for the years ended September 30, 2008 and 2007,
respectively. To minimize the draw on the Credit Facility and the liability, the
Company expects to be at a break-even or negative working capital. We believe
that we have the ability to meet current operating activities through current
revenue levels, expected revenue growth, and in conjunction with the funds
available through the Credit Facility, will have sufficient funds to support the
Company’s growth through at least September 30, 2009.


23





Capital
Commitments and Contingencies.   We have access
agreements with the owners of MDU properties to supply our satellite television
and Internet 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
resources to cover current levels of operating expenses and working capital
needs. However, this is a capital-intensive business and an increasing rate of
growth is dependent on additional cash or financing. Should the Credit Facility
become unavailable to us, there is no guarantee that we will be able to sustain
an increasing rate of growth.




CONTRACTUAL
OBLIGATIONS AND OTHER COMMERCIAL COMMITTMENTS




As of
September 30, 2008, the resources required for scheduled payment of contractual
obligations were as follows:





Total
                  
                  
                  Less than 1 year
                  
                  
                  1 to 3 years
                  
                  
                  3 to 5 yearsCapital
      lease (equipment)
                  
                  $
                  12,431
                  
                  
                  $
                  12,431
                  
                  
                  $
                  -
                  
                  
                  $
                  -Operating
      leases
                  
                  
                  699,104
                  
                  
                  
                  355,311
                  
                  
                  
                  310,278
                  
                  
                  
                  33,515Notes
      payable
                  
                  
                  50,290
                  
                  
                  
                  50,290
                  
                  
                  
                  -
                  
                  
                  
                  -Credit
      line borrowing
                  
                  
                  16,851,967
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,851,967Total
      contractual obligations
                  
                  $
                  17,613,792
                  
                  
                  $
                  418,032
                  
                  
                  $
                  310,278
                  
                  
                  $
                  16,885,482





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.




Revenue
recognition with respect to initial service or connection:





On June
5, 2007, the Company signed a new System Operator Agreement with DIRECTV (the
“New Agreement"). The New Agreement became effective June 1, 2007 and replaced
the agreement dated September 29, 2003, which was already in its first renewal
period. The New Agreement resulted in an increase in the amount of "residual"
fees the Company receives from DIRECTV. The Company is paid these fees monthly
by DIRECTV based upon the programming revenue DIRECTV receives from subscribers
within the Company's MDU properties. The new "residual" rate applies to both the
Company's existing subscriber base and for all new subscribers the Company adds.
Additionally, the number of DIRECTV digital programming packages that qualify
for residual fees in determining the total monthly fee paid to the Company by
DIRECTV has increased. The method of determining the recurring monthly residual
fees will remain unchanged, however, the new higher rate, by approximately 30%,
will be applied in the estimation of the recurring monthly residual
fees.





Under the
New Agreement, the Company will continue to be paid an "activation fee" for
every new subscriber that activates a DIRECTV commissionable programming
package. The activation fee is paid on a gross activation basis in the Company's
choice and exclusive properties and on a one-time basis in the Company's bulk
properties, as was previously the case under the terms of the Company's previous
agreement with DIRECTV. The "activation fee" paid is slightly lower than that
previously paid to the Company for subscribers located in the Company's choice
and exclusive properties, however, it remains the same amount as that previously
paid to the Company for subscribers in the Company's bulk properties. The method
of calculating the activation fees and the treatment of these fees remains the
same as prior to the New Agreement, however, the new rates as stated in the New
Agreement are being applied.


24


The New
Agreement calls for an “Analog Commission” to the Company for the addition of a
new Bulk Choice Advantage (“BCA”) subscriber. The commission is not subject to
an annual commitment from a subscriber and there is no proportional “charge
back” by DIRECTV if a subscriber disconnects at any time. Due to the fact that
no portion of the BCA Analog Commission is subject to the annual commitment or
“charge back” provision, the Analog Commission is recognizable immediately upon
the approval and acceptance of the subscriber by DIRECTV. The New Agreement also
offers the “Individual Subscriber PPC” (prepaid programming commission).
Contrary to the Analog Commission, the payment of the Individual Subscriber PPC
by DIRECTV requires an annual commitment for the individual services and is
subject to a “charge back” if a subscriber disconnects within the annual
commitment. The revenue from the Individual Subscriber PPC is comprised of two
components, commission and equipment discount. The commission portion is
recognized over one year in conjunction with the annual commitment.
However, under the new Agreement there is a change in the equipment discount
effective October 1, 2007. Equipment discounts for set-top receivers are no
longer dependent on subscriber type. Set-top receivers subject to equipment
discounts were previously accounted for as property and equipment when they were
removed from inventory and deployed into a subscriber’s unit. As of October 1,
2007, the equipment is treated as cost of sales once the equipment is deployed.
The cost of these set-top receivers is being reduced by the value of the
equipment discount. Therefore, equipment discounts previously accounted for as
deferred revenue for prepaid commission received for the set-top receivers and
recognized as revenue over seven years, in conjunction with the depreciation
expense, are being accounted for as a reduction of cost of sales in accordance
with EITF 06-1 as of October 1, 2007.





Additionally,
on December 14, 2007, the Company signed a letter agreement with DIRECTV that
allows the Company to receive from DIRECTV an upgrade subsidy when it completes
a HDTV system upgrade on certain of its properties to which the Company
currently is providing DIRECTV services. The Company is required to submit an
invoice for this subsidy to DIRECTV within thirty days after the upgrade of the
property and subscribers are complete. This subsidy is treated as revenue,
similar to the “activation fee” referenced above, except that the entire amount
of the subsidy is recognized immediately. On August 15, 2008, the Company signed
a subsequent letter agreement with DIRECTV that allows the Company to continue
to receive the upgrade subsidy from DIRECTV, under similar terms, through July
2009.





Deferred
Revenue:





The
Company’s line item of deferred revenue represents (i) payments by subscribers
in advance of the delivery of services, and (ii) the commission that DIRECTV
pays the Company for obtaining subscribers with an annual commitment. The
quarterly and annual advance payments made by some subscribers to the Company’s
services (see (i) above) and the commissions paid to the Company from DIRECTV
for certain DBS and BCA customers who sign an annual agreement (see (ii) above)
are placed in the current portion of deferred revenue because such revenue is
recognized within one year. The quarterly and annual advance payments are
recognized in each month for which the payment is intended by the subscriber.
The DIRECTV commissions are recognized equally over a twelve month period
because DIRECTV has the ability to pro-rate a “charge-back” on the commission
for any subscriber cancellation of an annual agreement during the first year of
programming service.




In
periods prior to October 1, 2007, the equipment discounts received for the
set-top receivers associated with subscribers in (ii), above, and due to the
fact that the Company depreciated this equipment over seven years, the discounts
received for the receivers were recognized over the seven years. The portion
that was not recognized within twelve months (current) is set forth in the long
term portion of the deferred revenue. However, as previously discussed, the
Company entered into a New Agreement with DIRECTV on June 1, 2007 and under the
new Agreement there was a change in the equipment discount. Equipment discounts
for set-top receivers are no longer dependent on subscriber type. Set-top
receivers subject to equipment discounts were previously accounted for as
property and equipment when they were removed from inventory and deployed into a
subscriber’s unit. As of October 1, 2007, the equipment is treated as cost of
sales once the equipment is deployed. The cost of these set-top receivers is
being reduced by the value of the equipment discount. Therefore, equipment
discounts previously accounted for as deferred revenue for prepaid commission
received for the set-top receivers and recognized as revenue over seven years,
in conjunction with the depreciation expense, are being accounted for as a
reduction of cost of sales in accordance with EITF 06-1 as of October 1,
2007.





Use
of Estimates:





The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”) 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, useful lives of
property and equipment, fair value of equity instruments, valuation of deferred
tax assets and potentially impaired long-lived assets. Actual results could
differ from those estimates.


25


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.





Fair
value of equity instruments:





In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004),
“Share-Based Payment,” (“SFAS 123R”) which revised SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”) and superseded the previous accounting
under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees,” (“APB 25”). SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on the portion of their grant date fair values
expected to vest over the period during which the employees are required to
provide services in exchange for the equity instruments. The pro forma
disclosures previously permitted under SFAS 123 are no longer an alternative to
financial statement recognition.




The
Company was required to adopt the provisions of SFAS 123R effective October 1,
2005 and has selected the Black-Scholes method of valuation for share-based
compensation. The Company used the modified prospective transition method
which requires that compensation cost be recorded as earned for new share-based
payments and for all unvested stock options outstanding at the beginning of the
first quarter of adoption of SFAS 123R. The Company’s Consolidated Financial
Statements for the years ended September 30, 2006, 2007 and 2008 reflect the
impact of the adoption of SFAS 123R. In accordance with the modified prospective
transition method, the Company’s Consolidated Financial Statements for prior
periods have not been restated to reflect, and do not include, the impact of
SFAS 123R.




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 were 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 historical and pro forma fair
values of options and warrants using the Black-Scholes option pricing model, we
used the following assumptions in the year ended September 30, 2008, 2007
and 2006:





2008
                        
                        2007
                        
                        2006Expected
      volatility
                        
                        
                        25%
                        
                        53%
                        
                        52%Risk-free
      interest rate
                        
                        
                        4.43%
                        
                        4.63%
                        
                        4.72%Expected
      years of option life
                        
                        
                        1
      to 4.1
                        
                        1
      to 5
                        
                        1
      to 5Expected
      dividends
                        
                        
                        0%
                        
                        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.





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, 2008 and 2007.





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. 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 noncash charges to income that could materially
affect our consolidated financial position or results of operations for that
period.


26





Reporting
segments:





Statement
of Financial Accounting Standards No. 131, Disclosures about segments of an
enterprise and related information (“SFAS No. 131”), which superseded
Statement of Financial Accounting Standards No. 14, Financial Reporting for Segments of
a Business Enterprise, establishes standards for the way that public
entities report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performances.





The
Company operates in one reported operating segment - communication services to
the residential MDU industry. Within communication services there are three main
communication products, (i) DBS digital satellite television programming, (ii)
Private Cable television programming, and (iii) high-speed Internet services,
all of which are provided and maintained through four Company regional offices.
Performance of the Company, and its three main products, is evaluated by the
Company's Chief Executive Officer based on total Company results. There are no
segment or product managers. All of the products (in all geographic regions) are
sold to common customers in multi-dwelling unit properties, are delivered over
common wiring schemes and common equipment, by common technicians and installers
trained in all three products, are thereafter maintained and serviced during
common service visits, customers are billed for products on a common invoice and
customer issues are handled through a common call center.





Therefore,
the Company maintains that because its products are evaluated with common
financial information by a common decision maker, SFAS 131 has no effect on its
financial statements as all of the Company's operations are in one primary
industry segment.





RECENT
ACCOUNTING PRONOUNCEMENTS





On
October 1, 2007, we adopted the Securities and Exchange Commission (“SEC”) Staff
Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current Year Financial
Statements(“SAB 108”). SAB 108 provides guidance on how the effects of
the carryover or reversal of prior year financial statement misstatements should
be considered in quantifying a current year misstatement. Prior practice allowed
the evaluation of materiality on the basis of (i) the error quantified as the
amount by which the current year income statement was misstated (rollover
method) or (ii) the cumulative error quantified as the cumulative amount by
which the current year balance sheet was misstated (iron curtain method).
Reliance on either method in prior years could have resulted in misstatement of
the financial statements. The guidance provided in SAB 108 requires both methods
to be used in evaluating materiality. Immaterial prior year errors may be
corrected with the first filing of prior year financial statements after
adoption. The cumulative effect of the correction would be reflected in the
opening balance sheet with appropriate disclosure of the nature and amount of
each individual error corrected in the cumulative adjustment, as well as a
disclosure of the cause of the error and that the error had been deemed to be
immaterial in the past. The adoption of this pronouncement did not have any
material effects on our consolidated financial position, results of operations,
or cash flows.




On
October 1, 2007, we adopted Emerging Issues Task Force (“EITF”), Issue EITF
No. 06-1, Accounting for
Consideration Given by a Service Provider to a Manufacturer or Reseller of
Equipment Necessary for an End-Customer to Receive Service from the Service
Provider(“EITF No. 06-1”), which provides guidance to service
providers regarding the proper reporting of consideration given to manufacturers
or resellers of equipment necessary for an end-customer to receive its services.
Depending on the circumstances, such consideration is reported as either an
expense or a reduction of revenues.  Set-top receivers subject to
equipment discounts were previously accounted for as property and equipment when
they were removed from inventory and deployed into a subscriber’s unit. As of
October 1, 2007, the equipment is treated as cost of sales once the equipment is
deployed. The cost of these set-top receivers is being reduced by the value of
the consideration provided. For the fiscal year ended September 30, 2008, there
was no material impact on our consolidated results of operations, but the
adoption of EITF No. 06-1 did effect how certain considerations are no longer
accounted for as deferred revenue in our consolidated balance sheets.





On
October 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109(“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The adoption of FIN 48 had no material
impact on our financial position and results of operations.


27





In
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, Fair Value
Measurement(“SFAS 157”). SFAS 157 defines fair value and establishes a
framework for measuring fair value in accordance with GAAP. SFAS 157 also
expands the disclosures related to the fair value measurements used to value
assets and liabilities. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We are
currently evaluating whether the adoption of SFAS 157 will have a material
impact on our consolidated financial statements.





In
February 2007, the FASB, issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement
No. 115(“SFAS 159”) which permits, but does not require, companies
to report at fair value the majority of recognized financial assets, financial
liabilities and firm commitments. Under SFAS 159, unrealized gains and losses on
items for which the fair value option is elected are reported in earnings at
each subsequent reporting date. SFAS 159 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We are
currently assessing the effect SFAS 159 may have, if any, on our consolidated
financial position, results of operations or cash flows.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(“SFAS
141(R)”).In SFAS
141(R), the FASB retained the fundamental requirements of Statement No. 141 to
account for all business combinations using the acquisition method (formerly the
purchase method) and for an acquiring entity to be identified in all business
combinations. However, the new standard requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS 141(R) is effective for annual periods
beginning on or after December 15, 2008. We are currently evaluating whether the
adoption of SFAS 141(R) will have a material impact on our financial
statements.




In April
2008, the FASB issued Staff Position No. FAS 142-3 which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other
Intangible Assets.” The intent of this Staff Position is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under FASB Statement No. 141 (revised 2007), “Business Combinations” and
GAAP. This Staff Position shall be effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years.We are in
the process of evaluating the effect of FAS No. 142-3 on our consolidated
financial statements.





In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS 162”). SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with GAAP for nongovernmental entities. SFAS
162 is effective November 15, 2008. The management of the Company does not
expect the adoption of this pronouncement to have a material impact on its
consolidated financial statements.





The FASB,
the EITF and the SEC have issued certain other accounting pronouncements and
regulations as of September 30, 2008 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
2008, 2007 and 2006, 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.





Off
Balance Sheet Arrangements:





None.




Item 7A.
              Quantitative
      and Qualitative Disclosures about Market
Risk




Not required under Regulation S-K for
“smaller reporting companies.”


28





Item 8.
              Financial
      Statements and Supplementary
Data





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, 2008 and
2007, and the related consolidated statements of operations, stockholders’
equity and cash flows for each of the years in the three year period ended
September 30, 2008. 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, 2008 and
2007, and their results of operations and cash flows for each of the years in
the three year period ended September 30, 2008, in conformity with accounting
principles generally accepted in the United States of America.




As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in the year
ended September 30, 2006.




/s/
      J. H. Cohn LLPRoseland,
      New Jersey
              December 23,
      2008


29


MDU
COMMUNICATIONS INTERNATIONAL, INC.
 Consolidated
Balance Sheets
 September
30, 2008 and 2007
 
 September
      30,
                  
                  
                  September
      30,2008
                  
                  
                  2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  60,634
                  
                  
                  $
                  767,296Accounts
      and other receivables - net of an allowance of $394,960 and $167,674 (Note
      3)
                  
                  
                  3,102,850
                  
                  
                  
                  2,381,234Prepaid
      expenses and deposits
                  
                  
                  541,612
                  
                  
                  
                  521,811TOTAL
      CURRENT ASSETS
                  
                  
                  3,705,096
                  
                  
                  
                  3,670,341Telecommunications
      equipment inventory
                  
                  
                  682,818
                  
                  
                  
                  970,456Property
      and equipment, net of accumulated depreciation of $16,682,317 and
      $12,784,932
                  
                  
                  21,738,007
                  
                  
                  
                  22,046,390Intangible
      assets, net of accumulated amortization of $5,338,356 and
      $4,153,493
                  
                  
                  2,988,557
                  
                  
                  
                  4,186,809Deposits,
      net of current portion
                  
                  
                  63,037
                  
                  
                  
                  60,508Deferred
      finance costs, net of accumulated amortization of $415,446 and
      $144,979
                  
                  
                  508,273
                  
                  
                  
                  513,740TOTAL
      ASSETS
                  
                  $
                  29,685,788
                  
                  
                  $
                  31,448,244LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  1,583,352
                  
                  
                  $
                  1,818,594Other
      accrued liabilities
                  
                  
                  1,287,091
                  
                  
                  
                  1,301,307Current
      portion of deferred revenue
                  
                  
                  578,841
                  
                  
                  
                  704,618Current
      portion of note payable
                  
                  
                  50,290
                  
                  
                  
                  51,723Current
      portion of capital lease obligations
                  
                  
                  12,431
                  
                  
                  
                  81,291TOTAL
      CURRENT LIABILITIES
                  
                  
                  3,512,005
                  
                  
                  
                  3,957,533Deferred
      revenue, net of current portion
                  
                  
                  379,966
                  
                  
                  
                  408,640Credit
      line borrowing, net of debt discount
                  
                  
                  16,641,586
                  
                  
                  
                  13,224,561Note
      payable, net of current portion
                  
                  
                  —
                  
                  
                  
                  50,286Capital
      lease obligations, net of current portion
                  
                  
                  —
                  
                  
                  
                  12,179TOTAL
      LIABILITIES
                  
                  
                  20,533,557
                  
                  
                  
                  17,653,199COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITYPreferred
      stock, par value $0.001; 5,000,000 shares authorized, none
      issued
                  
                  
                  —
                  
                  
                  
                  —Common
      stock, par value $0.001; 70,000,000 shares authorized, 52,005,464 and
      51,556,989 shares issued and outstanding
                  
                  
                  52,005
                  
                  
                  
                  51,556Additional
      paid-in capital
                  
                  
                  60,764,621
                  
                  
                  
                  60,208,501Accumulated
      deficit
                  
                  
                  (51,664,395
                  )
                  
                  
                  (46,465,012
                  )TOTAL
      STOCKHOLDERS’ EQUITY
                  
                  
                  9,152,231
                  
                  
                  
                  13,795,045TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  29,685,788
                  
                  
                  $
                  31,448,244
 
 See
accompanying notes to the consolidated financial statements
  30
 
 MDU
COMMUNICATIONS INTERNATIONAL, INC.
 Consolidated
Statements of Operations
 Years
Ended September 30, 2008, 2007 and 2006
 
 Years ended September 30,2008
                  
                  
                  2007
                  
                  
                  2006REVENUE
                  
                  $
                  23,650,725
                  
                  
                  $
                  16,658,392
                  
                  
                  $
                  13,366,205OPERATING
      EXPENSESDirect
      costs
                  
                  
                  10,076,041
                  
                  
                  
                  7,266,595
                  
                  
                  
                  5,307,770Sales
      expenses
                  
                  
                  1,266,694
                  
                  
                  
                  1,296,570
                  
                  
                  
                  1,629,228Customer
      service and operating expenses
                  
                  
                  5,940,525
                  
                  
                  
                  4,784,931
                  
                  
                  
                  4,762,336General
      and administrative expenses
                  
                  
                  4,692,763
                  
                  
                  
                  4,292,991
                  
                  
                  
                  5,389,638Depreciation
      and amortization
                  
                  
                  6,578,842
                  
                  
                  
                  5,384,562
                  
                  
                  
                  4,391,640TOTALS
                  
                  
                  28,554,865
                  
                  
                  
                  23,025,649
                  
                  
                  
                  21,480,612OPERATING
      LOSS
                  
                  
                  (4,904,140
                  )
                  
                  
                  (6,367,257
                  )
                  
                  
                  (8,114,407
                  )Other
      income (expense)Gain
      (loss) on sale of customers and property and
equipment
                  
                  
                  1,860,593
                  
                  
                  
                  (110,052
                  )
                  
                  
                  —Interest
      income
                  
                  
                  1,799
                  
                  
                  
                  27,729
                  
                  
                  
                  128,909Interest
      expense
                  
                  
                  (2,157,635
                  )
                  
                  
                  (1,059,079
                  )
                  
                  
                  (25,556
                  )NET
      LOSS
                  
                  $
                  (5,199,383
                  )
                  
                  $
                  (7,508,659
                  )
                  
                  $
                  (8,011,054
                  )BASIC
      AND DILUTED NET LOSS PER COMMON SHARE
                  
                  $
                  (0.10
                  )
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.16
                  )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
                  
                  
                  51,827,948
                  
                  
                  
                  51,307,618
                  
                  
                  
                  50,204,409
 
 See
accompanying notes to the consolidated financial statements
  31
  MDU
COMMUNICATIONS INTERNATIONAL, INC.
 Consolidated
Statements of Stockholders’ Equity
 Years
Ended September 30, 2008, 2007 and 2006
 
 Common
      stockShares
                          
                          
                          Amount
                          
                          
                          Additional
                            paid-in
      capital
                          
                          
                          Unearned
                            compensation
                          
                          
                          Accumulated
                            deficit
                          
                          
                          TotalBalance,
      October 1, 2005
                          
                          
                          49,812,922
                          
                          
                          $
                          49,815
                          
                          
                          $
                          57,194,221
                          
                          
                          $
                          (549,475
                          )
                          
                          $
                          (30,945,299
                          )
                          
                          $
                          25,749,262Effect
      of adoption of SFAS 123R
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          549,475
                          
                          
                          
                          
                          
                          
                          
                          549,475Issuance
      of common stock through employee stock purchase plan
                          
                          
                          162,678
                          
                          
                          
                          161
                          
                          
                          
                          175,481
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          175,642Issuance
      of common stock for employee bonuses
                          
                          
                          86,385
                          
                          
                          
                          86
                          
                          
                          
                          99,747
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          99,833Issuance
      of common stock for warrants exercised
                          
                          
                          350,000
                          
                          
                          
                          350
                          
                          
                          
                          87,150
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          87,500Issuance
      of common stock for options exercised
                          
                          
                          50,136
                          
                          
                          
                          50
                          
                          
                          
                          16,494
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          16,544Issuance
      of warrants in connection with revolver credit line
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          290,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          290,000Share-based
      compensation - employees
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,048,856
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,048,856Share-based
      compensation - nonemployees
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (87,952
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (87,952
                          )Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (8,011,054
                          )
                          
                          
                          (8,011,054
                          )Balance,
      October 1, 2006
                          
                          
                          50,462,121
                          
                          
                          
                          50,462
                          
                          
                          
                          58,823,997
                          
                          
                          
                          
                          
                          
                          
                          (38,956,353
                          )
                          
                          
                          19,918,106Issuance
      of common stock through employee stock purchase plan
                          
                          
                          343,011
                          
                          
                          
                          343
                          
                          
                          
                          233,871
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          234,214Issuance
      of common stock for employee bonuses
                          
                          
                          210,473
                          
                          
                          
                          210
                          
                          
                          
                          131,145
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          131,355Issuance
      of restricted common stock for compensation for services to be
      rendered
                          
                          
                          140,000
                          
                          
                          
                          140
                          
                          
                          
                          113,860
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          114,000Issuance
      of common stock for options exercised, including effects of net share
      settlements
                          
                          
                          401,384
                          
                          
                          
                          401
                          
                          
                          
                          83,103
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          83,504Share-based
      compensation - employees
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          822,525
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          822,525Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (7,508,659
                          )
                          
                          
                          (7,508,659
                          )Balance,
      October 1, 2007
                          
                          
                          51,556,989
                          
                          
                          
                          51,556
                          
                          
                          
                          60,208,501
                          
                          
                          
                          
                          
                          
                          
                          (46,465,012
                          )
                          
                          
                          13,795,045Issuance
      of common stock through employee stock purchase plan
                          
                          
                          69,134
                          
                          
                          
                          69
                          
                          
                          
                          46,320
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          46,389Issuance
      of common stock for employee bonuses
                          
                          
                          232,969
                          
                          
                          
                          233
                          
                          
                          
                          82,451
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          82,684Issuance
      of restricted common stock for compensation for services
      rendered
                          
                          
                          146,372
                          
                          
                          
                          147
                          
                          
                          
                          64,117
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          64,264Issuance
      of warrants in connection with credit line borrowing
    agreement
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          45,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          45,000Share-based
      compensation - employees
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          304,732
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          304,732Share-based
      compensation - nonemployees
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          13,500
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          13,500Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (5,199,383
                          )
                          
                          
                          (5,199,383
                          )Balance,
      September 30, 2008
                          
                          
                          52,005,464
                          
                          
                          $
                          52,005
                          
                          
                          $
                          60,764,621
                          
                          
                          $
                          -
                          
                          
                          $
                          (51,664,395
                          )
                          
                          $
                          9,152,231
 
 See
accompanying notes to the consolidated financial statements
  32
  MDU
COMMUNICATIONS INTERNATIONAL, INC.
 Consolidated
Statements of Cash Flows
 Years
Ended September 30, 2008, 2007 and 2006
 
 Years
      ended September 30,2008
                    
                    
                    2007
                    
                    
                    2006OPERATING
      ACTIVITIESNet
      loss
                    
                    $
                    (5,199,383
                    )
                    
                    $
                    (7,508,659
                    )
                    
                    $
                    (8,011,054
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Bad
      debt provision
                    
                    
                    133,486
                    
                    
                    
                    191,989
                    
                    
                    
                    107,044Inventory
      provision
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    57,977Depreciation
      and amortization
                    
                    
                    6,578,842
                    
                    
                    
                    5,384,562
                    
                    
                    
                    4,391,640Share-based
      compensation expense - employees
                    
                    
                    304,732
                    
                    
                    
                    822,525
                    
                    
                    
                    1,048,856Share-based
      compensation expense - nonemployees
                    
                    
                    13,500
                    
                    
                    
                    63,125
                    
                    
                    
                    398,394Charge
      to interest expense for amortization of deferred finance costs and debt
      discount
                    
                    
                    322,968
                    
                    
                    
                    195,873
                    
                    
                    
                    —Compensation
      expense for issuance of common stock through employee stock purchase
      plan
                    
                    
                    19,327
                    
                    
                    
                    19,808
                    
                    
                    
                    50,290Compensation
      expense for issuance of common stock for employee bonuses
                    
                    
                    39,357
                    
                    
                    
                    37,240
                    
                    
                    
                    99,833Compensation
      expense for issuance of common stock for employee services
                    
                    
                    8,640
                    
                    
                    
                    33,945
                    
                    
                    
                    83,634Compensation
      expense for issuance of restricted common stock for
      compensation
                    
                    
                    70,206
                    
                    
                    
                    73,500
                    
                    
                    
                    299,907Compensation
      expense accrued to be settled through the issuance of common
      stock
                    
                    
                    208,585
                    
                    
                    
                    73,120
                    
                    
                    
                    —Loss
      (gain) on sale of customers and property and equipment
                    
                    
                    (1,860,593
                    )
                    
                    
                    110,052
                    
                    
                    
                    —Write-off
      of intangible assets
                    
                    
                    149,427
                    
                    
                    
                    —
                    
                    
                    
                    —Changes
      in operating assets and liabilities:Accounts
      and other receivables (Note 3)
                    
                    
                    (880,089
                    )
                    
                    
                    (931,044
                    )
                    
                    
                    (186,825
                    )Prepaid
      expenses and deposits
                    
                    
                    (42,702
                    )
                    
                    
                    (217,132
                    )
                    
                    
                    (124,338
                    )Accounts
      payable
                    
                    
                    (235,242
                    )
                    
                    
                    687,132
                    
                    
                    
                    (65,043
                    )Other
      accrued liabilities
                    
                    
                    (165,044
                    )
                    
                    
                    132,182
                    
                    
                    
                    (57,835
                    )Deferred
      revenue
                    
                    
                    (154,451
                    )
                    
                    
                    264,380
                    
                    
                    
                    (85,392
                    )Net
      cash used in operating activities
                    
                    
                    (688,434
                    )
                    
                    
                    (567,402
                    )
                    
                    
                    (1,992,912
                    )INVESTING
      ACTIVITIESPurchase
      of property and equipment
                    
                    
                    (5,310,235
                    )
                    
                    
                    (8,053,457
                    )
                    
                    
                    (7,549,353
                    )Proceeds
      from the sale of customers and property and equipment
                    
                    
                    2,529,000
                    
                    
                    
                    80,715
                    
                    
                    
                    —Acquisition
      of intangible assets
                    
                    
                    (267,181
                    )
                    
                    
                    (3,276,742
                    )
                    
                    
                    (42,864
                    )Net
      cash used in investing activities
                    
                    
                    (3,048,416
                    )
                    
                    
                    (11,249,484
                    )
                    
                    
                    (7,592,217
                    )FINANCING
      ACTIVITIESNet
      proceeds from credit line borrowing
                    
                    
                    3,409,524
                    
                    
                    
                    9,562,874
                    
                    
                    
                    3,879,569Deferred
      financing costs
                    
                    
                    (265,000
                    )
                    
                    
                    (200,000
                    )
                    
                    
                    (444,910
                    )Payments
      of notes payable
                    
                    
                    (51,719
                    )
                    
                    
                    (48,838
                    )
                    
                    
                    (45,459
                    )Proceeds
      from purchase of common stock through employee stock purchase
      plan
                    
                    
                    18,422
                    
                    
                    
                    21,582
                    
                    
                    
                    41,718Proceeds
      from options exercised
                    
                    
                    —
                    
                    
                    
                    83,504
                    
                    
                    
                    16,544Proceeds
      from warrants exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    87,500Payments
      of capital lease obligations
                    
                    
                    (81,039
                    )
                    
                    
                    (73,879
                    )
                    
                    
                    (68,915
                    )Net
      cash provided by financing activities
                    
                    
                    3,030,188
                    
                    
                    
                    9,345,243
                    
                    
                    
                    3,466,047NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    (706,662
                    )
                    
                    
                    (2,471,643
                    )
                    
                    
                    (6,119,082
                    )CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                    
                    
                    767,296
                    
                    
                    
                    3,238,939
                    
                    
                    
                    9,358,021CASH
      AND CASH EQUIVALENTS, END OF YEAR
                    
                    $
                    60,634
                    
                    
                    $
                    767,296
                    
                    
                    $
                    3,238,939
  33
 
 Years ended September 30,2008
                              
                              
                              2007
                              
                              
                              2006SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Issuance
      of  256,258 and 126,720 shares of common stock for accrued
      compensation
                              
                              $
                              —
                              
                              
                              $
                              158,879
                              
                              
                              $
                              133,924Issuance
      of 120,694 and 151,799 shares of common stock for employee
      bonuses
                              
                              $
                              43,327
                              
                              
                              $
                              94,115
                              
                              
                              $
                              —Issuance
      of  18,037 and 45,000 shares of restricted common stock for
      services rendered
                              
                              $
                              14,430
                              
                              
                              $
                              40,500
                              
                              
                              $
                              —Issuance
      of  50,695 shares of restricted common stock for services to be
      rendered
                              
                              $
                              20,128
                              
                              
                              $
                              —
                              
                              
                              $
                              —Issuance
      of warrants in connection with credit line borrowing
    agreement
                              
                              $
                              45,000
                              
                              
                              $
                              —
                              
                              
                              $
                              290,000Equipment
      acquired through capital lease obligations
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              166,533SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
                              
                              $
                              1,943,801
                              
                              
                              $
                              863,206
                              
                              
                              $
                              25,556
  See
accompanying notes to the consolidated financial statements
  34
  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. Management considers all of the Company’s operations to be in
one industry segment.
 
 2.                 SIGNIFICANT ACCOUNTING
POLICIES
 
 These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) and
reflect the significant accounting polices described below:
 
 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, provision for inventory reserve,
useful lives of property and equipment, fair value of equity instruments,
valuation of deferred tax assets and potentially impaired long-lived assets.
Actual results could differ from those estimates.
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of MDU Communications
International, Inc. and its subsidiaries, MDU Communications Inc. and MDU
Communications (USA) Inc. All inter-company balances and transactions are
eliminated.
  Deferred
Financing Costs and Debt Discount
 
 Costs
related to obtaining loans are presented as deferred finance costs on the
consolidated balance sheets and amortized to interest expense using the
straight-line method over the term of the related obligation. Debt discount is
offset against the principal balance of the related loan and amortized using the
straight-line method over the term of the related loan. As a result of the
Amended and Restated Loan and Security Agreement entered into on June 30, 2008,
the Company incurred additional deferred financing costs that, as well as all
other previously incurred deferred financing costs, will be amortized to
interest expense using the straight-line method over the new term.
 
 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 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
      years
  35
  Intangible
Assets
 
 Intangible
assets consist of acquired building access agreements and subscriber lists and
are being amortized over their estimated useful lives of five years using the
straight-line method.
 
 Long-lived
Assets
 
 The
Company reviews the carrying value of its long-lived assets for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds the fair value
of the assets. No impairment losses were identified by the Company for the years
ended September 30, 2008, 2007 and 2006.
 
 Revenue
Recognition
 
 The
Company recognizes revenue for satellite programming and other services to
customers in the period the related services are provided and 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 June
5, 2007, the Company signed a new System Operator Agreement with DIRECTV (the
“New Agreement"). The New Agreement is effective June 1, 2007 replaced an
agreement dated September 29, 2003 which was already in its first renewal
period. The New Agreement results in an increase in the amount of "residual"
fees the Company receives monthly from DIRECTV based upon the programming
revenue DIRECTV receives from subscribers within the Company's MDU properties.
The new "residual" rate will apply to both the Company's existing subscriber
base and for all new subscribers the Company adds. Additionally, the number of
DIRECTV digital programming packages that qualify for residual fees in
determining the total monthly fee paid to the Company by DIRECTV has increased.
The method of determining the recurring monthly residual fees will remain
unchanged, however, the new higher rate, by approximately 30%, will be applied
in the estimation of the recurring monthly residual fees.
 
 Under the
New Agreement, the Company will continue to be paid an "activation fee" for
every new subscriber that activates a DIRECTV commissionable programming
package. The activation fee will be paid on a gross activation basis in the
Company's choice and exclusive properties and on a one-time basis in the
Company's bulk properties, as was previously the case under the terms of the
Company's previous agreement with DIRECTV. The "activation fee" paid will be
slightly lower than that previously paid to the Company for subscribers located
in the Company's choice and exclusive properties, however, it will remain the
same amount as previously paid to the Company for subscribers in the Company's
bulk properties. The method of calculating the activation fees and the treatment
of these fees will remain the same as prior to the New Agreement, however, the
new rates as stated in the New Agreement will be applied.
 
 The New
Agreement calls for an “Analog Commission” to the Company for the addition of a
new Bulk Choice Advantage (“BCA”) subscriber. The commission is not subject to
an annual commitment from a subscriber and there is no proportional “charge
back” by DIRECTV if a subscriber disconnects at any time. Due to the fact that
no portion of the BCA Analog Commission is subject to the annual commitment or
“charge back” provision, the Analog Commission is recognizable immediately upon
the approval and acceptance of the subscriber by DIRECTV. The New Agreement also
offers the “Individual Subscriber PPC” (prepaid programming commission).
Contrary to the Analog Commission, the payment of the Individual Subscriber PPC
by DIRECTV requires an annual commitment for the individual services and is
subject to a “charge back” if a subscriber disconnects within the annual
commitment. The revenue from the Individual Subscriber PPC is comprised of two
components, commission and equipment discount. The commission portion is
recognized over one year in conjunction with the annual commitment.
However, under the new Agreement there is a change in the equipment discount
effective October 1, 2007. Equipment discounts for set-top receivers are no
longer dependent on subscriber type. Set-top receivers subject to equipment
discounts were previously accounted for as property and equipment when they were
removed from inventory and deployed into a subscriber’s unit. As of October 1,
2007, the equipment is treated as cost of sales once the equipment is deployed.
The cost of these set-top receivers is being reduced by the value of the
equipment discount. Therefore, equipment discounts previously accounted for as
deferred revenue for prepaid commission received for the set-top receivers and
recognized as revenue over seven years, in conjunction with the depreciation
expense, are being accounted for as a reduction of cost of sales in accordance
with EITF 06-1 as of October 1, 2007.
  36
  Additionally,
on December 14, 2007, the Company signed a letter agreement with DIRECTV that
allows the Company to receive from DIRECTV an upgrade subsidy when it completes
a high definition system upgrade on certain of its properties to which the
Company currently is providing DIRECTV services. The Company is required to
submit an invoice for this subsidy to DIRECTV within thirty days after the
upgrade of the property and subscribers are complete. This subsidy is treated as
revenue, similar to the “activation fee” referenced above, except that the
entire amount of the subsidy is recognized immediately. On August 15, 2008, the
Company signed a subsequent letter agreement with DIRECTV, with similar terms,
that allows the Company to continue to receive from DIRECTV this upgrade subsidy
through July 2009.
 
 Deferred
Revenue:
 
 The
Company’s line item of deferred revenue represents (i) payments by subscribers
in advance of the delivery of services, and (ii) the commission that DIRECTV
pays the Company for obtaining subscribers with an annual commitment. The
quarterly and annual advance payments made by some subscribers to the Company’s
services (see (i) above) and the commissions paid to the Company from DIRECTV
for certain direct-to-home customers who sign an annual agreement (see (ii)
above) are placed in the current portion of deferred revenue because such
revenue is recognized within one year. The quarterly and annual advance payments
are recognized in each month for which the payment is intended by the
subscriber. The DIRECTV commissions are recognized equally over a twelve month
period because DIRECTV has the ability to pro-rate a “charge-back” on the
commission for any subscriber cancellation of an annual agreement during the
first year of programming service.
  In
periods prior to October 1, 2007, the equipment discounts received for the
set-top receivers associated with subscribers in (ii), above, and due to the
fact that the Company depreciated this equipment over seven years, the discounts
received for the receivers were recognized over the seven years. The portion
that was not recognized within twelve months (current) is set forth in the long-
term portion of the deferred revenue. However, as previously discussed, the
Company entered into a New Agreement with DIRECTV on June 1, 2007 and under the
new Agreement there was a change in the equipment discount. Equipment discounts
for set-top receivers are no longer dependent on subscriber type. Set-top
receivers subject to equipment discounts were previously accounted for as
property and equipment when they were removed from inventory and deployed into a
subscriber’s unit. As of October 1, 2007, the equipment is treated as cost of
sales once the equipment is deployed. The cost of these set-top receivers is
being reduced by the value of the equipment discount. Therefore, equipment
discounts previously accounted for as deferred revenue for prepaid commission
received for the set-top receivers and recognized as revenue over seven years,
in conjunction with the depreciation expense, are being accounted for as a
reduction of cost of sales in accordance with EITF 06-1 as of October 1,
2007.
 
 Accounts
Receivable
 
 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.
 
 Loss
Per Common Share
 
 The
Company presents “basic” earnings (loss) per common share and, if applicable,
“diluted” earnings per common share pursuant to the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic
earnings (loss) per common 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 common share is similar to that of basic
earnings per common 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, were issued during the period and the treasury stock
method was applied.
  For the
years ended September 30, 2008, 2007 and 2006, 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 and warrants would be anti-dilutive.
As of September 30, 2008, 2007 and 2006, the Company had potentially dilutive
common shares attributable to options and warrants that were exercisable (or
potentially exercisable) into shares of common stock as presented in the
following table:
  37
  For the years ended September 30,2008
                      
                      
                      2007
                      
                      
                      2006Warrants
                      
                      
                      1,900,000
                      
                      
                      
                      3,969,567
                      
                      
                      
                      6,298,885Options
                      
                      
                      2,004,440
                      
                      
                      
                      2,743,340
                      
                      
                      
                      2,602,072Potentially
      dilutive common shares
                      
                      
                      3,904,444
                      
                      
                      
                      6,712,907
                      
                      
                      
                      8,900,957
  Foreign
Exchange
 
 The
Company uses the United States dollar as its functional and reporting currency
since the 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. 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, 2008, 2007 and 2006 and cumulative
translation gains and losses as of September 30, 2008, 2007 and 2006 were
not material.
 
 Share-Based
Compensation
 
 In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004),
Share-Based Payment,
(“SFAS 123R”) which revised SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”) and superseded the previous accounting under
Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees(“APB 25”). SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on the portion of their grant date fair values
expected to vest over the period during which the employees are required to
provide services in exchange for the equity instruments.
 
 The
Company adopted the provisions of SFAS 123R effective October 1, 2005 and has
selected the Black-Scholes method of valuation for share-based compensation. The
Company used the modified prospective transition method which requires that
compensation cost be recorded as earned for new share-based payments and for all
unvested stock options outstanding at the beginning of the first quarter of
adoption of SFAS 123R. The Company’s Consolidated Financial Statements for the
years ended September 30, 2008, 2007 and 2006 reflect the impact of the adoption
of SFAS 123R. In accordance with the modified prospective transition method, the
Company’s Consolidated Financial Statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123R.
  Stock-based
compensation charges arising from options and warrants issued to non-employees
are recorded in accordance with the consensus in Emerging Issues Tasks Force
(“EITF”) 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, over the service period. The
amount of the compensation is based on the fair value of the option or warrant
at the applicable measurement date.
 
 Cash
and Cash Equivalents
 
 Cash and
cash equivalents consist of bank deposits and short-term notes with maturities
at the date of acquisition of ninety days or less.
  Fair
Value of Financial Instruments
 
 The fair
value of the Company’s cash and cash equivalents, accounts receivable, accounts
payable, other accrued liabilities and notes payable at September 30,
2008 and 2007 are estimated to approximate their carrying values due to the
relative liquidity of these instruments.
 
 Concentrations
 
 Financial
instruments that potentially subject the Company to a concentration of credit
risk consist principally of cash and cash equivalents and accounts
receivable.
 
 38
  Accounts
receivable from DIRECTV (see Note 7 to the Consolidated Financial
Statements) at September 30, 2008 and 2007, represented 53% and 32%,
respectively, of total trade accounts receivable. Revenues realized directly
from DIRECTV represented 25%, 21%, and 23% of total revenues in the years ended
September 30, 2008, 2007 and 2006, respectively. Management believes the
Company has an adequate allowance for potential losses from such
concentration.
 
 Deferred
Tax Valuation Allowance
 
 Deferred
taxes arise due to temporary differences in the bases of assets and liabilities
and from net operating losses and credit carry forwards. In general, deferred
tax assets represent future tax benefits to be received when certain expenses
previously recognized in the Company’s statement of operations become deductible
expenses under applicable income tax laws or loss or credit carry forwards
utilized. Accordingly, realization of deferred tax assets is dependent on future
taxable income against which these deductions, losses and credits can be
utilized. In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Management considers historical
operating losses, scheduled reversals of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this assessment. 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.
  Other
Recently Issued and Not Yet Effective Accounting Standards
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurement(“SFAS
157”). SFAS 157 defines fair value and establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
United States of America. SFAS 157 also expands the disclosures related to the
fair value measurements used to value assets and liabilities. SFAS 157 is
effective for fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years. The Company is currently evaluating whether the
adoption of SFAS 157 will have a material impact on its consolidated financial
statements.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement
No. 115(“SFAS 159”) which permits, but does not require, companies
to report at fair value the majority of recognized financial assets, financial
liabilities and firm commitments. Under SFAS 159, unrealized gains and losses on
items for which the fair value option is elected are reported in earnings at
each subsequent reporting date. The Company is currently assessing the effect
SFAS 159 may have, if any, on its consolidated financial position, results of
operations or cash flows.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(“SFAS
141(R)”).In SFAS
141(R), the FASB retained the fundamental requirements of Statement No. 141 to
account for all business combinations using the acquisition method (formerly the
purchase method) and for an acquiring entity to be identified in all business
combinations. However, the new standard requires the acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS 141(R) is effective for annual periods
beginning on or after December 15, 2008. The Company is currently evaluating
whether the adoption of SFAS 141(R) will have a material impact on its
consolidated financial statements.
  In April
2008, the FASB issued Staff Position No. FAS 142-3 which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other
Intangible Assets. The intent of this Staff Position is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and
GAAP. This Staff Position shall be effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years.The Company
is in the process of evaluating the effect of FAS No. 142-3 on its consolidated
financial statements.
 
 In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(“SFAS 162”). SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with GAAP for nongovernmental entities. SFAS
162 is effective November 15, 2008. The management of the Company does not
expect the adoption of this pronouncement to have a material impact on its
consolidated financial statements.
  39
  The FASB,
the EITF and the SEC have issued certain other accounting pronouncements and
regulations as of September 30, 2008 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
2008, 2007 and 2006, 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.
 
 Certain
reclassifications have been made to prior period amounts to conform to the
current period presentation.
 
 3.                 ACCOUNTS AND OTHER
RECEIVABLES
 
 As
of  September 30, 2008 and 2007, accounts receivable, trade, net of
allowances were $2,091,250 and $2,381,234, respectively.
 
 As
of  September 30, 2008, the allowance for doubtful accounts increased
primarily as a result of (i) an acquired property in Florida in dispute with the
Company over $70,000 in billing issues, and (ii) the 42% increase in revenue
from the previous year resulting in an additional allowance
requirement.
 
 Additionally,
as of September 30, 2008, there were other receivables in the amount of
$1,011,600 for a balance due from CSC Holdings, Inc., being held in escrow, for
the sale of subscribers and certain related property and equipment (See Note
8).
  4.                 DEBT AND CAPITAL LEASE
OBLIGATIONS
 
 Credit
Facility
 
 On
September 11, 2006, the Company entered into a Loan and Security Agreement with
FCC, LLC, d/b/a First Capital, and Full Circle Funding, LP for a senior secured
$20 million credit facility (“Credit Facility”) to fund the Company’s subscriber
growth. On June 30, 2008, the Company entered into an Amended and Restated Loan
and Security Agreement with FCC, LLC, d/b/a First Capital, and Full Circle
Funding, LP for a senior secured $10 million increase to its original $20
million Credit Facility. The Credit Facility, of now up to $30 million, has a
new five-year term under which the Company will pay interest on actual principal
drawn during the full term of the agreement. The original terms and conditions
of the Credit Facility, previously negotiated and executed on September 11,
2006, have not changed.
  The
Credit Facility is secured by the assets of the Company. The amount that Company
can draw from the Credit Facility is equal to the lesser of $30 million or the
Company's borrowing base which, in large part, is determined by future revenues
and costs accruing from the Company's access agreements. The borrowing base of
the Company currently exceeds $27 million. The Credit Facility can be prepaid
upon thirty days notice with a penalty of 0% to 2% of the outstanding principal
balance depending on the prepayment timing.
  The
Credit Facility has a term of five years with interest only payable monthly on
the principal outstanding. The original Credit Facility is divided into four
$5,000,000 increments with the interest rate per increment declining as
principal is drawn from each increment. The first $5,000,000 increment carries
an interest rate of prime rate plus 4.1%, the second $5,000,000 at prime plus
3%, the third $5,000,000 at prime plus 2%, and the fourth $5,000,000 at prime
plus 1%. The additional $10 million to the Credit Facility is divided into two
$5 million increments with the interest rate on these increments being prime
plus 1% to 4%, depending on the Company's ratio of EBITDA to the total
outstanding loan balance. As defined in the Credit Facility, “prime” shall be a
minimum of 7.75%. The Company is under no obligation to draw any of the
increments.
 
 As of
September 30, 2008, the Company had drawn into the fourth increment of the
Credit Facility and has borrowed a total of $16,851,967, which is reflected in
the accompanying consolidated balance sheet as of September 30, 2008, net of
debt discount of $210,381. The outstanding principal is payable on June 30,
2013. As of September 30, 2008, $13,148,033 remains available for borrowing
under the Credit Facility subject to covenants described below.
 
 As a
result of drawing into the fourth $5,000,000 increment, the Company incurred an
additional annual $50,000 deferred finance cost that will be amortized to
interest expense using the straight-line method over a twelve month period
ending in November 2008. Additionally, Morgan Joseph & Co. Inc., who acted
as advisor and placement agent for the Credit Facility, also received a success
fee of 2% (equal to $100,000) when the Company drew into the fourth increment,
which was charged to deferred finance costs that will be amortized to interest
expense using the straight-line method over the remaining life of the Credit
Facility.
  40
  In the
three months ended March 31, 2008, the Company incurred an additional annual
$50,000 deferred finance cost that will be amortized to interest expense using
the straight-line method over a twelve month period ending in February
2009.
 
 In the
three months ended September 30, 2008, the Company incurred an additional annual
$50,000 deferred finance cost that will be amortized to interest expense using
the straight-line method over a twelve month period ending in June
2009.
 
 As a
result of executing the Amended and Restated Loan and Security Agreement, the
Company incurred an additional $15,000 in deferred finance cost that, as well as
all other previously incurred deferred finance costs, will be amortized to
interest expense using the straight-line method over the new term.
 
 The
amount that the Company can draw from the Credit Facility is equal to the
Company’s borrowing base which, in large part, is determined by future revenue
and costs accruing from the Company’s access agreements. The borrowing base of
the Company currently exceeds $20 million. To access the Credit Facility above
$20 million, the Company must have (i) positive EBITDA, on either a trailing
twelve (12) month basis or a pro-forma basis, of $1 million, and (ii) have
60,000 subscribers. To access the Credit Facility above $25 million, the Company
must have (i) positive EBITDA, on either a trailing 12 month basis or pro-forma
basis, of $3 million, and (ii) have 65,000 subscribers.
 
 The
Credit Facility is secured by the Company’s cash and temporary investments,
accounts receivable, inventory, access agreements and certain property, plant
and equipment. The Credit Facility contains covenants limiting the Company’s
ability to, without the prior written consent of FCC, LLC, d/b/a First Capital,
and Full Circle Funding, LP, among other things:
 
 •
              
              incur
      other indebtedness;
  •
              
              incur
      other liens;
  •
              
              undergo
      any fundamental changes;
  •
              
              engage
      in transactions with affiliates;
  •
              
              issue
      certain equity, grant dividends or repurchase
  shares;
  •
              
              change
      our fiscal periods;
  •
              
              enter
      into mergers or consolidations;
  •
              
              sell
      assets; and
  •
              
              prepay
      other debt.
  Regarding
the sale transactions with CSC Holdings, FCC, LLC, d/b/a First Capital, and Full
Circle Funding, LP provided their written consent.  The Credit
Facility also includes certain events of default, including failure to make
payment, bankruptcy and change of control. Borrowings will generally be
available subject to a borrowing base and to the accuracy of all representations
and warranties, including the absence of a material adverse change and the
absence of any default or event of default.
 
 In
connection with the Credit Facility, on October 1, 2006, the Company issued to
FCC, LLC, d/b/a First Capital, a five-year warrant to purchase 476,190 shares of
the Company's common stock at an exercise price of $0.82 per share, issued to
Full Circle Funding, LP a five-year warrant to purchase 476,191 shares of the
Company's common stock at an exercise price of $0.82 per share and issued to
Morgan Joseph & Co. Inc., who acted as advisor and placement agent, a
five-year warrant to purchase 47,619 shares of the Company’s common stock at an
exercise price of $0.82 per share. The relative fair value of the warrants of
$290,000, at the time of issuance, which was determined using the Black-Scholes
option pricing model, was recorded as additional paid-in-capital and as debt
discount which is a reduction of the carrying value of the Credit Facility
borrowing, and is being amortized using the interest method over the term of the
related loan.
 
 In
connection with the Amended and Restated Loan and Security Agreement executed on
June 30, 2008, the Company issued to FCC, LLC, d/b/a First Capital a five year
warrant to purchase 375,000 shares of the Company's common stock and issued to
Full Circle Funding, LP a five year warrant to purchase 375,000 shares of the
Company's common stock, both at an exercise price of $0.60 per share. The
warrants had a fair value of $45,000, as determined using the Black-Sholes
pricing model, which is being amortized as debt discount over the remaining term
of the Amended and Restated Loan Agreement.
 
 The
warrants discussed above are subject to customary registration rights set forth
in a Registration Rights Agreement that provides for demand registration within
one hundred and thirty five days and (i) a four (4%) percent share penalty if
not effective within that time period, and (ii) two (2%) percent share penalty
thereafter for each thirty days until effectiveness or one year, whichever is
earlier.
  41
  Capital
Lease Obligations
 
 The
Company finances certain equipment acquisitions through capital lease agreements
that expire through 2009. Future minimum rental payments under capital leases
and related information in years subsequent to September 30, 2008 are presented
in the table below:
 
 Year ending September 30, 2009
                  
                  Capital LeaseTotal
                  
                  $
                  12,963Less
      amount representing interest
                  
                  
                  532Present
      value of net minimum payments
                  
                  
                  12,431Less
      current portion
                  
                  
                  12,431Long-term
      portion
                  
                  $
                  -
 
 The net
book value of equipment under capital leases as of September 30, 2008 and
2007 was $12,431 and $143,269 respectively, and is included in property and
equipment.
 
 Notes
Payable
 
 Notes
payable under term loans outstanding as of September 30, 2008 and 2007
consisted of the following:
  2008
                    
                    
                    2007Wachovia
      Bank Note(1)
      - current portion
                    
                    $
                    50,290
                    
                    
                    $
                    51,723Wachovia
      Bank Note(1)
      - long term
                    
                    
                    —
                    
                    
                    
                    50,286Totals
                    
                    $
                    50,290
                    
                    
                    $
                    102,009
 
 
 (1)
              On
      August 1, 2005, the Company entered into an unsecured Term Loan and
      Promissory Note Agreement with Wachovia Bank, National Association for
      $200,000. The note had a term of four years commencing September 1, 2005
      with equal monthly payments of $4,719 of principal and interest at a fixed
      rate of 6.15% per annum through July,
2009.
 
 5.                 STOCKHOLDERS’
EQUITY
 
 Preferred
Stock
 
 As of
September 30, 2008, 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. There were no shares of preferred stock
outstanding as of September 30, 2008 and 2007.
 
 Employee
Stock Option Plans
 
 On
November 24, 1998, the Company established an Employee Stock Option Plan
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. Under this 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.
 
 On
April 11, 2001, the Board of Directors approved the 2001 Stock Option Plan
(“2001 Option Plan”) to replace the 2000 Incentive Stock Option Plan. The 2001
Option Plan is in all respects identical to the 2000 Incentive Stock 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 and is currently effective.  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 4,000,000 to
5,600,000.
  42
  Stock
options awards are generally granted with an exercise price equal to the market
price of the Company’s stock on the date of the grant. The option awards vest
quarterly over three years and have a five-year contractual life. The following
table summarizes information about all of the Company’s stock option activity
during the fiscal years ended September 30, 2008, 2007 and 2006:
  Number of shares
                                      
                                      
                                      Weighted-average
                                        exercise price ($)Options outstanding at
      October 1, 2005
                                      
                                      
                                      3,300,342
                                      
                                      
                                      
                                      1.79Options
      granted
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Options
      cancelled/expired
                                      
                                      
                                      (648,134
                                      )
                                      
                                      
                                      1.83Options
      exercised (1)
                                      
                                      
                                      (50,136
                                      )
                                      
                                      
                                      0.33Options outstanding at
      September 30, 2006
                                      
                                      
                                      2,602,072
                                      
                                      
                                      
                                      1.81Options
      granted (weighted average fair value of $0.38 per share)
                                      
                                      
                                      595,000
                                      
                                      
                                      
                                      0.75Options
      cancelled/expired
                                      
                                      
                                      (52,348
                                      )
                                      
                                      
                                      0.69Options
      exercised (2)
                                      
                                      
                                      (401,384
                                      )
                                      
                                      
                                      0.33Options outstanding at
      September 30, 2007
                                      
                                      
                                      2,743,340
                                      
                                      
                                      
                                      1.82Options
      granted (weighted average fair value of $0.45 per share)
                                      
                                      
                                      605,000
                                      
                                      
                                      
                                      0.45Options
      cancelled/expired (3)
                                      
                                      
                                      (1,343,896
                                      )
                                      
                                      
                                      2.51Options
      exercised
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Options outstanding at
      September 30, 2008(4)
                                      
                                      
                                      2,004,444
                                      
                                      
                                      
                                      0.94Options exercisable at
      September 30, 2008(4)
                                      
                                      
                                      1,424,876
                                      
                                      
                                      
                                      1.13
 
 
 (1)
              The
      aggregate intrinsic value of options exercised during the year ended
      September 30, 2006 was $22,818.(2)
              Of
      the 509,334 options exercised during the year ended September 30, 2007,
      256,292 options were granted cashless exercise status by the Board of
      Directors, so that upon exercise of these options, 85,602 options were
      surrendered back to the Company at fair market value of $0.74 per share
      and 22,348 options were surrendered back to the Company at fair market
      value of $0.95 in lieu of the exercise price, with the remaining 148,342
      shares issued to the employees. The aggregate intrinsic value of options
      exercised during the year ended September 30, 2007 was
      $169,244.(3)
              During
      the fiscal year ended September 30, 2008, (i) Sheldon Nelson forfeited
      back to the Company, without consideration, 600,000 stock options with an
      exercise price of $3.01 per share and a fair market value of $1.94 per
      share and of the 600,000 options, 558,333 were vested and $1,083,167 in
      noncash expense had already been recognized in general and administrative
      expense since their issuance, (ii) Director Carolyn Howard forfeited back
      to the Company, without consideration, 100,000 stock options with an
      exercise price of $1.83 and a fair market value of $1.18 per share and the
      entire 100,000 options were vested and the entire fair market value of
      $118,000 in noncash expense had been recognized in general and
      administrative expense since their issuance, (iii) certain employees
      collectively forfeited back to the Company, without consideration, 300,000
      stock options with an exercise price of $2.71 per share and a fair market
      value of $1.74 per share; 100,000 stock options with an exercise price of
      $2.05 per share and a fair market value of $0.89; 100,000 stock options
      with an exercise price of $2.01 and a fair market value of $1.29; 50,000
      stock options with an exercise price of $2.20 and a fair market value of
      $1.31, of which the entire 550,000 options were vested and the entire fair
      market value of $805,500 in noncash expense had been recognized in general
      and administrative expense since their issuance. All stock options were
      returned for general use under the 2001 Stock Option Plan, which had very
      few options remaining.(4)
              The
      weighted average remaining contractual term of outstanding and exercisable
      options at September 30, 2008 was 2.4 and 1.8 years, respectively.
      The aggregate intrinsic value of outstanding and exercisable options at
      September 30, 2008 was $5,125 and $4,500, respectively. An additional
      charge of approximately $110,000 is expected to vest and be recognized
      subsequent to September 30, 2008 over a weighted average period of 20
      months. The charge will be amortized to general and administrative expense
      as the options vest in subsequent periods.
 
 During
the years ended September 30, 2008, 2007 and 2006, the Company recorded the
share-based compensation expense under SFAS 123R of $304,732, $822,525 and
$1,048,856, respectively, which is included in general and administrative
expense.
 
 At
September 30, 2008, a total of 888,238 shares of common stock were
available for grant under the 2001 Option Plan.
 43
 Warrants
to Purchase Common Stock
 
 The
following table summarizes all of the Company’s warrant activity during the
years ended September 30, 2008, 2007 and 2006:
  Number of
                                        warrants outstanding
                                      
                                      
                                      Weighted avg. exercise
                                        price per share ($)Outstanding
      at October 1, 2005
                                      
                                      
                                      5,648,884
                                      
                                      
                                      
                                      2.29Issued
      (1)
                                      
                                      
                                      1,000,000
                                      
                                      
                                      
                                      0.82Cancelled/Expired
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Exercised
      (2)
                                      
                                      
                                      (350,000
                                      )
                                      
                                      
                                      0.25Outstanding
      at September 30, 2006
                                      
                                      
                                      6,298,884
                                      
                                      
                                      
                                      2.17Issued
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Cancelled/Expired
      (3)
                                      
                                      
                                      (2,329,317
                                      )
                                      
                                      
                                      2.13Exercised
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Outstanding
      at September 30, 2007
                                      
                                      
                                      3,969,567
                                      
                                      
                                      
                                      2.01Issued
      (4)
                                      
                                      
                                      750,000
                                      
                                      
                                      
                                      0.60Cancelled/Expired
      (5)
                                      
                                      
                                      (2,819,567
                                      )
                                      
                                      
                                      2.79Exercised
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Outstanding
      at September 30, 2008
                                      
                                      
                                      1,900,000
                                      
                                      
                                      
                                      0.68
 
  (1)
                In
      connection with the Credit Facility, on September 11, 2006, the Company
      issued to FCC, LLC, d/b/a First Capital, a five year warrant to purchase
      476,190 shares of the Company's common stock at an exercise price of $0.82
      per share, issued to Full Circle Funding, LP a five year warrant to
      purchase 476,191 shares of the Company's Common Stock at an exercise price
      of $0.82 per share and issued to Morgan Joseph & Co. Inc., who acted
      as advisor and placement agent, a five year warrant to purchase 47,619
      shares of the Company’s Common Stock at an exercise price of $0.82 per
      share. The warrants had a fair value of $290,000. For the term of the
      warrants, they are subject to a Registration Rights Agreement that
      provides for “demand” registration within one hundred and thirty five days
      and (i) a four (4%) percent share penalty if not effective within that
      time period, and (ii) two (2%) percent share penalty thereafter for each
      thirty days until effectiveness or one year, whichever is
      earlier.(2)
                During
      the year ended September 30, 2006, certain investors exercised warrants to
      purchase 350,000 shares of common stock with an exercise price of $0.25
      per share, and as a result, the Company received cash proceeds of
      $87,500.(3)
                During
      the year ended September 30, 2007, 2,329,317 warrants to purchase shares
      of common stock expired, including 40,000 warrants at an exercise price of
      $0.33, 40,000 warrants at an exercise price of $0.65, 833,334 warrants at
      an exercise price of $1.75 and 1,415,983 warrants at an exercise price of
      $2.46.(4)
                In
      connection with the Amended and Restated Loan and Security Agreement
      executed on June 30, 2008, the Company issued to FCC, LLC, d/b/a First
      Capital a five year warrant to purchase 375,000 shares of the Company's
      common stock at an exercise price of $0.60 per share and issued to Full
      Circle Funding, LP a five year warrant to purchase 375,000 shares of the
      Company's common stock at an exercise price of $0.60 per share. The
      warrants had a fair value of $45,000, as determined using the Black-Sholes
      pricing model, which is being amortized as debt discount over the
      remaining term of the Amended and Restated Loan Agreement. The warrants
      are subject to customary registration rights set forth in a Registration
      Rights Agreement that provides for demand registration within one hundred
      and thirty five days and (i) a four (4%) percent share penalty if not
      effective within that time period, and (ii) two (2%) percent share penalty
      thereafter for each thirty days until effectiveness or one year, whichever
      is earlier.(5)
                During
      the year ended September 30, 2008, 2,819,567 warrants to purchase shares
      of common stock expired, including 2,122,203 warrants at an exercise price
      of $3.40, 250,000 warrants at an exercise price of $1.84, and 447,364
      warrants at an exercise price of
$0.40.
 
 Additionally,
during the year ended September 30, 2008, a warrant agreement for 150,000
warrants was extended for an additional twelve months for additional consulting
services. The extended expiration had a fair value of $13,500 determined using
the Black-Scholes option pricing model in accordance with SFAS 123R and will be
amortized over the length of the consulting service period.
  44





Assumptions
Used in Determining Fair Value of Share-based Compensation, Stock Options and
Warrants





For
purposes of determining the fair value of options and warrants using the
Black-Scholes option pricing model, the Company used the following assumptions
in the years ended September 30, 2008, 2007 and 2006:





2008
                        
                        2007
                        
                        2006Expected
      volatility
                        
                        
                        25%
                        
                        53%
                        
                        
                        52%Risk-free
      interest rate
                        
                        
                        4.43%
                        
                        4.63%
                        
                        
                        4.72%Expected
      years of option life
                        
                        
                        1
      to 4.1
                        
                        1
      to 5
                        
                        
                        1
      to 5Expected
      dividends
                        
                        
                        0%
                        
                        0%
                        
                        
                        0%





Employee
Stock Purchase Plan





On
October 23, 2001, the Company established, and the stockholders 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. Funds derived from the employee
purchase of Company common stock under the Purchase Plan can be used for general
corporate purposes.





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. As extended by the shareholders on June 1, 2006, the Purchase Plan shall
terminate on August 5, 2014 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 year ended September 30, 2008, (i) the Company issued 69,134 shares to
employees under the Purchase Plan through payroll deductions, the aggregate
purchase price for those shares of $46,389 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, and (ii) the Company issued 232,969
shares for $82,684 in employee bonuses. Of the 232,969 shares issued for
bonuses, 120,694 shares for $43,327 had been accrued in the year ended in
September 30, 2007, but were not issued until fiscal 2008.





During
the year ended September 30, 2007, (i) the Company issued 343,011, shares
to employees under the Purchase Plan through payroll deductions, the aggregate
purchase price for those shares of $234,214 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, and (ii) the Company issued 210,473
shares for $131,355 in employee bonuses. Of the 210,473 shares issued for
bonuses, 151,799 shares for $94,115 had been accrued in the year ended in
September 30, 2006, but were not issued until fiscal 2007.





During
the year ended September 30, 2006, (i) the Company issued 162,678 shares to
employees under the Purchase Plan through payroll deduction, the aggregate
purchase price for those shares of $175,642 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, and (ii) the Company
issued 86,385 shares for $99,833 in employee bonuses.





Restricted
Stock





Three
members of our Board of Directors were each granted 20,000 shares of restricted
common stock as part of their approved compensation for Board service during
fiscal 2007 and into fiscal 2008. As a result, 60,000 shares of restricted
common stock were issued during the year ended September 30, 2007 with a
fair value of $54,000 based on the quoted market price at the
grant date to be recognized during the next twelve months and the Company
recognized compensation expense of $40,500 for the year ended September 30,
2008.





During
fiscal 2008, one new Director was granted 20,000 shares of restricted common
stock as part of his approved compensation for Board service partially in fiscal
2008 and in fiscal 2009. The grant had a fair value of $7,400 based on
the quoted market price at the grant date to be recognized during the
next twelve months. As a result, the Company recognized compensation expense of
$5,550 for the year ended September 30, 2008. Additionally, three members of the
Board of Directors were granted shares of restricted common stock as part of
their approved compensation for Board service for fiscal 2008 and into fiscal
2009. As a result, 78,335 shares of restricted stock were issued during fiscal
2008 with a fair value of $31,334 based on the quoted market price at
the grant date to be recognized during the next twelve months, and the Company
recognized compensation expense of $13,056 for the year ended September 30,
2008.


45





During
the year ended September 30, 2008, the Company issued 30,000 shares of
restricted common stock to an executive. As a result, the Company recognized
$11,100 for an employee bonus based on the quoted market price at the grant
date.  Additionallly, the Company issued 18,037 shares of restricted
common stock for $14,430 for an employee bonus to the same executive that had
been accrued in the year ended in September 30, 2007, but was not issued until
fiscal 2008.





6.
            COMMITMENTS
      AND CONTINGENCIES





Litigation





None.





Contracts





The
Company had previously entered into an open ended management agreement with a
senior executive that provides for annual compensation, excluding bonuses, of
$275,000. 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.





Operating
Leases





The
Company is obligated under non-cancelable operating leases for its various
facilities that expire through the year ending September 30, 2012 to make future
minimum rental payments in each of the years subsequent to September 30, 2008 as
summarized in the following table:





Year
      ending September 30,
                          
                          Minimal Rental
                            Payments2009
                          
                          $
                          355,3112010
                          
                          
                          239,4372011
                          
                          
                          70,8402012
                          
                          
                          33,516Total
      minimum payments
                          
                          $
                          699,104





Rent
expense under all operating leases amounted to $375,408, $364,821, and $368,105,
respectively, for the years ended September 30, 2008, 2007 and
2006.





7.
            STRATEGIC
      ALLIANCE WITH DIRECTV





On June
1, 2007, the Company entered into a New Agreement with DIRECTV, which replaced
the September 29, 2003 Agreement. The New Agreement has an initial term of three
years with two, two-year automatic renewal periods upon our achievement of
certain subscriber growth goals, with an automatic extension of the entire
Agreement to coincide with the expiration date of the Company’s latest property
access agreement. A vast majority of the terms set forth in the September 29,
2003 agreement have been carried over to the New Agreement, however, the
significant changes are set forth below.





The New
Agreement results in an increase in the amount of "residual" fees the Company
receives monthly from DIRECTV based upon the programming revenue DIRECTV
receives from subscribers within the Company's MDU properties. The new residual
rate applies to both the Company’s existing subscriber base and all new
subscribers added. Additionally, the number of DIRECTV digital programming
packages that qualify for residual fees has increased.


46




Under the
terms of the New Agreement, the Company continues to be paid an "activation fee"
for every new subscriber that activates a DIRECTV commissionable programming
package. The activation fee is paid on a gross activation basis in choice and
exclusive properties and on a one-time basis in bulk properties, as was
previously the case under the terms of the previous agreement with DIRECTV. The
activation fee paid is slightly lower than that previously paid for subscribers
located in choice and exclusive properties, however, it remains the same amount
as previously paid for subscribers in bulk properties. Additionally, the Company
and DIRECTV have agreed to terms allowing DIRECTV a "first option" to bid on
subscribers at fair market value that the Company may wish to sell.





On
December 14, 2007, the Company signed a letter agreement with DIRECTV that
allows the Company to receive from DIRECTV an upgrade subsidy when it completes
a high definition (“HDTV”) system upgrade on certain of its properties to which
the Company currently is providing DIRECTV services. The Company is required to
submit an invoice for this subsidy to DIRECTV within thirty days after the
upgrade of the property and subscribers is complete. This subsidy is treated as
revenue, similar to the “activation fee” referenced above, except that the
entire amount of the subsidy is recognized immediately. On August 15, 2008, the
Company signed a subsequent letter agreement with DIRECTV that allows the
Company to continue to receive from DIRECTV this upgrade subsidy, under similar
terms, through July 2009.





8.
            GAIN/LOSS
      ON SALE OF CUSTOMERS AND RELATED PROPERTY AND
  EQUIPMENT





On
September 30, 2008, the Company sold subscribers and certain related property
and equipment to CSC Holdings, Inc. for $2,529,000. The total gain on the sale
was $1,860,593.





On
September 1, 2007, a property that the Company acquired from another service
provider terminated its contract prior to expiration pursuant to a certain
provision of Florida condominium law relating strictly to new condominium
boards, resulting in a loss of $124,297.





On June
1, 2007, the Company received notification that a property, which was previously
acquired by the Company, was exercising its previously negotiated right to
terminate its access agreement with the Company. In accordance with the “Buyout
Schedule” contained within the access agreement, upon payment of the buyout fee,
ownership of the equipment transfers to the property. The Company received
proceeds of $80,715 which resulted in a gain of $14,245.





9.
            ACQUISITIONS
      OF SUBSCRIBERS AND EQUIPMENT





On July
19, 2007, the Company executed an asset purchase agreement and acquired 9,575
subscribers and related access agreement and telecommunications assets located
in approximately 180 multi-dwelling unit properties from Multiband Corporation.
There were three closing, two of which occurred in fiscal 2007 and one in fiscal
2008. The acquisition price, after certain adjustments, was $3,372,620 for the
entire 9,575 subscribers as of September 30, 2007. However, during the year
ended September 30, 2008, the acquisition price was again adjusted downward by
$24,820 (of which $13,120 were intangibles) for assets that were unable to be
transferred as per the initial asset purchase agreement. As mentioned, the third
closing with Multiband Corporation occurred during the year ended September 30,
2008, whereby the Company acquired access agreements and incurred transfer fees,
collectively, in the amount of $280,301,representing intangible
assets.  Additionally, in the year ended September 30, 2007, the
Company acquired intangibles and other equipment of $2,051,198.





The
acquisition costs of all acquired access agreements and equipment for the years
ended September 30, 2008 and 2007 were allocated to the fair value of the assets
acquired, as set forth below:





September
      30,2008
                        
                        
                        2007Property
      and equipment
                        
                        $
                        56,216
                        
                        
                        $
                        2,147,076Amortizable
      intangible assets
                        
                        
                        267,181
                        
                        
                        
                        3,276,742Total
      acquisition cost of all acquired access agreements and
      equipment
                        
                        $
                        323,397
                        
                        
                        $
                        5,423,818




47





10.
            PROPERTY
      AND EQUIPMENT





The
components of property and equipment are set forth below:




September 30,2008
                          
                          
                          2007Telecommunications
      equipment, installed
                          
                          $
                          37,317,427
                          
                          
                          $
                          33,187,713Computer
      equipment
                          
                          
                          1,218,163
                          
                          
                          
                          1,170,187Furniture
      and fixtures
                          
                          
                          254,089
                          
                          
                          
                          252,416Leasehold
      improvements
                          
                          
                          172,482
                          
                          
                          
                          163,083Other
                          
                          
                          59,430
                          
                          
                          
                          57,92339,021,591
                          
                          
                          
                          34,831,322Less:
      Accumulated depreciation
                          
                          
                          (17,283,584
                          )
                          
                          
                          (12,784,932
                          )Totals
                          
                          $
                          21,738,007
                          
                          
                          $
                          22,046,390




Depreciation
expense amounted to $5,304,496, $4,472,214, and $3,430,404 for the years ended
September 30, 2008, 2007 and 2006, respectively.





11.
            INTANGIBLE
      ASSETS





The
components of intangible assets are set forth below:




September 30,2008
                        
                        2007Property
      access agreements, including subscriber lists
                        
                        $
                        8,326,913
                        
                        
                        $
                        8,340,311Less:
      Accumulated amortization
                        
                        
                        (5,338,356
                        )
                        
                        
                        (4,153,502
                        )Totals
                        
                        $
                        2,988,557
                        
                        
                        $
                        4,186,809





Amortization
expense amounted to $ 1,274,346, $912,348, and $961,236 for the years ended
September 30, 2008, 2007 and 2006, respectively. Amortization of
intangibles in the years subsequent to September 30, 2008 is as
follows:





Year
                
                Amortization
                  Amount2009
                
                $
                1,133,8692010
                
                
                721,6302011
                
                
                660,4332012
                
                
                439,3712013
                
                
                33,254





12.
            OTHER
      ACCRUED LIABILITIES




Other
accrued liabilities consist of the following:





2008
                      
                      
                      2007Accrued
      costs and expenses:Equipment
                      
                      $
                      4,213
                      
                      
                      $
                      107,043Employee
      stock purchases and employee compensation payable in common
      stock
                      
                      
                      212,453
                      
                      
                      
                      79,018Subcontractors
      maintenance and installation
                      
                      
                      52,367
                      
                      
                      
                      169,958Programming
      costs
                      
                      
                      8,872
                      
                      
                      
                      233,702Professional
      fees
                      
                      
                      167,277
                      
                      
                      
                      262,740Wages
                      
                      
                      784,392
                      
                      
                      
                      334,808Other
                      
                      
                      57,517
                      
                      
                      
                      114,038Totals
                      
                      $
                      1,287,091
                      
                      
                      $
                      1,301,307




48





13.
            INCOME
      TAXES





The
Company had pre-tax losses but did not record any benefits for Federal or other
income taxes for the years ended September 30, 2008, 2007 and 2006. The
Company did not record Federal income tax benefits at the statutory rate of 34%
and state income tax credits because (i) 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 (ii) 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, 2008 and 2007, 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:





2008
                        
                        
                        2007Deferred
      tax assets:Benefits
      from net operating loss carryforwards:United
      States
                        
                        $
                        16,953,000
                        
                        
                        $
                        14,797,000Canada
                        
                        
                        3,377,000
                        
                        
                        
                        3,375,000Tax
      benefit for nonqualified stock options
                        
                        
                        11,000
                        
                        
                        
                        11,000Other
                        
                        
                        163,000
                        
                        
                        
                        92,000Totals
                        
                        
                        20,504,000
                        
                        
                        
                        18,275,000Deferred
      tax liabilities—depreciation and amortization of property and equipment
      and intangible assets
                        
                        
                        (2,426,000
                        )
                        
                        
                        (3,811,000
                        )Net
      deferred tax assets
                        
                        
                        18,078,000
                        
                        
                        
                        14,464,000Less
      valuation allowance
                        
                        
                        (18,078,000
                        )
                        
                        
                        (14,464,000
                        )Totals
                        
                        $
                        —
                        
                        
                        $
                        —





At
September 30, 2008 and 2007, the Company had net operating loss carry
forwards of approximately $42,381,000 and $36,991,000, respectively, available
to reduce future Federal taxable income and net operating loss carryforwards of
approximately $7,423,000 and $7,419,000, respectively, available to reduce
future Canadian taxable income. As of September 30, 2008, the Federal tax
loss carryforwards will expire from 2009 through 2028 and the Canadian tax loss
carryforwards will expire from 2009 through 2012. However, the Company
terminated substantially all of its Canadian operations in the year ended
September 30, 2002.





The
deferred tax valuation allowance increased by $3,614,000, $588,000, and
$2,768,000 for the years ended September 30, 2008, 2007 and 2006,
respectively.





Effective
October 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109(“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation contains a two-step
approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefits as the largest amount that has a greater than 50%
likelihood of being realized upon effective settlement. The interpretation also
provides guidance on de-recognition, classification, interest and penalties, and
other matters. The adoption did not have an effect on the financial
statements.  The tax years 2005-2007 remain open to examination by the
major taxing jurisdictions to which the Company is subject.


49





14.
            SUPPLEMENTAL
      QUARTERLY INFORMATION (UNAUDITED)





Summarized
operations information for the years ended September 30, 2008 and 2007 is shown
in the following schedules:





Quarter EndedDecember 31,
                    2007
                  
                  
                  March 31,
                    2008
                  
                  
                  June 30,
                    2008
                  
                  
                  September 30,
                    2008Consolidated
      Statements of Operations Data:Revenue
                  
                  $
                  5,268,439
                  
                  
                  $
                  5,611,908
                  
                  
                  $
                  6,257,780
                  
                  
                  $
                  6,512,598Operating
      expenses (1)
                  
                  
                  6,962,759
                  
                  
                  
                  6,833,359
                  
                  
                  
                  6,958,825
                  
                  
                  
                  7,799,922Operating
      loss
                  
                  
                  (1,694,320
                  )
                  
                  
                  (1,221,451
                  )
                  
                  
                  (701,045
                  )
                  
                  
                  (1,287,324
                  )Other
      income (expenses)
                  
                  
                  (485,988
                  )
                  
                  
                  (549,148
                  )
                  
                  
                  (562,136
                  )
                  
                  
                  1,302,029Net
      income (loss)
                  
                  
                  (2,180,308
                  )
                  
                  
                  (1,770,599
                  )
                  
                  
                  (1,263,181
                  )
                  
                  
                  14,705Basic
      and diluted loss per common share
                  
                  
                  (0.04
                  )
                  
                  
                  (0.03
                  )
                  
                  
                  (0.02
                  )
                  
                  
                  0.00Weighted
      average common shares outstanding
                  
                  
                  51,570,529
                  
                  
                  
                  51,819,304
                  
                  
                  
                  51,920,237
                  
                  
                  
                  52,002,629




Quarter
      EndedDecember 31,
                  2006
                
                
                March 31,
                  2007
                
                
                June 30,
                  2007
                
                
                September 30,
                  2007Consolidated
      Statements of Operations Data:Revenue
                
                $
                3,934,350
                
                
                $
                3,981,485
                
                
                $
                3,956,978
                
                
                $
                4,785,579Operating
      expenses (1)
                
                
                5,408,936
                
                
                
                5,510,352
                
                
                
                5,446,756
                
                
                
                6,659,605Operating
      loss
                
                
                (1,474,586
                )
                
                
                (1,528,867
                )
                
                
                (1,489,778
                )
                
                
                (1,874,026
                )Other
      expenses
                
                
                (183,425
                )
                
                
                (200,302
                )
                
                
                (236,189
                )
                
                
                (521,486
                )Net
      loss
                
                
                (1,658,011
                )
                
                
                (1,729,169
                )
                
                
                (1,725,967
                )
                
                
                (2,395,512
                )Basic
      and diluted loss per common share
                
                
                (0.03
                )
                
                
                (0.03
                )
                
                
                (0.03
                )
                
                
                (0.05
                )Weighted
      average common shares outstanding
                
                
                51,003,121
                
                
                
                51,324,899
                
                
                
                51,346,257
                
                
                
                51,556,989







(1)
            Operating
      expenses includes noncash charges of $797,833 and $1,315,252 for the years
      ended September 30, 2008 and 2007, respectively. In accordance with the
      modified prospective transition method, the Company's Consolidated
      Financial Statements for prior periods have not been restated and do not
      include the impact of SFAS 123R. The Company recognized stock-based
      compensation expense – employees for the years ended September 30, 2008
      and 2007 of $304,732 and $822,525,
respectively.





15.
            SUBSEQUENT
      EVENTS





On
November 5, 2008, the Company completed the second closing on the sale of 1,803
subscribers and related property and equipment to CSC Holdings, Inc. for total
proceeds of $2,704,500, of which 40% is being held in escrow for seventy days.
The carrying value of the related property and equipments sold as of the
September 30, 2008 balance sheet date was $284,998, with related expenses of
$55,000. There are no adjustments to fair value on the disposed property and
equipment required. The total gain on the sale to CSC Holdings, Inc. in the
second closing is $2,382,502.





On
December 11, 2008, the Company received the entire amount that had previously
been held in escrow, $1,011,600, from the September 30, 2008 closing with CSC
Holdings, Inc.





On
December 17, 2008, the Company completed the third closing on the sale of 2,064
subscribers and related property and equipment to CSC Holdings, Inc. for total
proceeds of $3,096,000, of which 40% is being held in escrow for seventy days.
The carrying value of the related property and equipments sold as of the
September 30, 2008 balance sheet date was $360,379. There are no adjustments to
fair value on the disposed property and equipment required. The total gain on
the sale to CSC Holdings, Inc. in the third closing is $2,735,621.




50





Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure





None.





Item 9A(T).
            Controls
      and Procedures




Evaluation
of disclosure controls and procedures





We
maintain "disclosure controls and procedures," as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange
Act"), that are designed to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer, who is also our Chief Financial Officer, or our Vice President of
Finance and Administration, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.





As of
September 30, 2008 (the end of the period covered by this Report), we carried
out an evaluation, under the supervision and with the participation of our Chief
Executive Officer, who is also our Chief Financial Officer, and our Vice
President of Finance and Administration of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule
13a-15(e). Based on this evaluation, our Chief Executive Officer and our Vice
President of Finance and Administration concluded that our disclosure controls
and procedures were effective in ensuring that information required to be
disclosed by us in our periodic reports is recorded, processed, summarized and
reported, within the time periods specified for each report and that such
information is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





Management’s
Annual Report on internal controls over financial reporting





Management
is responsible for establishing and maintaining an adequate system of internal
controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
of the Exchange Act. Internal controls over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with
GAAP.





Our
internal controls over financial reporting includes those policies and
procedures that:





•
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect our transactions and dispositions of our
      assets;•
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with GAAP, and that
      receipts and expenditures are being made only in accordance with
      authorizations of our management and directors;
  and


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





Management
has conducted, with the participation of our Chief Executive Officer, who is
also our Chief Financial Officer, and our Vice President of Finance and
Administration, an assessment, including testing of the effectiveness of our
internal controls over financial reporting as of September 30, 2008.
Management’s assessment of internal controls over financial reporting was based
on the framework in Internal
Control over Financial Reporting – Guidance for Smaller Public
Companiesissued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our
system of internal controls over financial reporting was effective as of
September 30, 2008.





The
effectiveness of our internal controls over financial reporting as of September
30, 2008 has not been audited by J.H. Cohn LLP, an independent registered public
accounting firm. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report.




51


Changes
in internal controls over financial reporting





There
were no changes in our internal controls over financial reporting for the period
ended September 30, 2008 identified in connection with the evaluation required
by paragraph (d) of Rule 13a-15 or Rule 15d-15 that materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.





Item 9B.
            Other
      Information





None.





PART
III




Item
      10.
            Directors,
      Executive Officers and Corporate
Governance




The
information required by this Item 10 is incorporated herein by reference to
the Company’s definitive 2009 Proxy Statement for the Annual Meeting of
Stockholders.





Information
regarding our executive officers is set forth in Item 1 of Part I of this
Report under the caption “Executive Officers.”




Item 11.
            Executive
      Compensation




The
information required by this Item 11 is incorporated herein by reference to
the Company’s definitive 2009 Proxy Statement for the Annual Meeting of
Stockholders.




Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




The
information required by this Item 12 is incorporated herein by reference to
the Company’s definitive 2009 Proxy Statement for the Annual Meeting of
Stockholders.




Item 13.
            Certain
      Relationships and Related Transactions, and Director
      Independence




The
information required by this Item 13 is incorporated herein by reference to
the Company’s definitive 2009 Proxy Statement for the Annual Meeting of
Stockholders.




Item 14.
            Principal
      Accounting Fees and Services




The
information required by this Item 14 is incorporated herein by reference to
the Company’s definitive 2009 Proxy Statement for the Annual Meeting of
Stockholders.





PART
IV




Item 15.
            Exhibits,
      Financial Statement Schedules




1.
            Financial
      Statements: See Part II, Item 8 of this Annual Report on Form
      10-K.




2.
            Exhibits:
      The exhibits listed in the accompanying index to exhibits are filed or
      incorporated by reference as part of this Annual Report on Form
      10-K.




52


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)10.1
            
            Loan
      and Security Agreement for September 11, 2006 $20M credit facility
      (6)21.1
            
            Subsidiaries
      of the Company (5)31.1
            
            Certification
      by CEO pursuant to Sections 302 of the Sarbanes-Oxley Act of 2002
      (7)31.2
            
            Certification
      by Vice President of Finance pursuant to Sections 302 of the
      Sarbanes-Oxley Act of 2002 (7)32.1
            
            Certification
      of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (7)32.2
            
            Certification
      Vice President of Finance pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002 (7)





_____________(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)
            Incorporated
      by reference from Report on Form 10-KSB, filed December 29,
      2004(6)
            Incorporated
      by reference from Report on Form 8-K, filed September 15,
    2006(7)
            Filed
      Herewith




53


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
      NelsonChief
      Financial OfficerDecember
      23, 2008




MDU
      COMMUNICATIONS INTERNATIONAL, INC.By:
                /s/  CARMEN
      RAGUSA, JR.Carmen
      Ragusa, Jr.Vice
      President of FinanceDecember
      23, 2008




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
            
            December
      23, 2008/s/  JOHN
      EDWARD BOYLEJohn
      Edward Boyle
            
            Director
            
            December
      23, 2008/s/  CAROLYN
      C. HOWARDCarolyn
      C. Howard
            
            Director
            
            December
      23, 2008/s/
      RICHARD NEWMANRichard
      Newman
            
            Director
            
            December
      23, 2008




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